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, 2008
OR
|
|
o
|
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)
(IRS
Employer Identification No.)
(State or
other jurisdiction of incorporation or organization)
|
1291 SW 29 Avenue, Pompano Beach, Florida 33069
|
(Address of principal
executive offices)
(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 Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No
o
Indicate
by check mark whether the registrant is a large 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 o
|
Accelerated
filer o
|
|
Non-accelerated filer o (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 o No
x
State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date. As of February 6, 2009 the registrant had
issued and outstanding 43,425,610 shares of common stock.
|
|
PAGE
|
|
PART
I – FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1 - Financial Statements
|
|
|
|
|
|
Unaudited
Consolidated Balance Sheet at December 31, 2008
and
Consolidated Balance Sheet at September 30, 2008
|
4
|
|
|
|
|
Unaudited
Consolidated Statements of Operations for the Three
Months
Ended December 31, 2008 and 2007
|
5
|
|
|
|
|
Unaudited
Consolidated Statement of Stockholders’ Equity for the
Three
Months
Ended December 31, 2008
|
6
|
|
|
|
|
Unaudited
Consolidated Statements of Cash Flows for the Three Months
Ended
December 31, 2008 and 2007
|
7
–8
|
|
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
9 –
57
|
|
|
|
|
Item
2 - Management’s Discussion and Analysis of Financial Condition
and
Results of Operations
|
58 – 71
|
|
|
|
|
Item
4 - Controls and Procedures
|
72
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
|
Item
1 – Legal Proceedings
|
73
|
|
|
|
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
73
|
|
|
|
|
Item
3 – Defaults upon Senior Securities
|
73
|
|
|
|
|
Item
4 – Submission of Matters to a Vote of Security Holders
|
73
|
|
|
|
|
Item
5 – Other Information
|
73
|
|
|
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Item
6 - Exhibits
|
74
|
|
|
|
|
Signatures
|
74
|
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS
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 the
Company's 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. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
December 31, 2008. 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-KSB, including the risks described in "Item 1
- Business - Risk Factors" of that 10-KSB. 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.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
615,464 |
|
|
$ |
674,492 |
|
|
Accounts receivable, net of
allowance for doubtful
accounts of $44,537 and $30,492, respectively
|
|
|
2,514,663 |
|
|
|
2,545,450 |
|
|
Prepaid expenses
|
|
|
291,868 |
|
|
|
328,090 |
|
|
Inventories
and other current assets
|
|
|
254,437 |
|
|
|
172,111 |
|
|
Total
current assets
|
|
|
3,676,432 |
|
|
|
3,720,143 |
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
3,565,827 |
|
|
|
4,056,770 |
|
|
INTANGIBLE
ASSETS, net
|
|
|
3,086,345 |
|
|
|
3,731,586 |
|
|
GOODWILL,
net
|
|
|
16,496,948 |
|
|
|
21,696,948 |
|
|
OTHER
NON-CURRENT ASSETS
|
|
|
650,385 |
|
|
|
639,101 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
27,475,937 |
|
|
$ |
33,844,548 |
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$ |
3,103,269 |
|
|
$ |
3,059,376 |
|
|
Amounts
due to shareholders and officers
|
|
|
109,419 |
|
|
|
109,419 |
|
|
Deferred revenue
|
|
|
131,163 |
|
|
|
128,715 |
|
|
Notes and leases payable
– current portion, net of discount
|
|
|
2,004,273 |
|
|
|
1,774,264 |
|
|
Series
A-12 Convertible Preferred stock – redeemable portion, net of
discount
|
|
|
184,000 |
|
|
|
— |
|
|
Total
current liabilities
|
|
|
5,532,124 |
|
|
|
5,071,774 |
|
|
|
|
|
|
|
|
|
|
|
|
Notes
and leases payable, net of current portion
|
|
|
79,874 |
|
|
|
109,151 |
|
|
Convertible
debentures, net of discount
|
|
|
814,297 |
|
|
|
795,931 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,426,295 |
|
|
|
5,976,856 |
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
Series
A-10 Convertible Preferred stock, par value $.0001 per share,
authorized 700,000 shares, -0- and 74,841 issued and outstanding,
respectively
|
|
|
— |
|
|
|
8 |
|
|
Series
A-12 Convertible Preferred stock, par value $.0001 per share,
authorized 100,000 shares, 80,000 and -0- issued and outstanding,
respectively
|
|
|
8 |
|
|
|
— |
|
|
Common
stock, par value $.0001 per share; authorized 75,000,000 shares,
43,304,337 and 42,625,627 issued and outstanding,
respectively
|
|
|
4,330 |
|
|
|
4,262 |
|
|
Additional
paid-in capital
|
|
|
130,468,105 |
|
|
|
130,078,354 |
|
|
Unamortized
discount
|
|
|
(48,000 |
) |
|
|
(20,292 |
) |
|
Accumulated
deficit
|
|
|
(109,374,801 |
) |
|
|
(102,194,640 |
) |
|
Total
stockholders’ equity
|
|
|
21,049,642 |
|
|
|
27,867,692 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
27,475,937 |
|
|
$ |
33,844,548 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
Three
Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
DMSP
and hosting
|
|
$ |
397,375 |
|
|
$ |
271,976 |
|
|
Webcasting
|
|
|
1,564,188 |
|
|
|
1,597,449 |
|
|
Audio
and web conferencing
|
|
|
1,756,969 |
|
|
|
1,779,674 |
|
|
Network
usage
|
|
|
541,740 |
|
|
|
627,961 |
|
|
Other
|
|
|
118,925 |
|
|
|
175,247 |
|
|
Total
revenue
|
|
|
4,379,197 |
|
|
|
4,452,307 |
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
OF REVENUE:
|
|
|
|
|
|
|
|
|
|
DMSP
and hosting
|
|
|
155,251 |
|
|
|
106,130 |
|
|
Webcasting
|
|
|
461,294 |
|
|
|
476,548 |
|
|
Audio
and web conferencing
|
|
|
430,039 |
|
|
|
342,266 |
|
|
Network
usage
|
|
|
234,290 |
|
|
|
244,509 |
|
|
Other
|
|
|
132,003 |
|
|
|
164,084 |
|
|
Total
costs of revenue
|
|
|
1,412,877 |
|
|
|
1,333,537 |
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
MARGIN
|
|
|
2,966,320 |
|
|
|
3,118,770 |
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
General
and administrative:
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
2,403,839 |
|
|
|
2,416,619 |
|
|
Professional
fees
|
|
|
398,598 |
|
|
|
710,973 |
|
|
Impairment
loss on goodwill and other intangible assets
|
|
|
5,500,000 |
|
|
|
— |
|
|
Other
|
|
|
607,802 |
|
|
|
670,776 |
|
|
Depreciation
and amortization
|
|
|
1,093,376 |
|
|
|
1,041,308 |
|
|
Total
operating expenses
|
|
|
10,003,615 |
|
|
|
4,839,676 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(7,037,295 |
) |
|
|
(1,720,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE, NET:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
— |
|
|
|
978 |
|
|
Interest
expense
|
|
|
(139,180 |
) |
|
|
(6,371 |
) |
|
Other
income, net
|
|
|
31,078 |
|
|
|
17,749 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense, net
|
|
|
(108,102 |
) |
|
|
12,356 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,145,397 |
) |
|
$ |
(1,708,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss
per share – basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
$ |
(0.17 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding – basic and
diluted
|
|
|
42,753,030 |
|
|
|
42,132,382 |
|
The
accompanying notes are an integral part of these consolidated financial
statements
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
THREE
MONTHS ENDED DECEMBER 31, 2008
(unaudited)
|
|
|
Series
A- 10
Preferred
Stock
|
|
|
Series
A- 12
Preferred
Stock
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
74,841 |
|
|
$ |
8 |
|
|
—
|
|
|
$ |
—
|
|
|
|
42,625,627 |
|
|
$ |
4,262 |
|
|
$ |
130,078,354 |
|
|
$ |
(20,292 |
) |
|
$ |
(102,194,640 |
) |
|
$ |
27,867,692 |
|
|
Issuance
of shares, warrants and options for consultant services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99,098 |
|
|
|
10 |
|
|
|
39,669 |
|
|
|
— |
|
|
|
— |
|
|
|
39,679 |
|
|
Issuance
of shares and options for employee services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
178,726 |
|
|
|
— |
|
|
|
— |
|
|
|
178,726 |
|
|
Issuance
of Series A-12 preferred
|
|
|
— |
|
|
|
— |
|
|
|
80,000 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
199,998 |
|
|
|
— |
|
|
|
— |
|
|
|
200,006 |
|
|
Surrender
of Series A-10 preferred for Series A-12 preferred
|
|
|
(60,000 |
) |
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
Reclassification
of redeemable portion of Series A-12 preferred as a
liability
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(200,000 |
) |
|
|
16,000 |
|
|
|
— |
|
|
|
(184,000 |
) |
|
Common
shares issued for interest and fees on convertible
debentures
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
158,000 |
|
|
|
16 |
|
|
|
69,504 |
|
|
|
— |
|
|
|
— |
|
|
|
69,520 |
|
|
Dividends
accrued or paid on Series A-10 preferred
|
|
|
2,994 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,957 |
|
|
|
— |
|
|
|
37,894 |
|
|
|
20,292 |
|
|
|
(34,764 |
) |
|
|
23,422 |
|
|
Conversion
of Series A-10 preferred to common shares
|
|
|
(17,835 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
178,361 |
|
|
|
18 |
|
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Dividends
accrued or paid on Series A-12 preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,294 |
|
|
|
24 |
|
|
|
63,976 |
|
|
|
(64,000 |
) |
|
|
—
|
|
|
|
— |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,145,397 |
) |
|
|
(7,145,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
— |
|
|
$ |
— |
|
|
|
80,000 |
|
|
$ |
8 |
|
|
|
43,304,337 |
|
|
$ |
4,330 |
|
|
$ |
130,468,105 |
|
|
$ |
(48,000 |
) |
|
$ |
(109,374,801 |
) |
|
$ |
21,049,642 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
Three
Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,145,397 |
) |
|
$ |
(1,708,550 |
) |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,093,376 |
|
|
|
1,041,308 |
|
|
Amortization
of deferred professional fee expenses paid with equity
|
|
|
109,557 |
|
|
|
369,607 |
|
|
Compensation
expenses paid with equity
|
|
|
178,725 |
|
|
|
359,868 |
|
|
Amortization
of discount on convertible debentures
|
|
|
18,366 |
|
|
|
— |
|
|
Amortization
of discount on notes payable
|
|
|
5,618 |
|
|
|
— |
|
|
Interest
expense paid in common shares and options
|
|
|
31,103 |
|
|
|
— |
|
|
Impairment
loss on goodwill and other intangible assets
|
|
|
5,500,000 |
|
|
|
— |
|
|
Bad
debt expense
|
|
|
14,046 |
|
|
|
10,961 |
|
|
Gain
from settlements of obligations and sales of equipment
|
|
|
(30,424 |
) |
|
|
(16,199 |
) |
|
Net
cash (used in) provided by operating activities, before changes in current
assets and liabilities
|
|
|
(225,030 |
) |
|
|
56,995 |
|
|
Changes
in current assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
|
|
(Increase)
Decrease in accounts receivable
|
|
|
(12,426 |
) |
|
|
6,167 |
|
|
Decrease
in prepaid expenses
|
|
|
10,796 |
|
|
|
13,840 |
|
|
(Increase)
in other current assets
|
|
|
(17,282 |
) |
|
|
(867 |
) |
|
Decrease
(Increase) in inventories
|
|
|
3,705 |
|
|
|
(11,243 |
) |
|
Increase
in accounts payable and accrued liabilities
|
|
|
246,473 |
|
|
|
78,489 |
|
|
Increase
(Decrease) in deferred revenue
|
|
|
2,448 |
|
|
|
(29,243 |
) |
|
Net
cash provided by operating activities
|
|
|
8,684 |
|
|
|
114,138 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(362,826 |
) |
|
|
(114,155 |
) |
|
Net
cash (used in) investing activities
|
|
|
(362,826 |
) |
|
|
(114,155 |
) |
(Continued)
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
|
|
|
Three
Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from loans and notes payable, net of expenses
|
|
$ |
382,664 |
|
|
$ |
495,000 |
|
|
Proceeds
from sale of A-12 preferred shares, net of expenses
|
|
|
100,000 |
|
|
|
— |
|
|
Repayment
of loans, notes and leases payable
|
|
|
(187,550 |
) |
|
|
(35,544 |
) |
|
Net
cash provided by financing activities
|
|
|
295,114 |
|
|
|
459,456 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(59,028 |
) |
|
|
459,439 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
674,492 |
|
|
|
560,230 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
615,464 |
|
|
$ |
1,019,669 |
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest
|
|
$ |
69,711 |
|
|
$ |
6,372 |
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
arising for shortfall in proceeds from sales of common shares issued for
acquisition of Infinite Conferencing – see note 2 for assets acquired and
liabilities assumed
|
|
$ |
— |
|
|
$ |
958,399 |
|
|
Issuance
of shares, warrants and options for consultant services
|
|
$ |
39,679 |
|
|
$ |
629,212 |
|
|
Issuance
of shares and options for employee services
|
|
$ |
178,726 |
|
|
$ |
359,868 |
|
|
Issuance
of A-10 preferred shares for A-10 dividends
|
|
$ |
29,938 |
|
|
$ |
27,679 |
|
|
Issuance
of common shares for A-12 dividends
|
|
$ |
64,000 |
|
|
$ |
— |
|
|
Issuance
of common shares for interest
|
|
$ |
69,520 |
|
|
$ |
— |
|
|
Issuance
of common shares for A-10 preferred shares and dividends
|
|
$ |
186,318 |
|
|
$ |
— |
|
|
Issuance
of A-12 preferred shares for A-10 preferred shares
|
|
$ |
600,000 |
|
|
$ |
— |
|
|
Issuance
of A-12 preferred shares for short-term receivable
|
|
$ |
100,000 |
|
|
$ |
— |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business
Onstream
Media Corporation (the "Company" or "Onstream" or "ONSM"), organized in 1993, is
a leading online service provider of live and on-demand Internet video,
corporate web communications and content management applications, including
digital media services and webcasting services. Digital media services are
provided primarily to entertainment, advertising and financial industry
customers. Webcasting services are provided primarily to corporate, education,
government and travel industry customers.
The
Company’s Digital Media Services Group consists of its Webcasting division, its
DMSP (“Digital Media Services Platform”) division, its UGC (“User Generated
Content”) division, its Smart Encoding division and its Travel
division.
The
Webcasting division, which operates primarily from facilities in Pompano Beach,
Florida, provides an array of web-based media services to the corporate market
including live audio and video webcasting, packaged corporate announcements, and
rich media information storage and distribution for any business entity. The
Webcasting division generates revenue through production and distribution
fees.
The DMSP
division, which operates primarily from facilities in San Francisco, California,
provides an online, subscription based service that includes access to enabling
technologies and features for the Company’s clients to acquire, store, index,
secure, manage, distribute and transform these digital assets into saleable
commodities. The UGC division, which
operates primarily from facilities in San Francisco, California and also
operates as Auction Video – see note 2, provides a video ingestion and flash
encoder that can be used by the Company’s clients on a stand-alone basis or in
conjunction with the DMSP.
The Smart
Encoding division, which operates primarily from facilities in San Francisco,
California, provides both automated and manual encoding and editorial services
for processing digital media, using a set of coordinated technologies and
processes that allow the quick and efficient online search, retrieval, and
streaming of this media, which can include photos, videos, audio, engineering
specs, architectural plans, web pages, and many other pieces of business
collateral. This division also provides hosting, storage and streaming services
for digital media, which are provided via the DMSP.
The
Travel division, which operates primarily from facilities in Pompano Beach,
Florida, produces Internet-based multi-media streaming videos related to hotels,
resorts, time-shares, golf facilities, and other travel destinations. The
Company warehouses this travel content on its own online travel portal –
www.travelago.com ("Travelago"). The Travel division generates revenue through
production and distribution fees.
On May
29, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc., a publicly held Delaware corporation
(“Narrowstep”) with most of its employees and facilities located in the United
Kingdom. As of the February 2009 filing date of the Company’s December 31, 2008
Form 10-Q, this merger was not consummated. Narrowstep is a provider of Internet
TV services supporting content providers, broadcasters, telecommunications
companies and corporations worldwide and will be part of the Company’s Digital
Media Services Group. See Note 9.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Nature of
Business (continued)
The
Company’s Audio and Web Conferencing Services Group consists of its Infinite
Conferencing (“Infinite”) division and its EDNet division. The Company’s
Infinite division, which operates primarily from facilities in the New York City
metropolitan 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 facilities in San Francisco, California, provides
connectivity within the entertainment and advertising industries through its
managed network, which encompasses production and post-production companies,
advertisers, producers, directors, and talent. The global network, with
approximately 500 active clients in cities throughout the United States, Canada,
Mexico, Europe, and the Pacific Rim, enables high-speed exchange of high quality
audio, compressed video and multimedia data communications, utilizing long
distance carriers, regional phone companies, satellite operators, and major
internet service providers. EDNet also provides systems integration and
engineering services, application-specific technical advice, audio equipment,
proprietary and off-the-shelf codecs, teleconferencing equipment, and other
innovative products to facilitate the Company's broadcast and production
applications. EDNet generates revenues from network usage, the sale, rental and
installation of equipment, and other related fees.
Liquidity
The
consolidated financial statements have been presented on the basis that the
Company is an ongoing concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The Company
has incurred losses since its inception, and has an accumulated deficit of
approximately $109.4 million as of December 31, 2008. The Company's operations
have been financed primarily through the issuance of equity and debt. For the
year ended September 30, 2008, ONSM had a net loss of approximately $6.6
million, although cash provided by operations for that period was approximately
$69,000. For the three months ended December 31, 2008, ONSM had a net loss of
approximately $7.1 million, although cash provided by operations for that period
was approximately $9,000. Although the Company had cash of approximately
$615,000 at December 31, 2008, working capital was a deficit of approximately
$1.9 million at that date.
The
Company is constantly evaluating its cash needs, in order to make appropriate
adjustments to operating expenses. Depending on its actual future cash needs,
the Company may need to raise additional debt or equity capital to provide
funding for ongoing future operations, or to refinance existing indebtedness. No
assurances can be given that the Company will be successful in obtaining
additional capital, or that such capital will be available on terms acceptable
to the Company. The Company's continued existence is dependent upon its ability
to raise capital and to market and sell its services successfully. 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 the Company is unsuccessful.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
(continued)
As of
February 6, 2009, the Company has estimated that, absent any reduction in its
current and planned expenditure levels, it would require an approximately 14%
increase in its consolidated revenues for the remaining three quarters of fiscal
2009, versus the comparable prior year periods, as well as approximately
$850,000 incremental receivable and equipment financing proceeds (or other
financing), in order to adequately fund those expenditures (including debt
service and anticipated capital expenditures) through September 30, 2009. The
Company has implemented specific actions, including hiring additional sales
personnel, developing new products and initiating new marketing programs, geared
towards achieving the above revenue increases. The costs associated with these
actions were contemplated in the above calculations. However, in the
event the Company is unable to achieve these revenue increases within the
required time frames, or is unable to obtain the financing as described above,
it has identified decreases in its current level of expenditures that it would
implement and that it believes would be sufficient to allow the Company to
operate through September 30, 2009. Although the Company’s revenues for the
first of the three quarters referred to above have yet to be determined, during
February 2009, the Company took actions that it expects will reduce its
previously anticipated personnel and certain other operating costs by
approximately $65,000 per month, which savings are expected to be realized
starting immediately and increasing to the target amount on or before April 30,
2009. The Company will closely monitor its revenue and other business activity
through the remainder of the second quarter of fiscal 2009 to determine if
further cost reductions or other activity is considered necessary.
Basis of
Consolidation
The
accompanying consolidated financial statements include the accounts of Onstream
Media Corporation and its subsidiaries - Entertainment Digital Network, Inc.,
Media On Demand, Inc., HotelView Corporation, OSM Acquisition, Inc., AV
Acquisition, Inc., Auction Video Japan, Inc. and Infinite Conferencing, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and
cash equivalents
Cash and
cash equivalents consists of all highly liquid investments with original
maturities of three months or less.
Bad Debt
Reserves
The
Company evaluates the collectibility of its accounts receivable based on a
combination of factors. In cases where the Company is aware of circumstances
that may impair a specific customer's ability to meet its financial obligations
to the Company, the Company records a specific allowance against amounts due to
us, and thereby reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. For all other customers, the Company
recognizes allowances for doubtful accounts based on the length of time the
receivables are past due, the current business environment and historical
experience. Bad debt reserves were approximately $45,000 and $30,000, at
December 31, 2008 and September 30, 2008, respectively.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair
Value Measurements
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short maturity
of the instruments. The carrying amounts of notes and leases payable approximate
fair value due to the short maturity of the instruments, as well as the market
value interest rates they carry.
