13.
Subsequent Events
Management has evaluated subsequent events through the date of the filing of this report. No events have occurred that would require adjustments to or disclosure in the financial statements other than:
On April 24, 2019, Camac Fund, LP, and its affiliates Camac Partners, LLC, Camac Capital, LLC, and Eric Shahinian, (collectively, “Camac”) made a demand to inspect the Company’s books and records, purportedly in connection with Camac’s efforts to compel the Company to call a special meeting of its stockholders. On May 8, 2019, the Company provided the materials required by relevant Nevada law. On July 15, 2019, Camac filed a verified complaint and alternative petition for a writ of mandamus/prohibition in Nevada District Court together with a motion for preliminary injunction, seeking to compel the Company to provide certain additional documents relating to the identity of beneficial owners of its common stock. The Company filed a response brief to the motion for preliminary injunction and a hearing was held on such motion on August 1. The Court’s decision denied the issuance of an injunction obligating the Company to generate or obtain those additional documents, but requires the Company to turn over any such documents should the Company use those documents in the future to engage in solicitation activity in connection with any special meeting of stockholders that may be held involving Camac.
NOTE 12 - SUBSEQUENT EVENTS – Continued
On October 4, 2019,8, 2020, Mr. Spencer, the Company reachedCompany’s former chief executive officer, satisfied his withholding tax liability, related to his separation agreement, of $918,852 by tendering 236,209 shares of stock, with a resolution with Camac. The settlement agreement provides for, among other things, the Company reimbursing Camac for upstock price of $3.89 per share, to $600,000 in out-of-pocket expenses and the cancellation of certain equity awards by the Company.
Immediately following the execution of the settlement agreement, the Company shall take all action necessary to irrevocably cancel those equity awards previously granted to the Company’s Chief Executive Officer and Chief Financial Officer representing an aggregate of 300,000 restricted shares (150,000 held by each of them), the vesting conditions with respect to which relate to the achievement of a Nasdaq uplisting. Promptly following such cancellation, the Company shall provide to the Stockholders evidence from its transfer agent regarding the return of such shares and their cancellation by the Company. The Company will obtain appropriate written confirmations from the affected individuals regarding such cancellation.
NOTE 13 – RESTATEMENT OF PREVIOUSLY REPORTED UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
This Quarterly Report on Form 10-Q/A (Amendment No. 1) amends the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (the “SEC”) by Liberated Syndication Corp. (the “Company”) on November 14, 2019 (the “Original 10-Q”) to restate our unaudited consolidated financial statements for the quarterly period ended September 30, 2019 and to amend related disclosures.
Background of the Restatement
On April 28, 2020, the Audit Committee of the Board of Directors of Liberated Syndication Inc, a Nevada corporation (the “Company”) determined that (a) the Consolidated Balance Sheet as of December 31, 2018, (b) the Consolidated Statement of Operations for the year ended December 31, 2018, (c) the Statement of Stockholders’ Equity for the year ended December 31, 2018, and (d) the Consolidated Statement of Cash Flows for the year December 31, 2018, all as presented in the Company’s Annual Report on Form 10-K for the Period Ended December 31, 2018, as previously filed with the U.S. Securities and Exchange Commission on March 14, 2019, should not be relied upon. Subsequent to such determination, the Company reviewed the related interim financial statements and interim financial statements for the first three quarters of 2019 and 2018, and as a result of such review, on May 20, 2020, the Audit Committee determined that such interim financial statement should likewise no longer be relied upon.
Specifically, the amounts reported in the Consolidated Balance Sheet as of September 30, 2019 for total assets, current liabilities, and consequently total liabilities and total stockholders’ equity, were determined to be materially different. Additionally, the income tax (benefit) expense in the Consolidated Statement of Operations for the three and nine months ended September 30, 2019 was changed. As a result, the net income and the basic and diluted income per common share were determined to be materially different. The Statement of Stockholders’ Equity for the period ended September 30, 2019 with its net income and accumulated deficit are consequently affected. The Consolidated Statement of Cash Flows for the nine months ended September 30, 2019 also changed as a result of the deferred income taxes and income tax payable for 2019.
During the 2019 audit process, it was discovered through an ongoing IRS examination that the Company owed Federal tax for 2018.
The IRS examination uncovered an error in calculating the Net Operating Loss Carryforward (NOL) resulting from the spin-off of Libsyn in 2016. At December 31, 2017, the Company had recorded an NOL of approximately $14 million. The NOL was part of deferred tax asset which was valued at $0 on the balance sheet, as it had a full valuation allowance. Consequently, the Company was not recognizing tax expenses or the associated tax payable during 2018. However, as the IRS examination continued, it has become clear that the $14 million NOL was overestimated by approximately $12.5 million, and by March 31, 2018, that the NOL has been completely utilized. The result is that the Company ought to have begun recording income tax (benefit) expense in 2018.
This Federal Tax Balance will be paid with an amended return in 2020.
The Company has temporary tax differences which result in a deferred tax asset (DTA). Under the provisions of ASC Topic 740, a DTA is to be recognized for the potential future tax benefit from a loss carryforward. Full realization of the benefit, however, depends on the Company having income in future years.
