Onstream Media Corp. F2Q10 (Qtr End 03/21/10) Earnings Call Transcript

May.19.10 | About: Onstream Media (ONSM)

Onstream Media Corp. (NASDAQ:ONSM)

F2Q10 (Qtr End 03/21/10) Earnings Call

May 18, 2010 4:30 p.m. EST


Brett Maas - Hayden Communications - IR Contact

Randy Selman - Chairman, President and CEO

Robert Tomlinson - CFO


Fred Milligan - Sanders Morris Harris

Van der Merve [ph] - EFG Bank

Don Steinkamp [ph]


Good afternoon, and welcome to the Onstream Media Corporation Conference Call to discuss the company's fiscal 2010 second quarter financial results. All participants have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation.

At this time, I would like to turn the floor over to our host, Brett Maas of Hayden IR. Sir, you may begin.

Brett Maas

Thank you. Good afternoon and welcome to the Onstream Media conference call. Slide two, forward-looking statements. I'd like to point out that during the course of the conference call, there may be statements made related to future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results, performance or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors including those set forth in the company's filings with the Securities and Exchange Commission.

It also should be noted that the webcast of today's conference call may be found on the internet by visiting Onstream Media’s corporate website at www.onstreammedia.com and then by selecting company at the top of the web page and then clicking on Press Releases. At that web page, you will find a link to the news release we issued to announce the company's fiscal 2010 second* quarter financial results and webcast.

An archived version of the webcast will shortly be available from the press release page and will be available for at least the next 12 months pursuant to SEC guidelines.

Finally, those interested in reviewing our recently filed 10-Q, which contains all of the financial information being discussed today, can find this document also via our corporate website by selecting company and under that heading Investor Relations and then clicking on SEC filings, where all of our recent SEC filings can be found as well as the Edgar database directly at www.sec.gov and then search for company filings.

At this time, I would like to introduce Randy Selman, President and Chief Executive Officer of Onstream Media. Randy, the floor is yours.

Randy Selman

Thank you. Good afternoon and thank you for joining us. Today we will review our results for the second fiscal quarter 2010 which ended March 31, 2010. We'll also provide an update on our overall strategic progress including some details about our iEncode and MarketPlace365 products.

With me today is our Chief Financial Officer, Robert Tomlinson. Hopefully you have all had an opportunity to review our financial results which were released Monday after the close of the market.

Revenues for our second fiscal quarter 2010, the period ended March 31, 2010 were approximately $4.1 million, up 1.6% sequentially from our first fiscal quarter of 2010 and down approximately 5.7% from the second fiscal quarter of the prior year.

The year-over-year decline in the second fiscal quarter primarily came from the audio and web conferencing services group.

However, with our recently announced partnership with iLinc, a leading provider of web conferencing technology and our partnership with etouches, a leading provider of event management tools which supports the division’s new webinar service, we expect that our audio and web conferencing division will quickly make up this revenue reduction and begin to demonstrate definitive growth during the coming quarters.

As we have seen over the last several quarters and again this quarter, the DMSP* and hosting revenues provided accelerating growth by 9.3% as compared to the same quarter last year.

In addition for the quarter, combined revenues of the digital media services group, which includes the DMSP and webcasting services exceeded last year's same quarter.

We expect DMSP revenues to continue accelerating and they will soon be driven by our new MarketPlace365 platform. It is increasingly clear that MarketPlace365 is being recognized as a compelling offering for virtual trade show producers, publishers and associations.

We are increasingly optimistic about the potential of this product offering and believe MarketPlace365 will become an important growth catalyst* for us starting this year.

So far we have signed 10 agent and nine promoter agreements for our MarketPlace365 platform which, as mentioned, is expected not only to drive some of the increase in DMSP and hosting revenues but also conferencing, webinars and webcasting revenues as well.

MarketPlace365 is an all-encompassing lead generation social media marketing and comprehensive communications platform. It enables publisher's associations, trade show promoters and entrepreneurs to rapidly and cost effectively self deploy their own online virtual marketplaces.

The solution comes prepackaged with an array of powerful marketing and search engine optimization features that can be implemented quickly with no upfront costs and minimal IT resources required. The initial MarketPlace365 marketplaces are expected to launch in July or August 2010.

Our infinite conferencing division signed an agreement with iLinc, a leading provider of web and video conferencing solutions to offer infinite clients tailored, affordable, web-based collaboration solutions.

