Attached files
file | filename |
---|---|
EX-31.1 - Onstream Media CORP | v211157_ex31-1.htm |
EX-32.2 - Onstream Media CORP | v211157_ex32-2.htm |
EX-32.1 - Onstream Media CORP | v211157_ex32-1.htm |
EX-31.2 - Onstream Media CORP | v211157_ex31-2.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 December 31, 2010
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR
15(d)
|
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _________ to _________
Commission
file number 000-22849
Onstream Media
Corporation
|
(Exact
name of registrant as specified in its charter)
65-0420146
|
(IRS
Employer Identification No.)
Florida
|
(State or
other jurisdiction of incorporation or organization)
1291 SW 29 Avenue, Pompano Beach, Florida
33069
|
(Address
of principal executive offices)
954-917-6655
|
(Registrant's
telephone number)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“non-accelerated filer” and “smaller reporting company” defined in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer
|
¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer
|
¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of
shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date. As of February 4, 2011 the registrant
had issued and outstanding 9,411,440 shares of common stock.
TABLE
OF CONTENTS
|
PAGE
|
|
PART
I – FINANCIAL INFORMATION
|
||
Item
1 - Financial Statements
|
4
|
|
Unaudited
Consolidated Balance Sheet at December 31, 2010 and Consolidated Balance
Sheet at September 30, 2010
|
4
|
|
Unaudited
Consolidated Statements of Operations for the Three Months Ended
December 31, 2010 and 2009
|
5
|
|
Unaudited
Consolidated Statement of Stockholders’ Equity for the Three Months Ended
December 31, 2010
|
6
|
|
Unaudited
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2010 and 2009
|
7 –
8
|
|
Notes
to Unaudited Consolidated Financial Statements
|
9 –
54
|
|
Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
55
– 72
|
|
Item
4 - Controls and Procedures
|
73
|
|
PART
II – OTHER INFORMATION
|
||
Item
1 – Legal Proceedings
|
74
|
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
74
|
|
Item
3 – Defaults upon Senior Securities
|
75
|
|
Item
4 – Submission of Matters to a Vote of Security Holders
|
75
|
|
Item
5 – Other Information
|
75
|
|
Item
6 - Exhibits
|
75
|
|
Signatures
|
76
|
2
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in our consolidated financial statements and in this
10-Q including common share quantities, convertible debenture conversion
prices and exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
CERTAIN
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this quarterly report on Form 10-Q contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
risks, uncertainties and other factors include, but are not limited to, our
ability to implement our strategic initiatives (including our ability to
successfully complete, produce, market and/or sell the DMSP and/or our ability
to eliminate cash flow deficits by increasing our sales), economic, political
and market conditions and fluctuations, government and industry regulation,
interest rate risk, U.S. and global competition, and other factors affecting our
operations and the fluctuation of our common stock price, and other factors
discussed elsewhere in this report and in other documents filed by us with the
Securities and Exchange Commission from time to time. Most of these factors are
difficult to predict accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any forward-looking
statements that may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of December
31, 2010, unless otherwise stated. You should carefully review this Form 10-Q in
its entirety, including but not limited to our financial statements and the
notes thereto, as well as our most recently filed 10-K. Except for our ongoing
obligations to disclose material information under the Federal securities laws,
we undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. Actual results could differ materially from the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this report
will, in fact, occur. For any forward-looking statements contained in any
document, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
When used
in this Annual Report, the terms "we", "our", and "us” refers to Onstream Media
Corporation, a Florida corporation, and its subsidiaries.
3
PART
I – FINANCIAL INFORMATION
Item
1 - Financial Statements
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31,
2010
(unaudited)
|
September 30,
2010
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 137,708 | $ | 825,408 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $359,739 and
$363,973, respectively
|
2,486,899 | 2,805,420 | ||||||
Prepaid
expenses
|
342,007 | 316,591 | ||||||
Inventories
and other current assets
|
122,352 | 125,000 | ||||||
Total
current assets
|
3,088,966 | 4,072,419 | ||||||
PROPERTY
AND EQUIPMENT, net
|
2,824,947 | 2,854,263 | ||||||
INTANGIBLE
ASSETS, net
|
1,160,942 | 1,284,524 | ||||||
GOODWILL,
net
|
12,396,948 | 12,396,948 | ||||||
OTHER
NON-CURRENT ASSETS
|
104,263 | 104,263 | ||||||
Total
assets
|
$ | 19,576,066 | $ | 20,712,417 | ||||
LIABILITIES
AND STOCKHOLDERS’EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 2,249,104 | $ | 2,553,366 | ||||
Accrued
liabilities
|
1,192,803 | 1,066,960 | ||||||
Amounts
due to directors and officers
|
395,742 | 374,124 | ||||||
Deferred
revenue
|
142,628 | 141,788 | ||||||
Notes
and leases payable – current portion, net of
discount
|
1,766,762 | 1,904,214 | ||||||
Convertible
debentures, net of discount
|
1,134,102 | 1,626,796 | ||||||
Total
current liabilities
|
6,881,141 | 7,667,248 | ||||||
Notes
and leases payable, net of current portion and discount
|
101,137 | 120,100 | ||||||
Convertible
debentures, net of discount
|
836,343 | 815,629 | ||||||
Detachable
warrants, associated with sale of common shares and Series A-14
Preferred
|
247,743 | 386,404 | ||||||
Total
liabilities
|
8,066,364 | 8,989,381 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Series
A-13 Convertible Preferred stock, par value $.0001 per share, authorized
170,000 shares, 35,000 issued and outstanding
|
3 | 3 | ||||||
Series
A-14 Convertible Preferred stock, par value $.0001 per share, authorized
420,000 shares, 420,000 issued and outstanding
|
42 | 42 | ||||||
Common
stock, par value $.0001 per share; authorized 75,000,000 shares, 8,976,740
and 8,384,570 issued and outstanding, respectively
|
898 | 838 | ||||||
Additional
paid-in capital
|
136,151,674 | 135,453,812 | ||||||
Unamortized
discount
|
(258,406 | ) | (297,422 | ) | ||||
Accumulated
deficit
|
(124,384,509 | ) | (123,434,237 | ) | ||||
Total
stockholders’ equity
|
11,509,702 | 11,723,036 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 19,576,066 | $ | 20,712,417 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
REVENUE:
|
||||||||
DMSP
and hosting
|
$ | 488,809 | $ | 552,225 | ||||
Webcasting
|
1,454,837 | 1,410,007 | ||||||
Audio
and web conferencing
|
1,809,460 | 1,589,961 | ||||||
Network
usage
|
465,120 | 456,213 | ||||||
Other
|
19,027 | 60,707 | ||||||
Total
revenue
|
4,237,253 | 4,069,113 | ||||||
COSTS
OF REVENUE:
|
||||||||
DMSP
and hosting
|
221,505 | 253,008 | ||||||
Webcasting
|
359,277 | 326,911 | ||||||
Audio
and web conferencing
|
600,107 | 535,697 | ||||||
Network
usage
|
208,706 | 187,642 | ||||||
Other
|
21,639 | 103,218 | ||||||
Total
costs of revenue
|
1,411,234 | 1,406,476 | ||||||
GROSS
MARGIN
|
2,826,019 | 2,662,637 | ||||||
OPERATING
EXPENSES:
|
||||||||
General
and administrative:
|
||||||||
Compensation
|
2,110,509 | 2,076,377 | ||||||
Professional
fees
|
541,925 | 478,059 | ||||||
Other
|
530,814 | 545,293 | ||||||
Impairment
loss on goodwill and other intangible assets
|
- | 3,100,000 | ||||||
Depreciation
and amortization
|
386,197 | 567,361 | ||||||
Total
operating expenses
|
3,569,445 | 6,767,090 | ||||||
Loss
from operations
|
(743,426 | ) | (4,104,453 | ) | ||||
OTHER
EXPENSE, NET:
|
||||||||
Interest
expense
|
(300,340 | ) | (235,400 | ) | ||||
Gain
for adjustment of derivative liability to fair value
|
138,661 | - | ||||||
Other
income (expense), net
|
7,412 | (1,188 | ) | |||||
Total
other expense, net
|
(154,267 | ) | (236,588 | ) | ||||
Net
loss
|
$ | (897,693 | ) | $ | (4,341,041 | ) | ||
Loss
per share – basic and diluted:
|
||||||||
Net
loss per share
|
$ | (0.10 | ) | $ | (0.58 | ) | ||
Weighted
average shares of common stock outstanding – basic and
diluted
|
8,742,092 | 7,430,814 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
THREE
MONTHS ENDED DECEMBER 31, 2010
(unaudited)
Series A- 13
Preferred Stock
|
Series A- 14
Preferred Stock
|
Common Stock
|
Additional Paid-in
Capital
|
Accumulated
|
||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Gross
|
Discount
|
Deficit
|
Total
|
|||||||||||||||||||||||||||||||
Balance,
September 30, 2010
|
35,000 | $ | 3 | 420,000 | $ | 42 | 8,384,570 | $ | 838 | $ | 135,453,812 | $ | (297,422 | ) | $ | (123,434,237 | ) | $ | 11,723,036 | |||||||||||||||||||||
Issuance
of common shares for consultant services
|
- | - | - | - | 62,500 | 6 | 71,543 | - | - | 71,549 | ||||||||||||||||||||||||||||||
Issuance
of options for employee services
|
- | - | - | - | - | - | 176,612 | - | - | 176,612 | ||||||||||||||||||||||||||||||
Sale
of common shares
|
- | - | - | - | 315,000 | 32 | 268,013 | - | - | 268,045 | ||||||||||||||||||||||||||||||
Conversion
of debt to common shares
|
- | - | - | - | 137,901 | 14 | 110,307 | - | - | 110,321 | ||||||||||||||||||||||||||||||
Issuance
of common shares for interest
|
- | - | - | - | 76,769 | 8 | 71,387 | - | - | 71,395 | ||||||||||||||||||||||||||||||
Dividends
on Series A-13
|
- | - | - | - | - | - | - | 1,687 | (8,687 | ) | (7,000 | ) | ||||||||||||||||||||||||||||
Dividends
on Series A-14
|
- | - | - | - | - | - | - | 37,329 | (43,892 | ) | (6,563 | ) | ||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | (897,693 | ) | (897,693 | ) | ||||||||||||||||||||||||||||
Balance,
December 31, 2010
|
35,000 | $ | 3 | 420,000 | $ | 42 | 8,976,740 | $ | 898 | $ | 136,151,674 | $ | (258,406 | ) | $ | (124,384,509 | ) | $ | 11,509,702 |
The
accompanying notes are an integral part of these consolidated financial
statements.
6
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (897,693 | ) | $ | (4,341,041 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Impairment
loss on goodwill and other intangible assets
|
- | 3,100,000 | ||||||
Gain
for adjustment of derivative liability to fair value
|
(138,661 | ) | - | |||||
Depreciation
and amortization
|
386,197 | 567,361 | ||||||
Amortization
of deferred professional fee expenses paid with equity
|
140,656 | 168,880 | ||||||
Compensation
expenses paid with equity
|
226,134 | 261,613 | ||||||
Amortization
of discount on convertible debentures
|
58,120 | 20,366 | ||||||
Amortization
of discount on notes payable
|
61,906 | 54,178 | ||||||
Interest
expense paid in common shares and options
|
40,902 | 37,040 | ||||||
Bad
debt expense
|
(4,233 | ) | 21,082 | |||||
Net
cash used in operating activities, before changes in current assets and
liabilities
|
(126,672 | ) | (110,521 | ) | ||||
Changes
in current assets and liabilities:
|
||||||||
Decrease
(Increase) in accounts receivable
|
322,752 | (397,660 | ) | |||||
(Increase)
Decrease in prepaid expenses
|
(94,522 | ) | 6,511 | |||||
Decrease
in inventories and other current assets
|
2,648 | 75,975 | ||||||
(Decrease)
in accounts payable, accrued liabilities and amounts due
to directors and officers
|
(184,315 | ) | (95,730 | ) | ||||
Increase
(Decrease) in deferred revenue
|
840 | (2,286 | ) | |||||
Net
cash used in operating activities
|
(79,269 | ) | (523,711 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(233,299 | ) | (262,594 | ) | ||||
Net
cash used in investing activities
|
(233,299 | ) | (262,594 | ) |
(Continued)
7
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
Three Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from sale of common shares, net of expenses
|
$ | 268,045 | $ | - | ||||
Proceeds
from notes payable, net of expenses
|
112,484 | 581,633 | ||||||
Proceeds
from convertible debentures
|
- | 125,000 | ||||||
Repayment
of notes and leases payable
|
(318,906 | ) | (130,424 | ) | ||||
Repayment
of convertible debentures
|
(436,755 | ) | - | |||||
Net
cash (used in) provided by financing activities
|
(375,132 | ) | 576,209 | |||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(687,700 | ) | (210,096 | ) | ||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
825,408 | 541,206 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 137,708 | $ | 331,110 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
payments for interest
|
$ | 139,412 | $ | 123,816 | ||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Issuance
of shares and options for consultant services
|
$ | 71,549 | $ | 256,944 | ||||
Issuance
of options for employee services
|
$ | 176,612 | $ | 261,613 | ||||
Issuance
of common shares and warrants for interest and fees
|
$ | 71,395 | $ | 99,558 | ||||
Issuance
of common shares upon debt conversion
|
$ | 110,321 | $ | - | ||||
Issuance
of right to obtain common shares for financing fees
|
$ | - | $ | 95,000 | ||||
Issuance
of A-13 preferred shares for A-12 preferred shares
|
$ | - | $ | 350,000 | ||||
Issuance
of common shares for A-12 preferred shares
|
$ | - | $ | 350,000 | ||||
Conversion
of short-term advance to convertible debenture
|
$ | - | $ | 200,000 |
The
accompanying notes are an integral part of these consolidated financial
statements.
8
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business
Onstream
Media Corporation (“we” or "Onstream" or "ONSM"), organized in 1993, is a
leading online service provider of live and on-demand Internet video, corporate
audio and web communications and content management applications, provided
primarily to corporate (including large as well as small to medium sized
businesses), education and government customers.
The
Digital Media Services Group consists primarily of our Webcasting division, our
DMSP (“Digital Media Services Platform”) division and our MP365
(“MarketPlace365”) division. The DMSP division includes the related UGC (“User
Generated Content”) and Smart Encoding divisions.
The
Webcasting division, which operates primarily from Pompano Beach, Florida and
has its main sales facility in New York City, provides an array of
corporate-oriented, web-based media services to the corporate market including
live audio and video webcasting and on-demand audio and video streaming for any
business, government or educational entity. The Webcasting division generates
revenue primarily through production and distribution fees.
The DMSP
division, which operates primarily from Colorado Springs, Colorado, provides an
online, subscription based service that includes access to enabling technologies
and features for our clients to acquire, store, index, secure, manage,
distribute and transform these digital assets into saleable commodities. The DMSP division
generates revenues primarily from monthly
subscription fees, plus charges for hosting, storage and professional services.
Our UGC division, which also operates as Auction Video (see note 2) and operates
primarily from Colorado Springs, Colorado, provides a video ingestion and flash
encoder that can be used by our clients on a stand-alone basis or in conjunction
with the DMSP. The Smart Encoding division, which operates primarily from San
Francisco, California, provides both automated and manual encoding and editorial
services for processing digital media. This division also provides hosting,
storage and streaming services for digital media, which are provided via the
DMSP.
The MP365
division, which operates primarily from Pompano Beach, Florida with additional
operations in San Francisco, California, enables publishers, associations,
tradeshow promoters and entrepreneurs to self-deploy their own online virtual
marketplaces using the MarketPlace365TM
platform. The MP365 division generates revenues primarily from monthly booth
fees charged to MP365 promoters.
The Audio
and Web Conferencing Services Group consists of our Infinite Conferencing
(“Infinite”) division and our EDNet division. Our Infinite division, which
operates primarily from the New York City area, generates revenues from usage
charges and fees for other services provided in connection with
“reservationless” and operator-assisted audio and web conferencing services –
see note 2.
The EDNet
division, which operates primarily from San Francisco, California, provides
connectivity (in the form of high quality audio, compressed video and multimedia
data communications) within the entertainment and advertising industries through
its managed network, which encompasses production and post-production companies,
advertisers, producers, directors, and talent. EDNet generates revenues
primarily from network access and usage fees as well as sale, rental and
installation of equipment.
9
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
The
consolidated financial statements have been presented on the basis that we are
an ongoing concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We have incurred
losses since our inception, and have an accumulated deficit of approximately
$124.4 million as of December 31, 2010. Our operations have been financed
primarily through the issuance of equity and debt. For the year ended September
30, 2010, we had a net loss of approximately $9.3 million, although cash used in
operations for that period was approximately $197,000. For the three months
ended December 31, 2010, we had a net loss of approximately $898,000, although
cash used in operations for that period was approximately $79,000. Although we
had cash of approximately $138,000 at December 31, 2010, our working capital was
a deficit of approximately $3.8 million at that date.
We have
estimated that we would require an approximately 7-8% increase in our
consolidated revenues, as compared to our revenues for the twelve months ended
September 30, 2010, in order to adequately fund our anticipated operating cash
expenditures for the twelve months ending September 30, 2011 (including cash
interest expense and a basic level of capital expenditures). Due to
seasonality, this increase would be accomplished if we were to achieve average
quarterly revenues during the twelve months ending September 30, 2011 equivalent
to the revenues for the third quarter of fiscal 2010. We have estimated that, in
addition to this revenue increase, we will also require additional debt or
equity financing of approximately $1.5 to $2.0 million (in addition to recent
sales of common shares discussed below) over the twelve months ending September
30, 2011 to satisfy principal repayments due against existing debt as well as
past due trade payables that we believe are necessary to pay to continue our
operations. However, approximately $1.0 million of this $1.5 to $2.0 million
(related to the repayment of the Equipment Notes – see note 4) would not be
required until June 2011.
If we
were to achieve revenue increases in excess of this 7-8%, or if any of our
lenders elected to convert a portion of the existing debt to equity as allowed
for under its terms, the required financing could be less than this $1.5 to $2.0
million. However, if we did not achieve these revenue increases, or if our
operating expenses, cash interest or capital expenditures were higher than
anticipated over the twelve months ending September 30, 2011, the required
financing could be greater than this $1.5 to $2.0 million.
We have
implemented and continue to implement specific actions, including hiring
additional sales personnel, developing new products and initiating new marketing
programs, geared towards achieving revenue increases. The costs associated with
these actions were contemplated in the above calculations. However,
in the event we are unable to achieve the required revenue increases, we believe
that a combination of identified decreases in our current level of expenditures
that we would implement and the raising of additional capital in the form of
debt and/or equity that we believe we could obtain from identified sources would
be sufficient to allow us to operate for the next twelve months. We will closely
monitor our revenue and other business activity to determine if and when further
cost reductions, the raising of additional capital, or other activity is
considered necessary.
10
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
(continued)
A
prospectus allowing us to offer and sell up to $6.6 million of our registered
common shares (“Shelf Registration”) was declared effective by the SEC on April
30, 2010. On September 17, 2010, we entered into a Purchase Agreement (the
“Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC
agreed to purchase our common and preferred shares, and 1.6 million common
shares (including those issuable upon conversion of the preferred shares) were
included in a prospectus supplement filed by us with the SEC in connection with
a takedown under the Shelf Registration. On September 24, 2010, we received
$824,044 net proceeds (after deducting fees and legal, accounting and other
out-of-pocket costs incurred by us) related to our issuance under that Purchase
Agreement of the equivalent of 770,000 common shares (including those issuable
upon conversion of the preferred shares). During the three months ended December
31, 2010, LPC purchased an additional 315,000 shares of our common stock under
that Purchase Agreement for net proceeds of $268,045. During the
period from January 1, 2011 through February 4, 2011 LPC purchased an additional
225,000 shares of our common stock under that Purchase Agreement for net
proceeds of $185,526. LPC has also committed to purchase, at our sole
discretion, up to an additional 290,000 shares of our common stock in
installments over the remaining term of the Purchase Agreement, generally at
prevailing market prices, but subject to the specific restrictions and
conditions in the Purchase Agreement, including but not limited to a minimum
market price of $0.75 per share.
In
addition, we have agreed to use our best efforts to get, within 190 days from
the date of the Purchase Agreement, shareholder approval to sell up to an
additional 1,900,000 of our common shares to LPC, which upon such approval LPC
has agreed to purchase, at our sole discretion and subject to the same
restrictions and conditions in the Purchase Agreement.
There is
no assurance that we will sell additional shares to LPC under the Purchase
Agreement of that we will sell additional shares under the Shelf Registration,
or if we do make such sales what the timing or proceeds will be. In addition, we
may incur fees in connection with such sales. Furthermore, sales under the Shelf
Registration that exceed in aggregate twenty percent (20%) of our outstanding
shares would be subject to prior shareholder approval.
On
January 4, 2011, we received a funding commitment letter (the “Funding Letter”)
from J&C Resources, Inc. (“J&C”) irrevocably agreeing to provide us,
within twenty (20) days after our notice given on or before December 31, 2011,
aggregate cash funding of up to $500,000, which may be requested in multiple
tranches. Mr. Charles Johnston, one of our directors, is the president of
J&C. This Funding Letter was obtained solely to demonstrate our ability to
obtain short-term funds in the event other funding sources are not available,
but does not represent any obligation to accept such funding on these terms and
is not expected by us to be exercised. Cash provided under the Funding Letter
would be in exchange for our issuance of (a) a note or notes with interest
payable monthly at 15% per annum and principal payable on the earlier of a date
twelve months from funding or July 1, 2012 and (b) our issuance of 1 million
unregistered common shares, which shares would be prorated in the case of
partial funding. The note or notes would be unsecured and subordinated to all of
our other debts, except to the extent such the terms of such debts would allow
pari passu status. Furthermore, the note or notes would not be subject to any
provisions, other than with respect to priority of payments or collateral, of
our other debts. Upon receipt by us of an equivalent amount in dollars of
investment from any other source after the date of this Funding Letter, other
than funding received in connection with the LPC Purchase Agreement,
this Funding Letter will be terminated.
11
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
(continued)
Our
continued existence is dependent upon our ability to raise capital and to market
and sell our services successfully. However, there are no assurances whatsoever
that we will be able to sell additional common shares or other forms of equity
under the LPC Purchase Agreement, the Shelf Registration or otherwise and/or
that we will be able to borrow further funds under the Funding Letter or
otherwise and/or that we will increase our revenues and/or control our expenses
to a level sufficient to provide positive cash flow. The financial statements do
not include any adjustments to reflect future effects on the recoverability and
classification of assets or amounts and classification of liabilities that may
result if we are unsuccessful.
Basis of
Consolidation
The
accompanying consolidated financial statements include the accounts of Onstream
Media Corporation and its subsidiaries - Infinite Conferencing, Inc.,
Entertainment Digital Network, Inc., OSM Acquisition, Inc., AV Acquisition,
Inc., Auction Video Japan, Inc., HotelView Corporation and Media On Demand, Inc.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reverse
stock split
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in these consolidated financial statements, including
common share quantities, convertible debenture conversion prices and
exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
Cash and
cash equivalents
Cash and
cash equivalents consists of all highly liquid investments with original
maturities of three months or less.
Concentration
of Credit Risk
We at
times have cash in banks in excess of FDIC insurance limits and place our
temporary cash investments with high credit quality financial institutions. We
perform ongoing credit evaluations of our customers' financial condition and do
not require collateral from them. Reserves for credit losses are maintained at
levels considered adequate by our management.
Bad Debt
Reserves
Where we
are aware of circumstances that may impair a specific customer's ability to meet
its financial obligations, we record a specific allowance against amounts due
from it, and thereby reduces the receivable to an amount we reasonably believe
will be collected. For all other customers, we recognize allowances for doubtful
accounts based on the length of time the receivables are past due, the current
business environment and historical experience.