Because the NOL has been completely utilized and the Company is now consistently recording profits, a DTA with the associated payable should have been recorded in 2018. DTAs represent future income tax benefits. But the tax (benefits) will be realized only if there is sufficient taxable income from which the deductible amount can be deducted.
Impact of the Restatement
As a result of the restatement, reported net income was decreased by $178,129, or $0.01 per basic and diluted share for the three months ended September 30, 2019.
As a result of the restatement, reported net income was decreased by $689,071, or $0.02 per basic and diluted share for the nine months ended September 30, 2019. Total assets increased by $1,752,979 at September 30, 2019. Current and total liabilities increased by $1,856,502 at September 30, 2019. Accumulated deficit decreased by $103,523 at September 30, 2019.
The financial statements included in this Form 10-Q/A have been restated to reflect the adjustments described. The table below summarizes the effects of the restatement on Libsyn’s Unaudited Consolidated Statements of Operation for the three and nine months ended September 30, 2019, Unaudited Consolidated Balance Sheet at September 30, 2019, and Unaudited Statement of Stockholders’ Equity for the period ended September 30, 2019.
In addition to the restatement of the financial statements, certain information within Note 7 – Income Taxes to the financial statements has been restated to reflect the corrections of misstatements discussed above as well as to add disclosure language as appropriate.
Unaudited Consolidated Balance Sheet |
| September 30, 2019 As Reported | | September 30, 2019 As Restated |
Deferred Tax Assets | - | 1,752,979 | 1,752,979 |
Total Assets | 42,854,632 | 1,752,979 | |
Income Taxes Payable | - | 1,856,502 | 1,856,502 |
Total Current Liabilities | 7,804,347 | 1,856,502 | |
Total Liabilities | 13,371,864 | 1,856,502 | |
Accumulated Deficit | (5,404,094) | | |
Stockholder’s Equity | 29,482,768 | | 29,379,245 |
Unaudited Consolidated Statement of Operations |
| Nine months ended September 30, 2019 As Reported | | Nine months ended September 30, 2019 As Restated |
Income Tax (Benefit) Expense | - | 689,071 | 689,071 |
Net Income | 3,194,996 | (689,071) | 2,505,925 |
Basic and Diluted Income Per Common Share | 0.11 | (0.02) | 0.09 |
Unaudited Consolidated Statement of Operations |
| Three months ended September 30, 2019 As Reported | | Three months ended September 30, 2019 As Restated |
Income Tax (Benefit) Expense | - | 178,129 | 178,129 |
Net Income | 819,384 | (178,129) | 641,255 |
Basic and Diluted Income Per Common Share | 0.03 | (0.01) | 0.02 |
Unaudited Statement of Stockholders’ Equity |
| September 30, 2019 As Reported | | September 30, 2019 As Restated |
Net Income | 3,194,996 | (689,071) | 2,505,925 |
Accumulated Deficit | (5,404,094) | | (5,507,617) |
ItemItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement.Forward-Looking Statements
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 web hosting and podcasting industries, our ability to continue to develop services acceptable to our industries, our ability to retain our business relationships, and our ability to raise capital and the growth of the web and podcasting hosting and domain industries, 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: the outbreak of the coronavirus (“COVID-19”) and the global spread of the COVID-19 pandemic during 2020; general economic or industry conditions, nationally and/or in the communities in which the Company conducts business,business; changes in the interest rate environment,environment; legislation or regulatory requirements,requirements; conditions of the securities markets,markets; changes in the web hosting and podcasting industries,industries; the development of services that may be superior to the services offered by the Company, competition,Company; competition; changes in the quality or composition of the Company's services,services; our ability to develop new services,services; our ability to raise capital,capital; changes in accounting principles, policies or guidelines,guidelines; financial or political instability,instability; acts of war or terrorism,terrorism; and 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 (“theInc. (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 web hosting services through its wholly-owned subsidiary Pair Networks, Inc., a Pennsylvania corporation (“Pair” or “PNI”). The Company’s consolidated financial statements include the financial statements of Libsyn and Pair. Libsyn’s focus is on our podcasting business, while Pair’s focus is on our web hosting and domains.domains business.
Our corporate offices consist of approximately 3,100 square feet of office space located at 5001 Baum Blvd, Suite 770, Pittsburgh, PA 15213. Our telephone number is (412) 621-0902. We also maintain an office at 2403 Sidney St., Suite 210, Pittsburgh, PA 15203 consisting of approximately 34,700 square feet.
BUSINESSBusiness
Libsyn
Libsyn is a Podcast Service Providerpodcast service provider offering hosting and distribution tools which include storage, bandwidth, RSS creation, distribution, and statistics tracking. 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 offers a basic, getting started plan for $5 per month and more advanced plans that include more storage, advanced statistics, and podcast apps. Plans are designed to provide full-featured podcast tools with generous storage and bandwidth transfer. LibsynPro service is an enterprise solution for professional media producers and corporate customers that require media network features and dedicated support.
