Attached files
| file | filename |
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| EX-21 - SUBSIDIARIES OF THE REGISTRANT - Liberated Syndication Inc. | lsyn_ex21.htm |
| EX-32 - 906 CERTIFICATION - Liberated Syndication Inc. | lsyn_ex32.htm |
| EX-31.2 - 302 CERTIFICATION OF JOHN BUSSHAUS - Liberated Syndication Inc. | lsyn_ex312.htm |
| EX-31.1 - 302 CERTIFICATION OF CHRISTOPHER J. SPENCER - Liberated Syndication Inc. | lsyn_ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2017
[ ]
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
File No. 000-55779
LIBERATED SYNDICATION INC.
(Exact
name of registrant as specified in its charter)
|
NEVADA
|
|
47-5224851
|
|
(State or other
jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification
No.)
|
5001
Baum Blvd, Suite 770
Pittsburgh, PA 15213
(Address of
Principal Executive Offices)
Registrant's
Telephone Number: (412) 621-0902
Securities
Registered pursuant to Section 12(b) of the Act:
NONE
Securities
Registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by checkmark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. ☐
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
☒
No☐
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See definitions of
‘‘large accelerated filer”, “accelerated
filer,’’ “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer ☐
|
Smaller reporting company ☒
|
|
Emerging growth company ☒
|
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☒
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter:
$20,428,703, based on the closing bid price of the
registrant’s common stock on June 30, 2017.
As of
March 22, 2018, there were 29,595,473 shares of common stock, par
value $0.001, of the registrant issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1.
Business.
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”). 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 webhosting
and domains.
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 consisting of approximately 34,700 square
feet.
BUSINESS
Libsyn
Libsyn
is a Podcast 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
70% of the shows that Libsyn distributes reach audiences using
Apple’s iTunes platform which includes iTunes on the
computer, iPods, iPads, iPhones, iPad, Apple Watch, Apple TV, and
Apple’s Podcasts App on iOS devices. Libsyn also enables
distribution to destinations like Google Play Music and aggregators
such as Spotify and iHeartRadio. 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, 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”)
Pair Networks, founded in 1996, is one of the oldest and most
experienced Internet hosting company 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 serves
businesses, bloggers, artists,
musicians, educational institutions and non-profit organizations
around the world.
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.
2
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.
Virtual
private servers
Virtual
private servers (VPS) is a step up from a shared hosting solution
in that specific serve resources are allocated directly for your
use, assuring performance levels. This is a more secure and
reliable option that separates your 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 custom
built to customer specification 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 are ready for your use
in no time and fully managed to keep them up to date.
Pair
hosting also offers self-managed service through pairCloud and
server collocation, both of which deliver the advantages of the
powerful infrastructure that was built behind the fully managed
offerings. pairCloud provides administrative access to a powerful
virtual server, allowing customization to a customer’s
precise needs. Additionally, 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.
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 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 or two years customer domain 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.
Research and Development
Research
and development costs are expensed as incurred and are record in
cost of revenue. Research and development costs include software,
supplies, equipment and wages of the Research and Development
team
Employees
The
parent does not conduct any operations of its own. Our operations
are conducted through our wholly-owned subsidiaries, Libsyn and
Pair. We currently have a total of 80 employees, of which 78 are
full-time employees. There are no employees that are represented by
employee union(s). The Company believes its relations
with all its employees are good.
3
Item 1A. Risk Factors.
Risks Relating to Our Business
Our
present and intended business operations are highly speculative and
involve substantial risks. Only investors who can bear the risk of
losing their entire investment should consider buying our shares.
Among the risk factors that you should consider are the
following:
The Company may pursue acquisitions, investments
or other strategic relationships or alliances, which may consume
significant resources, may be unsuccessful and could dilute holders
of its common stock.
Acquisitions,
investments and other strategic relationships and alliances, if
pursued, may involve significant cash expenditures, debt
incurrence, operating losses, and expenses that could have a
material adverse effect on the Company’s financial condition
and operating results. Acquisitions involve numerous other risks,
including:
●
Diversion of
management time and attention from daily operations;
●
Difficulties
integrating acquired businesses, technologies, and personnel into
the Company;
●
Inability to obtain
required regulatory approvals and/or required financing on
favorable terms;
●
Entry into new
markets in which the Company has little previous
experience;
●
Potential loss of
key employees, key contractual relationships, or key customers of
acquired companies or of the Company; and
●
Assumption of the
liabilities and exposure to unforeseen liabilities of acquired
companies.
If
these types of transactions are pursued, it may be difficult for
the Company to complete these transactions quickly and to integrate
these acquired operations efficiently into its current business
operations. Any acquisitions, investments or other strategic
relationships and alliances by the Company may ultimately harm our
business and financial condition. In addition, future acquisitions
may not be as successful as originally anticipated and may result
in impairment charges.
The Company’s products and services compete in segments of
the internet service industry that are highly
competitive.
The
principal competitive factors that affect the Company include:
technical innovation, marketing products and services, podcast
monetization, managing costs to maintain competitive pricing,
delivering superior customer service, and aggressively managing
costs. We cannot assure you that it will be able to
successfully compete against current and future competitors and
grow and maintain its market share.
We may be required to record a significant charge to earnings as we
are required to re-assess our goodwill and other intangible
assets.
We are
required under U.S. GAAP to review our intangible assets, including
goodwill for impairment when events or changes in circumstances
indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment annually or more frequently if
facts and circumstances warrant a review. Factors that may be
considered a change in circumstances indicating that the carrying
value of our intangible assets may not be recoverable include a
decline in stock price and market capitalization and slower or
declining growth rates in our industry. We may be required to
record a significant charge to earnings in our financial statements
during the period in which any impairment of our goodwill or
amortizable intangible assets is determined.
We face a higher risk of failure because of the competitiveness of
companies in the internet, technology, domain, hosting and media
industries.
We face
the difficulties frequently encountered by internet, technology,
and media companies in new and evolving markets. These potential
difficulties include the following:
4
●
substantial delays
and expenses related to testing and developing of our new
products;
●
successfully
establishing podcasting as a large-scale advertising
medium;
●
marketing and
distribution problems with new and existing products and
technologies;
●
we rely on the
internet, third-party providers, marketplaces and social media
platforms who control distribution of information;
●
competition from
larger and more established companies;
●
delays in reaching
our marketing goals;
●
difficulty in
recruiting qualified employees for management and other
positions;
●
our lack of
sufficient customers, revenue, and cash flow; and
●
our limited
financial resources.
We may
continue to face these and other difficulties in the future. Some
of these problems may be beyond our control. If we are unable to
successfully address them, our business will suffer.
We face significant competition for our products in the domain name
registration and web-hosting markets and other markets in which we
compete, which we expect will continue to intensify, and we may not
be able to maintain or improve our competitive position or market
share.
We
provide Internet hosting solutions enabling individuals, businesses
and organizations to establish an online presence, connect with
consumers and manage their ventures. The market for these solutions
is highly fragmented and competitive. These solutions are also
rapidly evolving, creating opportunity for new competitors to enter
the market with or address specific segments of the market. Our
competitors include providers of domain registration services,
web-hosting solutions, website creation and management solutions,
e-commerce enablement providers, cloud computing service and online
security providers, and providers of productivity tools such as
business-class email.
We
expect competition to increase in the future from competitors in
the domain and hosting markets. Some of our current and potential
competitors have greater resources, more brand recognition and
consumer awareness, more diversified product offerings, greater
international scope and larger customer bases than we do, and we
may therefore not be able to effectively compete with them. If
these competitors and potential competitors decide to devote
greater resources to the development, promotion and sale of
products in the markets in which we compete, or if the products
offered by these companies are more attractive to or better meet
the evolving needs of our customers, our market share, growth
prospects and operating results may be adversely
affected.
In
addition, in an attempt to gain market share, competitors may offer
aggressive price discounts or alternative pricing models on the
products they offer, such as so-called "freemium" pricing in which
a basic offering is provided for free with advanced features
provided for a fee, or increase commissions paid to their referral
sources. As a result, increased competition could result in lower
sales, price reductions, reduced margins and the loss of market
share.
Furthermore,
conditions in our market could change rapidly and significantly as
a result of technological advancements, partnering by our
competitors or continuing market consolidation. Innovative new
start-up companies and large competitors making significant
investments in technology and development may invent similar or
superior products and technologies competing with our products and
technology. Our current and potential competitors may also
establish cooperative relationships among themselves or with third
parties that may further enhance their ability to compete. The
continued entry of competitors into the domain name registration
and web-hosting markets, and the rapid growth of some competitors
that have already entered each market, may make it difficult for us
to maintain our market position. Our ability to compete will depend
upon our ability to provide a better product than our competitors
at a competitive price. To remain competitive, we may be required
to make substantial additional investments in research,
development, marketing and sales in order to respond to
competition, and there can be no assurance that these investments
will achieve any returns for us or that we will be able to compete
successfully in the future.
5
If the rate of growth of small and medium businesses is
significantly lower than our estimates or if demand for our
products does not meet expectations, our ability to generate
revenue and meet our financial targets could be adversely
affected.
Although
we expect continued demand from small and medium businesses for our
products, it is possible the rate of growth may not meet our
expectations, or the market may not grow, either of which would
adversely affect our business. Our expectations for future revenue
growth are based in part on assumptions reflecting our industry
knowledge and experience serving small and medium businesses, as
well as our assumptions regarding demographic shifts, growth in the
availability and capacity of Internet infrastructure and the
general economic climate. If any of these assumptions proves to be
inaccurate, our revenue growth could be significantly lower than
expected.
Our
ability to compete successfully depends on our ability to offer an
integrated and comprehensive suite of products enabling our diverse
base of customers to start, grow and run their businesses. The
success of our domains, hosting, and business applications
offerings is predicated on the assumption that an online presence
is, and will continue to be, an important factor in our customers'
abilities to establish, expand and manage their businesses quickly,
easily and affordably. If we are incorrect in this assumption, for
example due to the introduction of a new technology or industry
standard superseding the importance of an online presence or
renders our existing or future products obsolete, then our ability
to retain existing customers and attract new customers could be
adversely affected, which could harm our ability to generate
revenue and meet our financial targets.
We may not be able to maintain and enhance our brands.
Management
believes that the Libsyn and Pair brands have significantly
contributed to the growth of the business. They are critical to
expanding our product and service offerings. These brands are a key
component in marketing products and services and attracting new
customers. Maintaining and enhancing our brands depends largely on
our ability to provide useful and reliable products and services,
which we may not do successfully. Additionally, if we fail to
provide superior customer service our brands may be adversely
impacted. If events occur that damage our reputation and brands, we
may not be able to compete.
If we do not respond effectively to technological change, our
products and services could become obsolete.
The
development of our products and services and other technology
entails significant technical and business risks. To remain
competitive, we must continue to improve our products'
responsiveness, functionality, and features.
High
technology industries are characterized by:
●
rapid technological
change;
●
changes in user and
customer requirements and preferences;
●
frequent new
product and services introductions embodying new technologies;
and
●
the emergence of
new industry standards and practices.
The
evolving nature of the Internet could render our existing
technology and systems obsolete. Our success will depend, in part,
on our ability to:
●
license or acquire
leading technologies useful in our business;
●
develop new
services and technologies that address our users' increasingly
sophisticated and varied needs; and,
●
respond to
technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely
way.
Future
advances in technology may not be beneficial to, or compatible
with, our business. Furthermore, we may not use new technologies
effectively or adapt our technology and systems to user
requirements or emerging industry standards in a timely way. To
stay technologically competitive, we may have to spend large
amounts of money and time. If we do not adapt to changing market
conditions or user requirements in a timely way, our business,
financial condition, and results of operations could be seriously
harmed.
6
If we fail to develop new products, or if we incur unexpected
expenses or delays in product development, we may lose our
competitive position.
Although
we currently have fully developed products available for sale, we
are also developing various products and technologies that we will
rely on to remain competitive. These new products and technologies
are related to podcast operations, are ongoing and in various
stages of their product lifecycle. New products and features are
continuously developed to address customer and market requirements.
Technology changes and advances are also constantly implemented to
reduce costs, increase reliability, and improve our products. Due
to the risks in developing new products and technologies, limited
financing, competition, obsolescence, loss of key personnel and
other factors, we may fail to develop these technologies and
products, or we may experience lengthy and costly delays in doing
so.
Changes to podcast, app and social media platform policies and
processes could have an adverse effect on the business plans of
Libsyn, including revenues.
Podcasts
and Podcast Apps are available in the most popular online platforms
and directories. Podcasts are included in third party directories
such as iTunes and Google Play Music. Podcast Apps are available in
App Stores such as Apple, Google, and Amazon. Additionally,
customers use Libsyn to distribute podcasts on social media
platforms (Facebook, Twitter, YouTube) and other third-party
content aggregators such as Spotify and iHeartRadio. We rely on
these third parties and must adhere to their rules for inclusion,
which in some cases requires their approval for submission. Changes
to these policies and requirements may prevent us from distributing
podcasts on these platforms in the future.
Distribution,
which cannot be guaranteed, depends on third-party review
personnel, their management and the specific platform and company
policies which are subject to change at any time. Changes in policy
and rejection of Podcasts or Podcast Apps by any one or all the
online platforms could have an adverse impact on future business
plans of Libsyn, including revenue.
Additionally,
these same policies may adversely affect monetization strategies.
These platforms may seek to limit our ability to generate revenue
from advertising, premium content, or the sale of apps. Our
business, financial condition and results of operations could be
seriously harmed as a result.
System and online security failures could harm our business and
operating results.
The
operation of our business depends on the efficient and
uninterrupted operation of our computer and communications hardware
systems. Our systems and operations are vulnerable to damage or
interruption from many sources, including fire, flood, power loss,
telecommunications failure, break-ins, earthquakes, and similar
events. Our servers are also vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. Any
substantial interruptions in the future could result in the loss of
data and could destroy our ability to generate revenues from
operations.
The
secure transmission of confidential information over public
networks is a significant barrier to electronic commerce and
communications. Anyone who can circumvent our security measures
could misappropriate confidential information or cause
interruptions in our operations. We may have to spend large amounts
of money and other resources to protect against potential security
breaches or to alleviate problems caused by any
breach.
7
A
network attack, a security breach or other data security incident
could delay or interrupt service to our customers, harm our
reputation or subject us to significant liability. Our operations
depend on our ability to protect our network and systems against
interruption or damage from unauthorized entry, computer viruses,
denial of service attacks and other security threats beyond our
control. We may be subject to distributed denial of service (DDOS)
attacks by hackers aimed at disrupting service to our customers and
attempts to place illegal or abusive content on our or our
customers' websites. Our response to such DDOS attacks may be
insufficient to protect our network and systems. In addition, there
has been an increase in the number of malicious software attacks in
the technology industry, including malware and ransomware. In
addition, from time to time, activities of our customers or other
parties may cause us to suspend or terminate customer accounts. We
have suspended and terminated, and will in the future suspend or
terminate, a customer's use of our products when their activities
breach our terms of service, interfere with or harm other
customers' information or use of our service or otherwise violate
applicable law. We may also suspend or terminate a customer's
account if it is repeatedly targeted by DDOS or other attacks
disrupting other customers or otherwise impacts our infrastructure.
We cannot guarantee our backup systems, regular data backups,
security protocols, network protection mechanisms and other
procedures currently in place, or that may be in place in the
future, will be adequate to prevent or remedy network and service
interruption, system failure, damage to one or more of our systems,
data loss, security breaches or other data security incidents.
Also, some of our products may be cloud-based, and the amount of
data we store for our customers on our servers has been increasing
as our business has grown. Despite the implementation of security
measures, our infrastructure may be vulnerable to computer viruses,
worms, other malicious software programs, illegal or abusive
content or similar disruptive problems caused by our customers,
employees, consultants or other Internet users who attempt to
invade or disrupt public and private data networks or to improperly
access, use or obtain data. Any actual or perceived breach of our
security, or any other data security incident, could damage our
reputation and brand, expose us to a risk of loss or litigation and
possible liability, subject us to regulatory or other government
inquiries or investigations, require us to expend significant
capital and other resources to alleviate problems caused by the
breach, and deter customers from using our products, any of which
would harm our business, financial condition and operating
results.
If the security of the confidential information or personally
identifiable information we maintain, including that of our
customers and the visitors to our customers' websites stored in our
systems, is breached or otherwise subjected to unauthorized access,
our reputation may be harmed, and we may be exposed to
liability.
Our
business involves the storage and transmission of confidential
information, including personally identifiable information. In
addition, as nearly all of our products are cloud-based, the amount
of data we store for our customers on our servers (including
personally identifiable information and other potentially sensitive
information) has been increasing. We take measures intended to
protect the security, integrity and confidentiality of the personal
information and other sensitive information, including payment card
information, we collect, store or transmit, but cannot guarantee
that inadvertent or unauthorized use or disclosure will not occur
or that third parties will not gain unauthorized access to this
information despite our efforts. If third parties succeed in
penetrating our security measures or those of our vendors and
partners, or in otherwise accessing or obtaining without
authorization the payment card information or other sensitive or
confidential information we or our vendors and partners maintain,
we could be subject to liability, loss of business, litigation,
government investigations or other losses. Hackers or individuals
who attempt to breach our security measures or those of our vendors
and partners could, if successful, cause the unauthorized
disclosure, misuse, or loss of personally identifiable information
or other confidential information, including payment card
information, suspend our web-hosting operations or cause
malfunctions or interruptions in our networks.
