Item 1. Financial
Statements
.
The
Unaudited Condensed Consolidated Financial Statements of Liberated
Syndication Inc., a Nevada corporation ( the “Company,”
“Libsyn,” “Pair”, “we,”
“our,” “us” and words of similar import),
required to be filed with this 10-Q Quarterly Report were prepared
by management and commence on the following page, together with
related notes. In the opinion of management, the Unaudited
Condensed Consolidated Financial Statements fairly present the
financial condition of the Company.
LIBERATED
SYNDICATION INC.
|
FINANCIAL
STATEMENTS
|
|
|
|
CONTENTS
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|
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PAGE
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Unaudited
Condensed Consolidated Balance Sheets
|
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4
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Unaudited
Condensed Consolidated Statements of Operations
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5
|
|
|
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Unaudited
Condensed Consolidated Statements of Cash Flows
|
|
6
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|
|
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Notes
to Unaudited Condensed Consolidated Financial
Statements
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7
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LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
$
6,587,745
|
|
$
5,211,845
|
Accounts
receivable, net
|
671,683
|
[1
]
|
660,139[1
]
|
Prepaid
expenses
|
142,699
|
|
186,425
|
Prepaid
domains, net
|
108,623
|
|
-
|
Total
current assets
|
7,510,750
|
|
6,058,409
|
|
|
|
|
Property
and equipment, net
|
2,704,454
|
|
3,007,025
|
Goodwill
|
16,388,171
|
|
16,352,069
|
Definite
life - intangible assets
|
9,179,671
|
|
9,644,000
|
Prepaid
domains, net of current portion
|
72,835
|
|
-
|
Other
|
3,582
|
|
7,076
|
Total
assets
|
$
35,859,463
|
|
$
35,068,579
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$
484,596
|
|
$
440,565
|
Accrued
expenses
|
313,013
|
|
769,485
|
Deferred
revenue, net
|
1,910,125
|
|
1,247,686
|
Current
portion of capital lease obligation
|
70,160
|
|
69,243
|
Current
portion of loans payable, net of $31,746 discount
|
1,568,254
|
|
1,566,634
|
Total
current liabilities
|
4,346,148
|
|
4,093,613
|
|
|
|
|
LONG TERM
LIABILITIES:
|
|
|
|
Loans
payable, net of $72,231 discount, less current portion
|
7,927,769
|
|
8,320,366
|
Capital lease
obligation, net of current portion
|
55,929
|
|
73,817
|
Deferred
revenue, net
|
260,814
|
|
133,617
|
Total
long-term liabilities
|
8,244,512
|
|
8,527,800
|
Total
liabilities
|
12,589,603
|
|
12,621,413
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Common
stock
|
59,611
|
|
29,596
|
Additional
paid-in capital
|
35,093,164
|
|
34,804,457
|
Retained
Earnings (accumulated deficit)
|
(11,853,972
)
|
|
(12,386,887
)
|
Total
stockholders' equity
|
23,268,803
|
|
22,447,166
|
Total
liabilities and stockholders' equity
|
$
35,859,463
|
|
$
35,068,579
|
Liberated Syndication Inc. and Subsidiaries
Balance Sheet
(Parenthetical)
|
|
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Statement of
Financial Position
|
|
|
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Allowance
for doubtful accounts
|
14,000
|
|
14,000
|
Common
stock authorized
|
200,000,000
|
|
200,000,000
|
Common
stock par value
|
0.001
|
|
0.001
|
Common
stock outstanding
|
29,776,974
|
|
29,595,473
|
The
accompanying notes are an integral part to the unaudited condensed
consolidated financial statements.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
Revenue
|
$
5,059,305
|
$
2,494,111
|
|
|
|
Costs and operating
expenses
|
|
|
|
|
|
Cost of revenue
(excluding depreciation and amortization)
|
707,370
|
617,054
|
General and
administrative
|
1,387,312
|
468,247
|
Non-cash
compensation
|
318,000
|
1,752,000
|
Technology
|
373,326
|
143,042
|
Selling
|
217,002
|
76,038
|
Customer
support
|
668,230
|
191,820
|
Depreciation and
amortization
|
766,900
|
4,304
|
Total costs and
operating expenses
|
3,730,770
|
3,252,205
|
Operating income
(loss)
|
621,165
|
(758,394
)
|
|
|
|
|
|
|
Interest
expense
|
(100,596
)
|
-
|
Interest
income
|
9,665
|
-
|
Other income
(expense)
|
2,681
|
-
|
Income (loss) from
operations
|
532,915
|
(758,394
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
-
|
-
|
Net Income
(loss)
|
$
532,915
|
$
(758,394
)
|
|
|
|
|
|
|
BASIC AND DILUTED
INCOME (LOSS) PER COMMON SHARE
|
$
0.02
|
$
(0.03
)
|
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
29,644,362
|
23,725,860
|
The
accompanying notes are an integral part to the unaudited condensed
consolidated financial statements.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
Net
income (loss)
|
$
532,915
|
$
(451,138
)
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
Depreciation
and amortization expense
|
766,900
|
4,304
|
Issuance
of common stock
|
318,000
|
1,752,000
|
Discount
on loan fees
|
9,023
|
-
|
Deferred
taxes
|
-
|
(307,256
)
|
Change
in assets and liabilities:
|
|
|
Accounts
receivable
|
(76,925
)
|
(248,402
)
|
Prepaid
expenses
|
(134,237
)
|
(53,769
)
|
Accounts
payable
|
44,031
|
38,109
|
Accrued
expense
|
(456,472
)
|
(291,575
)
|
Deferred
revenue
|
789,635
|
5,202
|
Net
Cash Provided by Operating Activities
|
1,792,870
|
447,475
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
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Net
Cash Used in Investing Activities
|
-
|
-
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Repayment
on term loan
|
(400,000
)
|
-
|
Repayment
on capital lease
|
(16,970
)
|
-
|
Net
Cash Used in Financing Activities
|
(416,970
)
|
-
|
|
|
|
Net
Increase in Cash
|
1,375,900
|
447,475
|
Cash
at Beginning of Period
|
5,211,845
|
4,875,458
|
Cash
at End of Period
|
$
6,587,745
|
$
5,322,933
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash
paid during the periods for:
|
|
|
Interest
|
$
96,730
|
$
-
|
Income
taxes
|
-
|
-
|
|
|
|
Supplemental
Non-Cash Investing and Financing Activities
|
|
|
Unregistered/restricted
stock awards issued
|
$
318,000
|
$
1,752,000
|
The
accompanying notes are an integral part to the unaudited condensed
consolidated financial statements
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
– Liberated Syndication Inc.,
(“Company”, “parent”), a Nevada
Corporation, was organized on September 30, 2015. Webmayhem, Inc.
