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
|
|
PAGE
|
Unaudited
Condensed Consolidated Balance Sheets
|
|
4
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations
|
|
5
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
|
6
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial
Statements
|
|
7
|
|
|
|
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
|
$
9,364,218
|
$
5,211,845
|
Accounts
receivable, net
|
515,852
(1)
|
660,139
(1)
|
Prepaid
expenses
|
243,534
|
186,425
|
Prepaid
domains, net
|
216,760
|
-
|
Total
current assets
|
10,340,364
|
6,058,409
|
|
|
|
Property
and equipment, net
|
2,381,456
|
3,007,025
|
Goodwill
|
16,388,171
|
16,352,069
|
Definite
life - intangible assets, net
|
8,251,014
|
9,644,000
|
Prepaid
domains, net of current portion
|
149,257
|
-
|
Other
|
3,582
|
7,076
|
Total
assets
|
$
37,513,844
|
$
35,068,579
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts
payable
|
$
452,418
|
$
440,565
|
Accrued
expenses
|
307,332
|
769,485
|
Deferred
revenue, net
|
2,293,245
|
1,247,686
|
Current
portion of capital lease obligation
|
72,032
|
69,243
|
Current
portion of loans payable, net of $29,371 and $33,366 discount,
respectively
|
2,637,296
|
1,566,634
|
Total
current liabilities
|
5,762,323
|
4,093,613
|
|
|
|
LONG TERM
LIABILITIES:
|
|
|
Loans
payable, net of $58,151 and $79,634 discount, respectively, less
current portion
|
6,075,182
|
8,320,366
|
Capital lease
obligation, net of current portion
|
19,439
|
73,817
|
Deferred
revenue, net
|
280,774
|
133,617
|
Total
long-term liabilities
|
6,375,395
|
8,527,800
|
Total
liabilities
|
12,137,718
|
12,621,413
|
|
|
|
COMMITMENTS &
CONTINGENCIES
|
-
|
-
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
Common
stock
|
29,778
|
29,596
|
Additional
paid-in capital
|
35,092,997
|
34,804,457
|
Accumulated
deficit
|
(9,746,649
))
|
(12,386,887
))
|
Total
stockholders' equity
|
25,376,126
|
22,447,166
|
Total
liabilities and stockholders' equity
|
$
37,513,844
|
$
35,068,579
|
|
|
|
Liberated Syndication Inc. and Subsidiaries
Balance Sheet
(Parenthetical)
|
|
Statement of
Financial Position
|
|
|
Allowance
for doubtful accounts (1)
|
14,000
|
14,000
|
Common
stock authorized
|
200,000,000
|
200,000,000
|
Common
stock par value
|
0.001
|
0.001
|
Common
stock issued and 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
|
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
5,726,425
|
$
2,730,237
|
$
16,091,492
|
$
7,723,250
|
|
|
|
|
|
Costs and operating
expenses
|
|
|
|
|
|
|
|
|
|
Cost of revenue
(excluding depreciation and amortization)
|
962,817
|
636,090
|
2,374,702
|
1,833,868
|
General and
administrative
|
1,348,731
|
642,262
|
4,252,630
|
1,916,787
|
Non-cash
compensation
|
-
|
-
|
318,000
|
1,752,000
|
Technology
|
426,339
|
157,328
|
1,292,238
|
463,386
|
Selling
|
220,460
|
75,649
|
647,833
|
235,583
|
Customer
support
|
680,094
|
53,099
|
2,055,389
|
138,721
|
Depreciation and
amortization
|
736,818
|
4,329
|
2,273,083
|
12,648
|
Total costs and
operating expenses
|
4,375,259
|
1,568,757
|
13,213,875
|
6,352,993
|
Operating
income
|
1,351,166
|
1,161,480
|
2,877,617
|
1,370,257
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(92,002
)
|
-
|
(291,205
)
|
-
|
Interest
income
|
21,904
|
-
|
44,970
|
-
|
Other
income
|
3,690
|
-
|
8,857
|
-
|
Income from
operations before income taxes
|
1,284,758
|
1,161,480
|
2,640,239
|
1,370,257
|
|
|
|
|
|
Income tax expense
(benefit)
|
-
|
-
|
-
|
-
|
Net
Income
|
$
1,284,758
|
$
1,161,480
|
$
2,640,239
|
$
1,370,257
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
INCOME PER COMMON SHARE
|
$
0.04
|
$
0.05
|
$
0.09
|
$
0.06
|
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
29,776,974
|
24,415,860
|
29,733,256
|
24,195,567
|
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
|
$
2,640,239
|
$
1,370,257
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
Depreciation
and amortization expense
|
2,273,083
|
14,098
|
Issuance