If we
or our partners experience any breaches of our security measures or
sabotage, or otherwise suffer unauthorized use or disclosure of, or
access to, personally identifiable information or other
confidential information, including payment card information, we
might be required to expend significant capital and resources to
protect against or address these problems. We may not be able to
remedy any problems caused by hackers or other similar actors in a
timely manner, or at all. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and
generally are not recognized until after they are launched against
a target, we and our vendors and partners may be unable to
anticipate these techniques or to implement adequate preventative
measures. Advances in computer capabilities, discoveries of new
weaknesses and other developments with software generally used by
the Internet community also increase the risk we, or our customers
using our servers, will suffer a security breach. Our partners and
we may also suffer security breaches or unauthorized access to
personally identifiable information and other confidential
information, including payment card information, due to employee
error, rogue employee activity, unauthorized access by third
parties acting with malicious intent or who commit an inadvertent
mistake or social engineering. If a breach of our security or other
data security incident occurs or is perceived to have occurred, the
perception of the effectiveness of our security measures and our
reputation could be harmed and we could lose current and potential
customers.
8
Security
breaches or other unauthorized access to personally identifiable
information and other confidential information, including payment
card information, could result in claims against us for
unauthorized purchases with payment card information, identity
theft or other similar fraud claims as well as for other misuses of
personally identifiable information, including for unauthorized
marketing purposes, which could result in a material adverse effect
on our business or financial condition. Moreover, these claims
could cause us to incur penalties from payment card associations
(including those resulting from our failure to adhere to industry
data security standards), termination by payment card associations
of our ability to accept credit or debit card payments, litigation
and adverse publicity, and regulatory or other government inquiries
or investigations, any of which could have a material adverse
effect on our business and financial condition. We expect to
continue to expend significant resources to protect against
security breaches and other data security incidents. The risk that
these types of events could seriously harm our business is likely
to increase as we expand the number of cloud-based products we
offer and operate in more countries.
Privacy concerns relating to our technology could damage our
reputation and deter existing and new customers from using our
products.
Concerns
about our practices with regard to the collection, use, disclosure
or security of personally identifiable information, including
payment card information, or other privacy related matters, even if
unfounded, could damage our reputation and adversely affect our
operating results. In addition, as nearly all of our products are
cloud-based, the amount of data we store for our customers on our
servers (including personally identifiable information) has been
increasing. Any systems failure or compromise of our security
resulting in the release of our users' or customers' data could
seriously limit the adoption of our product offerings, as well as
harm our reputation and brand and, therefore, our business. We
expect to continue to expend significant resources to protect
against security breaches. The risk that these types of events
could seriously harm our business is likely to increase as we
expand the number of cloud-based products we offer.
We are subject to privacy and data protection laws and regulations
as well as contractual privacy and data protection obligations. Our
failure to comply with these or any future laws, regulations or
obligations could subject us to sanctions and damages and could
harm our reputation and business.
We are
subject to a variety of laws and regulations, including regulation
by various federal government agencies, including the Federal Trade
Commission (FTC), Federal Communications Commission, and state and
local agencies. We collect personally identifiable information,
including payment card information, and other data from our current
and prospective customers, website users and employees. The U.S.
federal and various state and foreign governments have adopted or
proposed limitations on, or requirements regarding, the collection,
distribution, use, security and storage of personally identifiable
information of individuals, including payment card information, and
the FTC and many state attorneys general are applying federal and
state consumer protection laws to impose standards on the online
collection, use and dissemination of data. Self-regulatory
obligations, other industry standards, policies, and other legal
obligations may apply to our collection, distribution, use,
security or storage of personally identifiable information or other
data relating to individuals, including payment card information.
These obligations may be interpreted and applied in an inconsistent
manner from one jurisdiction to another and may conflict with one
another, other regulatory requirements or our internal practices.
Any failure or perceived failure by us to comply with U.S., E.U. or
other foreign privacy or security laws, policies, industry
standards or legal obligations or any security incident resulting
in the unauthorized access to, or acquisition, release or transfer
of, personally identifiable information or other data relating to
our customers, employees and others, including payment card
information, may result in governmental enforcement actions,
litigation, fines and penalties or adverse publicity and could
cause our customers to lose trust in us, which could have an
adverse effect on our reputation and business.
We
expect there will continue to be new proposed laws, regulations and
industry standards concerning privacy, data protection and
information security in the U.S., the European Union and other
jurisdictions, and we cannot yet determine the impact such future
laws, regulations and standards may have on our business. Future
laws, regulations, standards and other obligations could impair our
ability to collect or use information we utilize to provide
targeted advertising to our customers, thereby impairing our
ability to maintain and grow our total customers and increase
revenue. Future restrictions on the collection, use, sharing or
disclosure of our users' data or additional requirements for
express or implied consent of users for the use and disclosure of
such information could require us to modify our products, possibly
in a material manner, and could limit our ability to develop new
products and features.
9
In
particular, with regard to transfers of personal data, as such term
is used in the 1995 EU Data Protection Directive and applicable
European Union member state legislation, from our employees and
European customers and users to the U.S., we historically have
relied upon adherence to the U.S. Department of Commerce's Safe
Harbor Privacy Principles and compliance with the U.S.-EU Safe
Harbor Framework agreed to by the U.S. Department of Commerce and
the European Union. The U.S.-EU Safe Harbor Framework, which
established means for legitimizing the transfer of personal data by
U.S. companies from the European Economic Area (the EEA) to the
U.S., was invalidated in October 2015 by a decision of the European
Court of Justice (the ECJ). In light of the ECJ's decision, we have
engaged in a review of our business practices and recently
self-certified under the U.S.-EU Privacy Shield, a replacement
framework for the U.S.-EU Safe Harbor Framework that was adopted in
July 2016. The U.S.-EU Privacy Shield may be subject to legal
challenge and may be modified or invalidated, and we may be
unsuccessful in maintaining legitimate means for our transfer and
receipt of personal data from the EEA. We may experience reluctance
or refusal by current or prospective European customers to use our
products, and we may find it necessary or desirable to make further
changes to our handling of personal data of EEA residents. The
regulatory environment applicable to the handling of EEA residents'
personal data, and our actions taken in response, may cause us to
assume additional liabilities or incur additional costs, and could
result in our business, operating results and financial condition
being harmed. Additionally, we and our customers may face a risk of
enforcement actions by data protection authorities in the EEA
relating to personal data transfers to us and by us from the EEA.
Any such enforcement actions could result in substantial costs and
diversion of resources, distract management and technical personnel
and negatively affect our business, operating results and financial
condition.
In
addition, several foreign countries and governmental bodies
including the European Union and Canada, have laws and regulations
concerning the collection and use of personally identifiable
information obtained from their residents, including payment card
information, which are often more restrictive than those in the
U.S. Laws and regulations in these jurisdictions apply broadly to
the collection, use, storage, disclosure and security of personally
identifiable information, including payment card information
identifying, or which may be used to identify, an individual, such
as names, email addresses and, in some jurisdictions, Internet
Protocol (IP) addresses. Although we are working to comply with
those laws and regulations applicable to us, these and other
obligations may be modified, and they may be interpreted in
different ways by courts, and new laws and regulations may be
enacted in the future. Within the European Union, legislators have
approved the General Data Protection Regulation (GDPR), a new
regulation that will become effective in May 2018 and, at that
time, will supersede the 1995 European Union Data Protection
Directive. The GDPR includes more stringent operational
requirements for processors and controllers of personal data,
including payment card information, imposes significant penalties
for non-compliance and has broader extra-territorial effect. As the
GDPR is a regulation rather than a directive, it requires strict
adoption by all EU member states, but permits those member states
to enact supplemental requirements if they so choose.
Any new
laws, regulations, other legal obligations or industry standards,
or any changed interpretation of existing laws, regulations or
other standards may require us to incur additional costs and
restrict our business operations. If our privacy or data security
measures fail to comply with current or future laws, regulations,
policies, legal obligations or industry standards, we may be
subject to litigation, regulatory investigations, fines or other
liabilities, as well as negative publicity and a potential loss of
business. Moreover, if future laws, regulations, other legal
obligations or industry standards, or any changed interpretations
of the foregoing limit our customers' ability to use and share
personally identifiable information, including payment card
information, or our ability to store, process and share such
personally identifiable information or other data, demand for our
products could decrease, our costs could increase, and our
business, operating results and financial condition could be
harmed.
If we are unable to attract and retain customers and increase sales
to new and existing customers, our business and operating results
would be harmed.
Our
success depends on our ability to attract and retain customers and
increase sales to new and existing customers. We derive a
substantial portion of our revenue from recurring hosting
subscriptions, domains and add-on services. The rate at which new
and existing customers purchase and renew subscriptions to our
products depends on a number of factors, including those outside of
our control. Although our total customers and revenue have grown
rapidly in the past, we cannot be assured that we will achieve
similar growth rates in future periods. In future periods, our
total customers and revenue could decline or grow more slowly than
we expect. Our sales could fluctuate or decline as a result of
lower demand for podcast or web hosting services, domain names, and
related products, declines in our customers' level of satisfaction
with our products and our customer support, the timeliness and
success of product enhancements and introductions by us and those
of our competitors, the pricing offered by us and our competitors,
the frequency and severity of any system outages, breaches and
technological change. Our revenue has grown historically due in
large part to customer growth and strong recurring hosting
subscriptions. Our future success depends in part on maintaining a
strong recurring subscription model. Any failure by us to continue
to attract new customers or maintain a strong recurring hosting
subscription model could have a material adverse effect on our
business, growth prospects and operating results. If we are unable
to increase sales of additional products to new and existing
customers, our growth prospects may be harmed.
10
If we do not successfully develop and market products that
anticipate or respond promptly to the needs of our customers, our
business and operating results may suffer.
The
markets in which we compete are characterized by constant change
and innovation, and we expect them to continue to evolve rapidly.
Our historical success has been based on our ability to identify
and anticipate customer needs and design products providing
individuals, small and medium businesses, and enterprises with the
tools they need to create, manage and augment their digital
identity. To the extent we are not able to continue to identify
challenges faced by our customers and provide products responding
in a timely and effective manner to their evolving needs, our
business, operating results and financial condition will be
adversely affected.
The
process of developing new technology is complex and uncertain. If
we fail to accurately predict customers' changing needs or emerging
technological trends, or if we fail to achieve the benefits
expected from our investments in technology, our business could be
harmed. We must continue to commit significant resources to develop
our technology in order to maintain our competitive position, and
these commitments will be made without knowing whether such
investments will result in products our customers will accept. Our
new products or product enhancements could fail to attain
meaningful customer acceptance for many reasons,
including:
●
delays in releasing
new products or product enhancements;
●
our failure to
accurately predict market demand or customer
preferences;
●
defects, errors or
failures in product design or performance;
●
negative publicity
about product performance or effectiveness;
●
introduction of
competing products (or the anticipation thereof) by other market
participants;
●
poor business
conditions for our customers or poor general macroeconomic
conditions;
●
the perceived value
of our products or product enhancements relative to their cost;
and
●
changing regulatory
requirements adversely affecting the products we
offer.
There
is no assurance we will successfully identify new opportunities,
develop and bring new products to market on a timely basis, or
products and technologies developed by others will not render our
products or technologies obsolete or noncompetitive, any of which
could adversely affect our business and operating results. If our
new products or enhancements do not achieve adequate acceptance by
our customers, or if our new products do not result in increased
sales or subscriptions, our competitive position will be impaired,
our anticipated revenue growth may not be achieved and the negative
impact on our operating results may be particularly acute because
of the upfront technology and development, marketing and
advertising and other expenses we may incur in connection with the
new product or enhancement.
We are exposed to the risk of system failures and capacity
constraints.
We may
in the future experience, system failures and outages disrupting
the operation of our hosting services and web-based products. Our
revenue depends in large part on the access and delivery of traffic
for podcasts and websites. Accordingly, the performance,
reliability and availability of our servers for our corporate
operations and infrastructure, as well as in the delivery of
products to customers, are critical to our reputation and our
ability to attract and retain customers.
We are
continually working to expand and enhance our hosting features,
technology and network infrastructure and other technologies to
accommodate substantial increases in the volume of traffic on our
network and our overall total customers. We may be unsuccessful in
these efforts, or we may be unable to project accurately the rate
or timing of these increases. In the future, we may be required to
allocate resources, including spending substantial amounts, to
build, purchase or lease data centers and equipment and upgrade our
technology and network infrastructure in order to handle increased
network or customer traffic. We cannot predict whether we will be
able to add network capacity from third-party suppliers or
otherwise as we require it. In addition, our network or our
suppliers' networks might be unable to achieve or maintain data
transmission capacity high enough to process orders or download
data effectively in a timely manner. Our failure, or our suppliers'
failure, to achieve or maintain high data transmission capacity
could significantly reduce consumer demand for our products. Such
reduced demand and resulting loss of traffic, cost increases, or
failure to accommodate new technologies could harm our business,
revenue and financial condition.
11
Our
systems, including those of our data centers and operations, are
also vulnerable to damage from fire, power loss, telecommunications
failures, computer viruses, physical and electronic break-ins and
similar events. The property and business interruption insurance
coverage we carry may not be adequate to compensate us fully for
losses that may occur.
Evolving technologies and resulting changes in customer behavior or
customer practices may impact the value of and demand for our
products.
Historically,
Internet users would typically navigate to a website by directly
typing its domain name into a web browser or navigation bar. The
domain name serves as a branded, unique identifier not unlike a
phone number or email address. People now use multiple methods in
addition to direct navigation to access websites. People
increasingly use search engines to find and access websites as an
alternative to typing a website address directly into a web browser
navigation bar. People are also using social networking and
microblogging sites more frequently to find and access websites.
Further, as people continue to access the Internet more frequently
through applications on mobile devices, domain names may become
less prominent and their value may decline. These evolving technologies and
changes in customer behavior may have an adverse effect on our
business and prospects.
The
domain name registration market continues to develop and adapt to
changing technology. This development may include changes in the
administration or operation of the Internet, including the creation
and institution of alternate systems for directing Internet traffic
without using the existing domain name registration system. The
widespread acceptance of any alternative system, such as mobile
applications or closed networks, could eliminate the need to
register a domain name to establish an online presence and could
materially and adversely affect our business.
The
shift in consumer behavior to mobile devices, applications and
social media platforms may impact how consumers find information
and make purchases. The popularity of social media platforms has
changed traditional communication and online presence due to the
number of landing pages and ecommerce sites being hosted on
Facebook and Etsy potentially impacting the number of websites in
the future.
Audio
and Video sharing platforms, mobile applications and new technology
may decrease the demand for podcasts. Mobile consumption through
YouTube and Facebook Live for video and audio and future
technologies may impact podcast consumption.
We rely on our marketing efforts and channels to promote our brand
and acquire new customers. These efforts may require significant
expense and may not be successful or cost-effective.
We use
a variety of marketing channels to promote our brands, including
online keyword search, advertising and email and social media
marketing. If we lose access to one or more of these channels, such
as online keyword search, because the costs of advertising become
prohibitively expensive or for other reasons, we may become unable
to promote our brand effectively, which could limit our ability to
grow our business. Further, if our marketing activities fail to
generate traffic to our website, attract customers and lead to new
and recurring subscriptions at the levels we anticipate, our
business and operating results would be adversely affected. There
can be no assurance our marketing efforts will succeed or be
cost-efficient, and if our customer acquisition costs increase, our
business, operating results and financial performance could be
adversely affected.
In
addition, search engines or social networking sites may change
their advertising policies from time to time. If any change to
these policies delays or prevents us from advertising through these
channels, it could result in reduced traffic to our website and
sales of our subscriptions.
We may need additional equity, debt or other financing in the
future, which we may not be able to obtain on acceptable terms, or
at all, and any additional financing may result in restrictions on
our operations or substantial dilution to our
stockholders.
We may
need to raise funds in the future, for example, to develop new
technologies, expand our business, respond to competitive pressures
and make acquisitions. We may try to raise additional funds through
public or private financings, strategic relationships or other
arrangements. Although our credit agreement limits our ability to
incur additional indebtedness, these restrictions may be amended
with the consent of our lenders. Accordingly, under certain
circumstances, we may incur substantial additional
debt.
12
Our
ability to obtain debt or equity funding will depend on a number of
factors, including market conditions, interest rates, our operating
performance, our credit rating and investor interest. Additional
funding may not be available to us on acceptable terms or at all.
If adequate funds are not available, we may be required to reduce
expenditures, including curtailing our growth strategies, foregoing
acquisitions or reducing our product development efforts. If we
succeed in raising additional funds through the issuance of equity
or equity-linked securities, then existing stockholders could
experience substantial dilution. If we raise additional funds
through the issuance of debt securities or preferred stock, these
new securities would have rights, preferences and privileges senior
to those of the holders of our common stock. In addition, any such
issuance could subject us to restrictive covenants relating to our
capital raising activities and other financial and operational
matters, which may make it more difficult for us to obtain
additional capital and to pursue business opportunities, including
potential acquisitions. Further, to the extent we incur additional
indebtedness or such other obligations, our possible inability to
service our debt, would increase.