Libsyn supports both audio and video podcasts, allowing producers to upload podcast episodes through the Libsyn interface or via FTP to manage publishing to online directories, web portals, content aggregators, App marketplaces and social media platforms for both download and streaming.
Approximately 62%Management estimates approximately 60% of the downloads from shows that Libsyn distributes reach audiences using Apple's iOS,the Apple Podcasts and Apple’s iTunes platform which includes iTunes on the computer iPads, iPhones,and the Apple Watch, Apple TV, and Apple’s Podcasts App on iOS devices.devices which includes iPhones, iPads, iPods, Apple Watch, and Apple TV. Libsyn also enables distribution to destinations like Google Play Music and aggregators such as Google Podcasts, Spotify, Pandora, iHeartRadio, radio.com and iHeartRadio.Deezer. The OnPublish feature enables podcast episodes to be posted to social media sites such as Facebook, Twitter, YouTube, Linked-In and blogging platforms like WordPress, Tumblr and Blogger. Libsyn also provides a podcast player that can be embedded on websites or shared via social media.
Libsyn’s podcast platform architecture allows for expansion of distribution destinations and OnPublish capabilities. Using the Libsyn service, podcast producers can more broadly distribute and promote their shows to attract larger audiences.
Pair Networks, Inc.
Pair, Networks, Inc. (“Pair”)
Pair Networks, founded in 1996, is one of the oldest and most experienced Internet hosting companycompanies providing a full range of fast, powerful and reliable web hosting services. Pair offers a suite of Internet services from shared hosting to virtual private servers to customized solutions with world-class 24x7 on-site customer support. Based in Pittsburgh, Pair servesbusinesses, bloggers, artists, musicians, educational institutions and non-profit organizations around the world.
Pair offers a variety of hosting plan levels;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 optimized WordPress hosting 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.
Shared 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.
Virtual private servers
Virtual private servers (VPS) is a step up from a shared hosting solution in that specific server resources are allocated directly for youra customer’s use, assuring performance levels. This is a more secure and reliable option that separates youra customer’s site from others and is ideal for storage or database applications for businesses, developers, and fast-growing sites.
Dedicated servers
Dedicated servers provide yet another level of security and performance for those who need more processing power or storage. Servers are built to customer specifications and tuned for performance, reliability and efficiency to meet the demand of more robust applications. Through Pair QuickServe (QS), a powerful hosting solution with tremendous capacity and speed, servers are ready for youra customer’s use in no timequickly and fully managed to keep them up to date.
Pair hosting also offers self-managed service through server collocation, which delivers the advantages of the powerful infrastructure that was built behind the fully managed offerings. For those customers who want to purchase their own hardware, collocation service in Pair’s data center allows for unmanaged service with the security and reliability of the diverse network, physically secure facilities, backup power and redundant climate control.
Optimized WordPress
WordPress (WP) is one of the fastest growing Content Management Systems (CMS) powering web sites today. Pair offers a managed WP product line that is optimally configured for performance and security. This managed WP service will ensureprovides fast performance, high availability and security by keeping sites up to date with the latest WP core updates and patches and ensuring hardware and network speed and uptime. The WP service offers a range of scalable solutions from several to unlimited WP sites, ideal for single sites through enterprise applications.
Pair Hosting customers sign-up online at www.pair.com,, using their credit card to subscribe to a monthly or annual plan. Pair offers a basic, getting started plan with a custom domain for $5.95 per month with a basic drag and drop website builder and more advanced plans that include additional storage, processing power and add-ons like eCommerce and WordPress. Plans are designed to provide full-featured web hosting tools for all levels including backups, Account Controlaccount control and security and operating system maintenance and upgrades.
Pair Domains offers custom domains for Top Level Domains (TLDs) including dot-com, dot-org, and dot-net that vary in price from $7.00 to $70 per year based on the TLD. Customers can search for available domains and sign-up online at www.pairdomains.com using their credit card for a one to ten-year domain name purchase or domain transfer. All domain names registered by Pair include enhanced services such as custom and dynamic Domain Name System (DNS) which controls your domain name’s website and email, WHOIS privacy, email forwarding, and a drag and drop website builder.
Results of Operations
Nine Monthsmonths Ended September 30, 20192020 and 2018.2019
During the nine months ended September 30, 2019,2020, the Company recorded revenues of $18,202,733,$19,114,200, a 13%5% increase overfrom revenues of $16,091,492$18,202,733 for the same period in 2018.2019. The increase for 20192020 reflects an increase in Libsyn4 hosting revenue as well as LibsynPro,and Premium Subscriptions, offset by decreasesa decrease in Advertising and Premium SubscriptionLibsynPro revenue. The increase also reflects an increase due to Pair’s hosting and domain offerings. Libsyn contributed $10,562,580$11,828,145 and $9,260,528$10,562,580 of revenue during the first nine months of 20192020 and 2018,2019, respectively. Pair contributed $7,640,153$7,286,055 and $6,830,964$7,640,153 of revenue during the first nine months of 20192020 and 2018,2019, respectively.