This partnership adds a number of new solutions to the infinite portfolio including webinar tools, online meetings, virtual training capabilities and more. The new services will include advanced capabilities such as integrated* audio conferencing, voice over IP support, turnkey* webinar provisioning, robust reporting, learning management integration and CRM integration with salesforce.com, for example.

In addition, Infinite Conferencing and BT Conferencing expanded their alliance by providing their jointly developed conferencing platform to Infinite's reservationaless client base.

Also, in March 2010, Infinite Conferencing and etouches signed an agreement to integrate each others' solutions to offer organizations and enterprises the event industry's first complete fully integrated event planning and management webinar platform for both in-person and online events.

The integrated event management solutions will be comprised of key components in the areas of self service, payment processing, event marketing, including email, surveys, social network and landing pages, as well as event planning, management and CRM integration.

We also officially launched our high-quality live mobile video streaming service for iPhone and Blackberry users. Onstream and All Mobile Video, an integrated resource provider of* mobile production and satellite services and a business partner of ours for eight years agreed to co-locate facilities in New York City to provide clients and prospects with greater, full-service video production, webcasting and Internet broadcasting solutions.

This includes the use of AMV's fully equipped high definition studios, satellite trucks and highly skilled technical production resources.

Before I turn it over to Robert, I'd like to put the NASDAQ issue to rest. As you are aware, we affected a one for six reverse stock split of the outstanding shares of our common stock as of April 5, 2010 at which time the company's stock began trading at $1.74 per share.

On April 21, 2010, we received a letter from the NASDAQ stock market stating that we were, as of that date, in compliance with all applicable requirements for continued listing and that accordingly NASDAQ has determined to continue the listing of our securities on the NASDAQ capital market.

I will now turn the call over to Robert who will provide financial details of the quarter. Then I'll update you on our products, particularly our game-changing MarketPlate365 platform before opening the call up for questions. Robert?

Robert Tomlinson

Thank you, Randy. Good afternoon. As Randy mentioned, consolidated operating revenue was approximately $4.1 million for the three months ended March 31, 2010, a decrease of approximately $249,000, 5.7% from $4.3 million in the corresponding period in the prior fiscal year due to decreased revenues of the audio and web* conferencing services group.

Revenues of the digital media services group increased during this period. To break down the quarterly numbers further, digital media services group revenues were approximately $2 million for the three months ended March 31, 2010, an increase of approximately $20,000, 1%, from the corresponding period of the prior fiscal year.

This increase was primarily due to an approximately $114,000, 8.5%, increase in webcasting division revenues plus smaller increases in certain other divisions, including an approximately $44,000, 9.3%, net increase in DMSP and hosting division revenues.

This increase in DMSP and hosting division revenues included an approximately $27,000 increase in DMSP store and stream and streaming publisher revenues and an approximately $17,000 increase in hosting and bandwidth charges to certain larger DMSP customers serviced by our Smart Encoding division.

The audio and web conferencing group revenues were approximately $2.1 million for the second quarter of fiscal 2010, a decrease of approximately $269,000 or 11.2% from the corresponding period of the prior fiscal year.

This decrease is primarily a result of decreased infinite division revenues arising from the loss of a major customer during the fourth quarter of fiscal 2009 as well as decreased network usage service fees from the EDnet division, which we believe resulted from a reduction in television and movie production activity in the current quarter in response to a general economic slowdown.

Also, please note that although the second quarter audio and web conferencing group revenues were down as compared to the same period of last year, the second quarter audio and web conferencing group revenues do represent an almost 3% increase from the first quarter of this same fiscal year.

Consolidated operating revenue was approximately $8.2 million for the six months ended March 31, 2010, a decrease of approximately $559,000, 6.4%, from the corresponding period of the prior fiscal year primarily due to decreased revenues of the audio and web conferencing services group.

Although revenues of the digital media services group also decreased during this period, the decrease was less than 1% from the corresponding period of the prior fiscal year.

Also, this decrease is primarily due to an approximately $155,000, 77.7%, decrease in Smart Encoding division revenues, other than hosting revenues, which occurred primarily because of a one-time encoding engagement occurring during the six months ended March 31, 2009 that did not recur during the six months ended March 31, 2010.

In spite of the small decrease in the digital media services group revenues, that decrease included an approximately $199,000, 22.9%, net increase in DMSP and hosting division revenues over the corresponding period of the prior fiscal year.

This slide shows a summary of our fiscal second quarter 2010 financial results compared to the same quarter of the prior fiscal year.