(“Libsyn”), a Pennsylvania corporation, currently a
wholly owned subsidiary of the Company, was originally organized on
January 1, 2001. Libsyn provides podcast hosting services for
producers of content. Libsyn also offers ad insertion on certain of
the producers’ content. On December 27, 2017, the Company
purchased all the issued and outstanding shares of Pair Networks
Inc., (“Pair”), a Pennsylvania corporation, and
subsidiaries Ryousha Kokusai, LLC (”Ryousha”) and
660837 N.B., Inc. (“NB”), in a transaction accounted
for as a purchase. Pair provides web hosting services and domain
name registrations.
Prior Period Reclassifications -
Reclassifications of
certain immaterial prior period amounts have been made to conform
to the current period presentation.
Consolidation
- The financial statements
presented reflect the accounts of the parent, Libsyn, Ryousha, NB
and Pair. All inter-company transactions have been eliminated in
consolidation.
Accounting Estimates
– The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reporting period. Management made assumptions
and estimates for determining reserve for accounts receivable,
depreciation of fixed assets and in determining the impairment of
definite life intangible assets and goodwill. Actual results could
differ from those estimated by management.
Our
more significant estimates include:
●
the determination
of the best estimate of selling price of the deliverables included
in multiple-deliverable revenue arrangements;
●
the fair value of
assets acquired, and liabilities assumed in business
acquisitions;
●
the assessment of
recoverability of long-lived assets, including property and
equipment, goodwill and intangible assets;
●
the estimated
reserve for refunds;
●
the estimated
useful lives of intangible and depreciable assets;
●
the grant date fair
value of equity-based awards;
●
the recognition,
measurement, and valuation of current and deferred income
taxes;
We
periodically evaluate these estimates and adjust prospectively, if
necessary. We believe our estimates and assumptions are reasonable;
however, actual results may differ from our estimates.
Cash and Cash Equivalents
– The Company considers all
highly liquid investments with an original maturity date of three
months or less when purchased to be cash equivalents. At March 31,
2018, the Company had $6,045,217 cash balances in excess of
federally insured limits.
Accounts Receivable
– Accounts receivable consist of
trade receivables arising in the normal course of business. At
March 31, 2018 and 2017, the Company has an allowance for doubtful
accounts of $14,000 and $14,000, respectively, which reflects the
Company’s best estimate of probable losses inherent in the
accounts receivable balance. The Company determines the allowance
based on known troubled accounts, historical experience, and other
currently available evidence. During the three months ended March
31, 2018 and 2017, the Company adjusted the allowance for bad debt
by $0.
Depreciation
– Depreciation of property and equipment
is provided on the straight-line method over the estimated useful
lives.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
Long-lived intangible assets
– The Company evaluates
its long-lived assets for impairment whenever events or change in
circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to the
future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is the excess of the carrying amount over the fair
value of the asset.
Software Development Costs
-
Software development costs associated with software to be sold,
leased, or for internal use are expensed as incurred until
technological feasibility, defined as a working model or prototype,
has been established. At that time, such costs are capitalized
until the product is available for general release. To date, costs
incurred between the completion of a working model and the point at
which the product is ready for general release have been
insignificant. Accordingly, the Company has expensed all such costs
to research and development during the three months ended March 31,
2018 and 2017.
Research and development costs totaling
$373,326 and 143,042 for the three months ended March 31, 2018 and
2017, respectively, were included in cost of revenue.
Goodwill
–
Goodwill is evaluated for
impairment annually in the fourth quarter of the Company’s
fiscal year, and whenever events or changes in circumstances
indicate the carrying value of goodwill may not be recoverable.
Triggering events that may indicate impairment include, but are not
limited to, a significant adverse change in customer demand or
business climate that could affect the value of goodwill or a
significant decrease in expected cash flows. Management noted no
triggering events during the period ended March 31,
2018.