of common stock for services
|
318,000
|
1,752,000
|
Discount
on loan fees
|
25,478
|
-
|
Change
in assets and liabilities:
|
|
|
Accounts
receivable
|
78,906
|
(206,236
)
|
Prepaid
expenses
|
(419,633
)
|
(3,599
)
|
Accounts
payable
|
11,853
|
(106,918
)
|
Accrued
expense
|
(462,152
)
|
(239,285
)
|
Deferred
revenue
|
1,192,715
|
(9,142
)
|
Net
Cash Provided by Operating Activities
|
5,658,489
|
2,571,175
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
Purchase of
property and equipment
|
(254,527
)
|
(69,064
)
|
Net
Cash Used in Investing Activities
|
(254,527
)
|
(69,064
)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Repayment
on term loan
|
(1,200,000
)
|
-
|
Repayment
on capital lease
|
(51,589
)
|
-
|
Re-purchase
of common stock
|
-
|
(8,000
)
|
Net
Cash Used in Financing Activities
|
(1,251,589
)
|
(8,000
)
|
|
|
|
Net
Increase in Cash
|
4,152,373
|
2,494,111
|
Cash
at Beginning of Period
|
5,211,845
|
4,875,458
|
Cash
at End of Period
|
$
9,364,218
|
$
7,369,569
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash
paid during the periods for:
|
|
|
Interest
|
$
263,981
|
$
-
|
Income
taxes
|
-
|
-
|
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.
Basis of Presentation
– Our financial statements have
been prepared in accordance with generally accepted accounting
principles in the United States (GAAP) and include our accounts and
the accounts of our subsidiaries. All material intercompany
accounts and transactions have been eliminated.
Our
interim financial statements are unaudited, and in our opinion,
include all adjustments of a normal recurring nature necessary for
the fair presentation of the periods presented. The results for the
interim periods are not necessarily indicative of the results to be
expected for any subsequent period or for the year ending December
31, 2018.
These
financial statements should be read in conjunction with our audited
consolidated financial statements and related notes included in our
Annual Report on Form 10-K for the year ended December 31, 2017
(the 2017 Form 10-K).
Prior Period Reclassifications -
Reclassifications of
certain immaterial prior period amounts have been made to conform
to the current period presentation.
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 September
30, 2018, the Company had $8,858,914 cash balances in excess of
federally insured limits.
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
Accounts Receivable
– Accounts receivable consist of
trade receivables arising in the normal course of business. At
September 30, 2018 and December 31, 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 nine months ended September 30, 2018 and 2017, the
Company adjusted the allowance for bad debt by $0.
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 technology during the nine months ended September 30, 2018 and
2017.
Software development costs totaled $1,292,238 and
$463,386 for the nine months ended September 30, 2018 and 2017,
respectively.
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 September 30,
2018.
Advertising Costs
– Advertising costs are expensed as
incurred and amounted to $95,075 and $25,344 for the nine months
ending September 30, 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.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
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.
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 recognize
advertising revenue is satisfied upon delivery of the media
download and collection is probable.
Equity-Based Compensation -
Our equity-based awards are
comprised of stock and are accounted for using the fair value
method. Stock is measured based on the fair market value of the
underlying common stock on the date of grant. Awards 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.
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.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
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.