Changes in accounting principles, or interpretations thereof, may
cause unexpected financial reporting fluctuations and adversely
affect our operating results and financial statements going
forward.
We
prepare our consolidated financial statements and the related notes
in accordance with generally accepted accounting principles in the
U.S. (GAAP). These principles are subject to interpretation by the
Financial Accounting Standards Board (FASB), the SEC and various
bodies formed to create and interpret appropriate accounting
principles. Accounting rules and regulations are continually
changing in ways that could materially impact our financial
statements, and a change in the current accounting principles could
have a significant effect on our reported results or may
retroactively affect previously reported transactions.
Additionally, the adoption of new or revised accounting principles
may require us to make significant changes to our systems,
processes and controls.
See
Note 1 to our consolidated financial statements for information
regarding recent accounting pronouncements.
Because we are generally required to recognize revenue for our
products over the term of the applicable agreement, changes in our
sales may not be immediately reflected in our operating
results.
As
described in Note 1 to our consolidated financial statements, we
generally recognize revenue from our customers ratably over the
respective terms of their subscriptions in accordance with GAAP.
Our subscription terms are typically one year but can range from
monthly terms to multi-annual terms of up to 10 years depending on
the product. Accordingly, increases in sales during a particular
period do not translate into immediate, proportional increases in
revenue during such period, and a substantial portion of the
revenue we recognize during a quarter is derived from deferred
revenue from customer subscriptions we entered into during previous
quarters. As a result, our margins may suffer despite substantial
sales activity during a particular period, since GAAP does not
permit us to recognize all of the revenue from our sales
immediately. Conversely, a decline in new or renewed subscriptions
in any one quarter may not be reflected in our revenue for that
quarter and the existence of substantial deferred revenue may
prevent deteriorating sales activity from becoming immediately
observable in our consolidated statement of operations. In
addition, we may not be able to adjust spending in a timely manner
to compensate for any unexpected bookings shortfall, and any
significant shortfall in bookings relative to planned expenditures
could negatively impact our business and results of
operations.
Our failure to properly register or maintain our customers' domain
names could subject us to additional expenses, claims of loss or
negative publicity that could have a material adverse effect on our
business.
System
and process failures related to our domain name registration
product may result in inaccurate and incomplete information in our
domain name database. Despite testing, system and process failures
may remain undetected or unknown, which could result in compromised
customer data, loss of or delay in revenues, failure to achieve
market acceptance, injury to our reputation or increased product
costs, any of which could harm our business. Furthermore, the
requirements for securing and renewing domain names vary from
registry to registry and are subject to change. We cannot guarantee
we will be able to readily adopt and comply with the various
registry requirements. Our failure or inability to properly
register or maintain our customers' domain names, even if we are
not at fault, might result in significant expenses and subject us
to claims of loss or to negative publicity, which could harm our
business, brand and operating results.
13
We rely heavily on the reliability, security and performance of our
internally developed systems and operations. Any difficulties in
maintaining these systems may result in damage to our brand,
service interruptions, decreased customer service or increased
expenditures.
The
reliability and continuous availability of the software, hardware
and workflow processes underlying our internal systems, networks
and infrastructure and the ability to deliver our products are
critical to our business, and any interruptions resulting in our
inability to timely deliver our products, or materially impacting
the efficiency or cost with which we provide our products, would
harm our brand, profitability and ability to conduct business. In
addition, many of the software and other systems we currently use
will need to be enhanced over time or replaced with equivalent
commercial products or services, which may not be available on
commercially reasonable terms or at all. Enhancing or replacing our
systems, networks or infrastructure could entail considerable
effort and expense. If we fail to develop and execute reliable
policies, procedures and tools to operate our systems, networks or
infrastructure, we could face a substantial decrease in workflow
efficiency and increased costs, as well as a decline in our
revenue.
Undetected or unknown defects in our products could harm our
business and future operating results.
The
products we offer or develop, including our proprietary technology
and technology provided by third parties, could contain undetected
defects or errors. The performance of our products could have
unforeseen or unknown adverse effects on the networks over which
they are delivered as well as, more broadly, on Internet users and
consumers and third-party applications and services utilizing our
solutions. These adverse effects, defects and errors, and other
performance problems relating to our products could result in legal
claims against us that harm our business and damage our reputation.
The occurrence of any of the foregoing could result in compromised
customer data, loss of or delay in revenues, an increase in our
annual refund rate, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our
reputation or brand and increased costs. In addition, while our
terms of service specifically disclaim certain warranties, and
contain limitations on our liability, courts may still hold us
liable for such claims if asserted against us.
Failure to adequately protect and enforce our intellectual property
rights could substantially harm our business and operating
results.
The
success of our business depends in part on our ability to protect
and enforce our trademarks, copyrights, trade secrets and other
intellectual property rights. We attempt to protect our
intellectual property under trademark, copyright and trade secret
laws, and through a combination of confidentiality procedures,
contractual provisions and other methods, all of which offer only
limited protection.
We rely
on our proprietary technology and confidential proprietary
information, including trade secrets and know-how. Despite our
efforts to protect the proprietary and confidential nature of such
technology and information, unauthorized parties may attempt to
misappropriate, reverse engineer or otherwise obtain and use them.
The contractual provisions in confidentiality agreements and other
agreements we generally enter into with employees, consultants,
partners, vendors and customers may not prevent unauthorized use or
disclosure of our proprietary technology or intellectual property
rights and may not provide an adequate remedy in the event of
unauthorized use or disclosure of our proprietary technology or
intellectual property rights. Moreover, policing unauthorized use
of our technologies, products and intellectual property is
difficult, expensive and time-consuming, particularly in foreign
countries where the laws may not be as protective of intellectual
property rights as those in the U.S. and where mechanisms for
enforcement of intellectual property rights may be weak. To the
extent we expand our international activities, our exposure to
unauthorized copying and use of our products and proprietary
information may increase. We may be unable to determine the extent
of any unauthorized use or infringement of our products,
technologies or intellectual property rights.
From
time to time, legal action by us may be necessary to enforce our
trademarks and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
intellectual property rights of others or to defend against claims
of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources, distract management
and technical personnel and negatively affect our business,
operating results and financial condition. If we are unable to
protect our intellectual property rights, we may find ourselves at
a competitive disadvantage to others who need not incur the
additional expense, time and effort required to create the
innovative products that have enabled us to be successful to date.
Any inability on our part to protect adequately our intellectual
property may have a material adverse effect on our business,
operating results and financial condition.
14
Our business depends on our customers continued and unimpeded
access to the Internet and the development and maintenance of
Internet infrastructure. Internet access providers may be able to
block, degrade or charge for access to certain of our products,
which could lead to additional expenses and the loss of
customers.
Our
products depend on the ability of our customers to access the
Internet. Currently, this access is provided by companies having
significant market power in the broadband and Internet access
marketplace, including incumbent telephone companies, cable
companies, mobile communications companies and government-owned
service providers. The Federal Communications Commission passed
Open Internet rules in February 2015, effective in June 2015,
generally providing for Internet neutrality with respect to fixed
and mobile broadband Internet service. Net Neutrality rules were
intended to keep the internet open and fair. Internet providers
were explicitly prohibited from speeding up or slowing down traffic
from specific websites and apps. In December 2017, the FCC replaced
net neutrality which would do away with rules barring internet
providers from blocking or slowing down access to online content.
Additionally, the FCC would eliminate a rule barring
providers’ from prioritizing their own content. These changes
could adversely affect the growth, popularity or use of the
Internet and could decrease the demand for our products and
increase our operating costs causing harm to our business.
Internationally, government regulation concerning the Internet, and
in particular, network neutrality, may be developing or
non-existent. Within such a regulatory environment, we could
experience discriminatory or anti-competitive practices impeding
both our and our customers' domestic and international growth,
increasing our costs or adversely affecting our
business.
Our business is exposed to risks associated with credit card and
other online payment chargebacks and fraud.
A
majority of our revenue is processed through credit cards and other
online payments. If our refunds or chargebacks increase, our
processors could require us to create reserves, increase fees or
terminate their contracts with us, which would have an adverse
effect on our financial condition.
Our
failure to limit fraudulent transactions conducted on our websites,
such as through the use of stolen credit card numbers, could also
subject us to liability and adversely impact our reputation. Under
credit card association rules, penalties may be imposed at the
discretion of the association for inadequate fraud protection. Any
such potential penalties would be imposed on our credit card
processor by the association. Under our contracts with our payment
processors, we are required to reimburse them for such penalties.
However, we face the risk that we may fail to maintain an adequate
level of fraud protection and that one or more credit card
associations or other processors may, at any time, assess penalties
against us or terminate our ability to accept credit card payments
or other form of online payments from customers, which would have a
material adverse effect on our business, financial condition and
operating results.
We
could also incur significant fines or lose our ability to give
customers the option of using credit cards to pay for our products
if we fail to follow payment card industry data security standards,
even if there is no compromise of customer information. Although we
believe we are in compliance with payment card industry data
security standards and do not believe there has been a compromise
of customer information, it is possible that at times either we may
not have been in full compliance with these standards. Accordingly,
we could be fined, which could impact our financial condition, or
certain of our products could be suspended, which would cause us to
be unable to process payments using credit cards. If we are unable
to accept credit card payments, our business, financial condition
and operating results may be adversely affected.
Activities of customers or the content of their websites could
damage our reputation and brand or harm our business and financial
results.
As a
provider of domain name registration and podcast and web hosting,
we may be subject to potential liability for the activities of our
customers on or in connection with their domain names, podcast
content, websites or for the data they store on our servers.
Although our terms of service prohibit illegal use of our products
by our customers and permit us to take down content or suspend
accounts or take other appropriate actions for illegal use,
customers may nonetheless engage in prohibited activities or upload
or store content with us in violation of applicable law or the
customer's own policies, which could subject us to liability.
Furthermore, our reputation and brand may be negatively impacted by
the actions of customers that are deemed to be hostile, offensive
or inappropriate. We do not proactively monitor or review the
appropriateness of the domain names our customers register or the
content of their podcasts or websites, and we do not have control
over customer activities. The safeguards we have in place may not
be sufficient to avoid harm to our reputation and brand, especially
if such hostile, offensive or inappropriate use is high
profile.
15
Several
U.S. federal statutes may apply to us with respect to various
activities of our customers, including: the Digital Millennium
Copyright Act of 1998 (the DMCA), which provides recourse for
owners of copyrighted material who believe their rights under U.S.
copyright law have been infringed on the Internet; the
Communications Decency Act of 1996 (the CDA), which regulates
content on the Internet unrelated to intellectual property; and the
Anticybersquatting Consumer Protection Act (the ACPA), which
provides recourse for trademark owners against cybersquatters. The
DMCA and the CDA generally protect online service providers like us
that do not own, or control podcast or website content posted by
customers from liability for certain activities of customers, such
as the posting of defamatory or obscene content, unless the online
service provider is participating in the unlawful
conduct.
For
example, the safe harbor provisions of the DMCA shield Internet
service providers and other intermediaries from direct or indirect
liability for copyright infringement. However, under the DMCA, we
must follow the procedures for handling copyright infringement
claims set forth in the DMCA including expeditiously removing or
disabling access to the allegedly infringing material upon the
receipt of a proper notice from, or on behalf of, a copyright owner
alleging infringement of copyrighted material located on websites
we host. Under the CDA, we are generally not responsible for the
customer-created content hosted on our servers and thus are
generally immunized from liability for torts committed by others.
Consequently, we do not monitor hosted websites or prescreen the
content placed by our customers. Under the safe harbor provisions
of the ACPA, domain name registrars are shielded from liability in
many circumstances, including cybersquatting, although the safe
harbor provisions may not apply if our activities are deemed
outside the scope of registrar functions.
Although
these statutes and case law in the U.S. have generally shielded us
from liability for customer activities to date, court rulings in
pending or future litigation may narrow the scope of protection
afforded us under these laws. Neither the DMCA nor the CDA
generally apply to claims of trademark violations, and thus they
may be inapplicable to many of the claims asserted against our
company. Furthermore, notwithstanding the exculpatory language of
these bodies of law, the activities of our customers may result in
threatened or actual litigation against us. If such claims are
successful, our business and operating results could be adversely
affected, and even if the claims do not result in litigation or are
resolved in our favor, these claims, and the time and resources
necessary to resolve them, could divert the resources of our
management and adversely affect our business and operating
results.
In
addition, laws governing these activities are unsettled in many
international jurisdictions or may prove difficult or impossible
for us to comply with in some international jurisdictions. Also,
other existing bodies of law, including the criminal laws of
various states, may be deemed to apply or new statutes or
regulations may be adopted in the future, any of which could expose
us to further liability and increase our costs of doing
business.
We may face liability or become involved in disputes over
registration and transfer of domain names and control over
websites.
As a
provider of web-based and cloud-based products, including as a
registrar of domain names and related products, we from time to
time become aware of disputes over ownership or control of customer
accounts, websites or domain names. We could face potential claims
of tort law liability for our failure to renew a customer's domain.
We could also face potential tort law liability for our role in the
wrongful transfer of control or ownership of accounts, websites or
domain names. The safeguards and procedures we have adopted may not
be successful in insulating us against liability from such claims
in the future. In addition, we face potential liability for other
forms of account, website or domain name "hijacking," including
misappropriation by third parties of our network of customer
accounts, websites or domain names and attempts by third parties to
operate accounts, websites or domain names or to extort the
customer whose accounts, websites or domain names were
misappropriated. Furthermore, we are exposed to potential liability
as a result of our domain privacy product, wherein the identity and
contact details for the domain name registrant are
masked.
Disputes
involving registration or control of domain names are often
resolved through the Uniform Domain Name Dispute Resolution Policy
(the UDRP), ICANN's administrative process for domain name dispute
resolution, or less frequently through litigation under the ACPA,
or under general theories of trademark infringement or dilution.
The UDRP generally does not impose liability on registrars, and the
ACPA provides that registrars may not be held liable for
registration or maintenance of a domain name absent a showing of
the registrar's bad faith intent to profit. However, we may face
liability if we act in bad faith or fail to comply in a timely
manner with procedural requirements under these rules, including
forfeiture of domain names in connection with UDRP actions. In
addition, domain name registration disputes and compliance with the
procedures under the ACPA and URDP typically require at least
limited involvement by us and, therefore, increase our cost of
doing business. The volume of domain name registration disputes may
increase in the future as the overall number of registered domain
names increases.
16
We are dependent on the continued services and performance of our
senior management and other key employees, the loss of any of whom
could adversely affect our business, operating results and
financial condition.
Our
future performance depends on the continued services and
contributions of our senior management and other key employees to
execute on our business plan and to identify and pursue new
opportunities and product innovations. The loss of services of
senior management or other key employees could significantly delay
or prevent the achievement of our development and strategic
objectives. The loss of the services of our senior management or
other key employees for any reason could adversely affect our
business, financial condition and operating results.
If we are unable to hire, retain and motivate qualified personnel,
our business would suffer.
Our
future success and ability to innovate depends, in part, on our
ability to continue to attract and retain highly skilled personnel.
The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel or delays in hiring
required personnel, may seriously harm our business, financial
condition and operating results. Our ability to continue to attract
and retain highly skilled personnel, specifically employees with
technical and engineering skills and employees with language skills
and cultural knowledge of the geographic markets we have recently
expanded to or that we intend to expand to in the near future, will
be critical to our future success. Competition for highly skilled
personnel is frequently intense, particularly in U.S. tech hubs. As
a public company, the ability of our employees to sell their stock
received pursuant to equity awards in the public market may lead to
a larger than normal turnover rate. We intend to issue stock
options or other equity awards as key components of our overall
compensation and employee attraction and retention efforts. In
addition, we are required under GAAP to recognize compensation
expense in our operating results for employee equity-based
compensation under our equity grant programs, which may negatively
impact our operating results and may increase the pressure to limit
equity-based compensation. We may not be successful in attracting,
assimilating or retaining qualified personnel to fulfill our
current or future needs.
The requirements of being a public company may strain our
resources.
As a
public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the Exchange Act), the
Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act). We expect the
requirements of these rules and regulations will continue to
increase our legal, accounting and financial compliance costs, make
some activities more difficult, time-consuming and costly, and
place significant strain on our personnel, systems and resources.
Management's attention may be diverted from other business
concerns, which could adversely affect our business and operating
results.
The
Sarbanes-Oxley Act requires us, among other things, to maintain
effective disclosure controls and procedures and internal control
over financial reporting. We continue to develop and refine our
disclosure controls and other procedures designed to ensure that
information required to be disclosed by us in the reports we will
file with the SEC is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and that
information required to be disclosed in reports under the Exchange
Act is accumulated and communicated to our principal executive and
financial officers. We also continue to improve our internal
control over financial reporting. In order to maintain and improve
the effectiveness of our disclosure controls and procedures and
internal control over financial reporting, we anticipate we will
continue to expend, significant resources, including legal and
accounting-related costs and management oversight.
Our business is subject to the risks of earthquakes, fire, power
outages, floods and other catastrophic events and to interruption
by man-made problems such as terrorism.