Advertising Costs
– Advertising costs are expensed as
incurred and amounted to $40,434 and $8,867 for the three months
ending March 31, 2018 and 2017, respectively.
Fair Value of Financial Instruments
– The Company
accounts for fair value measurements for financial assets and
financial liabilities in accordance with FASB ASC Topic 820. The
authoritative guidance, which, among other things, defines fair
value, establishes a consistent framework for measuring fair value
and expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis.
Fair value is defined as the exit price, representing the amount
that would either be received to sell an asset or be paid to
transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market
participants would use in pricing an asset or liability. As a basis
for considering such assumptions, the guidance establishes a
three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value as follows:
●
Level 1. Observable
inputs such as quoted prices in active markets for identical assets
or liabilities;
●
Level 2. Inputs,
other than the quoted prices in active markets, that are observable
either directly or indirectly; and
●
Level 3.
Unobservable inputs in which there is little or no market data,
which require the reporting entity to develop its own
assumptions.
Unless
otherwise disclosed, the fair value of the Company’s
financial instruments including cash, accounts receivable, prepaid
expenses, and accounts payable, deferred revenue and accrued
expenses approximates their recorded values due to their short-term
maturities.
Revenue Recognition
- On January 1, 2018, we adopted the
Financial Accounting Standards Board's (FASB) new revenue
recognition standard using the modified retrospective method
applied to those contracts not completed as of January 1, 2018.
Results for reporting periods beginning after January 1, 2018 are
presented under the new standard, while prior period amounts were
not adjusted and continue to be reported in accordance with our
historic accounting.
The
adoption of the new standard did not have a material impact to our
financial statements.
Revenue
is recognized when control of the promised services is transferred
to our customers, in an amount reflecting the consideration we
expect to be entitled to in exchange for those
services.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
Certain
products are generally sold with a right of return within our
policy, which are accounted for as variable consideration when
estimating the amount of revenue to recognize. Refunds are
estimated at contract inception using the expected value method
based on historical refund experience and updated each reporting
period as additional information becomes available and only to the
extent it is probable a significant reversal of any incremental
revenue will not occur. Refunds reduce deferred revenue at the time
they are granted and resulted in a reduced amount of revenue
recognized over the contract term of the applicable service
compared to the amount originally expected.
Our
revenue is categorized and disaggregated as follows:
Domains
- Domains revenue primarily consists of domain
registrations and renewals, domain privacy, domain application
fees, domain back-orders, aftermarket domain sales and fee
surcharges paid to ICANN. Domain registrations provide a customer
with the exclusive use of a domain during the applicable contract
term. After the contract term expires, unless renewed, the customer
can no longer access the domain. Consideration is recorded as
deferred revenue when received, which is typically at the time of
sale, and revenue, other than for aftermarket domain sales, is
recognized over the period in which the performance obligations are
satisfied, which is generally over the contract term. Aftermarket
domain revenue is recognized when ownership of the domain is
transferred to the buyer.
Hosting Services
- Hosting services revenue primarily
consists of website hosting products, website building products and
services, website security products, an online shopping cart and
online visibility products and email accounts. Consideration is
recorded as deferred revenue when received, which is typically at
the time of sale, and revenue is recognized over the period in
which the performance obligations are satisfied, which is generally
over the contract term.
Podcast Hosting
- Podcast hosting publishing services are
billed on a month to month basis, with first month’s bill
prorated to the end of the month so all performance obligations are
satisfied at each month-end. Consideration is recorded as revenue
as the services, the underlying performance obligation, are
provided and or satisfied and collection is probable which is
generally when received.
Media Subscription Services
- The Company facilitates the
sale of producers’ premium content through the sale of
subscriptions. The amount earned per transaction is fixed with the
producers determine the price for the sale of each subscription,
and the Company earns a percentage of what the customer pays. The
performance obligation is providing the subscription hosting medium
and billing services. Accordingly, the Company reports premium
subscription revenue on a net basis over the subscription service
period in which the performance obligation is
satisfied.
Advertising
– The Company recognizes revenue from the
insertion of advertisements in digital media. The performance
obligation is the download of the digital media with the
advertisement inserted. The performance obligation to recognized
advertising revenue is satisfied upon delivery of the media
download and collection is probable.
Equity-Based Compensation -
Our equity-based awards are
comprised of options and stock and are accounted for using the fair
value method. We grant options at exercise prices equal to the fair
market value of our common stock as reported on the OTCQB on the
date of grant. We measure and recognize compensation expense for
equity-based awards made to employees and directors based on the
grant date fair values of the awards. Stock is measured based on
the fair market value of the underlying common stock on the date of
grant. For options with service or performance-based vesting
conditions, the grant date fair value is estimated using the
Black-Scholes option-pricing model, which requires management to
make assumptions and apply judgment in determining the grant date
fair value. Options and award vest and compensation is recognized
over the requisite service period. The measurement date for
performance vesting awards is the date on which the applicable
performance criteria are approved by our board of directors. Key
assumptions used in the determination of fair value for stock
options are as follows:
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
Expected term.
The expected term represents the period the
options are expected to be outstanding. Because of the lack of
sufficient historical data necessary to calculate the expected
term, we use the simple average of the vesting period and the
contractual term to estimate the expected term.