In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements", which is
discussed in “Effects of Recent Accounting Pronouncements” below. Effective
October 1, 2008, the Company adopted the provisions of SFAS 157 with respect to
its financial assets and liabilities, identified based on the definition of a
financial instrument contained in SFAS 107, “Disclosures about Fair Value of
Financial Instruments”. This definition includes a contract that imposes a
contractual obligation on the Company to exchange other financial instruments
with the other party to the contract on potentially unfavorable terms. The
Company has determined that the convertible debentures (the “Notes”) discussed
in Note 4 and the Series A-12 Convertible Preferred Stock (“Series A-12”)
discussed in Note 6 are financial liabilities subject to the accounting and
disclosure requirements of SFAS 157.
Under
SFAS 157, 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 under SFAS 157 should maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard describes 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.
The
Company has determined that there are no Level 1 inputs for determining the fair
value of the Notes and the Series A-12. However, the Company has determined that
the fair value of the Notes and the Series A-12 may be determined using Level 2
inputs, as follows: the fair market value interest rate paid by the Company
under its line of credit arrangement (the “Line”) as discussed in Note 4 and the
value of conversion rights contained in those arrangements, based on the same
Black Scholes valuation model used by the Company to value its options and
warrants. The Company has also determined that the fair value of the Notes and
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, the Company has determined that there was
no material difference between the carrying value and the fair value of the
Notes and the Series A-12 as of October 1, 2008 as well as of December 31, 2008
and therefore no adjustment for the effect of SFAS 157 was made to the Company’s
financial statements as of December 31, 2008 or for the three months then
ended.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration
of Credit Risk
The
Company at times has cash in banks in excess of FDIC insurance limits and places
its temporary cash investments with high credit quality financial institutions.
The Company performs ongoing credit evaluations of its customers' financial
condition and does not require collateral from them. Reserves for credit losses
are maintained at levels considered adequate by management.
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.
Included
in property and equipment is computer software developed for internal use,
including the Digital Media Services Platform (“DMSP”) – see notes 2 and
3. Such amounts have been accounted for in accordance with Statement
of Position 98-1 “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use” and Emerging Issues Task Force pronouncement
(“EITF”) 00–2 “Accounting for Web Site Development Costs”. Such
costs are amortized on a straight-line basis over three to five years,
commencing when the related asset has been substantially placed in
service.
Goodwill
and other intangible assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) 142,
“Goodwill and Other Intangible Assets”, 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.
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company assesses 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.
The
Company follows 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 Company
reporting units to the Company's market capitalization, after appropriate
adjustments for control premium and other considerations. See Note 2 – Goodwill
and other Acquisition-Related Intangible Assets.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
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 the Company and the customer exists, (ii) the good or
service has been provided to the customer, (iii) the price to the customer is
fixed or determinable and (iv) collectibility of the sales prices 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 the Company’s 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 the Company has difficulty in producing the webcast,
it 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 the Company hosts 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 the Company has referred to
these separately billed transactions as verifiable and objective evidence of the
amount of its revenues related to on-demand services. In addition,
the Company has determined that the material portion of all views of archived
webcasts take place within the first ten days after the live
webcast.
Based on
its review of the above data, the Company has determined that the material
portion of its revenues for on-demand webcasting services are recognized during
the period in which those services are provided, which complies with the
provisions of Staff Accounting Bulletin (“SAB”) 101 and SAB 104, “Revenue
Recognition”, and EITF 00-21, “Accounting for Revenue Arrangements with Multiple
Elements”. Furthermore, the Company has determined that the maximum potentially
deferrable revenue from on-demand webcasting services charged for but not
provided as of September 30, 2007 and 2008 is immaterial in relation to the
Company’s recorded liabilities.
The
Travel division of the Digital Media Services Group recognizes a portion of its
contract revenue at the time of completion of video production services with the
remaining revenue recognized over the term of the contract. Per hit charges are
recognized when users watch a video on the Internet. Fixed monthly
fees are recognized on a monthly basis consistent with the terms of the
contract. Commissions on bookings are recognized when the stays are
completed.
The
Company includes 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. The Company includes the Travel division revenues,
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.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition (continued)
The DMSP,
UGC and Smart Encoding divisions of the Digital Media Services Group recognizes
revenues from the acquisition, editing, transcoding, indexing, storage and
distribution of its customers’ digital media. 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. 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.
The
Infinite Conferencing 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 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
The
Company has no components of other comprehensive income or loss, and
accordingly, net loss equals comprehensive loss for all periods
presented.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
and marketing
Advertising
and marketing costs, which are charged to operations as incurred and included in
Professional Fees and Other General and Administrative Operating Expenses, were
approximately $104,000 and $143,000 for the three months ended December 31, 2008
and 2007, respectively.
Income
Taxes
Significant
judgment is required in determining the Company’s provision for income taxes,
its deferred tax assets and liabilities and any valuation allowance recorded
against those deferred tax assets. The Company had a deferred tax asset of
approximately $30.9 million as of September 30, 2008, 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.
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 has been recorded in the accompanying consolidated
statement of operations as a result of the net tax losses for the years ended
September 30, 2008 and 2007, respectively. The primary differences
between the net loss for book and tax purposes are the following items expensed
for book purposes but not deductible for tax purposes – amortization of certain
loan discounts, amortization 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.
In June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for
Uncertainty in Income Taxes”, which clarifies SFAS 109, “Accounting for Income
Taxes” by prescribing 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. The Company adopted FIN 48 as of the
beginning of its fiscal year beginning October 1, 2007. However, as of the date
of such adoption and as of December 31, 2008, the Company has not taken, nor
recognized the financial statement impact of, any material tax positions, as
defined by FIN 48. The Company’s policy is to recognize as non-operating expense
interest or penalties related to income tax matters at the time such payments
become probable, although it had not recognized any such material items in its
statement of operations for the three months ended December 31, 2008 or 2007.
The tax years ending September 30, 2005 and thereafter remain subject to
examination by Federal and various state tax jurisdictions.
The
Company has been assessed state income taxes, plus penalties and interest, for
the years ending September 30, 2004 and 2005, in an aggregate amount of
approximately $89,000. It has contested these assessments with the state taxing
authorities and believes the ultimate resolution will not have a material impact
on the Company’s financial position or results of operations - see note
5.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss
Per Share
For the
three months ended December 31, 2008 and 2007, net loss per share is based on
the net loss divided by the weighted average number of shares of common stock
outstanding. Since the effect of common stock equivalents was
anti-dilutive, all such equivalents were excluded from the calculation of
weighted average shares outstanding. The total outstanding options and warrants,
which have been excluded from the calculation of weighted average shares
outstanding, were 15,594,625 and 14,870,765 at December 31, 2008 and 2007,
respectively.
In
addition, the potential dilutive effects of the following convertible securities
outstanding at December 31, 2008 have been excluded from the calculation of
weighted average shares outstanding: (i) 80,000 shares of Series A-12
Convertible Preferred Stock (“Series A-12”) which could potentially convert into
80,000 shares of ONSM common stock and (ii) $1,000,000 of convertible notes
which in aggregate could potentially convert into up to 1,250,000 shares of ONSM
common stock (excluding interest). The potential dilutive effects of the
following convertible securities previously outstanding at December 31, 2007
were excluded from the calculation of weighted average shares outstanding:
71,963 shares of Series A-10 Convertible Preferred Stock (“Series A-10”) which
could have potentially converted into 719,630 shares of ONSM common
stock.
Equity
Compensation to Employees and Consultants
The
Company has a stock based compensation plan for its employees (the “Plan”). In
December 2004, the FASB issued SFAS 123R, “Share-Based Payments”,
which requires all companies to measure compensation cost for all share-based
payments, including employee stock options, at fair value, which the Company
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, 2008 and 2007 includes compensation cost for all share-based
payments granted subsequent to September 30, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). 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 31, 2008 requiring the Company’s valuation using the
Black-Scholes model. For Plan options that were granted and thus valued under
the Black-Scholes model during the three months ended December 31, 2007, the
expected volatility rate was 78% to 79%, the risk-free interest rate was 4.1% to
4.3%, expected dividends were $0 and the expected term was 4 to 6.5 years, the
full term of the related options.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity
Compensation to Employees and Consultants (continued)
The
Company has granted Non-Plan Options to consultants and other third parties.
These options have been accounted for under SFAS 123, under which the fair value
of the options at the time of their issuance is reflected in the Company’s
consolidated financial statements and expensed as professional fees at the time
the services contemplated by the options are provided to the Company. There were
no Non-Plan options granted during the three months ended December 31, 2008
requiring the Company’s valuation using the Black-Scholes model. For Non-Plan
options that were granted and thus valued under the Black-Scholes model during
the three months ended December 31, 2007, the expected volatility rate was 79%,
the risk-free interest rate was 6.25%, expected dividends were $0 and the
expected term was 4 years, the full term of the related options.
See Note
8 for additional information related to all stock option issuances.
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. Accounts payable and accrued liabilities
includes approximately $685,000 and $555,000 as of December 31, 2008 and
September 30, 2008, respectively, related to salaries, commissions, taxes,
vacation and other benefits earned but not paid as of those dates.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States, requires 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, taxes,
contingencies and impairment allowances. Such estimates are reviewed on an
on-going basis and actual results could materially differ from those
estimates.
Certain
prior year amounts have been reclassified to conform to the current year
presentation, including inventories and other current asset balance sheet
groupings, property and equipment footnote category classifications and segment
revenue and operating income (loss) classifications.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim
Financial Data
In the
opinion of management, the accompanying unaudited interim financial statements
have been prepared by the Company 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 the Company’s annual financial statements as of September 30,
2008. These interim financial statements have not been audited. However,
management believes the accompanying unaudited interim financial statements
contain all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the consolidated financial position of ONSM and
subsidiaries as of December 31, 2008 and the results of their operations and
cash flows for the three months ended December 31, 2008 and 2007. 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, 2009.
Effects
of Recent Accounting Pronouncements
In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements". SFAS 157
does not expand the use of fair value measures in financial statements, but
standardizes its definition and guidance by defining fair value as used in
numerous accounting pronouncements, establishes a framework for measuring fair
value and expands disclosure related to the use of fair value measures. In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective
Date of FASB Statement No. 157”, which provides a one-year deferral of the
effective date of SFAS 157 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. SFAS 157 was effective for the
Company’s fiscal year beginning October 1, 2008, excluding the effect of the
deferral granted in FSP FAS 157-2. See “Fair Value Measurements” above. The
Company is currently evaluating the impact of adopting SFAS 157 with respect to
non-financial assets and non-financial liabilities on the Company’s consolidated
financial statements, which will be effective beginning October 1,
2009.
In
February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". Under SFAS 159, the Company
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. SFAS 159 was effective for the Company’s
fiscal year beginning October 1, 2008 – however, the Company has elected not to
measure eligible financial assets and liabilities at fair value. Accordingly,
the adoption of SFAS 159 did not have a significant impact on the Company’s
consolidated financial statements.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects
of Recent Accounting Pronouncements (continued)
In
December 2007, the FASB issued SFAS 141R, “Business Combinations”, which
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. The requirements of SFAS 141R will be effective for
the Company’s fiscal year beginning October 1, 2009 and early adoption is
prohibited. Under the provisions of SFAS 141R, the Company would have recorded
as expense the $462,090 of acquisition-related costs included in other
non-current assets on its balance sheet as of December 31, 2008 – $418,058 of
this expense would have been recorded prior to September 30, 2008 and the
remaining $44,032 would have been recorded during the three months ended
December 31, 2008. The Company is currently evaluating any additional
impact SFAS 141R may have on its financial statements.
In April
2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of
Intangible Assets”, which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets”. The objective of FSP FAS 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141 “Business Combinations” and other U.S. GAAP. FSP FAS 142-3
shall be effective for the Company’s fiscal year beginning October 1, 2009 and
early adoption is prohibited. FSP FAS 142-3 applies to all intangible
assets, whether acquired in a business combination or otherwise, and should be
applied prospectively to intangible assets acquired after the effective date.
The Company is currently evaluating the impact FSP FAS 142-3 may have on
its financial statements.
In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”. Among other items, FSP APB 14-1 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. The
requirements of FSP APB 14-1 will be effective for the Company’s fiscal year
beginning October 1, 2009, including interim periods within that fiscal
year. The Company is currently evaluating the impact FSP APB 14-1 may have
on its financial statements.
In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles". Under SFAS 162, the Generally Accepted Accounting Principles (GAAP)
hierarchy will now reside in the accounting literature established by the FASB.
SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements in
conformity with GAAP. SFAS 162 was effective November 15, 2008 (60 days
following the SEC's approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.") The Company believes
that its adoption of this standard on its effective date did not have a material
effect on its consolidated financial statements.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
Information
regarding the Company’s goodwill and other acquisition-related intangible assets
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infinite
Conferencing
|
|
$ |
11,100,887 |
|
|
$ |
— |
|
|
$ |
11,100,887 |
|
|
$ |
12,000,887 |
|
|
$ |
— |
|
|
$ |
12,000,887 |
|
|
Acquired
Onstream
|
|
|
4,121,401 |
|
|
|
— |
|
|
|
4,121,401 |
|
|
|
8,421,401 |
|
|
|
— |
|
|
|
8,421,401 |
|
|
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
|
|
|
16,496,948 |
|
|
|
— |
|
|
|
16,496,948 |
|
|
|
21,696,948 |
|
|
|
— |
|
|
|
21,696,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infinite Conferencing -
customer lists, trademarks, URLs, supplier terms and
consulting/non- competes
|
|
|
4,383,604 |
|
|
|
(1,500,000 |
) |
|
|
2,883,604 |
|
|
|
4,583,604 |
|
|
|
(1,275,000 |
) |
|
|
3,308,604 |
|
|
Auction
Video - customer lists, patent pending and consulting/non-
competes
|
|
|
1,080,999 |
|
|
|
(878,258 |
) |
|
|
202,741 |
|
|
|
1,174,827 |
|
|
|
(751,845 |
) |
|
|
422,982 |
|
|
Total
intangible assets
|
|
|
5,464,603 |
|
|
|
(2,378,258 |
) |
|
|
3,086,345 |
|
|
|
5,758,431 |
|
|
|
(2,026,845 |
) |
|
|
3,731,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
goodwill and other acquisition-related intangible assets
|
|
$ |
21,961,551 |
|
|
$ |
(2,378,258 |
) |
|
$ |
19,583,293 |
|
|
$ |
27,455,379 |
|
|
$ |
(2,026,845 |
) |
|
$ |
25,428,534 |
|
Infinite Conferencing –
April 27, 2007
On April
27, 2007 the Company completed the acquisition of Infinite Conferencing LLC
(“Infinite”), a Georgia limited liability company. The transaction, by which the
Company acquired 100% of the membership interests of Infinite, was structured as
a merger by and between Infinite and the Company’s wholly-owned subsidiary,
Infinite Conferencing, Inc. (the “Infinite Merger”). The primary assets
acquired, in addition to Infinite’s ongoing audio and web conferencing business
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 operations of Infinite are
part of the Audio and Web Conferencing Services Group.
The
consideration for the Infinite Merger was a combination of $14 million in cash
and 1,376,622 shares of Onstream Media restricted common stock (valued at
approximately $4.0 million, or $2.906 per share), for an aggregate purchase
price of approximately $18 million, before transaction costs. Onstream arranged
a private equity financing for net proceeds totaling approximately $10.2
million, to partially fund the cash portion of the
transaction.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Infinite Conferencing –
April 27, 2007 (continued)
The use
of $2.906 per share, the average share price for the thirty days prior to the
announcement of the definite merger agreement, to value the portion of the
purchase price paid in shares, was in accordance with the merger agreement.
However, EITF No. 99-12 indicates that securities given in a business
combination should be measured during a period only up to "a few days before and
after” the measurement date. In cases where there is a formula, the measurement
date is when the number of shares first becomes fixed, which in this case was
March 26, 2007, when the March 23, 2007 signing of the definitive merger
agreement was publicly announced. The ONSM market price was $2.73 per share on
March 21, 2007, $2.78 per share on March 26, 2007 and $2.64 per share on March
27, 2007. Although the $2.906 price used to value the shares was outside the
high end of the range indicated by these prices, the Company’s management
believes that it was not materially different (particularly when considering
that the equity portion was only approximately 22% of the total purchase price)
and so is acceptable as reasonably indicative of fair value as of the date of
the Infinite Merger.
At the
closing of the Infinite Merger, the Company entered into a lock-up agreement
with the former Infinite shareholders that limits the number of shares that they
may sell, to 25% per quarter and/or weekly sales of 30,000 shares, commencing
with the June 15, 2007 registration of such shares with the SEC and which
percentage and weekly limitation may be increased at our option. The lock-up
agreement also provided that in the event that the accumulated gross proceeds of
the sale of first 50% of the 1,376,622 shares issued to them was less than $2.0
million, the Company, at its sole option but provided that all securities to be
issued in connection with the merger agreement and any related financing or
other transactions do not exceed 19.99% of ONSM outstanding common stock at the
measurement date, would pay the difference in registrable ONSM common shares, or
cash to the extent required by the 19.99% restriction. On December 27, 2007, the
former Infinite shareholders notified the Company that the first 688,311 shares
had been sold by them for $1,041,601, which would have required an additional
payment by the Company in cash or shares of approximately $958,399. In
accordance with SFAS 141, contingent consideration should only be recorded once
the contingency is resolved and the additional consideration is issued or
becomes issuable. The Company concluded that these conditions were substantively
met as of December 31, 2007, and accordingly recorded the liability on its
financial statements as of that date, which was offset by a reduction in
additional paid in capital. Furthermore, on March 12, 2008, the Company executed
collateralized promissory notes payable to the former Infinite shareholders in
final settlement of this obligation – see note 4.
In
connection with the merger agreement, the Company entered into two employment
contracts and one consulting contract with three key Infinite executives. The
employment contracts include five-year option grants for the purchase of up to
200,000 common shares with an exercise price of $2.50 per share (fair market
value at the date of closing) and vesting over two years – see Note 8. As a
result of the April 2008 expiration and non-renewal of one of the employment
contracts, 50,000 of these options were forfeited. The employment and consulting
contracts contain non-compete provisions with a minimum term of three years from
the merger closing.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Infinite Conferencing –
April 27, 2007 (continued)
The
summarized balance sheet of Infinite as of the April 27, 2007 closing of the
Infinite Merger is as follows, showing the fair values assigned by the Company
to Infinite’s assets and liabilities in accordance with SFAS 141 and recorded by
the Company at that time.
|
Accounts
receivable
|
|
$ |
893,228 |
|
|
Property
and equipment
|
|
|
894,388 |
|
|
Other
tangible assets (includes $14,861 cash)
|
|
|
48,817 |
|
|
Identifiable
intangible assets
|
|
|
4,583,604 |
|
| |
|
|
|
|
|
Total
assets
|
|
$ |
6,420,037 |
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
204,395 |
|
|
Shareholder’s
equity
|
|
|
6,215,642 |
|
|
Total
liabilities and shareholder’s equity
|
|
$ |
6,420,037 |
|
Infinite’s
accounts receivable, net of reserves, were considered to be reasonably
collectible and were generally due within thirty days of the closing of the
Infinite Merger and therefore their book carrying value as of the date of
acquisition was considered to be a reasonable estimate of their fair
value.
Infinite’s
management estimated the fair value of their property and equipment, primarily
phone switch equipment and related internally developed billing and management
reporting software, based on information regarding third-party sales of similar
equipment and the estimated cost to recreate the customized
software. The Company is amortizing these assets over useful lives
ranging from 3 to 5 years.
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 Company 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 next three to six years immediately following the merger, as
projected by the Company’s and Infinite’s management on a stand-alone basis
without regard to the Infinite Merger. 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. The Company is amortizing these assets over
useful lives ranging from 3 to 6 years.