Libsyn4 hosting revenue increased $ 1,379,214, or 17%, during the nine months ended September 30, 2020 when compared to the same period in 2019 due to the growth in the number of podcasts on the network when comparingnetwork. LibsynPro decreased by 5% during the first nine months of 2019 versus 2018. LibsynPro revenue increased as a result of additional LibsynPro networks using our platform in the first nine months of 2019 with increased bandwidth usage fees for delivery of podcasts contributingended September 30, 2020 when compared to the revenue gain.same period in 2019. Advertising revenue decreased $538,253$151,197 during the first nine months of 20192020 versus the same period of 2018.2019. The decrease resulted from a decrease in the dollars being spent on ad campaigns during the first nine months of 20192020 with existing advertisers. Premium subscription revenue decreased $45,282.increased $117,290 in the first nine months of 2020 versus the same period of 2019.
The Company recorded total costs and operating expenses of $14,942,936$17,184,769 during the first nine months of 2019, an 13%2020, a 15% increase as compared to total costs and operating expenses of $13,213,875$14,942,936 during the same period of 2018.2019. Libsyn contributed $7,037,308$9,196,311 to total costs and operating expenses during the first nine months of 2019,2020, and $5,259,665$7,037,309 during the same period in 2018.2019. Pair contributed $7,905,628$7,988,458 to total costs and operating expenses during the first nine months of 20192020 and $7,954,210$7,905,627 during the same period in 2018.2019.
During the first nine months of 2019,2020, cost of revenue totaled $2,581,659, a 9% increase$2,367,400, an 8% decrease as compared to $2,374,702$2,581,659 for the same period in 2018.2019. Libsyn contributed $1,737,553$1,449,868 while Pair contributed $844,106$917,532 to the cost of revenue during the first nine months of 2019.2020. Libsyn recorded a decrease in bandwidth costs and ad sharing paid to producers offset by an increase in bandwidth costs, credit card processing fees and colocation fees offset by a decrease in ad sharing paid to producers during the first nine months of 20192020 versus 2018.the same period of 2019. Pair recorded an increasea decrease in domain name fees and internet fees.fees for the first nine months of 2020 versus the same period of 2019. Cost of revenue as a percentage of revenue for Libsyn decreasedincreased to 16%12% during the first nine months of 20192020 from 20%16% during the same period in 2018.2019. This is a reflection of the reduction in the bandwidth rate to deliver the podcasts, off-set by an increase in bandwidth usage during the first nine months of 20192020 due to the growth in the number of podcasts and increased podcast consumption on the Libsyn Platform.Platform, offset by a reduction in the bandwidth rate to deliver the podcasts. Cost of revenue as a percentage of revenue for Pair increased to 11%13% during the first nine months of 20192020 from 8%11% during the same period in 2018.2019. This is due primarily to the increase in domain name purchase fees and internet connectivity fees.
General and administrative expenses totaled $6,074,072$8,458,122 during the first nine months of 20192020 versus $4,570,630$6,074,072 during the same period in 2018,2019, an increase of 33%39%. The increase was driven primarily due to an increase in legal and advisory fees, wagethe $2,926,439 related to our former CEO’s Separation Agreement expense and insurance costs, offset by a decrease in professional fees as well as a reduction of non-cash expense for Libsyn. The increase includesexpenses related to legal support costs. 2019 expenses included $610,179 of legal and advisory fees incurred by the Company in associated with its settlement with Camac reached following the end of the quarter and $1,125,000 due to the accrual of bonuses for senior management. The increase was further driven by the increase in employment benefits.Camac. General and administrative expense for Pair during the first nine months of 20192020 was $2,030,374$1,959,902 and $2,161,977$2,030,374 for the same period in 2018.2019. General and administrative expense for Libsyn for the same periods was $6,498,220 and $4,043,698, respectively.
During the third quarter of 2020, the Company, and $2,408,653, respectively.Christopher Spencer, the Company’s former CEO, entered into a Separation and Transition Services Agreement and General Release (the “Separation Agreement”). As a result of the Separation Agreement, the Company booked $2,926,439 of compensation expense in the third quarter of 2020. This compensation expense related to a stock grant of 775,000 shares of common stock with an associated $2.50 put option on up to 550,000 of those shares through December 30, 2021, cash bonuses and salaries. In addition, the Company purchased 1,353,795 shares from Mr. Spencer at the market closing price of the Company’s common stock on July 31, 2020. As a result of these transactions, the Company was required to pay $918,852 in withholding taxes, for which Mr. Spencer was required to reimburse the Company under the Separation Agreement. As of September 30, 2020, that balance was reflected in the Company’s related party receivables.
Technology expenses represented $1,390,161$1,754,245 during the first nine months of 20192020 versus $1,292,238$1,390,161 in 2018,the same period of 2019, driven by an increase in wage expense during the first nine months of 2019.2020. Selling expenses during the first nine months of 20192020 were $702,521$842,001 versus $647,833$702,521 during the same period in 20182019 driven by a reductionan increase in advertising expense. Customer support expenses in the first nine months of 20192020 were $1,995,309$2,310,430 versus $2,055,389$1,995,309 during the same period in 20182019 driven by the decreasean increase in support staff costs.