Expected volatility.
We determine the expected stock price
volatility based on the historical volatilities of our common
stock.
Expected dividend yield.
We do not use a dividend rate due
to our expectation of not paying dividends in the foreseeable
future.
Risk-free interest rate.
We base the risk-free interest rate
on the yield curve of a zero-coupon U.S. Treasury bond with a
maturity equal to the expected term of the option on the grant
date.
Leases
–
The Company accounts for leases in
accordance with Accounting Standards Codification
(“ASC”) Topic 840. Leases that meet one or more of the
capital lease criteria of standard are recorded as a capital lease,
all other leases are operating leases.
Earnings Per Share
– The Company computes earnings per
share in accordance with FASB ASC Topic 260 Earnings Per Share,
which requires the Company to present basic earnings per share and
diluted earnings per share when the effect is dilutive (see Note
9).
Income Taxes
– The Company accounts for income taxes
in accordance with FASB ASC Topic 740 Accounting for Income Taxes.
This topic requires an asset and liability approach for accounting
for income taxes (See Note 7).
Recently Enacted Accounting Standards -
In February 2016,
the FASB issued changes to the accounting for leases that primarily
affect presentation and disclosure requirements. The new standard
will require the recognition of a right to use asset and underlying
lease liability for operating leases with an initial life in excess
of one year. This standard is effective for us beginning in the
first quarter of 2019. We have not yet determined the impact of the
new standard on our consolidated financial statements.
R
ecent accounting pronouncements issued by the FASB did not
or are not believed by management to have a material impact on the
Company’s present or future financial
statements.
NOTE 2
- PROPERTY & EQUIPMENT
The
following is a summary of property and equipment at:
|
|
|
|
|
|
|
|
Furniture,
fixtures, and equipment
|
3-10
yrs
|
$
8,032,178
|
$
8,032,178
|
Leasehold
improvements
|
3-5
yrs
|
2,646,400
|
2,646,400
|
Software
|
3 yrs
|
6,503
|
6,503
|
|
10,685,081
|
10,685,081
|
Less: Accumulated
depreciation
|
|
(7,980,627
)
|
(7,678,056
)
|
Property &
equipment, net
|
|
$
2,704,454
|
$
3,007,025
|
Depreciation
expense for the three months ended March 31, 2018 and 2017 was
$302,571 and $4,304, respectively.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3
- GOODWILL
AND OTHER DEFINITE-LIFE
INTANGIBLE ASSETS
Impairment
- During the fourth quarter of 2017, management performed its
annual test of impairment of goodwill by comparing the net carrying
value of the intangible asset with the fair value of the reporting
units. Based upon the results of this analysis, it was determined
that the goodwill was not impaired.
Goodwill
- The following is a summary of
goodwill:
|
|
|
|
|
|
Goodwill at
beginning of period
|
$
16,352,069
|
$
11,484,251
|
Acquisition of
Pair
|
36,102
|
4,867,818
|
Impairment
|
-
|
-
|
Goodwill at end of
period
|
$
16,388,171
|
$
16,352,069
|
During the first quarter of 2018, the Company completed its
net-working capital closing adjustment for the acquisition of Pair,
resulting in an additional allocation of $36,102 of
goodwill.
Other definite-life intangible assets
-
Other intangible assets consist of customer
relationships, intellectual property, trade name and non-compete,
which were generated through the acquisition of Pair. Management
considers these intangible assets to have finite-lives except trade
name. These assets are being amortized on a straight-line basis
over their estimated useful lives.
As of March 31, 2018,
identifiable intangible assets consist of
following:
|
|
Weighted Average
Useful
Life
(in
Years)
|
|
|
Customer
Relationships
|
$
3,947,000
|
7
|
$
140,965
|
$
3,806,035
|
Intellectual
Property
|
3,709,000
|
7
|
132,464
|
3,576,536
|
Trade
name
|
576,000
|
10
|
14,400
|
561,600
|
Non-compete
|
1,412,000
|
2
|
176,500
|
1,235,500
|
Total
|
$
9,644,000
|
|
$
464,329
|
$
9,179,671
|
NOTE 3
- GOODWILL
AND OTHER DEFINITE-LIFE
INTANGIBLE ASSETS - Continued
The estimated future amortization expenses related to other
intangible assets as of March 31, 2018 are as follows:
For twelve months
ending March 31,
|
|
2019
|
$
1,857,314
|
2020
|
1,680,814
|
2021
|
1,151,314
|
2022
|
1,151,314
|
2023
|
1,151,314
|
Thereafter
|
2,187,601
|
Total
|
$
9,179,671
|
NOTE 4
- LOANS
On December 27, 2017, the Company entered into a loan agreement
(the “Loan Agreement”) among the Company, Libsyn, and
Pair, together, and First Commonwealth Bank, a Pennsylvania bank
and trust company (the “Bank”).
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4
– LOANS - Continued
The Loan Agreement provides for: (i) a revolving credit facility
pursuant to which the Company may borrow an aggregate principal
amount not to exceed $2,000,000 (the “Revolving Credit
Facility”); and (ii) a term loan in a principal amount equal
to $8,000,000 (the “Term Loan” and, together with the
Revolving Credit Facility, the “Facility”). A portion
of the Revolving Credit Facility, up to $500,000, may be used for
standby letters of credit for the account of the Company. As of
March 31, 2018, $2,000,000 was drawn down on the revolving line
with $0 available.