Infinite’s
accounts payable and accrued liabilities were generally due within thirty days
of the closing of the Infinite Merger and therefore their book carrying value as
of the date of acquisition was considered to be a reasonable estimate of their
fair value.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Infinite Conferencing –
April 27, 2007 (continued)
The
Company purchased Infinite for $18,216,529 in cash and stock. In conjunction
with the acquisition, liabilities were assumed as follows:
|
Identifiable
tangible and intangible assets
|
|
$ |
6,420,037 |
|
|
Goodwill
|
|
|
12,000,887 |
|
|
Acquired
assets (at fair value)
|
|
|
18,420,924 |
|
|
Less:
Cash paid for non-cash assets
|
|
|
(14,201,668 |
) |
|
Less:
Cash acquired for cash
|
|
|
(14,861 |
) |
|
Less:
Shares issued for non-cash assets
|
|
|
(4,000,000 |
) |
|
Assumed
liabilities
|
|
$ |
204,395 |
|
The
$12,000,887 excess included in the $18,216,529 paid by the Company for 100% of
Infinite over $6,215,642 (the fair values assigned to the tangible and
intangible assets, net of liabilities at fair value) was recorded by the Company
as goodwill, subject to regular future valuations and adjustments as required by
SFAS 142. The other intangible assets are being amortized to expense over their
estimated useful lives, although the unamortized balances are still subject to
review and adjustment for impairment. 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.
As
discussed in “Testing for Impairment” below, the initially recorded goodwill for
Infinite Conferencing of approximately $12.0 million was determined to be
impaired as of December 31, 2008 and a $900,000 adjustment was made to reduce
the carrying value of that goodwill to approximately $11.1 million as of that
date. A similar adjustment of $200,000 was made to reduce the
carrying value of certain intangible assets acquired as part of the Infinite
merger. These adjustments, totaling $1.1 million, were included in the aggregate
$5.5 million charge for impairment of goodwill and other intangible assets as
reflected in the Company’s results of operations for the three months ended
December 31, 2008.
Auction Video – March 27,
2007
On March
27, 2007 the Company 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 the Company’s
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 467,290 shares of restricted ONSM common stock (valued at
approximately $1.5 million, or $3.21 per share) 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, before transaction costs. The Company has
determined that these transactions do not meet the requirements established by
the Securities and Exchange Commission for a “significant acquisition”, and
therefore no pro-forma or other financial information related to the periods
prior to the acquisition is being presented. The operations of Auction Video are
part of the Digital Media Services Group.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Auction Video – March 27,
2007 (continued)
On
December 5, 2008 the Company 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 the Company’s outstanding assets and
liabilities connected with that operation - see Note 5.
The
Company allocated $2,046,996 of 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. $600,000 was
assigned as the value of the video ingestion and flash transcoder, which was
already integrated into the Company’s 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 Onstream Media customers existing prior to the acquisition were valued at
$250,000 and are reflected in non-current assets as of September 30, 2008 and
December 31, 2008, being amortized to cost of sales over a two-year period
commencing April 2007. 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 are being
amortized over various lives between two to five years commencing April 2007.
Other tangible assets acquired were valued at $46,996.
Subsequent
to the Auction Video acquisition, the Company 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 its UGV (User Generated Video) technology. In
April 2008, the Company 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. In August
2008 and February 2009, the U.S. Patent Office issued non-final rejections of
the claims pending in the first of the two applications. The Company believes
that its claims have merit and accordingly has filed a formal appeal to the
latest non-final rejection. Regardless of this, the Company’s management has
determined that an unsuccessful appeal or a final rejection of these claims
would not have a material adverse effect on the Company’s financial position or
results of operations. The U.S. Patent Office has taken no formal action with
regard to the second of the two applications.
The
Company purchased Auction Video for $2,023,963 in cash and stock. In conjunction
with the acquisition, liabilities were assumed as follows:
|
Identifiable
tangible and intangible assets
|
|
$ |
2,046,996 |
|
|
Goodwill
|
|
|
3,216 |
|
|
Acquired
assets (at fair value)
|
|
|
2,050,212 |
|
|
Less:
Cash paid for non-cash assets
|
|
|
(523,066 |
) |
|
Less:
Cash acquired for cash
|
|
|
(897 |
) |
|
Less:
Shares issued for non-cash assets
|
|
|
(1,500,000 |
) |
|
Assumed
liabilities
|
|
$ |
26,249 |
|
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Auction Video – March 27,
2007 (continued)
In
connection with the acquisition, the Company entered into three consulting
contracts with three key Auction Video employees, two of which expired as of
February 28, 2008. Starting with such expiration to date, the Company has
continued paying one of these two employees on a month to month basis. The third
such contract included a two-year option grant to one of the consultants for the
purchase of up to 35,000 common shares with an exercise price of $2.98 per share
(fair market value at the date of closing) and vesting over two years – see Note
8. The consulting contracts contain non-compete provisions with a minimum term
of two years from the acquisition closing.
As
discussed in “Testing for Impairment” below, the carrying value of the initially
recorded identifiable intangible assets acquired as part of the Auction Video
Acquisition were determined to be impaired as of December 31, 2008 and a
$100,000 adjustment was made to reduce the carrying value of those intangible
assets to approximately $200,000 as of that date. This $100,000
adjustment was included in the aggregate $5.5 million charge for impairment of
goodwill and other intangible assets as reflected in the Company’s results of
operations for the three months ended December 31, 2008.
Acquired Onstream – December
23, 2004
On
October 22, 2003 the Company executed an agreement and plan of merger agreement
with privately held Onstream Media Corporation (“Acquired Onstream”) to acquire
the remaining 74% of Acquired Onstream not already owned by the Company. On
December 23, 2004, after approval by a majority of the Company’s shareholders in
a duly constituted meeting, Acquired Onstream was merged with and into OSM
Acquisition Inc., a Delaware corporation and the Company’s wholly owned
subsidiary (the “Onstream Merger”). At that time, all outstanding shares of
Acquired Onstream capital stock and options not already owned by the Company
were converted into 2,207,966 shares of the ONSM restricted common stock and
463,554 options and warrants to purchase ONSM common stock at an exercise price
of $3.376 per share. The Company also issued common stock options to directors
and management as additional compensation at the time of and for the Onstream
Merger, which was accounted for in accordance with APB 25.
Acquired
Onstream was a development stage company founded in 2001 that began the
development of 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 new product (the “Digital Media Services
Platform” or “DMSP”) 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.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Acquired Onstream – December
23, 2004 (continued)
The
summarized balance sheet of Acquired Onstream as of the December 23, 2004
Onstream Merger is as follows, showing the fair values assigned by the Company
to Acquired Onstream’s assets and liabilities in accordance with SFAS 141 and
recorded by the Company at that time.
|
Cash
and other current assets
|
|
$ |
36,059 |
|
|
Property
and equipment
|
|
|
2,667,417 |
|
|
Total
assets
|
|
$ |
2,703,476 |
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
814,739 |
|
|
Notes
payable and capitalized lease
|
|
|
335,179 |
|
|
Total
liabilities
|
|
|
1,149,918 |
|
|
Shareholder’s
equity
|
|
|
1,553,558 |
|
|
Total
liabilities and shareholder’s equity
|
|
$ |
2,703,476 |
|
Property
and equipment in the above table represents the partially (at the time)
completed DMSP, primarily Acquired Onstream’s payments to its vendors SAIC,
Virage, North Plains and Nine Systems. This was the primary asset included in
the purchase of Acquired Onstream, and was recorded at fair value as of the
December 23, 2004 closing, in accordance with SFAS 141 – see Note 3. The fair
value was primarily based on the discounted projected cash flows related to this
asset for the next five years immediately following the acquisition, as
projected at the time of the acquisition by the Company’s and Acquired
Onstream’s management on a stand-alone basis without regard to the Onstream
Merger. The discount rate utilized considered equity risk factors (including
small stock risk and bridge/IPO stage 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.
The
$8,421,401 excess included in the $9,974,959 paid by the Company for 100% of
Acquired Onstream over $1,553,558 (the fair values assigned to the tangible and
intangible assets, net of liabilities at fair value) was recorded by the Company
as goodwill, subject to regular future valuations and adjustments as required by
SFAS 142.
As
discussed in “Testing for Impairment” below, the initially recorded goodwill for
Acquired Onstream of approximately $8.4 million 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.
This $4.1 million adjustment was included in the aggregate $5.5 million charge
for impairment of goodwill and other intangible assets as reflected in the
Company’s results of operations for the three months ended December 31,
2008.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
SFAS 142,
Goodwill and Other Intangible Assets, 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. 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. The Company
performed impairment tests on Infinite Conferencing as of April 27, 2008 and
Acquired Onstream as of December 31, 2008. The Company 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, the Company
concluded that there was no impairment of Infinite Conferencing’s net assets as
of April 27, 2008. Although the first step of the two step testing process of
Acquired Onstream’s net assets (which include the DMSP) indicated that the fair
value of those intangible assets exceeded their recorded carrying value as of
December 31, 2008, it was noted that as a result of recent
substantial volatility in the capital markets, the Company's stock price and
market value had decreased significantly and as of December 31, 2008, the
Company's market capitalization, after appropriate adjustments for control
premium and other considerations, was determined to be less than its net book
value (i.e., stockholders’ equity as reflected in the Company’s financial
statements). Based on this condition, and in accordance with the provisions of
SFAS 142, the Company recorded a non-cash expense, for the impairment of its
goodwill and other intangible assets of $5.5 million for the three months ended
December 31, 2008. As discussed above, this $5.5 million adjustment was
determined to relate to $1.1 million of goodwill and intangible assets of
Infinite Conferencing, $100,000 of intangible assets of Auction Video and $4.3
million of goodwill of Acquired Onstream. Furthermore, since the most recent
impairment review was completed, the Company’s stock price and market value have
continued to decline, which may result in future non-cash impairment charges to
the Company’s results of operations related to its goodwill and other
intangible assets.
SFAS 142
allows the carryforward of a previous detail valuation, provided certain
criteria are met, including no significant changes in assets and liabilities of
the reporting unit since the previous valuation, a substantial margin between
the previous valuation and the carrying value at the time and a determination
that a current year impairment would be remote based on an analysis of past
events and changes in circumstances since the previous valuation. The Company
determined that these criteria were met as of September 30, 2008 and based on
this, as well as its internal valuation calculations and review for impairment
performed on a basis consistent with the September 30, 2006 detail valuation,
determined that an independent valuation of EDNet’s unamortized goodwill was not
necessary, and that no impairment existed, as of September 30,
2008.
The
valuations of EDNet, Acquired Onstream and Infinite Conferencing incorporate
management’s estimates of future sales and operating income, which estimates in
the case of Acquired Onstream are dependent on a product (the DMSP) from which
significant sales increases may be required to support that valuation. The
Company is required to perform reviews for impairment in future periods, at
least annually, that 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.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
3: PROPERTY AND EQUIPMENT
Property
and equipment, including equipment acquired under capital leases, consists
of:
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
and software
|
|
$ |
10,127,682 |
|
|
$ |
10,096,433 |
|
|
|
1-5
|
|
|
DMSP
|
|
|
5,402,335 |
|
|
|
5,256,575 |
|
|
|
3-5
|
|
|
Travel
video library
|
|
|
1,368,112 |
|
|
|
1,368,112 |
|
|
|
2
|
|
|
Capitalized
internal use software
|
|
|
845,495 |
|
|
|
771,485 |
|
|
|
3-5
|
|
|
Furniture,
fixtures and leasehold improvements
|
|
|
475,857 |
|
|
|
475,857 |
|
|
|
2-7
|
|
|
|
|
|
18,219,481 |
|
|
|
17,968,462 |
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(14,653,654 |
) |
|
|
(13,911,692 |
) |
|
|
|
|
|
Net
book value
|
|
$ |
3,565,827 |
|
|
$ |
4,056,770 |
|
|
|
|
|
Depreciation
and amortization expense for property and equipment was approximately $742,000
and $691,000 for the three months ended December 31, 2008 and 2007,
respectively. The travel video library was fully depreciated as of December 31,
2008 and furniture, fixtures and leasehold improvements represented an aggregate
of $43,000 remaining net book value as of that date. The net book value of the
DMSP was approximately $1.1 million as of December 31, 2008.
The DMSP
is comprised of four separate “products”, which are transcoding, storage,
search/retrieval and distribution. A limited version of the DMSP, with three of
the four products, was first placed in service with third-party customers in
November 2005, at which time depreciation of 75% (for three of the four products
in service, based on guidance in SFAS 86, “Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed”) of the DMSP’s carrying cost
began and continued until the fourth product was placed in service during
October 2006, at which time the Company began to depreciate 100% of the DMSP’s
carrying cost. This initial version of the DMSP offered for sale to
the general public since October 2006 is known as the “Store and Stream”
version. In connection with the development of a second version of the DMSP with
additional functionality and known as “Streaming Publisher”, the Company has
capitalized as part of the DMSP’s carrying cost approximately $272,000 of
employee compensation and related costs as of December 31, 2008, including
$126,000 capitalized during the three months ended December 31,
2008.
On March
27, 2007 the Company 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 Company’s DMSP as of the date of the acquisition.
Based on the Company’s determination of the fair value of that transcoder at the
date of the acquisition, $600,000 was added to the DMSP’s carrying cost as
reflected above, which additional cost is being depreciated over a three-year
life commencing April 2007.
On March
31, 2008 the Company agreed to pay $300,000 for a perpetual license for certain
digital asset management software, which it currently utilizes to provide its
automatic meta-tagging services, in addition to and in accordance with a limited
term license that it purchased in 2007 for $281,250 - see Note 5 for additional
terms of this license. Although the Company continues to use this software to
provide its automatic meta-tagging services, the Company recently expanded its
use of this software in providing its core DMSP services.
Therefore, the Company recorded a portion of this 2008 purchase, as
well as a portion of the remaining unamortized amount of the 2007 purchase, as
an aggregate $243,750 increase in the DMSP’s carrying cost as reflected above,
which additional cost is being depreciated over a five-year life commencing
April 2008.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
3: PROPERTY AND EQUIPMENT (Continued)
Capitalized
internal use software as of December 31, 2008 includes approximately $213,000 of
employee compensation and related costs related to the development of iEncode
webcasting software, including $126,000 capitalized during the three months
ended December 31, 2008.
NOTE 4:
CONVERTIBLE DEBENTURES AND NOTES PAYABLE
Convertible
Debentures
During
the period from June 3, 2008 through July 8, 2008 the Company received an
aggregate of $1.0 million from seven accredited individuals and other entities
(the “Lenders”), under a software and equipment financing arrangement. The
Company issued Notes to those Lenders, which are collateralized by specifically
designated software and equipment owned by the Company with a cost basis of
approximately $1.5 million, as well as a subordinated lien on certain other
Company 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. Under this arrangement, the Lenders
received 10,000 restricted ONSM common shares for each $100,000 lent to the
Company, and will also receive interest at 12% per annum. Interest is payable
every 6 months in cash or, at the Company’s 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 November 11, 2008, the Company elected to
issue 158,000 unregistered shares of common stock in lieu of $48,740 cash
interest on these debentures for the period from June 2008 through October 2008.
These shares were recorded as interest expense of $69,504 on the Company’s
books, based on the fair value of those shares on the issuance
date.
The
Company may prepay the Notes, which have a three (3) year maturity date, at any
time upon ten (10) days' prior written notice to the Lenders during which time
the Lender may choose to convert the Note. 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. Lenders holding in excess of 50% of
the outstanding principal amount of the Notes may declare a default and may take
steps to amend or otherwise modify the terms of the Notes and related security
agreement.
The Notes
may be converted to restricted ONSM common shares at any time prior to their
three (3) year maturity date, at the Lender’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 $0.80 per share. In the event the Notes
are converted prior to maturity, interest on the 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.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 4:
CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
Convertible
Debentures (continued)
Fees were
paid to placement agents and finders for their services in connection with the
Notes in aggregate of 101,250 restricted ONSM common shares and $31,500 paid in
cash. The 101,250 shares plus the 100,000 shares issued to the investors
discussed above had a fair market value of approximately $186,513. The value of
these 201,250 shares, plus the $31,500 cash fees and $9,160 paid for legal fees
and other issuance costs related to the Notes, were reflected as a $227,173
discount against the Notes and are being amortized as interest expense over the
three year term of the Notes. The effective interest rate of the Notes is
approximately 19.5% per annum, excluding the potential effect of a premium to
market prices if payment is made in common shares instead of cash.
Although
the minimum conversion price was established in the Notes at $0.80 per ONSM
share, the quoted market price was approximately $0.93 per ONSM share at the
time the material portion of the proceeds ($950,000 out of $1 million total)
were received by the Company (including releases of funds previously placed in
escrow) and the related Notes were issued (June 3-5, 2008). However, the quoted
market price per ONSM share was $0.81 on April 30, 2008, $0.84 on May 20, 2008
and back to $0.80 by June 27, 2008, less than one month after the issuance of
the related Notes. Therefore, the Company has determined that the $0.80 per
share conversion price in the Notes was materially equivalent to fair value at
the date of issuance, which was the intent of all parties when the deal was
originally discussed between them in late April and early May 2008. Accordingly,
the Company determined that there was not a beneficial conversion feature
included in the Notes and did not record additional discount in that
respect.
Notes
Payable
Notes
payable consist of the following as of December 31, 2008 and September 30,
2008:
|
|
|
|
|
|
|
|
|
Note
payable to a financial institution, collateralized by accounts receivable,
interest at prime plus 8% (prime plus 11% from December 2008), payable
monthly. Revolving line of credit expiring December 2009.
|
|
$ |
1,600,000 |
|
|
$ |
1,200,000 |
|
|
Notes
payable to former Infinite shareholders, collateralized by subordinated
liens on all assets other than accounts receivable, principal payable in
monthly installments through July 2009, interest at 12% per annum payable
at maturity
|
|
|
308,399 |
|
|
|
458,399 |
|
|
Capitalized
software and equipment leases
|
|
|
211,259 |
|
|
|
248,809 |
|
|
Total
notes payable
|
|
|
2,119,658 |
|
|
|
1,907,208 |
|
|
Less:
discount on notes payable
|
|
|
(35,511 |
) |
|
|
(23,793 |
) |
|
Notes
payable, net of discount
|
|
|
2,084,147 |
|
|
|
1,883,415 |
|
|
Less:
current portion, net of discount
|
|
|
( 2,004,273 |
) |
|
|
( 1,774,264 |
) |
|
Long
term notes payable, net of current portion
|
|
$ |
79,874 |
|
|
$ |
109,151 |
|
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 4:
CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
Notes Payable
(continued)
In
December 2007, the Company entered into a line of credit arrangement (the
“Line”) with a financial institution under which it could borrow up to an
aggregate of $1.0 million for working capital, collateralized by its accounts
receivable. In August 2008 the maximum allowable borrowing amount under the Line
was increased to $1.6 million and the Company has received $1.2 million and $1.6
million funding under the Line as of September 30, 2008 and December 31, 2008,
respectively. The outstanding balance bears interest at prime plus 8% per annum
(prime plus 11% from December 2, 2008), payable monthly in arrears. The Company
paid initial origination and commitment fees aggregating $20,015 and in August
2008 paid an additional commitment fee of $6,000 related to the increase in the
lending limit. A commitment fee of $16,000 was paid on the one year anniversary
of the initial commitment and will be due for any subsequent year. The
outstanding principal may be repaid at any time, but no later than two (2) years
after the date of the agreement, which term may be extended by the Company for
an extra year, subject to compliance with all loan terms, including no material
adverse change. The outstanding principal is due on demand in the event a
payment default is uncured five (5) days after written notice. Mr. Leon
Nowalsky, a member of the Company’s Board of Directors, is also a founder and
board member of the lender.
The Line
is also subject to the Company maintaining an adequate level of receivables,
based on certain formulas, as well as its compliance with debt service coverage
and minimum tangible net worth covenants. Although the balance outstanding
during January 2009 and part of February 2009 was in excess of the allowable
borrowing amount based on the formulas discussed above, principal payments made
in February 2009 reduced the outstanding balance to $1,519,000 and it no longer
exceeded the allowable borrowing amount. The lender has waived any breach
related to these past overages. In addition, the Company received waivers from
the lender with respect to lack of compliance with the tangible net worth
covenant as of March 31, 2008, with respect to the tangible net worth and debt
service to cash flow covenants as of June 30, 2008 and for the quarter then
ended, with respect to the tangible net worth and debt service to cash flow
covenants as of September 30, 2008 and for the quarter then ended and with
respect to the tangible net worth and debt service to cash flow covenants as of
December 31, 2008 and for the quarter then ended.
The
lender must approve any additional debt incurred by the Company, other than debt
incurred in the ordinary course of business (which includes equipment
financing). Accordingly the lender has approved the Infinite Notes issued by the
Company in March 2008 with an initial amount of $858,399 as discussed below, the
$1.0 million aggregate debt for Notes the Company issued in June and July 2008,
as discussed above, and the Company’s December 2008 issuance of the Series A-12
Redeemable Convertible Preferred Stock with a stated value of $800,000, as
discussed in Note 6.