A
significant natural disaster, such as an earthquake, fire or flood
could have a material adverse impact on our business, operating
results and financial condition. Natural disasters could lead to
significant power outages and otherwise affect our data centers as
well as our infrastructure vendors' abilities to provide
connectivity and perform services on a timely basis. In the event
our or our service providers' IT systems' abilities are hindered by
any of the events discussed above, we and our customers' websites
could experience downtime, and our products could become
unavailable. In addition, acts of terrorism and other geopolitical
unrest could cause disruptions in our business or the business of
our infrastructure vendors, partners or customers or the economy as
a whole. Any disruption in the business or operations of our data
center hosting providers or customers could have a significant
adverse effect on our operating results and financial performance.
All of the aforementioned risks may be further increased if our
disaster recovery plans prove to be ineffective in the event of
such a disaster.
17
With the spin-off, the Company may be responsible for certain
obligations retained by FAB.
Although
the Company does not expect to be liable for any obligations not
expressly assumed by the Company from the Spin-Off, it is possible
that the Company could be required to assume responsibility for
certain obligations retained by FAB should FAB fail to pay or
perform its retained obligations. After the Spin-Off, FAB 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.
Risks Related to Our Industry
Governmental and regulatory policies or claims concerning the
domain name registration system and the Internet in general, and
industry reactions to those policies or claims, may cause
instability in the industry and disrupt our business.
ICANN
is a multi-stakeholder, private sector, not-for-profit corporation
formed in 1998 for the express purposes of overseeing a number of
Internet related tasks, including managing the DNS allocation of IP
addresses, accreditation of domain name registrars and registries
and the definition and coordination of policy development for all
of these functions. We are accredited by ICANN as a domain name
registrar and thus our ability to offer domain name registration
products is subject to our ongoing relationship with, and
accreditation by, ICANN.
ICANN
has been subject to strict scrutiny by the public and governments
around the world, as well as multi-governmental organizations such
as the United Nations, with many of those bodies becoming
increasingly interested in Internet governance. There is also
uncertainty concerning the nature and significance of the recent
transition from U.S. oversight of ICANN to oversight of ICANN by
its members.
Additionally, we
continue to face the possibility that:
●
the structure and
accountability mechanisms contained in ICANN's new bylaws are
untested, which may result in ICANN not being accountable to its
stakeholders and unable to make, implement or enforce its
policies;
●
the U.S. or another
government or intergovernmental organization may reassess ICANN's
role in overseeing the domain name registration
market;
●
the Internet
community, the U.S. government or other governments may
(i) refuse to recognize ICANN's authority or support its
policies, (ii) attempt to exert pressure on ICANN, or
(iii) enact laws in conflict with ICANN's policies, each of
which could create instability in the domain name registration
system;
●
governments, via
ICANN's Governmental Advisory Committee (GAC), may seek greater
influence over ICANN policies and contracts with registrars and may
advocate changes that may adversely affect our
business;
●
some of ICANN's
policies and practices, such as ICANN's position on privacy and
proxy domain name registrations, and the policies and practices
adopted by registries and registrars, could be found to conflict
with the laws of one or more jurisdictions, or could be materially
changed in a way that negatively impacts the sale of our
products;
●
the terms of the
Registrar Accreditation Agreement (the RAA) under which we are
accredited as a registrar, could change in ways that are
disadvantageous to us or under certain circumstances could be
terminated by ICANN, thereby preventing us from operating our
registrar service, or ICANN could adopt unilateral changes to the
RAA that are unfavorable to us, that are inconsistent with our
current or future plans, or that affect our competitive
position;
●
International
regulatory or governing bodies, such as the International
Telecommunications Union, a specialized agency of the United
Nations, or the European Union, may gain increased influence over
the management and regulation of the domain name registration
system, leading to increased regulation in areas such as taxation,
privacy and the monitoring of our customers' hosted
content;
●
ICANN or any
third-party registries may implement policy changes impacting our
ability to run our current business practices throughout the
various stages of the lifecycle of a domain name;
18
●
the U.S. Congress
or other legislative bodies in the U.S. could take action
unfavorable to us or influencing customers to move their business
from our products to those located outside the U.S.;
●
ICANN could fail to
maintain its role, potentially resulting in instability in DNS
services administration;
●
some governments
and governmental authorities outside the U.S. have in the past
disagreed, and may in the future disagree, with the actions,
policies or programs of ICANN and registries relating to the DNS,
which could fragment the single, unitary Internet into a
loosely-connected group of one or more networks, each with
different rules, policies and operating protocols; and
●
multi-party review
panels established by ICANN's new bylaws may take positions
unfavorable to our business.
If any
of these events occur, they could create instability in the domain
name registration system and may make it difficult for us to
continue to offer existing products and introduce new products or
serve customers in certain markets. These events could also disrupt
or suspend portions of our domain name registration product and
subject us to additional restrictions on how the registrar and
registry products businesses are conducted, which would result in
reduced revenue.
Changes in state taxation laws and regulations may discourage the
registration or renewal of domain names for
e-commerce.
Due to
the global nature of the Internet, it is possible that any U.S. or
foreign federal, state or local taxing authority might attempt to
regulate our transmissions or levy transaction, income or other
taxes relating to our activities. Tax authorities at the
international, federal, state and local levels are regularly
reviewing the appropriate treatment of companies engaged in
e-commerce. New or revised international, federal, state or local
tax regulations may subject either us or our customers to
additional sales, income and other taxes. We cannot predict the
effect of current attempts to impose sales, income or other taxes
on e-commerce. New or revised taxes, in particular sales and other
transaction taxes, would likely increase the cost of doing business
online and decrease the attractiveness of advertising and selling
goods and services over the Internet. New taxes could also create
significant increases in internal costs necessary to capture data
and to collect and remit taxes. Any of these events could have an
adverse effect on our business and results of
operations.
There are substantial risks related to our Common Stock and
management's percentage of ownership of our Common
Stock
The market price and trading volume of our Common Stock may be
volatile and may face negative pressure.
There
may be significant fluctuations in the Company’s Common Stock
price. Investors’ interest may not lead to a liquid trading
market and the market price of our Common Stock may be volatile.
This may result in short or long-term negative pressure on the
trading price of shares of our Common Stock. The market price of
our Common Stock may be volatile due to the risks and uncertainties
described in this “Risk Factors” section, as well as
other factors that may affect the market price, such
as:
●
Conditions and
publicity regarding the podcast hosting industries
generally;
●
Price and volume
fluctuations in the stock market at large which do not relate to
the Company’s operating performance; and
●
Comments by
securities analysts or government officials, including those with
regard to the viability or profitability of the podcasting sector
generally or with regard to our ability to meet market
expectations.
●
The stock market
has from time to time experienced extreme price and volume
fluctuations that are unrelated to the operating performance of
particular companies.
19
Future sales of our Common Stock could adversely affect its stock
price and our ability to raise capital in the future.
Sales
of substantial amounts of the Company’s common stock could
harm the market price of its stock. This also could harm our
ability to raise capital in the future. The Company’s shares
are freely tradable without restriction under the Securities Act of
1933 (the “Securities Act”) by persons other than
“affiliates,” as defined under the Securities Act. Any
sales of substantial amounts of the Company’s common stock in
the public market, or the perception that that sales might occur,
could harm the market price of the Company’s common
stock.
The
Company will not solicit the approval of its stockholders for the
issuance of authorized but unissued shares of the Company’s
common stock unless this approval is deemed advisable by our board
of directors or is required by applicable law, regulation or any
applicable stock exchange listing requirements. The issuance of
those shares could dilute the value of the Company’s
outstanding shares of common stock.
Due to the instability in our common stock price, you may not be
able to sell your shares at a profit.
The
public market for our common stock is limited and volatile. As with
many other companies, any market price for our shares is likely to
continue to be very volatile. In addition, the other risk factors
disclosed in this Form 10-K may significantly affect our stock
price. The volatility and limited volume of our stock price may
make it more difficult for you to resell shares when you want at
prices you find attractive.
In
addition, the stock market in general and the market for small
podcast hosting companies, in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of these companies.
These broad market and industry factors may reduce our stock price,
regardless of our operating performance.
The sale of already outstanding shares of our common stock could
hurt our common stock market price.
The
number of our shares available for resale in the public market may
exceed the number of shares that purchasers wish to buy. This
imbalance may place downward pressure on our stock
price.
Sales
of substantial amounts of the Company’s common stock could
harm the market price of its stock. This also could harm the
Company’s ability to raise capital in the future. Any sales
of substantial amounts of the Company’s common stock in the
public market, or the perception that that sales might occur, could
harm the market price of the Company’s common
stock.
Failure to meet financial expectations could have an adverse impact
on the market price of the Company’s common
stock.
The
Company’s ability to achieve its financial targets is subject
to a number of risks, uncertainties and other factors affecting its
business and the podcasting and hosting industries generally, many
of which are beyond the Company’s control. These factors may
cause actual results to differ materially. We describe a number of
these factors throughout this document, including in these Risk
Factors. The Company cannot assure you that it will meet
these targets. If the Company is not able to meet these targets, it
could harm the market price of its common stock.
Item 1B. Unresolved Staff Comments.
Not
applicable to smaller reporting companies.
Item 2. Properties.
The
Company’s principal executive offices consist of
approximately 3,100 square feet of office space located at 5001
Baum Boulevard, Suite 770, Pittsburgh, Pennsylvania 15213. Our
telephone number is (412) 621-0902. The Pittsburgh office is rented
for $4,841 per month and the lease ends April 31, 2022.
We also maintain an office at 2403
Sidney St., Suite 210, Pittsburgh, PA for the Pair operations. The
office consists of approximately 34,700 square feet of space and is
rented for $34,014 per month and the lease ends on September 30,
2021.
20
Item 3. Legal Proceedings.
The
Company 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. While any
proceeding or claim contains an element of uncertainty, management
does not expect that any such proceeding or claim will have a
material adverse effect on our results of operations or financial
position.
Item 4. Mine Safety Disclosures
Not
applicable
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
As of
March 22, 2018, 29,595,473 shares of our common stock were
outstanding and the last reported sales price for our common stock
on the OTCQB on that date was $1.60 per share. We have
approximately 7,000 stockholders. This figure includes an
indeterminate number of stockholders who hold their shares in
“street name”. We cannot guarantee that the present
market for our common stock will continue or be
maintained.
The
quarterly high and low closing sales prices for our shares of
common stock since public trading of these shares began are as
follows:
|
Fiscal Year 2016
and 2017
|
Low
|
High
|
|
|
|
|
|
July 1, 2016
through September 30, 2016
|
$0.22
|
$0.90
|
|
October 1, 2016
through December 31, 2016
|
$0.33
|
$0.90
|
|
January 1. 2017
through March 31, 2017
|
$0.436
|
$0.76
|
|
April 1, 2017
through June 30, 2017
|
$0.84
|
$0.98
|
|
July 1, 2017
through September 30, 2017
|
$0.95
|
$1.07
|
|
October 1, 2017
through December 31, 2017
|
$1.04
|
$1.75
|
We have
not declared any cash dividends on our common stock, and do not
intend to declare dividends in the foreseeable future. Management
intends to use all available funds for the development of our plan
of operation. There are no material restrictions limiting, or that
are likely to limit, our ability to pay dividends on our common
stock.
Equity
Compensation Plan Information
The
following information is provided as of December 31,
2017:
|
Plan
Category
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number of
securities remaining available for future issuance under equity
compensation plans excluded securities reflected in column
(a)
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation
plans approved by stockholders
|
0
|
$0.00
|
0
|
|
|
|
|
|
|
Equity compensation
plans not approved by stockholders
|
0
|
$0.00
|
0
|
|
|
|
|
|
|
Total
|
0
|
$0.00
|
0
|
21
Recent Sales of Unregistered Securities; Use of Proceeds from
Registered Securities.
We have not issued any unregistered or restricted shares of common
stock during the calendar years ended December 31, 2017 and 2016,
that have not already been disclosed in our Quarterly Reports on
Form 10-Q and/or Current Reports on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.
Not
applicable.
Item 6. Selected Financial Data
Not
applicable to smaller reporting companies.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The
following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes
included in this Form 10-K.
Safe Harbor Statement.
Statements
made in this Form 10-K 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, Pair
and Libsyn, including, without limitation, (i) our ability to gain
a larger share of the podcasting industry in our chosen markets,
our ability to continue to develop products and services acceptable
to that industry, our ability to retain our business relationships,
and our ability to raise capital and the growth of podcast
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" 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 our reports on file with the SEC:
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 podcast
industry, the development of services that may be superior to the
services offered by the Company, demand for services, 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 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
Libsyn
Libsyn
was on the forefront of the podcast trend when it was founded in
2004, launching the first Podcast Service Provider (Host), offering
storage, bandwidth, and RSS (Really Simple Syndication) creation
tools. Today, Libsyn is a worldwide leader of podcast hosting,
distribution, and monetization. Hosting over 44,000 podcast shows,
Libsyn delivered 7.25 billion podcast requests to audiences
worldwide in 2017. The Libsyn brand has built a reputation for
reliable service, world class podcast statistics and exceptional
customer service. This has allowed Libsyn to grow into one of the
market leaders in the industry.
22
The Libsyn business has also experienced upward trends in the areas
of podcast creation, consumption, and audience growth. Podcast
shows on the Libsyn platform increased to over 44,000 in 2017 from
35,000 in 2016 from 28,000 and in 2015. This resulted in 3,968,275
active episodes in 2017 versus 3,193,997 in 2016 and 2,572,295 in
2015. Annual podcast download requests on the Libsyn platform
exceeded 7.2 billion in 2017, up from 4.59 billion in 2016, and
3.33 billion in 2015. Additionally, the Libsyn network now reaches
92 million audience members monthly, an increase from 62 million in
2016 and 55 million in 2015.
In 2017, Libsyn generated 64% of its $10.5 million in revenue from
Podcast hosting fees paid by Libsyn4 Producers. Advertising revenue
is 15% of overall revenues, and LibsynPro, which includes hosting,
along with bandwidth charges and other professional level add-ons,
makes up 17% of revenues. App subscriptions make up 4% of total
Libsyn revenues.
Podcast Hosting and Distribution
Libsyn is a Podcast 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 stats,
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 70% of the shows that Libsyn distributes reach
audiences using Apple’s iTunes platform which includes iTunes
on the computer, iPods, iPads, iPhones, iPad, Apple Watch, Apple
TV, and Apple’s Podcasts App on iOS devices. Libsyn also
enables distribution to destinations like Google Play Music and
aggregators such as Spotify and iHeartRadio. 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, Blogger. Libsyn offers 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.
Mobile Podcast Apps
Each month, more than 2 billion people download apps for the Apps
stores versus approximately 100 million who download podcasts. To
grow audience for a podcast, producers seek to distribute the show
everywhere. After the iTunes podcast directory, the next largest
and most readily used marketplaces are App stores. Libsyn provides
the ability for producers to have their own customized apps or be
included in the Libsyn PodSource app, across all the major App
Stores. This includes Apple, Google, Amazon, and Windows Phone App
Stores. Libsyn recently partnered with Amazon to include podcast
apps for the Amazon Echo via Alexa Skills.
This allows podcasts to be discovered by those new to podcasts but
familiar with Apps and more importantly, enables a simple way to
consume podcasts and share them with friends. Additionally, podcast
apps open podcast consumption to users who are not Apple-centric
and do not require listeners to subscribe or download podcasts.
Once the App has been downloaded to a mobile device, the podcast
episodes can be played directly from the App.
23
Advertising
The Libsyn Ad Sales team has ongoing relationships with agencies
and advertisers and works directly with podcast producers on
advertising and sponsorship opportunities. Producers’ shows
earn revenue share from advertising campaigns. Additionally,
Campaign Management services which include automated ad insertion
tools are integrated into the Libsyn platform. The Libsyn Ad
Operations team and enterprise customers use these tools to
schedule and track ad impressions that are dynamically inserted
into podcasts. Libsyn statistics show that over 50% of podcast
downloads come from the back catalog of content. With dynamic ad
insertion, ads are included only during the campaign which allows
the entire show catalog to be available for future campaigns.
Host-read ads are permanently included in the episode limiting
future advertising opportunities across a show’s entire
inventory but benefiting advertisers with episodic lifetime
advertising.
Advertisers and agencies run renewal campaigns and add new
campaigns based on the ROI performance and working experience with
Libsyn’s Ad Operations team. Based on management’s
experience, advertisers prefer to deal with a company like Libsyn
when it comes to podcast advertising, which has a larger audience
reach. We are able to leverage our relationship with our producers
and simplify the coordination of advertising buys and campaign
tracking. Management believes that the value of targeted audiences
will continue to drive higher-value CPMs (cost per million
advertising rates) and sponsorship rates based on successful
results, positive ROIs, and relationships with the
producers.
Premium Podcast Content
Premium podcast content is a monetization strategy for producers to
lock down show episodes and offer them to their audience on a paid
subscription basis. Through MyLibsyn, podcast shows get a custom
App and a podcast website where listeners can access their show,
login to purchase a subscription and get access to premium content.
Subscriptions are offered on a one month, six month or annual basis
and revenue is shared with the show’s producer. With over 50%
of podcast downloads coming from the back catalog of content, the
Premium offering enables shows to make their most recent episodes
available for free in order to continue to build audiences but
charge for their back catalog to generate revenue from the
subscriptions.