Although gross margin decreased compared to the second fiscal quarter of last year, which was generally due to the decreased revenue levels I just discussed, our consolidated net loss for the three months ended March 31, 2010 was approximately $1.3 million or $687,000 less than the loss of $1.9 million for the same quarter last year.

Although the decreased net loss was primarily the result of us recording an approximately $540,000# charge for the write-off of deferred acquisition costs for the three months ended March 31, 2009, versus no such expense in the comparable period in the current fiscal year, we also saw a decrease in certain other operating expenses, primarily compensation and depreciation amortization in the current fiscal year second quarter as compared to the prior fiscal year second quarter.

I will talk more about certain of our expense reduction initiatives in a minute. You will also note that even though we reported a net loss of approximately $1.3 million for the three months ended March 31, 2010, that net loss included a number of non-cash items, primarily depreciation amortization.

As a result, the cash used in operations for the quarter was only $333,000 before changes and current assets and liabilities.

This slide shows a summary of our fiscal first half 2010 financial results compared to the same period of the prior fiscal year. As was the case for the quarterly comparison, reduced gross margin for the six month period is generally explained by the reduced revenues.

Again, reduced operating expenses resulted in a lower net loss than the prior fiscal year period.

In this case, the decreased net loss was primarily the result of the $3.1 million charge for impairment and good will and other intangible assets for the current fiscal year period being $2.4 million lower than the $5.5 million charge for such items in the comparable period prior fiscal year as well as us recording an approximately $540,000 charge for the write-off of deferred acquisition costs for the six months ended March 31, 2009 versus no such expense in the comparable period of the current fiscal year.

But we also saw a decrease in certain other operating expenses, primarily compensation and depreciation amortization in the first six months of the current fiscal year as compared to the corresponding period of the prior fiscal year.

Our consolidated net loss of the six months ended March 31, 2010 of approximately $5.6 million included approximately $5.2 million of non-cash expenses, including a $3.1 million charge for good will impairment and other intangible assets and $1.1 million of depreciation and amortization expense.

As a result, the cash used in* operations for the six months ended March 31, 2010 was only $440,000 before changes in current assets and liabilities.

Although we do not present it on these slides, you may note that the cash used in* operations for the second quarter of fiscal 2010 was greater than the cash used in operations for the first quarter of fiscal 2010, both numbers before changes in current assets and liabilities.

This was due to the adverse effect of several items in the second quarter of fiscal 2010. Those items included a $49,000 increase in the accrual for unused vacation time, which did not represent an actual cash outlay by the company.

They also included $66,000 for increased legal fees, $50,000 for increased FICA taxes due to the start of a new calendar year and $46,000 for printing, mailing and legal costs of our March 25th annual meeting.

This slide provides more detail of our operating cash flows for the first six months of fiscal 2010 as compared to the same information for the corresponding period of fiscal 2009.

I have already pointed out that the net losses reported by us include a number of non-cash expenses, including impairment of good will and other intangible assets and depreciation and amortization.

Other non-cash expenses include employee compensation expense arising from the issuance of stock and options, amortization of deferred professional fee expenses paid for by issuing stock and options and interest expense including amortization of debt discount paid in common shares and options.

Overall, operating expenses decreased for the quarter and year-to-date from the corresponding periods of last year. Second quarter fiscal 2010 operating expenses declined 22.7% to $3.7 million compared to $4.8 million in the same period last year.

Operating expenses decreased 29.2% to $10.5 million year-to-date 2010 compared to $14.8 million in the same period last year.

As we mentioned, a significant portion of these reductions arose from reduced charges for impairment of good will and intangible assets as well as write-off of deferred acquisition costs. But we also saw meaningful decreases in compensation expense as well as depreciation and amortization as compared to the corresponding periods of the previous fiscal year.

Effective October 1, 2009, a significant portion of Onstream's workforce, including all of management, took a 10% payroll reduction, which is expected to be maintained until increased revenue levels result in positive cash flow.

This and the other initiatives resulting in compensation expense reductions in fiscal 2010 as compared with fiscal 2009 are outlined on this slide. We expect compensation expenses to continue to reflect reductions in the remaining quarters of fiscal 2010 as compared to the corresponding periods of the previous fiscal year.

In addition, we recently began to identify and implement certain infrastructure-related cost savings which actions we expect will reduce operating cost of sales by approximately $55,000 per month, once they are fully implemented by the end of fiscal 2010.

The consolidations of two of our co-location facilities into two other existing locations were completed as scheduled during the second fiscal 2010 quarter. During the third fiscal 2010 quarter, we are planning to discontinue the use of a third-party software application incorporated as part of our DMSP and hosting services in favor of a less costly application.