At the
time of the April 27, 2007 Infinite Merger (see note 2), the Company entered
into a lock-up agreement with the former Infinite shareholders (the "Infinite
Shareholders") that provided that in the event the accumulated gross proceeds of
the sale of certain shares issued to them in connection with that merger were
less than a contractually defined amount, the Company would pay the
difference. On December 27, 2007, the Infinite Shareholders notified
the Company that those shares had been sold by them for proceeds which under the
lock-up agreement would require the Company to pay an additional $958,399. The
Company recorded this amount as a liability as of December 31, 2007, which was
offset by a reduction in additional paid in capital and on February 14, 2008,
the Company paid $100,000 against this obligation.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 4:
CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Continued)
Notes Payable
(continued)
On March
12, 2008, the Company executed promissory notes (the “Infinite Notes”) payable
to the Infinite Shareholders for the remaining aggregate balance due of $858,399
plus interest accruing at 12% per annum on the outstanding balance from February
15, 2008 until the July 10, 2009 maturity. Note payments of (i) $100,000 (one
hundred thousand dollars) were paid on March 15, 2008 and (ii) $50,000 (fifty
thousand dollars) were paid monthly from April 2008 through February 2009.
Additional payments of (iii) $50,000 (fifty thousand dollars) will be due on the
10th of the following four months and (iv) the final payment of $8,399 plus
approximately $68,000 interest (including approximately $59,000 accrued as of
December 31, 2008) will be due on July 10, 2009.
The
Company also agreed to pay in aggregate up to $7,500 of the Infinite
Shareholders' legal expenses incurred in connection with negotiating this
matter, which the Company recorded, along with its own legal expenses in the
matter, as a note discount to be amortized as interest expense over the
remaining term of the Infinite Notes.
The
Infinite Notes are collateralized by all of the Company’s assets other than
accounts receivable and are subordinated to the first $4.0 million of Company
debt outstanding from time to time. The Infinite Notes may be prepaid without
penalty and all principal and interest thereunder, as well as the legal
expenses, is payable in cash. The Infinite Notes provide that if any
of certain identified events of default occur, which includes a scheduled
payment not made and remaining unpaid after five days notice from the Infinite
Shareholders, then or at any time during the continuance of the event of
default, the Infinite Shareholders, at their option, may accelerate the maturity
of the Infinite Notes and require all accrued interest and other amounts to
become immediately due and payable.
As part
of the Onstream Merger, the Company assumed a capital lease for software, which
had an outstanding principal balance of $16,429 as of December 31, 2008. The
balance is payable in equal monthly payments of $3,366 through May 2009, which
includes interest at approximately 7% per annum. Accounts payable at September
30, 2008 includes $91,855 of past due payments related to this lease. See Note
2.
During
July 2007, the Company entered into a capital lease for audio conferencing
equipment, which had an outstanding principal balance of $194,830 as of December
31, 2008. The balance is payable in equal monthly payments of $10,172 through
August 2010, which includes interest at approximately 5% per annum, plus an
optional final payment based on fair value, but not to exceed
$16,974.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES
Narrowstep
acquisition – On May 29, 2008, the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) to acquire Narrowstep, which merger has
not been consummated as of the February 2009 filing date of the Company’s
December 31, 2008 Form 10-Q. Since the Effective Time did not occur on or prior
to November 30, 2008, the terms of the Merger Agreement allow that it may be
terminated by either Onstream or Narrowstep at any time after that date provided
that the terminating party is not responsible for the delay. Onstream and
Narrowstep are currently negotiating to extend this termination date, which
negotiations may result in changes to other terms of the transaction. In the
event this merger is not consummated, the Company may recognize certain expenses
or incur certain liabilities, including (i) the write-off of $462,090 of
acquisition-related costs included in other non-current assets on its balance
sheet as of December 31, 2008 and (ii) satisfaction of certain compensation
agreements entered into by the Company in contemplation of this merger. In
addition, in November 2008 Narrowstep invoiced the Company approximately
$372,000 for Narrowstep’s equipment alleged to be in the Company’s custody as of
that date. Although the Company acknowledged possession of at least some of this
equipment, it has not agreed to a payment for that equipment and believes that
if a payment were made it would be substantially less than the Narrowstep
invoice. Accordingly, this matter is not reflected on the Company’s financial
statements.
Furthermore,
Narrowstep’s recent 10-Q reported a net loss of approximately $848,000 and a
comprehensive loss after currency adjustments of approximately $1.1 million for
the three months ended November 30, 2008. Although Narrowstep has agreed to
significantly reduce its costs related to leases, public company costs,
professional fees and other selling and administrative expenses, it appears that
the operations of Narrowstep could still be generating cash deficits as of the
merger date. It is also possible that the Company will need to expend additional
cash for capital expenditures to continue or expand the operations after the
merger date. However, the Company believes that the anticipated Narrowstep cash
balance as of the merger date, including additional proceeds from their planned
sale of preferred shares, will be sufficient to fund such operating cash
deficits and capital expenditures until such time as the Narrowstep operations
are at least cash flow neutral, although this cannot be assured. See
Note 9.
NASDAQ letters regarding
share price and annual meeting listing requirements – The Company
received a letter from NASDAQ dated January 4, 2008 indicating that it had 180
calendar days, or until July 2, 2008, to regain compliance with Marketplace Rule
4310(c)(4) (the “Rule”), which is necessary in order to be eligible for
continued listing on the NASDAQ Capital Market. The NASDAQ letter indicated that
the Company’s non-compliance with the Rule was as a result of the bid price of
ONSM common stock closing below $1.00 per share for the preceding thirty
consecutive business days. On July 3, 2008, the Company received a
letter from NASDAQ stating that the Company was not considered compliant with
the Rule as of that date, but because the Company met all other initial listing
criteria for the NASDAQ Capital Market, it was granted an additional 180
calendar days, or until December 30, 2008, to regain compliance with the Rule.
On October 22, 2008, the Company received a letter from NASDAQ stating that
NASDAQ had recently suspended enforcement of the bid price listing requirement
through January 19, 2009, which on December 19, 2008 was extended to April 20,
2009. As a result, all companies presently in a bid price compliance
period will remain at the same stage of the process they were when the NASDAQ
announced the suspension and will not be subject to delisting for that concern,
and accordingly the Company will have until at least July 6, 2009 to regain
compliance with this requirement. The Company might be considered compliant with
the Rule, subject to the NASDAQ staff’s discretion, if ONSM common stock closes
at $1.00 per share or more for a minimum of ten consecutive business days before
the July 6, 2009 deadline. The closing ONSM share price was $0.19 per
share on February 6, 2009.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
NASDAQ letters regarding
share price and annual meeting listing requirements (continued) –On
October 1, 2008 the Company received a letter from NASDAQ stating that its
common stock is subject to delisting since it failed to hold the required annual
shareholder meeting by September 30, 2008, the end of the Company’s fiscal year.
Company representatives attended a hearing with the NASDAQ Listing
Qualifications Panel on November 20, 2008, at which time they appealed the
deficiency and sought an extension of the annual meeting date requirement. On
December 22, 2008 the Company received a letter from NASDAQ stating that the
NASDAQ Listing Qualifications Panel had granted the Company’s request that its
securities continue to be listed on NASDAQ, provided that it hold its annual
shareholder meeting on or before February 28, 2009. Notwithstanding
the Panel’s decision to continue the Company’s common stock’s listing on the
NASDAQ Capital Market, the Panel issued the Company a public reprimand for its
failure to hold an annual meeting for the prior fiscal year in a timely manner.
The Company has scheduled a combined 2008 and 2009 annual shareholder meeting to
be held on February 27, 2009, for which proxies have been solicited in
connection with the Company’s filing of a definitive proxy statement with the
SEC on January 28, 2009. The Company’s management believes that
Onstream will be in compliance with this listing requirement following the
combined 2008 and 2009 annual shareholder meeting on February 27,
2009.
The terms
of the 8% Senior Convertible Debentures and the 8% Subordinated Convertible
Debentures (and the related warrants) issued by the Company at various times
from December 2004 through April 2006, as well as the common shares issued in
connection with the April 2007 Infinite Merger, contain penalty clauses in the
event the Company’s common stock is not traded on NASDAQ or a similar national
exchange – See further discussion below.
Registration payment
arrangements – The Company included the 8% Subordinated Convertible
Debentures and related $1.50 warrants on a registration statement which was
declared effective by the Securities and Exchange Commission (“SEC”) on July 26,
2006. The Company is only required to expend commercially reasonable efforts to
keep the registration statement continuously effective. However, in the event
the registration statement or the ability to sell shares thereunder lapses for
any reason for 30 or more consecutive days in any 12 month period or more than
twice in any 12 month period, the purchasers of the 8% Subordinated Convertible
Debentures may require the Company to redeem any shares obtained from the
conversion of those notes and still held, for 115% of the market value for the
previous five days. The same penalty provisions apply if the Company’s common
stock is not listed or quoted, or is suspended from trading on an eligible
market for a period of 20 or more trading days (which need not be consecutive).
Due to the fact that that there is no established mechanism for reporting to the
Company changes in the ownership of these shares after they are
originally issued, the Company is unable to quantify how many of these shares
are still held by the original recipient and thus subject to the above
provisions. Regardless of the above, the Company believes that the applicability
of these provisions would be limited by equity and/or by statute to a certain
timeframe after the original security purchase. All of these debentures were
converted to common shares on or before March 31, 2007.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Registration payment
arrangements (continued) – The Company included the common shares
underlying the 8% Senior Convertible Debentures, including the Additional 8%
Convertible Debentures (AIR), and the related $1.65 warrants, on a registration
statement declared effective by the SEC on June 29, 2005. These debentures
provide cash penalties of 1% of the original purchase price for each month that
(a) the Company’s common shares are not listed on the NASDAQ Capital Market for
a period of 3 trading days (which need not be consecutive) or (b) the common
shares underlying those securities and the related warrants are not saleable
subject to an S-3 or other registration statement then effective with the SEC.
The latter penalty only applies for a five-year period beginning with the June
29, 2005 registration statement effective date and does not apply to shares
saleable under Rule 144(k).
The $1.65
warrants provide that if the shares are not subject to an effective registration
statement on the date required in relation to the initial and/or subsequent
issuance of shares under these transactions and at the time of warrant exercise,
the holder could elect a “cashless exercise” whereby the Company would issue
shares based on the excess of the market price at the time of the exercise over
the warrant exercise price. Regardless of the above, the Company believes that
the applicability of these provisions would be limited by equity and/or by
statute to a certain timeframe after the original security purchase. All of
these debentures were converted to common shares on or before March 31, 2007,
although 1,128,530 of the warrants are still outstanding as of December 31, 2008
– see Note 8.
During
March and April 2007, the Company sold an aggregate of 4,888,889 restricted
common shares at $2.25 per share for total gross proceeds of approximately $11.0
million. This private equity financing was arranged by the Company to partially
fund the Infinite Merger – see Note 2. These shares were included in a
registration statement declared effective by the SEC on June 15,
2007. The Company is required to maintain the effectiveness of this
registration statement until the earlier of the date that (i) all of the shares
have been sold, (ii) all the shares have been transferred to persons who may
trade such shares without restriction or (iii) all of the shares may be sold at
any time, without volume or manner of sale limitations pursuant to Rule 144(k)
or any similar provision. In the event such effectiveness is not maintained or
trading in the shares is suspended or if the shares are delisted for more than
five (5) consecutive trading days then the Company is liable for a compensatory
payment (pro rated on a daily basis) of one and one-half percent (1.5%) per
month until the situation is cured, such payment based on the purchase price of
the shares still held and provided that such payments may not exceed ten percent
(10%) of the initial purchase price of the shares with respect to any one
purchaser. Regardless of the above, the Company believes that the applicability
of these provisions would be limited by equity and/or by statute to a certain
timeframe after the original security purchase.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Registration payment
arrangements (continued) – Effective within the year ended September 30,
2007, the Company elected early adoption of FASB Staff Position (“FSP”)
EITF 00-19-2, “Accounting for Registration Payment Arrangements”, which was
issued on December 21, 2006 and establishes that contingent obligations under
registration payment arrangements, as defined in FSP EITF 00-19-2, shall be
recognized and measured separately in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 5, “Accounting for Contingencies”
and FASB Interpretation (“FIN”) No. 14, “Reasonable Estimation of the
Amount of a Loss”, and not under EITF 00-19. The Company has concluded that (i)
the terms discussed in the three preceding paragraphs above are registration
payment arrangements as defined in the applicable accounting pronouncements,
(ii) based on its satisfactory recent history of maintaining the effectiveness
of its registration statements and its NASDAQ listing, as well as stockholders’
equity in excess of the NASDAQ listing standards as of December 31, 2008, that
material payments under these registration payment arrangements are not
probable, and (iii) therefore no accrual related to them is necessary with
respect to SFAS 5 and FIN 14 as of that date. However, the Company’s share price
was below $1.00 as of February 6, 2009, and the Company had also failed to hold
the required annual shareholder meeting as of that date, which conditions could
eventually affect its NASDAQ listing status, as discussed above.
Registration rights -
The Company has granted a major shareholder demand registration rights,
effective six months from the January 2007 modification date of a certain
convertible note, for any unregistered common shares issuable thereunder. Upon
such demand, the Company will have 60 days to file a registration statement and
shall use its best efforts to obtain promptly the effectiveness of such
registration statement. 784,592 of the 2,789,592 shares issued in March 2007
were included in a registration statement declared effective by the SEC on June
15, 2007 and as of February 6, 2009 the Company has not received any demand for
the registration of the balance. As the note does not provide for damages or
penalties in the event the Company does not comply with these registration
rights, the Company has concluded that these rights do not constitute
registration payment arrangements under FSP EITF 00-19-2. Furthermore, since the
unregistered shares were originally issued in March 2007, they may be saleable,
in whole or in part, under Rule 144. In any event, the Company has determined
that material payments in relation to these rights are not probable and
therefore no accrual related to them is necessary with respect to SFAS 5 and FIN
14.
The
Company has granted demand registration rights, effective six months from the
date of a certain October 2006 convertible note, for any unregistered common
shares issuable thereunder. Upon such demand, the Company will have 60 days to
file a registration statement and shall use its best efforts to obtain promptly
the effectiveness of such registration statement. 1,000,000 of the 1,694,495
total principal and interest shares were included in a registration statement
declared effective by the SEC on June 15, 2007 and as of February 6, 2009 the
Company has not received any demand for the registration of the
balance. As the note does not provide for damages or penalties in the
event the Company does not comply with these registration rights, the Company
has concluded that these rights do not constitute registration payment
arrangements under FSP EITF 00-19-2. Furthermore, the unregistered shares were
originally issued in November and December 2006 and may be saleable, in whole or
in part, under Rule 144. In any event, the Company has determined that material
payments in relation to these rights are not probable and therefore no accrual
related to them is necessary with respect to SFAS 5 and FIN 14. See Note 6
regarding a consulting contract entered into by the Company with the principal
and beneficial owner of the lending entity.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Registration rights
(continued) - 255,000 options and 100,000 shares issued to consultants prior to
June 15, 2007 were granted with piggyback registration rights but were not
included on the registration statement declared effective by the SEC on June 15,
2007. As these options and shares do not provide for damages or penalties in the
event the Company does not comply with these registration rights, the Company
has concluded that these rights do not constitute registration payment
arrangements under FSP EITF 00-19-2. In any event, the Company has determined
that material payments in relation to these rights are not probable and
therefore no accrual related to them is necessary with respect to SFAS 5 and FIN
14.
Consultant contracts
– Effective January 1, 2008, the Company entered into an agreement with a major
shareholder (in excess of 5% beneficial Company ownership) requiring the
issuance of approximately 240,000 unregistered shares for financial consulting
and advisory services, of which the company has recorded the issuance of 120,000
shares, and related professional fee expense, for the twelve months ended
December 31, 2008. Although all previous and future compensation
under that contract was cancelled as the result of an agreement made between
that shareholder and the Company and considered effective December 31, 2008, the
final signatures were not obtained on the necessary documentation until early
2009. Accordingly, this cancellation will be reflected as the January 2009
reversal of approximately $80,000 previously recorded professional fee expense
as well as a corresponding reduction of additional paid-in capital. Effective
October 1, 2008, the Company entered into an agreement with another major
shareholder requiring the issuance of approximately 120,000 unregistered shares
for financial consulting and advisory services, of which the company has
recorded the issuance of 30,000 shares, and related professional fee expense,
for the three months ended December 31, 2008. The services related to the
remaining 90,000 shares will be provided over a 9 month period, and will result
in a professional fees expense of approximately $18,000 over that service
period, based on the current market value of an ONSM common share. In addition
to 20,000 shares related to the second of the two consultant contracts discussed
above, the Company recorded the issuance of another 201,173 shares for financial
consulting and advisory services during the period from January 1, 2009 through
February 6, 2009 under agreements entered into on or before December 31, 2008 –
see Note 10. None of these shares were or will be issued to Company directors or
officers.
Employment Contracts and
Severance – On September 27, 2007, the Company’s 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 the Company’s
Compensation Committee and Board approved certain corrections and modifications
to those agreements, which are reflected in the discussion of the terms of these
agreements below.
The
agreements provide 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, and allow for 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 $5,000 allowance for the reimbursement of dues or
charitable donations. The Company also pays insurance premiums for
the Executives, including medical, life and disability
coverage.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contracts and
Severance (continued) – As part of the above employment agreements, and
in accordance with the terms of the “2007 Equity Incentive Plan” approved by the
Company’s shareholders in their September 18, 2007 annual meeting,
the Company’s Compensation Committee and Board of Directors granted each of the
Executives options (“Plan Options”) to purchase an aggregate of 400,000 shares
of ONSM common stock at an exercise price of $1.73 per share, the fair market
value at the date of the grant, which shall be exercisable for a period of four
(4) years from the date of vesting. The options vest in installments of 100,000
per year, starting on September 27, 2008, and they automatically vest upon the
happening of the following events on a date more than six (6) months after the
date of the agreement: (i) change of control (ii) constructive termination, and
(iii) termination other than for cause, each as defined in the employment
agreements. Unvested options automatically terminate upon (i) termination for
cause or (ii) voluntary termination. In the event the agreement is
not renewed or the Executive is terminated other than for cause, the Executives
shall be entitled to require the Company to register the options.
As part
of the above employment agreements, the Executives are eligible for a
performance bonus, based on meeting revenue and cash flow objectives. In
connection with this bonus program, the Company’s Compensation Committee and
Board of Directors granted each of the Executives Plan Options to purchase an
aggregate of 220,000 shares of ONSM common stock at an exercise price of $1.73
per share, the fair market value at the date of the grant, which shall be
exercisable for a period of four (4) years from the date of vesting. Up to
one-half of these shares will be eligible for vesting on a quarterly basis and
the rest annually, with the total grant allocated over a two-year period
starting October 1, 2007. Vesting of the quarterly portion is subject to
achievement of increased revenues over the prior quarter as well as positive and
increased net cash flow per share (defined as cash provided by operating
activities per the Company’s statement of cash flow, measured before changes in
working capital components and not including investing or financing activities)
for that quarter. Vesting of the annual portion is subject to meeting the above
cash flow requirements on a year-over-year basis, plus a revenue growth rate of
at least 30% for the fiscal year over the prior year.
In the
event of quarter to quarter decreases in revenues and or cash flow, the options
shall not vest for that quarter but the unvested quarterly options shall be
added to the available options for the year, vested subject to achievement of
the applicable annual goal. In the event options do not vest based on the
quarterly or annual goals, they shall immediately expire. In the event the
agreement is not renewed or the Executive is terminated other than for cause,
the Executives shall be entitled to require the Company to register the vested
options. The Company has also agreed that this bonus program will continue after
the initial two-year period, with the specific bonus parameters to be negotiated
in good faith between the parties at least ninety (90) days before the
expiration of the program then in place.
The
Company has determined that the performance objectives were met for the quarter
ended December 31, 2007 but that they were not met for the remaining three
quarters of fiscal 2008 nor were they met for the year ended September 30, 2008.
Therefore, 13,750 options out of a potential 110,000 performance options vested
for each executive during fiscal 2008 and as a result the Company recognized
compensation expense of approximately $80,000 for the three months ended
December 31, 2007, related to the vested quarterly portion of these options.
Another $80,000 recorded as compensation expense for the three months ended
December 31, 2007, related to the pro-rata quarterly share of the annual portion
of these options expected to be earned by the executives based on the quarterly
results was reversed by the Company during the three months ended September 30,
2008, based on the annual results.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contracts and
Severance (continued) – The Company has determined that the performance
objectives were not met for the quarter ended December 31, 2008 and as a result
the Company recognized no compensation expense for the three months ended
December 31, 2008, related to these performance options.