The Premium offering is also available to LibsynPro customers to
create private podcasts. Private Premium is ideal for large
organizations and companies that want to distribute audio and video
information internally through mobile apps. Access to Private
Premium content is controlled and managed by an access list through
the LibsynPro interface. The organizations pay monthly for the
private subscribers, so users are only required to download the App
from one of the App stores and login. This provides an easy
solution for organization to distribute information to employees,
partners, and affiliates by utilizing smartphone apps.
Pair Networks, Inc. (“Pair”)
Pair Networks, founded in 1996, is one of the oldest and most
experienced Internet hosting company 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 serves
businesses, bloggers, artists,
musicians, educational institutions and non-profit organizations
around the world.
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.
24
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.
Virtual
private servers
Virtual
private servers (VPS) is a step up from a shared hosting solution
in that specific serve resources are allocated directly for your
use, assuring performance levels. This is a more secure and
reliable option that separates your 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 custom
built to customer specification 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 are ready for your use
in no time and fully managed to keep them up to date.
Pair
hosting also offers self-managed service through pairCloud and
server collocation, both of which deliver the advantages of the
powerful infrastructure that was built behind the fully managed
offerings. pairCloud provides administrative access to a powerful
virtual server, allowing customization to a customer’s
precise needs. Additionally, 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.
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 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 or two years customer domain 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.
Critical Accounting Policies
Our
discussion and analysis of our financial condition and the results
of our operations are based upon our financial statements and the
data used to prepare them. Our financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. On an ongoing basis, we re-evaluate
our judgments and estimates including those related to bad debts,
investments, long-lived intangible assets, and income
taxes.
We base
our estimates and judgments on our historical experience, knowledge
of current conditions and our beliefs of what could occur in the
future considering available information. Actual results may differ
from these estimates under different assumptions or conditions. Our
estimates are guided by observing the following critical accounting
policies.
Goodwill
Goodwill
represents the excess of the purchase price over the fair market
value of identifiable net assets of acquired companies. Goodwill is
not amortized, but rather is tested at least annually for
impairment or more frequently if triggering events or changes in
circumstances indicate impairment. The Company adopted the new
guidance of Accounting
Standards Update No. 2010-28, Intangibles —
Goodwill and Other (Topic 350):
25
When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts (ASU
2010-28), which simplifies the goodwill impairment test by
allowing the option to first assess qualitative factors in order to
determine whether it is more likely than not that the fair value of
a reporting unit is less than its carrying amount. Some of these
qualitative factors may include macroeconomic conditions, industry
and market considerations, a change in financial performance,
entity-specific events, a sustained decrease in share price, and
consideration of the difference between the fair value and carrying
amount of a reporting unit as determined in the most recent
quantitative assessment. If, through this qualitative assessment,
the conclusion is made that it is more likely than not that a
reporting unit's fair value is less than its carrying amount, a
two-step impairment analysis is performed to estimate the fair
value of goodwill. The first step involves comparing the fair value
of a reporting unit to its carrying amount. If the carrying amount
of the reporting unit exceeds its fair value, the second step of
the process involves comparing the implied fair value to the
carrying amount of the goodwill of that reporting unit. If the
carrying amount of the goodwill of a reporting unit exceeds the
implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
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.
Revenue
The
Company recognizes revenue when earned. The Company recognized
revenue in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) Topic 605, Revenue is recognized when
persuasive evidence of an arrangement exists, services have been
provided, the price of services is fixed or determinable, and
collection is reasonably assured.
We
recognize revenue over the period during which products or services
are delivered to the customer. Customers are billed for products,
generally in advance, based on their selected contract term
duration. For all customers, regardless of the method we use to
bill them, cash received in advance of the provision of products is
recorded as deferred revenue.
We
commence revenue recognition when all of the following conditions
are satisfied:
●
there is persuasive
evidence of an arrangement;
●
the service has
been or is being provided to the customer;
●
the collection of
the fees is reasonably assured; and
●
the amount of fees
to be paid by the customer is fixed or determinable.
We may
sell multiple products to customers at the same time. For example,
we may design a customer website and separately offer other
products such as hosting and an online shopping cart, or a customer
may combine a domain registration with other products such as
private registration or email. Revenue arrangements with multiple
deliverables are divided into separate units of accounting if each
deliverable has stand-alone value to the customer. The majority of
our revenue arrangements consist of multiple-element arrangements,
with revenue for each unit of accounting recognized as the product
or service is delivered to the customer.
Consideration
is allocated to each deliverable at the inception of an arrangement
based on relative selling prices. We determine the relative selling
price for each deliverable based on our vendor-specific objective
evidence of selling price (VSOE), if available, or our best
estimate of selling price (BESP), if VSOE is not available. We
establish VSOE for certain of our products when a consistent number
of stand-alone sales of these products have been priced within a
reasonably narrow range. We are unable to establish VSOE when we
lack pricing consistency, primarily related to our marketing
strategies and variability in pricing due to promotional
activity.
Our
process for determining BESP requires judgment and considers
multiple factors that may vary over time depending upon the unique
facts and circumstances related to each deliverable. For products
where VSOE is not available, we determined BESP by considering our
overall pricing objectives and market conditions. Significant
factors taken into consideration include historical and expected
discounting practices, the size, volume and term length of
transactions, customer demographics, the geographic areas in which
our products are sold and our overall go-to-market
strategy.
26
The
determination of gross or net revenue recognition is reviewed on a
product by product basis and is dependent on whether we act as
principal or agent in the transaction.
We
maintain a reserve to provide for refunds granted to customers. Our
reserve is an estimate based on historical refund experience.
Refunds reduce deferred revenue at the time they are granted and
result in a reduced amount of revenue recognized over the contract
term of the applicable product compared to the amount originally
expected.
Income taxes
The
Company accounts for income taxes using the liability method, which
requires the determination of deferred tax assets and liabilities
based on the differences between the financial and tax basis of
assets and liabilities, using enacted tax rates in effect for the
year in which differences are expected to reverse. Deferred tax
assets are adjusted by a valuation allowance, if based on the
weight of available evidence it is more likely than not that some
portion or all of the deferred tax assets will not be
realized. The Company anticipates earnings in the near
future and the realization of the benefit of the deferred tax
assets.
For a
description of accounting changes and recent enacted accounting
standards, including the expected dates of adoption and estimated
effects, if any, on our financial statements, see “Note 1:
Recently Enacted Accounting Standards” in the financial
statements included elsewhere in this prospectus.
Equity-Based Compensation
Our
equity-based awards are comprised of options and stock and are
accounted for using the fair value method. We grant options at
exercise prices equal to the fair market value of our common stock
as reported on the OTCQB on the date of grant. We measure and
recognize compensation expense for equity-based awards made to
employees and directors based on the grant date fair values of the
awards. Stock is measured based on the fair market value of the
underlying common stock on the date of grant. Options and award
vest and compensation is recognized over the requisite service
period. For options with service or performance-based vesting
conditions, the grant date fair value is estimated using the
Black-Scholes option-pricing model, which requires management to
make assumptions and apply judgment in determining the grant date
fair value.
The
most significant assumptions and judgments include estimating the
expected option term, the expected volatility of our common stock
and the risk-free interest rates. The assumptions used in our
option pricing model represent management's best estimates. If
factors change and different assumptions are used, our equity-based
compensation expense could be materially different in the
future.
Business Combinations
We
include the results of operations of acquired businesses in our
consolidated financial statements as of the respective dates of
acquisition. Accounting for business combinations requires us to
make significant estimates and assumptions, especially at the
acquisition date, with respect to tangible and intangible assets
acquired and liabilities assumed and pre-acquisition contingencies.
The purchase price of acquisitions, including estimates of the fair
value of contingent consideration when applicable, is allocated to
the tangible and intangible assets acquired and the liabilities
assumed based on their estimated fair values on the respective
acquisition dates, with the excess recorded as goodwill. We use our
best estimates and assumptions to accurately assign fair value to
the tangible and intangible assets acquired and liabilities assumed
at the acquisition date. The estimates are inherently uncertain and
subject to refinement. We continue to collect information and
reevaluate these estimates and assumptions quarterly and record any
adjustments to the preliminary estimates to goodwill provided we
are within the measurement period. Contingent consideration is
adjusted to fair value in subsequent periods as an increase or
decrease in general and administrative expenses.
Acquisition-related costs are expensed as incurred.
See
Note 3 to our consolidated financial statements for additional
information regarding business combinations.
27
Goodwill and Indefinite-Lived Intangible Assets
We make
estimates, assumptions and judgments when valuing goodwill and
other intangible assets in connection with the initial purchase
price allocations of acquired businesses, as well as when
evaluating the recoverability of our goodwill and other intangible
assets on an ongoing basis. We assess our goodwill and
indefinite-lived intangible assets for impairment at least annually
during the fourth quarter. We will also perform an assessment at
other times if and when events or changes in circumstances indicate
the carrying value of these assets may not be
recoverable.
We
first make a qualitative assessment of whether it is
more-likely-than-not our single reporting unit's fair value is less
than its carrying value to determine whether it is necessary to
perform the two-step impairment test. The qualitative assessment
includes considering various factors including macroeconomic
conditions, industry and market conditions and our historical and
projected operating results. We are only required to perform the
two-step impairment test if our qualitative assessment determines
our single reporting unit's fair value is not greater than its
carrying value. We may elect to perform the two-step impairment
test without considering such qualitative factors.
Our
qualitative analyses during 2017 and 2016 did not indicate any
impairment of our goodwill and indefinite-lived intangible assets,
and accordingly, no impairment was recorded. As of
December 31, 2017, we believe such assets are recoverable;
however, there can be no assurances these assets will not be
impaired in future periods. Any future impairment charges could
adversely impact our consolidated results of
operations.
Results of Operations.
The Libsyn business has also experienced upward trends in the areas
of podcast creation, consumption, and audience growth. Podcast
shows on the Libsyn platform increased to over 44,000 in 2017 from
35,000 in 2016 from 28,000 and in 2015. This resulted in 3,968,275
active episodes in 2017 versus 3,193,997 in 2016 and 2,572,295 in
2015. Annual podcast download requests on the Libsyn platform
exceeded 7.2 billion in 2017, up from 4.59 billion in 2016, and
3.33 billion in 2015. Additionally, the Libsyn network now reaches
92 million audience members monthly, an increase from 62 million in
2016 and 55 million in 2015.
Revenues of $47,563 and net loss of $26,840 from December 28, 2017
to December 31, 2018 of the acquired subsidiaries have been
included in the Consolidated Financial Statements.
The Libsyn4 product offering is a podcast hosting and distribution
service which includes 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’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.
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 12 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 cost of revenue continue to
grow in 2018. With the level of bandwidth usage currently incurred,
the company has Content Delivery Network (CDN) and storage solution
contracts that leverage economies of scale over the next 12 months
to continue to help manage cost of revenue.
In 2017, Libsyn generated 64% of its $10.5 million in revenue from
Podcast hosting fees paid by Libsyn4 Producers. Advertising revenue
is 15% of overall revenues, and LibsynPro, which includes hosting,
along with bandwidth charges and other professional level add-ons,
makes up 17% of revenues. App subscriptions make up 4% of total
Libsyn revenues.
28
In 2016, Libsyn generated 61% of its $8.8 million in revenue from
Podcast hosting fees paid by Libsyn4 Producers. Advertising revenue
is 18% of overall revenues, and LibsynPro, which includes hosting,
along with bandwidth charges and other professional level add-ons,
makes up 16% of revenues. App subscriptions make up 5% of total
Libsyn revenues.
Fiscal year ended December 31, 2017 compared to fiscal year ended
December 31, 2016:
During
2017, the Company recorded revenues of $10,584,219, a 20% increase
over revenues of $8,792,208 for the same period in 2016. The
increase for 2017 reflects an increase in Libsyn 4 hosting revenue
as well as LibsynPro and Advertising revenue. Libsyn4 hosting
revenue increased due to the growth in the number of podcasts on
the network between 2016 and 2017. LibsynPro revenue increased as a
result of additional LibsynPro networks using our platform in 2017
with increased bandwidth usage fees for delivery of podcasts
contributing to the revenue gain. Advertisers and agencies
continued to renew campaigns in 2017 based on positive performance
and experience with Libsyn’s Ad Operations team. Premium
subscription revenue increased due to more shows offering
premium.
In
2017, cost of revenue totaled $2,379,151, a 5% increase as compared
to $2,268,046 in 2016. This is a reflection of the increase in
bandwidth usage during 2017 due to the growth in the number of
podcasts and increased podcast consumption on the Libsyn Platform
off-set by a reduction in bandwidth rate to deliver the
podcasts.
The
Company recorded general and administrative expenses totaled
$2,989,775 in 2017 versus $2,786,923 in 2016, an increase of 7%,
due increase in fees associated with the acquisition of Pair
Networks Inc. off-set by an increase in personnel costs, medical
insurance and travel expense. The Company incurred $7,274,000 of
non-cash compensation expense due to the issuance of common stock
to officers, directors and employees. Technology expenses
represented $610,794 in 2017 versus $515,756 in 2016, driven by an
increase in wages during 2017. Selling expenses in 2017 were
$299,074 versus $282,954 in 2016 due to an increase in wages paid
during 2017. Customer support expenses in 2017 were $191,820 versus
$129,232 in 2016 driven by an increase in support
personnel.
The
Company’s net loss was $3,182,395 in 2017. This represents a
$5,967,013 decrease from our net income of $2,784,618 in
2017.
Inflation and seasonality:
The
Company does not believe that inflation or seasonality will
significantly affect its results of operation.
Liquidity and Capital Resources
2017 compared to 2016
Cash on
hand was $5,211,845 at December 31, 2017, an increase of $336,387
over the $4,875,458 on hand at December 31, 2016. Cash provided by
operations for 2017, was $3,587,404, as compared to cash provided
by operations of $3,088,821 for 2016. This is a result of increased
revenue during 2017 offset by an increase in expenses.
During
2017, cash used for investing was $13,130,017 of which $13,060,953
was for the purchase of Pair Networks Inc. During 2016, Cash used
in investing was $36,791 for the purchase of
equipment.
In
2017, net cash provided by financing activities was $9,879,000. The
increase was the result of two credit facilities totaling
$10,000,000, for which the proceeds were used for the acquisition
of Pair Networks Inc. Cash used in financing activities was
$647,266 for distributions to FAB Universal Corp. during
2016.
29
Debt and Contractual Obligations
On December 27, 2017, the Company entered into a loan agreement
(the “Loan Agreement”) among the Company, Webmayhem,
Inc., a Pennsylvania corporation and a wholly-owned subsidiary of
the Company (“Libsyn”), and Pair Networks (Pair
Networks, together with Libsyn and the “Company”), 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 up 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.
The Term Loan is repayable in quarterly installments of $400,000
commencing on March 31, 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 call
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.
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.
Item 7A. Quantitative and Qualitative Disclosure about Market
Risk
Not
applicable to smaller reporting companies.
30
Liberated Syndication Inc.
Index to Financial Statements
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
32
|
|
|
|
|
Consolidated
Balance Sheets
|
33
|
|
|
|
|
Consolidated
Statements of Operations
|
34
|
|
|
|
|
Consolidated
Statements of Changes in Stockholder’s Equity
|
35
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
36
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
37
|
|
|
|
31
4397
South Albright Drive, Salt Lake City, UT 84124
(801)
277-2763 Phone
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board
of Directors and Shareholders
Liberated
Syndication Inc.
Pittsburgh,
Pennsylvania 15213
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets Liberated
Syndication Inc. and subsidiaries (“the Company”) as of
December 31, 2017 and 2016, and the related consolidated statements
of income, comprehensive income, stockholders’ equity
(deficit), and cash flows for each of the years in the two year
period ended December 31, 2017 and the related notes (collectively
referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of its operations and its cash flows
for each of the years in the two year period ended December 31,
2017, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal security
laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining on a
test basis, evidence regarding the amounts and disclosures in the
financial statements. Our Audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since
2015.
Salt Lake City, Utah
March 26, 2018
32
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
2017
|
December
31,
2016
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
$5,211,845
|
$4,875,458
|
|
Accounts
receivable, net
|
660,139[1]
|
385,335[1]
|
|
Prepaid
expenses
|
186,425
|
44,583
|
|
Total
current assets
|
6,058,409
|
5,305,376
|
|
|
|
|
|
Property
and equipment, net
|
3,007,025
|
33,982
|
|
Goodwill
|
16,352,069
|
11,484,251
|
|
Definite
life - intangible assets
|
9,644,000
|
-
|
|
Other
|
7,076
|
-
|
|
Total
assets
|
$35,068,579
|
$16,823,609
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Accounts
payable
|
$440,565
|
$536,295
|
|
Accrued
expenses
|
769,485
|
313,586
|
|
Deferred
revenue, net
|
1,247,686
|
110,167
|
|
Current
portion of capital lease obligation
|
69,243
|
-
|
|
Current
portion of loans payable, net of $33,366 discount
|
1,566,634
|
-
|
|
Total
current liabilities
|
4,093,613
|
960,048
|
|
|
|
|
|
LONG TERM
LIABILITIES:
|
|
|
|
Loans
payable, net of $79,634 discount, less current portion
|
8,320,366
|
-
|
|
Capital lease
obligation, net of current portion
|
73,817
|
-
|
|
Deferred
revenue, net
|
133,617
|
-
|
|
Total
long-term liabilities
|
8,527,800
|
-
|
|
Total
liabilities
|
12,621,413
|
960,048
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Common
stock
|
29,596
|
20,806
|
|
Additional
paid-in capital
|
34,804,457
|
25,047,247
|
|
Retained
Earnings (accumulated deficit)
|
(12,386,887)
|
(9,204,492)
|
|
Total
stockholders' equity
|
22,447,166
|
15,863,561
|
|
Total
liabilities and stockholders' equity
|
$35,068,579
|
$16,823,609
|
|
Liberated Syndication Inc. and Subsidiaries
Balance Sheet (Parenthetical)
|
|
|
|
Statement of
Financial Position
|
December
31,
2017
|
December
31,
2016
|
|
Allowance
for doubtful accounts
|
14,000
|
14,000
|
|
Common
stock authorized
|
200,000,000
|
200,000,000
|
|
Common
stock par value
|
0.001
|
0.001
|
|
Common
stock outstanding
|
29,595,473
|
20,805,860
|
The
accompanying notes are an integral part of these consolidated
financial statements.