Depreciation and amortization expenses consist of charges relating to the depreciation of the property and equipment used in our operations and the amortization of intangible assets. Depreciation and amortization expense for the first nine months of 20192020 was $2,199,214$1,452,571 and $2,273,083$2,199,214 during the same period in 2018.2019. During the first nine months of 2019,2020, Libsyn contributed $60,175$62,488 and Pair contributed $2,139,039$1,390,083 to depreciation and amortization expense.
Interest expense for the first nine months of 20192020 was $245,002$123,823 compared to $291,205 in$245,002 for the first nine months of 2018,2019, which represents interest on the loan facilityFacility obtained in connection with the acquisition of Pair. Interest expense for the nine months of 20192020 was offset withby interest income of $178,551,$74,772, resulting in net cash expenditure of $66,451 on the note.$49,051.
Income tax expense for the nine months ended September 30, 20192020 was $689,071,$2,658,998, which represents a change in the deferred tax assets and the expected federal balance due for the nine month periodmonths ended September 30, 2019. The income2020. There has been no change to the Company’s NOL carryforward uncertain tax payable will be payable with the amended return in 2020.position. Income tax benefitexpense for the nine months ended September 30, 2019 was $689,071.
In connection with an ongoing IRS examination, the Company has been asked to provide certain financial records supporting tax returns previously filed by Fab Universal Corp. (“FAB”) prior to the spin-off of the Company. The IRS request is related to a failure by FAB to include certain financial information related to certain of its subsidiaries in its consolidated tax returns. We believe it is unlikely that we will be able to provide the IRS with the requested financial records due to FAB’s record retention policies. As a result, we believe we have an uncertain tax position related to the utilization in our 2016, 2017, and 2018 was $827,323.tax returns of the net operating loss carryforwards associated with the Webmayhem subsidiary operations for 2007-2015. Accordingly, we have recorded an uncertain tax provision reserve of approximately $1.2 million for the quarter ended September 30, 2020.
The Company’s net incomeloss was $628,531 for the nine months ended September 30, 2020. This represents a $3,134,456 decrease from $2,505,925 for the nine months ended September 30, 2019. This represents a $961,637 decrease from $3,467,562 for the nine months ended September 30, 2018. Earnings per share decreased to $0.09by $0.11 per share for the first nine months of 2019 from $0.12 per share for2020 when compared to the first nine months of 2018.2019.
Three Months Ended September 30, 20192020 and 2018.2019
During the three months ended September 30, 2019,2020, the Company recorded revenues of $6,219,119,$6,511,707, a 9%5% increase overfrom revenues of $5,726,425$6,219,119 for the same period in 2018. This2019. The increase for 2020 reflects an increase in Libsyn4 hosting revenue, as well as LibsynPro revenue, and Premium Subscriptions, offset by a decrease in advertisingAdvertising revenue. This also reflects an increase in Pair’s hosting and domain offerings. Libsyn contributed $4,078,303 and $3,637,589 of revenue whileduring the three months ended September 30, 2020 and 2019, respectively. Pair contributed $2,581,530.$2,433,404 and $2,581,530 of revenue during the three months ended September 30, 2020 and 2019, respectively.
Libsyn4 hosting revenue increased $467,566, or 17%, during the three months ended September 30, 2020 when compared to the same period in 2019 due to the growth in the number of podcasts on the network when comparingnetwork. LibsynPro revenue grew by 8% as a result of an increase in LibysnPro customers with increased listening habits and higher bandwidth transfer revenue resulting from a rise in podcast consumption. Advertising revenue decreased $29,269 during the three months ended September 30, 20192020 versus the same period of 2019. The decrease resulted from a decrease in 2018. LibsynProthe dollars being spent on advertising campaigns during the three months ended September 30, 2020 with existing advertisers. Premium subscription revenue increased as a result of additional LibsynPro networks using our platformdecreased $40,615 in the three months ended September 30, 2019 with increased bandwidth usage fees for delivery of podcasts contributing to the revenue gain. Advertising revenue decreased $338,986.04 during the three months ended September 30, 20192020 versus the same period of 2018. The decrease resulted from decrease in the dollars being spent on ad campaigns by advertisers. Premium subscription revenue increased by $8,141.2019.
The Company recorded total costs and operating expenses of $5,391,594$7,927,250 during the three months ended September 30, 2019,2020, a 23%47% increase as compared to total costs and operating expenses of $4,375,259$5,391,594 during the same period of 2018.2019. Libsyn contributed $2,736,604$5,168,942 to total costs and operating expenses during the three months ended September 30, 2019,2020, and $1,761,654$2,233,922 during the same period in 2018.2019. Pair contributed $2,654,990$3,019,019 to total costs and operating expenses during the three months ended September 30, 20192020 and $2,613,605$2,654,990 during the same period in 2018.2019.