During the fourth fiscal 2010 quarter, we are also planning to reduce the number of telephone switches and/or switch locations used by our Infinite division. With these consolidations, as well as recently negotiated reductions in our bandwidth and telephone line and usage rates, we expect to reduce our cost of sales by approximately $400,000 during fiscal 2010 as compared to those costs for fiscal 2009.

Although some of this benefit is already recognized in our March 31, 2010 financial results, most of the financial benefit of these infrastructure cost reductions will be recognized during the second half of fiscal 2010 and forward.

Turning to the balance sheet, we had approximately $710,000 in cash as of the end of the second fiscal quarter 2010 and our stockholder's equity was approximately $14.1 million as of the same date.

During the three months ended March 31, 2010, the company obtained $750,000 in new financing via subordinated convertible notes. During May, the company received an additional $250,000 via subordinated convertible notes.

One other action we took subsequent to the quarter-end is that we have filed a prospectus, also known as a shelf registration which was declared effective by the SEC on April 30, 2010. That will allow us to offer and sell up to $6.6 million of our registered common shares, although there is no assurance that we will make sales under this shelf registration, or if we do make such sales what the timing of proceeds will be.

I would now like to turn it back over to Randy.

Randy Selman

Thank you, Robert, for the overview of our second fiscal quarter 2010 operating results and financial position.

We are confident that MarketPlace365 and iEncode will be major drivers of our revenue going forward. Although iEncode has shown acceptance in various markets including education, pharma, financial and video production, the primary usage of iEncode may come from MarketPlace365.

Prospective* clients that have been introduced to MarketPlace365 have also shown an interest in using the iEncode appliance to capture presentations, courses and speeches at their physical events and make them available through the marketplace all year round.

Publishers have shown a strong interest in using iEncode to lower their cost to do webinars that will also be integrated into the MarketPlace offerings. In addition to our resellers and major partnerships with companies such as British Telecomm, we expect iEncode sales, both as individual units as well as part of larger enterprise systems will continue to grow* throughout the balance of this fiscal year.

In addition, we recently introduced our high-quality live mobile video streaming service enabled for iPhone and Blackberry users. This service, developed with our DMSP technology, is device agnostic, enabling adaptive and segmented streaming to popular mobile devices using Akamai's network to deliver video and HD or standard definition as well as many popular formats including Adobe Flash H.264, VP6 and Windows Media VC1.

We are also confident that our web and audio conferencing division will also driver our growth as we implement and bring to market our new advanced conferencing services and our new webinar services.

We are emphatic in our confidence that our MarketPlace365 platform represents a game-changing technology. That has been reinforced year-to-date as we sign 10 agent and nine promoter agreements and began discussions with a number of other potential promoters, partners and resellers for this unique platform although still in development.

We are increasingly optimistic about the potential of this product offering and believe MarketPlace365 can become a significant growth driver for us starting this year. I'll recap some of our partnerships.

At the end of our first fiscal quarter we announced our partnership with the Tarsus Group and Trade Show News Network, the world's largest online resource for the trade show industry.

In February we announced an agreement with the Trade Show Exhibitors Association, TSEA, for them to market MP365 to their members, vendors and sponsors. Also, in February, we signed both an agent and promoter agreement with eConventions365 for them to develop both a virtual trade show for the commercial design and building industry called CDAC Worldwide using MP365 and as an agent to help other organizations develop their own marketplaces. CDAC is expected to launch in the summer of 2010.

In March 2010, we announced that Specialized Publications Corporation, SPC, had signed both MP365 agent and promoter agreements. Under the promoter agreement, SPC, a multi-faceted business, including long-time publisher of targeted consumer, business and association magazines, plans to develop three virtual marketplaces using MP365 and focus on the consumer and commercial aviation, restaurant and scuba diving industries.

Also in March 2010 we announced that Home Dec Show signed an MP365 agreement to develop a virtual trade show and business community for the home tech styles gifts and decorative accessory industry worldwide, which is planning to launch, also, in summer 2010.

In April 2010, we announced that we have partnered with AMC Institute to provide MP365 as well as our full suite of digital media and communication services to the organization's 150 association management company members who represent over 1,500 associations throughout the US, Canada, Europe and Asia.

In May 2010, we announced NewGen Broadcasting has signed both MP365 agent and promoter agreements to promote the MP365 platform and develop its own virtual trade show to complement its physical trade show AffCon in the affiliate marketing vertical.