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, the Company 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. The Company 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 $2.50 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 the Company will pay all taxes for the
Executive(s). If the five-day average closing price of the common
stock is less than $2.50 per share on the date of any termination or change in
control, the options will remain exercisable under the original
terms.
As part
of the above employment agreements, and in consideration for the provision in
the new employment agreements that change of control benefits would not be paid
related to any merger and any related financing occurring within eighteen months
of entering into the new agreements, the Company’s Compensation Committee and
Board of Directors agreed that the Company would grant each of the Executives
fully vested four-year options for shares equivalent to one percent (1%) of the
total number of shares issued in connection with any such merger and/or any
related financing including any contingent shares, once earned. If the Company
enters into a definitive merger agreement during that eighteen month period, the
number of options will be determined and granted at the time of closing that
merger and will have an exercise price equal to the fair value at the date of
grant, but no less than $1.00. The Company agreed to register these and all
other shares or options held by the Executives with or simultaneously to any
shares registered in connection with such a merger and/or any related financing.
See Note 9 for a discussion of the proposed Narrowstep Merger, which would
result in the issuance of options to the Executives in accordance with the above
provision.
Under the
terms of the above employment agreements, the Company 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 the Company’s 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. These
employment agreements contain certain non-disclosure and non-competition
provisions and the Company has agreed to indemnify the Executives in certain
circumstances.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contracts and
Severance (continued) – As part of the above employment agreements, the
Company’s Compensation Committee and Board of Directors agreed that in the event
the Company is sold for a Company Sale Price in excess of the Current
Capitalization during the term of the agreements, both terms as defined below,
and the Company Sale Price represents at least $2.50 per share (adjusted for
recapitalization including but not limited to splits and reverse splits), the
Executives and certain other employees, will receive, as a group, cash
compensation of twelve and one-half percent (12.5%) of the excess of the Company
Sale Price over the Current Capitalization, payable in immediately available
funds at the time of closing such transaction. The Current Capitalization is
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 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 $2.00. The
Company Sale Price is defined as the number of common shares outstanding at the
time the Company is sold multiplied by the price per share paid in such Company
Sale transaction. The 12.5% was allocated in the new employment agreements as
two and one-half percent (2.5%) each to Messrs. Selman, Saperstein, Friedland
and Glassman and one and one-half percent (1.5%) to Mr. Tomlinson. The remaining
one percent (1.0%) will be allocated by the Board and the Company’s management
at a later date, which will be primarily to compensate other Company executives
not having employment contracts, but may also include additional allocation to
some or all of these five senior Executives.
Long Distance Purchase
Commitment - Effective January 15, 2006, EDNet entered into a two-year
long distance telephone rate agreement with a national telecommunications
company, which included a telephone services purchase commitment of
approximately $120,000 per year. On September 13, 2007, this agreement was
extended to add another two years, for a total term of four years. The Company
is in compliance with this agreement.
Bandwidth Purchase
Commitments - Effective July 1, 2008, the Company entered into a two-year
long distance bandwidth rate agreement with a national CDN (content delivery
network) company, which includes a minimum purchase commitment of approximately
$200,000 per year. The Company is in compliance with this
agreement.
The
Company has entered into various agreements with a national co-location
facilities company, for an aggregate minimum purchase commitment of
approximately $27,000 per month, expiring at various times through September
2009.
Lease Commitments -
The Company is obligated under operating leases for its four offices (one each
in Pompano Beach, Florida and San Francisco, California and two in the New York
City area), which call for monthly payments totaling approximately $52,800. The
leases, with expiration dates ranging from 2009 to 2010, provide for renewal
options and annual increases. Total rental expense for all operating leases was
approximately $208,000 and $172,000 for the three months ended December 31, 2008
and 2007, respectively. Future minimum lease payments required under
these non-cancelable leases as of December 31, 2008, excluding the capital lease
obligations discussed in Note 4, total approximately $1,746,000, which includes
approximately $1,081,000 related to the expected renewal of the San Francisco
lease as discussed below.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Lease Commitments
(continued) -The Company’s three-year operating lease for its principal
executive offices in Pompano Beach, Florida expires September 15, 2010. The
monthly base rental is currently approximately $21,400 (including the Company's
share of property taxes and common area expenses) with annual five percent (5%)
increases. The lease provides for one two-year renewal option with 5% annual
increases.
The
Company’s five-year operating lease for office space in San Francisco expires
April 30, 2009. The monthly base rental (including month-to-month
parking) is approximately $18,000 with annual increases up to five percent (5%).
Based on its most recent discussions with the landlord, the Company expects, but
has not yet committed, to renew this lease for a five year term starting at
approximately $16,600 per month (including parking), in addition to a one
five-year renewal option at 95% of fair market value.
The
Company’s annual operating lease for office space in New York City expires
December 31, 2009. The monthly base rental is approximately
$6,600. The Company’s annual operating lease for its Infinite
Conferencing location in New Jersey expires July 31, 2009. The monthly base
rental is approximately $6,800.
Software purchase and
royalty commitment – On March 31, 2008 the Company agreed to pay $300,000
(plus a $37,500 annual support fee) for a perpetual license for certain digital
asset management software, which it currently utilizes to provide its automatic
meta-tagging and other DMSP services. The initial $56,250 payment due under this
perpetual license agreement was paid in July 2008 and the remaining obligation
of $281,250 is included in accounts payable at September 30, 2008 and December
31, 2008. In connection with this license, the Company also agreed to pay a 1%
royalty on revenues arising from the use, licensing or offering of the
functionality of this software to its customers, to the extent such revenue
exceeds certain levels, subject to a minimum amount per transaction and only to
the extent the calculated royalty exceeds the perpetual license payment. The
Company is not yet liable for any royalty payments under this
agreement.
State income taxes -
The Company has been assessed state income taxes, plus penalties and interest,
for the years ending September 30, 2004 and 2005, in an aggregate amount of
approximately $89,000. The basis of the assessment is an attempt by the state to
disallow certain net operating loss carryforwards to the years in question. The
Company has contested these assessments with the state taxing authorities and
believes the ultimate resolution will not have a material impact on the
Company’s financial position or results of operations.
Legal Proceedings –
The Company is involved in 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 management that the resolution
of these outstanding claims will not have a material adverse effect on the
Company’s financial position or results of operations.
SAIC Contract - As
part of the Onstream Merger, the Company became obligated under a contract with
SAIC, under which SAIC would build a platform that eventually, after further
design and re-engineering by the Company, became the DMSP. The contract
terminated by mutual agreement of the parties on June 30, 2008. Although
cancellation of the contract among other things releases SAIC to offer what is
identified as the “Onstream Media Solution” directly or indirectly to third
parties, Onstream’s management does not expect this right to result in a
material adverse impact on future DMSP sales.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Auction Video Japan
office - On December 5, 2008 the Company 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 the Company’s
outstanding assets and liabilities connected with that operation, in exchange
for non-exclusive rights to sell Onstream Media products in Japan and be
compensated on a commission-only basis. As a result, the Company recognized
other income of approximately $45,000 for the three months ended December 31,
2008, which is the difference between the assumed liabilities of approximately
$84,000 and the assumed assets of approximately $39,000. While the ultimate
outcome of this matter is not presently determinable, it is the opinion of
management that the ultimate resolution will not have a material adverse effect
on the Company’s financial position or results of operations. See Note
2.
NOTE
6: CAPITAL STOCK
Common
Stock
During
the three months ended December 31, 2008, the Company issued 99,098 unregistered
shares valued at approximately $35,000 and recognized as professional fees
expense for financial consulting and advisory services over various service
periods of up to 3 months. None of the shares were issued to Company directors
or officers.
During
the three months ended December 31, 2008, the Company recorded the issuance of
certain options to purchase 8,333 of its common shares, in exchange for
financial consulting and advisory services, such options valued at approximately
$5,000. This was the pro-rata share of total options to purchase 50,000 shares
issued to Mr. Leon Nowalsky, director, in December 2007 as compensation for
services to be rendered by him in connection with his appointment to the board.
Professional fee expenses arising from these and prior issuances of shares and
options for financial consulting and advisory services were approximately
$110,000 and $370,000 for the three months ended December 31, 2008 and 2007,
respectively. As a result of previously issued shares and options for financial
consulting and advisory services, the Company has approximately $216,000 in
deferred equity compensation expense at December 31, 2008, to be amortized over
the remaining periods of service of up to 22 months. The deferred equity
compensation expense is included in the balance sheet captions prepaid expenses
and other non-current assets.
The
Company recognized compensation expense (and a corresponding increase in
additional paid in capital) of approximately $179,000 and $360,000 for the three
months ended December 31, 2008 and 2007, respectively, in connection with
options issued to its employees to purchase its common shares. See Note 5
(employment contracts and severance) and Note 8.
During
the three months ended December 31, 2008, the Company issued 158,000 shares
valued at $69, 520 in connection with interest on the Notes – see Note
4.
During
the three months ended December 31, 2008, the Company issued 178,361 shares in
connection with the conversion of Series A-10 preferred as well as 243,251
shares in payment of dividends on Series A-10 and Series A-12 preferred, both
issuances discussed in more detail below.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
6: CAPITAL STOCK (Continued)
Preferred
Stock
As of
September 30, 2008, the only preferred stock outstanding was Series A-10
Convertible Preferred Stock (“Series A-10”). As of December 31, 2008, the only
preferred stock outstanding was Series A-12 Redeemable Convertible Preferred
Stock (“Series A-12”).
Series
A-10 Convertible Preferred Stock
The
Series A-10 had a coupon of 8% per annum, payable annually in cash (or
semi-annually at the Company’s option in cash or in additional shares of Series
A-10). The Company’s Board declared a dividend payable on November 15, 2008 to
Series A-10 shareholders of record as of November 10, 2008 of 2,994 Series A-10
preferred shares, in lieu of a $29,938 cash payment.
The
Series A-10 had a stated value of $10.00 per preferred share and had a
conversion rate of $1.00 per common share. The Series A-10 was not redeemable by
the Company and 17,835 shares of Series A-10 that were still outstanding as of
December 31, 2008 were automatically converted into 178,361 common
shares. The remaining 60,000 shares of Series A-10 that were still
outstanding as of December 31, 2008 were exchanged for Series A-12 preferred as
discussed below.
The
estimated fair value of warrants given in connection with the initial sale of
the Series A-10 (see Note 8), plus the Series A-10’s beneficial conversion
feature, was allocated to additional paid in capital and discount. The discount
was amortized as a dividend over the four-year term of the Series A-10, with the
final $20,292 amortized during the three months ended December 31,
2008.
Series
A-12 Redeemable Convertible Preferred Stock
Effective
December 31, 2008, the Company’s Board of Directors authorized the sale and
issuance of up to 100,000 shares of Series A-12 Redeemable Convertible Preferred
Stock (“Series A-12”). On January 7, 2009, the Company filed with the Florida
Secretary of State a Certificate of Designation, Preferences and Rights for the
Series A-12. The Series A-12 has a coupon of 8% per annum, a stated value of
$10.00 per preferred share and a conversion rate of $1.00 per common share.
Series A-12 dividends are cumulative and must be fully paid by the Company prior
to the payment of any dividend on its common shares. Dividends are payable in
advance, in the form of ONSM common shares. The holders of Series A-12 may
require redemption by the Company under certain circumstances, as outlined
below, but any shares of Series A-12 that are still outstanding as of December
31, 2009 will automatically convert into ONSM common shares. Series A-12 is
senior to all other preferred share classes that may be issued by the Company
except as explicitly required by applicable law, the holders of Series A-12
shall not be entitled to vote on any matters as to which holders of ONSM common
shares are entitled to vote. Holders of Series A-12 are not entitled to
registration rights.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
6: CAPITAL STOCK (Continued)
Preferred Stock
(continued)
Series
A-12 Convertible Preferred Stock (continued)
Effective
December 31, 2008, the Company sold two (2) investors an aggregate of 80,000
shares of Series A-12, with the purchase price paid via (i) the surrender of an
aggregate of 60,000 shares of Series A-10 held by those two investors and having
a stated value of $10.00 per A-10 share in exchange for an aggregate of 60,000
shares of Series A-12 plus (ii) the payment of additional cash aggregating
$200,000 for an aggregate of 20,000 shares of Series A-12 (“Additional Shares”).
$100,000 of this cash was received during December 31, 2008 and the remaining
$100,000 was received on January 2, 2009, which is included in inventories and
other current assets on the Company’s December 31, 2008 balance
sheet.
In
accordance with the terms of the Series A-12, dividends are payable in advance
in the form of ONSM common shares, using the average closing bid price of those
shares for the five trading days immediately preceding the Series A-12 purchase
closing date. Accordingly, the Company issued 235,294 common shares as payment
of $64,000 dividends for the one year period ending December 31, 2009, which was
allocated to additional paid in capital and discount on the Company’s December
31, 2008 balance sheet. The discount will be amortized as a dividend over the
one-year term of the Series A-12.
In
accordance with the terms of the Series A-12, after six months the holders may
require the Company, to the extent legally permitted, to redeem any or all
Series A-12 shares purchased as Additional Shares at the additional purchase
price of $10.00 per share. Shares of Series A-12 acquired in exchange
for shares of Series A-10 have no redemption rights. Accordingly, the
Company has reflected $184,000 of the Series A-12 as a current liability on its
December 31, 2008 balance sheet, which is the $200,000 redeemable portion of the
Series A-12, net of a pro-rata share of the total discount.
NOTE
7: SEGMENT INFORMATION
The
Company's operations are currently comprised of two groups, Digital Media
Services and Audio and Web Conferencing Services. The primary operating
activities of the DMSP, UGC and Smart Encoding divisions of the Digital Media
Services Group as well as the EDNet division of the Audio and Web Conferencing
Services Group are in San Francisco, California. The primary operating
activities of the Infinite division of the Audio and Web Conferencing Services
Group are in the New York City, New York area. The primary operating activities
of the Webcasting and Travel divisions of the Digital Media Services Group, as
well as the Company’s headquarters, are in Pompano Beach, Florida. All material
Company sales, as well as the location of the Company’s property and equipment,
are within the United States.
The above
structure reflects changes made by the Company during the fiscal year ending
September 30, 2008, as follows: the Webcasting and Travel divisions were
included in the already existing Digital Media Services Group, the Infinite
division and the EDNet division were combined in a newly created Audio and Web
Conferencing Group and the previously existing Web Communications Services
Group, which contained the Webcasting, Infinite and Travel divisions, was
discontinued. Detailed below are the results of operations by segment for the
three months ended December 31, 2008 and 2007, and total assets by segment as of
December 31, 2008 and September 30, 2008. All numbers reflect the current
corporate structure outlined above.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
7: SEGMENT INFORMATION (Continued)
|
|
|
For the three months ended
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
Digital
Media Services Group
|
|
$ |
2,040,471 |
|
|
$ |
1,991,548 |
|
|
Audio
and Web Conferencing Services Group
|
|
|
2,338,726 |
|
|
|
2,460,759 |
|
|
Total
consolidated revenue
|
|
$ |
4,379,197 |
|
|
$ |
4,452,307 |
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income:
|
|
|
|
|
|
|
|
|
|
Digital
Media Services Group
|
|
|
192,815 |
|
|
|
52,786 |
|
|
Audio
and Web Conferencing Services Group
|
|
|
733,407 |
|
|
|
992,842 |
|
|
Total
segment operating income
|
|
|
926,222 |
|
|
|
1,045,628 |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
( 1,093,376 |
) |
|
|
( 1,041,308 |
) |
|
Corporate
and unallocated shared expenses
|
|
|
( 1,370,141 |
) |
|
|
( 1,725,226 |
) |
|
Impairment
loss on goodwill and other intangible assets
|
|
|
( 5,500,000 |
) |
|
|
— |
|
|
Other
(expense) income, net
|
|
|
( 108,102 |
) |
|
|
12,356 |
|
|
Net
loss
|
|
$ |
( 7,145,397 |
) |
|
$ |
( 1,708,550 |
) |
|
|
|
December 31, 2008
|
|
|
September 30, 2008
|
|
|
Assets:
|
|
|
|
|
|
|
|
Digital
Media Services Group
|
|
$ |
8,231,816 |
|
|
$ |
13,215,981 |
|
|
Audio
and Web Conferencing Services Group
|
|
|
17,574,308 |
|
|
|
18,986,117 |
|
|
Corporate
and unallocated
|
|
|
1,669,813 |
|
|
|
1,642,450 |
|
|
Total
assets
|
|
$ |
27,475,937 |
|
|
$ |
33,844,548 |
|
Depreciation
and amortization, as well as impairment losses on goodwill and other intangible
assets, are not utilized by the Company’s primary decision makers for making
decisions with regard to resource allocation or performance
evaluation.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
8: STOCK OPTIONS AND WARRANTS
As of
December 31, 2008, the Company had issued and outstanding options and warrants
to purchase up to 15,594,625 ONSM common shares, including 8,553,000 Plan
Options; 2,416,582 Non-Plan Options to employees and directors; 1,841,558
Non-Plan Options to financial consultants; and 2,783,485 warrants issued in
connection with various financings and other transactions.
On
February 9, 1997, the Board of Directors and a majority of the Company's
shareholders adopted the 1996 Stock Option Plan (the "1996 Plan"), which,
including the effect of subsequent amendments to the Plan, authorized up to
4,500,000 shares available for issuance as options and up to another 2,000,000
shares available for stock grants. On September 18, 2007, the Company’s Board of
Directors and a majority of the Company's shareholders adopted the 2007 Equity
Incentive Plan (the “2007 Plan”), which authorized the issuance of up to
6,000,000 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
the Company may no longer issue additional options or stock grants under the
1996 Plan.
Detail of
Plan Option activity under the 1996 Plan and the 2007 Plan for the three months
ended December 31, 2008 is as follows:
|
|
|
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
|
8,103,000 |
|
|
$ |
1.31 |
|
|
Granted
during the period
|
|
|
500,000 |
|
|
$ |
1.00 |
|
|
Expired
or forfeited during the period
|
|
|
( 50,000 |
) |
|
$ |
1.57 |
|
|
Balance,
end of the period
|
|
|
8,553,000 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of the period
|
|
|
4,547,583 |
|
|
$ |
1.12 |
|
The
Company recorded total compensation expense of approximately $179,000 and
$360,000 for the three months ended December 31, 2008 and 2007, respectively,
related to Plan Options granted to employees and vesting during those periods.
The unvested portion of Plan Options outstanding as of December 31, 2008 (and
granted on or after the Company’s October 1, 2006 adoption of SFAS 123R)
represents approximately $3,745,000 of potential future compensation expense.
This $3,745,000 includes approximately $639,000 related to unvested performance
options granted to certain Company executives for which the performance
objectives were not met within the required time periods, although they could
vest under certain circumstances such as (i) change of control, (ii)
constructive termination or (iii) termination other than for cause. See Note
5.