Recent
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
|
$
8,103,172
|
$
8,032,178
|
Leasehold
improvements
|
3 - 5
yrs
|
2,646,400
|
2,646,400
|
Software
|
3 yrs
|
190,038
|
6,503
|
|
10,939,609
|
10,685,081
|
Less: Accumulated
depreciation
|
|
(8,558,154
)
|
(7,678,056
)
|
Property &
equipment, net
|
|
$
2,381,456
|
$
3,007,025
|
Depreciation
expense for the nine months ended September 30, 2018 and 2017 was
$880,097 and $14,098, respectively.
NOTE 3
- GOODWILL
AND OTHER DEFINITE-LIFE
INTANGIBLE ASSETS
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.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 3
- GOODWILL
AND OTHER DEFINITE-LIFE
INTANGIBLE ASSETS - Continued
As of September 30, 2018,
identifiable intangible assets consist of
following:
|
|
Weighted Average
Useful
Life
(in
Years)
|
|
|
Customer
Relationships
|
$
3,947,000
|
7
|
$
422,893
|
$
3,524,107
|
Intellectual
Property
|
3,709,000
|
7
|
397,393
|
3,311,607
|
Trade
name
|
576,000
|
10
|
43,200
|
532,800
|
Non-compete
|
1,412,000
|
2
|
529,500
|
882,500
|
Total
|
$
9,644,000
|
|
$
1,392,986
|
$
8,251,014
|
Amortization
expense for the nine months ended September 30, 2018 and 2017 was
$1,392,986 and $0, respectively
The estimated future amortization expenses related to other
intangible assets as of September 30, 2018 are as
follows:
For twelve months
ending September 30,
|
|
2019
|
$
1,857,314
|
2020
|
1,327,814
|
2021
|
1,151,315
|
2022
|
1,151,314
|
2023
|
1,151,314
|
Thereafter
|
1,611,943
|
Total
|
$
8,251,014
|
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”).
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
September 30, 2018, $2,000,000 was drawn down on the revolving line
with $0 available.
The
loan currently accrues interest at LIBOR plus 150 base points or
prime plus 75 basis points at the election of the Company. As of
September 30, 2018, the Company has elected LIBOR plus 150 basis
points or 3.886%.
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 September 30, 2018, the balance on the term loan
was $6,800,000.
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.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4
– LOANS - Continued
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 September
30, 2018, the discount was $87,522.
Future
maturities of the loans at September 30, 2018 are as
follows:
For the year ending
September 30,
|
|
2019
|
$
2,666,667
|
2020
|
1,600,000
|
2021
|
1,600,000
|
2022
|
1,600,000
|
2023
|
1,333,333
|
Thereafter
|
-
|
Total
|
$
8,800,000
|
NOTE 5
- CAPITAL STOCK
Common Stock
- The Company has authorized 200,000,000 shares
of common stock, $0.001 par value. As of September 30, 2018,
29,776,974 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
connection with the closing adjustment for the net-working capital
provision.
During
the first quarter of 2017, the Company issued 3,650,000 shares of
common stock valued at $1,752,000 to officers and
directors.
