CAPITAL STOCK AND EQUITY

12 Months Ended

Sep. 30, 2015

Stockholders' Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

NOTE 6:  CAPITAL STOCK AND EQUITY

Common Stock

During the year ended September 30, 2014 we recorded the issuance to the Executives of an aggregate of 375,000 fully restricted ONSM common shares (“Executive Incentive Shares”), related to achievement of two of the financial objectives related to fiscal 2014. The value of these shares was recognized as compensation expense paid with common shares and other equity over the relevant service period, which was fiscal 2014. See note 5 for details. The 375,000 shares is excluding 125,000 Executive Incentive Shares also recorded by us in fiscal 2014 but then reversed in fiscal 2015, as discussed below.

During the year ended September 30, 2015 we recorded the issuance to the Executives of an aggregate of 375,000 Executive Incentive Shares, related to achievement of two of the financial objectives related to fiscal 2015. The value of these shares was recognized as compensation expense paid with common shares and other equity over the relevant service period, which was fiscal 2015. See note 5 for details.  In addition to recording the 375,000 shares, during the year ended September 30, 2015 we reversed our entry of 125,000 Executive Incentive Shares that were recorded in our financial statements for the year ended September 30, 2014. This represented a financial statement matter only, as these shares were never issued to the Executives, and the recorded value of $22,000 was considered to be immaterial for a prior period adjustment.

During the year ended September 30, 2014 we issued 746,502 unregistered common shares for consultant services valued at approximately $151,000, which were recognized as professional fees expense over various service periods of up to twelve months. During the year ended September 30, 2015 we issued 680,000 unregistered common shares for consultant services valued at approximately $114,000, which are being recognized as professional fees expense over various service periods of up to twelve months. None of these shares were issued to our directors or officers.

Professional fee expenses arising from these and prior issuances of shares and options for financial consulting and advisory services were approximately $63,000 and $155,000 for the years ended September 30, 2015 and 2014, respectively. As a result of previously recorded shares for financial consulting and advisory services, there remained approximately $29,000 and $54,000 in deferred equity compensation expense at September 30, 2015 and 2014, respectively, to be amortized over the remaining periods of service. The deferred equity compensation expense is included in the balance sheet caption prepaid expenses.

During the year ended September 30, 2014, we recorded the issuance of 1,647,334 common shares for interest and financing fees, which were valued at approximately $393,000 and are being recognized as interest expense over the various respective financing periods. See summary below and note 4 for details.

	Number of  Shares		Approximate Value
Sigma Notes 1 and 2 – modification and extension		875,000	$	190,000
Rockridge Note – extension		25,000		5,000
Working Capital Notes – origination fees		458,334		128,000
Subordinated Notes – extension		240,000		60,000
Intella2 Investor Notes –  extension		49,000		10,000
		1,647,334	$	393,000

In accordance with an Allonge to the Rockridge Note dated September 10, 2014, we agreed to increase the loan origination fee by 25,000 common shares. Since these shares were committed to be issued by us as of September 10, 2014 and Rockridge may require us to issue them solely by providing us with written notice of not less than sixty-one (61) days, the issuance was reflected in our financial statements for the year ended September 30, 2014 and is accordingly included in the above table.

In accordance with the December 31, 2014 issuance of the New Sigma Note, we issued an aggregate of 100,000 common shares to Sigma and Sigma Capital, which were valued at approximately $20,000 and recorded as loan discount, which is being amortized as interest expense over the applicable financing period – see note 4.

In accordance with the December 31, 2014 and April 30, 2015 extensions of the Rockridge Note, we agreed to increase the loan origination fee by an aggregate of 80,000 common shares. Since these shares were committed to be issued by us as of September 30, 2015 and Rockridge may require us to issue them solely by providing us with written notice of not less than sixty-one (61) days, the issuance was reflected in our financial statements as interest expense of approximately $14,700 for the year ended September 30, 2015 – see note 4.