In addition, through NewGen's extensive network of search engines optimization specialists and more than 50,000 bloggers, NewGen will be assisting MarketPlace365 promoters to develop the best lead generation results as well as finding sources of continuous and current information for their marketplaces.

Through its web master radio service, NewGen will provide online radio and relevant content syndication for use by other MarketPlace365 promoters to enhance the attendee experience at their marketplaces.

Finally, in May 2010, we announced Conventions.net signed a MarketPlace365 agent agreement. Conventions.net is one of the leading* online resources for trade shows, conventions, corporate events, conferences and meetings in the world with thousands of industry suppliers in over 150 categories.

As a MarketPlace365 agent, Conventions.net plans to showcase Onstream's MarketPlace365 platform through its website and other marketing vehicles.

This slide shows a snapshot of several views of the MarketPlace365 platform, which I’m going to show in more detail in the next few slides. The real power of this platform is that it creates a substantial lead generation service, reduces the cost to acquire the leads and provides a system to fully qualify each lead.

The MarketPlace also efficiently organizes content and information, whether it's organized by booths, stores or by libraries. Instead of a trade show or conference existing once per year for a short period of time, our MarketPlace is available all year long as the online destination or community on a particular subject.

MarketPlace365 is a fully automated and user provisioned solution requiring limited Onstream personnel to manage or support it. Although its primary purpose is to facilitate lead generation, MP365 fully supports social interaction using chat blogs and moderated groups.

MP365 incorporates Onstream's DMSP including user generated content, pay-per-view and streaming publisher along with webcasting and web conferencing capabilities all in one platform.

Most of our competitors in contrast need to string together products in several companies and require substantial expensive professional services to implement the platform, which adds time and money to launch a show.

We handle all of these services in an automated way, allowing for rapid scalability and the potential to increase Onstream's margin as this product gains market adoption.

Based on our revenue share program, Onstream's share of the potential revenues for many of these marketplaces could be in excess of $200,000 annually based on 100 booths or more.

For those of you that haven't seen a demo of MarketPlace365, I've taken the liberty of reproducing actual screen shots of our platform so that you can see the user interface and the aesthetics* of this innovative technology.

Here is a scene of the MarketPlace365 lobby. From here you can access all of the rooms of the MarketPlace, including the auditorium, media library, exhibit hall, lounge and learning center.

Below the lobby is HTML that the promoter can use to direct the attendees and provide marketplace information.

Here is the scene of the MarketPlace365 auditorium. Here is where the live event, such as key note speeches and presentations take place. The live events in this room can be supplied from either our professional webcasting services or from our iEncode appliance.

The media library is like having a YouTube for just this marketplace subject area. Content can be uploaded by the promoter or by anyone visiting the marketplace with the promoter having the ability to review and publish video, documents and images. Information can be searched and easily found through categories or granular searching.

The learning center is similar to the auditorium in operation but it's specifically designed to provide a means to access classroom training and demonstrations either free of charge or through a pay-per-view system.

This slide shows a view of a couple of booths on an aisle. Aisles are dynamically created by either a promoter through the use of categories or by the attendee through granular search. Applicable booths are found that meet the search criteria and then an aisle of such booth is automatically created.

Finally, this slide shows the inside of a booth. An exhibitor can upload content such as video, PowerPoints, documents and images and arrange them for best results. In addition, attendees can establish direct chat with the exhibitors and send email messages.

Finally, below the booth, the exhibitor can put additional information such as an HTML document or can paste their entire website so that the attendees can visit the site without ever leaving the marketplace.

Our confidence in our MarketPlace365 platform was reinforced during the quarter as we signed a number of promoter and agent agreements and began discussions with other potential promoters, partners and resellers for our new platform.

Based on the industry acceptance we’ve already received* for our MarketPlace platform and the pipeline of opportunities we already have in place as well as the increasing sales of our current products, we are reiterating our expectation of continued sequential revenue growth throughout the remainder of fiscal 2010.

We believe that if we achieve these increased revenues as well as realize our expectations of decreased costs for the second half of the fiscal year as compared to the first half, we could return to cash flow positive status from operations before changes in current assets and liabilities by the end of the fiscal year.

With the help of our operator, we'll now open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Fred Milligan - Sanders Morris Harris.

Fred Milligan - Sanders Morris Harris

These promoters and agents, do they have any skin in the game currently?