During
the second quarter of 2017, the Company repurchased 40,000 shares
of common stock for $8,000, and the stock was retired.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 6
– DEFERRED REVENUE
Deferred
revenue consists of the following:
|
|
|
Current:
|
|
|
Hosting
services
|
$
1,698,164
|
$
1,032,000
|
Domains
|
486,102
|
104,172
|
Media
subscription
|
108,979
|
111,514
|
|
$
2,293,245
|
$
1,247,686
|
Noncurrent:
|
|
|
Hosting
services
|
-
|
50,351
|
Domains
|
280,774
|
83,266
|
|
$
2,574,019
|
$
1,381,303
|
Deferred
revenue as of September 30, 2018 is expected to be recognized as
revenue as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domains
|
$
169,901
|
$
350,520
|
$
99,312
|
$
67,619
|
$
54,236
|
$
25,289
|
$
766,877
|
Hosting
|
821,308
|
791,839
|
85,016
|
-
|
-
|
-
|
1,698,163
|
Media
Subscription
|
55,633
|
53,346
|
-
|
-
|
-
|
-
|
108,979
|
|
$
1,046,842
|
$
1,195,705
|
$
184,328
|
$
67,619
|
$
54,236
|
$
25,289
|
$
2,574,019
|
Disaggregated
revenue consists of following:
|
Three Months
Ended September 30
|
Nine months
ended September 30
|
|
|
|
|
|
Hosting
services
|
$
2,246,071
|
$
-
|
$
6,439,706
|
$
-
|
Podcast
hosting
|
2,794,994
|
2,191,311
|
7,945,625
|
6,159,613
|
Advertising
|
449,467
|
443,107
|
1,020,881
|
1,285,075
|
Domains
|
159,128
|
-
|
347,423
|
-
|
Other
|
76,765
|
95,819
|
337,857
|
278,562
|
|
$
5,726,425
|
$
2,730,237
|
$
16,091,492
|
$
7,723,250
|
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 September 30, 2018 and December 31,
2017, the total of all deferred tax assets was $2,691,737 and
$3,458,667, respectively, and the total of the deferred tax assets
related to goodwill was $2,380,160 and $1,848,717, 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 nine months ended September 30, 2018 and 2017 was
$766,929 and $557,580, respectively.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 7
- INCOME TAXES – continued
The
components of income tax expense (benefit) from continuing
operations for the nine months ended September 30, 2018 and 2017
consist of the following:
|
For the Nine
months ended
|
|
|
|
|
|
Current tax
expense:
|
|
|
Federal
|
$
-
|
$
-
|
State
|
-
|
-
|
Current tax
expense
|
-
|
-
|
|
|
|
Deferred tax
expense (benefit):
|
|
|
Depreciation
|
(648,116
)
|
-
|
Intangible
Assets
|
531,442
|
383,331
|
Valuation
Allowance
|
(766,929
)
|
(557,580
)
|
Net operating loss
carryforward
|
883,603
|
174,249
|
Subtotal deferred
tax expense/(benefit)
|
-
|
-
|
Income tax
expense/(benefit)
|
$
-
|
$
-
|
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 Nine
months ended September 30,
|
|
|
|
|
|
|
Computed tax at the
expected statutory rate
|
$
554,450
|
$
465,893
|
State
and local income taxes, net of federal
|
209,493
|
90,565
|
Other
non-deductible expenses
|
2,986
|
1,122
|
Valuation
Allowance
|
(766,929
)
|
(557,580
)
|
Income tax
expense/(benefit)
|
$
-
|
$
-
|
The
temporary differences, tax credits and carryforwards gave rise to
the following deferred tax asset at September 30, 2018 and December
31, 2017:
|
|
|
|
|
|
Net deferred tax
assets (liabilities):
|
|
|
Depreciation
and amortization
|
648,116
|
-
|
Goodwill -
impaired
|
2,066,632
|
2,066,632
|
Intangible assets
– tax amortization
|
(4,446,792
)
|
(3,915,349
)
|
Net operating loss
carryforward
|
4,423,781
|
5,307,384
|
Valuation
allowance
|
(2,691,737
)
|
(3,458,667
)
|
Net term deferred tax
assets (liabilities)$
|
$
-
|
-
|
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 $34,014 a month through September 2021.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 8
– LEASES - Continued
The
future minimum lease payments for non-cancelable operating leases
having remaining terms in excess of one year as of September 30,
2018 are as follows:
Year ending
September 30:
|
|
2019
|
466,260
|
2020
|
466,260
|
2021
|
466,260
|
2022
|
33,887
|
Total Minimum Lease
Payment
|
$
1,432,667
|
Lease
expense charged to operations was $458,805 and $153,252 for the
nine months ended September 30, 2018 and 2017,
respectively.
NOTE 9
–EARNINGS PER SHARE
Basic
income (loss) per share is computed by dividing net income (loss)
attributable to Liberated Syndication Inc. by the weighted-average
number of shares of common stock outstanding during the period. As
of September 30, 2018, there were no common stock equivalents
outstanding.