During the three months ended September 30, 2019,2020, cost of revenue totaled $881,171,$937,863, a 8% decrease6% increase as compared to $962,817$881,171 for the same period in 2018.2019. Libsyn contributed $584,850$490,068 while Pair contributed $296,321$447,795 to the cost of revenue during the three months ended September 30, 2019.2020. Libsyn recorded an increase in bandwidth costs, credit card processing fees and colocation fees, offset by a decrease in bandwidth costs and ad sharing that was paid to producers during the three months ended September 30, 20192020 versus 2018.the same period in 2019. Pair recorded an increasea decrease in domain name fees and internet fees offset by a decrease in processing fees and colocation fees.for the three months ended September 30, 2020. Cost of revenue as a percentage of revenue for Libsyn decreasedincreased to 16% in18% during the three months ended September 30, 20192020 from 22%11% during the same period in 2018.2019. This is a reflection of the reduction in the bandwidth rate to deliver the podcasts, off-set by an increase in bandwidth usage during the three months ended September 30, 20192020 due to the growth in the number of podcasts and increased podcast consumption on the Libsyn Platform.Platform offset by a reduction in the bandwidth rate to deliver the podcasts. Additionally, Libsyn’s revenue increased by 58% during the three months ended September 30, 2020. Cost of revenue as a percentage of revenue for Pair increased to 11% in18% during the three months ended September 30, 20192020 from 9%11% during the same period in 2018.2019. This is due primarily to the increase in domain name purchase fees and internet connectivity fees. Additionally, Pair’s revenue increased by 13% during the three months ended September 30, 2020.
General and administrative expenses totaled $2,339,966 in$4,820,259 during the three months ended September 30, 20192020 versus $1,348,731$2,339,966 during the same period in 2018,2019, an increase of 73%106%. The increase was driven primarily due to an increase inthe $2,926,439 related to our former CEO’s Separation Agreement and expenses related to legal and advisory fees and accrual of bonuses, offset by a decrease in employment benefits. The increase includessupport costs. 2019 expenses included $444,620 of legal and advisory fees incurred by the Company in associated with Camac reached following the end of the quarter and $375,000 due to the accrual of bonuses for senior management.its settlement with Camac. General and administrative expense for Pair during the three months ended September 30, 20192020 was $666,950$649,683 and $687,677$666,950 for the same period in 2018.2019. General and administrative expense for Libsyn for the same periods was $1,673,016$4,170,576 and $661,053,$1,673,016, respectively.
During the third quarter of 2020, the Company and Mr. Spencer, the Company’s former CEO, entered into the Separation Agreement. As a result of the Separation Agreement, the Company booked $2,926,439 of compensation expense in the third quarter of 2020. This compensation expense related to a stock grant of 775,000 shares of common stock with an associated $2.50 put option on up to 550,000 of those shares through December 30, 2021, cash bonuses and salaries. In addition, the Company purchased 1,353,795 shares from Mr. Spencer at the market closing price of the Company’s common stock on July 31, 2020. As a result of these transactions, the Company was required to pay $918,852 in withholding taxes, for which Mr. Spencer was required to reimburse the Company under the Separation Agreement. As of September 30, 2020, that balance was reflected in the Company’s related party receivables.
Technology expenses represented $478,372 in$595,393 during the three months ended September 30, 20192020 versus $426,339$478,372 for the same period in 2018,2019, driven by a decreasean increase in wages.wage expense during the three months ended September 30, 2020. Selling expenses during the three months ended September 30, 20192020 were $293,185$312,179 versus $220,460$293,185 during the same period in 20182019 driven by an increase in travel and entertainmentadvertising expense. Customer support expenses in the three months ended September 30, 20192020 were $686,876$833,315 versus $680,094$686,876 during the same period in 20182019 driven by thean increase ofin support staff wages.costs.
Depreciation and amortization expenses consist of charges relating to the depreciation of the property and equipment used in our operations and the amortization of intangible assets. Depreciation and amortization expense for the three months ended September 30, 20192020 was $712,024$428,241 and $736,818$712,024 during the same period in 2018.2019. During the three months ended September 30, 2019,2020, Libsyn contributed $22,569$20,409 and Pair contributed $689,455$407,832 to depreciation and amortization expense.
Interest expense for the three months ended September 30, 20192020 was $75,280$27,319 compared to $92,002$75,280 in the third quarterthree months ended September 30, 2019, which represents interest on the Facility obtained in connection with the acquisition of 2018.Pair. Interest expense for the three months ended September 30, 20192020 was offset withby interest income of $66,862,$7,387, resulting in net cash expenditure of $8,418 on the note.$19,932.
Income tax expense for the three months ended September 30, 20192020 was $178,129,$727,269, which represents a change in the deferred tax assets and the expected federal balance due for the nine month periodthree months ended September 30, 2019. The income2020. There has been no change to the Company’s NOL carryforward uncertain tax payable will be payable with the amended return in 2020.position. Income tax expense for the three months ended September 30, 20182019 was $270,527.$178,129.
The Company’s net loss was $2,024,006 for the three months ended September 30, 2020. This represents a $2,665,261 decrease from net income wasof $641,255 for the three months ended September 30, 2019. This represents a $372,976 decrease from $1,014,231Earnings per share decreased by $0.09 for the three months ended September 30, 2018. Earnings per share decreased $.01 per share2020 when compared to $0.02 for the three months ended September 30, 2019 from $0.03 for the three months ended September 30, 2018.2019.