The
loan accrues interest at LIBOR plus 175 base points or prime plus
75 basis points at the election of the Company. As of March 31,
2018, the Company has elected LIBOR plus 175 basis points or
3.625%.
The Term Loan is repayable in
quarterly installments of $400,000 commencing on March 30, 2018 and
on the last day of each June, September, December and March
thereafter, through and including September 30, 2022. Accrued
interest is payable in arrears not less frequently than quarterly.
The remaining unpaid principal balance of the Term Loan, together
with accrued interest thereon, is due and payable in full on
December 27, 2022. The Term Loan also calls for additional payment
equal to the following: 1)100% of the proceeds from the sale of any
common shares 2) 100% of the proceeds from the sale of assets not
immediately replaced 3)excess liquidity in any given year up to
$1,066,667 a year and no more than $3,200,000 over the life of the
term loan. As of March 31, 2018, the balance on the term loan was
$7,600,000.
The Company, Libsyn and Pair have granted the bank a blanket
security interest in their respective assets, and the Company has
pledged the stock of Webmayhem Inc. and Pair Networks Inc. to the
bank, as security for all obligations under the Loan
Agreement.
Borrowings under the Facility are at variable rates which are, at
the
Company’s option,
tied to LIBOR (London Interbank Offered Rate) plus an applicable
rate or a prime rate. Interest rates are subject to change based on
the Company’s combined cash balances. The Facility contains
covenants that may have the effect of limiting the ability of the
Company to, among other things, merge with or acquire other
entities, enter into a transaction resulting in a change in
control, create certain new liens, incur certain additional
indebtedness, engage in certain transactions with affiliates,
engage in new lines of business or sell a substantial part of its
assets. The Facility also requires the Company to maintain certain
consolidated fixed charge coverage ratios and minimum liquidity
balances.
The Facility also contains customary events of default, including
(but not limited to) default in the payment of principal or,
following an applicable grace period, interest, breaches of the
Company’s covenants or warranties under the Facility, payment
default or acceleration of certain indebtedness of the Company or
any subsidiary, certain events of bankruptcy, insolvency or
liquidation involving the Company or its subsidiaries, certain
judgments or uninsured losses, changes in control and certain
liabilities related to ERISA based plans.
On December 27, 2017, the Company drew $10,000,000 under the
Facility to finance a portion of the cash consideration payable to
the Seller pursuant to the Share Purchase Agreement. Debt issuance
costs of $113,000 for the Facility were recorded as a discount and
will be amortized over the life of the Facility. As of March 31,
2018, the discount was $103,977.
Future
maturities of the loans at March 31, 2018 are as
follows:
For the year ending
March 31,
|
|
2019
|
$
1,600,000
|
2020
|
1,600,000
|
2021
|
1,600,000
|
2022
|
1,600,000
|
2023
|
3,200,000
|
Thereafter
|
-
|
Total
|
$
9,600,000
|
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 5
- CAPITAL STOCK
Common Stock
- The Company has authorized 200,000,000 shares
of common stock, $0.001 par value. As of March 31, 2018, 29,795,473
shares were issued and outstanding.
During
the first quarter of 2018, the Company issued 200,000 shares of
common stock valued at $318,000 to a consultant for services
rendered.
During
the first quarter of 2018, the seller of Pair Networks Inc.,
returned $18,499 shares valued at $29,278 to the company as per the
terms of the acquisition agreement dated December 27, 2017 in
connect the closing adjustment for the net-working capital
provision.
During
the first quarter 2017, the Company issued 3,650,000 shares of
common stock valued at $1,752,000 to officers and
directors.
NOTE 6
– DEFERRED REVENUE
Deferred
revenue consists of the following:
|
|
|
Current:
|
|
|
Hosting
services
|
$
1,501,482
|
$
1,032,000
|
Domains
|
295,757
|
104,172
|
Media
subscription
|
112,885
|
111,514
|
|
$
1,910,125
|
$
1,247,686
|
Noncurrent:
|
|
|
Hosting
services
|
79,752
|
50,351
|
Domains
|
181,062
|
83,266
|
|
$
2,170,939
|
$
1.381.303
|
The
increase in the deferred revenue balance is primarily driven by
payments received in advance of satisfying our performance
obligations, offset by revenue recognized during the three months
ended March 31, 2018 that was included in the deferred revenue
balance as of December 31, 2017. The deferred revenue balance
as of March 31, 2018 represents our aggregate remaining
performance obligations that will be recognized as revenue over the
period in which the performance obligations are
satisfied.