12
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market by
analyzing market conditions, current sales prices, inventory costs, and
inventory balances. We evaluate inventory balances for excess
quantities and obsolescence on a regular basis by analyzing backlog, estimated
demand, inventory on hand, sales levels and other information. Based on that
analysis, our management estimates the amount of provisions made for obsolete or
slow moving inventory.
Fair
Value Measurements
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities and amounts due to directors and officers
approximate fair value due to the short maturity of the instruments. The
carrying amounts of the current portion of notes, debentures and leases payable
approximate fair value due to the short maturity of the instruments, as well as
the market value interest rates they carry.
Effective
October 1, 2008, we adopted the provisions of the Fair Values Measurements and
Disclosures topic of the Accounting Standards Codification (“ASC”), with respect
to our financial assets and liabilities, identified based on the definition of a
financial instrument contained in the Financial Instruments topic of the ASC.
This definition includes a contract that imposes a contractual obligation on us
to exchange other financial instruments with the other party to the contract on
potentially unfavorable terms. We have determined that the Lehmann Note, the
Wilmington Notes, the Greenberg Note, the Rockridge Note, the CCJ Note and the
Equipment Notes discussed in note 4 and the redeemable portion of the Series
A-12 (preferred stock) are (or were) financial liabilities subject to the
accounting and disclosure requirements of the Fair Values Measurements and
Disclosures topic of the ASC. This is further discussed in “Effects of Recent
Accounting Pronouncements” below.
Under the
above accounting standards, fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value should maximize the use of
observable inputs and minimize the use of unobservable inputs. The accounting
standards describe a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
13
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair
Value Measurements (continued)
We have
determined that there are no Level 1 inputs for determining the fair value of
the Lehmann Note, the Wilmington Notes, the Greenberg Note, the Rockridge Note,
the CCJ Note, the Equipment Notes or the redeemable portion of the Series A-12.
However, we have determined that the fair value of the Lehmann Note, the
Wilmington Notes, the Greenberg Note, the Rockridge Note, the CCJ Note, the
Equipment Notes and the redeemable portion of the Series A-12 may be determined
using Level 2 inputs, as follows: the fair market value interest rate paid by us
under our line of credit arrangement (the “Line”) as discussed in note 4 and the
value of conversion rights contained in those arrangements, based on the
relevant aspects of the same Black Scholes valuation model used by us to value
our options and warrants. We have also determined that the fair value of the
Lehmann Note, the Wilmington Notes, the Greenberg Note, the Rockridge Note, the
CCJ Note, the Equipment Notes and the redeemable portion of the Series A-12 may
be determined using Level 3 inputs, as follows: third party studies arriving at
recommended discount factors for valuing payments made in unregistered
restricted stock instead of cash.
Based on
the use of the inputs described above, we have determined that there was no
material difference between the carrying value and the fair value of the Lehmann
Note, the Wilmington Notes, the Greenberg Note, the Rockridge Note, the CCJ
Note, the Equipment Notes and the redeemable portion of the Series A-12 as of
September 30, 2009, December 31, 2009, September 30, 2010 or December 31, 2010
(to the extent each of those liabilities were outstanding on each of those
dates) and therefore no adjustment with respect to fair value was made to our
financial statements as of those dates or for the three months ended December
31, 2010 and 2009, respectively.
In
accordance with the Financial Instruments topic of the ASC, we may elect to
report most financial instruments and certain other items at fair value on an
instrument-by-instrument basis with changes in fair value reported in earnings.
After the initial adoption, the election is made at the acquisition of an
eligible financial asset, financial liability, or firm commitment or when
certain specified reconsideration events occur. The fair value election may not
be revoked once an election is made. We have elected not to measure eligible
financial assets and liabilities at fair value.
14
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated
depreciation. Property and equipment under capital leases are stated
at the lower of the present value of the minimum lease payments at the beginning
of the lease term or the fair value at the inception of the lease. Depreciation
is computed using the straight-line method over the estimated useful lives of
the related assets. Amortization expense on assets acquired under capital leases
is included in depreciation expense. The costs of leasehold improvements are
amortized over the lesser of the lease term or the life of the
improvement.
Software
Included
in property and equipment is computer software developed for internal use,
including the Digital Media Services Platform (“DMSP”), the iEncode webcasting
software and the MarketPlace365 (“MP365”) platform – see notes 2 and
3. Such amounts have been accounted for in accordance with the
Intangibles – Goodwill and Other topic of the ASC and are amortized on a
straight-line basis over three to five years, commencing when the related asset
(or major upgrade release thereof) has been substantially placed in
service.
Goodwill
and other intangible assets
In
accordance with the Intangibles – Goodwill and Other topic of the ASC, goodwill
is reviewed annually (or more frequently if impairment indicators arise) for
impairment. Other intangible assets, such as customer lists, are amortized to
expense over their estimated useful lives, although they are still subject to
review and adjustment for impairment.
We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. We assess
the recoverability of such assets by comparing the estimated undiscounted cash
flows associated with the related asset or group of assets against their
respective carrying amounts. The impairment amount, if any, is calculated based
on the excess of the carrying amount over the fair value of those
assets.
We follow
a two step process for impairment testing of goodwill. The first step of this
test, used to identify potential impairment and described above, compares the
fair value of a reporting unit with its carrying amount, including goodwill. The
second step, if necessary, measures the amount of the impairment, including a
comparison and reconciliation of the carrying value of all of our reporting
units to our market capitalization, after appropriate adjustments for control
premium and other considerations. See note 2 – Goodwill and other
Acquisition-Related Intangible Assets.
15
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition
Revenues
from sales of goods and services are recognized when (i) persuasive evidence of
an arrangement between us and the customer exists, (ii) the goods or service has
been provided to the customer, (iii) the price to the customer is fixed or
determinable and (iv) collectibility of the sales price is reasonably
assured.
The
Webcasting division of the Digital Media Services Group recognizes revenue from
live and on-demand webcasts at the time an event is accessible for streaming
over the Internet. Webcasting services are provided to customers
using our proprietary streaming media software, tools and processes. Customer
billings are typically based on (i) the volume of data streamed at rates agreed
upon in the customer contract or (ii) a set monthly fee. Since the primary
deliverable for the webcasting group is a webcast, returns are
inapplicable. If we have difficulty in producing the webcast, we may
reduce the fee charged to the customer. Historically these reductions
have been immaterial, and are recorded in the month the event
occurs.
Services
for live webcast events are usually sold for a single price that includes
on-demand webcasting services in which we host an archive of the webcast event
for future access on an on-demand basis for periods ranging from one month to
one year. However, on-demand webcasting services are sometimes sold separately
without the live event component and we have referred to these separately billed
transactions as verifiable and objective evidence of the amount of our revenues
related to on-demand services. In addition, we have determined that
the material portion of all views of archived webcasts take place within the
first ten days after the live webcast.
Based on
our review of the above data, we have determined that the material portion of
our revenues for on-demand webcasting services are recognized during the period
in which those services are provided, which complies with the provisions of the
Revenue Recognition topic of the ASC. Furthermore, we have determined that the
maximum potentially deferrable revenue from on-demand webcasting services
charged for but not provided as of December 31, 2010 and September 30, 2010 was
immaterial in relation to our recorded liabilities at those dates.
We
include the DMSP and UGC divisions’ revenues, along with the Smart Encoding
division’s revenues from hosting, storage and streaming, in the DMSP and hosting
revenue caption. We include the EDNet division’s revenues from equipment sales
and rentals and the Smart Encoding division’s revenues from encoding and
editorial services in the Other Revenue caption.
The DMSP,
UGC and Smart Encoding divisions of the Digital Media Services Group recognize
revenues from the acquisition, editing, transcoding, indexing, storage and
distribution of their customers’ digital media. Charges to customers by these
divisions generally include a monthly subscription or hosting fee. Additional
charges based on the activity or volumes of media processed, streamed or stored
by us, expressed in megabytes or similar terms, are recognized at the time the
service is performed. Fees charged for customized applications or set-up are
recognized as revenue at the time the application or set-up is
completed.
16
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition (continued)
The
Infinite division of the Audio and Web Conferencing Services Group generates
revenues from audio conferencing and web conferencing services, plus recording
and other ancillary services. Infinite owns telephone switches used
for audio conference calls by its customers, which are generally charged for
those calls based on a per-minute usage rate. Infinite provides online
webconferencing services to its customers, charging either a per-minute rate or
a monthly subscription fee allowing a certain level of usage. Audio conferencing
and web conferencing revenue is recognized based on the timing of the customer’s
use of those services.
The EDNet
division of the Audio and Web Conferencing Services Group generates revenues
from customer usage of digital telephone connections controlled by EDNet, as
well as bridging services and the sale and rental of equipment. EDNet
purchases digital phone lines from telephone companies (and resellers) and sells
access to the lines, as well as separate per-minute usage charges. Network usage
and bridging revenue is recognized based on the timing of the customer’s use of
those services.
EDNet
sells various audio codecs and video transport systems, equipment which enables
its customers to collaborate with other companies or with other
locations. As such, revenue is recognized for the sale of equipment
when the equipment is installed or upon signing of a contract after the
equipment is installed and successfully operating. All sales are
final and there are no refund rights or rights of return. EDNet leases some
equipment to customers under terms that are accounted for as operating
leases. Rental revenue from leases is recognized ratably over the
life of the lease and the related equipment is depreciated over its estimated
useful life. All leases of the related equipment contain fixed
terms.
Deferred
revenue represents amounts billed to customers for webcasting, EDNet, smart
encoding or DMSP services to be provided in future accounting
periods. As projects or events are completed and/or the services
provided, the revenue is recognized.
Comprehensive
Income or Loss
We have
recognized no transactions generating comprehensive income or loss that are not
included in our net loss, and accordingly, net loss equals comprehensive loss
for all periods presented.
Advertising
and marketing
Advertising
and marketing costs, which are charged to operations as incurred and included in
Professional Fees and Other General and Administrative Operating Expenses, were
approximately $202,000 and $80,000 for the three months ended December 31, 2010
and 2009, 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.
17
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income
Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating current tax exposure together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We then
assess the likelihood that the deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
establish a valuation allowance. To the extent we establish a valuation
allowance or change this allowance in a period, we include an expense or a
benefit within the tax provision in our statement of
operations.
We have
approximately $93 million in Federal net operating loss carryforwards as of
December 31, 2010, approximately $8 million which expire in fiscal years 2011
through 2012 and approximately $85 million which expire in fiscal years 2018
through 2030. Our utilization of approximately $20 million of the net
operating loss carryforwards, acquired from the 2001 acquisition of EDNet and
the 2002 acquisition of MOD and included in this $93 million total, against
future taxable income may be limited as a result of ownership changes and other
limitations.
Significant
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against those
deferred tax assets. We had a deferred tax asset of approximately $35.0 million
as of December 31, 2010, primarily resulting from net operating loss
carryforwards. A full valuation allowance has been recorded related to the
deferred tax asset due to the uncertainty of realizing the benefits of certain
net operating loss carryforwards before they expire. Our management will
continue to assess the likelihood that the deferred tax asset will be realizable
and the valuation allowance will be adjusted accordingly.
Accordingly,
no income tax benefit was recorded in our consolidated statement of operations
as a result of the net tax losses for the three months ended December 31, 2010
and 2009. The primary differences between the net loss for book and
the net loss for tax purposes are the following items expensed for book purposes
but not deductible for tax purposes – amortization of certain loan discounts,
amortization and/or impairment adjustments of certain acquired intangible
assets, and expenses for stock options and shares issued in payment for
consultant and employee services but not exercised by the recipients, or in the
case of shares, not registered for or eligible for resale.
The
Income Taxes topic of the ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. However, as of December
31 and September 30, 2010, respectively, we have not taken, nor recognized the
financial statement impact of, any material tax positions, as defined above. Our
policy is to recognize, as non-operating expense, interest or penalties related
to income tax matters at the time such payments become probable, although we had
not recognized any such material items in our statement of operations for the
three months ended December 31, 2010 and 2009. The tax year ending September 30,
2005 as well as the tax years ending September 30, 2007 and thereafter remain
subject to examination by Federal and various state tax
jurisdictions.
18
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss
per Share
For the
three months ended December 31, 2010 and 2009, net loss per share is based on
the net loss divided by the weighted average number of shares of common stock
outstanding – see discussion of reverse stock split above. Since the
effect of common stock equivalents was anti-dilutive, all such equivalents were
excluded from the calculation of weighted average shares outstanding. The total
outstanding options and warrants, which have been excluded from the calculation
of weighted average shares outstanding, were 2,172,439 and 2,169,008 at December
31, 2010 and 2009, respectively.
In
addition, the potential dilutive effects of the following convertible securities
outstanding at December 31, 2010 have been excluded from the calculation of
weighted average shares outstanding: (i) 35,000 shares of Series A-13
Convertible Preferred Stock (“Series A-13”) which could have potentially
converted into 116,667 shares of ONSM common stock (175,000 shares based on the
January 2011 amendment – see note 6), (ii) 420,000 shares of Series A-14
Convertible Preferred Stock which could potentially convert into 420,000 shares
of ONSM common stock (iii) $1,000,000 of convertible notes which in aggregate
could potentially convert into up to 208,333 shares of our common stock
(excluding interest), (iv) the right to receive 366,667 restricted shares of our
common stock for an origination fee in connection with the Rockridge Note,
issuable upon not less than sixty-one (61) days written notice to us, (v) the
$996,334 convertible portion of the Rockridge Note which could have potentially
converted into up to 415,139 shares of our common stock, (vi) the $200,000 CCJ
Note, which could have potentially converted into up to 66,667 shares of our
common stock (100,000 shares based on the January 2011 amendment – see note 4)
and (vii) the $172,000 outstanding balance of the Lehmann Note, which could have
potentially converted into up to 84,314 shares of our common stock (and was
repaid by the issuance of 200,000 common shares in January 2011 – see note
4).
Furthermore,
if we were to sell all or substantially all of our assets prior to the repayment
of the Rockridge Note, the remaining outstanding principal amount of the Rockridge Note
could be converted into restricted shares of our common stock, which would have
been 208,606 shares as of December 31, 2010 (in addition to the 415,139 shares
noted above).
The
potential dilutive effects of the following convertible securities outstanding
at December 31, 2009 have been excluded from the calculation of weighted average
shares outstanding: (i) 35,000 shares of Series A-13 which could have
potentially converted into 116,667 shares of ONSM common stock, (ii) $1,000,000
of convertible notes which in aggregate could have potentially converted into up
to 208,333 shares of our common stock (excluding interest), (iii) the right to
receive 366,667 restricted shares of our common stock for an origination fee in
connection with the Rockridge Note, issuable upon not less than sixty-one (61)
days written notice to us, (iv) the $500,000 convertible portion of the
Rockridge Note which could have potentially converted into up to 208,333 shares
of our common stock and (v) the $200,000 CCJ Note, which could have potentially
converted into up to 66,667 shares of our common stock.
19
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Compensation
and related expenses
Compensation
costs for employees considered to be direct labor are included as part of
webcasting and smart encoding costs of revenue. Certain compensation costs for
employees involved in development of software for internal use, as discussed
under Software above, are capitalized. Accrued liabilities and amounts due to
directors and officers includes, in aggregate, approximately $797,000 and
$779,000 as of December 31 and September 30, 2010, respectively, related to
salaries, commissions, taxes, vacation and other benefits earned but not paid as
of those dates.
Equity
Compensation to Employees and Consultants
We have a
stock based compensation plan (the “2007 Plan”) for our employees. The
Compensation – Stock Compensation topic of the ASC requires all companies to
measure compensation cost for all share-based payments, including employee stock
options, at fair value, which we adopted as of October 1, 2006 (the required
date) and first applied during the year ended September 30, 2007, using the
modified-prospective-transition method. Under this method, compensation cost
recognized for the three months ended December 31, 2010 and 2009 includes
compensation cost for all share-based payments granted subsequent to September
30, 2006, calculated using the Black-Scholes model, based on the estimated
grant-date fair value and allocated over the applicable vesting and/or service
period. As of October 1, 2006, there were no outstanding share-based payments
granted prior to that date, but not yet vested. There were no Plan options
granted during the three months ended December 30, 2010. For Plan options that
were granted (or extended) and thus valued under the Black-Scholes model during
the three months ended December 31, 2009, the expected volatility rate was
approximately 88%, the risk-free interest rate was approximately 2.5% and the
expected term was approximately 5 years.
We have
granted Non-Plan Options to consultants and other third parties. These options
have been accounted for under the Equity topic (Equity-Based Payments to
Non-Employees subtopic) of the ASC, under which the fair value of the options at
the time of their issuance, calculated using the Black-Scholes model, is
reflected as a prepaid expense in our consolidated balance sheet at that time
and expensed as professional fees during the time the services contemplated by
the options are provided to us. There were no Non-Plan options granted during
the three months ended December 31, 2010. For Non-Plan options that were granted
and thus valued under the Black-Scholes model during the three months ended
December 31, 2009, the expected volatility rate was approximately 91 to 97%, the
risk-free interest rate was approximately 1.9% to 2.6% and the expected term was
4 to 5 years.
In all
valuations above, expected dividends were $0 and the expected term was the full
term of the related options (or in the case of extended options, the incremental
increase in the option term as compared to the remaining term at the time of the
extension). See Note 8 for additional information related to all stock option
issuances.
20
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Estimates are used when accounting for allowances for
doubtful accounts, revenue reserves, inventory reserves, depreciation and
amortization lives and methods, income taxes and related reserves, contingencies
and goodwill and other impairment allowances. Such estimates are reviewed on an
on-going basis and actual results could be materially affected by those
estimates.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation, including classifications between accounts payable, accrued
liabilities and amounts due to directors and officers. Also see discussion of
reverse stock split above.
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 generally accepted
accounting principles for complete financial statements and should be read in
conjunction with our annual financial statements as of September 30, 2010. 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 December 31, 2010 and
the results of our operations and cash flows for the three months ended December
31, 2010 and 2009. The results of operations and cash flows for the interim
period are not necessarily indicative of the results of operations or cash flows
that can be expected for the year ending September 30, 2011.
Effects
of Recent Accounting Pronouncements
The Fair
Value Measurements and Disclosures topic of the Accounting Standards
Codification (“ASC”) includes certain concepts first set forth in September
2006, which define the use of fair value measures in financial statements,
establish a framework for measuring fair value and expand disclosure related to
the use of fair value measures. In February 2008, the FASB provided a one-year
deferral of the effective date of those concepts for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. The application of these
concepts was effective for our fiscal year beginning October 1, 2008, excluding
the effect of the one-year deferral noted above. See “Fair Value Measurements”
above. We adopted these concepts with respect to our non-financial assets and
non-financial liabilities that are not measured at fair value at least annually,
effective October 1, 2009. The adoption of these concepts did not have a
material impact on our financial position, results of operations or cash
flows.
21
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects
of Recent Accounting Pronouncements (continued)
The
Business Combinations topic of the ASC establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. Certain provisions of this
guidance were first effective for our fiscal year beginning October 1, 2009,
although they did not have a material impact on our financial position, results
of operations or cash flows.
The
Intangibles – Goodwill and Other topic of the ASC states the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset, which requirements were
effective for our fiscal year beginning October 1, 2009. The objective of these
requirements is to improve the consistency between the useful life of a
recognized intangible asset under the Intangibles – Goodwill and Other topic of
the ASC and the period of expected cash flows used to measure the fair value of
the asset under the Business Combinations topic of the ASC. These requirements
apply to all intangible assets, whether acquired in a business combination or
otherwise, and will be applied prospectively to intangible assets acquired after
the effective date.
The Debt
topic of the ASC specifies that issuers of convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement) should
separately account for the liability and equity components in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. These requirements were effective for our
fiscal year beginning October 1, 2009, although they did not have a material
impact on our financial position, results of operations or cash
flows.
ASC Topic
415, Derivatives and Hedging, outlines a two-step approach to evaluate an
instrument’s contingent exercise provisions, if any, and to evaluate the
instrument’s settlement provisions when determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity’s own stock,
which would in turn determine whether the instrument was treated as a liability
to be recorded on the balance sheet at fair value and then adjusted to market in
subsequent accounting periods. These provisions were first effective for fiscal
years beginning after December 15, 2008 and accordingly were first applied
by us for our fiscal year beginning October 1, 2009. There were no outstanding
instruments that this accounting would apply to as of the beginning of the
fiscal year of adoption, and therefore there was no cumulative-effect adjustment
recorded to the opening balance of retained earnings related to this issue.
However, it was determined that this pronouncement did apply to warrants issued
by us in September 2010 – see note 8.
22
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects of Recent Accounting Pronouncements (continued)
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued ASC
update number 2009-14 -Software (Topic 985): Certain Revenue Arrangements That
Include Software Elements (“Update 2009-14”) and ASC update number 2009-13 -
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
(“Update 2009-13”). As summarized in Update 2009-14, ASC Topic 985 has been
amended to remove from the scope of industry specific revenue accounting
guidance for software and software related transactions, tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality. As summarized in
Update 2009-13, ASC Topic 605 has been amended (1) to provide updated
guidance on whether multiple deliverables exist, how the deliverables in an
arrangement should be separated, and the consideration allocated; (2) to
require an entity to allocate revenue in an arrangement using estimated selling
prices of deliverables if a vendor does not have vendor-specific objective
evidence (“VSOE”) or third-party evidence of selling price; and (3) to
eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method. These requirements were
effective for our fiscal year ended September 30, 2011 and were adopted by us
accordingly, on a prospective basis. These requirements are not expected to have
a material impact on our financial position or results of
operation.
In
January 2010, the FASB issued ASC update number 2010-06 - Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“Update 2010-06”). Update 2010-06 requires new and revised
disclosures for recurring or non-recurring fair value measurements, specifically
related to significant transfers into and out of Levels 1 and 2, and for
purchases, sales, issuances, and settlements in the rollforward of activity for
Level 3 fair value measurements. Update 2010-06 also clarifies existing
disclosures related to the level of disaggregation and the inputs and valuation
techniques used for fair value measurements. The new disclosures and
clarifications of existing disclosures about fair value measurements were
effective January 1, 2010. However, the disclosures about purchases, sales,
issuances, and settlements in the rollforward of activity for Level 3 fair value
measurements are not effective until our fiscal year ended September 30, 2012.
Our adoption of Update 2010-06 did not, and is not expected to, have a material
impact on our financial position, results of operations or cash
flows.
In
February 2010, the FASB issued ASC update number 2010-09, which amended ASC
Topic 855 (Subsequent Events), effective upon issuance, to remove the
requirement that an SEC filer disclose the date through which subsequent events
have been evaluated. Our adoption of this guidance was limited to the form and
content of disclosures and did not have a material impact on our consolidated
financial statements.
23
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
Information
regarding the Company’s goodwill and other acquisition-related intangible assets
is as follows:
December 31, 2010
|
September 30, 2010
|
|||||||||||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
|||||||||||||||||||
Goodwill:
|
||||||||||||||||||||||||
Infinite
Conferencing
|
$ | 8,600,887 | $ | - | $ | 8,600,887 | $ | 8,600,887 | $ | - | $ | 8,600,887 | ||||||||||||
Acquired
Onstream
|
2,521,401 | - | 2,521,401 | 2,521,401 | - | 2,521,401 | ||||||||||||||||||
EDNet
|
1,271,444 | - | 1,271,444 | 1,271,444 | - | 1,271,444 | ||||||||||||||||||
Auction
Video
|
3,216 | - | 3,216 | 3,216 | - | 3,216 | ||||||||||||||||||
Total
goodwill
|
12,396,948 | - | 12,396,948 | 12,396,948 | - | 12,396,948 | ||||||||||||||||||
Acquisition-related
intangible assets (items listed are those remaining on our books as of
December 31, 2010):
|
||||||||||||||||||||||||
Infinite Conferencing -
customer
lists, trademarks and
URLs
|
3,181,197 | ( 2,134,028 | ) | 1,047,169 | 3,181,197 | ( 2,021,321 | ) | 1,159,876 | ||||||||||||||||
Auction
Video - patent pending
|
327,025 | ( 213,252 | ) | 113,773 | 321,815 | ( 197,167 | ) | 124,648 | ||||||||||||||||
Total
intangible assets
|
3,508,222 | ( 2,347,280 | ) | 1,160,942 | 3,503,012 | ( 2,218,488 | ) | 1,284,524 | ||||||||||||||||
Total
goodwill and other acquisition-related intangible assets
|
$ | 15,905,170 | $ | (2,347,280 | ) | $ | 13,557,890 | $ | 15,899,960 | $ | (2,218,488 | ) | $ | 13,681,472 |
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.