Randy Selman

Well, I mean, every single promoter that's going to be developing a marketplace has got to put a lot of hours and a lot of effort, staff and information. So even though they're not writing us a check, which is a very favorable scenario to get a lot of these guys to sign up for our program in the industry, they do have to put in a lot of time and effort and spend money developing their marketplace.

Fred Milligan - Sanders Morris Harris

Are there any of them right now that are recruiting the exhibits?

Randy Selman

Absolutely, yes, there are several of them. In fact, the ones that we mentioned that are under contract, virtually all of them are. So at this time, just so that you understand, there are beta testing -- in fact, one of the questions somebody asked, it looks like Allen [ph] asked about testing of the platform to avoid delays.

He wanted to know whether or not we were already testing. Yes, we already have clients on the system beta testing each aspect of it as it gets completed by the engineering team. So once we throw a new feature set over the wall, it goes out to our promoters and they get to test it. So these are friendly promoters that aren't afraid to see a hiccup once in a while.

But the good news is it's progressing very, very well. Four of the five rooms are completed. All that's left is to complete some of the social networking functions, some of the administrative functions and some of the attendee functions and we can launch it, which we believe is in the timeframe. In fact, we are hoping to complete it within about five weeks.

Fred Milligan - Sanders Morris Harris

Now, you mentioned July or August early on in your comments. I heard it was July and I thought it was the early part of July. So has something happened to extend it out or are you being conservative?

Randy Selman

The product is expected to be completed at the beginning of July as we had mentioned. It's just that some of the promoters may take a few extra days before they actually launch their marketplaces, make sure the final release of the software is stable, make sure they've got all the exhibitors fully operational and set up once the new load's put in.

So I think it's just a matter of a week or two after that load gets put in before the actual launches will occur. So my guess is you'll actually see them -- they'll probably pre-launch in July and probably officially launch August 1.

Fred Milligan - Sanders Morris Harris

Now, you mentioned social networking. My antenna goes up right away when this is mentioned. Has this got a potential outside of 365?

Randy Selman

I'm sorry. I didn't understand.

Fred Milligan - Sanders Morris Harris

The social networking that you're developing for the MarketPlace, does that have a potential outside of the MarketPlace?

Randy Selman

A potential outside?

Fred Milligan - Sanders Morris Harris

Yes, I mean, is there something else you can do with that?

Randy Selman

Well, we're not necessarily developing all of the social networking functions internally. We're using third-party products and what we're basically doing is we're integrating those products into the MarketPlace platform.

So, for instance, we wouldn't necessarily recreate chat but we can integrate chat so that it looks like it's part of the user console that the attendee uses when he was walking around the show.

Necessarily recreate a blog or a group -- we can use off-the-shelf products for that and make them available through the lounge to the attendees. Then, finally, some of the other functions that are built into the show like Twitter and whatever come directly from those companies.

Fred Milligan - Sanders Morris Harris

I see. I see. You talked about cutting costs. What would be a quarterly breakeven by the fourth quarter? Better yet, not break even, but rather just cash flow positive.

Randy Selman

I'm sorry. Again, the question?

Fred Milligan - Sanders Morris Harris

By the fourth quarter, all of the reductions that you're implementing will be in effect. So what will be the cash flow break even in the fourth quarter?

Randy Selman

Are you saying -- ?

Robert Tomlinson

Fred, this is Robert. Basically we expect our operating expenses to reduce in the second half of the fiscal year. So based on that expected report, for the most part things that we've planned to reduce based on our previous initiative. If we were to maintain our current level of sales and our current level of margin, it would be very close to break even.

It's hard to tell exactly which side of the line we'd be on. So we're looking at basically not so much from the cost point of view. We think we've got costs well in hand. It's just basically what do sales do from here on out and what’s the [ph] increases in those sales.

Fred Milligan - Sanders Morris Harris

Right, but you are cutting costs. So you must have some idea where in fact is break even.

Robert Tomlinson

Our point is the cost reductions get us -- they don't get us -- they get us practically there by the end of this fiscal year.

Fred Milligan - Sanders Morris Harris

Well, what would you be doing on a quarterly basis at that point in terms of revenues?

Robert Tomlinson

Well, that's assuming that revenue is at the same level that we're experiencing right now.


(Operator Instructions)

Randy Selman

Let me mention some of the comments that are coming in via the web and then we can go back to the phone. One mentioned it's great to see an expansion in alliance with BT but quarter to quarter we have yet to see meaningful results. Can you please provide some color going forward?

Our BT relationship already is producing very substantial results. That client accounts for a pretty substantial dollar revenue figure in our webcasting division. What's happening is we're looking to expand that number through several initiatives.