33
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
ended
|
|
|
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
|
|
|
Revenue
|
$10,584,219
|
$8,792,208
|
|
|
|
|
|
Costs and operating
expenses
|
|
|
|
|
|
|
|
Cost of revenue
(excluding depreciation and amortization)
|
2,379,151
|
2,268,046
|
|
General and
administrative
|
2,989,775
|
2,786,923
|
|
Non-cash
compensation
|
7,274,000
|
-
|
|
Technology
|
610,794
|
515,756
|
|
Selling
|
299,074
|
282,954
|
|
Customer
support
|
191,820
|
129,232
|
|
Depreciation and
amortization
|
22,033
|
24,679
|
|
Total costs and
operating expenses
|
13,766,647
|
6,007,590
|
|
Operating income
(loss)
|
(3,182,428)
|
2,784,618
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
33
|
-
|
|
Income (loss) from
operations
|
(3,182,395)
|
2,784,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
-
|
-
|
|
Net Income
(loss)
|
$(3,182,395)
|
$2,784,618
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
INCOME (LOSS) PER COMMON SHARE
|
$(0.13)
|
$0.13
|
|
BASIC AND DILUTED
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
24,390,595
|
20,805,860
|
The
accompanying notes are an integral part of these consolidated
financial statements.
34
LIBERATED
SYNDICATION INC.
STATEMENT
OF STOCKHOLDERS’ EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
|
|
Additional
|
|
|
|
Common
Stock
|
Paid
In
|
Accumulated
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
|
|
|
|
|
|
|
Balance at December
31, 2015 (Restated)
|
20,805,860
|
$20,806
|
$25,694,513
|
$(11,989,110)
|
|
|
|
|
|
|
|
Distribution to FAB
Universal Corp
|
-
|
-
|
(647,266)
|
-
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
2,784,618
|
|
|
|
|
|
|
|
Balance at December
31, 2016
|
20,805,860
|
$20,806
|
$25,047,247
|
$(9,204,492)
|
|
|
|
|
|
|
|
Issuance of Common
Stock for services
|
7,250,000
|
7,250
|
7,266,750
|
-
|
|
|
|
|
|
|
|
Repurchase of
Common Stock
|
(40,000)
|
(40)
|
(7,960)
|
-
|
|
|
|
|
|
|
|
Issuance of Common
Stock to acquire Pair Networks Inc.
|
1,579,613
|
1,580
|
2,498,420
|
-
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
(3,182,395)
|
|
|
|
|
|
|
|
Balance at December
31, 2017
|
29,595,473
|
$29,596
|
$34,804,457
|
$(12,386,887)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
35
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
Net
income (loss)
|
$(3,182,395)
|
$2,784,618
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
22,033
|
24,679
|
|
Issuance
of common stock for services
|
7,274,000
|
-
|
|
Change
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(184,874)
|
(49,068)
|
|
Prepaid
expenses
|
(70,289)
|
(32,083)
|
|
Accounts
payable
|
(319,483)
|
125,861
|
|
Accrued
expense
|
66,586
|
271,507
|
|
Deferred
revenue
|
(18,174)
|
(36,693)
|
|
Net
Cash Provided by Operating Activities
|
3,587,404
|
3,088,821
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Purchase
of property & equipment
|
(69,064)
|
(36,791)
|
|
Acquisition
of Pair Networks Inc., net of cash acquired
|
(13,060,953)
|
-
|
|
Net
Cash Used in Investing Activities
|
(13,130,017)
|
(36,791)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Distribution
to FAB Universal Corp
|
-
|
(647,266)
|
|
Re-purchase
of common stock
|
(8,000)
|
-
|
|
Proceeds
from loans
|
10,000,000
|
-
|
|
Payment
of debt issuance costs
|
(113,000)
|
-
|
|
Net
Cash Used in Financing Activities
|
9,879,000
|
(647,266)
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
336,387
|
2,404,764
|
|
Cash
and Cash Equivalents at Beginning of Period
|
4,875,458
|
2,470,694
|
|
Cash
and Cash Equivalents at End of Period
|
$5,211,845
|
$4,875,458
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
Cash
paid during the periods for:
|
|
|
|
Interest
|
-
|
-
|
|
Income
taxes
|
-
|
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
36
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO 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, a wholly owned
subsidiary of the Company, was 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 660837NB, Inc. (NB), in a transaction accounted
for as a purchase. The accompanying consolidated financial
statements include the financial statements of Pair Ryousha and NB
from December 28, 2017 to December 31, 2017.
Pair
Networks Inc., provides web hosting services and domain name
registrations. Services include shared web hosting, e-commerce,
fully-managed virtual private and dedicated servers, customer
self-managed dedicated servers, domain-name registration,
co-location and content-delivery networks. Pair began operations in
August 1995. It incorporated in the state of Pennsylvania in August
1998. Pair’s principal operations are conducted on-site in
Pittsburgh, PA. Pair also has an operating site in Denver,
Colorado, and a remote site back-up location in Pittsburgh,
PA.
Ryousha
Kokusai, LLC (dba Pair International), a wholly owned single-member
limited liability company subsidiary of Pair, was formed on January
1, 2015. The Value Added Tax(VAT) for sales to European Union
countries subject to the VAT in Europe are paid through Ryousha
Kokusai LLC. N.B LLC, a Canadian Company was organized on December
2, 2011. NB is used solely for holding the Canadian tradenames and
domain names. There are no operating activities conducted by
NB
Consolidation - The financial statements
presented reflect the accounts of Libsyn, parent, Ryousha, NB and
Pair. All inter-company transactions have been eliminated in
consolidation. The Company allocated expenses incurred by FAB to
the Libsyn through July 31, 2016 using a proportional cost
allocation method. Management believes this to be a reasonable
method and reflects all costs of doing business.
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.
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.
Segment and Reporting Unit - Our chief operating decision
maker function is comprised of our Chief Executive Officer and
Chief Financial Officer who collectively review financial
information presented on a consolidated basis for purposes of
allocating resources and evaluating financial performance for the
entire company. Accordingly, we have a single operating segment and
reporting unit.
37
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
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 December
31, 2017, the Company had $4,597,648 cash balances in excess of
federally insured limits.
Accounts Receivable – Accounts receivable consist of
trade receivables arising in the normal course of business. At
December 31, 2017 and 2016, 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
years ended December 31, 2017 and 2016, the Company adjusted the
allowance for bad debt by $0.
Registry Deposits - Registry deposits represent amounts on
deposit with, or receivable from, various domain name registries to
be used by us to make payments for future domain registrations or
renewals.
Prepaid Domain Name Registry Fees - Prepaid domain name
registry fees represent amounts charged by a registry at the time a
domain is registered or renewed. These amounts are amortized to
cost of revenue over the same period revenue is recognized for the
related domain registration contracts.
Depreciation – Depreciation of property and equipment
is provided on the straight-line method over the estimated useful
lives.
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 - We
account for software development costs, including costs to develop
software products or the software component of products to be
marketed to external users, as well as software programs to be used
solely to meet our internal needs in accordance with ASC Topic 985
Software and ASC Topic 350 Intangibles – Goodwill and Other.
We have determined that technological feasibility for our products
to be marketed to external users was reached shortly before the
release of those products. As a result, the development costs
incurred after the establishment of technological feasibility and
before the release of those products were not material, and
accordingly, were expensed as incurred. In addition, costs incurred
during the application development stage for software programs to
be used solely to meet our internal needs were not
material.
Debt Issuance Costs - We defer and amortize issuance costs,
underwriting fees and related expenses incurred in connection with
the issuance of debt instruments using the effective interest
method over the terms of the respective instruments. Debt issuance
costs, other than those associated with our revolving credit loan,
are reflected as a direct reduction (discount) of the carrying
amount of the related debt liability.
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. The company recorded
no impairment charge for goodwill, during the years ended December
31, 2017 and 2016.
Advertising Costs – Advertising costs are expensed as
incurred and amounted to $34,623 and $29,397 for the periods ending
December 31, 2017 and 2016, respectively.
38
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
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 - Revenue is recognized when earned. The
Company's revenue recognition policies are in compliance with FASB
ASC Topic 985-605, Software — Revenue Recognition. The
Company's revenue recognition policies are also in compliance with
the Securities and Exchange Commission Staff Accounting Bulletin
No. 101 and 104.
Revenue
consist of podcast hosting, media publishing /advertising, podcast
subscription, app sales, web hosting services including shared web
hosting, e-commerce, fully-managed virtual private and dedicated
servers, customer self-managed dedicated servers, domain name
registrations and co-location and content-delivery networks. These
products are sold to customer throughout the world. The Company
does not track the geographic location of its
customers.
Podcast
Hosting. Podcast hosting publishing services are billed on a month
to month basis. The Company recognizes revenue from providing
digital media publishing services when the services are provided
and when collection is probable.
Podcast
Subscription. The Company facilitates the sale of producers’
premium content through the sale of subscriptions. The amount
earned per transaction is fixed and the producers determine the
price for the sale of the subscription, and the Company earns a
percentage of what the customer pays. Accordingly, the Company
reports premium subscription revenue on a net basis over the
subscription service period.
Media
Publishing /Advertising. The Company recognizes revenue from the
insertion of advertisements in digital media, as the digital media
with the advertisement is downloaded and collection is
probable.
Apps.
The Company recognizes revenue from the sale of apps when sold and
collection is probable.
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 at
the time of sale, and revenue, other than for aftermarket domain
sales, is recognized as the product or service is delivered to the
customer. Aftermarket domain revenue is recognized when control of
the domain is transferred to the buyer.
WEB
Hosting. Hosting revenue primarily consists of website hosting
products, website building products and services, an online
shopping cart, search engine optimization and SSL certificates for
encrypting data between the online browser and the certificate
owner's server. Consideration is recorded as deferred revenue at
the time of sale, and revenue is recognized as the product or
service is delivered to the customer.
39
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
Revenue
arrangements with multiple deliverables are divided into separate
units of accounting if each deliverable has stand-alone value to
the customer. The majority of our revenue arrangements consist of
multiple-element arrangements, with revenue for each unit of
accounting recognized as the product or service is delivered to the
customer. Our multiple-element arrangements may include a
combination of some or all of the following: domain registrations,
website hosting products, website building products and services,
Secure Sockets Layer (SSL) certificates and other cloud-based
products. Each of these products has stand-alone value and are sold
separately.
Consideration
is allocated to each deliverable at the inception of an arrangement
based on relative selling prices. We determine the relative selling
price for each deliverable based on our vendor-specific objective
evidence of selling price (VSOE) or our best estimate of selling
price (BESP), if VSOE is not available. We have determined
third-party evidence of selling price (TPE) is not a practical
alternative due primarily to the significant variability among
available third-party pricing information for similar products and
differences in the features of our product and service offerings
compared to other parties.
We
establish VSOE for certain of our products when a consistent number
of stand-alone sales of these products have been priced within a
reasonably narrow range. We are unable to establish VSOE when we
lack pricing consistency, primarily related to our marketing
strategies and variability in pricing due to promotional
activity.
For
products where VSOE is not available, we determine BESP by
considering our overall pricing objectives and market conditions.
Significant factors taken into consideration include historical and
expected discounting practices, the size, volume and term length of
transactions, customer demographics, the geographic areas in which
our products and services are sold and our overall go-to-market
strategy.
We
maintain a reserve to provide for refunds granted to customers. Our
reserve is an estimate based on historical refund experience.
Refunds reduce deferred revenue at the time they are granted and
result in a reduced amount of revenue recognized over the contract
term of the applicable product compared to the amount originally
expected.
Consideration
provided to customers for sales incentives or service disruption
credits is recorded as a reduction of revenue at the later of the
time the related revenue is recognized or when such consideration
is offered. Such incentives and credits were not material in any of
the periods presented.
Equity-Based Compensation - Our equity-based awards are
comprised of options and stock and are accounted for using the fair
value method. We grant options at exercise prices equal to the fair
market value of our common stock as reported on the OTCQB on the
date of grant. We measure and recognize compensation expense for
equity-based awards made to employees and directors based on the
grant date fair values of the awards. Stock is measured based on
the fair market value of the underlying common stock on the date of
grant. For options with service or performance-based vesting
conditions, the grant date fair value is estimated using the
Black-Scholes option-pricing model, which requires management to
make assumptions and apply judgment in determining the grant date
fair value. Options and award vest and compensation is recognized
over the requisite service period. The measurement date for
performance vesting awards is the date on which the applicable
performance criteria are approved by our board of directors. Key
assumptions used in the determination of fair value for stock
options are as follows:
Expected term. The expected term represents the period the
options are expected to be outstanding. Because of the lack of
sufficient historical data necessary to calculate the expected
term, we use the simple average of the vesting period and the
contractual term to estimate the expected term.
Expected volatility. We determine the expected stock price
volatility based on the historical volatilities of our common
stock.
Expected dividend yield. We do not use a dividend rate due
to our expectation of not paying dividends in the foreseeable
future.
Risk-free interest rate. We base the risk-free interest rate
on the yield curve of a zero-coupon U.S. Treasury bond with a
maturity equal to the expected term of the option on the grant
date.
40
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
Business Combinations - We include the results of operations
of acquired businesses as of the respective acquisition dates.
Purchase price is allocated to the tangible and intangible assets
acquired and the liabilities assumed based on their estimated fair
values, with the excess recorded as goodwill. If applicable, we
estimate the fair value of contingent consideration payments in
determining the purchase price. Measurement period adjustments to
provisional purchase price allocations are recognized in the period
in which they are determined, with the effect on earnings of
changes in depreciation, amortization or other income resulting
from such changes calculated as if the accounting had been
completed at the acquisition date. Contingent consideration is
adjusted to fair value in subsequent periods as an increase or
decrease in general and administrative expenses.
Acquisition-related costs are expensed as incurred.
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.
Research and Development - Research and development costs
are expensed as incurred and record in cost of revenue. Research
and development costs totaling, $610,794 and $515,756, for 2017 and
2016, respectively where included in cost of revenue.
Earnings (Loss) 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 May 2014, the
Financial Accounting Standards Board (FASB) issued a new standard
to achieve a consistent application of revenue recognition within
the U.S., resulting in a single revenue model to be applied by
reporting companies under U.S. generally accepted accounting
principles. Under the new model, recognition of revenue occurs when
a customer obtains control of promised goods or services in an
amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. In
addition, the new standard requires that reporting companies
disclose the nature, amount, timing, and uncertainty of revenue and
cash flows arising from contracts with customers. On July 9 2015,
the FASB agreed to delay the effective date by one year;
accordingly, the new standard is effective for us beginning in the
first quarter of 2018 and we expect to adopt it at that time. The
new standard is required to be applied retrospectively to each
prior reporting period presented or retrospectively with the
cumulative effect of initially applying it recognized at the date
of initial application.
Prior Period Reclassifications - Reclassifications of
certain immaterial prior period amounts have been made to conform
to the current period presentation.
We will
adopt the new standard effective January 1, 2018 using the modified
retrospective transition method. We finalized our assessment of the
new standard and the adoption of this guidance will not have a
material impact on our consolidated financial statements or our
internal controls over financial reporting.
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.
In
January 2017, the FASB issued new guidance clarifying the
definition of a business for determining whether transactions
should be accounted for as acquisitions or disposals of assets or
businesses. If substantially all of the fair value of the gross
assets acquired (or disposed of) is concentrated in a single asset
or a group of similar assets, the assets acquired (or disposed of)
are not considered to be a business. Our early adoption of this
guidance effective October 1, 2017 did not have a material
impact.
41
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES –
continued
In
January 2017, the FASB issued new guidance simplifying the goodwill
impairment test, eliminating the requirement for an entity to
determine the fair value of its assets and liabilities (including
unrecognized assets and liabilities) at the impairment testing date
following the procedure that would be required in determining the
fair value of assets acquired and liabilities assumed in a business
combination. Instead, an entity will be required to perform its
annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. An entity will
be required to recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit's fair value;
however, the loss recognized should not exceed the total amount of
goodwill allocated to the reporting unit. The guidance is effective
for annual and interim reporting periods beginning after December
15, 2019, with early adoption permitted. We are currently
evaluating the timing of our adoption and the expected impact of
this new guidance.