24
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Infinite Conferencing –
April 27, 2007 (continued)
The fair
value of certain intangible assets (internally developed software, customer
lists, trademarks, URLs (internet domain names), favorable contractual terms and
employment and non-compete agreements) acquired as part of the Infinite Merger
was determined by our management at the time of the merger. This fair value was
primarily based on the discounted projected cash flows related to these assets
for the three to six years immediately following the merger on a stand-alone
basis without regard to the Infinite Merger, as projected by our management and
Infinite’s management. The discount rate utilized considered equity risk factors
(including small stock risk) as well as risks associated with profitability and
working capital, competition, and intellectual property. The projections were
adjusted for charges related to fixed assets, working capital and workforce
retraining. We have been and are amortizing these assets over useful lives
ranging from 3 to 6 years - as of September 30, 2010 the assets with a useful
life of three years (favorable contractual terms and employment and non-compete
agreements) had been fully amortized and removed from our balance
sheet.
The
approximately $18.2 million purchase price exceeded the fair values we assigned
to Infinite’s tangible and intangible assets (net of liabilities at fair value)
by approximately $12.0 million, which we recorded as goodwill as of the purchase
date. This initially recorded goodwill was determined to be impaired as of
December 31, 2008 and a $900,000 adjustment was made to reduce its carrying
value to approximately $11.1 million as of that date. A similar
adjustment of $200,000 was made as of that date to reduce the carrying value of
certain intangible assets acquired as part of the Infinite Merger. Furthermore,
as discussed in “Testing for Impairment” below, the Infinite goodwill was
determined to be further impaired as of December 31, 2009 and a $2.5 million
adjustment was made to reduce the carrying value of that goodwill to
approximately $8.6 million as of that date. A similar adjustment of $600,000 was
made as of that date to reduce the carrying value of certain intangible assets
acquired as part of the Infinite Merger. These adjustments, totaling $3.1
million, were reflected in our results of operations for the three months ended
December 31, 2009, as a charge for impairment of goodwill and other intangible
assets.
Auction Video – March 27,
2007
On March
27, 2007 we completed the acquisition of the assets, technology and patents
pending of privately owned Auction Video, Inc., a Utah corporation, and Auction
Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”).
The Auction Video, Inc. transaction was structured as a purchase of assets and
the assumption of certain identified liabilities by our wholly-owned U.S.
subsidiary, AV Acquisition, Inc. The Auction Video Japan, Inc. transaction was
structured as a purchase of 100% of the issued and outstanding capital stock of
Auction Video Japan, Inc. The acquisitions were made with a combination of
restricted shares of our common stock valued at approximately $1.5 million
issued to the stockholders of Auction Video Japan, Inc. and $500,000 cash paid
to certain stockholders and creditors of Auction Video, Inc., for an aggregate
purchase price of approximately $2.0 million, including transaction
costs.
25
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Auction Video – March 27,
2007 (continued)
We
allocated the Auction Video purchase price to the identifiable tangible and
intangible assets acquired, based on a determination of their reasonable fair
value as of the date of the acquisition. The technology and patent pending
related to the video ingestion and flash transcoder, the Auction Video customer
lists and the consulting and non-compete agreements entered into with the former
executives and owners of Auction Video were valued in aggregate at $1,150,000
and have been and are being amortized over various lives between two to five
years commencing April 2007 - as of September 30, 2010 the assets
with a useful life of two or three years (customer lists and the consulting and
non-compete agreements) had been fully amortized and removed from our balance
sheet.
$600,000
was assigned as the value of the video ingestion and flash transcoder, which was
already integrated into our DMSP as of the date of the acquisition and was added
to that asset’s carrying cost for financial statement purposes, with
depreciation over a three-year life commencing April 2007 – see note 3. Future
cost savings for Auction Video services to be provided to our customers existing
prior to the acquisition were valued at $250,000 and were amortized to cost of
sales over a two-year period commencing April 2007.
Subsequent
to the Auction Video acquisition, we began pursuing the final approval of the
patent pending application and in March 2008 retained the law firm of Hunton
& Williams to assist in expediting the patent approval process and to help
protect rights related to our UGV (User Generated Video) technology. In April
2008, we revised the original patent application primarily for the purpose of
splitting it into two separate applications, which, while related, were being
evaluated separately by the U.S. Patent Office (“USPO”). With respect to the
claims pending in the first of the two applications, the USPO issued non-final
rejections in August 2008, February 2009 and May 2009, as well as final
rejections in January 2010 and June 2010. Our responses to certain of these
rejections included modifications to certain claims made in the original patent
application. In response to the latest rejection we filed a Notice of Appeal
with the USPO on November 22, 2010 and we filed an appeal brief with the USPO on
February 9, 2011. The USPO has until approximately April 9, 2011 to file
their response, after which a decision would be made as to our appeal by a three
member panel, either based on the filings or a hearing if requested by us.
Regardless of the ultimate outcome of this matter, our management has determined
that an adverse decision with respect to this patent application would not have
a material adverse effect on our financial position or results of operations.
The USPO has taken no formal action with regard to the second of the two
applications. Certain of the former owners of Auction Video, Inc. have an
interest in proceeds that we may receive under certain circumstances in
connection with these patents.
On
December 5, 2008 we entered into an agreement whereby one of the former owners
of Auction Video Japan, Inc. agreed to shut down the Japan office of Auction
Video as well as assume all of our outstanding assets and liabilities connected
with that operation, in exchange for non-exclusive rights to sell our products
in Japan and be compensated on a commission-only basis. 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.
26
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Acquired Onstream – December
23, 2004
On
December 23, 2004, privately held Onstream Media Corporation (“Acquired
Onstream”) was merged with and into our wholly owned subsidiary OSM Acquisition,
Inc. (the “Onstream Merger”). At that time, all outstanding shares of Acquired
Onstream capital stock and options not already owned by us (representing 74%
ownership interest) were converted into restricted shares of our common stock
plus options and warrants to purchase our common stock. We also issued common
stock options to directors and management as additional compensation at the time
of and for the Onstream Merger, accounted for at the time in accordance with
Accounting Principles Board Opinion 25 (which accounting pronouncement has since
been superseded by the ASC).
Acquired
Onstream was a development stage company founded in 2001 that began working on a
feature rich digital asset management service offered on an application service
provider (“ASP”) basis, to allow corporations to better manage their digital
rich media without the major capital expense for the hardware, software and
additional staff necessary to build their own digital asset management solution.
This service was intended to be offered via the Digital Media Services Platform
(“DMSP”), which was initially designed and managed by Science Applications
International Corporation (“SAIC”), one of the country's foremost IT security
firms, providing services to all branches of the federal government as well as
leading corporations.
The
primary asset acquired in the Onstream Merger was the partially completed DMSP,
recorded at fair value as of the December 23, 2004 closing, in accordance with
the Business Combinations topic of the ASC. The fair value was primarily based
on the discounted projected cash flows related to this asset for the five years
immediately following the acquisition on a stand-alone basis without regard to
the Onstream Merger, as projected at the time of the acquisition by our
management and Acquired Onstream’s management. The discount rate utilized
considered equity risk factors (including small stock risk and bridge/IPO stage
risk) plus risks associated with profitability/working capital, competition, and
intellectual property. The projections were adjusted for charges related to
fixed assets, working capital and workforce retraining.
The
approximately $10.0 million purchase price we paid for 100% of Acquired Onstream
exceeded the fair values we assigned to Acquired Onstream’s tangible and
intangible assets (net of liabilities at fair value) by approximately $8.4
million, which we recorded as goodwill as of the purchase date. This initially
recorded goodwill was determined to be impaired as of December 31, 2008 and a
$4.3 million adjustment was made to reduce the carrying value of that goodwill
to approximately $4.1 million as of that date. Furthermore, as discussed in
“Testing for Impairment” below, the Acquired Onstream goodwill was determined to
be further impaired as of September 30, 2010 and a $1.6 million adjustment was
made to reduce the carrying value of that goodwill to approximately $2.5 million
as of that date.
Testing for
Impairment
The
Intangibles – Goodwill and Other topic of the ASC, which addresses the financial
accounting and reporting standards for goodwill and other intangible assets
subsequent to their acquisition, requires that goodwill be tested for impairment
on a periodic basis. Although other intangible assets are being amortized to
expense over their estimated useful lives, the unamortized balances are still
subject to review and adjustment for impairment.
27
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Testing for
Impairment (continued)
There is
a two step process for impairment testing of goodwill. The first step of this
test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. The second step, if
necessary, measures the amount of the impairment. We performed impairment tests
on Infinite, EDNet and Acquired Onstream as of December 31, 2009. We assessed
the fair value of the net assets of these reporting units by considering the
projected cash flows and by analysis of comparable companies, including such
factors as the relationship of the comparable companies’ revenues to their
respective market values. Based on these factors, we concluded that there was no
impairment of the assets of Acquired Onstream or EDNet as of that date. However,
we determined that Infinite’s goodwill and certain of its intangible assets were
impaired as of that date and based on that condition, a $3.1 million adjustment
was made to reduce the carrying value of goodwill as of that date, which we
reflected as a non-cash expense for the three months ended December 31,
2009.
As the
result of the decline in the price of our common stock from $1.86 per share as
of March 31, 2010 to $1.03 as of June 30, 2010, it appeared that our market
value (after appropriate adjustments for control premium and other
considerations) was probably less than our net book value as of June 30, 2010.
However, we concluded that the decline in market value as of June 30, 2010 was
not of sufficient duration nor was it otherwise indicative of a triggering event
that would require an interim impairment review. However, this decline continued
after June 30, 2010 and resulted in a common stock price of $1.04 as of
September 30, 2010 (and $0.76 as of December 23, 2010). As a result,
we determined that it was appropriate for us to evaluate whether our goodwill
and other intangible assets were impaired as of September 30, 2010. We performed
impairment tests on Infinite, EDNet and Acquired Onstream as of September 30,
2010, using the same methodologies discussed above. Based on these
factors, we concluded that there was no impairment of the assets of Infinite or
EDNet as of that date. However, we determined that Acquired Onstream’s goodwill
was impaired as of that date and based on that condition, a $1.6 million
adjustment was made to reduce the carrying value of goodwill as of that
date.
The
market price of our common stock increased from $0.76 as of December 23, 2010 to
$0.80 as of December 31, 2010 and $1.06 as of February 4, 2011. Based on this
recovery of the market value of our stock as compared to the valuations that
were considered as part of the September 30, 2010 valuation, we have concluded
that there are no triggering events that would require an interim impairment
review as of December 31, 2010.
The
valuations of Infinite, EDNet and Acquired Onstream incorporate our management’s
estimates of future sales and operating income, which estimates in the cases of
Infinite and Acquired Onstream are dependent on products (audio and web
conferencing and the DMSP, respectively) from which significant sales and/or
sales increases may be required to support that valuation. Furthermore, even if
our market value were to exceed our net book value in the future, annual reviews
for impairment in future periods may result in future periodic
write-downs. Tests for impairment between annual tests may be
required if events occur or circumstances change that would more likely than not
reduce the fair value of the net carrying amount.
28
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
3: PROPERTY AND EQUIPMENT
Property
and equipment, including equipment acquired under capital leases, consists
of:
December 31, 2010
|
September 30, 2010
|
|||||||||||||||||||||||||||
Historical
Cost
|
Accumulated
Depreciation
and
Amortization
|
Net Book
Value
|
Historical
Cost
|
Accumulated
Depreciation
and
Amortization
|
Net Book
Value
|
Useful
Lives
(Yrs)
|
||||||||||||||||||||||
Equipment
and software
|
$ | 10,409,469 | $ | ( 9,736,909 | ) | $ | 672,560 | $ | 10,367,283 | $ | ( 9,596,497 | ) | $ | 770,786 | 1-5 | |||||||||||||
DMSP
|
5,916,435 | ( 5,168,493 | ) | 747,942 | 5,890,134 | ( 5,113,292 | ) | 776,842 | 3-5 | |||||||||||||||||||
Other
capitalized internal
use software
|
1,994,938 | ( 654,873 | ) | 1,340,065 | 1,840,136 | ( 599,753 | ) | 1,240,383 | 3-5 | |||||||||||||||||||
Travel video
library
|
1,368,112 | ( 1,368,112 | ) | - | 1,368,112 | ( 1,368,112 | ) | - | N/A | |||||||||||||||||||
Furniture,
fixtures
and leasehold
improvements
|
545,470 | ( 481,090 | ) | 64,380 | 540,669 | ( 474,417 | ) | 66,252 | 2-7 | |||||||||||||||||||
Totals
|
$ | 20,234,424 | $ | (17,409,477 | ) | $ | 2,824,947 | $ | 20,006,334 | $ | (17,152,071 | ) | $ | 2,854,263 |
Depreciation
and amortization expense for property and equipment was approximately $257,000
and $365,000 for the three months ended December 31, 2010 and 2009,
respectively.
As part
of the Onstream Merger (see note 2), we became obligated under a contract with
SAIC, under which SAIC would build a platform that eventually, albeit after
further extensive design and re-engineering by us, led to the DMSP. This
platform was the primary asset included in our purchase of Acquired Onstream,
and was recorded at an initial amount of approximately $2.7 million. The SAIC
contract terminated by mutual agreement of the parties on June 30, 2008.
Although cancellation of the contract released SAIC to offer what was identified
as the “Onstream Media Solution” directly or indirectly to third parties, we do
not expect this right to result in a material adverse impact on future DMSP
sales.
The DMSP
is comprised of four separate “products”- transcoding, storage, search/retrieval
and distribution. A limited version of the DMSP, with three of the four
products, was first placed in service in November 2005. “Store and Stream” was
the first version of the DMSP sold to the general public, starting in October
2006.
On March
27, 2007 we completed the acquisition of Auction Video – see note 2. The assets
acquired included a video ingestion and flash transcoder, which was already
integrated into the DMSP as of that date. Based on our determination of the fair
value of the transcoder at that date, $600,000 was added to the DMSP’s carrying
cost, which additional cost was depreciated over a three-year life commencing
April 2007.
29
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
3: PROPERTY AND EQUIPMENT (Continued)
On March
31, 2008 we agreed to pay $300,000 for a perpetual license for certain digital
asset management software, which we currently utilize to provide our automatic
meta-tagging services, in addition to and in accordance with a limited term
license that we purchased in 2007 for $281,250. At the time of this purchase, in
addition to continuing to use this software to provide our automatic
meta-tagging services, we expanded our use of this software in providing our
core DMSP services. Therefore, we recorded a portion of this purchase, plus a
portion of the remaining unamortized 2007 purchase amount, as an aggregate
$243,750 increase in the DMSP’s carrying cost, such additional cost being
depreciated over five years commencing April 2008.
In
connection with the development of “Streaming Publisher”, a second version of
the DMSP with additional functionality, we have capitalized as part of the DMSP
approximately $799,000 of employee compensation, payments to contract
programmers and related costs as of December 31, 2010, including $25,000
capitalized during the three months ended December 31, 2010, $314,000 during the
year ended September 30, 2010, $274,000 during the year ended September 30, 2009
and $186,000 during the year ended September 30, 2008. As of December 31, 2010,
approximately $724,000 of these Streaming Publisher costs had been placed in
service and are being depreciated primarily over five years. The remainder of
the costs not in service relate primarily to new versions and/or releases of the
DMSP under development. Streaming Publisher is a stand-alone product based on a
different architecture than Store and Stream and is a primary building block of
the MP365 platform, discussed below.
Other
capitalized internal use software as of December 31, 2010 includes approximately
$705,000 of employee compensation and payments to contract programmers for the
development of the MP365 platform, which enables the creation of on-line virtual
marketplaces and trade shows utilizing many of our other technologies such as
DMSP, webcasting, UGC and conferencing. Approximately $122,000 was capitalized
during the three months ended December 31, 2010, $435,000 during the year ended
September 30, 2010 and $148,000 during the year ended September 30, 2009. This
excludes related costs for the development of Streaming Publisher, as discussed
above. $297,000 of these MP365 costs were first placed in service as of August
1, 2010. The remainder of the costs not in service relate primarily to new
versions and/or releases of MP365 under development.
Other
capitalized internal use software as of December 31, 2010 includes approximately
$711,000 of employee compensation and other costs for the development of iEncode
software, which runs on a self-administered, webcasting appliance that can be
used anywhere to produce a live video webcast. Approximately $30,000 was
capitalized during the three months ended December 31, 2010, $180,000 was during
the year ended September 30, 2010, $288,000 during the year ended September 30,
2009 and $213,000 during the year ended September 30, 2008. As of December 31,
2010, $592,000 of these iEncode costs had been placed in service and are being
depreciated over five years. The remainder of the costs not in service relate
primarily to new versions and/or releases of iEncode under
development.
30
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT
Debt
includes convertible debentures, notes payable and capitalized lease
obligations.
Convertible
Debentures
Convertible
debentures consist of the following:
December 31,
2010
|
September 30,
2010
|
|||||||
Equipment
Notes
|
$ | 1,000,000 | $ | 1,000,000 | ||||
CCJ
Note
|
200,000 | 200,000 | ||||||
Greenberg
Note
|
- | 159,000 | ||||||
Wilmington
Notes
|
- | 344,000 | ||||||
Lehmann
Note
|
172,000 | 211,000 | ||||||
Rockridge
Note (excluding portion classified under notes payable)
|
996,334 | 1,016,922 | ||||||
Total
convertible debentures
|
2,368,334 | 2,930,922 | ||||||
Less:
discount on convertible debentures
|
(397,889 | ) | (488,497 | ) | ||||
Convertible
debentures, net of discount
|
1,970,445 | 2,442,425 | ||||||
Less:
current portion, net of discount
|
( 1,134,102 | ) | ( 1,626,796 | ) | ||||
Convertible
debentures, net of current portion
|
$ | 836,343 | $ | 815,629 |
Equipment
Notes
During
the period from June 3, 2008 through July 8, 2008 we received an aggregate of
$1.0 million from seven accredited individuals and other entities (the
“Investors”), under a software and equipment financing arrangement. This
included $50,000 received from CCJ Trust (“CCJ”). CCJ is a trust for the adult
children of Mr. Charles Johnston, one of our directors, and he disclaims any
beneficial ownership interest in CCJ. We issued notes to those Investors (the
“Equipment Notes”), which mature on June 3, 2011 and are collateralized by
specifically designated software and equipment owned by us with a cost basis of
approximately $1.5 million, as well as a subordinated lien on certain other of
our assets to the extent that the designated software and equipment, or other
software and equipment added to the collateral at a later date, is not
considered sufficient security for the loan.
The
Investors initially received 1,667 restricted ONSM common shares for each
$100,000 lent to us, and also receive interest at 12% per annum. Interest is
payable every 6 months in cash or, at our option, in restricted ONSM common
shares, based on a conversion price equal to seventy-five percent (75%) of the
average ONSM closing price for the thirty (30) trading days prior to the date
the applicable payment is due.
The
Equipment Notes may be converted to restricted ONSM common shares at any time
prior to their maturity date, at the Investors’ option, based on a conversion
price equal to seventy-five percent (75%) of the average ONSM closing price for
the thirty (30) trading days prior to the date of conversion, but in no event
may the conversion price be less than $4.80 per share. In the event the
Equipment Notes are converted prior to maturity, interest on the Equipment Notes
for the remaining unexpired loan period will be due and payable in additional
restricted ONSM common shares in accordance with the same formula for interest
payments as described above.
31
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Equipment
Notes (continued)
In lieu
of cash payments for interest previously due on these Equipment Notes, we
elected to issue the following unregistered common shares to the Investors,
which were recorded based on the fair value of those shares on the issuance
date. The next interest due date is April 30, 2011.
Share issuance date
|
Number of unregistered
common shares
|
Interest period
|
Interest if
paid in cash
|
Fair value of
shares at issuance
|
|||||||||
November
11, 2008
|
26,333
|
June
- October 2008
|
$48,740
|
$69,520
|
|||||||||
May
21, 2009
|
49,098
|
Nov
2008 - April 2009
|
$60,000
|
$67,756
|
|||||||||
November
11, 2009
|
34,920
|
May
- October 2009
|
$60,493
|
$67,040
|
|||||||||
April
30, 2010
|
44,369
|
Nov
2009 - April 2010
|
$59,507
|
$92,288
|
|||||||||
December
2, 2010
|
76,769
|
May
- October 2010
|
$60,493
|
$71,395
|
We may
prepay the Equipment Notes at any time upon ten (10) days' prior written notice
to the Investors during which time any or all of the Investors may choose to
convert the Equipment Notes held by them. In the event of such
repayment, all interest accrued and due for the remaining unexpired loan period
is due and payable and may be paid in cash or restricted ONSM common shares in
accordance with the above formula.
The
outstanding principal is due on demand in the event a payment default is uncured
ten (10) business days after written notice. Investors holding in excess of 50%
of the outstanding principal amount of the Equipment Notes may declare a default
and may take steps to amend or otherwise modify the terms of the Equipment Notes
and related security agreement.
Fees were
paid to placement agents and finders for their services in connection with the
Equipment Notes in aggregate of 16,875 restricted ONSM common shares and $31,500
paid in cash. These 16,875 shares, plus the 16,667 shares issued to the
investors (as discussed above) had a fair market value of approximately
$186,513. The value of these 33,542 shares, plus the $31,500 cash fees and
$9,160 paid for legal fees and other issuance costs related to the Equipment
Notes, were reflected as a $227,173 discount against the Equipment Notes and are
being amortized as interest expense over the three year term of the Equipment
Notes. The effective interest rate of the Equipment Notes is approximately 19.5%
per annum, excluding the potential effect of a premium to market prices if
payment of interest is made in common shares instead of cash. The unamortized
portion of this discount was $38,778 and $57,144 at December 31 and September
30, 2010, respectively.
32
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
CCJ
Note
On
December 29, 2009, we entered into an agreement with CCJ whereby a previously
received $200,000 advance was converted to an unsecured subordinated note
payable (the “CCJ Note”) at a rate of 8% interest per annum in equal monthly
installments of principal and interest for 48 months plus a $100,000 principal
balloon at maturity, although none of those payments were subsequently made by
us. To resolve this payment default, the CCJ Note was amended in January 2011 to
prospectively increase the interest rate to 10% per annum, payable quarterly,
and to require two principal payments of $100,000 each on December 31, 2011 and
December 31, 2012, respectively. This amendment also called for our cash payment
of the previously accrued interest in the amount of $16,263 on or before January
31, 2011. The remaining principal balance of the CCJ Note may be converted at
any time into our common shares at the greater of (i) the previous 30 day market
value or (ii) $2.00 per share (which was $3.00 per share prior to the January
2011 renegotiation).
In
conjunction with and in consideration of the December 29, 2009 note transaction,
the 35,000 shares of Series A-12 held by CCJ at that date were exchanged for
35,000 shares of Series A-13 plus four-year warrants for the purchase of 29,167
ONSM common shares at $3.00 per share. In conjunction with and in consideration
of the January 2011 note amendment, it was agreed that certain terms of the
35,000 shares of Series A-13 held by CCJ at that date would be modified – see
note 6.