Deferred
revenue as of March 31, 2018 is expected to be recognized as
revenue as follows:
|
|
|
|
|
|
|
|
Domains
|
$
239,758
|
$
119,934
|
$
52,213
|
$
32,902
|
$
23,102
|
$
8,610
|
$
476,819
|
Hosting
|
1,417,173
|
164,062
|
-
|
-
|
-
|
-
|
1,581,235
|
Media
Subscription
|
109,798
|
3,087
|
-
|
-
|
-
|
|
112,885
|
|
$
1,766,729
|
$
287,083
|
$
52,513
|
$
32,902
|
$
23,102
|
$
8,610
|
$
2,170,939
|
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 6
– DEFERRED REVENUE - Continued
Disaggregated
revenue consists of following:
|
Three Months
Ended March 31,
|
|
|
|
Hosting
services
|
$
2,061,495
|
$
-
|
Podcast
Hosting
|
2,501,107
|
1,931,188
|
Advertising
|
320,664
|
480,891
|
Domains
|
71,796
|
-
|
Other
|
90,028
|
82,032
|
|
$
5,059,305
|
$
2,494,111
|
NOTE 7
- INCOME TAXES
The
Company accounts for income taxes in accordance with FASB ASC Topic
740, Accounting for Income Taxes which requires the Company to
provide a net deferred tax asset or liability equal to the expected
future tax benefit or expense of temporary reporting differences
between book and tax accounting and any available operating loss or
tax credit carryforwards. At March 31, 2018 and 2017, the total of
all deferred tax assets was $3,303,428 and $3,876,789,
respectively, and the total of the deferred tax assets related to
goodwill was $1,890,006 and $2,214,117, respectively. The amount of
and ultimate realization of the benefits from the deferred tax
assets for income tax purposes is dependent, in part, upon the tax
laws in effect, the Company’s future earnings, and other
future events, the effects of which cannot be determined. Because
of the uncertainty surrounding the realization of the deferred tax
assets the Company established a valuation allowance equal to the
deferred tax asset. The change in the valuation allowance for the
three months ended March 31, 2018 and 2017 was $(155,239) and
$(127,777), respectively.
The
components of income tax expense (benefit) from continuing
operations for the three months ended March 31, 2018 and 2017
consist of the following:
|
For the Three
Months Ended
|
|
|
|
|
|
Current tax
expense:
|
|
|
Federal
|
$
-
|
$
-
|
State
|
-
|
-
|
Current tax
expense
|
-
|
-
|
|
|
|
Deferred tax
expense (benefit):
|
|
|
Depreciation
|
(219,281
)
|
-
|
Intangible
Assets
|
41,290
|
127,777
|
Valuation
Allowance
|
(155,239
)
|
(127,777
)
|
Net operating loss
carryforward
|
333,230
|
(307,256
)
|
Subtotal deferred
tax expense/(benefit)
|
-
|
(307,256
)
|
Income tax
expense/(benefit)
|
$
-
|
$
(307,256
)
|
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 7
- INCOME TAXES – continued
Deferred
income tax expense/(benefit) results primarily from the reversal of
temporary timing differences between tax and financial statement
income.
A
reconciliation of income tax expense as the federal statutory rate
to income tax expense at the Company’s effective rate is as
follows:
|
For the Three
Months Ended March 31,
|
|
|
|
|
|
|
Computed tax at the
expected statutory rate
|
$
112,134
|
$
(257,854
)
|
State
and local income taxes, net of federal
|
42,405
|
(49,906
)
|
Other
non-deductible expenses
|
700
|
504
|
Valuation
Allowance
|
(155,239
)
|
-
|
Income tax
expense/(benefit)
|
$
-
|
$
(307,256
)
|
The
temporary differences, tax credits and carryforwards gave rise to
the following deferred tax asset at March 31, 2018 and
2017:
|
|
|
|
|
|
Net deferred tax
assets (liabilities):
|
|
|
Depreciation
and amortization
|
353,435
|
-
|
Goodwill -
impaired
|
2,066,632
|
2,903,618
|
Intangible assets
– tax amortization
|
(4,090,793
)
|
(5,117,735
)
|
Net operating loss
carryforward
|
4,974,154
|
6,090,906
|
Valuation
allowance
|
(3,303,428
)
|
(3,569,533
)
|
Netterm deferred tax
assets (liabilities)$
|
$
-
|
307,256
|
NOTE 8
- LEASES
Operating Lease
- The Company leases two office spaces in
Pittsburgh, Pennsylvania. The corporate headquarters’ lease
is for $4,841 a month through April 2022. The office space for Pair
is $34,400 a month through September 2022.
The
future minimum lease payments for non-cancelable operating leases
having remaining terms in excess of one year as of March 31, 2018
are as follows:
Year ending
March 31:
|
|
2019
|
466,260
|
2020
|
466,260
|
2021
|
466,260
|
2022
|
262,176
|
Thereafter
|
4,841
|
Total Minimum Lease
Payment
|
$
1,665,797
|
Lease
expense charged to operations was $153,337 and $74,399 for the
three months ended March 31, 2018 and 2017,
respectively.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 9
–EARNINGS PER SHARE
The
following data shows the amounts used in computing earnings per
share and the weighted average number of shares of common stock
outstanding for the periods presented for the periods
ended:
|
For the Three
Months Ended
March
31,
|
|
|
|
Income(loss) from
operations available to common
stockholders(numerator)$
|
$
532,915
|
(451,138
)
|
Net income (loss)
available to common stockholders (numerator)
|
532,915
|
(451,138
)
|
Weighted average
number of common shares outstanding during the period used in
earnings per share (denominator)
|
29,644,362
|
23,725,860
|
NOTE 10
– COMMITMENTS AND CONTINGENCIES
After
the Spin-Off, FAB Universal Corp. (“FAB”), the former
parent company of the Company, may have obligations that at the
present time are unknown or unforeseen. As the nature of such
obligations are unknown, we are unable to provide an estimate of
the potential obligation. However, should FAB incur such
obligations, the Company may be financially obligated to pay any
losses incurred.