The
following data shows the amounts used in computing earnings per
share and the weighted average number of shares of common stock
outstanding for the periods presented for the periods
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
operations available to common stockholders
(numerator)$
|
$
1,284,758
|
$
1,161,480
|
$
2,640,239
|
1,370,257
|
Income available to
common stockholders (numerator)
|
1,284,758
|
1,161,480
|
2,640,239
|
1,370,257
|
Restated Weighted
average number of common shares outstanding during the period used
in earnings per share (denominator)
|
29,776,974
|
24,415,860
|
29,733,256
|
24,195,567
|
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 2018.
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.
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 11
- SEGMENT REPORTING - Continued
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 September 30, 2018 which are podcast
hosting services (Libsyn) and internet hosting services
(Pair).
The
following table presents summary information by segment for the
nine months ended September 30, 2018 and 2017,
respectively:
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
9,260
|
$
6,831
|
$
16,091
|
$
7,723
|
$
-
|
$
7,723
|
Cost of
revenue
|
1,818
|
557
|
2,375
|
1,834
|
-
|
1,834
|
|
|
|
|
|
|
|
Total
assets
|
$
19,675
|
$
17,839
|
$
37,514
|
$
19,583
|
$
-
|
$
19,583
|
Depreciation and
amortization
|
$
30
|
$
2,243
|
$
2,273
|
$
14
|
$
-
|
$
14
|
The
following table presents summary information by segment for the
three months ended September 30, 2018 and 2017,
respectively:
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
3,352
|
$
2,374
|
$
5,726
|
$
2,730
|
$
-
|
$
2,730
|
Cost of
revenue
|
745
|
218
|
963
|
636
|
-
|
636
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
$
12
|
$
725
|
$
737
|
$
6
|
$
-
|
$
6
|
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 choose 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 nine months of 2018, Libsyn generated 70% of its
revenue from Podcast hosting fees paid by Libsyn4 Producers.
LibsynPro revenue is 17% of overall revenues, and Advertising
revenue makes up 10% revenues. App subscriptions make up 3% of
total Libsyn revenues. During the first nine months of 2017, Libsyn
generated 64% of its revenue from Podcast hosting fees paid by
Libsyn4 Producers. LibsynPro revenue is 17% of overall revenues,
and Advertising revenue makes up 16% of revenues. App subscriptions
make up 3% of total Libsyn revenues.
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
Nine months ended September 30, 2018 and 2017.
During
the nine months ended September 30, 2018, the Company recorded
revenues of $16,091,492, a 108% increase over revenues of
$7,723,250 for the same period in 2017. The increase for 2018
reflects an increase in Libsyn4 hosting revenue as well as
LibsynPro and Premium Subscription, offset by decreases in
Advertising revenue. Pair contributed $6,830,964 of revenue during
the first nine months of 2018, and $0 during 2017 due to the
acquisition in December 2017. Libsyn4 hosting revenue increased 31%
due to the growth in the number of podcasts on the network when
comparing the first nine months 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 24% in the first nine months of
2018 versus 2017. The decrease resulted from decrease in the
dollars being spent on ad campaigns during the first nine months of
2018 with existing advertisers. Premium subscription revenue
increased $18,714.
The
Company recorded total costs and operating expenses of $13,213,875
during the nine months ended September 30, 2018, an 108% increase
as compared to operating expenses of $6,352,993 in the same period
of 2017. Pair contributed $7,954,209 to total costs and operating
expenses during the first nine months of 2018, and $0 during 2017
due to the acquisition in December 2017.
During
the nine months ended September 30, 2018, cost of revenue totaled
$2,374,702, a 29% increase as compared to $1,833,868 for the same
period in 2017. Pair contributed $556,560 to cost of revenue during
the first nine months of 2018. There was also an increase in
bandwidth costs, credit card processing fees, and colocation fees,
offset by a decrease in ad sharing that is being paid to producers
in 2018 versus 2017, driven by a decrease in ad
revenue.
The
increase in general and administrative was primarily driven by the
addition of the Pair business consisting primarily of wages, rent,
utilities, and health insurance costs. General and administrative
expenses, including non-cash compensation, totaled $4,570,630 in
2018 versus $3,668,787 in 2017, an increase of 25%, driven by an
increase in wages from the addition of Pair during 2018. Technology
expenses represented $1,292,238 in 2018 versus $463,386 in 2017,
driven by an increase in wages from the addition of Pair during
2018. Selling expenses in 2018 were $647,833 versus $235,583 in
2017 with the addition of the selling team for Pair. Customer
support expenses in 2018 were $2,055,389 versus $138,721 in 2017
driven by the 24/7 support provided by Pair.