The
effective interest rate of the CCJ Note prior to the January 2011 amendment was
approximately 47.4% per annum, including the Black-Scholes value of the warrants
of $32,518 plus the $108,500 value of the increased number of common shares
underlying the Series A-13 shares versus the Series A-12 shares (see note 6),
which total of $141,018 we recorded as a debt discount. The effective rate of
47.4% per annum also included 11.2% per annum related to dividends that would
have accrued to CCJ as a result of the later mandatory conversion date of the
Series A-13 shares versus the mandatory conversion date of the Series A-12
shares. Following the January 2011 amendment, the effective interest rate of the
CCJ Note increased to approximately 78.5% per annum, to reflect the value of the
increased value of common shares underlying the Series A-13 shares as a result
of the modified terms as well as the increase in the periodic cash interest rate
from 8% to 10% per annum. The effective rate of 78.5% per annum also includes
9.3% per annum related to dividends that could accrue to CCJ as a result of the
later mandatory conversion date of the Series A-13 shares as a result of the
modified terms.
The
unamortized portion of the debt discount, which is being amortized as interest
expense over the original four-year term of the CCJ Note, was $105,763 and
$114,577 at December 31 and September 30, 2010, respectively. Effective January
2011, the remaining unamortized discount, plus additional discount arising from
the modified terms, will be amortized as interest expense over the modified
two-year term of the CCJ Note.
33
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Greenberg
Note
On
January 13, 2010 we borrowed $250,000 from Greenberg Capital (“Greenberg”) under
the terms of an unsecured subordinated convertible note (the “Greenberg Note”),
which was repayable in principal installments of $13,000 per month beginning
March 1, 2010. Although the note called for a final balloon payment on December
31, 2010, including remaining principal and all accrued but unpaid interest (at
10% per annum), it also provided that if we successfully concluded a subsequent
financing of debt or equity in excess of $500,000 during the note term, the
proceeds of such financing would be used to pay off any remaining balance.
Accordingly, following the sale of common and preferred shares under the LPC
Purchase Agreement (see note 1), we repaid the $159,000 principal balance due
under the Greenberg Note in cash on October 1, 2010. The unamortized portion of
the debt discount was $9,911 at September 30, 2010, which was written off to
interest expense upon the repayment of the loan on October 1, 2010.
Wilmington
Notes
During
February 2010 we borrowed an aggregate of $500,000 from three entities (the
“Wilmington Investors”) under the terms of unsecured subordinated convertible
notes (the “Wilmington Notes”), which were issued on a pari passu basis with the
Greenberg Note and were repayable in aggregate principal installments of $26,000
per month beginning April 18, 2010. Although the notes called for final balloon
payments on February 18, 2011, including remaining principal and all accrued but
unpaid interest (at 10% per annum), they also provided that if we
successfully concluded a subsequent financing of debt or equity in excess of
$750,000 during the note term, the proceeds of such financing would be used to
pay off any remaining balances. Accordingly, following the sale of common and
preferred shares under the LPC Purchase Agreement (see note 1), we repaid the
$344,000 principal balance due under the Wilmington Notes on October 1, 2010 by
a cash payment of $238,756 plus the issuance of 137,901 common shares, which
cash and shares also included the settlement of all cash and non-cash interest
and fees otherwise due.
Lehmann
Note
On May 3,
2010 we borrowed $250,000 from an individual (“Lehmann”) under the terms of an
unsecured subordinated convertible note (the “Lehmann Note”), which was
repayable in principal installments of $13,000 per month beginning July 3, 2010.
Although the note called for a final balloon payment on May 3, 2011, including
remaining principal and all accrued but unpaid interest (at 10% per annum), it
also provided that if we successfully concluded a subsequent financing of debt
or equity in excess of $1,000,000 during the note term, the proceeds of such
financing would be used to pay off any remaining balance. Accordingly, following
the sale of common and preferred shares under the LPC Purchase Agreement (see
note 1), we repaid the $172,000 principal balance due under the Lehmann Note on
January 13, 2011 by the issuance of 200,000 common shares, which shares also
included the settlement of all cash and non-cash interest and fees otherwise
due, except as otherwise stated below.
34
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Lehmann
Note (continued)
The
Lehmann Note provided for (i) our prepayment of the first six months of interest
in the form of shares, based on our closing share price on the funding date of
the Lehmann Note, (ii) our issuance of 37,500 unregistered common shares upon
receipt of the funds and (iii) our issuance of 25,000 unregistered common shares
if the loan was still outstanding after 6 months, although in the event the
Lehmann Note was prepaid after the first six months, the second tranche of
25,000 unregistered common shares would be cancelled on a pro-rata basis, to the
extent the second six month time period had not elapsed at the time of such
payoff. We did not issue the second tranche of 25,000 shares but we did issue
the pro-rata earned portion, 9,600 shares, at the time of the January 13, 2011
payoff.
The
effective rate of the Lehmann Note was approximately 77.0% per annum, assuming a
six month loan term and excluding the finder’s fees payable by us to a third
party in cash and equal to 7% of the borrowed amount. The value of the 43,142
shares initially issued to Lehmann for fees and prepaid interest plus the
finder’s fees of $17,500, were reflected as a $105,509 discount against the
Lehmann Note and was being amortized as interest expense primarily over the
initial six month term of the Lehmann Note. The unamortized portion of the debt
discount was $5,613 and $26,642 at December 31 and September 30, 2010,
respectively.
The
Lehmann Note was convertible into common stock at Lehmann’s option based on our
closing share price on the funding date of the Lehmann Note, which was
$2.04.
Rockridge
Note
A portion
of the Rockridge Note ($996,334 face value, which is $748,599 net, after
deducting the applicable discount) is also convertible into ONSM common shares,
as discussed below, and classified under the non-current portion of Convertible
Debentures, net of discount, on our December 31, 2010 balance sheet. This
convertible portion was $1,016,922 ($736,699 net of discount) as of September
30, 2010.
35
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable
Notes and
leases payable consist of the following:
December 31,
2010
|
September 30,
2010
|
|||||||
Line
of Credit Arrangement
|
$ | 1,497,108 | $ | 1,637,150 | ||||
Rockridge
Note (excluding portion classified under convertible
debentures)
|
496,334 | 516,921 | ||||||
Capitalized
equipment leases
|
25,599 | 27,328 | ||||||
Total
notes and leases payable
|
2,019,041 | 2,181,399 | ||||||
Less:
discount on notes payable
|
(151,142 | ) | (143,085 | ) | ||||
Less:
consideration for funding commitment letters
|
- | (14,000 | ) | |||||
Notes
and leases payable, net of discount
|
1,867,899 | 2,024,314 | ||||||
Less:
current portion, net of discount
|
( 1,766,762 | ) | ( 1,904,214 | ) | ||||
Long
term notes and leases payable, net of current portion
|
$ | 101,137 | $ | 120,100 |
Line
of Credit Arrangement
In
December 2007, we entered into a line of credit arrangement (the “Line”) with a
financial institution (the “Lender”) under which we could borrow up to an
aggregate of $1.0 million for working capital, collateralized by our accounts
receivable and certain other related assets. In August 2008 the maximum
allowable borrowing amount under the Line was increased to $1.6 million and in
December 2009 this amount was again increased to $2.0
million.
The
outstanding balance bears interest at 13.5% per annum, adjustable based on
changes in prime after December 28, 2009 (was prime plus 8% per annum through
December 2, 2008 and prime plus 11% from that date through December 28, 2009),
payable monthly in arrears. Effective December 28, 2009, we also incur a weekly
monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit,
payable monthly in arrears.
We paid
initial origination and commitment fees in December 2007 aggregating $20,015, an
additional commitment fee in August 2008 of $6,000 related to the increase in
the lending limit for the remainder of the year, a commitment fee of $16,000 in
December 2008 related to the continuation of the increased Line for an
additional year, a commitment fee of $20,000 in December 2009 related to the
continuation of the Line for an additional year as well as an increase in the
lending limit and a commitment fee of $20,000 in December 2010 related to the
continuation of the Line for an additional year. An additional commitment fee of
one percent (1%) of the maximum allowable borrowing amount will be due for any
subsequent annual renewal after December 28, 2011. These origination and
commitment fees (plus other fees paid to Lender) are recorded by us as debt
discount and amortized as interest expense over the remaining term of the loan.
The unamortized portion of this discount was $18,636 and zero as of December 31
and September 30, 2010, respectively.
36
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Line
of Credit Arrangement (continued)
The
outstanding principal balance due under the Line may be repaid by us at any
time, but no later than December 28, 2011, which may be extended by us for an
extra year, subject to compliance with all loan terms, including no material
adverse change, as well as concurrence of the Lender. We will incur a charge
equal to two percent (2%) of the borrowing limit if we terminate the Line before
June 28, 2011 and a charge equal to one percent (1%) of the borrowing limit if
we terminate the Line after that date but before December 28, 2011. The
outstanding principal is due on demand in the event a payment default is uncured
five (5) days after written notice.
The Line
is also subject to us maintaining an adequate level of receivables, based on
certain formulas, as well as our compliance with a quarterly debt service
coverage covenant (the “Covenant”), effective with the September 30, 2010
quarter. We were in compliance with this Covenant for the September 30, 2010
quarter. The Covenant, as defined in the applicable loan documents, requires
that our net income or loss, adjusted to remove all non-cash expenses as well as
cash interest expense, be equal to or greater than that same cash interest
expense. Calculated strictly on this basis, we were in compliance with the
Covenant for the three months ended December 31, 2010. The Lender has raised the
question as to whether the net income or loss used in the Covenant calculation
should also be adjusted to remove non-cash revenues (i.e. the $138,661 gain for
adjustment of derivative liability to fair value). Although an adjustment for
non-cash revenues is not specified in the applicable loan documents, if this
adjustment to remove non-cash revenues were made, we would not be in compliance
with that Covenant for the quarter ended December 31, 2010. In its February 14,
2011 communication to us, the Lender indicated that it believed that we had
failed to comply with the Covenant and that it would construe such situation to
be a default if not corrected within 30 days. The Lender also indicated that,
while it reserves all its rights and remedies provided in the loan agreement, it
is not their intention to accelerate the repayment of this loan.
The
Lender must approve any additional debt incurred by us, other than debt incurred
in the ordinary course of business (which includes equipment financing).
Accordingly the Lender has approved the $1.0 million Equipment Notes we issued
in June and July 2008, the $200,000 CCJ Note we issued in December 2009, the
$250,000 Greenberg Note we issued in January 2010, the $500,000 Wilmington Notes
we issued in February 2010 and the $250,000 Lehmann Note we issued in May 2010,
all as discussed above, and the $2.0 million Rockridge Note we issued in April
2009 and amended in September 2009, as discussed
below.
Mr. Leon
Nowalsky, a member of our Board of Directors, is also a founder and board member
of the Lender.
Rockridge
Note
In April
2009 we received $750,000 from Rockridge Capital Holdings, LLC (“Rockridge”), an
entity controlled by one of our largest shareholders, in accordance with the
terms of a Note and Stock Purchase Agreement (the “Rockridge Agreement”) that we
entered into with Rockridge dated April 14, 2009. In June 2009, we received an
additional $250,000 from Rockridge in accordance with the Rockridge Agreement,
for total borrowings thereunder of $1.0 million. On September 14, 2009, we
entered into Amendment Number 1 to the Agreement (the “Amendment”), as well as
an Allonge to the Note (the “Allonge”), which allowed us to borrow up to an
additional $1.0 million from Rockridge, resulting in cumulative allowable
borrowings of up to $2.0 million. We borrowed $500,000 of the additional $1.0
million on September 18, 2009 and the remaining $500,000 on October 20,
2009.
In
connection with this transaction, we issued a Note (the “Rockridge Note”), which
is collateralized by a first priority lien on all of our assets, such lien
subordinated only to the extent higher priority liens on assets, primarily
accounts receivable and certain designated software and equipment, are held by
certain of our other lenders. We also entered into a Security Agreement with
Rockridge that contains certain covenants and other restrictions with respect to
the collateral.
37
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Rockridge
Note (continued)
The
Rockridge Note had an outstanding principal balance of $1,492,668 and $1,533,843
at December 31 and September 30, 2010, respectively. The note is repayable in
equal monthly installments of $41,409 extending through August 14, 2013 (the
“Maturity Date”), which installments include principal (except for a $500,000
balloon payable on the Maturity Date) plus interest (at 12% per annum) on the
remaining unpaid balance. Monthly payments of $45,202 were made from November
14, 2009 through October 14, 2010, at which time the payment schedule was
corrected to (i) omit the November 2010 payment and (ii) start with the new
payment amount on December 14, 2010.
The
Rockridge Agreement, as amended, also provides that Rockridge may receive an
origination fee upon not less than sixty-one (61) days written notice to us,
payable by our issuance of 366,667 restricted shares of our common stock (the
“Shares”). The Rockridge Agreement provides that on the Maturity Date we shall
pay Rockridge up to a maximum of $75,000, based on the sum of (i) the cash
difference between the per share value of $1.20 (the “Minimum Per Share Value”)
and the average sale price for all previously sold Shares (whether such
number is positive or negative) multiplied by the number of sold
Shares and (ii) for the Shares which were not previously sold by Rockridge, the
cash difference between the Minimum Per Share Value and the market value of the
Shares at the Maturity Date (whether such number is positive or negative)
multiplied by the number of unsold Shares, up to a maximum shortfall amount of
$75,000 in the aggregate for items (i) and (ii). We have recorded no accrual for
this matter on our financial statements as of December 31, 2010, since we
believe that the variables affecting any eventual liability cannot be reasonably
estimated. However, if the closing ONSM share price of $1.06 per share on
February 4, 2011 was used as a basis of calculation, the required payment would
be approximately $59,000.
Legal
fees totaling $55,337 were paid or accrued by us in connection with the
Rockridge Agreement. The 366,667 origination fee Shares discussed above are
considered earned by Rockridge and had a fair market value of approximately
$626,000 at the date of the Rockridge Agreement or the Amendment, as applicable.
The value of these Shares plus the legal fees paid or accrued were reflected as
a $681,337 discount against the Rockridge Note (as well as a corresponding
increase in additional paid-in capital for the value of the Shares), which is
being amortized as interest expense over the term of the Rockridge Note. The
unamortized portion of this discount was $380,241 and $423,308 as of December 31
and September 30, 2010, respectively.
The
effective interest rate of the Rockridge Note was approximately 44.3% per annum,
until the September 2009 amendment, when it was reduced to approximately 28.0%
per annum. These rates exclude the potential effect of a premium to market
prices if the balloon payment is satisfied in common shares instead of cash as
well as the potential effect of any appreciation in the value of the Shares at
the time of issuance beyond their value at the date of the Rockridge Agreement
or the Amendment, as applicable.
38
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Rockridge
Note (continued)
Upon
notice from Rockridge at any time and from time to time prior to the Maturity
Date up to $500,000, representing the current balloon payment, may be converted
into a number of restricted shares of our common stock. Upon notice from
Rockridge at any time prior to the Maturity Date, up to fifty percent (50%) of
the outstanding principal amount of the Rockridge Note
(excluding the balloon payment subject to conversion per the previous sentence)
may be converted into a number of restricted shares of our common stock. If we
sell all or substantially all of our assets, or at any time after September 4,
2011 and prior to the Maturity Date, the remaining outstanding principal amount of the Rockridge Note
may be converted by Rockridge into a number of restricted shares of our common
stock.
The above
conversions are subject to a minimum of one month between conversion notices
(unless such conversion amount exceeds $25,000) and will use a conversion price
of eighty percent (80%) of the fair market value of the average closing bid
price for our common stock for the twenty (20) days of trading on The NASDAQ
Capital Market (or such other exchange or market on which our common shares are
trading) prior to such Rockridge notice, but such conversion price will not be
less than $2.40 per share. We will not effect any conversion of the
Rockridge Note, to the extent Rockridge and Frederick DeLuca, after giving
effect to such conversion, would beneficially own in excess of 9.9% of our
outstanding common stock (the “Beneficial Ownership Limitation”). The
Beneficial Ownership Limitation may be waived by Rockridge upon not less than
sixty-one (61) days prior written notice to us unless such waiver would result
in a violation of the NASDAQ shareholder approval rules.
Furthermore,
in the event of any conversions of principal to ONSM shares by Rockridge (i) the
$500,000 balloon payment will be reduced by the amount of any such conversions
and (ii) the interest portion of the monthly payments under the Rockridge Note
for the remaining months after any such conversion will be adjusted to reflect
the outstanding principal being immediately reduced for amount of the
conversion. We may prepay the Rockridge Note at any time. The outstanding
principal is due on demand in the event a payment default is uncured ten (10)
business days after Rockridge’s written notice to us.
Capitalized
Equipment Leases
We are
obligated under a capital lease for telephone equipment, with an outstanding
principal balance of $25,599 and $27,328 as of December 31 and September 30,
2010, respectively. The balance is payable in monthly payments of $828 through
January 2014, which includes interest at approximately 11% per
annum.
Funding
Commitment Letters
During
2009, we received funding commitment letters (“Letters”) from certain entities
agreeing to provide us funding under certain terms on or before December 31,
2010. The value of shares issued as consideration for the Letters was reflected
on our balance sheet as a reduction of the carrying value of notes payable,
pending inclusion as part of discount for any connected financing. However, we
did not obtain financing under the Letters before they expired and accordingly
this $14,000 balance on our September 30, 2010 balance sheet was written off as
interest expense for the three months ended December 31, 2010.
39
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
5: COMMITMENTS AND CONTINGENCIES
Narrowstep acquisition
termination and litigation – On May 29, 2008, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) to acquire Narrowstep,
Inc. (“Narrowstep”). The terms of the Merger Agreement, as amended, allowed that
if the acquisition did not close on or prior to November 30, 2008, the Merger
Agreement could be terminated by either us or Narrowstep at any time after that
date provided that the terminating party was not responsible for the delay. On
March 18, 2009, we terminated the Merger Agreement and the acquisition of
Narrowstep.
On
December 1, 2009, Narrowstep filed a complaint against us in the Court of
Chancery of the State of Delaware, alleging breach of contract, fraud and three
additional counts and is seeking (i) $14 million in damages, (ii) reimbursement
of an unspecified amount for all of its costs associated with the negotiation
and drafting of the Merger Agreement, including but not limited to attorney and
consulting fees, (iii) the return of Narrowstep’s equipment alleged to be in our
possession, (iv) reimbursement of an unspecified amount for all of its attorneys
fees, costs and interest associated with this action and (v) any further relief
determined as fair by the court. After reviewing the complaint document, we have
determined that Narrowstep had no basis in fact or in law for any claim and
accordingly, this matter was not reflected as a liability on our financial
statements. On December 30, 2010 Narrowstep counsel advised the Court in writing
that Narrowstep had reached an agreement in principle with us to dismiss their
lawsuit with prejudice, provided that both parties executed a mutual release.
Under this mutual release, which has been agreed to in principle by both parties
but is still being finalized, no further actions will be filed against each
other or affiliated parties in connection with this matter. This resolution of
this matter will not have a material adverse impact on our future financial
position or results of operations.
Other legal
proceedings – We are involved in other litigation and regulatory
investigations arising in the ordinary course of business. While the ultimate
outcome of these matters is not presently determinable, it is the opinion of our
management that the resolution of these outstanding claims will not have a
material adverse effect on our financial position or results of
operations.
NASDAQ listing compliance
issue - On June 24, 2010, we received a letter from NASDAQ stating that
we are currently not compliant with NASDAQ’s minimum audit committee size
requirement of three independent members, as set forth in Listing Rule 5605 (c)
(2) (a) (the “Audit Committee Rule”), for which compliance is necessary in order
to be eligible for continued listing on The NASDAQ Capital Market. Unless we
regain compliance with the Audit Committee Rule as of the earlier of our next
annual shareholders’ meeting or June 5, 2011, our common stock will be subject
to immediate delisting. However, during the compliance period, our stock will
continue to be listed and eligible for trading on The NASDAQ Capital
Market.
On June
14, 2010, we were notified that Mr. Robert J. Wussler, who was then a director
and a member of our audit committee, had passed away on June 5, 2010. He has not
at the present time been replaced on the audit committee, which currently has
two independent members. We are in the process of evaluating independent
candidates to fill the vacancy left as a result of Mr. Wussler’s passing, both
on the Board as well as the audit committee. We will make that selection as soon
as possible.
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
NASDAQ
listing compliance issue (continued) - Our past operations have been
financed primarily through the issuance of equity and debt and our access to
funding under the LPC Purchase Agreement requires our common stock to be traded
on NASDAQ or a similar national exchange. However, based on our satisfactory
recent history of maintaining the effectiveness of our registration statements
and our NASDAQ listing, as well as stockholders’ equity in excess of the NASDAQ
listing standards as of December 31, 2010, we have concluded that the resolution
of this matter will not have a material adverse effect on our financial position
or results of operations.
Employment
contracts and severance – On September 27, 2007, our Compensation
Committee and Board of Directors approved three-year employment agreements with
Messrs. Randy Selman (President and CEO), Alan Saperstein (COO and Treasurer),
Robert Tomlinson (Chief Financial Officer), Clifford Friedland (Senior Vice
President Business Development) and David Glassman (Senior Vice President
Marketing), collectively referred to as “the Executives”. On May 15, 2008 and
August 11, 2009 our Compensation Committee and Board approved certain
corrections and modifications to those agreements, which are reflected in the
discussion of the terms of those agreements below. The agreements provide that
the initial term shall automatically be extended for successive one (1) year
terms thereafter unless (a) the parties mutually agree in writing to alter the
terms of the agreement; or (b) one or both of the parties exercises their right,
pursuant to various provisions of the agreement, to terminate the employment
relationship.
The
agreements provide initial annual base salaries of $253,000 for Mr. Selman,
$230,000 for Mr. Saperstein, $207,230 for Mr. Tomlinson and $197,230 for Messrs.
Friedland and Glassman, plus 10% annual increases through December 27, 2008 and
5% per year thereafter. In addition, each of the Executives receives an auto
allowance payment of $1,000 per month, a “retirement savings” payment of $1,500
per month and an annual reimbursement of dues or charitable donations up to
$5,000. We also pay insurance premiums for the Executives, including
medical, life and disability coverage. These agreements contain certain
non-disclosure and non-competition provisions and we have agreed to indemnify
the Executives in certain circumstances.
Under the
terms of the above employment agreements, upon a termination subsequent to a
change of control, termination without cause or constructive termination, each
as defined in the agreements, we would be obligated to pay each of the
Executives an amount equal to three times the Executive’s base salary plus full
benefits for a period of the lesser of (i) three years from the date of
termination or (ii) the date of termination until a date one year after the end
of the initial employment contract term. We may defer the payment of all or part
of this obligation for up to six months, to the extent required by Internal
Revenue Code Section 409A. In addition, if the five day average closing price of
the common stock is greater than or equal to $6.00 per share on the date of any
termination or change in control, all options previously granted the
Executive(s) will be cancelled, with all underlying shares (vested or unvested)
issued to the executive, and we will pay all related taxes for the
Executive(s). If the five-day average closing price of the common
stock is less than $6.00 per share on the date of any termination or change in
control, the options will remain exercisable under the original
terms.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment
contracts and severance (continued) – Under the terms of the above
employment agreements, we may terminate an Executive’s employment upon his death
or disability or with or without cause. To the extent that an Executive is
terminated for cause, no severance benefits are due him. If an employment
agreement is terminated as a result of the Executive’s death, his estate will
receive one year base salary plus any bonus or other compensation amount or
benefit then payable or that would have been otherwise considered vested or
earned under the agreement during the one-year period subsequent to the time of
his death. If an employment agreement is terminated as a result of the
Executive’s disability, as defined in the agreement, he is entitled to
compensation in accordance with our disability compensation for senior
executives to include compensation for at least 180 days, plus any bonus or
other compensation amount or benefit then payable or that would have been
otherwise considered vested or earned under the agreement during the one-year
period subsequent to the time of his disability.