One is an advancement of BT's sales force involvement in selling streaming media products, which they've committed to do.* Second, the introduction and launch of the iEncode product, which we expect BT will soon be carrying that as well in their sales toolkit.

So I think that those two things are the two primary drivers and we also expect that will eventually offer some advanced uses of the iEncode product in enterprise solution which is truly the target of the BT group.

They do want to go after large corporate accounts and we're looking to put together a partnership with them to sell the iEncode in conjunction with several other services* to market it into the commercial community, to the larger enterprises.

Related to the recent $250,000 financing, was the financing bid out, or is the company in such dire financial straights that you're forced to pay in excess of 70% financing rate plus a finder fee of $70,000 plus warrants to this one borrower?

The question is really I guess written in a way where obviously it looks like we're in dire straights and that's not really the case. We chose these particular individuals to do our financing with because of the potential in the future of working with some of these larger funds.

Number two, the actual financing rates, although on a shorter-term scale, look like they're pretty large yields, as he stated in his question , effectively, if these are spread out over more time, obviously the interest rate would drop off. But these are intended as short-term loans and to get short-term loans and in a quick process, sometimes you have to pay up for those.

Look, the company has come out of a very rough time. I chose the loans versus selling a whole lot of stock at really, really cheap prices because even though our stock has been where it is, the discounts they still are looking for against those share prices are very, very extensive.

So the choice was whether or not we were going to issue millions of more shares in an equity-based financing or a lot less in a debt-based financing and there were more values to working with the group that came in who has bigger resources and will be longer-term players overall and may even convert some of this debt, which we're hoping to see become longer-term shareholders with us.

So that's the intent of this. Money is hard to find. Money in a lot of different forms is very hard to find even if you can be creative. It's still difficult. But capital is required at times. We do have to raise it in order to keep going. I'm trying to bootstrap the development of MarketPlace365. It does cost a lot of money to develop a product like this.

We're getting it done. We're keeping it as tight as we can and we're not blowing out the dilution in the process. So that's how I answer that.

Who are your competitors in the virtual trade show world and how do you differentiate? In the virtual trade show world there are trade show event competitors, companies that do trade shows online for a specific event.

Many of these have not come up yet with the permanent marketplace concept but even if they have they haven't come up with our business model or our ability to self service the marketplace, which means there still has to be some sizeable upfront costs.

With our model, with the revenue share or a commitment model which we also have, we can generate very, very substantial revenues on day one once the marketplace launches and the exhibitor base is in place.

Most of these companies won't launch their marketplaces unless they have at least 100 or more booths in the marketplace, which would generate a pretty nice return to Onstream. So besides the search engine optimization, besides the no upfront fees, besides the ability to update and manage all of the functions within the marketplace by the exhibitor or by the promoter and really there's a whole lot of other capabilities that are built into MarketPlace.

As far as the feature set goes, we think we really do stand out from the existing competitors. That's what I have on the web so far. Any other questions from the phone?


Yes, sir, we did receive another question over the phone lines. (Operator Instructions) Your next question comes from the line of Van der Merve [ph] - UBS Bank.

Van der Merve - EFG Bank

It's Van der Merve in London. I'm associated with EFG Bank and I'm an asset manager. I'd like to know if you have any institutional coverage, either local in the US or in Europe and what that coverage is.

Randy Selman

Unfortunately, there isn't any formal coverage at this point in time, not that I've heard of any recent updates on. MDB Capital [ph] out of California was following us for some period of time. I'm not really sure what happened to that coverage. I haven't heard or seen updates from them but that was the last company that was doing coverage on Onstream.

At this point in time, obviously we're looking at trying to create some coverage because one of our key directions is to try to get institutional buying in the stock.

Van der Merve - EFG Bank

Referring to British Telecom was one of your clients, do you have any other European telecommunications companies that you're doing business with?

Randy Selman

Besides BT? I'm not sure of any specific transactions but we do business with a lot of resellers. There may be more than just BT in that mix.


Your next question comes from the line of Fred Milligan - Sanders Morrison Harris.

Fred Milligan - Sanders Morrison Harris

You talked some time ago about signing up something like 20 people, promoters or agents, before the introduction of the MarketPlace. It looks like you're there. Currently could you give us, if you have the numbers that you might sign up between now and the time of the actual introduction?

Randy Selman

I can't give you the specific numbers. There’s at least another, I would say, two dozen that I’m working with directly. So a lot of those will be signed up before the launch.