The
Company’s 8,553,000 outstanding Plan Options all have exercise prices equal to
or greater than the fair market value at the date of grant, the exercisable
portion has a remaining life of approximately 2.2 years and are
further described below.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
|
|
|
|
|
Total
number of
options
outstanding
|
|
|
Vested
portion of
options
outstanding
|
|
|
|
|
date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
150,000 |
|
|
$ |
1.21 |
|
|
|
July
2005
|
|
Directors
and senior management
|
|
|
1,400,000 |
|
|
|
1,400,000 |
|
|
$ |
1.12 |
|
July
2010
|
|
July
2005
|
|
Employees
excluding senior management
|
|
|
884,000 |
|
|
|
884,000 |
|
|
$ |
1.12 |
|
July
2010
|
|
July
2006
|
|
Carl
Silva – new director
|
|
|
50,000 |
|
|
|
50,000 |
|
|
$ |
0.88 |
|
July
2010
|
|
Sept
2006
|
|
Directors
and senior management
|
|
|
650,000 |
|
|
|
650,000 |
|
|
$ |
0.71 |
|
Sept
2011
|
|
Sept
2006
|
|
Employees
excluding senior management
|
|
|
649,000 |
|
|
|
649,000 |
|
|
$ |
0.71 |
|
Sept
2011
|
|
February
2007
|
|
Auction
Video acquisition – see note 2
|
|
|
35,000 |
|
|
|
17,500 |
|
|
$ |
2.98 |
|
February
2009
|
|
March
2007
|
|
Employees
excluding senior management
|
|
|
25,000 |
|
|
|
25,000 |
|
|
$ |
2.28 |
|
March
2011
|
|
April
2007
|
|
Infinite
Merger – see note 2
|
|
|
150,000 |
|
|
|
100,000 |
|
|
$ |
2.50 |
|
April
2012
|
|
Sept
2007
|
|
Senior
management employment contracts – see note 5
|
|
|
3,100,000 |
|
|
|
568,750 |
|
|
$ |
1.73 |
|
Sept
2012 – Sept 2016
|
|
Dec
2007
|
|
Leon
Nowalsky – new director
|
|
|
50,000 |
|
|
|
50,000 |
|
|
$ |
1.00 |
|
Dec
2011
|
|
Dec
2007
|
|
Employees
excluding senior management
|
|
|
10,000 |
|
|
|
3,333 |
|
|
$ |
1.00 |
|
Dec
2011
|
|
April
2008
|
|
Employees
excluding senior management
|
|
|
25,000 |
|
|
None
|
|
|
$ |
1.00 |
|
April
2012
|
|
May
2008
|
|
Employees
excluding senior management
|
|
|
40,000 |
|
|
None
|
|
|
$ |
1.00 |
|
May
2012
|
|
May
2008
|
|
Narrowstep
– see note 9
|
|
|
400,000 |
|
|
None
|
|
|
$ |
1.00 |
|
May
2013-May 2017
|
|
August
2008
|
|
Employees
excluding senior management
|
|
|
435,000 |
|
|
None
|
|
|
$ |
1.00 |
|
August
2012
|
|
Dec
2008
|
|
Employees
excluding senior management
|
|
|
500,000 |
|
|
None
|
|
|
$ |
1.00 |
|
Dec
2012
|
|
|
|
Totals
as of December 31, 2008
|
|
|
8,553,000 |
|
|
|
4,547,583 |
|
|
|
|
|
|
As of
December 31, 2008, the Company had 2,416,582 outstanding Non Plan options issued
to employees and directors, which were issued during the year ended September
30, 2005. During that period, the Company issued immediately exercisable
five-year options to certain executives, directors and other management for the
purchase of 1,350,000 shares of ONSM common stock at $1.57 per share (fair
market value at date of grant); five-year options to certain executives,
fully-vested as of September 30, 2005, for the purchase of 800,000 shares of
ONSM common stock at $2.50 per share (greater than the $1.57 fair market value
at date of grant); and 281,390 immediately exercisable options at an exercise
price of $3.376 per share, issued in conjunction with the Onstream Merger and of
which 14,808 have expired as of December 31, 2008.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
December 31, 2008, the Company had 1,841,558 outstanding and fully vested Non
Plan options issued to financial consultants, as follows:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
$ |
1.73 |
|
|
|
|
|
|
100,000 |
|
|
$ |
1.83 |
|
|
Year
ended September 30, 2008
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000 |
|
|
$ |
1.00 |
|
|
|
|
|
|
40,000 |
|
|
$ |
1.50 |
|
|
|
|
|
|
490,000 |
|
|
$ |
2.46 |
|
|
|
|
|
|
21,184 |
|
|
$ |
2.48 |
|
|
Year
ended September 30, 2007
|
|
|
626,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
2005 – August 2006
|
|
|
295,000 |
|
|
$ |
1.00 |
|
|
|
|
|
|
85,750 |
|
|
$ |
1.05 |
|
|
Year
ended September 30, 2006
|
|
|
380,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,000 |
|
|
$ |
1.10 |
|
|
|
|
|
|
215,000 |
|
|
$ |
1.65 |
|
|
|
|
|
|
30,000 |
|
|
$ |
2.50 |
|
|
|
|
|
|
50,000 |
|
|
$ |
3.50 |
|
|
|
|
|
|
29,624 |
|
|
$ |
3.376 |
|
|
Year
ended September 30, 2005
|
|
|
549,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000 |
|
|
$ |
2.25 |
|
|
Year
ended September 30, 2004
|
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non Plan consultant options as of December 31, 2008
|
|
|
1,841,558 |
|
|
|
|
|
|
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
December 31, 2008, the Company had outstanding vested warrants, primarily issued
in connection with various financings, to purchase an aggregate of 2,783,485
shares of common stock, as follows:
Description of transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement
fees – common share offering – March and April 2007
|
|
|
342,222 |
|
|
$ |
2.70 |
|
|
8%
Subordinated Convertible Debentures – March and April
2006
|
|
|
403,650 |
|
|
$ |
1.50 |
|
|
Additional
8% Convertible Debentures -February and April
2005
|
|
|
391,416 |
|
|
$ |
1.65 |
|
|
8%
Convertible Debentures – December 2004
|
|
|
737,114 |
|
|
$ |
1.65 |
|
|
Series
A-10 Preferred – December 2004
|
|
|
909,083 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
warrants as of December 31, 2008
|
|
|
2,783,485 |
|
|
|
|
|
|
The
warrants issued in connection with the sale of 8% Subordinated Convertible
Debentures include a cashless exercise feature, which provides that, starting
one year after issuance, in the event the shares are not subject to an effective
registration statement at the time of exercise, the holder could elect a
“cashless exercise” whereby the Company would issue shares based on the excess
of the market price at the time of the exercise over the warrant exercise price.
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 4.999% of the Company’s issued and outstanding
common stock.
With
respect to the warrants issued in connection with the sale of 8% Convertible
Debentures and Additional 8% Convertible Debentures, the number of shares of
ONSM common stock that can be issued upon the exercise of these $1.65 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 9.999% of the Company’s issued and outstanding common
stock.
In
December 2004, in connection with the sale of Series A-10 Preferred, the Company
issued five-year warrants to purchase ONSM common stock at an exercise price of
$1.50 per share. 909,083 of these warrants remain outstanding as of December 31,
2008.
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.
See Note 5 related to certain registration payment arrangements and related
provisions contained in certain of the above warrants.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION
On May
29, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), a Delaware corporation
with most of its employees and facilities located in the United Kingdom.
Narrowstep is a provider of Internet TV services supporting content providers,
broadcasters, telecommunications companies and corporations worldwide. The
initial Narrowstep Merger Agreement was amended twice (on August 13, 2008 and on
September 15, 2008) and on September 23, 2008, the Company filed a combination
Proxy/Form S-4 for the transaction with the SEC. As a result of the SEC’s
comments, the Company filed an amended Proxy/Form S-4 on November 6, 2008. The
SEC has provided the Company with comments on this amended Proxy/Form S-4, which
Company management believes will not require a long period of time to address.
However, the Merger Agreement may be terminated under certain specified events,
including by either Onstream or Narrowstep if the Effective Time has not
occurred on or prior to November 30, 2008. Onstream and Narrowstep are currently
negotiating to extend this termination date, which negotiations may result in
changes to other terms of the transaction.
Pursuant
to the Merger Agreement, at the effectiveness of the Merger (the “Effective
Time”), each outstanding share of Narrowstep common stock, par value $0.000001
per share (“Narrowstep Common Stock”), including shares issued under restricted
stock awards, and other than shares held by stockholders who have perfected
their appraisal rights under Delaware law, cancelled shares and shares held by
any subsidiary of Narrowstep (collectively, the “Shares to be Converted”), will
be converted into (i) shares of Onstream common stock, par value $0.0001 per
share (“Onstream Common Stock”) based on an exchange ratio determined as
described below and (ii) one contingent value right (a “Contingent Value Right”)
having terms and conditions described below. Onstream Common Stock and
Contingent Value Rights issued for Narrowstep Common Stock issued pursuant to
certain restricted stock awards will be subject to any vesting conditions in
those awards.
The
aggregate number of shares of Onstream Common Stock issuable in the Acquisition
in exchange for the Shares to be Converted will be the greater of (i) the sum of
(A) two (2) times Annualized Narrowstep Revenue (as defined in the Merger
Agreement) and (B) one (1) times the amount of Narrowstep’s cash and cash
equivalents immediately prior to the Effective Time, including any proceeds in
escrow from Series A Preferred Stock as discussed below, and the sum of these
items not exceeding $600,000 and (ii) 8,100,000. The exchange ratio
will be the amount determined as described in the prior sentence divided by the
Shares to be Converted plus the number of Narrowstep shares held by stockholders
who have perfected their appraisal rights (the “Exchange Ratio”).
The final
Exchange Ratio will be determined based on Narrowstep’s consolidated revenues
for the quarter ended May 31, 2008 (after adjustments as defined in the Merger
Agreement) and may not be known prior to the Effective
Time. Accordingly, the Merger Agreement provides that the Shares to
be Converted will receive an aggregate of 8,100,000 shares of Onstream Common
Stock (the “Minimum Exchange Ratio”) upon consummation of the
Merger. In the event that the final Exchange Ratio exceeds the
Minimum Exchange Ratio, former holders of Shares to be Converted will receive
additional shares of Onstream Common Stock within 30 days after the final
determination of the Exchange Ratio. No assurance can be given that
the Exchange Ratio will exceed the Minimum Exchange Ratio.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
In the
Acquisition, outstanding shares of Narrowstep’s Series A Preferred Stock, par
value $0.000001 per share (the “Series A Preferred Stock”), will be converted
into an aggregate of 2,000,000 shares of Onstream Common Stock.
In
connection with the Acquisition, the Surviving Corporation will assume
Narrowstep’s obligations under its outstanding Warrants for the purchase of up
to 39,449,939 shares of Narrowstep Common Stock, which includes the 2007
Warrants discussed below. From and after the Acquisition, except as
summarized below, holders of warrants will have the right to exercise their
warrants for a number of shares of Onstream Common Stock and at exercise prices
appropriately adjusted to give effect to the greater of the Exchange Ratio or
the Minimum Exchange Ratio. Holders of warrants issued by Narrowstep
in August 2007 to acquire an aggregate of 22,726,400 shares of Narrowstep Common
Stock (the “2007 Warrants”) will have the right to exercise their 2007 Warrants
for cash only for an aggregate of 1,000,000 shares of Onstream Common Stock at
an exercise price of $3.50 per share. In the event that any of the
warrants are exercised prior to the Final Exercise Date (as defined in the CVR
Agreement referenced below), an exercising holder will also be entitled to
receive Contingent Value Rights in an amount equal to the number of Contingent
Value Rights such holder would have received had its warrants been exercised
immediately prior to the Effective Time. In connection with the
Merger Agreement, holders of a majority of the 2007 Warrants have entered into
an Amendment and Waiver Agreement with Narrowstep (the “Amendment and Waiver
Agreement”) pursuant to which such holders, on behalf of themselves and all
other holders of the 2007 Warrants, agreed to amend the terms of the 2007
Warrants as provided above and to waive certain antidilution and other
rights.
Narrowstep
has agreed that, for a period of at least fifteen (15) days prior to the
Effective Time, it shall provide each holder of an option (“Narrowstep Option”)
granted by it under the Narrowstep Inc. 2004 Stock Plan or otherwise with the
opportunity to exercise each such Narrowstep Option, regardless of whether such
Narrowstep Option is otherwise vested or exercisable. To the extent
that any such Narrowstep Option is not exercised prior to the Effective Time,
such Narrowstep Option shall be canceled and be of no further force and
effect. If any Narrowstep Options are exercised prior to the
Effective Time, any shares of Narrowstep Stock issued as a result thereof will
be included in the total number of Shares to be Converted.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
The
Contingent Value Rights will be issued pursuant to the terms of a Contingent
Value Rights Agreement to be entered into among Onstream, the CVR Representative
and the Rights Agent, in the form attached to the Merger Agreement (the “CVR
Agreement”). Pursuant to the terms and subject to the conditions set
forth in the CVR Agreement, the Contingent Value Rights will be converted into
shares of Onstream Common Stock in the event that the Narrowstep business
reaches certain revenue targets for the 18 month period starting 6 months after
the Acquisition; provided, however, that the maximum number of shares of
Onstream Common Stock issuable in the Acquisition, including those pursuant to
the Contingent Value Rights and the conversion of the Series A Preferred Stock,
will not exceed 20,000,000. The number of shares of Onstream Common
Stock issuable upon the conversion of each Contingent Value Right will depend on
a number of factors, including the Narrowstep business meeting the revenue
targets set forth in the CVR Agreement and the number of warrants, if any,
exercised prior to the final determination of the consideration, if any, to be
paid pursuant to the CVR Agreement. The conversion of Contingent
Value Rights into Onstream Common Stock will occur in two stages, shortly
following the final determination of whether the initial 12-month and subsequent
6-month revenue targets within the 18-month revenue measurement period have been
met. The Contingent Value Rights will not be transferable by the holders thereof
except by operation of law in limited circumstances.
The
Boards of Directors of both Onstream and Narrowstep have unanimously approved
the Merger Agreement and have recommended adoption of the Merger Agreement by
the respective stockholders. The Merger is intended to qualify as a tax-free
reorganization for Federal income tax purposes.
The
Merger Agreement contains customary representations and warranties of Narrowstep
and Onstream. The Merger Agreement also contains customary covenants,
including covenants regarding operation of the business of Narrowstep and its
subsidiaries prior to the closing of the Merger. In addition,
Narrowstep has agreed to use its commercially reasonable efforts to operate its
business in accordance with a restructuring plan (the “Plan”), attached as an
exhibit to the Merger Agreement, which is designed to significantly reduce or
eliminate substantial costs related to Narrowstep’s facility leases, selling,
general and administrative expenses, public company and headquarters costs, and
other professional fees and services.
The
Acquisition is subject to customary closing conditions, including obtaining the
approval of Narrowstep’s and Onstream’s stockholders. Each of
Narrowstep and Onstream has agreed, unless the Merger Agreement is terminated
earlier, to cause a stockholders meeting to be held, for the purpose of
considering approval of the Merger and the Merger Agreement, with respect to
Narrowstep’s stockholders and, among other things, for the purpose of
considering approval of the issuance of Onstream’s common stock as provided in
the Merger Agreement, with respect to Onstream’s stockholders. If the Merger
Agreement is terminated under certain circumstances specified in the Merger
Agreement, Narrowstep may be required to pay a termination fee of $377,000 to
Onstream. Both Narrowstep and Onstream have entered into voting
agreements (“Voting Agreements”) pursuant to which several significant
stockholders have agreed to vote their shares in favor of the adoption of the
Merger Agreement. Pursuant to the Voting Agreements, the holders of
approximately 35% of the Narrowstep Common Stock presently outstanding and
approximately 41% of the Onstream Common Stock presently outstanding have agreed
to vote their shares in favor of the adoption of the Merger
Agreement.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
In
connection with the original Merger Agreement, as well as its subsequent
amendment, Narrowstep entered into subscription agreements (the “Subscription
Agreements”) with three of Narrowstep’s major stockholders, as well as other
qualified investors. Under the Subscription Agreements, which contain
a consent to the Merger, the investors agreed to purchase immediately prior to
the Merger shares of a to-be-established Series A Preferred
Stock. Holders of the Series A Preferred Stock will be entitled to
such dividends, if any, as may be declared by the Company’s Board of Directors
out of funds legally available therefore (although no such dividends are
provided for in the Plan), will not have any voting rights (except to the extent
required by applicable law), will have no right to convert the Series A
Preferred Stock into Common Stock or any other Narrowstep security and will have
no right to force the redemption or repurchase of the Series A Preferred Stock
by Narrowstep.
The
following table sets forth the components of the estimated purchase price of
$5.1 million:
|
Number
of ONSM common shares issued to sellers
|
|
|
10,100,000 |
|
|
Number
of ONSM common shares issued as finders fee
|
|
|
200,000 |
|
|
Number
of ONSM common shares issued
|
|
|
10,300,000 |
|
|
ONSM
per common share closing price on September 15, 2008
|
|
$ |
0.42 |
|
|
Value
of ONSM common shares issued
|
|
$ |
4,326,000 |
|
|
Warrants
assumed – Black Scholes valuation
|
|
|
100,000 |
|
|
Estimated
cash transaction costs
|
|
|
700,000 |
|
|
Total
purchase price
|
|
$ |
5,126,000 |
|
The 10.1
million ONSM common shares indicated above as issued to the sellers represents
the minimum number issuable on the Effective Date. Although the Merger Agreement
provides that the number of ONSM common shares issued to the sellers on or
shortly after the Effective Date might be greater than 10.1 million depending
on, among other things, Narrowstep’s consolidated revenues for the quarter ended
May 31, 2008 (after adjustments as defined in the Merger Agreement), the
Company’s preliminary calculations indicate that these provisions will not
result in an issuance on or shortly after the Effective Date in excess of the
minimum number indicated above. In the event the Company is required to issue
shares above the minimum, it will be recorded as additional purchase price
included in goodwill and subject to periodic evaluation for
impairment.
EITF No.
99-12 indicates that securities given in a business combination should be
measured during a period only up to "a few days before and after” the
measurement date, which in this case September 15, 2008, the day before the
September 15, 2008 signing of the second amendment to the definitive merger
agreement was publicly announced on September 16, 2008. The ONSM market price
was $0.49 per share on September 10, 2008, $0.42 per share on September 15, 2008
and $0.37 per share on September 18, 2008. The Company believes that the prices
three business days before and three business days after were not materially
different from the price as of the date the second amendment to the definitive
merger agreement was publicly announced and so the value at that date is
acceptable for valuing the ONSM common shares issued in connection with the
Acquisition.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
EITF No.
99-12 indicates that if the purchase price (i.e., number of shares or other
consideration) is substantively changed after the initial acquisition agreement
is announced, that the measurement date would be changed to be the date that the
new terms were announced. On September 16, 2008, the Company publicly announced
the September 15, 2008 amendment of the Merger Agreement and related documents,
which amendment resulted in a 1.0 million share decrease in the minimum number
of ONSM shares to be issued to the holders of Narrowstep common shares and no
change in the number of ONSM shares to be issued to the holders of Narrowstep
preferred shares. The terms of this second amendment resulted in an
approximately 9% decrease in the total minimum number of ONSM shares to be
issued in the transaction, from 11.1 million to 10.1 million, which the Company
determined to be a substantive change. Therefore, based on the guidance provided
in EITF 99-12, a change in the measurement date, to the date the second
amendment was announced, was indicated.
The above
purchase price will be allocated by the Company to assets acquired and
liabilities assumed, based upon its determination of the fair value of those
assets and liabilities on the Effective Date. Based on information currently
available to it, the Company expects the fair value of the assets acquired, net
of assumed liabilities, will be approximately $2.9 million (including intangible
assets such as customer lists, tradenames, URLs (internet domain names) and
employment agreements) and goodwill will be approximately $2.2 million. These
estimates of fair value may change based upon completion of the Company’s final
valuation. In accordance with applicable accounting pronouncements, goodwill is
not amortized but 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 the
unamortized balances are still subject to review and adjustment for impairment.
In the event the Company is required to issue shares or pay cash under the CVR
Agreement, it will be recorded as additional purchase price included in goodwill
and subject to periodic evaluation for impairment as well.
The
shares of Narrowstep Common Stock being exchanged for a portion of the 10.1
million ONSM common shares to be issued in the Merger include restricted shares
subject to vesting conditions established at the time those restricted shares
were issued. Most of those restricted shares will vest as a result of
termination of the holder’s employment arising from a change in control, the
definition of which is satisfied by the Merger. The remaining restricted shares
will convert on the Effective Date to restricted ONSM common shares, which will
vest under the original conditions, primarily the holder’s continued service as
an employee for a certain period after the Effective Date. Since these
restricted ONSM common shares are considered immaterial to the transaction as a
whole, they are included as part of the Narrowstep purchase price.
In
connection with, and in anticipation of, the Acquisition, the Company entered
into an employment contract with an individual who was employed by Narrowstep as
a consultant upon the signing of the Definitive Agreement and will become an
employee (and the Managing Director) of Narrowstep on the Effective Date,
although the Company’s obligations under the contract are not contingent on the
closing of the merger. The terms of this contract include:
a) Base
fees/salary of $20,000 per month (pro-rated for initial part-time
service),
b) A
recoverable draw of $2,000 per month for the first six months, to be deducted
from future paid commissions if applicable,
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
c)
Commissions of 1% on Narrowstep’s sales that are 25% above annualized existing
revenue and 2% on sales that are 50% above annualized existing
revenue,
d)
Four-year vested options for the purchase of 15,000 common ONSM shares for every
one million dollars that Narrowstep’s sales are above 125% annualized existing
revenue, applicable for the first two years of service,
e)
Four-year term (from vesting) option grants for the purchase of 400,000 common
ONSM shares, vesting over four years at 100,000 per year, and
f)
Reimbursement of travel and moving expenses up to $16,000.