The above
employment agreements also provide that in the event we are sold for a Company
Sale Price that represents at least $6.00 per share (adjusted for
recapitalization including but not limited to splits and reverse splits), the
Executives will receive, as a group, cash compensation of twelve percent (12.0%)
of the Company Sale Price, payable in immediately available funds at the time of
closing such transaction. The Company Sale Price is defined as the number of
Equivalent Common Shares outstanding at the time we are sold multiplied by the
price per share paid in such Company Sale transaction. The Equivalent Common
Shares are defined as the sum of (i) the number of common shares issued and
outstanding, (ii) the common stock equivalent shares related to paid for but not
converted preferred shares or other convertible securities and (iii) the number
of common shares underlying “in-the-money” warrants and options, such sum
multiplied by the market price per share and then reduced by the proceeds
payable upon exercise of the “in-the-money” warrants and options, all determined
as of the date of the above employment agreements but the market price per share
used for this purpose to be no less than $6.00. The 12.0% is allocated in the
employment agreements as two and one-half percent (2.5%) each to Messrs. Selman,
Saperstein, Friedland and Glassman and two percent (2.0%) to Mr.
Tomlinson.
On
January 14, 2011 our Compensation Committee agreed that it would approve
amendments to the executive employment agreements, as well as amending the same
terms as applicable to the Board members (see below), allowing for all or part
of such compensation to be paid in shares at the recipient’s option, at any time
if our stock is trading above $6.00 per share, without requiring that we be
sold. The issuance of such shares would be to the extent permitted by applicable
law and subject to shareholder and/or any other required regulatory
approvals.
Other
compensation – In addition to the 12% allocation of the Company Sale
Price to the Executives, as discussed above, on August 11, 2009 our Compensation
Committee determined that an additional three percent (3.0%) of the Company Sale
Price would be allocated, on the same terms, with two percent (2.0%) allocated
to the then four outside Directors (0.5% each), as a supplement to provide
appropriate compensation for ongoing services as a director and as a termination
fee, one-half percent (0.5%) allocated to one additional executive-level
employee and the remaining one-half percent (0.5%) to be allocated by the Board
and our management at a later date, which will be primarily to compensate other
executives not having employment contracts, but may also include additional
allocation to some or all of these five senior Executives. On June 5, 2010, one
of the four outside Directors passed away and we are still in the process of
evaluating independent candidates to fill the resulting Board
vacancy.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Consultant
contracts – We entered into a consulting contract, effective June 1,
2009, with an individual for executive management services to be performed for
our Infinite and webcasting divisions. This contract calls for base compensation
of $175,000, plus $25,000 commission, per year. In addition we pay a travel
allowance of $5,000 per month for up to the first thirteen months and a one-time
$15,000 moving expenses reimbursement. The contract is renewable by mutual
agreement of the parties with six months notice to the other. Termination of the
contract without cause after the end of the two-year contract term requires six
months notice (which includes a three month severance period) from the
terminating party, although termination with cause requires no
notice.
We have
entered into various agreements for financial consulting and advisory services
which, if not terminated as allowed by the terms of such agreements, will
require the issuance after December 31, 2010 of approximately 151,000
unregistered shares and options to purchase approximately 300,000 common shares
at $1.50 per share. The services related to these shares and options will be
provided over periods up to 12 months, and will result in a professional fees
expense of approximately $359,000 over that service period, based on the $1.06
market value of an ONSM common share as of February 4, 2011.
Lease
commitments – We are obligated under operating leases for our five
offices (one each in Pompano Beach, Florida, San Francisco, California and
Colorado Springs, Colorado and two in the New York City area), which call for
monthly payments totaling approximately $57,000. The leases have expiration
dates ranging from 2011 to 2013 (after considering our rights of termination)
and in most cases provide for renewal options. Most of the leases have annual
rent escalation provisions. The future minimum lease payments required under the
non-cancelable portion of these leases (including the tentatively agreed on
Pompano lease terms, as described below), is approximately $1,199,000. In
addition to these commitments, we also lease equipment space at co-location or
other equipment housing facilities in South Florida; Atlanta, Georgia; Jersey
City, New Jersey; San Francisco, California and Colorado Springs, Colorado under
varying terms. An aggregate approximately $8,000 per month related to these
facilities is classified by us as rental expense with the balance of our
payments to these facilities classified as costs of sales – see discussion of
bandwidth and co-location facilities purchase commitment discussion below. Total
rental expense (including executory costs) for all operating leases was
approximately $208,000 and $203,000 for the three months ended December 31, 2010
and 2009, respectively.
The
three-year operating lease for our principal executive offices in Pompano Beach,
Florida expired September 15, 2010. The monthly base rental is currently
approximately $23,400 (including our share of property taxes and common area
expenses). We are currently in negotiations to extend this lease for an
additional three years, and have tentatively agreed to a starting monthly base
rental of approximately $21,100 (including our share of property taxes and
common area expenses), which would also be retroactive to September 15, 2009,
plus two percent (2%) annual increases. The proposed extension would provide one
two-year renewal option, with a three percent (3%) rent increase in year
one.
The
five-year operating lease for our office space in San Francisco expires July 31,
2015. The monthly base rental (including month-to-month parking) is
approximately $8,900 with annual increases up to 5.1%. The lease provides one
five-year renewal option at 95% of fair market value and also provides for early
cancellation at any time after August 1, 2011, at our option, with six (6)
months notice and a payment of no more than approximately $25,000.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Lease
commitments (continued) – The three-year operating lease for our Infinite
Conferencing location in New Jersey expires October 31, 2012. The monthly base
rental is approximately $11,400 with five percent (5%) annual increases. The
lease provides one two-year renewal option, with no rent
increase.
The
three-year operating lease for office space in New York City expires January 31,
2013, although both we and the landlord have the right to terminate the lease
without penalty, upon nine (9) months notice given any time after February 1,
2011. The monthly base rental is approximately $12,000, with no
increases.
Bandwidth
and co-location facilities purchase commitments - We were a party to a
bandwidth services agreement with a national CDN (content delivery network)
provider, which expired on December 31, 2010, and included a minimum purchase
commitment of approximately $200,000 per year (based on June 30 anniversary
dates) and required us to use that provider for at least 80% of our content
delivery needs. We were in compliance with this agreement, based on comparing
our purchases through December 31, 2010 to the corresponding pro-rata share of
that commitment. We have also entered into various agreements for our purchase
of bandwidth and use of co-location facilities, for an aggregate minimum
purchase commitment of approximately $310,000, such agreements expiring at
various times through June 2013.
Phone
system services commitment – We are a party to an agreement for services
in connection with our internal corporate phone system, requiring monthly
payments of approximately $2,600 per month for a three year period commencing
August 2010.
NOTE
6: CAPITAL STOCK
Common
Stock
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in these consolidated financial statements, including
common share quantities, convertible debenture conversion prices and
exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
During
the three months ended December 31, 2010, we issued 62,500 unregistered common
shares valued at approximately $72,000, which shares will be recognized as
professional fees expense for financial consulting and advisory services over
various service periods of up to 6 months. None of these shares were issued to
our directors or officers. Professional fee expenses arising from these and
prior issuances of shares and options for financial consulting and advisory
services were approximately $141,000 and $169,000 for the three months ended
December 31, 2010 and 2009, respectively.
As a
result of previously issued shares and options for financial consulting and
advisory services, we have recorded approximately $56,000 in deferred equity
compensation expense at December 31, 2010, to be amortized over the remaining
periods of service of up to 8 months. The deferred equity compensation expense
is included in the balance sheet caption prepaid expenses.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
6: CAPITAL STOCK (Continued)
Common
Stock (continued)
On
September 17, 2010, we entered into a Purchase Agreement (the “Purchase
Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to
an initial purchase of 300,000 shares of our common stock and 420,000 shares of
our Series A-14 Preferred Stock (“Series A-14”), together with warrants to
purchase 540,000 of our common shares. In accordance with the Purchase
Agreement, LPC also received 50,000 shares of our common stock as a one-time
commitment fee and a cash payment of $26,250 as a one-time structuring fee. On
September 24, 2010, we received $824,044 net proceeds (after deducting fees and
legal, accounting and other out-of-pocket costs incurred by us) related to our
issuance under that Purchase Agreement of the equivalent of 770,000 common
shares (including those issuable upon conversion of the preferred shares). See
notes 6 and 8 for further details with respect to the Series A-14 and the
warrants.
During
the three months ended December 31, 2010 LPC purchased an additional 315,000
shares of our common stock under that Purchase Agreement for net proceeds of
$268,045. During the period from January 1, 2011 through February 4,
2011 LPC purchased an additional 225,000 shares of our common stock under that
Purchase Agreement for net proceeds of $185,526. LPC has also committed to
purchase, at our sole discretion, up to an additional 290,000 shares of our
common stock in installments over the remaining term of the Purchase Agreement,
generally at prevailing market prices, but subject to the specific restrictions
and conditions in the Purchase Agreement. There is no upper limit to the price
LPC may pay to purchase these additional shares. The purchase of our shares by
LPC will occur on dates determined solely by us and the purchase price of the
shares will be fixed on the purchase date and will be equal to the lesser of (i)
the lowest sale price of our common stock on the purchase date or (ii) the
average of the three (3) lowest closing sale prices of our common stock during
the twelve (12) consecutive business days prior to the date of a purchase by
LPC. LPC shall not have the right or the obligation to purchase any
shares of our common stock from us at a price below $0.75 per
share.
In
addition, we have agreed to use our best efforts to get, within 190 days from
the date of the Purchase Agreement, shareholder approval to sell up to an
additional 1,900,000 of our common shares to LPC, which upon such approval LPC
has agreed to purchase, at our sole discretion and subject to the same
restrictions and conditions in the Purchase Agreement.
The
Purchase Agreement has a term of 25 months but may be terminated by us at any
time after the first year at our discretion without any cost to us and may be
terminated by us at any time in the event LPC does not purchase shares as
directed by us in accordance with the terms of the Purchase Agreement. LPC may
terminate the Purchase Agreement upon certain events of default set forth
therein. The Purchase Agreement restricts our use of variable priced financings
for the greater of one year or the term of the Purchase Agreement and, in the
event of future financings by us, allows LPC the right to participate under
conditions specified in the Purchase Agreement.
45
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
6: CAPITAL STOCK (Continued)
Common
Stock (continued)
The
shares of common stock sold and issued under the Purchase Agreement and the
shares of common stock issuable upon conversion of Series A-14, were sold and
issued pursuant to a prospectus supplement filed by us on September 24, 2010
with the Securities and Exchange Commission in connection with a takedown of an
aggregate of 1.6 million shares from our Shelf Registration. In
connection with the Purchase Agreement, we also entered into a Registration
Rights Agreement (the “Registration Rights Agreement”) with LPC, dated September
17, 2010, under which we agreed, among other things, to use our best efforts to
keep the registration statement effective until the maturity date as defined in
the Purchase Agreement and to indemnify LPC for certain liabilities in
connection with the sale of the securities. Since there are no specified
damages payable by us in the event of a default under the Registration Rights
Agreement, we have determined that this is not a registration payment
arrangement, as that term is defined in the Derivatives and Hedging topic
(Contracts in Entity’s own Equity subtopic) of the ASC.
On
October 1, 2010 we repaid the $344,000 principal balance due under the
Wilmington Notes by a cash payment of $238,756 plus the issuance of 137,901
common shares valued at approximately $110,000, which cash and shares also
included the settlement of all cash and non-cash interest and fees otherwise due
– see note 4.
On
December 2, 2010, we issued 76,769 unregistered common shares for interest on
the Equipment Notes, valued at approximately $71,000 - see note 4.
Preferred
Stock
As of
December 31 and September 30, 2010, the only preferred stock outstanding was
Series A-13 Convertible Preferred Stock (“Series A-13”) and Series A-14
Convertible Preferred Stock (“Series A-14”).
Series
A-13 Convertible Preferred Stock
Effective
December 17, 2009, our Board of Directors authorized the sale and issuance of up
to 170,000 shares of Series A-13 Convertible Preferred Stock (“Series A-13”). On
December 23, 2009, we filed a Certificate of Designation, Preferences and Rights
for the Series A-13 with the Florida Secretary of State. The Series A-13 has a
coupon of 8% per annum, an assigned value of $10.00 per preferred share and a
conversion rate of $3.00 per common share (to be modified to $2.00 per share per
January 2011 agreement – see below). Series A-13 dividends are cumulative and
must be fully paid by us prior to the payment of any dividend on our common
shares. Series A-13 dividends are declared quarterly but are payable at the time
of any conversion of A-13, in cash or at our option in the form of our common
shares, using the greater of (i) $3.00 per share (to be modified to $2.00 per
share per January 2011 agreement – see below) or (ii) the average closing bid
price of a common share for the five trading days immediately preceding the
conversion. As of December 31, 2010, we have accrued Series A-13 dividends of
$28,000, which are reflected as a current liability on our balance
sheet.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
6: CAPITAL STOCK (Continued)
Preferred
Stock (continued)
Series
A-13 Convertible Preferred Stock (continued)
Any
shares of Series A-13 that are still outstanding as of December 31, 2011 (to be
modified to December 31, 2012 per January 2011 agreement – see below) will
automatically convert into our common shares. Series A-13 may also be converted
before that date at our option, provided that the closing bid price of our
common shares has been at least $9.00 per share, on each of the twenty (20)
trading days ending on the third business day prior to the date on which the
notice of conversion is given. Series A-13 is subordinate to Series A-12 (which
is no longer outstanding) but is senior to all other preferred share classes
that may be issued by us. Except as explicitly required by applicable law, the
holders of Series A-13 shall not be entitled to vote on any matters as to which
holders of our common shares are entitled to vote. Holders of Series A-13 are
not entitled to registration rights.
35,000
shares of Series A-13 were outstanding as of December 31 and September 30, 2010.
We incurred $6,747 of legal fees and other expenses in connection with the
issuance of these shares, which was recorded on our balance sheet as a discount
and was amortized as a dividend over the first year of the term of the Series
A-13. The unamortized portion of the discount was zero and $1,687 at
December 31 and September 30, 2010, respectively.
In
conjunction with and in consideration of January 2011 note transaction entered
into by us with CCJ Trust (see note 4), it was agreed that certain terms of the
35,000 shares of Series A-13 held by CCJ Trust at that date would be modified as
follows - the conversion rate to common shares, as well as the minimum
conversion rate for payment of dividends in common shares, will be $2.00 per
share, the maturity date will be December 31, 2012 and dividends will be paid
quarterly, in cash or, at our option, in unregistered shares. In addition it was
agreed that $28,000 in Series A-13 dividends for calendar 2010 would be paid by
issuance of 14,000 unregistered common shares, using the minimum conversion rate
of $2.00 per share.
Series
A-14 Convertible Preferred Stock
Effective
September 17, 2010, our Board of Directors authorized the sale and issuance of
up to 420,000 shares of Series A-14 Preferred Stock (“Series A-14”). On
September 22, 2010, we filed a Certificate of Designations for the Series A-14
with the Florida Secretary of State. Series A-14 has a stated value of $1.25 per
preferred share and a fixed conversion rate of $1.25 per common
share. Series A-14 has a onetime 5% dividend payable in cash on the
first anniversary of the original issue date. As of December 31, 2010, we have
accrued Series A-14 dividends of approximately $7,100, which are reflected as a
current liability on our balance sheet.
The holders of Series A-14
may convert, at the option of the holder and subject to certain limitations,
each share of Series A-14 into one fully-paid, non-assessable share of our
common stock. Any shares of Series A-14 that are still outstanding as
of second annual anniversary of the original issue date shall automatically be
converted into our common shares, using the same ratio. Series A-14
is senior to our common stock but subordinate to Series A-13 and the holders of
Series A-14 shall not be entitled to vote on any matters as to which holders of
our common shares are entitled to vote. Series A-14 is redeemable at our option
for $1.56 per share plus accrued but unpaid dividends, provided that the holder
has the right to convert to common during a ten day notice period prior to such
redemption.
47
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
6: CAPITAL STOCK (Continued)
Preferred
Stock (continued)
Series
A-14 Convertible Preferred Stock (continued)
As
discussed above, on September 17, 2010, we entered into a Purchase Agreement
whereby LPC agreed to an initial purchase of common stock plus shares of Series
A-14. We issued 420,000 shares of Series A-14 to LPC on September 24, 2010. The
shares issuable upon conversion of Series A-14 were registered for resale
subject to the LPC Registration Rights Agreement.
The fair
value of the warrants issued in connection with the Purchase Agreement was
calculated to be approximately $386,000 using the Black-Scholes model (with the
assumptions including expected volatility of 105% and a risk free interest rate
of 1.08%). The common shares issued as a one-time commitment fee in
connection with the Purchase Agreement were valued at approximately $55,000,
based on the quoted market value on the date of issuance. The aggregate of these
two items, plus the cash out-of-pocket costs incurred by us in connection with
the Purchase Agreement, was allocated on a pro-rata basis between the number of
common shares sold and the common shares underlying the Series A-14. The amount
allocated to the Series A-14, $298,639, was recorded on our balance sheet as a
discount and is being amortized as a dividend over the term of the Series
A-14. The unamortized portion of the discount was $258,406 and $295,735 at
December 31 and September 30, 2010, respectively. See Note 8 with respect to the
recording of the warrants as a liability on our December 31 and September 30,
2010 balance sheets.
The
number of shares of ONSM common stock that can be issued upon the conversion of
Series A-14 is limited to the extent necessary to ensure that following the
conversion the total number of shares of ONSM common stock beneficially owned by
the holder does not exceed 4.999% of our issued and outstanding common stock,
although this percentage may be changed at the holder’s option upon not less
than 61 days advance notice to us and provided the changed limitation does not
exceed 9.99%.
48
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
7: SEGMENT INFORMATION
Our
operations are comprised within two groups, Digital Media Services and Audio and
Web Conferencing Services. The primary operating activities of the Webcasting
and MP365 divisions of the Digital Media Services Group, as well as our
corporate headquarters, are in Pompano Beach, Florida. The Webcasting division
has its main sales facility in New York City. The primary operating activities
of the Smart Encoding division of the Digital Media Services Group and the EDNet
division of the Audio and Web Conferencing Services Group are in San Francisco,
California. The primary operating activities of the DMSP and UGC divisions of
the Digital Media Services Group are in Colorado Springs, Colorado. The primary
operating activities of the Infinite division of the Audio and Web Conferencing
Services Group are in the New York City area. All material sales, as well as
property and equipment, are within the United States. Detailed below are
the results of operations by segment for the three months ended December 31,
2010 and 2009, and total assets by segment as of December 31 and September 30,
2010, respectively.
For the three months ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue:
|
||||||||
Digital
Media Services Group
|
$ | 1,949,633 | $ | 1,994,563 | ||||
Audio
and Web Conferencing Services Group
|
2,287,620 | 2,074,550 | ||||||
Total
consolidated revenue
|
$ | 4,237,253 | $ | 4,069,113 | ||||
Segment
operating income:
|
||||||||
Digital
Media Services Group
|
396,820 | 568,494 | ||||||
Audio
and Web Conferencing Services Group
|
589,700 | 460,760 | ||||||
Total
segment operating income
|
986,520 | 1,029,254 | ||||||
Depreciation
and amortization
|
(386,197 | ) | (567,361 | ) | ||||
Corporate
and unallocated shared expenses
|
(1,343,749 | ) | (1,466,346 | ) | ||||
Impairment
loss on goodwill and other intangible assets
|
- | (3,100,000 | ) | |||||
Other
expense, net
|
(154,267 | ) | (236,588 | ) | ||||
Net
loss
|
$ | (897,693 | ) | $ | (4,341,041 | ) |
December 31,
|
September 30,
|
|||||||
2010
|
2010
|
|||||||
Assets:
|
||||||||
Digital
Media Services Group
|
$ | 6,289,800 | $ | 6,320,046 | ||||
Audio
and Web Conferencing Services Group
|
12,923,086 | 13,300,614 | ||||||
Corporate
and unallocated
|
363,180 | 1,091,757 | ||||||
Total
assets
|
$ | 19,576,066 | $ | 20,712,417 |
Depreciation
and amortization, as well as other expense, net, and impairment loss on goodwill
and other intangible assets, are not utilized by our primary decision makers for
making decisions with regard to resource allocation or performance
evaluation.
49
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
8: STOCK OPTIONS AND WARRANTS
As of
December 31, 2010, we had issued options and warrants still outstanding to
purchase up to 2,172,439 ONSM common shares, including 1,165,843 shares under
Plan Options; 41,962 shares under Non-Plan Options to employees and directors;
271,155 shares under Non-Plan Options to financial consultants; and 693,479
shares under warrants issued in connection with various financings and other
transactions.
On
February 9, 1997, our Board of Directors and a majority of our shareholders
adopted the 1996 Stock Option Plan (the "1996 Plan"), which, including the
effect of subsequent amendments to the 1996 Plan, authorized up to 750,000
shares available for issuance as options and up to another 333,333 shares
available for stock grants. On September 18, 2007, our Board of Directors and a
majority of our shareholders adopted the 2007 Equity Incentive Plan (the “2007
Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common
stock pursuant to stock options, stock purchase rights, stock appreciation
rights and/or stock awards for employees, directors and consultants. The options
and stock grants authorized for issuance under the 2007 Plan were in addition to
those already issued under the 1996 Plan, although we may no longer issue
additional options or stock grants under the 1996 Plan, which expired on
February 9, 2007. On March 25, 2010, our Board of Directors and a majority of
our shareholders approved a 1,000,000 increase in the number of shares
authorized for issuance under the 2007 Plan, for total authorization of
2,000,000 shares.
Detail of
Plan Option activity under the 1996 Plan and the 2007 Plan for the three
months ended December 31, 2010 is as follows:
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Balance,
beginning of period
|
1,170,843 | $ | 8.62 | |||||
Granted
during the period
|
- | $ | - | |||||
Expired
or forfeited during the period
|
(5,000 | ) | $ | 6.00 | ||||
Balance,
end of the period
|
1,165,843 | $ | 8.63 | |||||
Exercisable
at end of the period
|
1,015,010 | $ | 8.86 |
We
recognized compensation expense of approximately $177,000 and $262,000 for the
three months ended December 31, 2010 and 2009, respectively, related to Plan
Options granted to employees and vesting during those periods. The unvested
portion of Plan Options outstanding as of December 31, 2010 (and granted on or
after our October 1, 2006 adoption of the requirements of the Compensation -
Stock Compensation topic of the ASC) represents approximately $543,000 of
potential future compensation expense, which excludes approximately $165,000
related to the ratable portion of those unvested options allocable to past
service periods and recognized as compensation expense as of December 31,
2010.
50
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
The
outstanding Plan Options for the purchase of 1,165,843 common shares all have
exercise prices equal to or greater than the fair market value at the date of
grant, the exercisable portion has a weighted-average remaining life of
approximately 2.2 years and are further described
below.