Liquidity and Capital Resources
Cash on hand was $15,734,962$13,818,169 at September 30, 2019, an increase2020, a decrease of $4,655,021$2,803,103 over the $11,079,941$16,621,272 on hand at December 31, 2018.2019. Cash provided by operations for the nine months ended September 30, 2019,2020, was $6,262,438, an increase$2,591,558, a decrease of $603,949$3,670,880 over the $5,658,489$6,262,438 of cash provided by operations for the nine months ended September 30, 2018.2019. The contribution from Libsyn of this cash generationusage for the nine months ended September 30, 2020 totaled $4,766,948,$1,560,023, and Pair added $1,495,490. Thisused $1,031,535. The decrease in cash provided by operations was due to fluctuations in working capital, including an increase is driven from our operating results of both segments of our business.in taxes paid.
Cash used in investing activities of $353,040$173,059 for the nine months ended September 30, 20192020 was for the purchase of equipment and capitalization of software development costs. Cash used in investing activities for the purchase of equipment and capitalization of software development costs was $254,527$353,040 during the same period in 2018.2019.
Cash used in financing activities was $1,254,377$5,221,602 for the nine months ended September 30, 20192020 and $1,251,589$1,254,377 in 2018.the same period of 2019. During the first nine months of 2020, the Company made $1,200,000 of payments on the Facility, as well as $831 of payments on the capital lease. In addition the company acquired 1,353,795 shares of stock for $4,020,771 on July 31, 2020. During the first nine months of 2019, the Company made $1,200,000 of payments on the loan facility,Facility, as well as $54,377$36,012 of payments on the capital lease.
Our operations and business could be disrupted and materially adversely affected by the recent outbreak of COVID-19. While the Company has taken mitigating actions in assessing our business operations and system supports including for employees to work remotely, there can be no assurance that these actions will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business conditions generally or in our sector in particular.
ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
ItemItem 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), which we refer to as disclosure controls, are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the ChiefPrincipal Executive Officer and the Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our companyCompany have been detected.
As of September 30, 2019, anAn evaluation was carried out under the supervision and with the participation of our management, including the ChiefPrincipal Executive Officer and the Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls. Based upon that evaluation, the ChiefPrincipal Executive Officer and the Interim Chief Financial Officer concluded that, as of such date,September 30, 2020, the design and operation of these disclosure controls were not effective to accomplish their objectives at the reasonable assurance level.level due to limited accounting and reporting personnel and a lack of segregation of duties due to limited financial resources and the size of our Company. On an on-going basis we will evaluate the adequacy of our controls and procedures.
The Company anticipates management attestation related to compliance with Section 404 of the Sarbanes-Oxley Act as of either the third quarter of 2021 or the first quarter of 2022. We are in the process of engaging a project partner to support the implementation of a compliant internal control regime and anticipate starting an implementation project for Section 404 compliance in the first quarter of 2021.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II -PART II. OTHER INFORMATIONItem 1. Legal Proceedings.
Liberated Syndication Inc. is involved in routine legal and administrative proceedings and claims of various types. We have no material pending legal or administrative proceedings, other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any property is the subject, exceptother than as follows:described below.
On April 24, 2019, Camac Fund, LP, and its affiliates Camac Partners, LLC, Camac Capital, LLC, and Eric Shahinian, (collectively, “Camac”) made a demand to inspect2020, John Busshaus, the Company’s books and records, purportedly in connection with such stockholder’s efforts to compelformer Chief Financial Officer, filed a complaint against the Company to call a special meeting of its stockholders. On May 8, 2019,with the American Arbitration Association (AAA) asserting claims arising from his employment relationship with the Company, providedincluding, inter alia, claims for wages, compensation and benefits, and claims of unlawful discharge and wrongful termination. Mr. Busshaus claims that he resigned for “Good Reason” as defined in Section 8(c) of his Employment Agreement pursuant to which he claims to be entitled to the materials required“Effect of Termination” under Section 9(c) of the Employment Agreement. The Company denies Mr. Busshaus’ claims in their entirety and intends to vigorously defend its position.
The COVID-19 pandemic may adversely impact our business, results of operations and financial position.
Our operations and business could be disrupted and materially adversely affected by relevant Nevada law. On July 15, 2019, Camac filed a verified complaint and alternative petition for a writthe recent outbreak of mandamus/prohibition in Nevada District Court together with a motion for preliminary injunction, seeking to compelCOVID-19. While the Company has taken mitigating actions in our business operations and system supports, including arranging for employees to provide certain additional documents relatingwork remotely, there can be no assurance that these actions will enable us to avoid part or all of any impact from the identityspread of beneficial owners ofCOVID-19 or its common stock. consequences, including downturns in business conditions generally or in our sector in particular.