Many companies -- and I would say virtually all of the publishing companies that we've spoken to and many of the very big trade show promoters that have seen the products, have talked to other people in the industry, have come to us and said, "Look, as soon as this product is ready we're ready to go with you. We just want to see it fully operational. We don't want to be a beta tester. We want to have a final product."

But we've been -- I can very easily say that there are a lot of companies that are ready to move as soon as we got the product finished. So you'll see some real aggressive improvement in the number of marketplaces that are being developed and even more agents right after the July release of the product.

You'll see announcements virtually every week up until then of marketplaces that are going to sign up.

Fred Milligan - Sanders Morrison Harris

So if we can daydream, what would it take -- an agent or promoter, fully up and running would generate what in terms of revenues to Onstream?

Randy Selman

Well, again, 100 booth show with our typical price will generate, as I mentioned, about $200,000 annual revenues to Onstream and that's 100 booths. Most of the ones we're looking at are considerably larger than that.

They're not looking at it to just make a living. They're looking at this to make some big money. If they're going to make this the community on this subject matter there's going to be investment in it and there's going to be expected returns on it.

So the bigger companies that we're involved with are putting a lot of resources towards this and all of them have indicated to us that this is the leading product that they are intending to go with not only because of the technology that we've used -- and there's a lot of technology here underneath this platform.

You can see that the user interface is very cool. When you actually see it working -- and I’m going to invite all of our shareholders at some point to join me in a full demo of the product towards the end of June, so this way you get a sneak peak at it before it launches.

But, anyway, everyone who's seen it has really been impressed with it and not only just because of its good looks and its capabilities but the business model, the way they could make money with it, all of the opportunities to enhance the revenue stream -- because it's not just booth fees.

All kinds of advertising and webinars and other kinds of communication services like webcasting and conferencing -- there's all kinds of ways of making additional money. When you make money, everybody makes money.

In other words, the people you're doing the service for, like the exhibitors, they're getting more leads. They're getting more business. They're selling more products. It's a win win for everybody involved. Attendees will really enjoy it because of the social networking functions.

It'll be the place to go when you have a question in any of these subjects. If it's a B2B scenario, which we believe a lot of it is going to be oriented towards the commercial world, it's going to be a place you have to stay linked up to all day long in your business just because you don't want to miss anything that's going on.

Fred Milligan - Sanders Morrison Harris

So all of this and we don't have to sweep the floors.

Randy Selman



(Operator Instructions).

Randy Selman

I just got another question online. Will you release dollars associated with the marketplaces when you are live as you sign your deals?

The only thing we could give information on would have to be on the portion that comes to us. We don't necessarily segment by individual marketplaces but we'll probably have a MarketPlace365 segment report at some point in the future that'll identify the specific revenues and you'll be able to compare that to the number of marketplaces and get an average revenue per marketplace.

I don't know how much detail we'll go into as far as on a per marketplace basis because that does give away some of the revenue streams of our client partner and I'm not sure that they'll be too happy with that. But we'll try to give you as much information so that you can determine the revenues that are associated with the specific product line as it develops.

Any further questions?


Your next question comes from the line of Don Steinkamp [ph].

Don Steinkamp - Unidentified

I was wondering if there are any brokerage firms that are considering writing up* research reports on Onstream.

Randy Selman

A gentleman just asked that question, Don, and we said at this point -- if you're talking about in the future, maybe that's the point of your question. There are a couple of brokerage firms that are looking to work with us and going forward. We have been talking to several of them and we're hoping their research department gets behind the company as well. But there is no definitive one at this time.


Your next question comes from the line of Mr. Van der Merve - EFG Bank.

Van der Merve - EFG Bank

Could you tell me if there are any analyst coverage in the US or here in Europe for the stock?

Randy Selman

No, I mean, analyst or research are the same thing. There are no coverages right now.

Van der Merve - EFG Bank

What are the number of shares in float -- shares issued and in float?

Randy Selman

There are 7.7 million shares total issued and outstanding right now. Do we know how much is in the DTC system? Hang on one second. According to the recent DTC report, of that amount, 6.2 million are in the float.

Van der Merve - EFG Bank

6.2 million?

Randy Selman

That's correct.


(Operator Instructions) Sir, there appear to be no further questions over on our phone lines.

Randy Selman

Well, thank you all very much for joining us today. We look forward to having a better report next quarter for you and to tell you about the successes of MarketPlace365. Thanks again. Have a good evening. Good-bye.


Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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