Grant
date
|
Description
|
Total number
of underlying
common
shares
|
Vested portion
of underlying
common
shares
|
Exercise
price
per
share
|
Expiration
date
|
||||||||||
Dec 2004
|
Senior management
|
25,000 | 25,000 |
$7.26
|
Aug
2014
|
||||||||||
Sept
2006
|
Directors
and senior management
|
108,333 | 108,333 |
$4.26
|
Sept
2011
|
||||||||||
Sept
2006
|
Employees
excluding senior management
|
96,166 | 96,166 |
$4.26
|
Sept
2011
|
||||||||||
March
2007
|
Employees
excluding senior management
|
4,167 | 4,167 |
$13.68
|
March
2011
|
||||||||||
April
2007
|
Infinite
Merger – see note 2
|
25,000 | 25,000 |
$15.00
|
April
2012
|
||||||||||
Sept
2007
|
Senior
management employment contracts – see note 5
|
356,250 | 272,917 |
$10.38
|
Sept
2012 –
Sept 2016
|
||||||||||
Dec
2007
|
Leon
Nowalsky – new director
|
8,333 | 8,333 |
$6.00
|
Dec
2011
|
||||||||||
Dec
2007
|
Employees
excluding senior management
|
1,667 | 1,667 |
$6.00
|
Dec
2011
|
||||||||||
April
2008
|
Employees
excluding senior management
|
2,500 | 1,666 |
$6.00
|
April
2012
|
||||||||||
May
2008
|
Infinite
management consultant – see note 5
|
16,667 | 16,667 |
$6.00
|
May
2013
|
||||||||||
Aug
2008
|
Employees
excluding senior management
|
62,500 | 62,500 |
$6.00
|
Aug
2012
|
||||||||||
May
2009
|
Infinite
management consultant – see note 5
|
66,667 | 16,667 |
$3.00
|
Jun
2014 –
Jun
2018
|
||||||||||
May
2009
|
Employees
excluding senior management
|
50,000 | 33,334 |
$3.00
|
May
2013 –
Jul
2015
|
||||||||||
Aug
2009
|
Directors
and senior management
|
133,334 | 133,334 |
$15.00
|
Aug
2014
|
||||||||||
Aug
2009
|
Directors
and senior management
|
83,449 | 83,449 |
$9.42
|
Aug
2014
|
||||||||||
Aug
2009
|
Director
|
926 | 926 |
$20.256
|
Aug
2014
|
||||||||||
Dec
2009
|
Directors
and senior management
|
124,884 | 124,884 |
$9.42
|
Dec
2014
|
||||||||||
Total
common shares underlying Plan Options as of December 31,
2010
|
1,165,843 | 1,015,010 |
On
January 14, 2011 our Compensation Committee awarded 983,400 four-year options
under the provisions of the 2007 Plan. These options were issued to our
directors, employees and consultants, vest over two years and are exercisable at
$1.23 per share, fair market value on the date of the grant. The Black-Scholes
valuation of this grant is approximately $803,000, which will be recognized as
non-cash compensation expense over the two year service period starting in
January 2011. Our Compensation Committee also instructed management to include a
request for additional authorized 2007 Plan shares in the next shareholder
proxy, and approved that the above grant be augmented by an equal number of
options issued to the same recipients, using the same strike price as the basic
grant, to the extent permitted by applicable law and subject to shareholder
and/or any other required regulatory approvals.
51
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
December 31, 2010, there were outstanding Non-Plan Options issued to employees
and directors for the purchase of 41,962 common shares, which were issued during
fiscal 2005 in conjunction with the Onstream Merger (see note 2). These options
are immediately exercisable at $20.26 per share and expire at various times from
July 2012 to May 2013.
As of
December 31, 2010, there were outstanding and fully vested Non-Plan Options
issued to financial consultants for the purchase of 271,155 common shares, as
follows:
Issuance period
|
Number of
common shares |
Exercise price
per share |
Expiration
Date
|
||||||
October
2009
|
75,000 |
$3.00
|
Oct
2013
|
||||||
July
2010
|
50,000 |
$6.00
|
July
2014
|
||||||
Year
ended September 30, 2010
|
125,000 | ||||||||
August
2009
|
16,667 |
$3.00
|
Aug
2013
|
||||||
September
2009
|
8,333 |
$3.00
|
Sept
2013
|
||||||
Year
ended September 30, 2009
|
25,000 | ||||||||
October
2007
|
25,000 |
$10.38
|
Oct
2011
|
||||||
October
2007
|
16,667 |
$10.98
|
Oct
2011
|
||||||
Year
ended September 30, 2008
|
41,667 | ||||||||
January
2007
|
61,666 |
$14.76
|
Jan
2011
|
||||||
March
2007
|
3,531 |
$14.88
|
March
2012
|
||||||
Year
ended September 30, 2007
|
65,197 | ||||||||
March
– September 2006
|
14,291 |
$6.30
|
March
2011
|
||||||
Year
ended September 30, 2006
|
14,291 | ||||||||
Total
common shares underlying Non-Plan
consultant options as
of December 31, 2010
|
271,155 |
52
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
December 31, 2010, there were outstanding vested warrants, issued in connection
with various financings, to purchase an aggregate of 693,479 shares of common
stock, as follows:
Description
of transaction
|
Number
of
common
shares
|
Exercise
price
per
share
|
Expiration
Date
|
||||||
LPC
Purchase Agreement – September 2010 – see note 6
|
540,000 |
$1.98
|
September
2015
|
||||||
CCJ
Note – December 2009 – see note 4
|
29,167 |
$3.00
|
December
2013
|
||||||
Placement
fees – common share offering – March and April 2007
|
57,037 |
$16.20
|
March
and April 2012
|
||||||
8%
Subordinated Convertible Debentures – March and April
2006
|
67,275 |
$9.00
|
March
and April 2011
|
||||||
Total
common shares underlying warrants as of December 31,
2010
|
693,479 |
With
respect to the warrants issued in connection with the LPC Purchase Agreement,
both the number of underlying shares as well as the exercise price are subject
to adjustment in accordance with certain anti-dilution provisions. As
a result of the effective conversion price of our common shares issued to retire
a portion of the Wilmington Notes (see note 4), the exercise price of these LPC
warrants was adjusted from $2.00 to approximately $1.98 as of December 31, 2010.
As a result of the effective conversion price of our common shares issued to
retire the Lehmann Note (see note 4), the exercise price of these LPC warrants
was adjusted from approximately $1.98 to approximately $1.96 in January
2011. Due
to the price-based anti-dilution protection provisions of these warrants (also
known as “down round” provisions) and in accordance with ASC Topic 815,
“Contracts in Entity’s Own Equity”, we are required to recognize these warrants
as a liability at their fair value on each reporting date. These warrants were
reflected as a non-current liability of $247,743 and $386,404 on our
consolidated balance sheets as of December 31 and September 30, 2010,
respectively. The $138,661 decrease in the fair value of this liability was
reflected as other income in our consolidated statement of operations for the
three months ended December 31, 2010. Subsequent changes in the fair value of
this liability will be recognized in our consolidated statement of operations as
other income or expense. See note 1 – Effects of Recent Accounting
Pronouncements.
The LPC
warrants are not exercisable for the first six months after issuance and contain
certain cashless exercise rights. The number of shares of ONSM common stock that
can be issued upon the exercise of these warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
ONSM common stock beneficially owned by the holder does not exceed 4.99% of our
issued and outstanding common stock, although this percentage may be changed at
the holder’s option upon not less than 61 days advance notice to us and provided
the changed limitation does not exceed 9.99%.
With
respect to the warrants issued in connection with the sale of 8% Subordinated
Convertible Debentures, the number of shares of ONSM common stock that can be
issued upon the exercise of these $9.00 warrants is limited to the extent
necessary to ensure that following the exercise the total number of shares of
ONSM common stock beneficially owned by the holder does not exceed 4.999% of our
issued and outstanding common stock.
53
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
The
exercise prices of all of the above warrants are subject to adjustment for
various factors, including in the event of stock splits, stock dividends, pro
rata distributions of equity securities, evidences of indebtedness, rights or
warrants to purchase common stock or cash or any other asset or mergers or
consolidations. Such adjustment of the exercise price would in most cases result
in a corresponding adjustment in the number of shares underlying the
warrant.
NOTE
9: SUBSEQUENT EVENTS
Notes 1
(Liquidity - sale of common shares to LPC, funding commitment letter), 2
(Auction Video - patent filings), 4 (CCJ Note – modifications, Lehmann Note -
early repayment with shares, Line – covenant compliance issues), 5 (Employment
contracts and severance - modifications), 6 (Series A-13 modifications) and 8
(Plan Options granted, adjustment of exercise price of LPC warrants) contain
disclosure with respect to transactions occurring after December 31,
2010.
On
January 28, 2011 we received a letter from The NASDAQ Stock Market (“NASDAQ”),
stating that as a result of our common stock closing at a bid price of $1.00 per
share or more for the ten consecutive business days ended January 27, 2011, we
were considered in compliance with Listing Rule 5550 (a)(2)(a). Compliance with
this minimum bid price and other NASDAQ Listing Rules is necessary in order to
be eligible for continued listing on The NASDAQ Capital Market. Onstream does
not currently comply with NASDAQ Listing Rule 5605 (c) (2) (A), related to the
number of independent Audit Committee members – see note 5.
54
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The
following discussion should be read together with the information contained in
the Consolidated Financial Statements and related Notes included in the annual
report.
Overview
We are a
leading online service provider of live and on-demand Internet video, corporate
audio and web communications and content management applications, provided
primarily to corporate (including large as well as small to medium sized
businesses), education and government customers. We had approximately
96 full time employees as of February 4, 2011, with operations organized in two
main operating groups:
|
·
|
Digital
Media Services Group
|
|
·
|
Audio
and Web Conferencing Services Group
|
Our
Digital Media Services Group consists primarily of our Webcasting division, our
DMSP (“Digital Media Services Platform”) division and our MP365
(“MarketPlace365”) division. The DMSP division includes the related UGC (“User
Generated Content”) and Smart Encoding
divisions.
Our
Webcasting division, which operates primarily from Pompano Beach, Florida and
has its main sales facility in New York City, provides an array of
corporate-oriented, web-based media services to the corporate market including
live audio and video webcasting and on-demand audio and video streaming for any
business, government or educational entity. Our DMSP division, which
operates primarily from Colorado Springs, Colorado, provides an online,
subscription based service that includes access to enabling technologies and
features for our clients to acquire, store, index, secure, manage, distribute
and transform these digital assets into saleable commodities. Our UGC division,
which also operates as Auction Video and operates primarily from Colorado
Springs, Colorado, provides a video ingestion and flash encoder that can be used
by our clients on a stand-alone basis or in conjunction with the DMSP. Our Smart
Encoding division, which operates primarily from San Francisco, California,
provides both automated and manual encoding and editorial services for
processing digital media. This division also provides hosting, storage and
streaming services for digital media, which are provided via the
DMSP.
Our MP365
division, which operates primarily from Pompano Beach, Florida with additional
operations in San Francisco, California, enables publishers, associations,
tradeshow promoters and entrepreneurs to self-deploy their own online virtual
marketplaces using the MarketPlace365TM
platform.
Our Audio
and Web Conferencing Services Group consists of our Infinite Conferencing
(“Infinite”) division and our EDNet division. Our Infinite division operates
primarily from the New York City area and provides “reservationless” and
operator-assisted audio and web conferencing services. Our EDNet division, which
operates primarily from San Francisco, California, provides connectivity (in the
form of high quality audio, compressed video and multimedia data communications)
within the entertainment and advertising industries through its managed network,
which encompasses production and post-production companies, advertisers,
producers, directors, and talent.
For
segment information related to the revenue and operating income of these groups,
see Note 7 to the Consolidated Financial Statements.
Recent
Developments
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related amounts reported in
our consolidated financial statements and in this 10-Q, including common
share quantities, convertible debenture conversion prices and exercise prices of
options and warrants, have been retroactively adjusted for the effect of this
reverse stock split.
55
On
September 17, 2010, we entered into a Purchase Agreement (the “Purchase
Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to
an initial purchase of 300,000 shares of our common stock and 420,000 shares of
our Series A-14 Preferred Stock (“Series A-14”), together with warrants to
purchase 540,000 of our common shares. In accordance with the
Purchase Agreement, LPC also received 50,000 shares of our common stock as a
one-time commitment fee and a cash payment of $26,250 as a one-time structuring
fee. On September 24, 2010, we received net proceeds of $873,750 from LPC in
exchange for our issuance of the above shares and warrants. In accordance with
the Purchase Agreement, LPC also committed to purchase, at our sole discretion,
up to an additional 830,000 shares of our common stock in installments over the
term of the Purchase Agreement, generally at prevailing market prices, but
subject to the specific restrictions and conditions in the Purchase Agreement.
During the period from October 1, 2010 through February 4, 2011 LPC purchased an
additional 540,000 shares of our common stock under that Purchase Agreement for
net proceeds of approximately $454,000, leaving a remaining commitment to
purchase 290,000 additional common shares.
From
January through May 2010 we borrowed an aggregate of $1.0 million from four
individual investors under the terms of unsecured subordinated convertible
notes. The remaining principal balance of these notes was $714,000 as of
September 30, 2010, $503,000 of which was satisfied by us on October 1, 2010 by
the payment of cash and the issuance of common shares and the remaining
principal balance of $211,000 satisfied by monthly principal payments during the
three months ended December 31, 2010 plus the issuance of common shares during
January 2011.
On March
18, 2009, we terminated the Merger Agreement for the acquisition of Narrowstep,
which Merger Agreement we had first entered into on May 29, 2008. The Merger
Agreement could be terminated by either Onstream or Narrowstep at any time after
November 30, 2008 provided that the terminating party was not responsible for
the delay. On December 1, 2009, Narrowstep filed a complaint against us in the
Court of Chancery of the State of Delaware, alleging breach of contract, fraud
and three additional counts and seeking (i) $14 million in damages, (ii)
reimbursement of an unspecified amount for all of its costs associated with the
negotiation and drafting of the Merger Agreement, including but not limited to
attorney and consulting fees, (iii) the return of Narrowstep’s equipment alleged
to be in our possession, (iv) reimbursement of an unspecified amount for all of
its attorneys fees, costs and interest associated with this action and (v) any
further relief determined as fair by the court. After reviewing the complaint
document, we determined that Narrowstep had no basis in fact or in law for any
claim and accordingly, this matter was not reflected as a liability on our
financial statements. On December 30, 2010 Narrowstep counsel advised the Court
in writing that Narrowstep had reached an agreement in principle with us to
dismiss their lawsuit with prejudice, provided that both parties executed a
mutual release. Under this mutual release, which has been agreed to in principle
by both parties but is still being finalized, no further actions will be filed
against each other or affiliated parties in connection with this matter. This
resolution of this matter will not have a material adverse impact on our future
financial position or results of operations.
Our
securities are listed on The NASDAQ Capital Market. We are currently not
compliant with NASDAQ’s minimum audit committee size requirement of three
independent members, as set forth in Listing Rule 5605 (c) (2) (a) (the “Rule”),
for which compliance is necessary in order to be eligible for continued listing
on The NASDAQ Capital Market. On June 24, 2010, we received a letter from NASDAQ
stating that unless we regain compliance with the Rule as of the earlier of our
next annual shareholders’ meeting or June 5, 2011, our common stock will be
subject to immediate delisting. Until that time, our shares will continue to be
listed on The NASDAQ Capital Market.
56
On June
14, 2010, we were notified that Mr. Robert J. Wussler, who was then a director
and a member of our audit committee, had passed away on June 5, 2010. He has not
at the present time been replaced on the audit committee, which currently has
two independent members. We are in the process of evaluating independent
candidates to fill the vacancy left as a result of Mr. Wussler’s passing, both
on the Board as well as the audit committee. We will make that selection as soon
as possible.
On
January 28, 2011 we received a letter from NASDAQ stating that as a result of
our common stock closing at a bid price of $1.00 per share or more for the ten
consecutive business days ended January 27, 2011, we were considered in
compliance with Listing Rule 5550 (a)(2)(a). We had previously been out of
compliance with the minimum bid price requirements set forth in this listing
rule, for which compliance is necessary in order to be eligible for continued
listing on The NASDAQ Capital Market.
Revenue
Recognition
Revenues
from recurring service are recognized when (i) persuasive evidence of an
arrangement exists between us and the customer, (ii) the goods or service has
been provided to the customer, (iii) the price to the customer is fixed or
determinable and (iv) collectibility of the sales price is reasonably
assured.
Our
Digital Media Services Group recognizes revenues from the acquisition, editing,
transcoding, indexing, storage and distribution of its customers’ digital media,
as well as from live and on-demand internet webcasting and internet distribution
of travel information.
The
Webcasting division charges for live and on-demand webcasting at the time an
event is accessible for streaming over the Internet. Charges to customers by the
DMSP division are generally based on a monthly subscription fee, as well as
charges for hosting, storage and professional services. Fees charged to
customers for customized applications or set-up are recognized as revenue at the
time the application or set-up is completed. Charges to customers by the Smart
Encoding and UGC divisions are generally based on the activity or volumes of
such media, expressed in megabytes or similar terms, and are recognized at the
time the service is performed. This division also provides hosting, storage and
streaming services for digital media, which are provided via the
DMSP.
Our Audio
and Web Conferencing Services Group recognizes revenue from audio and web
conferencing as well as customer usage of digital telephone
connections.
The
Infinite division generally charges for audio conferencing and web conferencing
services on a per-minute usage rate, although webconferencing services are also
available for a monthly subscription fee allowing a certain level of usage.
Audio conferencing and web conferencing revenue is recognized based on the
timing of the customer’s use of those services. The EDNet division primarily
generates revenue from customer usage of digital telephone connections
controlled by them. EDNet purchases digital phone lines from telephone companies
and sells access to the lines, as well as separate per-minute usage charges.
Network usage and bridging revenue is recognized based on the timing of the
customer’s usage of those services.
We
include the DMSP and UGC divisions’ revenues, along with the Smart Encoding
division’s revenues from hosting, storage and streaming, in the DMSP and Hosting
revenue caption. We include the EDNet division’s revenues from equipment sales
and rentals and the Smart Encoding division’s revenues from encoding and
editorial services in the Other Revenue caption.
Results
of Operations
Our
consolidated net loss for the three months ended December 31, 2010 was
approximately $898,000 ($0.10 loss per share) as compared to a loss of
approximately $4.3 million ($0.58 loss per share) for the corresponding period
of the prior fiscal year, a decrease in our loss of approximately $3.4 million
(79%). The decreased net loss was primarily due to a $3.1 million non-cash
charge for the impairment of goodwill and other intangible assets in the first
quarter of the prior fiscal year, versus no such charge in the first quarter of
the current fiscal year. We accelerated the most recent annual valuation of our
goodwill and intangible assets from the first quarter of fiscal 2011 to the
fourth quarter of fiscal 2010, and as a result of that valuation we recorded a
$1.6 million charge for the impairment of goodwill, which was reflected in our
results for the three months ended September 30, 2010.
57
The
following table shows, for the periods indicated, the percentage of revenue
represented by items on our consolidated statements of
operations.
Three Months Ended
December 31, |
||||||||
2010
|
2009
|
|||||||
Revenue:
|
||||||||
DMSP
and hosting
|
11.5 | % | 13.6 | % | ||||
Webcasting
|
34.3 | 34.7 | ||||||
Audio
and web conferencing
|
42.7 | 39.1 | ||||||
Network
usage
|
11.0 | 11.2 | ||||||
Other
|
0.5 | 1.4 | ||||||
Total
revenue
|
100.0 | % | 100.0 | % | ||||
Costs
of revenue:
|
||||||||
DMSP
and hosting
|
5.2 | % | 6.2 | % | ||||
Webcasting
|
8.5 | 8.0 | ||||||
Audio
and web conferencing
|
14.2 | 13.2 | ||||||
Network
usage
|
4.9 | 4.6 | ||||||
Other
|
0.5 | 2.6 | ||||||
Total
costs of revenue
|
33.3 | % | 34.6 | % | ||||
Gross
margin
|
66.7 | % | 65.4 | % | ||||
Operating
expenses:
|
||||||||
Compensation
|
49.8 | % | 51.0 | % | ||||
Professional
fees
|
12.8 | 11.8 | ||||||
Other
general and administrative
|
12.5 | 13.4 | ||||||
Impairment
loss on goodwill and other intangible assets
|
- | 76.2 | ||||||
Depreciation
and amortization
|
9.1 | 13.9 | ||||||
Total
operating expenses
|
84.2 | % | 166.3 | % | ||||
Loss
from operations
|
(17.5 | )% | (100.9 | )% | ||||
Other
expense, net:
|
||||||||
Interest
expense
|
(7.2 | )% | (5.8 | )% | ||||
Gain
for adjustment of derivative liability to fair value
|
3.3 | - | ||||||
Other
income (expense), net
|
0.2 | - | ||||||
Total
other expense, net
|
(3.7 | )% | (5.8 | )% | ||||
Net
loss
|
(21.2 | )% | (106.7 | )% |
58
The
following table is presented to illustrate our discussion and analysis of our
results of operations and financial condition. This table should be
read in conjunction with the consolidated financial statements and the notes
therein.
For the three months ended
December 31,
|
Increase (Decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Total
revenue
|
$ | 4,237,253 | $ | 4,069,113 | $ | 168,140 | 4.1 | % | ||||||||
Total
costs of revenue
|
1,411,234 | 1,406,476 | 4,758 | 0.3 | % | |||||||||||
Gross
margin
|
2,826,019 | 2,662,637 | 163,382 | 6.1 | % | |||||||||||
General
and administrative expenses
|
3,183,248 | 3,099,729 | 83,519 | 2.7 | % | |||||||||||
Impairment
loss on goodwill and other intangible assets
|
- | 3,100,000 | (3,100,000 | ) | (100.0 | )% | ||||||||||
Depreciation
and amortization
|
386,197 | 567,361 | (181,164 | ) | (31.9 | )% | ||||||||||
Total
operating expenses
|
3,569,445 | 6,767,090 | (3,197,645 | ) | (47.3 | )% | ||||||||||
Loss
from operations
|
(743, 426 | ) | (4,104,453 | ) | (3,361,027 | ) | (81.9 | )% | ||||||||
Other
expense, net
|
(154,267 | ) | (236,588 | ) | (82,321 | ) | ( 34.8 | )% | ||||||||
Net
loss
|
$ | (897,693 | ) | $ | (4,341,041 | ) | $ | (3,443,348 | ) | (79.3 | )% |
Revenues
and Gross Margin
Consolidated
operating revenue was approximately $4.2 million for the three months ended
December 31, 2010, an increase of approximately $168,000 (4.1%) from the prior
fiscal year, due to increased revenues of the Audio and Web Conferencing
Services Group.
Audio and
Web Conferencing Services Group revenues were approximately $2.3 million for the
three months ended December 31, 2010, an increase of approximately $213,000
(10.3%) from the corresponding period of the prior fiscal year. This increase
was primarily a result of increased audio conferencing revenues in the Infinite
division.
The
number of minutes billed by the Infinite division was approximately 24.3 million
for the three months ended December 31, 2010, as compared to approximately 20.3
million minutes billed for the corresponding period of the prior fiscal year.
However, the average revenue per minute was approximately 7.5 cents for the
three months ended December 31, 2010, as compared to approximately 7.9 cents for
the corresponding period of the prior fiscal year. The average revenue per
minute statistic includes auxiliary services and fees that are not billed to the
customer on a per minute basis. The average revenue per minute also includes
conferencing revenue rebilled to our third party customers by another Onstream
division and thus included in that other division’s reported
revenues.
For some
time the Infinite division sales force has been focusing on entering into
agreements with organizations with resources to provide Infinite’s audio and web
conferencing services to certain targeted groups. This included agreements with
Proforma, a leading provider of graphic communications solutions, a reseller
agreement with Copper Conferencing, a leading, carrier-class conferencing
services provider for small and medium-sized businesses, a master agency
agreement with Presidio Networked Solutions, a systems integrator and a
collaboration with PeerPort to launch WebMeet Community, an integrated suite of
virtual collaboration services. In March 2010 we
announced the expansion of Infinite’s alliance with BT Conferencing by providing
a jointly developed conferencing platform to Infinite’s reservationless client
base. Although these relationships and initiatives are important as a basis for
building future sales, in some cases we expect a lead time of a year or longer
before they are reflected in actual recorded sales. We believe that the current
levels of Infinite division revenues are a reflection of these and other sales
initiatives.
59
We expect
the above trend to continue and accordingly we expect the fiscal 2011 revenues
of the Audio and Web Conferencing Services Group (for the year as a whole) to
exceed the fiscal 2010 amounts, although this increase cannot be
assured.
Digital
Media Services Group revenues were approximately $1.9 million for the three
months ended December 31, 2010, a decrease of approximately $45,000 (2.3%) from
the corresponding period of the prior fiscal year. This decrease was primarily
due to an approximately $63,000 (11.5%) net decrease in DMSP and hosting
revenues from the corresponding period of the prior fiscal year. This decrease
in DMSP and hosting revenues included (i) an approximately $41,000 decrease in
hosting and bandwidth charges to certain larger DMSP customers serviced by our
Smart Encoding division and (ii) an approximately $22,000 decrease in the DMSP
division’s revenues from its “Store and Stream” and “Streaming Publisher”
products.