In May
2017, the FASB issued new guidance to amend the scope of
modification accounting for share-based payment arrangements. The
amendment provides guidance on the types of changes to the terms or
conditions of share-based payment awards which would require an
entity to apply modification accounting. Our adoption of this
guidance on January 1, 2018 is not expected to have a material
impact.
Other
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:
|
|
Life
|
December
31,
2017
|
December
31,
2016
|
|
|
|
|
|
|
Furniture,
fixtures, and equipment
|
3-10
yrs
|
$8,032,178
|
$145,553
|
|
Leasehold
improvements
|
3 - 5
yrs
|
2,646,400
|
-
|
|
Software
|
3 yrs
|
6,503
|
-
|
|
|
10,685,081
|
145,553
|
|
|
Less: Accumulated
depreciation
|
|
(7,678,056)
|
(111,571)
|
|
Property &
equipment, net
|
|
$3,007,025
|
$33,982
|
Depreciation
expense for the periods ended December 31, 2017 and 2016 was
$22,033 and $24,679, respectively.
NOTE 3
– ACQUISITION
On December 27, 2017, the Company acquired of all the issued and
outstanding shares of common stock of Pair, in exchange for the
issuance of a total of 1,579,613 shares of the Company’s
common stock and $13,542,689 of cash.
Any loss arising from a breach of the representations as described
under Section 6.02(a) of the Share Purchase Agreement shall not
exceed $1,000,000. The parties agreed to set aside 631,844 common
shares of the Company in an escrow account to satisfy any
recourse.
42
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 3
– ACQUISITION - Continued
The transaction was accounted for in accordance with the provisions
of ASC 805-10, Business
Combinations. The Company
retained independent appraisers to advise management in the
preliminary determination of the fair value of the various assets
acquired and liabilities assumed. The values assigned in these
financial statements are preliminary and represent
management’s best estimate of fair values as of the Closing
Date. The Company has recorded estimated amounts of the fair market
value of the assets acquired. The determination of the Pair
purchase price and allocation of the purchase price to the
underlying tangible and intangible assets in the financial
statements are subject to change as additional information becomes
available. As required by ASC 805-20, Business
Combinations—Identifiable Assets and Liabilities, and Any
Non-controlling Interest,
management conducted a review to reassess whether they identified
all the assets acquired and all the liabilities assumed, and
followed ASC 805-20’s measurement procedures for Closing Date
recognition of the fair value of net assets
acquired.
On December 27, 2017, the Company entered into a Loan Agreement
between the Company, Libsyn, and Pair, and First Commonwealth Bank,
a Pennsylvania bank and trust company.
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.
On December 27, 2017, the Company drew $10,000,000 under the
Facility to finance a portion of the cash consideration paid to the
Seller pursuant to the Share Purchase Agreement.
The following are the fair value of assets acquired and liabilities
assumed as of the Closing Date of December 27,
2017:
|
Cash and cash
equivalents
|
$481,736
|
|
Accounts
receivable, net
|
89,929
|
|
Prepaid
assets
|
78,629
|
|
Property and
equipment, net
|
2,926,012
|
|
Accounts
payable
|
(223,753)
|
|
Accrued
liabilities
|
(389,312)
|
|
Deferred revenue,
current
|
(1,114,700)
|
|
Capital
lease
|
(143,060)
|
|
Deferred revenue,
non-current
|
(174,610)
|
|
Net tangible assets
acquired
|
1,530,871
|
|
Goodwill
|
4,867,818
|
|
Other intangible
assets
|
9,644,000
|
|
Total
Consideration
|
$16,042,689
|
43
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 3
– ACQUISITION - Continued
The fair value of the major components of the other intangible
assets acquired and their estimated useful lives are as follows:
|
|
Preliminary
Fair
Value
|
Weighted Average
Useful
Life
(in
Years)
|
|
Customer
relationships
|
$3,947,000
|
7
|
|
Intellectual
Property
|
3,709,000
|
7
|
|
Trade
name
|
576,000
|
10
|
|
Non-compete
|
1,412,000
|
2
|
|
Total
|
$9,644,000
|
|
Under ASC 805-10, acquisition-related costs (i.e., advisory, legal,
valuation and other professional fees) are not included as a
component of consideration transferred but are accounted for as
expenses in the periods in which the costs are
incurred. Acquisition-related costs were $468,146 during
2017.
As of December 31, 2017, revenues of $47,563 and net loss of
$26,840 from December 28, 2017 to December 31, 2018 of the acquired
subsidiaries have been included in the Consolidated Financial
Statements.
The following unaudited pro forma condensed financial information
presents the combined results of operations of Libsyn and Pair as
if the acquisition had occurred as of the beginning of each period
presented. The unaudited pro
forma condensed financial information is not intended to represent
or be indicative of the consolidated results of operations of the
Company that would have been reported had the acquisition been
completed as of the beginning of the period presented and should
not be taken as being representative of the future consolidated
results of operations of the Company:
|
|
For the year
ended December 31, 2017
|
|
|
|
|
|
Historical
|
Pro
forma
|
|
|
|
(in thousands except
per share amounts)
|
Libsyn
|
Pair
|
Adjustments
|
Combined
|
|
Net
sales
|
$10,537
|
$12,026
|
-
|
$22,563
|
|
Net income
(loss)
|
(3,155)
|
1,038
|
(1,900)[a]
|
(4,017)
|
|
Net income (loss)
per common share, basic and diluted
|
|
|
|
$(0.15)
|
|
Shares outstanding,
basic and diluted
|
|
|
|
25,995
|
|
|
|
|
|
|
|
|
For the year
ended December 31, 2016
|
|
|
|
|
|
Historical
|
Pro
forma
|
|
|
|
(in thousands except
per share amounts)
|
Libsyn
|
Pair
|
Adjustments
|
Combined
|
|
Net
sales
|
$8,792
|
12,233
|
-
|
$21,025
|
|
Net income
(loss)
|
2,785
|
1,316
|
(1,405)[a]
|
2,696
|
|
Net income per
common share, basic and diluted
|
|
|
|
$0.10
|
|
Shares outstanding,
basic and diluted
|
|
|
|
25,995
|
[a] Pro forma adjustments represent the full year amortization of
intangible assets acquired in the acquisition of Pair. These
assets were amortized on a straight-line basis over their estimated
useful lives.
44
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 4 – GOODWILL AND OTHER DEFINITE-LIFE INTANGIBLE
ASSETS
Goodwill consists of:
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
Pair
|
$4,867,818
|
$-
|
|
Libsyn
|
11,484,251
|
11,484,251
|
|
Total
Goodwill
|
$16,352,069
|
$11,484,251
|
The following is a summary of goodwill for the Year
Ended:
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Goodwill at
beginning of period
|
$11,484,251
|
$11,484,251
|
|
Acquisition of
Pair
|
4,867,818
|
-
|
|
Impairment
|
-
|
-
|
|
Goodwill at end of
period
|
$16,352,069
|
$11,484,251
|
Impairment - During 2017 and 2016, management performed its annual
test of impairment of goodwill assessing the qualitative factors
and determined it is more than likely than not that the fair value
of the reporting unit is greater than or equal to the carrying
value of the reporting unit. Thus, not requiring further testing.
All of the Company’s goodwill is expected to be deductible
for tax purposes.
Other definite-life intangible assets - Other intangible assets consist of customer
relationships, intellectual property, trade name and non-compete,
which were generated through the acquisition of Pair. Management
considers these intangible assets to have finite-lives except trade
name. These assets are being amortized on a straight-line basis
over their estimated useful lives.
As of December 31, 2017, identifiable intangible assets consist of
following:
|
|
Preliminary
Fair
Value
|
Weighted Average
Useful
Life
(in
Years)
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|
Customer
Relationships
|
$3,947,000
|
7
|
$-
|
$3,947,000
|
|
Intellectual
Property
|
3,709,000
|
7
|
-
|
3,709,000
|
|
Trade
name
|
576,000
|
10
|
-
|
576,000
|
|
Non-compete
|
1,412,000
|
2
|
-
|
1,412,000
|
|
Total
|
$9,644,000
|
|
$-
|
$9,644,000
|
The estimated future amortization expenses related to other
intangible assets as of December 31, 2017 are as
follows:
|
For twelve months
ending December 31,
|
|
|
2018
|
$1,857,314
|
|
2019
|
1,857,314
|
|
2020
|
1,151,314
|
|
2021
|
1,151,314
|
|
2022
|
1,151,314
|
|
Thereafter
|
2,475,429
|
|
Total
|
$9,644,000
|
45
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 5
- 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
December 31, 2017, $2,000,000 was drawn down on the revolving line
with $0 available.
The
loan accrues interest at libor plus 175 base points or prime plus
75 basis points at the election of the Company. As of December 31,
2017, the Company has elected libor plus 175 basis points or
3.44%.
The Term Loan is
repayable in quarterly installments of $400,000 commencing on March
31, 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 call 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.
The Company has 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
their obligations under the Loan Agreement.
Borrowings under the Facility are at variable rates which are, at
the Company’s option,
tied to LIBOR (London Interbank Offered Rate) plus an applicable
rate or a prime rate. Interest rates are subject to change based on
the Company’s combined cash balances. The Facility contains
covenants that may have the effect of limiting the ability of the
Company to, among other things, merge with or acquire other
entities, enter into a transaction resulting in a change in
control, create certain new liens, incur certain additional
indebtedness, engage in certain transactions with affiliates,
engage in new lines of business or sell a substantial part of its
assets. The Facility also requires the Company to maintain certain
consolidated fixed charge coverage ratios and minimum liquidity
balances.
The Facility also contains customary events of default, including
(but not limited to) default in the payment of principal or,
following an applicable grace period, interest, breaches of the
Company’s covenants or warranties under the Facility, payment
default or acceleration of certain indebtedness of the Company or
any subsidiary, certain events of bankruptcy, insolvency or
liquidation involving the Company or its subsidiaries, certain
judgments or uninsured losses, changes in control and certain
liabilities related to ERISA based plans.
On December 27, 2017, the Company drew $10,000,000 under the
Facility to finance a portion of the cash consideration payable to
the Seller pursuant to the Share Purchase Agreement. Debt issuance
costs of $113,000 for the Facility were recorded as a discount and
will be amortized over the life of the Facility.
Future
Maturities of the loans at December 31, 2017 are as
follows:
|
For the year ending
December 31,
|
|
|
2018
|
$1,600,000
|
|
2019
|
1,600,000
|
|
2020
|
1,600,000
|
|
2021
|
1,600,000
|
|
2022
|
3,600,000
|
|
Thereafter
|
-
|
|
Total
|
$10,000,000
|
46
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 6
- CAPITAL STOCK
Common Stock - The Company has authorized 200,000,000 shares
of common stock, $0.001 par value. As of December 31, 2017,
29,595,473 shares were issued and outstanding.
During
April 2017, the Company issued 3,650,000 stock awards comprising of
shares of common stock valued at $1,752,000 to officers and
directors and recorded non-compensation of $1,752,000. These shares
are subject to forfeiture based on market conditions, including the
market cap of the Company and up-listing to NASDAQ. These market
conditions expire through April 2019. The shares are unable to be
traded until these market conditions have been
achieved.
During
the second quarter of 2017, the Company repurchased 40,000
restricted stock awards comprising of shares of common stock for
$8,000, and the stock was retired.
During
December 2017, the Company issued 3,600,000 stock awards comprising
of shares of common stock valued at $5,522,000 to officers,
directors and employees, and recorded non-compensation of
$5,522,000. These shares are subject to forfeiture based on market
conditions, including the market cap of the Company, the trading
price of the common stock of the Company and up-listing to NASDAQ.
These market conditions expire through December 2020. The shares
are unable to be traded until these market conditions have been
achieved.
On
December 27, 2017, the Company completed the acquisition of all the
issued and outstanding shares of capital stock of Pair. As part of the consideration, the
Company issued 1,579,613 “unregistered” shares
of the Company’s common stock valued at $2,500,000. Of the
total shares issued, 631,844 shares valued at $1,000,000 are
“unregistered” and “restricted” and held in
escrow.
Information
regarding vested stock awards for the year ended December 31, 2017
is summarized in the table below:
|
|
Shares
|
Weighted Average Grant Date Fair Value
|
Average Remaining Life
|
|
Issued
and outstanding awards subject to forfeiture at beginning of
period
|
-
|
$-
|
-
|
|
Stock
Awards Issued
|
7,250,000
|
$1.00
|
2.06
|
|
Awards
no-longer subject to forfeiture
|
-
|
$-
|
-
|
|
Cancelled
/ Forfeited Awards
|
-
|
-
|
-
|
|
Issued
and outstanding awards subject to forfeture at end of
period
|
7,250,000
|
$1.00
|
1.68
|
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 December 31, 2017 and 2016, the total
of all deferred tax assets was $3,458,667 and $3,569,533,
respectively, and the total of the deferred tax assets related to
goodwill was $1,848,717 and $2,086,340, 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 has established a valuation allowance of
$3,458,667 and $3,569,533 for the years ended December 31, 2017 and
2016. The change in the valuation allowance for the year ended
December 31, 2017 and 2016 was $110,866 and $1,131,217,
respectively.
47
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 7
– INCOME TAXES – continued
The
components of income tax expense (benefit) from continuing
operations for the Years ended December 31, 2017 and 2016 consist
of the following:
|
|
For the Years
Ended
|
|
|
|
December
31,
|
|
|
Current tax
expense:
|
2017
|
2016
|
|
Federal
|
$-
|
$-
|
|
State
|
-
|
-
|
|
Current tax
expense
|
-
|
-
|
|
Deferred tax
expense (benefit):
|
|
|
|
Revaluation of
deferred tax asset change in Federal Tax Rate
|
1,400,760
|
-
|
|
Goodwill
|
511,108
|
511,108
|
|
Valuation
Allowance
|
(110,866)
|
(1,131,217)
|
|
Net
operating loss carryforward
|
(1,801,002)
|
620,109
|
|
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 at the federal statutory rate
to income tax expense at the company’s effective rate is as
follows:
|
|
For the Years
Ended
|
|
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Computed tax at the
expected statutory rate
|
$(1,082,014)
|
$946,770
|
|
State and local
income taxes, net of federal
|
173,117
|
183,738
|
|
Other
non-deductible expenses
|
1,632
|
709
|
|
Revaluation of
deferred tax assets for change in Federal Tax Rate
|
1,400,760
|
-
|
|
Other
items
|
(382,629)
|
-
|
|
Valuation
Allowance
|
(110,866)
|
(1,131,217)
|
|
Income tax
expense/(benefit)
|
$-
|
$-
|
The
temporary differences, tax credits and carryforwards gave rise to
the following deferred tax asset December 31, 2017 and
2016:
|
|
December
31,
|
December
31,
|
|
|
2017
|
2016
|
|
Current deferred
tax assets (liabilities):
|
|
|
|
Allowance for
doubtful accounts
|
$-
|
$-
|
|
Vacation
accrual
|
-
|
-
|
|
Total current
deferred tax assets (liabilities)
|
-
|
-
|
|
|
|
|
|
Long-term deferred
tax assets (liabilities):
|
|
|
|
Goodwill -
impaired
|
2,066,632
|
2,903,618
|
|
Goodwill –
tax amortization
|
(3,915,349)
|
(4,989,958)
|
|
Net operating loss
carryforward
|
5,307,384
|
5,655,873
|
|
Valuation
allowance
|
(3,458,667)
|
(3,569,533)
|
|
Total long-term
deferred tax assets (liabilities)
|
$-
|
$-
|
|
Net term deferred
tax assets (liabilities)
|
$-
|
$-
|
48
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 7
– INCOME TAXES – continued
At
December 31, 2017, the company has loss carryforwards of
approximately $18,369,671 that expire in various years through
2037.
We file
U.S. federal, and U.S. states returns, and we are generally no
longer subject to tax examinations for years prior to 2014 for U.S.
federal and U.S. states tax returns.
NOTE 8
- LEASES
Operating Lease - The Company leases office two spaces in
Pittsburgh, Pennsylvania. The corporate headquarter lease is for
$4,841 a month through April 2022. The office space for Pair is
$34,014 a month through September 2022.
The
future minimum lease payments for non-cancelable operating leases
having remaining terms in excess of one year as of December 31,
2017 are as follows:
|
Year ending
December 31:
|
Lease
Payments
|
|
2018
|
466,260
|
|
2019
|
466,260
|
|
2020
|
466,260
|
|
2021
|
364,218
|
|
2022
|
19,364
|
|
Thereafter
|
-
|
|
Total Minimum Lease
Payment
|
$1,782,362
|
Lease
expense charged to operations was $167,945 and $266,405 for the
periods ended December 31, 2017 and 2016,
respectively.
Capital Leases – In connection with the
acquisition of Pair, the Company acquired a lease of equipment on a
capital leases currently calling for monthly payments
of approximately $6,261 through January of 2020. Included in
property and equipment, at December 31, 2017, the Company had
recorded equipment on capital lease at $332,324, with related
accumulated depreciation of $83,081.
During
the years ended December 31, 2017, depreciation expense for
equipment on capital lease amounted to $39,623 and has been
included in depreciation expense.