The
Company has a 401 (k) plan and Profit sharing plan for the benefit
of the employees of the Company. Employees are eligible to
participate in the plan the first of the month following their hire
date and attaining the age of 21. Profit sharing contributions are
made at the discretion of the Board of Directors and vest 100%
after the second year of service. The Company made a $100,000
profit sharing contribution to the plan in 2017.
NOTE 11
- SEGMENT REPORTING
ASC
280, “Segment Reporting”, establishes standards for
reporting information about operating segments on a basis
consistent with the Company's internal organizational structure as
well as information about geographical areas, business segments and
major customers in financial statements for details on the
Company's business segments.
The
Company is engaged in providing hosting services. The Company's
chief operating decision maker (“CODM”) has been
identified as the CEO who reviews the financial information of
separate operating segments when making decisions about allocating
resources and assessing performance of the group. Based on
management's assessment, the Company has determined that it has two
operating segments as of March 31, 2018 which are podcast hosting
services (Libsyn) and internet hosting services
(Pair).
The
following table presents summary information by segment for the
three months ended March 31, 2018 and 2017,
respectively:
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Revenue
|
$
2,882
|
$
2,177
|
$
5,059
|
$
2,494
|
$
-
|
$
2,494
|
Cost of
revenue
|
534
|
173
|
707
|
617
|
-
|
617
|
Gross
margin
|
2,348
|
2,004
|
4,352
|
1,877
|
-
|
1,877
|
|
|
|
|
|
|
|
Total
assets
|
$
17,682
|
$
18,177
|
$
35,859
|
$
17,569
|
$
-
|
$
17,569
|
Depreciation and
amortization
|
$
8
|
$
759
|
$
767
|
$
4
|
$
-
|
$
4
|
NOTE 12
- SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the
filing of this report.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
.
Safe Harbor Statement
.
Statements
made in this Form 10-Q which are not purely historical are
forward-looking statements with respect to the goals, plan
objectives, intentions, expectations, financial condition, results
of operations, future performance and business of the Company,
including, without limitation, (i) our ability to gain a larger
share of the home healthcare industry, our ability to continue to
develop services acceptable to our industry, our ability to retain
our business relationships, and our ability to raise capital and
the growth of the home healthcare industry, and (ii) statements
preceded by, followed by or that include the words "may", "would",
"could", "should", "expects", "projects", "anticipates",
"believes", "estimates", "plans", "intends", "targets", "tend" or
similar expressions.
Forward-looking
statements involve inherent risks and uncertainties, and important
factors (many of which are beyond the Company's control) that could
cause actual results to differ materially from those set forth in
the forward-looking statements, including the following, in
addition to those contained in the Company's reports on file with
the Securities and Exchange Commission: general economic or
industry conditions, nationally and/or in the communities in which
the Company conducts business, changes in the interest rate
environment, legislation or regulatory requirements, conditions of
the securities markets, changes in the home healthcare industry,
the development of services that may be superior to the services
offered by the Company, competition, changes in the quality or
composition of the Company's services, our ability to develop new
services, our ability to raise capital, changes in accounting
principles, policies or guidelines, financial or political
instability, acts of war or terrorism, other economic, competitive,
governmental, regulatory and technical factors affecting the
Company’s operations, services and prices.
Accordingly,
results actually achieved may differ materially from expected
results in these statements. Forward-looking statements speak only
as of the date they are made. The Company does not undertake, and
specifically disclaims, any obligation to update any
forward-looking statements to reflect events or circumstances
occurring after the date of such statements.
Company Overview
Founded
in 2015, Liberated Syndication Inc (“the
“Company,”, “parent”, “we,” or
“us” and words of similar import), a Nevada
corporation, provides podcast hosting services through its
wholly-owned subsidiary Webmayhem Inc., a Pennsylvania corporation
(“Libsyn”), and webhosting services through its
wholly-owned subsidiary Pair Networks, Inc., a Pennsylvania
corporation (“Pair” or “PNI”).
Libsyn’s focus is on our podcasting business, while
Pair’s focus is on webhosting and domains.
Podcast Hosting and Distribution
Libsyn
is a Podcast Service Provider offering hosting and distribution
tools which include storage, bandwidth, RSS creation, destination
distribution and audience statistics and analytics. Podcast
producers can chose from a variety of hosting plan levels based on
the requirements for their podcast. Plans are designed to provide
full-featured podcast tools with generous storage and bandwidth
transfer.
Podcast producers can choose from a variety of hosting plan levels
based on the requirements for their podcast. Podcast
producers’ sign-up online at www.libsyn.com, using their
credit card to subscribe to a monthly plan. Libsyn’s standard
plans range for $5 to $75 per month. LibsynPRO service is an
enterprise solution for professional media producers and corporate
customers that require media network features and dedicated
support. LibsynPro revenue consists primarily of monthly hosting
fees and bandwidth usage charges. Other professional level add-ons,
such as set-up fees and custom features, represent a small portion
of LibsynPro revenue.
During the first three months of 2018, Libsyn generated 70% of its
revenue from Podcast hosting fees paid by Libsyn4 Producers.
