COMMITMENTS AND CONTINGENCIES

9 Months Ended

Jun. 30, 2016

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

NOTE 5:  COMMITMENTS AND CONTINGENCIES

Employment contracts and severance

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

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives and we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to executives and officers” – the liability is approximately $677,000 and $745,000 as of September 30, 2015 and June 30, 2016, respectively. No related modifications of the compensation as called for under their related employment agreements was made, as it was expected that this compensation withheld from the Executives would eventually be paid, although the Executives did agree that they would accept payment in equity of such shortfalls to a certain extent and under certain terms. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.

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

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

In connection with the settlement of certain unpaid salary and other amounts due to the Executives, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013 to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”).  Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. To the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares as compared to twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. All shortfall reimbursements shall be payable by us within ten (10) business days after presentation by reasonable supporting documentation of the shortfall to us by the Executives.

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

Other compensation

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

Lease commitments

As of June 30, 2016, we were obligated under operating leases for five office locations (one each in Pompano Beach, Florida, San Francisco, California and Colorado Springs, Colorado and two in the New York City area), which called for monthly payments totaling approximately $54,000. The leases have expiration dates ranging from 2016 to 2022 (after considering our rights of termination) and in most cases provide for renewal options.

The operating lease for our principal executive offices in Pompano Beach, Florida expired September 15, 2013. The monthly base rental is currently approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly). The lease provided for two percent (2%) annual increases, as well as one two-year renewal option, with a three percent (3%) rent increase in year one. Although we notified the landlord of our exercise of the renewal option, the landlord never confirmed that we have met the conditions for such renewal, and this renewal period expired September 15, 2015. Accordingly, payments for this lease, which we have considered to be on month-to-month status since September 15, 2015, do not appear in the table of future minimum lease payments as presented below. Also, although approximately eleven months of unpaid rent is included as a liability on our balance sheet as of June 30, 2016, these amounts also do not appear in the table of future minimum lease payments as presented below. As of October 28, 2016, our rent payments remain in arrears, by approximately twelve months, and we are in negotiations with the landlord with respect to this obligation and the terms of our continuing tenancy at that location.

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

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

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

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

Total rental expense (including executory costs) for all operating leases was approximately $600,000 and $610,000 for the nine months ended June 30, 2016 and 2015, respectively and was approximately $196,000 and $206,000 for the three months ended June 30, 2016 and 2015, respectively. Rental expense is classified in our financial statements under Other General and Administrative Operating Expenses.

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

Year Ending June 30:
2017	$	348,007
2018		254,782
2019		146,352
2020		134,500
2021		140,500
2022		84,000
Total minimum lease payments	$	1,108,141

In addition to the commitments listed above, we have commitments not included in the above table for leasing equipment space at co-location or other equipment housing facilities in South Florida, Georgia, New Jersey, Colorado, Texas and Minnesota. Approximately $9,000 in aggregate per month of our payments to these facilities is classified by us as rental expense with the approximately $22,000 per month remaining balance classified as cost of revenues – see discussion of bandwidth and co-location facilities purchase commitments below.

Purchase commitments

We have entered into various agreements for our purchase of Internet, long distance and other connectivity as well as use of certain co-location facilities, for an aggregate remaining minimum purchase commitment of approximately $900,000, substantially all of that commitment related to the one year period ending June 30, 2017.

In April 2015, we entered into a marketing consulting contract calling for total potential payments of $292,500 over the one year period ended April 2016, against which contract we paid $30,000 during fiscal 2015 and accrued $91,875 as a liability as of September 30, 2015, which remains on our balance sheet as of June 30, 2016. We have objected to making further payments against this contract on the grounds of non-performance by the consultant and therefore have not made additional payments or accrued any additional liability related to this contract since September 30, 2015. We believe that it is unlikely that any eventual liability to us under this contract will exceed the amounts already accrued by us.

Legal and regulatory proceedings

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

While we believe that we have registered our operations appropriately with the FCC, including the filing of both quarterly and annual reports regarding the revenues derived from audio conference calling, and the remittance of USF contributions thereon, it is possible that our determination of the extent to which our operations are subject to USF could be challenged or changed. It is also possible we would need to change our pricing structure in order to maintain our current margins, with our ability to do that possibly affected by the related actions of our competitors. However, we do not believe that the ultimate outcome of any such challenge or changes would have a material adverse effect on our financial position or results of operations. See notes 1 and 4.

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