In December 2012, as part of a transaction under which J&C Resources issued us a funding commitment letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares (“Conversion Shares”) CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 Convertible Preferred Stock (“Series A-13”). We accrued an estimated shortfall liability of $43,750, which we amortized to interest expense over the one-year funding commitment term ended December 31, 2013. Based on the closing ONSM price of $0.30 per share on December 31, 2013, we determined that there would be no material difference between the present value of the obligation and that accrual. However, based on the September 30, 2014 closing ONSM price of $0.16 per share, we increased that accrual by recognizing approximately $54,000 of interest expense for the year ended September 30, 2014, which resulted in an approximately $98,000 liability under the caption “Accrued liabilities” on our balance sheet as of that date. We recognized another approximately $11,000 of interest expense for the year ended September 30, 2015, which resulted in an approximately $109,000 liability as of that date. If the closing ONSM share price of $0.21 per share on December 31, 2014 (the end of the period during which the shares must be sold to be eligible for reimbursement of any shortfall) was used as a basis of calculation, our obligation for this shortfall payment would be $83,000 plus brokerage commissions and other selling costs.

As a condition of the above shortfall reimbursement, CCJ agreed to sell the Conversion Shares in the open market between the December 21, 2013 conversion date and December 31, 2014 payment date, taking due care with respect to the timing and volume of those sales and the market conditions. As of October 28, 2016, CCJ has not formally requested this reimbursement nor have they provided proof that the above conditions of reimbursement have been met. However, because of our ongoing discussions with CCJ, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this shortfall reimbursement obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible that CCJ could assert mitigating circumstances, notwithstanding whether or not they met the conditions of reimbursement, under which we might honor all or part of this shortfall reimbursement obligation. Therefore, pending our further evaluation of our position with respect to this shortfall reimbursement obligation, we are leaving the accrued liability on our balance sheet as of September 30, 2015.

Variable Interest Entity (VIE)

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

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

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

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

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

ASC 810-10-15-14 provides that a legal entity shall be determined to be a Variable Interest Entity (“VIE”) subject to consolidation if, by design, any one of certain enumerated conditions exist. The Partners entity was created in 2015 solely to transact the above transactions as well as the other related transactions described below and has no other business activity. Infinite, and its parent company Onstream, were significantly involved in determining the structure of the Partners entity as well as the structure of these transactions. Based on the foregoing, we concluded that the “by design” prerequisite was met. Furthermore, we concluded, based on the specific terms of the MSA as set forth above, as well as other related  transactions discussed below, that out of the enumerated conditions, the following would cause Partners to be classified as a VIE and therefore be subject to consolidation:

•The total equity investment at risk is not sufficient to permit the legal entity (Partners) to finance its activities without additional subordinated financial support provided by any parties, including equity holders. Since the capital contribution of the equity investors in Partners was used entirely to purchase the Sold Accounts, none of that capital remained available to (i) carry accounts receivable from the Sold Accounts or (ii) provide the necessary infrastructure to service, invoice and collect the Sold Accounts. Such accounts receivable are being carried, and such infrastructure and services are being provided to the Sold Accounts, by Infinite as part of its contractual arrangements with Partners.

•As a group the holders of the equity investment at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact the entity’s economic performance. The activities that most significantly impact Partners’ economic performance are the provision of conferencing services to the Sold Accounts, the billing of the Sold Accounts for those services and the collection of the amounts charged the Sold Accounts for those services. As noted above, such services are being provided to the Sold Accounts by Infinite as part of its contractual arrangements with Partners and furthermore those contractual arrangements significantly limit the extent to which Partners may interfere with Infinite’s provision of such services.

Once it is determined that an entity is a VIE, and therefore is subject to consolidation, it must be determined whether we (the “reporting entity”) would be required to consolidate the VIE. ASC 810-10-25-38 provides that a reporting entity shall consolidate a VIE when the following reporting entity characteristics exist that establish that it has a controlling financial interest in the VIE:

•The reporting entity has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The provisions of paragraphs ASC 810-10-25-38B through 25-38G contain guidance with respect to determining the activities of a VIE that most significantly impact the VIE’s economic performance and whether a reporting entity has the power to direct those activities. After considering this guidance, we determined that (i) the activities of the VIE (Partners) that most significantly impact such VIE’s economic performance are the provision of conferencing services to the Sold Accounts, the billing of the Sold Accounts for those services and the collection of the amounts charged the Sold Accounts for those services and (ii) based on the contractual identification of those activities as the responsibility of Infinite and the related contractual restrictions on Partners’ interference with those activities, as discussed above, we concluded that Infinite has the power to direct those activities.