LibsynPro revenue is 18% of overall revenues, and Advertising
revenue makes up 10% revenues. App subscriptions make up 2% of
total Libsyn revenues. During the first three months of 2017, those
revenues contributions were 62% for Libsyn4, 16%, for LibsynPro,
19% for Advertising and 3% for App subscriptions.
Trends in the number of podcast shows on the Libsyn network and
podcast consumption affect our revenue and financial results as
they are directly related to cash flow and cost of revenue.
Management believes that over the next 3 months, growth in the
podcasting industry and Libsyn’s market leadership will
continue to fuel expansion of the Libsyn network and revenue. The
Company expects to see year-over-year bandwidth usage continue to
grow in 2018.
Pair Networks, Inc. (“Pair”)
Pair
offers a variety of hosting plan levels, value add Internet
services and domain registration. Through the Pair Account Control
Center (ACC), customers can manage their hosting accounts and
domains from one place.
Customers
can choose from a variety of web hosting plan levels based on their
requirements and applications. Pair Hosting offers shared servers,
virtual private servers, dedicated servers and Pair cloud
technology as managed services. With over twenty years of
experience in Internet hosting, Pair has the expertise to build and
manage reliable and powerful hosting solutions. The managed service
and 24x7 support allow customers to focus on their core business
without having to worry about hardware, operating systems, network
connectivity or uptime.
Share
web hosting is a great option for startup or smaller businesses as
the website sits on the same server with other websites and shares
resources such as memory and Central Processing Unit (CPU). Basic
website applications such as email and file sharing are ideal for
shared server offerings.
Results of Operations
Three Months Ended March 31, 2018 and 2017.
During
the three months ended March 31, 2018, the Company recorded
revenues of $5,059,305, a 103% increase over revenues of $2,494,111
for the same period in 2017. The increase for 2018 reflects an
increase in Libsyn4 hosting revenue as well as LibsynPro, offset by
decreases in Premium Subscription and Advertising revenue. Pair
contributed $2,177,115 of revenue during the first quarter of 2018.
Libsyn4 hosting revenue increased due to the 30% growth in the
number of podcasts on the network when comparing the first quarter
of 2018 versus 2017. LibsynPro revenue increased as a result of
additional LibsynPro networks using our platform in 2018 with
increased bandwidth usage fees for delivery of podcasts
contributing to the majority of the revenue gain. Advertising
revenue decreased 37% in the first quarter of 2018 versus 2017. The
decrease resulted from decrease in the dollars being spent on ad
campaigns during the first quarter of 2018 with existing
advertisers. Premium subscription revenue increased
$23,409.
During
the three months ended March 31, 2018, cost of revenue totaled
$707,370, a 15% increase as compared to $617,054 for the same
period in 2017. This is a reflection of the increase the ad sharing
that is being paid to producers in 2018 versus 2017. Pair
contributed $170,800 to cost of revenue during the first quarter of
2018.
The
Company recorded total operating expenses of $3,730,770 during the
three months ended March 31, 2018, a 15% increase as compared to
operating expenses of $3,252,205 in the same period of 2017. The
increase is increase in general and administrative were primarily
driven by the addition of the Pair business, offset by a decrease
in non-cash compensation. General and administrative expenses
totaled $1,387,312 in 2018 versus $468,247 in 2017, an increase of
196%. Technology expenses represented $373,326 in 2018 versus
$143,042 in 2017, driven by an increase in wages from the addition
of Pair during 2018. Selling expenses in 2018 were $217,002 versus
$76,038 in 2017 with the addition of the selling team for Pair.
Customer support expenses in 2018 were $668,230 versus $191,820 in
2017 driven by the 24/7 support provided by Pair.
Interest
expense for the first quarter of 2018 was $100,596, which
represents interest on the loan facility obtained in connection
with the acquisition of Pair.
The
Company’s net income was $532,915 for the three months ended
March 31, 2018. This represents a $1,290,309 increase from our net
loss of $758,394 for the three months ended March 31,
2017.
Liquidity and Capital Resources
.
Cash on
hand was $6,587,745 at March 31, 2018, an increase of $1,375,900
over the $5,211,845 on hand at December 31, 2017. Cash provided by
operations for the three months ended March 31, 2018, was
$1,792,870, an increase of $1,345,395 over the $447,475 cash
provided by operations for the three months ended March 31, 2017.
The contribution from Pair of this cash generation totaled
$608,140, and Libsyn added $737,255. This increase is driven from
our operating results of both segments of our
business.
Cash
used in financing activities was $416,970 for the three months
ended March 31, 2018 and $0 in 2017. During the first quarter, we
made our payment on the loan used to acquire Pair, $400,000 as well
as $16,970 of payments on our capital lease.
The
increase in cash of $1,375,900 during the first quarter of 2018 is
a reflection of the strength of the overall business during the
quarter.
Off-balance sheet arrangements
We have
operating leases for certain facilities, but otherwise do not have
any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our
financial condition, results of operations, liquidity, or capital
resources.
The
future minimum lease payments for non-cancelable operating leases
having remaining terms in excess of one year as of March 31, 2018
are as follows:
Year ending
March 31:
|
|
2019
|
466,260
|
2020
|
466,260
|
2021
|
466,260
|
2022
|
262,176
|
Thereafter
|
4,841
|
Total Minimum Lease
Payment
|
$
1,665,797
|