As of
December 31, 2010, we had 347 monthly recurring subscribers to the “Store and
Stream” and/or “Streaming Publisher” applications of the DMSP, which
applications were developed as a focused interface for small to medium business
(SMB) clients, as compared to 344 subscribers as of December 31, 2009. Including
large DMSP hosting customers supported by our Smart Encoding Division, these
customer counts were 357 and 363, respectively.
We expect
this DMSP customer base to grow, especially as a result of the launch of MP365
discussed below. In addition to the “Store and Stream” and “Streaming Publisher”
applications of the DMSP, we are continuing to work with several entities
assisting us in the deployment via the DMSP of enabling technologies necessary
to create social networks with integrated professional and user generated
multimedia content.
One of
the key components of our March 2007 acquisition of Auction Video was the video
ingestion and flash transcoder, already integrated at the time into the DMSP as
an integral component of the services offered to social network providers and
other User Generated Video (UGV) applications. Auction Video’s technology may be
used in various applications such as online Yellow Pages listings, delivering
video to mobile phones, multi-level marketing and online newspaper classified
advertisements, and can also provide for direct input from webcams and other
imaging equipment. In addition, our Auction Video service was approved by eBay
to provide video hosting services for eBay users and PowerSellers (high volume
users of eBay). The Auction Video acquisition was another strategic step in
providing a complete range of enabling, turnkey technologies for our clients to
facilitate “video on the web” applications, which we believe will make the DMSP
a more competitive option as an increasing number of companies look to enhance
their web presence with digital rich media and social applications.
In
addition to the beneficial effect of the Auction Video technology on DMSP
revenues, we believe that our ownership of that technology will provide us with
other revenue opportunities, including software sales and licensing fees,
although the timing and amount of these revenues cannot be assured. In March
2008 we retained the law firm of Hunton & Williams to assist in expediting
the patent approval process and helping protect our rights related to our patent
pending UGV technology. In April 2008, we revised the original patent
application primarily for the purpose of splitting it into two separate
applications, which, while related, are being evaluated separately by the U.S.
Patent Office (“USPO”). With respect to the claims pending in the first of the
two applications, the USPO issued non-final rejections in August 2008, February
2009 and May 2009, as well as final rejections in January 2010 and June 2010.
Our responses to certain of these rejections included modifications to certain
claims made in the original patent application. In response to the latest
rejection we filed a Notice of Appeal with the USPO on November 22, 2010 and we
filed an appeal brief with the USPO on February 9, 2011. The USPO has until
approximately April 9, 2011 to file their response, after which a decision would
be made as to our appeal by a three member panel, either based on the filings or
a hearing if requested by us. Regardless of the ultimate outcome of this matter,
our management has determined that an adverse decision with respect to this
patent application would not have a material adverse effect on our financial
position or results of operations. The USPO has taken no formal action with
regard to the second of the two applications. Certain of the former owners of
Auction Video, Inc. have an interest in proceeds that we may receive under
certain circumstances in connection with these patents.
60
Webcasting
revenues increased by approximately $45,000 (3.2%) for the three months ended
December 31, 2010 as compared to the corresponding period of the prior fiscal
year. The number of webcasts produced, approximately 1,900 for the three months
ended December 31, 2010, was approximately equal to the number of webcasts
produced during the corresponding period of the prior fiscal year and the
average revenue per webcast event of approximately $774 for the three months
ended December 31, 2010 was approximately equal to the corresponding period of
the prior fiscal year. The number of webcasts reported, as well as the resulting
calculation of the average revenue per webcast event, does not include any
webcast events attributed with $100 or less revenue, based on our determination
that excluding such low-priced or even no-charge events increases the usefulness
of this statistic. The average revenue per webcast also includes webcasting
revenue rebilled to our third party customers by another Onstream division and
thus included in that other division’s reported revenues.
In
addition, we believe that the following factors will favorably impact our
webcasting revenues for fiscal 2011:
·
|
Expanding
government related business - In November 2007 we announced that we had
been awarded a stake in a three-year Master Services Agreement (MSA) by
the State of California to provide video and audio streaming services to
the state and participating local governments. In August 2008 we announced
that we had been awarded three new multi-year public sector webcasting
services contracts with the United States Nuclear Regulatory Commission
(NRC), California State Department
of Technology Services (DTS), and California State Board of Equalization
(BOE). In April 2009 we announced that, in addition to the extension of
the NRC contract for the first full year after a successful initial test
period, we were engaged to perform webcasting services for use by the U.S.
Department of Interior, Minerals Management Service, via a strategic
partner relationship.
|
In
November 2009, we announced that we were engaged to perform webcasting services
for the Department of the Treasury’s Internal Revenue Service (IRS) and to
provide webinar services for use by the U.S. Department of Housing and Urban
Development’s Federal Housing Administration (FHA) Philadelphia Homeownership
Center (HOC), via a strategic partner relationship. We also announced the
extension of the NRC contract, discussed above, for the second full
year.
We
recognized aggregate revenues for the above government-related contracts of
approximately $136,000 and $65,000 for the three months ended December 31, 2010
and 2009, respectively, which represents a 109.2% increase. We recognized
aggregate revenues for the above government-related contracts of approximately
$509,000 and $322,000 for the years ended September 30, 2010 and 2009,
respectively, which represents a 58.1% increase. Our financial statements for
these periods include webcasting revenues from government related business not
included in these numbers, as these numbers only relate to the specific
government related contracts that we have publicly announced, as listed
above.
61
|
·
|
New
products and technology - iEncode™ is a full-featured, turnkey, standalone
webcasting solution, designed to operate inside a corporate LAN
environment with multicast capabilities. Although iEncode™ sales have been
limited to date, we expect them to start to increase to more meaningful
levels during fiscal 2011.
|
We have
relatively recently completed several feature enhancements to our proprietary
webcasting platform including a premium Flash webcasting service announced by us
in November 2010 for the Google Android™ smartphone platform. In
addition to delivering webcasts to Android based mobile users, the new
Flash-based webcasting solution enhances our traditional online webcasting
service to existing clients as well as opens up a new market for us with
enterprise customers.
·
|
BT
reseller agreement - In October 2009, we announced an expansion of our
business relationship with BT Conferencing, a division of BT Group plc,
one of the world's leading providers of communications solutions and
services, via the signing of a new webcasting, iEncode, and digital media
services reseller agreement. Prior to this agreement, and continuing to
the current time, we recognized significant webcasting revenues from a BT
business group that had succeeded to our business relationship with
another reseller, by virtue of BT’s acquisition of that reseller. Under
the reseller agreement announced in October 2009, another business group
within BT Conferencing will also be offering our webcasting, iEncode and
digital media services to its new and existing clients worldwide. The
implementation of this new agreement is in process and is expected to
first impact our revenues in a meaningful way during fiscal
2011.
|
·
|
Organizational
changes - In October 2010, we announced
Ari Kestin’s appointment as the Executive Vice President and General
Manager of our Webcasting division. In his new role with the Webcasting
division, Mr. Kestin will be responsible for all client-facing activities,
sales and marketing, operations, partnerships, product and application
development within the division. Mr. Kestin will also continue as
President of the Infinite division, a position he has held since June
2009.
|
As a
result of the above factors, we expect fiscal 2011 webcasting revenues (for the
year as a whole) to exceed the corresponding fiscal 2010 amounts, although such
increase cannot be assured.
During
fiscal 2009, we began the development of the MarketPlace365™ (MP365) platform,
which enables the creation of on-line virtual marketplaces, trade shows and
social communities, with the goal of generating business leads for our
customers, the MP365 site promoters. There are currently four active MP365
promoter sites – SUBWAY (a private marketplace for internal use by SUBWAY
vendors, franchisees and staff and the first site launched in July 2010), Home
Service Expo (a general public accessible marketplace providing services for
homeowners in the Dade, Broward and Palm Beach counties of Florida launched in
November 2010), Green Light Expo (a general public accessible global products
and services expo targeting all things green for lifestyle and business
applications launched in November 2010) and ProActive Capital Forum (general
public accessible and believed to be the first 24/7/365 financial tradeshow
concentrating on companies in the life-sciences and technology areas
launched in November 2010). Fred DeLuca, co-founder and co-owner of SUBWAY and
active in the management of that company, is one of our major shareholders and
also controls Rockridge Capital Holdings, LLC, an entity to which we owe
approximately $1.5 million as of December 31, 2010 and which debt is convertible
into shares of our common stock under certain conditions. The promoter of Green
Light Expo’s MP365 site is also affiliated with SUBWAY.
62
In
addition to the four active marketplaces, we have signed MP365 promoter
contracts for another 20 marketplaces, several of which we expect will launch
and become active in the coming weeks and months. In addition, we have entered
into several MP365 agent agreements, including the following:
|
·
|
In
December 2009, we announced an agreement with the Tarsus Group plc
(“Tarsus”) for them to market MP365 to Tarsus' more than 19,000 trade
shows and 2,000 suppliers that are part of their Trade Show News Network
(“TSNN”), a leading online resource for the trade show, exhibition and
event industry.
|
|
·
|
In
February 2010, we announced an agreement with the Trade Show Exhibitors
Association (“TSEA”) for them to market MP365 to TSEA’s members, vendors
and sponsors.
|
|
·
|
In
April 2010, we announced an agreement with AMC Institute, to provide
MP365, as well as our full suite of digital media and communications
services, to the organization’s 150 association management company members
who represent over 1,500 associations throughout the U.S., Canada, Europe
and Asia.
|
|
·
|
In
May 2010, we announced an MP365 agent agreement with Conventions.net,
which has thousands of industry suppliers in over 150 categories and plans
to showcase the MP365 platform through its website and other marketing
vehicles.
|
We will
charge each promoter a monthly fee based on the number of exhibitors within
their MP365 marketplace, as well as a share of the revenue from advertising in
their MP365 marketplace, but we also expect to recognize additional revenue
beyond these exhibitor and advertising fees since MP365 will integrate with and
utilize almost all of our other technologies including DMSP, webcasting, UGC and
conferencing. Special pricing and payment terms have been granted to SUBWAY and
may be granted to other MP365 promoters, particularly during the initial stages
of introducing the MP365 platform. Once we are past the initial
introductory stage and as the process of launching MP365 sites continues, we
expect that revenues from MP365 will begin to be a meaningful part of our
overall operating results. However, the attainment of any revenue from a
MP365 marketplace or promoter contract will be subject to various factors,
including the implementation of the MP365 product by the promoter/purchaser,
including the sales of booths to exhibitors and related advertising, which
amount and timing cannot be assured.
Due to
the anticipated increase in webcasting revenues, as well as our
anticipation of meaningful revenues in fiscal 2011 from the recently launched
MP365 platform, both as discussed above, we expect the fiscal 2011 revenues of
the Digital Media Services Group (for the year as a whole) to exceed the
corresponding fiscal 2010 amounts, although such increase cannot be
assured.
Consolidated
gross margin was approximately $2.8 million for the three months ended December
31, 2010, an increase of approximately $163,000 (6.1%) from the corresponding
period of the prior fiscal year. This increase was primarily due to
approximately $142,000 additional gross margin from the Audio and Web
Conferencing Services Group, corresponding to the $213,000 increase in Audio and
Web Conferencing Services Group revenues as discussed above. Our consolidated
gross margin percentage was 66.7% for the three months ended December 31, 2010,
versus 65.4% for the corresponding period of the prior fiscal year.
Based on
our expectation that the fiscal 2011 revenues of both the Audio and Web
Conferencing Services Group and the Digital Media Services Group (for the year
as a whole) will exceed the corresponding fiscal 2010 amounts, as discussed
above, we expect consolidated gross margin (in dollars) for fiscal year 2011
(for the year as a whole) to exceed the corresponding fiscal 2010 amounts,
although such increase cannot be assured. However, it is possible that gross
margin as a percentage of the related revenue for fiscal year 2011 may be lower
than such percentage for fiscal year 2010, since (i) we expect continued price
pressure in fiscal 2011, as compared to fiscal 2010, arising from competition in
all of our major product lines and (ii) it is possible that the Infinite
division’s cost of sales, on a per-minute basis, may increase in fiscal 2011, as
compared to fiscal 2010, in order for us to attract larger customers by
increasing the reliability of the subcontractors supporting our service
offerings.
63
Operating
Expenses
Consolidated
operating expenses were approximately $3.6 million for the three months ended
December 31, 2010, a decrease of approximately $3.2 million (47.3%) from the
corresponding period of the prior fiscal year, primarily due to a $3.1 million
non-cash charge for the impairment of goodwill and other intangible assets in
the first quarter of the prior fiscal year, versus no such charge in the first
quarter of the current fiscal year. We accelerated the most recent annual
valuation of our goodwill and intangible assets from the first quarter of fiscal
2011 to the fourth quarter of fiscal 2010, and as a result of that valuation we
recorded a $1.6 million charge for the impairment of goodwill, which was
reflected in our results for the three months ended September 30,
2010.
The
valuations of Infinite, EDNet and Acquired Onstream incorporate our management’s
estimates of future sales and operating income, which estimates in the cases of
Infinite and Acquired Onstream are dependent on products (audio and web
conferencing and the DMSP, respectively) from which significant sales and/or
sales increases may be required to support that valuation. Furthermore, even if
our market value were to exceed our net book value in the future, annual reviews
for impairment in future periods may result in future periodic
write-downs. Tests for impairment between annual tests may be
required if events occur or circumstances change that would more likely than not
reduce the fair value of the net carrying amount.
The
decrease in depreciation and amortization expense for the three months ended
December 31, 2010 of approximately $181,000 was 31.9% of that expense for the
corresponding period of the prior fiscal year. This decrease is primarily due to
(i) an approximately $93,000 reduction of depreciation expense related to
certain equipment and purchased software reaching the end of the useful lives
assigned to them for book depreciation purposes, (ii) an approximately $74,000
reduction of amortization expense related to certain intangible assets as a
result of the impairment losses we recorded during the year ended September 30,
2010, which were recorded as a reduction of the historical depreciable cost
basis of those assets as of those dates, as well as certain intangible assets
reaching the end of the lives assigned to them for book amortization purposes
and (iii) an approximately $58,000 reduction of depreciation expense related to
the DMSP as a result of certain DMSP components reaching the end of the useful
lives assigned to them for book depreciation purposes. These decreases were
partially offset by an approximately $42,000 increase in depreciation expense
for internally developed software, including iEncode and MP365, recently placed
into service.
Excluding
any impact arising from fiscal 2011 goodwill impairment charges as compared to
those costs in fiscal 2010, we expect our consolidated operating expenses for
fiscal year 2011 to be equal to or less than the corresponding prior year
amounts, expressed as a percentage of revenues, although this cannot be
assured.
Other
Expense
Other
expense of approximately $154,000 for the three months ended December 31, 2010
represented an approximately $82,000 (34.8%) decrease as compared to the
corresponding period of the prior fiscal year. This decrease arose from an
approximately $139,000 gain recognized in the three months ended December 31,
2010 and arising from the adjustment of a derivative liability to fair value,
versus no such item in the corresponding period of the prior fiscal year. The
impact of this valuation gain was partially offset by an increase in interest
expense of approximately $65,000 for the three months ended December 31, 2010 as
compared to the corresponding period of the prior fiscal year, primarily arising
from new interest bearing debt and increased effective interest
rates.
64
Due to
the price-based anti-dilution protection provisions (also known as “down round”
provisions) included in warrants issued by us in September 2010 in
connection with the LPC Purchase Agreement and in accordance with ASC Topic 815,
“Contracts in Entity’s Own Equity”, we are required to recognize these warrants
as a liability at their fair value on each reporting date. These warrants were
reflected as a non-current liability of $386,404 on our September 30, 2010
consolidated balance sheet. However, since the fair value of this liability was
$247,743 as of December 31, 2010, an adjustment for the $138,661 decrease in
that liability’s carrying value on our balance sheet was reflected as other
income in our consolidated statement of operations for the three months ended
December 31, 2010. Subsequent changes in the fair value of this liability will
be recognized in our consolidated statement of operations as other income or
expense.
From
January through May 2010 we borrowed an aggregate of $1.0 million from four
individual investors under the terms of unsecured subordinated convertible
notes. The remaining principal balance of these notes was $714,000 as of
September 30, 2010, $503,000 of which was satisfied by us on October 1, 2010 by
the payment of cash and the issuance of common shares (the Greenberg Note and
the Wilmington Notes) and the remaining principal balance of $211,000 was
satisfied by monthly principal payments during the three months ended December
31, 2010 plus the issuance of common shares during January 2011 (the Lehmann
Note). The Lehmann Note, which had an effective interest rate of approximately
77.0% per annum, as well as the write-off of the unamortized debt discount at
the time the Greenberg Note and Wilmington Notes were repaid, accounted for
approximately $43,000 of interest expense for the three months ended December
31, 2010, related to debt which did not exist during the three months ended
December 31, 2009.
In
addition to the increased interest from the new debt as noted above, our line of
credit arrangement (the “Line”) was amended in December 2009 and as a result the
interest rate modified to be 13.5% per annum, adjusted for future changes in the
prime rate, plus a weekly monitoring fee of one twentieth of a percent (0.05%)
of the borrowing limit. The interest rate at the time of the amendment was
14.25% per annum (prime rate plus 11%) but there was no monitoring fee. Based on
the amended terms, interest expense, including the monitoring fee, for the Line
increased by approximately $10,000 for the three months ended December 31, 2010,
as compared to the three months ended December 31,
2009.
As a
result of the January 2011 renegotiation of the terms of the $200,000 CCJ Note,
including related changes to Series A-13 Preferred also held by CCJ, the
effective interest rate on the CCJ Note increased from 47.4% per annum to
approximately 78.5% per annum – see the discussion of Liquidity and Capital
Resources below for details.
Although
a significant portion of the remaining outstanding balance due on the borrowings
made during fiscal 2010 was recently repaid using proceeds from non-interest
bearing equity financing as well as the issuance of common shares, based on the
remaining outstanding interest-bearing debt, the increased interest rate on the
Line that was not effective for the entirety of fiscal 2010, the increased
effective interest rate on the CCJ Note from January 2011 and potential further
borrowings in fiscal 2011 in order to address our working capital deficit, we
anticipate our interest expense during fiscal 2011 to at least be equal to, or
potentially greater than, that expense for fiscal 2010.
Liquidity
and Capital Resources
Our
financial statements for the three months ended December 31, 2010 reflect a net
loss of approximately $898,000 and cash used in operations for that period of
approximately $79,000. Although we had cash of approximately $138,000 at
December 31, 2010, our working capital was a deficit of approximately $3.8
million at that date.
65
During
the three months ended December 31, 2010, we obtained financing primarily from
the sale of our common stock under the terms of the LPC Purchase Agreement,
discussed in more detail below and which resulted in net cash proceeds of
approximately $268,000 during the period. Amounts outstanding under the Line,
which are subject to the amount and aging of our accounts receivable, decreased
by approximately $140,000 as a result of our net repayments required during the
period.
On
September 17, 2010, we entered into a Purchase Agreement (the “Purchase
Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to
an initial purchase of 300,000 shares of our common stock and 420,000 shares of
our Series A-14 Preferred Stock (“Series A-14”), together with warrants to
purchase 540,000 of our common shares. In accordance with the
Purchase Agreement, LPC also received 50,000 shares of our common stock as a
one-time commitment fee and a cash payment of $26,250 as a one-time structuring
fee. On September 24, 2010, we received net proceeds of $873,750 from LPC in
exchange for our issuance of the above shares and warrants. After deducting
legal, accounting and other out-of-pocket costs incurred by us in connection
with this transaction, the net cash proceeds were $824,044.
During
the period from October 1, 2010 through February 4, 2011 LPC purchased an
additional 540,000 shares of our common stock under that Purchase Agreement for
net proceeds of approximately $454,000. LPC has also committed to
purchase, at our sole discretion, up to an additional 290,000 shares of our
common stock in installments over the remaining term of the Purchase Agreement,
generally at prevailing market prices, but subject to the specific restrictions
and conditions in the Purchase Agreement. There is no upper limit to the price
LPC may pay to purchase these additional shares. The purchase of our shares by
LPC will occur on dates determined solely by us and the purchase price of the
shares will be fixed on the purchase date and will be equal to the lesser of (i)
the lowest sale price of our common stock on the purchase date or (ii) the
average of the three (3) lowest closing sale prices of our common stock during
the twelve (12) consecutive business days prior to the date of a purchase by
LPC. LPC shall not have the right or the obligation to purchase any shares of
our common stock from us at a price below $0.75 per share.
In
addition, we have agreed to use our best efforts to get, within 190 days from
the date of the Purchase Agreement, shareholder approval to sell up to an
additional 1,900,000 of our common shares to LPC, which upon such approval LPC
has agreed to purchase, at our sole discretion and subject to the same
restrictions and conditions in the Purchase Agreement.
The
Purchase Agreement has a term of 25 months but may be terminated by us at any
time after the first year at our discretion without any cost to us and may be
terminated by us at any time in the event LPC does not purchase shares as
directed by us in accordance with the terms of the Purchase Agreement. LPC may
terminate the Purchase Agreement upon certain events of default set forth
therein, including but not limited to the occurrence of a material adverse
effect, delisting of our common stock and the lack of immediate relisting on one
of the specified alternate markets and the lapse of the effectiveness of the
applicable registration statement for more than the specified number of days.
The Purchase Agreement restricts our use of variable priced financings for the
greater of one year or the term of the Purchase Agreement and, in the event of
future financings by us, allows LPC the right to participate under conditions
specified in the Purchase Agreement.
The
shares of common stock sold and issued under the Purchase Agreement and the
shares of common stock issuable upon conversion of Series A-14, were sold and
issued pursuant to a prospectus supplement filed by us on September 24, 2010
with the Securities and Exchange Commission in connection with a takedown of an
aggregate of 1.6 million shares from our Shelf Registration. In
connection with the Purchase Agreement, we also entered into a Registration
Rights Agreement (the “Registration Rights Agreement”) with LPC, dated September
17, 2010, under which we agreed, among other things, to use our best efforts to
keep the registration statement effective until the maturity date as defined in
the Purchase Agreement and to indemnify LPC for certain liabilities in
connection with the sale of the securities.
66
From
January through May 2010 we issued the unsecured subordinated convertible
Greenberg Note, Wilmington Notes and Lehmann Note, for aggregate gross proceeds
of $1.0 million. The remaining principal balance of the Greenberg and Wilmington
Notes, representing $750,000 in original borrowing, was $503,000 as of September
30, 2010. This $503,000 balance, as well as all accrued but unpaid interest, was
satisfied by us on October 1, 2010 with cash payments aggregating $400,000 plus
the issuance of 137,901 unregistered common shares. The remaining principal
balance of the Lehmann Note, representing $250,000 in original borrowing, was
$211,000 as of September 30, 2010 and was satisfied by monthly principal
payments of $13,000 each during the three months ended December 31, 2010 plus
the issuance of 200,000 unregistered common shares during January 2011 for the
remaining balance. The effective rate of the Lehmann Note was initially
calculated to be approximately 77.0% per annum, assuming a six month loan term
and excluding the finder’s fees payable by us to a third party in cash and equal
to 7% of the borrowed amount.
The
maximum allowable borrowing amount under the Line is now $2.0 million, subject
to certain formulas with respect to the amount and aging of the underlying
receivables. The outstanding balance (approximately $1.4 million as of February
4, 2011) bears interest at 13.5% per annum, adjustable based on changes in prime
after December 28, 2009, plus a weekly monitoring fee of one twentieth of a
percent (0.05%) of the borrowing limit. The outstanding principal under the Line
may be repaid at any time, but no later than December 2011, which term may be
extended by us for an extra year, subject to compliance with all loan terms,
including no material adverse change, as well as concurrence of the
Lender.