All
options are exercisable at the fair market value at the date of grant, but no
less than $1.00 per share. The employment contract contains non-compete
provisions and is for a minimum term of one year from the June 1, 2008 signing
of the employment agreement and provides for 6 months severance in the event of
termination without cause after that one year period. The Company has estimated
the total compensation expense under the above arrangement to be approximately
$302,000 for the initial year, which includes expected salary, expense
reimbursement and minimum commission payments, as well as the fair value of the
400,000 guaranteed options, the latter calculated in accordance with the
provisions of SFAS No. 123R, “Share-Based Payments”, using the Black-Scholes
model with the following assumptions: expected volatility of 79-90%, risk-free
interest rate of 4.5%, expected dividends of $0 and expected term of 6.5 years,
the average term of the related options. This total compensation expense
excludes commissions and options that are contingent on increased
sales.
The Board
of Directors of Narrowstep selected W. Austin Lewis IV to act as the Stockholder
Representative under the merger agreement and as the Contingent Value Rights
Representative under the contingent value rights agreement. Pursuant
to the terms of the merger agreement and the contingent value rights agreement,
Mr. Lewis is required to perform certain duties on behalf of the former
stockholders of Narrowstep, including confirming or disputing the Company’s
calculation of the exchange ratio under the merger agreement and the amount of
consideration, if any, payable under the contingent value rights
agreement. Mr. Lewis is the principal owner of Lewis Asset Management
Corp., Lewis Opportunity Fund and LAM Opportunity Fund, and as such the
beneficial owner of approximately 5,694,799 shares of the Company’s common
stock. In addition, pursuant to the merger agreement, Lewis Asset
Management Corp., Lewis Opportunity Fund and/or LAM Opportunity Fund will
receive in aggregate approximately 1,767,387 additional shares of the Company’s
common stock and 11,506,667 contingent value rights in exchange for the shares
of Narrowstep common and preferred stock beneficially owned by them or expected
to be owned by them on the effective date of the merger.
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9:
NARROWSTEP ACQUISITION (Continued)
In
addition, Lewis Opportunity Fund and LAM Opportunity Fund hold in aggregate
warrants to purchase 26,250 shares of the Company’s common stock at $1.50 per
share and warrants to purchase 2,770,000 shares of Narrowstep common stock, the
latter which will be assumed by the Company upon the merger and converted into
warrants to purchase 132,383 shares of our common stock at prices from $3.50 to
$10.34 per share, with a weighted average price of $5.75 per share and which
will also result in the issuance of up to 2,770,000 contingent value rights in
the event the warrants are exercised within 25 months after the effective date
of the merger. Further, Mr. Lewis executed voting agreements with respect to his
beneficially owned common shares in both Onstream and Narrowstep. Because of his
ownership interest in Onstream, Mr. Lewis may be presented with circumstances
where his duties under the merger agreement and the contingent value rights
agreement conflict with his financial interest in Onstream. Pursuant
to the terms of the merger agreement and the contingent value rights agreement,
the former Narrowstep stockholders do not have the right to remove Mr. Lewis as
the Stockholder Representative and may only remove Mr. Lewis as the Contingent
Value Rights Representative by action of the holders of a majority of the
contingent value rights. Mr. Lewis is not required to recuse himself
from any situation where a conflict of interest may exist and will not be liable
to the former Narrowstep stockholders for any act or omission as Stockholder
Representative or Contingent Value Rights Representative except to the extent
such act or omission has been held by a court of competent jurisdiction to
constitute willful misconduct or gross negligence.
NOTE 10:
SUBSEQUENT EVENTS
During
the period from January 1, 2009 through February 6, 2009, the Company recorded
the issuance of 241,273 unregistered shares of common stock for financial
consulting and advisory services. The services were provided over a period of
three to six months, and will result in a professional fees expense of
approximately $55,000 over the service period. None of these shares were issued
to Company directors or officers.
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 this
quarterly report on Form 10-Q.
Overview
We are a
leading online service provider of live and on-demand Internet video, corporate
web communications and content management applications. We had
approximately 110 full time employees as of February 6, 2009, with operations
organized in two main operating groups:
|
|
·
|
Digital
Media Services Group
|
|
|
·
|
Web
and Audio Conferencing Services
Group
|
Our
Digital Media Services Group consists of our Webcasting division, our DMSP
(“Digital Media Services Platform”) division, our UGC (“User Generated Content”)
division, our Smart Encoding division and our Travel division.
Our
Webcasting division, which operates primarily from facilities in Pompano Beach,
Florida, provides an array of corporate-oriented, web-based media services to
the corporate market including live audio and video webcasting and on-demand
audio and video streaming for any business, government or educational entity.
Our DMSP division, which operates primarily from facilities in San Francisco,
California 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 facilities in 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 facilities in San Francisco, California provides both
automated and manual encoding and editorial services for processing digital
media, using a set of coordinated technologies and processes that allow the
quick and efficient online search, retrieval and streaming of this media, which
can include photos, videos, audio, engineering specs, architectural plans, web
pages, and many other pieces of business collateral. Our Travel
division, which operates primarily from facilities in Pompano Beach, Florida,
produces and distributes Internet-based multi-media streaming videos related to
hotels, resorts, time-shares, golf facilities, and other travel
destinations.
Our Web
and Audio Conferencing Services Group includes a) our Infinite Conferencing
(“Infinite”) division, which operates primarily from facilities in the New York
City area and provides “reservationless” and operator-assisted audio and web
conferencing services and b) our EDNet division, which operates primarily from
facilities in San Francisco, California and provides connectivity 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.
Fiscal
2009 Year to Date Highlights
We are
currently party to a line of credit arrangement with a financial institution
under which we can borrow up to an aggregate of $1.6 million for working
capital, collateralized by our accounts receivable. We had received $1.2 million
funding under this arrangement as of September 30, 2008 and we borrowed the
remaining $400,000 available under this line during the three months ended
December 31, 2008. The outstanding balance, reduced to $1,519,000 after
principal repayments in February 2009, bears interest at prime plus 11% per
annum, payable monthly in arrears.
Effective
December 31, 2008, our Board of Directors authorized the sale and issuance of up
to 100,000 shares of Series A-12 Redeemable Convertible Preferred Stock (“Series
A-12”) and we sold two (2) investors an aggregate of 80,000 shares of Series
A-12, with the purchase price paid via (i) the surrender of an aggregate of
60,000 shares of Series A-10 held by those two investors in exchange for an
aggregate of 60,000 shares of Series A-12 plus (ii) the payment of additional
cash aggregating $200,000 for an aggregate of 20,000 shares of Series A-12
(“Additional Shares”). In accordance with the terms of the Series A-12, we
issued 235,294 common shares as payment of $64,000 dividends for the one year
period ending December 31, 2009. In accordance with the terms of the Series
A-12, after six months the holders may require us, to the extent legally
permitted, to redeem any or all Series A-12 shares purchased as Additional
Shares at the additional purchase price of $10.00 per share. Shares
of Series A-12 acquired in exchange for shares of Series A-10 have no redemption
rights. Any shares of Series A-12 that are still outstanding as of December 31,
2009 will automatically convert into ONSM common shares.
On May
29, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), a Delaware corporation
with most of its employees and facilities located in the United Kingdom.
Narrowstep is a provider of Internet TV services supporting content providers,
broadcasters, telecommunications companies and corporations worldwide. The
initial Narrowstep Merger Agreement was amended twice (on August 13, 2008 and on
September 15, 2008) and on September 23, 2008, we filed a combination Proxy/Form
S-4 for the transaction with the SEC. As a result of the SEC’s comments, we
filed an amended Proxy/Form S-4 on November 6, 2008. The SEC has provided us
with comments on this amended Proxy/Form S-4, which we believe will not require
a long period of time for us to address. However, the Merger
Agreement may be terminated under certain specified events, including by either
Onstream or Narrowstep if the Effective Time has not occurred on or prior to
November 30, 2008. Onstream and Narrowstep are currently negotiating to extend
this termination date, which negotiations may result in changes to other terms
of the transaction.
See
Liquidity and Capital Resources.
Revenue
Recognition
Revenues
from recurring service are recognized when (i) persuasive evidence of an
arrangement exists between us and the customer, (ii) the good or service has
been provided to the customer, (iii) the price to the customer is fixed or
determinable and (iv) collectibility of the sales prices 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.
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.
The
Webcasting division charges for live and on-demand webcasting at the time an
event is accessible for streaming over the Internet. The Travel division
recognizes production revenue at the time of completion of the related video or
website. Travel distribution revenue is recognized when a user watches a video
on the Internet, if charged on a per hit basis, or over the term of the
contract, if charged as a fixed monthly fee.
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 Travel division revenues, 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, 2008 was
approximately $7.1 million ($0.17 loss per share) as compared to a loss of
approximately $1.7 million ($0.04 loss per share) for the corresponding period
of the prior fiscal year, an increase in our loss of approximately $5.4 million
(318%). The increased net loss was primarily due to a $5.5 million charge for
impairment of goodwill and other intangible assets in the current fiscal year
quarter (arising from the difference between our market capitalization, as
adjusted, and our net book value — i.e.,
stockholders’ equity as reflected in our financial statements) versus no
comparable amount in the corresponding prior fiscal year quarter.
In
addition to the above, our consolidated results of operations for the three
months ended December 31, 2008 as well as for the three months ended December
31, 2007 include a full three months of operating results for Auction Video and
Infinite Conferencing. The acquisitions of those entities were completed by us
on March 27, 2007 and April 27, 2007, respectively.
The
following table shows, for the periods presented, the percentage of revenue
represented by items on our consolidated statements of operations.
|
|
|
Three Months Ended
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMSP
and hosting
|
|
|
9.1 |
% |
|
|
6.1 |
% |
|
Webcasting
|
|
|
35.7 |
|
|
|
35.9 |
|
|
Audio
and web conferencing
|
|
|
40.1 |
|
|
|
40.0 |
|
|
Network
usage
|
|
|
12.4 |
|
|
|
14.1 |
|
|
Other
|
|
|
2.7 |
|
|
|
3.9 |
|
|
Total
revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMSP
and hosting
|
|
|
3.5 |
% |
|
|
2.4 |
% |
|
Webcasting
|
|
|
10.5 |
|
|
|
10.7 |
|
|
Audio
and web conferencing
|
|
|
9.8 |
|
|
|
7.7 |
|
|
Network
usage
|
|
|
5.4 |
|
|
|
5.5 |
|
|
Other
|
|
|
3.1 |
|
|
|
3.7 |
|
|
Total
costs of revenue
|
|
|
32.3 |
% |
|
|
30.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
67.7 |
% |
|
|
70.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
54.9 |
% |
|
|
54.3 |
% |
|
Professional
fees
|
|
|
9.1 |
|
|
|
16.0 |
|
|
Other
general and administrative
|
|
|
13.8 |
|
|
|
15.0 |
|
|
Impairment
loss on goodwill and other intangible assets
|
|
|
125.6 |
|
|
|
- |
|
|
Depreciation
and amortization
|
|
|
25.0 |
|
|
|
23.4 |
|
|
Total
operating expenses
|
|
|
228.4 |
% |
|
|
108.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(160.7 |
)% |
|
|
(38.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
- |
% |
|
|
- |
% |
|
Interest
expense
|
|
|
(3.2 |
) |
|
|
(0.1 |
) |
|
Other
income, net
|
|
|
0.7 |
|
|
|
0.4 |
|
|
Total
other income (expense), net
|
|
|
(2.5 |
)% |
|
|
(0.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(163.2 |
)% |
|
|
(38.4 |
)% |
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.
|
|
|
Three months ended
December 31,
|
|
|
Increase (Decrease)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
4,379,197 |
|
|
$ |
4,452,307 |
|
|
$ |
(73,110 |
) |
|
|
(1.6 |
)% |
|
Total
costs of revenue
|
|
|
1,412,877 |
|
|
|
1,333,537 |
|
|
|
79,340 |
|
|
|
5.9 |
% |
|
Gross
margin
|
|
|
2,966,320 |
|
|
|
3,118,770 |
|
|
|
(152,450 |
) |
|
|
(4.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
3,410,239 |
|
|
|
3,798,368 |
|
|
|
(388,129 |
) |
|
|
(10.2 |
)% |
|
Impairment
loss on goodwill and other intangible assets
|
|
|
5,500,000 |
|
|
|
— |
|
|
|
5,500,000 |
|
|
|
— |
|
|
Depreciation
and amortization
|
|
|
1,093,376 |
|
|
|
1,041,308 |
|
|
|
52,068 |
|
|
|
5.0 |
% |
|
Total
operating expenses
|
|
|
10,003,615 |
|
|
|
4,839,676 |
|
|
|
5,163,939 |
|
|
|
106.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(7,037,295 |
) |
|
|
(1,720,906 |
) |
|
|
5,316,389 |
|
|
|
308.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
(108,102 |
) |
|
|
12,356 |
|
|
|
(120,458 |
) |
|
|
(974.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,145,397 |
) |
|
$ |
(1,708,550 |
) |
|
$ |
5,436,847 |
|
|
|
318.2 |
% |
Revenues
and Gross Margin
Consolidated
operating revenue was approximately $4.4 million for the three months ended
December 31, 2008, a decrease of approximately $0.1 million (2%) from the
corresponding period of the prior fiscal year, primarily due to decreased
revenues of the Audio and Web Conferencing Services Group, partially offset by
increased revenues of the Digital Media Services Group.
Audio and
Web Conferencing Services Group revenues were approximately $2.3 million for the
three months ended December 31, 2008, a decrease of approximately $0.1 million
(5%) from the corresponding period of the prior fiscal year. This decrease
primarily was a result of decreased network usage service fees from the EDNet
division, which we believe resulted from higher than normal production activity
by our customers in the comparable prior year quarter in an attempt to mitigate
the impact of the threatened Hollywood actor’s strike, which strike did
ultimately occur in the last part of that December 2007 quarter and extended
into the March 2008 quarter.
In August
2008, we announced that our Infinite division signed a reseller agreement with
Copper Conferencing, one of the nation’s leading, carrier-class conferencing
services providers for small and medium-sized businesses. Under the new
agreement, Infinite will provide Copper Conferencing with its audio and web
conferencing services, as well as customized applications. In October 2008, we
announced the hiring of Mr. Scott Lee, an experienced executive in sales and
other strategic areas, as Vice President, Business Development for Infinite.
Based on the Copper Conferencing relationship and our expectations that under
Mr. Lee’s direction, the Infinite sales force will focus on entering into
agreements with similar organizations to provide Infinite’s audio and web
conferencing services, we expect the fiscal 2009 revenues of the Audio and Web
Conferencing Services Group (for the year as a whole) to exceed the
corresponding fiscal 2008 amounts, although such increase cannot be
assured.
Digital
Media Services Group revenues were approximately $2.0 million for the three
months ended December 31, 2008, which represented an increase of 2.5% over the
corresponding period of the prior fiscal year. This increase was due to an
approximately $125,000 (46%) increase in DMSP and hosting division revenues over
the corresponding period of the prior fiscal year, partially offset by decreased
Webcasting division revenues. This increased DMSP and hosting division revenues
were comprised of (i) an approximately $63,000 increase in hosting and bandwidth
charges to certain larger DMSP customers serviced by our Smart Encoding division
and (ii) an approximately $107,000 increase in DMSP “Store and Stream”
revenues.
Although
we continued to see increasing revenues generated via a single reseller of our
financial webcasts, as noted in prior quarters, the increase in revenues from
this customer for the first quarter of fiscal 2009 over the first quarter of
fiscal 2008 was only approximately $34,000, as compared to an approximately
$510,000 increase from this customer for fiscal 2008 as compared to fiscal
2007.
The
number of webcasts produced increased to approximately 1,900 webcasts for the
three months ended December 31, 2008, versus approximately 1,550 webcasts for
the corresponding period of the prior fiscal year. However, since most of the
350 event increase was attributable to audio events with a lower per-event cost
than video events, the average revenue per webcast event decreased to
approximately $817 for the current fiscal year period as compared to
approximately $998 for the prior fiscal year period.
The
number of webcasts reported above, 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 prior period numbers presented herein have been calculated on the
same basis.
We have
made the following announcements with respect to our government related sales
activity:
|
|
·
|
In
April 2007 we announced our selection as a member of the Qwest
Communications International team that was awarded a stake in Networx
Universal, the largest communications services contract in the world.
Qwest and its team members will participate in the U.S. government program
to provide leading-edge voice, data and video services, including managed
and secure advanced data networks, to federal agencies nationwide. Our
role as part of the Qwest team will be providing comprehensive video and
audio encoding services and webcasting for live and archived distribution
of content via a wide range of digital delivery networks. Although we have
not yet recognized revenue related to Qwest, we have responded to several
related requests for proposals from government agencies, ranging in size
from $250,000 per year to several million dollars, although there is no
assurance that these contracts will be ultimately awarded to
us.
|
|
|
·
|
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. We recognized related revenues of approximately
$140,000 for the year ended September 30, 2008 and $25,000 for the three
months ended December 31,
2008.
|
|
|
·
|
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), for an allocated total of $1.5 million in contract awards. We
are servicing these contracts in cooperation with Akamai, as one of their
resellers. We recognized related revenues of approximately $103,000 for
the year ended September 30, 2008 and $60,000 for the three months ended
December 31, 2008.
|
We have
recently completed several feature enhancements to our proprietary webcasting
platform, including embedded Flash video and animations as well as a webinar
service providing the means to hold a virtual seminar online in real time and
both audio and video editing capabilities. Additional upgrades expected include
storage and search of webcasts in the DMSP by March 2009.
We
recently announced an upgrade to our webcasting service, featuring broadcast
quality video using the industry standard 16:9 aspect ratio, which we named
Visual Webcaster HD™. The new upgrade includes the ability to use high
definition cameras and other HD sources input via SDI (Serial Digital Interface)
into our encoders, providing a broadcast-quality experience. In addition, we
have recently launched iEncode™, a full-featured, turnkey, standalone webcasting
solution, designed to operate inside a corporate LAN environment with multicast
capabilities. Initial releases of both Visual Webcaster HD and iEncode are
available and they will be fully compatible with the DMSP for archiving,
intelligent indexing and retrieval, after an upgrade scheduled for March 2009 or
before.
As of
December 31, 2008, we had approximately 278 monthly recurring subscribers to the
“Store and Stream” application of the DMSP, which was developed as a focused
interface for small to medium business (SMB) clients, as compared to 135
subscribers as of December 31, 2007. We expect this DMSP customer base to
continue to grow, especially as a result of our February 2009 launch of
“Streaming Publisher”, an additional version of the DMSP platform. Streaming
Publisher is designed to provide enhanced capabilities for advanced users such
as publishers, media companies and other content developers. The new Streaming
Publisher upgrade to the DMSP directly addresses the developing online video
advertising market and includes features such as automated transcoding (the
ability to convert media files into multiple file formats), player gallery (the
ability to create various video players and detailed usage reports), as well as
advanced permissions, security and syndication features. Users of the basic
Store and Stream version of the DMSP may easily upgrade to the Streaming
Publisher version for a higher monthly fee.
In
addition to the development of these additional features and products, we have
made progress on our development of an enhanced video search function, which is
now referred to as Video Search Engine Optimization (VSEO). VSEO is based on the
software and hardware infrastructure purchased primarily from Autonomy/Virage
plus the allocation of internal resources from our programming and development
professionals. VSEO is expected to be released during calendar
2009.
In
addition to the “Store and Stream” and “Streaming Publisher” applications of the
DMSP, we are working 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, such as found on
YouTube, MySpace and other similar platforms.
One of
the key components of our March 2007 acquisition of Auction Video was the video
ingestion and flash transcoder, already integrated 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 is being 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 is 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. In August 2008 and February 2009, the U.S. Patent Office issued
non-final rejections of the claims pending in the first of the two applications.
We believe that our claims have merit and accordingly have filed a formal appeal
to the latest non-final rejection. Regardless of this, our management has
determined that an unsuccessful appeal or a final rejection of these claims
would not have a material adverse effect on our financial position or results of
operations. The U.S. Patent Office has taken no formal action with regard to the
second of the two applications. As a result of this technology, plus other
enhancements to the DMSP as noted above and our increased sales and marketing
focus on opportunities with social networks and other high-volume users of
digital rich media, as well as a result of sales of the recently launched
Streaming Publisher version of the DMSP we expect the fiscal 2009 DMSP and
hosting revenues (for the year as a whole) to exceed the corresponding fiscal
2008 amounts, although such increase cannot be assured.
In
October 2008, we announced the hiring of Mr. Daniel Debaun, an experienced
executive in sales and other strategic areas, as Vice President, Business
Development for the iEncode product. In February 2009, as ongoing iEncode sales
began, Mr. DeBaun’s role was redefined for him to be a focused commissioned
agent for the iEncode product, and we expect sales from that product to increase
in fiscal 2009. We also expect increased webcasting and other
revenues as a result of increased government contract activity, including the
items noted above. Therefore, due to these anticipated increases in both DMSP
and hosting revenues, as well as webcasting revenues, we expect the fiscal 2009
revenues of the Digital Media Services Group (for the year as a whole) to exceed
the corresponding fiscal 2008 amounts, although such increase cannot be
assured.