•The reporting entity has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Although the equity investors in Partners receive a minimum guaranteed return of their investment, they have no rights to receive any profits of the entity in excess of that amount. Such profits, through the mechanics of the contractual management fee in the MSA, as discussed above, are remitted to us. Furthermore, in connection with the February 28, 2015 sale Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis. As evidenced by the terms of these agreements, it is not intended or expected that the equity investors in Partners would participate in any losses of the entity.

As required by ASC 810-10-25-38A, our evaluation of the two reporting entity characteristics listed above included an assessment of the reporting entity’s variable interest(s) and other involvements (including involvement of related parties and de facto agents), if any, in the VIE, as well as the involvement of other variable interest holders. The de facto agents of a reporting entity include the following parties: (i) an officer, employee, or member of the governing board of the reporting entity, (ii) a party that has an agreement that it cannot sell, transfer, or encumber its interests in the VIE without the prior approval of the reporting entity and/or (iii) a party that has a close business relationship like the relationship between a professional service provider and one of its significant clients. In accordance with the above, we considered the following as additional support for our determination that the reporting entity characteristics listed above exist:

•The limited partners of Partners include two Onstream directors (one of whom is also the executive officer primarily responsible for Infinite’s operations) and two other officers of Onstream/Infinite (who are not Onstream or Infinite directors), resulting in total related party ownership of approximately 60% for the period from February 28, 2015 through December 15, 2015. As part of the sale of additional Infinite customer accounts in December 2015 and June 2016 transactions discussed in more detail below, the number of limited partners increased and the related party ownership percentage decreased to approximately 25%, and then 21%, respectively. Another individual (not considered to be a related party with respect to those limited partners, Onstream or Infinite until July 2015, when his beneficial ownership of our common stock exceeded 5% of our total outstanding shares and which condition continues as of October 28, 2016) serves as general partner, and is solely responsible for administering the activities of Partners as outlined above.

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

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

Based on our determination that, for the period from February 28, 2015 through December 15, 2015, we exhibit the two reporting entity characteristics listed above, but prior to considering the impact of ASU 2015-02, we preliminarily concluded that we had a controlling financial interest in the VIE Partners during that period. In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendment to the Consolidation Analysis), which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted, including adoption in an interim period. We elected to apply the provisions of ASU 2015-02 effective January 1, 2015. As a result of ASU 2015-02 (i) certain factors, focusing on fee arrangements between the VIE and the reporting entity, were added to those factors already required to be considered in evaluating the second of the two reporting entity characteristics listed above and (ii) such additional factors are allowed to be relied on as the basis of a conclusion that the second of the two reporting entity characteristics listed above is not present. However, ASU 2015-02 also provides that if the fee arrangements (i) are designed in a manner such that the fee is inconsistent with the reporting entity’s role or the type of service and (ii) contain fees or payments that expose a reporting entity to risk of loss in the VIE, including those related to guarantees of the value of the assets or liabilities of a VIE and obligations to fund operating losses, then the additional factors identified in ASU 2015-02 may not be relied on as the basis of a conclusion that the second of the two reporting entity characteristics listed above is not present. We concluded that since the terms of the MSA and the Make Whole Agreement, as described above for the period from February 28, 2015 through December 15, 2015, are consistent with the characteristics in the preceding sentence, the application of ASU 2015-02 would not change our preliminary conclusion that the second of the two reporting entity characteristics listed above is present and thus would not change our conclusion that we had a controlling financial interest in the VIE Partners during that period. Accordingly, we have concluded that in accordance with ASC 810-10-25-38, we are required to consolidate the VIE Partners as of September 30, 2015 and for the year then ended.

The assets of the VIE Partners, which after consolidation elimination entries are primarily accounts receivable from the Sold Accounts, can only be used to settle the obligations of the VIE Partners, including the obligation for the Management Fee payable to us in accordance with the MSA as discussed above. The liabilities of the VIE Partners, which after consolidation elimination entries do not include the Management Fee obligation but are primarily accrued distributions payable to the noncontrolling owners of Partners, are non-recourse to us, except that we are indirectly responsible for such liabilities as a result of our obligations under the Make Whole Agreement, as discussed above.

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

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

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

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

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

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

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

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

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

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

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

We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively. In December 2015, we recorded the issuance of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and which will be recognized as other non-operating expense over a service period of twelve months.