Interest
expense for the first nine months of 2018 was $291,205, which
represents interest on the loan facility obtained in connection
with the acquisition of Pair.
The
Company’s net income was $2,640,239 for the nine months ended
September 30, 2018. This represents a $1,269,982 increase from
$1,370,257 for the nine months ended September 30,
2017.
Three Months Ended September 30, 2018 and 2017.
During
the three months ended September 30, 2018, the Company recorded
revenues of $5,726,425, a 110% increase over revenues of $2,730,237
for the same period in 2017. The increase for 2018 reflects an
increase in Libsyn 4 hosting revenue as well as LibsynPro, Premium
Subscription and advertising. Pair contributed $2,373,822 of
revenue during the third quarter of 2018, and $0 during 2017 due to
the acquisition in December 2017. Libsyn4 hosting revenue increased
due to the growth in the number of podcasts on the network when
comparing the third 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 increased due to an increase in spending on
campaigns during the third quarter of 2018. Premium subscription
revenue increased due an increase in the number producers offering
subscription.
Libsyn
recorded total costs and operating expenses of $4,375,259 during
the three months ended September 30, 2018, a 179% increase as
compared to operating expenses of $1,568,757 in the same period of
2017. Pair contributed $2,613,605 to total costs and operating
expenses during the third quarter of 2018, and $0 during 2017 due
to the acquisition in December 2017.
During
the three months ended September 30, 2018, cost of revenue totaled
$962,817, a 51% increase as compared to $636,090 for the same
period in 2017. Pair contributed $218,285 to cost of revenue during
the third quarter of 2018. There was also an increase in bandwidth
costs, credit card processing fees, and colocation fees, offset by
a decrease in ad sharing that is being paid to producers in 2018
versus 2017.
General
and administrative expenses totaled $1,348,731 in 2018 versus
$642,262 in 2017, an increase of 110%, driven by an increase in
wages from the addition of Pair during 2018, and increases in
personnel and wages within Libsyn. Technology expenses represented
$426,339 in the third quarter of 2018 versus $157,328 in 2017,
driven by an increase in personnel from the addition of Pair during
2018. Selling expenses in the third quarter of 2018 were $220,460
versus $75,649 in 2017, driven by an increase in wages and
advertising from the addition of Pair during 2018.
The
Company’s net income was $ 1,284,758 for the three months
ended September 30, 2018. This represents a $123,278 increase from
our net income of $1,161,480 for the three months ended September
30, 2017.
Liquidity and Capital Resources
.
Cash on
hand was $9,364,218 at September 30, 2018, an increase of
$4,152,373 over the $5,211,845 on hand at December 31, 2017. Cash
provided by operations for the nine months ended September 30,
2018, was $5,658,489, an increase of $3,087,314 over the $2,571,175
cash provided by operations for the nine months ended September 30,
2017. The contribution from Pair of this cash generation totaled
$1,494,893, and Libsyn added $2,657,480. This increase is driven
from our operating results of both segments of our
business.
Cash
used in investing activities of $254,527 during the third quarter
of 2018 was for the purchase of equipment and capitalization of
software development costs.
Cash
used in financing activities was $1,251,589 for the nine months
ended September 30, 2018 and $8,000 in 2017. During the first nine
months of 2018, we made our payments on the loan used to acquire
Pair, a total of $1,200,000, as well as $51,589 of payments on our
capital lease.
The
increase in cash of $4,152,373 during the first nine months of 2018
is a reflection of the strength of the overall business through the
first nine months of 2018.
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 September 30,
2018 are as follows:
Year ending
September 30:
|
|
2019
|
466,260
|
2020
|
466,260
|
2021
|
466,260
|
2022
|
33,887
|
Total Minimum Lease
Payment
|
$
1,432,667
|