The
proposed acquisition of Narrowstep, if consummated as anticipated by April 2009,
will also increase the fiscal 2009 revenues of the Digital Media Services Group,
as compared to corresponding fiscal 2008 amounts. Narrowstep is a provider of
Internet TV services supporting content providers, broadcasters,
telecommunications companies and corporations worldwide.
Consolidated
gross margin was approximately $3.0 million for the three months ended December
31, 2008, a decrease of approximately $152,000 (5%) from the corresponding
period of the prior fiscal year. This decrease was primarily due to
approximately $186,000 less gross margin from the Audio and Web Conferencing
Services Group corresponding to the $122,000 decrease in Audio and Web
Conferencing Services Group revenues as discussed above, as well as decreased
gross margin percentage on those revenues from 75.3% to 70.8%. A primary reason
for this decrease was the October 2008 implementation at our Infinite division
of an order by the Federal Communications Commission that required conference
calling companies to charge and remit Universal Service Fund (USF) contribution
payments on customer usage associated with conference calls, which had an
adverse impact on our previous pricing structure.
The
consolidated gross margin percentage was 67.7% for the three months ended
December 31, 2008, versus 70.0% for the corresponding period of the prior fiscal
year.
Based on
our expectations of increased sales as discussed above, we expect consolidated
gross margin (in dollars) for fiscal year 2009 (for the year as a whole) to
exceed the prior fiscal year amounts, although such increase cannot be
assured.
Operating
Expenses
Consolidated
operating expenses were approximately $10.0 million for the three months ended
December 31, 2008, an increase of approximately $5.2 million (107%) over the
prior fiscal year, primarily due to a charge for goodwill impairment in the
current fiscal year quarter versus no comparable amount in the corresponding
prior fiscal year quarter, partially offset by a decline in professional fees
expense in the current fiscal year quarter as compared to that amount in the
corresponding prior fiscal year quarter.
SFAS 142,
Goodwill and Other Intangible Assets, 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. 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 Acquired Onstream as of December 31, 2008, including an
assessment of 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. Although, based on these factors, the first
step of the two step testing process of Acquired Onstream’s net assets (which
include the DMSP) indicated that the fair value of those intangible assets
exceeded their recorded carrying value as of December 31, 2008, it was noted
that as a result of recent substantial volatility in the capital
markets, our stock price and market value had decreased significantly and as of
December 31, 2008, our market capitalization, after appropriate adjustments for
control premium and other considerations, was determined to be less than
Onstream’s net book value (i.e., stockholders’ equity as reflected in our
financial statements). Based on this condition, and in accordance with the
provisions of SFAS 142, we recorded a non-cash expense, for the impairment of
its goodwill and other intangible assets, of $5.5 million for the three months
ended December 31, 2008. Furthermore, since the most recent impairment review
was completed, our stock price and market value have continued to decline, which
may result in future non-cash impairment charges to our results of operations
related to our goodwill and other intangible assets.
Professional
fee expense for the three months ended December 31, 2008 was approximately
$312,000 (44%) less than the corresponding period of the prior fiscal year. This
decrease is primarily due to lower non-cash expenses related to equity-based
compensation (shares and options) paid for financial and other consulting
services.
Although,
as a result of increased revenues and gross margin, we expect our consolidated
operating expenses for fiscal year 2009 to exceed the corresponding prior year
amounts, we expect that percentage increase (for the year as a whole and
excluding the impact of current and potential future goodwill impairment
charges) to be less than the percentage increase in the gross margin dollars for
fiscal year 2009, although this cannot be assured.
Other
(Expense) Income
Other
expense of approximately $108,000 for the three months ended December 31, 2008
represented additional expense of $120,000 as compared to other income of
approximately $12,000 for the three months ended December 31, 2007. This
additional expense was primarily related to an increase in interest expense of
approximately $133,000, arising from a much higher level of interest bearing
debt as of December 31, 2008 as compared to December 31, 2007. As of December
31, 2008, we had outstanding interest bearing debt with a total face amount of
approximately $3.1 million, which was primarily comprised of (i) $1.6 million in
borrowings outstanding for working capital under a line of credit arrangement
with a financial institution, collateralized by our accounts receivable and
bearing interest at prime plus 8% (prime plus 11% from December 2, 2008), (ii)
convertible debentures for financing software and equipment purchases with a
balance of $1.0 million at December 31, 2008 and incurring interest expense at
12% per annum and (iii) notes payable to former shareholders of Infinite
Conferencing, with a balance of $308,399 at December 31, 2008 and incurring
interest expense at 12% per annum. In addition to these interest amounts, we are
also recognizing interest expense as a result of amortizing discount on these
debts. As compared to the approximately $3.1 million as of December 31, 2008,
our interest bearing debt totaled approximately $900,000 as of December 31,
2007. We also anticipate our interest expense during fiscal 2009 to
be greater than the corresponding prior year amounts.
Liquidity
and Capital Resources
Our
financial statements for the three months ended December 31, 2008 reflect a net
loss of approximately $7.1 million, although cash provided by operations for
that period was approximately $9,000. Although we had cash of approximately
$615,000 at December 31, 2008, working capital was a deficit of approximately
$1.9 million at that date.
During
the three months ended December 31, 2008, we obtained financing from two primary
sources – a) a line of credit arrangement (the “Line”) collateralized by our
accounts receivable, under which we have borrowed a total of $1.6 million as of
December 31, 2008 ($400,000 during the three months then ended) and b) $200,000
in gross cash proceeds from our sale of Series A-12 preferred in December
2008.
The
maximum allowable borrowing amount under the Line is now $1.6 million, subject
to certain formulas with respect to the amount and aging of the underlying
receivables. The outstanding balance bears interest at prime plus 11%, payable
monthly in arrears. The outstanding principal under the Line may be repaid at
any time, but no later than December 2009, which term may be extended by the
Company for an extra year, subject to compliance with all loan terms, including
no material adverse change. The Company has not been in compliance with certain
loan covenants through December 31, 2008, and certain other loan terms during
January and February 2009 (which have since been cured) although the lender has
granted waivers through those dates.
In
accordance with the terms of the Series A-12, at any time after June 30, 2009
until it automatically converts to ONSM common shares on December 31, 2009, the
holders may require us, to the extent legally permitted, to redeem up to
$200,000 of the Series A-12 shares currently outstanding. We prepaid the
dividends on all shares of Series A-12 currently outstanding ($800,000 stated
value) through the December 31, 2009 conversion date via the December
2008 issuance of 235,294 shares of our common stock.
In
accordance with the terms of our acquisition of Infinite Conferencing, we agreed
that in the event the accumulated gross proceeds of the sale of certain shares
issued in connection with that acquisition were less than a contractually
defined amount, we would pay the difference. On March 12, 2008, we executed
promissory notes (the “Infinite Notes”) in satisfaction of that obligation,
which had a remaining principal balance due of $308,399 plus accrued interest at
12% per annum as of December 31, 2008. Additional payments of $50,000 (fifty
thousand dollars) are due on the 10th of the following six months plus a final
payment of $8,399 plus accrued interest of approximately $77,000 is due on July
10, 2009. The Infinite Notes are collateralized by all of our assets other than
accounts receivable and are subordinated to the first $4.0 million of our debt
outstanding from time to time.
We are
currently obligated under convertible Notes with a face value of $1.0 million
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 The next interest payment date is April 30, 2009
and the principal is not due before June 2011. The Notes may be converted to
restricted ONSM common shares at any time prior to their maturity date, at the
Lender’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 $0.80
per share. In the event the Notes are converted prior to maturity, interest on
the 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
also obligated under 2 capital leases: (i) a capital lease for software payable
in equal monthly payments of $3,366 through May 2009, which includes interest at
approximately 7% per annum, plus $91,855 of past due payments related to this
lease and (ii) a capital lease for audio conferencing equipment payable in equal
monthly payments of $10,172 through August 2010, which includes interest at
approximately 5% per annum, plus an optional final payment based on fair value,
but not to exceed $16,974.
We
believe that we could obtain additional financing based on approximately
$650,000 collateralized by software and equipment purchased and paid for by us
during the past year, which is not included in the $1.5 million of software and
equipment identified as collateral for the currently outstanding convertible
debentures. Although we have made no arrangements for this financing and cannot
assure that we would be able to ultimately obtain it and if we did obtain it, on
what terms, we believe that this is a potentially viable alternative to obtain
sufficient capital resources to fund our continued operations.
On May
29, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), a Delaware corporation
with most of its employees and facilities located in the United Kingdom.
Narrowstep is a provider of Internet TV services supporting content providers,
broadcasters, telecommunications companies and corporations worldwide. The
merger is not expected to be consummated until at least April 2009. Furthermore,
the Merger Agreement may be terminated under certain specified events, including
by either Onstream or Narrowstep if the Effective Time has not occurred on or
prior to November 30, 2008. Onstream and Narrowstep are currently negotiating to
extend this termination date, which negotiations may result in changes to other
terms of the transaction.
The
current terms of the Merger Agreement call for a minimum issuance of 10.1
million ONSM common shares, as well as the assumption of certain Narrowstep
warrants. In addition, we could be required to issue up to an additional 9.9
million ONSM common shares, subject to the achievement of certain revenues from
the Narrowstep business during the eighteen-month period beginning six months
after the consummation of the merger.
Prior to
the consummation of the merger, we expect to incur incremental
acquisition-related costs of approximately $506,000 payable in cash, of which
approximately $462,000 had been included in other non-current assets on our
balance sheet as of December 31, 2008, including approximately $268,000 paid as
of that date. Additional cash closing costs of approximately $194,000 will be
incurred once the merger is consummated. If the Merger Agreement is
terminated under certain circumstances specified in the Merger Agreement,
Narrowstep may be required to pay us a termination fee of $377,000.
In
connection with, and in anticipation of, the acquisition, we entered into an
employment contract with an individual who was employed by Narrowstep as a
consultant upon the signing of the Definitive Agreement and will become an
employee (and the Managing Director) of Narrowstep on the Effective Date,
although our obligations under the contract are not contingent on the closing of
the merger. The employment contract contains non-compete provisions and is for a
minimum term of one year from the June 1, 2008 signing of the employment
contract and provides for 6 months severance in the event of termination without
cause after that one year period. The terms of this contract include
base fees/salary of $20,000 per month (pro-rated for initial part-time service),
a recoverable draw of $2,000 per month for the first six months, to be deducted
from future paid commissions if applicable, commissions of 1% on Narrowstep’s
sales that are 25% above annualized existing revenue and 2% on sales that are
50% above annualized existing revenue, reimbursement of travel and moving
expenses up to $16,000, as well as certain option grants.
In
addition, in November 2008 Narrowstep invoiced us approximately $372,000 for
Narrowstep’s equipment alleged to be in our custody as of that date. Although we
have acknowledged possession of at least some of this equipment, we have not
agreed to a payment for that equipment and believe that if a payment were made
it would be substantially less than the Narrowstep invoice. This matter is not
reflected on our financial statements.
Although
Narrowstep reported cash used in operating activities of approximately $3.6
million for the nine months ended November 30, 2008, this included a number of
one-time expenses associated with the termination of leases and other
commitments as well as expenses related to the merger. In addition, Narrowstep
reported cash and cash equivalents totaling approximately $668,000 as of
November 30, 2008 and has committed to selling preferred shares for additional
cash proceeds of $1.0 million prior to the merger.
Although
Narrowstep has agreed to significantly reduce its costs related to leases,
public company costs, professional fees and other selling and
administrative expenses, Narrowstep’s recent 10-Q reported a net loss of
approximately $848,000 and a comprehensive loss after currency adjustments of
approximately $1.1 million for the three months ended November 30, 2008.
Therefore, we anticipate that the operations of Narrowstep could still be
generating operating cash deficits at the time the merger is consummated. In
addition, it is possible that we will need to incur additional cash expenses in
connection with capital expenditures needed to continue or expand those
operations. However, we believe that the anticipated Narrowstep cash balance as
of the consummation of the merger, including the additional proceeds from
Narrowstep’s sale of preferred shares as discussed above, will be sufficient to
fund such operating cash deficits and capital expenditures until such time as
the Narrowstep operations are at least cash flow neutral, although this cannot
be assured.
Projected
capital expenditures for the next twelve months total approximately $2.0 million
which includes software development and hardware upgrades to the DMSP, software
development and hardware upgrades to the webcasting system (including iEncode)
and software and hardware upgrades to the audio and web conferencing
infrastructure. This total includes the payment of approximately $354,000
reflected by us as accounts payable at December 31, 2008 (which will not be
reflected as capital expenditures in our cash flow statement until
paid). This total does not include capital expenditures that may be
necessary as a result of the Narrowstep acquisition, as discussed above. In
addition, certain of these projected capital expenditures may be financed,
deferred past the twelve month period or cancelled entirely.
As of
February 6, 2009, there were approximately 681,000 registered options and
warrants outstanding, excluding options held by directors and employees, to
purchase ONSM shares with exercise prices from $1.00 to $1.10 per share. The
closing ONSM share price was $0.19 per share on February 6, 2009.
Our
accumulated deficit was approximately $109.4 million at December 31, 2008. We
have incurred losses since our inception and our operations have been financed
primarily through the issuance of equity and debt. Cash used for 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, market our
other existing products and services, the degree to which competitive products
and services are introduced to the market, and our ability to control overhead
expenses as we grow.
Other
than working capital which may become available to us through the exercise of
outstanding options and warrants, from further borrowing against our equipment
or from the Narrowstep Merger, we do not presently have any additional sources
of working capital other than cash on hand and cash, if any, generated from
operations. There are no assurances whatsoever that any options or warrants will
be exercised, that we will be able to further borrow against our equipment, that
the Narrowstep Merger will be consummated (or that it will generate the
anticipated cash) or that we will increase our revenues and/or control our
expenses to a level sufficient to continue and/or provide positive cash
flow.
We cannot
assure that our revenues will continue at their present levels, nor can we
assure that they will not decrease. Although we believe there is a market for
the DMSP, which had approximately 315 monthly recurring subscribers as of
February 6, 2009, the current level of DMSP and hosting revenues ($1.4 million
for the year ended September 30, 2008 and $397,000 for the three months ended
December 31, 2008) is less than our related operating expenses plus continuing
development and other capital costs and we do not know when, if ever, that we
will generate sufficient revenues from this product to cover those costs and
expenses. 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. As a result of the
uncertainty as to our available working capital over the upcoming months, we may
be required to delay or cancel certain of the projected capital expenditures,
some of the planned marketing expenditures, or other planned expenses. In
addition, it is possible that we will need to seek additional capital through
equity and/or debt financing. 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.
As of
February 6, 2009, we have estimated that, absent any reduction in our current
and planned expenditure levels, we would require an approximately 14% increase
in our consolidated revenues, as well as approximately $850,000 incremental
financing or equity proceeds, in order to adequately fund those expenditures
(including debt service and anticipated capital expenditures) through September
30, 2009. We have implemented specific actions, including hiring additional
sales personnel, developing new products and initiating new marketing programs,
geared towards achieving the above revenue increases. The costs associated with
these actions were contemplated in the above calculations. However, in the event
we are unable to achieve these revenue increases within the required time
frames, or are unable to obtain the financing as described above, we have
identified decreases in our current level of expenditures that we would
implement and that we believe would be sufficient to allow us to operate through
September 30, 2009. Although our revenues for the first of the three quarters
referred to above have yet to be determined, during February 2009, we took
actions that we expect will reduce our previously anticipated personnel and
certain other operating costs by approximately $65,000 per month, which savings
are expected to be realized starting immediately and increasing to the target
amount on or before April 30, 2009. We will closely monitor our revenue and
other business activity through the remainder of the second quarter of fiscal
2009 to determine if further cost reductions or other activity is considered
necessary.
There can
be no assurance that acceptable financing, if needed to fund our ongoing
operations, can be obtained on suitable terms, if at all. Our ability to
continue our existing operations and/or to continue to implement our growth
strategy could suffer if we are unable to raise additional funds on acceptable
terms, which will have an adverse impact on our financial condition and results
of operations.
Cash
provided by operating activities was approximately $9,000 for the three months
ended December 31, 2008, as compared to approximately $114,000 provided by
operations for the corresponding period of the prior fiscal year. The $9,000
reflects our net loss of approximately $7.1 million, reduced by approximately
$6.9 million of non-cash expenses included in that loss as well as by
approximately $234,000 arising from a net decrease in non-cash working capital
items during the period. The decrease in non-cash working capital items for the
three months ended December 31, 2008 is primarily due to an approximately
$246,000 increase in accounts payable. This compares to a net decrease in
non-cash working capital items of approximately $57,000 for the corresponding
period of the prior fiscal year. The primary non-cash expenses included in our
loss for the three months ended December 31, 2008 were $5.5 million arising from
a charge for impairment of goodwill and other intangible assets, $1.1 million of
depreciation and amortization, approximately $179,000 of employee compensation
expense arising from the issuance of stock and options and approximately
$110,000 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 $363,000 for the three months ended
December 31, 2008 as compared to approximately $114,000 for the corresponding
period of the prior fiscal year. Current and prior period investing activities
related to the acquisition of property and equipment.
Cash
provided by financing activities was approximately $295,000 for the three months
ended December 31, 2008 as compared to approximately $459,000 for the
corresponding period of the prior fiscal year. Current and prior period
financing activities primarily related to net proceeds from notes payable, net
of repayments. The current period also included proceeds from the sale of A-12
preferred shares.
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 $19.6 million at December
31, 2008, representing approximately 71% of our total assets and 93% of the book
value of shareholder equity. In addition, property and equipment as of December
31, 2008 includes approximately $1.1 million (net of depreciation) related to
the DMSP.
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 change in our business operations, the value of our intangible
assets, including the DMSP, could decrease significantly. In the event that it
is determined that we will be unable to successfully market or sell the DMSP, 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 Onstream’s 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.
Since our stock price and market value have continued to decline after December
31, 2008, we will closely monitor and evaluate all such factors as of March 31,
2009 and subsequent periods, in order to determine whether to record future
non-cash impairment charges.
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, 2008, we have carried out an evaluation of the effectiveness of the
design and operation of our company's disclosure controls and procedures. This
evaluation was carried out under the supervision and with the participation of
our company's management, including our company's President along with our
company's Chief Financial Officer. Based upon that evaluation, our company's
President along with our company's Chief Financial Officer concluded that our
company's 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 company's 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 company's management, including our company's President
along with our company's Chief Financial Officer. Based upon that evaluation,
our company's President along with our company's 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.
PART II -
OTHER INFORMATION
Item 1.
Legal Proceedings.
We are
involved in 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 management that the resolution of these
outstanding claims will not have a material adverse effect on our financial
position or results of operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Effective
December 31, 2008, our Board of Directors authorized the sale and issuance of up
to 100,000 shares of Series A-12 Redeemable Convertible Preferred Stock (“Series
A-12”) and we sold to two (2) investors an aggregate of 80,000 shares of Series
A-12 have a stated value of $10.00 per share, with the purchase price paid via
(i) the surrender of an aggregate of 60,000 shares of Series A-10 held by those
two investors plus (ii) the payment of additional cash aggregating $200,000. In
accordance with the terms of the Series A-12, in December 2008 we issued 235,294
common shares as payment of $64,000 dividends for the one year period ending
December 31, 2009. In accordance with the terms of the Series A-12, after six
months the holders may require us, to the extent legally permitted, to redeem
any or all Series A-12 shares purchased as additional shares at the additional
purchase price of $10.00 per share. Shares of Series A-12 acquired in
exchange for shares of Series A-10 have no redemption rights. Any shares of
Series A-12 that are still outstanding as of December 31, 2009 will
automatically convert into ONSM common shares at a conversion price of $1.00 per
common share. None of these shares were issued to Company directors or
officers.
In
February 2009, we issued 305,023 unregistered shares of common stock for
consulting, financial advisory and legal services. The services are being
provided over a three to six month period and will result in a professional fees
expense of approximately $77,000 over the service period. None of these shares
were issued to Company directors or officers.
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.
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
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.
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Onstream
Media Corporation,
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a
Florida corporation
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Date:
February 17, 2009
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/s/ Randy S. Selman
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Randy
S. Selman,
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President
and Chief Executive Officer
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/s/ Robert E. Tomlinson
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Chief
Financial Officer
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And
Principal Accounting Officer
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