The Line
is also subject to us maintaining an adequate level of receivables, based on
certain formulas, as well as our compliance with a quarterly debt service
coverage covenant (the “Covenant”), effective with the September 30, 2010
quarter. We were in compliance with this covenant for the September 30, 2010
quarter. The Covenant, as defined in the applicable loan documents, requires
that our net income or loss, adjusted to remove all non-cash expenses as well as
cash interest expense, be equal to or greater than that same cash interest
expense. Calculated strictly on this basis, we were in compliance with the
Covenant for the three months ended December 31, 2010. The Lender has raised the
question as to whether the net income or loss used in the Covenant calculation
should also be adjusted to remove non-cash revenues (i.e. the $138,661 gain for
adjustment of derivative liability to fair value). Although an adjustment for
non-cash revenues is not specified in the applicable loan documents, if this
adjustment to remove non-cash revenues were made, we would not be in compliance
with that Covenant for the quarter ended December 31, 2010. In its February 14,
2011 communication to us, the Lender indicated that it believed that we had
failed to comply with the Covenant and that it would construe such situation to
be a default if not corrected within 30 days. The Lender also indicated that,
while it reserves all its rights and remedies provided in the loan agreement, it
is not their intention to accelerate the repayment of this loan.
We are
obligated under a Note (the “Rockridge Note”) issued to Rockridge Capital
Holdings, LLC (“Rockridge”), an entity controlled by one of our largest
shareholders, which had an outstanding principal balance of approximately $1.5
million at December 31, 2010. The Rockridge Note is secured by a first priority
lien on all of our assets, such lien subordinated only to the extent
higher priority liens on assets, primarily accounts receivable and certain
designated software and equipment, are held by certain of our other lenders. We
also entered into a Security Agreement with Rockridge that contains certain
covenants and other restrictions with respect to the
collateral.
The
Rockridge Note is repayable in equal monthly installments of $41,409 extending
through August 14, 2013 (the “Maturity Date”), which installments include
principal (except for a $500,000 balloon payable at the Maturity Date and which
balloon payment is also convertible into restricted ONSM common shares under
certain circumstances) plus interest (at 12% per annum) on the remaining unpaid
balance. Upon notice from Rockridge at any time prior to the Maturity Date, up
to fifty percent (50%) of the outstanding principal amount of
the Rockridge Note (excluding the balloon payment subject to conversion per the
previous sentence) may be converted into a number of restricted shares of ONSM
common stock. If we sell all or substantially all of our assets, or at any time
after September 4, 2011 and prior to the Maturity Date, the remaining
outstanding principal amount of
the Rockridge Note may be converted by Rockridge into a number of restricted
shares of ONSM common stock. The above conversions are subject to a minimum of
one month between conversion notices (unless such conversion amount exceeds
$25,000) and will use a conversion price of eighty percent (80%) of the fair
market value of the average closing bid price for ONSM common stock for the
twenty (20) days of trading on The NASDAQ Capital Market (or such other exchange
or market on which ONSM common shares are trading) prior to such Rockridge
notice, but such conversion price will not be less than $2.40 per
share.
67
The Note
and Stock Purchase Agreement also provides that Rockridge may receive an
origination fee, upon not less than sixty-one (61) days written notice to us, of
366,667 restricted shares of our common stock (the “Shares”). The value of those
Shares is subject to a limited guaranty of no more than an additional payment by
us of $75,000 which will be effective in the event the Shares are sold for an
average share price less than the minimum of $1.20 per share. We have recorded
no accrual for this matter on our financial statements as of December 31, 2010,
since we believe that the variables affecting any eventual liability cannot be
reasonably estimated. However, if the closing ONSM share price of $1.06 per
share on February 4, 2011 was used as a basis of calculation, the required
payment would be approximately $59,000.
The
effective interest rate of the Rockridge Note is approximately 28.0% per annum.
This rate excludes the potential effect of a premium to market prices if the
balloon payment is satisfied in common shares instead of cash as well as the
potential effect of any appreciation in the value of the Shares at the time of
issuance beyond their value at the date of the Rockridge Agreement or the
Amendment, as applicable.
We are
obligated under convertible Equipment Notes with a face value of $1.0 million
and a maturity date of June 3, 2011, which are collateralized by specifically
designated software and equipment owned by us with a cost basis of approximately
$1.5 million, as well as a subordinated lien on certain other of our assets to
the extent that the designated software and equipment, or other software and
equipment added to the collateral at a later date, is not considered sufficient
security for the loan. Interest is payable every 6 months in cash or, at our
option, in restricted ONSM common shares, based on a conversion price equal to
seventy-five percent (75%) of the average ONSM closing price for the thirty (30)
trading days prior to the date the applicable payment is due. On December 2,
2010, we elected to issue 76,769 unregistered shares of our common stock to the
holders in lieu of $60,493 cash interest on these Equipment Notes for the period
from May 2010 through October 2010, which was recorded as interest expense of
$71,395 on our books, based on the fair value of those shares on the issuance
date.
The
Equipment Notes may be converted to restricted ONSM common shares at any time
prior to their maturity date, at the holder’s option, based on a conversion
price equal to seventy-five percent (75%) of the average ONSM closing price for
the thirty (30) trading days prior to the date of conversion, but in no event
may the conversion price be less than $4.80 per share. In the event the Notes
are converted prior to maturity, interest on the Equipment Notes for the
remaining unexpired loan period will be due and payable in additional restricted
ONSM common shares in accordance with the same formula for interest as described
above.
We are
obligated under an unsecured subordinated note payable note (the “CCJ
Note”) issued to CCJ Trust (“CCJ”), with an outstanding balance of
$200,000 as of December 31, 2010. The CCJ Note originally bore interest at 8%
per annum and was payable in equal monthly installments of principal and
interest for 48 months plus a $100,000 principal balloon at maturity (the “CCJ
Note”) although none of those payments were made by us. To resolve this payment
default, the CCJ Note was amended in January 2011 to prospectively increase the
interest rate to 10% per annum, payable quarterly, and to require two principal
payments of $100,000 each on December 31, 2011 and December 31, 2012,
respectively. This amendment also called for our cash payment of the previously
accrued interest in the amount of $16,263 on or before January 31, 2011. The
remaining principal balance of this note may be converted at any time into our
common shares at the greater of (i) the previous 30 day market value or (ii)
$2.00 per share (which was $3.00 per share prior to the January 2011
renegotiation). In conjunction with and in consideration of the January 2011
note amendment, it was agreed that certain terms of the 35,000 shares of Series
A-13 held by CCJ at that date would be modified.
The
effective interest rate of the CCJ Note prior to the January 2011 amendment was
approximately 47.4% per annum, including the Black-Scholes value of warrants
given plus the value of an increase granted in the number of common shares
underlying the Series A-13 shares versus the Series A-12 shares that were
exchanged for them. The effective rate of 47.4% per annum also included 11.2%
per annum related to dividends that would have accrued to CCJ as a result of the
later mandatory conversion date of the Series A-13 shares versus the mandatory
conversion date of the Series A-12 shares. Following the January 2011 amendment,
the effective interest rate of the CCJ Note increased to approximately 78.5% per
annum, to reflect the value of the increased value of common shares underlying
the Series A-13 shares as a result of the modified terms as well as the increase
in the periodic cash interest rate from 8% to 10% per annum. The effective rate
of 78.5% per annum also includes 9.3% per annum related to dividends that could
accrue to CCJ as a result of the later mandatory conversion date of the Series
A-13 shares as a result of the modified terms.
68
Projected
capital expenditures for the twelve months ending December 31, 2011 total
approximately $1.3 million which includes software and hardware upgrades to the
DMSP, the webcasting system (including iEncode) and the audio and web
conferencing infrastructure, as well as costs of software development and
hardware costs in connection with the introduction and establishment of the
MarketPlace365 platform. This total includes at least $550,000 of projected
capital expenditures which we have determined may be financed, deferred past the
twelve month period or cancelled entirely, depending on our other cash flow
considerations. This total excludes approximately $255,000 reflected by us as
accounts payable at December 31, 2010, representing amounts that are presently
the subject of litigation and which will not be reflected as capital
expenditures in our cash flow statement until paid.
We have
estimated that we would require an approximately 7-8% increase in our
consolidated revenues, as compared to our revenues for the twelve months ended
September 30, 2010, in order to adequately fund our anticipated operating cash
expenditures for the twelve months ending September 30, 2011 (including cash
interest expense and a basic level of capital expenditures). Due to
seasonality, this increase would be accomplished if we were to achieve average
quarterly revenues during the twelve months ending September 30, 2011 equivalent
to the revenues for the third quarter of fiscal 2010. We have estimated that, in
addition to this revenue increase, we will also require additional debt or
equity financing of approximately $1.5 to $2.0 million (in addition to recent
sales of common shares discussed above) over the twelve months ending September
30, 2011 to satisfy principal repayments due against existing debt as well as
past due trade payables that we believe are necessary to pay to continue our
operations. However, approximately $1.0 million of this $1.5 to $2.0 million
(related to the repayment of the Equipment Notes as discussed above) would not
be required until June 2011.
If we
were to achieve revenue increases in excess of this 7-8%, or if any of our
lenders elected to convert a portion of the existing debt to equity as allowed
for under its terms, the required financing could be less than this $1.5 to $2.0
million. However, if we did not achieve these revenue increases, or if our
operating expenses, cash interest or capital expenditures were higher than
anticipated over the twelve months ending September 30, 2011, the required
financing could be greater than this $1.5 to $2.0 million.
We have
implemented and continue to implement specific actions, including hiring
additional sales personnel, developing new products and initiating new marketing
programs, geared towards achieving revenue increases. The costs associated with
these actions were contemplated in the above calculations. However,
in the event we are unable to achieve the required revenue increases, we believe
that a combination of identified decreases in our current level of expenditures
that we would implement and the raising of additional capital in the form of
debt and/or equity that we believe we could obtain from identified sources would
be sufficient to allow us to operate for the next twelve months. We will closely
monitor our revenue and other business activity to determine if further cost
reductions, the raising of additional capital, or other activity is considered
necessary.
A
prospectus allowing us to offer and sell up to $6.6 million of our registered
common shares (“Shelf Registration”) was declared effective by the SEC on April
30, 2010. In connection with the LPC Purchase Agreement 1.6 million common
shares (including shares issuable upon conversion of preferred shares) were
included in a prospectus supplement filed by us on September 17, 2010 with the
SEC as a takedown under the Shelf Registration. However, there is no assurance
that we will sell additional shares to LPC under the Purchase Agreement or that
we will sell additional shares under the Shelf Registration, or if we do make
such sales what the timing or proceeds will be. In addition, we may incur fees
in connection with such sales. Furthermore, sales under the Shelf Registration
that exceed in aggregate twenty percent (20%) of our outstanding shares would be
subject to prior shareholder approval.
69
On
January 4, 2011, we received a funding commitment letter (the “Funding Letter”)
from J&C Resources, Inc. (“J&C”) irrevocably agreeing to provide us,
within twenty (20) days after our notice given on or before December 31, 2011,
aggregate cash funding of up to $500,000, which may be requested in multiple
tranches. Mr. Charles Johnston, one of our directors, is the president of
J&C. This Funding Letter was obtained by us solely to demonstrate our
ability to obtain short-term funds in the event other funding sources are not
available, but does not represent any obligation on our part to accept such
funding on these terms and is not expected by us to be exercised. The cash
provided under the Funding Letter would be in exchange for our issuance of (a) a
note or notes with interest payable monthly at 15% per annum and principal
payable on the earlier of a date twelve months from funding or July 1, 2012 and
(b) our issuance of 1 million unregistered common shares, which shares would be
prorated in the case of partial funding. The note or notes would be unsecured
and subordinated to all of our other debts, except to the extent such the terms
of such debts would allow pari passu status. Furthermore, the note or notes
would not be subject to any provisions, other than with respect to priority of
payments or collateral, of our other debts. Upon receipt by us of an equivalent
amount in dollars of investment from any other source after the date of this
Funding Letter, other than funding received in connection with the LPC
Purchase Agreement, this Funding Letter will be terminated.
We have
incurred losses since our inception, and have an accumulated deficit of
approximately $124.4 million as of December 31, 2010. Our operations have been
financed primarily through the issuance of equity and debt. Cash
required to fund our continued operations will be affected by numerous known and
unknown risks and uncertainties including, but not limited to, our ability to
successfully market and sell the DMSP, iEncode and MarketPlace365 as well as our
other existing products and services, the degree to which competitive products
and services are introduced to the market, our ability to control and/or reduce
expenses, our need to invest in new equipment and/or technology, and our ability
to service and/or refinance our existing debt and accounts payable. We cannot
assure that our revenues will continue at their present levels, nor can we
assure that they will not decrease.
As long
as our cash flow from sales remains insufficient to completely fund operating
expenses, financing costs and capital expenditures, we will continue depleting
our cash and other financial resources. Other than working capital which may
become available to us from further borrowing or sales of equity (including but
not limited to proceeds from the LPC Purchase Agreement, Shelf Registration or
Funding Letter, as discussed above), we do not presently have any additional
sources of working capital other than cash on hand and cash, if any, generated
from operations. As
a result of the uncertainty as to our available working capital over the
upcoming months, we may be required to delay or cancel certain of the projected
capital expenditures, some of the planned marketing expenditures, or other
planned expenses. In addition, it is likely that we will need to seek additional
capital through equity and/or debt financing. If we raise additional
capital through the issuance of debt, this will result in increased interest
expense. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our company held by
existing shareholders will be reduced and those shareholders may experience
significant dilution.
Our
continued existence is dependent upon our ability to raise capital and to market
and sell our services successfully. However, there are no assurances whatsoever
that we will be able to sell additional common shares or other forms of equity
under the LPC Purchase Agreement, the Shelf Registration or otherwise and/or
that we will be able to borrow further funds under the Funding Letter or
otherwise and/or that we will increase our revenues and/or control our expenses
to a level sufficient to provide positive cash flow.
70
Cash used
in operating activities was approximately $79,000 for the three months ended
December 31, 2010, as compared to approximately $524,000 used in operations for
the corresponding period of the prior fiscal year. The $79,000 reflects our net
loss of approximately $898,000, reduced by approximately $910,000 of non-cash
expenses included in that loss and by approximately $47,000 arising from a net
decrease in non-cash working capital items during the period and increased for
an approximately $139,000 non-cash gain for adjustment of derivative liability
to fair value. The net decrease in non-cash working capital items for the three
months ended December 31, 2010 is primarily due to an approximately $323,000
decrease in accounts receivable, partially offset by an approximately $184,000
decrease in accounts payable, accrued liabilities and amounts due to directors
and officers. This compares to a net increase in non-cash working capital items
of approximately $413,000 for the corresponding period of the prior fiscal year,
primarily due to an approximately $398,000 increase in accounts receivable. The
primary non-cash expenses included in our loss for the three months ended
December 31, 2010 were approximately $386,000 of depreciation and amortization,
approximately $226,000 of employee compensation expense arising from the
issuance of stock and options and approximately $141,000 of amortization of
deferred professional fee expenses paid for by issuing stock and options. The
primary sources of cash inflows from operations are from receivables collected
from sales to customers. Future cash inflows from sales are subject
to our pricing and ability to procure business at existing market
conditions.
Cash used
in investing activities was approximately $233,000 for the three months ended
December 31, 2010 as compared to approximately $263,000 for the corresponding
period of the prior fiscal year. Current and prior period investing activities
related to the acquisition of property and equipment.
Cash used
in financing activities was approximately $375,000 for the three months ended
December 31, 2010 as compared to approximately $576,000 provided by financing
activities for the corresponding period of the prior fiscal year. Current year
financing activities primarily related to repayments of notes and leases payable
and convertible debentures, partially offset by proceeds from the sale of common
stock and proceeds from notes payable. Prior year financing
activities primarily related to net proceeds from notes payable and convertible
debentures, net of repayments.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance with United
States generally accepted accounting principles (“GAAP”) and our significant
accounting policies are described in Note 1 to those statements. The
preparation of financial statements in accordance with GAAP requires that we
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying footnotes. Our
assumptions are based on historical experiences and changes in the business
environment. However, actual results may differ from estimates under
different conditions, sometimes materially. Critical accounting
policies and estimates are defined as those that are both most important to the
management’s most subjective judgments. Our most critical accounting
policies and estimates are described as follows.
Our prior
acquisitions of several businesses, including the Onstream Merger and the
Infinite Merger, have resulted in significant increases in goodwill and other
intangible assets. Goodwill and other unamortized intangible assets, which
include acquired customer lists, were approximately $13.6 million at December
31, 2010, representing approximately 69% of our total assets and approximately
118% of the book value of shareholder equity. In addition, property and
equipment as of December 31, 2010 includes approximately $2.1 million (net of
depreciation) related to the DMSP and other capitalized internal use software,
representing approximately 11% of our total assets and approximately 18% of the
book value of shareholder equity.
71
In
accordance with GAAP, we periodically test these assets for potential
impairment. As part of our testing, we rely on both historical
operating performance as well as anticipated future operating performance of the
entities that have generated these intangibles. Factors that could
indicate potential impairment include a significant change in projected
operating results and cash flow, a new technology developed and other external
market factors that may affect our customer base. We will continue to
monitor our intangible assets and our overall business environment. If there is
a material adverse and ongoing change in our business operations (or if an
adverse change initially considered temporary is determined to be ongoing), the
value of our intangible assets, including those of our DMSP or Infinite
divisions, could decrease significantly. In the event that it is determined that
we will be unable to successfully market or sell our DMSP or audio and web
conferencing services, an impairment charge to our statement of operations could
result. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets, although not requiring any additional
cash outlay, could have a material adverse effect on our financial condition and
results of operations.
We follow
a two step process for impairment testing of goodwill. The first step of this
test, used to identify potential impairment and described above, compares the
fair value of a reporting unit with its carrying amount, including goodwill. The
second step, if necessary, measures the amount of the impairment, including a
comparison and reconciliation of the carrying value of all of our reporting
units to our market capitalization, after appropriate adjustments for control
premium and other considerations. If our market capitalization, after
appropriate adjustments for control premium and other considerations, is
determined to be less than our net book value (i.e., stockholders’ equity as
reflected in our financial statements), that condition might indicate an
impairment requiring the write-off of a significant portion of unamortized
intangible assets, although not requiring any additional cash outlay, could have
a material adverse effect on our financial condition and results of
operations.
Our
common stock has demonstrated significant volatility in recent months, from
$1.04 per share as of September 30, 2010 to $0.80 per share as of December 31,
2010 to $1.40 per share as of January 21, 2011 to $1.06 per share as of February
4, 2011. If the price of our common stock and our market value were to decline
to the level experienced in December 2010, such condition could result in future
non-cash impairment charges to our results of operations related to our goodwill
and other intangible assets arising either from an interim impairment review as
of March 31, 2011 or from our next scheduled recurring annual impairment review,
as of September 30, 2011. We will closely monitor and evaluate all such factors
as of March 31, 2011 and subsequent periods, in order to determine whether to
record future non-cash impairment charges.
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ITEM
4. CONTROLS AND PROCEDURES
Limitations
on the effectiveness of controls
We are
responsible for establishing and maintaining adequate disclosure controls and
procedures and internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of external
financial statements in accordance with generally accepted accounting
principles. However, all control systems, no matter how well designed, have
inherent limitations. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Therefore, even those systems determined to
be effective can provide only reasonable, not absolute, assurance with respect
to financial statement preparation and presentation. Because of inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, omissions, errors or even fraud. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Management’s
report on disclosure controls and procedures:
As
required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of
1934, as of the end of the period covered by the quarterly report, being
December 31, 2010, we have carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer along with our Chief Financial
Officer. Based upon that evaluation, our Chief Executive Officer along with our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective.
Changes
in internal control over financial reporting:
As
required by Rules 13a-15(d) and 15d-15(d) under the Securities Exchange Act of
1934, we have carried out an evaluation of changes in our internal control over
financial reporting during the period covered by this Quarterly Report. This
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer along with our Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer along
with our Chief Financial Officer concluded that there was no change in our
internal control over financial reporting that occurred during the period
covered by this Quarterly Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
73
PART
II - OTHER INFORMATION
Item 1.
Legal Proceedings.
On May
29, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), which Merger Agreement
was amended twice (on August 13, 2008 and on September 15, 2008). The terms of
the Merger Agreement, as amended, allowed that if the acquisition did not close
on or prior to November 30, 2008, the Merger Agreement could be terminated by
either us or Narrowstep at any time after that date provided that the
terminating party was not responsible for the delay. On March 18, 2009, we
terminated the Merger Agreement and the acquisition of Narrowstep.
On
December 1, 2009, Narrowstep filed a complaint against us in the Court of
Chancery of the State of Delaware, alleging breach of contract, fraud and three
additional counts and seeking (i) $14 million in damages, (ii) reimbursement of
an unspecified amount for all of its costs associated with the negotiation and
drafting of the Merger Agreement, including but not limited to attorney and
consulting fees, (iii) the return of Narrowstep’s equipment alleged to be in our
possession, (iv) reimbursement of an unspecified amount for all of its attorneys
fees, costs and interest associated with this action and (v) any further relief
determined as fair by the court. After reviewing the complaint document, we
determined that Narrowstep had no basis in fact or in law for any claim and
accordingly, this matter was not reflected as a liability on our financial
statements. On December 30, 2010 Narrowstep counsel advised the Court in writing
that Narrowstep had reached an agreement in principle with us to dismiss their
lawsuit with prejudice, provided that both parties executed a mutual release.
Under this mutual release, which has been agreed to in principle by both parties
but is still being finalized, no further actions will be filed against each
other or affiliated parties in connection with this matter. This resolution of
this matter will not have a material adverse impact on our future financial
position or results of operations.
We are
involved in other litigation and regulatory investigations arising in the
ordinary course of business. While the ultimate outcome of these matters is not
presently determinable, it is the opinion of our management that the resolution
of these outstanding claims will not have a material adverse effect on our
future financial position or results of operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
During
the period from December 25, 2010 through February 4, 2011, we recorded the
issuance of 20,000 unregistered shares of common stock for financial consulting
and advisory services. The services will be provided over a period of three
months, and will result in a professional fees expense of approximately $22,000
over the service period, based on the market value of an ONSM common share at
the time of issuance. None of these shares were issued to our directors or
officers.
During
May 2010 we issued the unsecured subordinated convertible Lehmann Note for gross
proceeds of $250,000, which note had a remaining principal balance of $172,000
as of December 31, 2010. This $172,000 balance, as well as all accrued but
unpaid interest and fees, was satisfied by us on January 13, 2011 with the
issuance of 209,700 unregistered common shares.
All of
the above securities were offered and sold without such offers and sales being
registered under the Securities Act of 1933, as amended (together with the rules
and regulations of the Securities and Exchange Commission (the "SEC")
promulgated thereunder, the "Securities Act"), in reliance on exemptions
therefrom as provided by Section 4(2) and Regulation D of the Securities Act of
1933, for securities issued in private transactions. The recipients were either
accredited or otherwise sophisticated investors and the certificates evidencing
the shares that were issued contained a legend restricting their transferability
absent registration under the Securities Act of 1933 or the availability of an
applicable exemption therefrom. The purchasers had access to business and
financial information concerning our company. Each purchaser represented that he
or she was acquiring the shares for investment purposes only, and not with a
view towards distribution or resale except in compliance with applicable
securities laws.
74
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Item 5.
Other Information.
None.
Item 6.
Exhibits
31.1 –
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 –
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 –
Section 906 Certification of Chief Executive Officer
32.2 –
Section 906 Certification of Chief Financial Officer
75
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Onstream
Media Corporation,
|
|
a
Florida corporation
|
|
Date:
February 14, 2011
|
|
/s/
Randy S. Selman
|
|
Randy
S. Selman,
|
|
President
and Chief Executive Officer
|
|
/s/
Robert E. Tomlinson
|
|
Robert E. Tomlinson | |
Chief
Financial Officer
|
|
And
Principal Accounting Officer
|
76