The Company filed a response brief to the motion for preliminary injunction and a hearing was held on such motion on August 1. The Court’s decision denied the issuance of an injunction obligating the Company to generate or obtain those additional documents, but requires the Company to turn over any such documents should the Company use those documents in the future to engage in solicitation activity in connection with any special meeting of stockholders that may be held involving Camac.subject to state income taxes it has not paid, collected from our customers or reserved for on our financial statements, which could materially adversely affect our business, financial condition or operating results. The Company has also underreported the personal income and failed to withhold sufficient Federal withholding taxes for certain employees, officers and directors which will result in a future Federal income tax liability.
On October 4,June 21, 2018, the United States Supreme Court rendered a decision in South Dakota v. Wayfair, Inc., holding that a state may require a remote seller with no physical presence in the state to collect and remit sales tax on goods and services provided to purchasers in the state, overturning certain existing court precedent.
The Company has failed to apportion revenue and file 2019 and 2020 state and local sales and income tax returns in the Company reached a resolution with Camac. The settlement agreement provides for, among other things, Libsyn reimbursing Camac for up to $600,000 in out-of-pocket expenses, the appointment of certain individuals identified by Camac to the Company’s board of directors (the “Board”), the formation of a strategic review committee of the Board and the cancellation of certain equity awardsmanner required by the Company.
Immediately following the execution of the settlement agreement, the Company shall take all action necessary to irrevocably cancel those equity awards previously granted to the Company’s Chief Executive Officer and Chief Financial Officer representing an aggregate of 300,000 restricted shares (150,000 held by each of them), the vesting conditionsWayfair decision. We have evaluated our state tax filings with respect to the Wayfair decision and are in the process normalizing our related tax practices. The Company has engaged a state sales tax compliance firm and is currently conducting an effort to accomplish appropriate apportionment and normalize its state and federal filings for sales, use, and income taxes. The Company does not anticipate having a detailed estimation of the taxes owed and associated normalization costs until the early 2021. The tax liability is therefore currently not estimable. The company anticipates completing the estimation and booking a reserve as part of its fourth quarter results.
It is possible that one or more jurisdictions may assert that we have liability for periods for which relatewe have not collected sales, use or other similar taxes, and if such an assertion or assertions were successful it could materially and adversely affect our business, financial condition and operating results. In addition, one or more jurisdictions may change their laws or policies to apply their sales, use or other similar taxes to our operations, and if such changes were made it could materially and adversely affect our business, financial condition, and operating results.
During the third quarter of 2020, the Company determined that it had incorrectly reported the personal income related to its restricted stock vesting events in 2017, 2018, and 2019. The Company underreported such personal income, failed to report the income in a timely fashion and failed to withhold Federal withholding taxes at an appropriate level. As a result, the Company has begun to amend its quarterly payroll tax filings and to issue amended reports of income to the achievementimpacted employees, officers and directors. The total amount of a Nasdaq uplisting. Promptly following such cancellation,underreported personal income across the three years is $3.8 million. The Company shall provideexpects to the Stockholders evidence fromcomplete its transfer agent regarding the return of such sharesnormalization efforts, including amending its annual Federal and their cancellationstate income tax returns, by the Company.first quarter of 2021. The Company will obtain appropriate written confirmationsis unable estimate the total tax liability related to this error until it receives assessment calculations from the affected individuals regarding such cancellation.IRS.
Item 1A. Risk Factors.
Not required for smaller reporting companies.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds. None; not applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Mine Safety Disclosures.
None; not applicable.
Item 5. Other Information.
None; not applicable.
Item 3. Defaults Upon Senior Securities
None; not applicable.
Item 4. Mine Safety Disclosures
None; not applicable.
Item 5. Other Information
None; not applicable.
Item 6. Exhibits.Exhibits LIBERATED SYNDICATION INC. AND SUBSIDIARIES
Index to Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Form 10-Q.
Exhibit No.Number | | Exhibit Description |
| 302 Certification | Bylaws of Christopher J. Spencerthe Company, amended as of September 24, 2020, incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2020. |
| 302 Certification | Employment Agreement, dated as of Gabriel MoseyJuly 29, 2020, between the Company and Richard P. Heyse, incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2020. |
| | Separation and Transition Services Agreement and General Release, dated July 31, 2020, between the Company and Christopher Spencer, incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2020. |
| | Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Certification.of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.1 | | The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 20192020 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019, (iii) the Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2020 and 2019, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and (iv)2019, and (v) Notes to Condensed Consolidated Financial Statements.Statements for the nine months ended September 30, 2020. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: | 7/10/2020 | | By: | /s/ Christopher J. Spencer | LIBERATED SYNDICATION INC. |
| | | | Christopher J. Spencer(Registrant) |
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Date: November 16, 2020 | | By: | | /s/ Laurie A. Sims |
| | | | Laurie A. Sims |
| | | | President, Chief Operating Officer and Principal Executive Officer |
| | | | |
| | | | |
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Date: November 16, 2020 | | By: | | /s/ Richard P. Heyse |
| | | | Richard P. Heyse |
| | | | Chief ExecutiveFinancial Officer and President |
Date: | 7/10/2020 | | | /s/ Gabriel J. Mosey |
| | | | Gabriel J. Mosey |
| | | | Interim Chief Financial Officer |