Future
minimum capital lease payments are as follows for the years ended
December 31:
|
Year ending December
31,
|
Lease
Payments
|
|
2018
|
75,132
|
|
2019
|
75,132
|
|
2020
|
835
|
|
Total
minimum lease payments
|
151,099
|
|
Less
amount representing interest
|
(8,039)
|
|
Present
value of minimum lease payments
|
143,060
|
|
Less
Current Portion
|
(69,243)
|
|
|
$73,817
|
49
LIBERATED
SYNDICATION INC. AND SUBSIDIARIES
NOTES
TO FINANCIAL STATEMENTS
NOTE 9
–EARNINGS PER SHARE
The
following data shows the amounts used in computing earnings per
share and the weighted average number of shares of common stock
outstanding for the periods presented for the periods
ended:
|
|
December
31,
2017
|
December
31,
2016
|
|
Income(loss) from
operations available to common stockholders
(numerator)$
|
$(3,182,395)
|
2,784,618
|
|
Income(loss)
available to common stockholders (numerator)
|
(3,182,395)
|
2,784,618
|
|
Weighted average
number of common shares outstanding during the period used in
earnings per share (denominator)
|
24,390,595
|
20,805,860
|
NOTE 10
– COMMITMENTS AND CONTINGENCIES
Although
the Company does not expect to be liable for any obligations not
expressly assumed by the Company from the Spin-Off, it is possible
that the Company could be required to assume responsibility for
certain obligations retained by FAB should FAB fail to pay or
perform its retained obligations. After the Spin-Off, FAB may have
obligations that at the present time are unknown or unforeseen. As
the nature of such obligations are unknown, we are unable to
provide an estimate of the potential obligation. However, should
FAB incur such obligations, the Company may be financially
obligated to pay any losses incurred.
The
Company has a 401 (k) plan and Profit sharing plan for the benefit
of the employees of the Company. Employees are eligible to
participate in the plan the first of the month following their hire
date and attaining the age of 21. Profit sharing contributions are
made at the discretion of the Board of Directors and vest 100%
after the second year of service. The Company made a $100,000
profit sharing contribution to the plan in 2017.
NOTE 11
- SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of the
filing of this report.
On
March 9, 2018, the Company issued 200,000 shares of unregistered
common stock valued at $318,000 to a consultant for services
rendered.
During the first quarter of 2018, 912,500 of 7,250,000 common
shares issued to officers, directors and employees (See Note 6) are
no-longer subject to forfeiture as the Company reached the market
condition.
50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure
Controls and Procedures—We maintain disclosure controls and
procedures that are designed to ensure that information we are
required to disclose in the reports that we file or submit under
the Securities Exchange Act of 1934 (the “Exchange
Act”), such as this Annual Report on Form 10-K, is recorded,
processed, summarized, and reported within the time periods
specified by SEC rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information we are required to disclose in
the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including the Chief
Executive Officer (“CEO”) and the Chief Financial
Officer (“CFO”), to allow timely decisions regarding
required disclosure.
Our
management evaluated, with the participation of our CEO and CFO,
the effectiveness of our disclosure controls and procedures as of
December 31, 2017, pursuant to paragraph (b) of Rules 13a-15 and
15d-15 under the Exchange Act. This evaluation included a review of
the controls’ objectives and design, the operation of the
controls, and the effect of the controls on the information
presented in this Annual Report. Our management, including the CEO
and CFO, do not expect that disclosure controls can or will prevent
or detect all errors and all fraud, if any. A control system, no
matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system
are met. Our disclosure controls and procedures are designed to
provide such reasonable assurance of achieving their objectives.
Also, the projection of any evaluation of the disclosure controls
and procedures to future periods is subject to the risk that the
disclosure controls and procedures may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based
on their review and evaluation, and subject to the inherent
limitations described above, our CEO and CFO have concluded that
our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) were effective as
of December 31, 2017 at the above-described reasonable assurance
level.
Internal Control over Financial Reporting—Management
is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Because
of inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even internal
controls determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation. The effectiveness of our internal control over
financial reporting is subject to various inherent limitations,
including cost limitations, judgments used in decision making,
assumptions about the likelihood of future events, the possibility
of human error, and the risk of fraud. The projection of any
evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies may
deteriorate. Because of these limitations, there can be no
assurance that any system of internal control over financial
reporting will be successful in preventing all errors or fraud or
in making all material information known in a timely manner to the
appropriate levels of management.
This
annual report does not include an attestation report of the
company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the company’s
registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that exempt from this
requirement issuers that are neither accelerated filers nor large
accelerated filers.
There
has been no change in our internal control over financial reporting
during the quarter ended December 31, 2017 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
51
Management’s Report on Internal Control over Financial
Reporting
Management
assessed the effectiveness of our internal control over financial
reporting as of December 31, 2017. In making this assessment,
management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control — Integrated Framework. Based on this
assessment, management has determined that the Company’s
internal control over financial reporting as of December 31, 2017,
was effective.
Item 9B. Other Information
None;
not applicable.
52
PART III
Item 10. Directors, Executive Officers, and Corporate
Governance.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth:
●
the names of our
current directors and executive officers,
●
their ages as of
March 31, 2017, which is the date for filing of this 10-K;
and
●
the capacities in
which they currently serve The Company:
|
Name
|
|
Age
|
|
Position(s)
|
|
Served in
Position Since
|
|
Christopher
J. Spencer
|
|
49
|
|
Chief
Executive Officer and Chairman of the Board
|
|
2015
|
|
John
Busshaus
|
|
54
|
|
Chief
Financial Officer
|
|
2015
|
|
Denis
Yevstifeyev
|
|
37
|
|
Director
|
|
2015
|
|
Douglas
Polinsky
|
|
58
|
|
Director
|
|
2015
|
|
J.
Gregory Smith
|
|
48
|
|
Director
|
|
2015
|
|
|
|
|
|
|
|
|
Christopher Spencer has served as our Chief Executive
Officer, President and as a director of the Company since its
inceptions on September 29, 2015. Mr. Spencer has served as Chief
Executive Officer, President, and a director of Future Healthcare
of America since June 22, 2012. Mr. Spencer has served as Chief
Executive Officer, President, and a director of FAB Universal Corp.
since February 7, 2001. From 1994 until 1996, Mr. Spencer founded
and worked for ChinaWire, Inc., a high-technology company engaged
in financial remittance between international locations and China.
Mr. Spencer worked for Lotto USA, Inc. from 1992-1994, where he was
founder and Chief Executive Officer for the Pennsylvania computer
networking company. From 1990 until 1992, Mr. Spencer worked for
John Valiant, Inc., and was responsible for business concept
development and obtaining financing.
John Busshaus has served Chief Financial Officer of the
Company since its inceptions on September 29, 2015. Mr. Busshaus
has served as Chief Financial Officer of Future Healthcare of
America since June 22, 2012. Mr. Busshaus has served as the Chief
Financial Officer of FAB Universal Corp. since January 29, 2007.
From 2004 to 2006, Mr. Busshaus was an independent business
consultant. Mr. Busshaus’ efforts were assisting
organizations with the implementation of Sarbanes Oxley, filing of
SEC reports, and taking a company through an IPO. Mr. Busshaus
worked for Talanga International from 2001 to 2004, where he was
the Chief Financial Officer for the company. From 1999 to 2000, Mr.
Busshaus worked for Mellon Bank as Controller and Vice President,
and was responsible for strategic planning and managing the annual
and monthly budgeting within Global Security Services. From 1994 to
1998, Mr. Busshaus worked for PepsiCo as Senior Business Planner,
and was responsible for annual and quarterly budgets planning, as
well as weekly, monthly, and quarterly reporting of results. As a
member of management, Mr. Busshaus' efforts contributed to the
revenue growth and market share increases in a market that was
categorized as saturated.
Douglas Polinsky has served as a Director of the Company
since its inceptions on September 29, 2015. Mr. Polinsky has served
as a Director of Future Healthcare of America since June 22, 2012.
Mr. Polinsky has served as a Director of FAB Universal Corp. since
October 2007. Mr. Polinsky serves as the President of Great North
Capital Corp., a Minnesota-based financial services company he
founded in 1995. Great North advises corporate clients on capital
formation and other transaction-related financial matters. Mr.
Polinsky earned a Bachelor of Science degree in Hotel
Administration at the University of Nevada at Las
Vegas.
53
Greg Smith has as a Director of the Company since its
inceptions on September 29, 2015. Mr. Smith has served as a
Director of Future Healthcare of America since on June 22, 2012.
Mr. Smith has served as a Director of FAB Universal Corp. since
October 2007. Mr. Smith is an award-winning producer and
entrepreneur with over 10 years of experience in Non-Fiction
Television. In 2000, Mr. Smith established The Solution Film
Group, LLC and acts as the Company’s President. Mr.
Smith provides professional production and editorial support for
various forms of non-fiction television entertainment, including
the direction of media projects from development through production
and post-production. His clients include Discovery Channel,
Science Channel, Discovery HD Theater, Animal Planet, The Military
Channel, PBS, and Discovery Networks International. Mr. Smith
most recently won an Emmy in 2006 for the Discovery Channel’s
animated special Before the Dinosaurs. His other awards for
excellence in production and editing include Emmys for the
Discovery Channel’s Walking with Prehistoric Beasts and
Allosaurus: A Walking with Dinosaurs Special. From 1997
to 2000, Mr. Smith worked for Discovery Communications, Inc. in the
capacity of Supervising Producer from January 1998 to November
2000, and Producer/Editor from October 1997 to January 1998. From
1995 to 1996, Mr. Smith worked for Discovery Channel Pictures
serving as Assistant Editor from March 1996 to October 1997, and
Production Assistant from September 1995 to March 1996. From 1994
to 1995, Mr. Smith worked for Crawford Communications in Atlanta,
Georgia as a Manager of Satellite Services for The Learning
Channel.
Denis Yevstifeyev has served as a Director of the Company
since its inceptions on September 29, 2015. Mr. Yevstifeyev has
served as a Director of Future Healthcare of America since June 22,
2012. Mr. Yevstifeyev has served as a Director of FAB Universal
Corp since October 2007. From December 2017 to present, Mr.
Yevstifeyev served as Vice President of Financial Planning &
Analysis and Procurement for Dream Center Education Holdings.
From 2009 to 2012, and from 2015 to
2017, Mr. Yevstifeyev served as the Director of Financial Planning
& Analysis for Education Management Corporation – Online
Higher Education. From 2012 to 2015, Mr. Yevstifeyev owned and operated his commercial
printing company. From 2007 to 2008, Mr. Yevstifeyev served as Sr.
Financial Reporting Analyst for American Eagle Outfitters, Inc., in
Pittsburgh. His duties included: preparing and analyzing
various internal and external financial reports; researching new
accounting pronouncements and evaluating any impact on the
financial statements. He also reviewed accounting workpapers and
prepared the company’s SEC filings for forms 8-K, 10-Q and
10-K. From 2005 to 2007, Mr. Yevstifeyev worked for Schneider
Downs, Inc., where he worked on Sarbanes-Oxley compliance
engagements. In 2005, Mr. Yevstifeyev graduated with a Bachelor of
Science degree in Business from Washington and Jefferson
College. He also graduated with honors from the Moscow Bank
College of the Central Bank of Russia in Moscow with a degree in
Finance in 2000. From 2002 to 2003, Mr. Yevstifeyev served as the
Settlement Department Manager for SDM BANK in Moscow, where he
dealt with domestic and international corresponding banks, among
other responsibilities.
There are no non-officer employees who are expected to make a
significant contribution to the business.
Family Relationships.
There
are no family relationships between any of our directors or
executive officers.
Involvement in Certain Legal Proceedings.
During
the past ten years, none of our present or former directors,
executive officers or persons nominated to become directors or
executive officers:
(1) A
petition under the Federal bankruptcy laws or any state insolvency
law was filed by or against, or a receiver, fiscal agent or similar
officer was appointed by a court for the business or property of
such person, or any partnership in which he was a general partner
at or within two years before the time of such filing, or any
corporation or business association of which he was an executive
officer at or within two years before the time of such
filing;
(2)
Such person was convicted in a criminal proceeding or is a named
subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses);
(3)
Such person was the subject of any order, judgment, or decree, not
subsequently reversed, suspended, or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining him
from, or otherwise limiting, the following activities:
54
(i)
Acting as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures
Trading Commission, or an associated person of any of the
foregoing, or as an investment adviser, underwriter, broker or
dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any
conduct or practice in connection with such activity;
(ii)
Engaging in any type of business practice; or
(iii)
Engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
Federal or State securities laws or Federal commodities
laws;
(4)
Such person was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any Federal or
State authority barring, suspending or otherwise limiting for more
than 60 days the right of such person to engage in any activity
described in paragraph (f)(3)(i) of this section, or to be
associated with persons engaged in any such activity;
(5)
Such person was found by a court of competent jurisdiction in a
civil action or by the Commission to have violated any Federal or
State securities law, and the judgment in such civil action or
finding by the Commission has not been subsequently reversed,
suspended, or vacated;
(6)
Such person was found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to have
violated any Federal commodities law, and the judgment in such
civil action or finding by the Commodity Futures Trading Commission
has not been subsequently reversed, suspended or
vacated;
(7)
Such person was the subject of, or a party to, any Federal or State
judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated, relating to an alleged
violation of:
(i) Any
Federal or State securities or commodities law or regulation;
or
(ii)
Any law or regulation respecting financial institutions or
insurance companies including, but not limited to, a temporary or
permanent injunction, order of disgorgement or restitution, civil
money penalty or temporary or permanent cease-and-desist order, or
removal or prohibition order; or
(iii)
Any law or regulation prohibiting mail or wire fraud or fraud in
connection with any business entity; or
(8)
Such person was the subject of, or a party to, any sanction or
order, not subsequently reversed, suspended or vacated, of any
self-regulatory organization (as defined in Section 3(a)(26) of the
Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as
defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C.
1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or
persons associated with a member.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORT COMPLIANCE
Section 16(a)
of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes
in ownership with the SEC. Officers, directors, and greater
than 10% stockholders are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file. Based
solely on a review of the copies of such forms furnished to us with
respect to fiscal 2017 and on representations that no other reports
were required, we believe that during the 2017 fiscal year all
applicable Section 16(a) filing requirements were
met.
55
CORPORATE GOVERNANCE
Code of Ethics
We
uphold a set of basic values to guide our actions and are committed
to maintaining the highest standards of business conduct and
corporate governance. We have adopted a Code of Business Conduct
and Ethics for directors, officers (including our principal
executive officer and principal financial officer) and employees,
which, in conjunction with our Certificate of Incorporation, Bylaws
and Board of Directors committee charters, form the framework for
governance of the Company. The Code of Ethics and Business Conduct,
Board of Directors committee charters, Bylaws and Article of
Incorporation are available at our corporate offices. Stockholders
may request free printed copies of these documents
from:
Liberated
Syndication Inc
Attn:
CFO
5001
Baum Blvd., Suite 770
Pittsburgh,
PA 15213
Board of Directors Independence
The
Board of Directors has determined that each of J. Gregory Smith,
Denis Yevstifeyev and Douglas Polinsky has no material relationship
with us (either directly or as a partner, stockholder or officer of
an organization that has a relationship with us) and satisfies the
independence requirements required by the SEC. The non-management
independent directors meet in executive session, without
management, at least annually. Mr. Polinsky, an independent
non-management director, chairs all executive session meetings of
directors.
Committees
of the Board of Directors
The
Board of Directors has adopted written charters for two standing
committees: the Nominating Committee and the Audit Committee. The
Board has determined that all members of the Nominating and Audit
Committees are independent and satisfy the relevant SEC
independence requirements for members of such
committees.
Nominating Committee. The Nominating
Committee currently consists of Mr. Polinsky as chair,
Mr. Yevstifeyev, and Mr. Smith. This committee
provides assistance to the Board in identifies individuals
qualified to become members of the Board of Directors consistent
with Board criteria. The committee also oversees the
evaluation of the Board of Directors and management. There
have not been any material changes to the procedures by which
stockholders recommend nominees to the Board of
Directors.
Audit Committee. The Audit Committee
currently consists of Mr. Polinsky as chair,
Mr. Yevstifeyev, and Mr. Smith. Mr. Yevstifeyev, the
Board of Directors has determined, is an “audit committee
financial expert” as defined under SEC rules. This
committee oversees the integrity of our financial statements,
disclosure controls and procedures, the systems of internal
accounting and financial controls, compliance with legal and
regulatory requirements, the qualifications and independence of the
independent auditors and the performance of our internal audit
function and independent auditors, and the quarterly reviews and
annual independent audit of our financial statements. Gregory
& Associates, our independent auditors, reports directly to the
Audit Committee.
We will
provide a free printed copy of any of the charters of any Board
committee to any stockholder on request.
Compensation Committee. The
Compensation Committee currently consists of Mr. Polinsky as
chair, Mr. Yevstifeyev, and Mr. Smith. This
committee provides assistance to the Board of Directors in
overseeing our compensation policies and practices. It reviews
and approves the compensation levels and policies for the Board of
Directors; reviews and approves corporate goals and objectives with
respect to CEO compensation and, based upon these evaluations,
determines and approves the CEO’s compensation; makes
recommendations to the Board of Directors with respect to non-CEO
executive officer compensation. The Compensation Committee also has
the responsibility to provide the report to stockholders on
executive officer compensation, which appears below.
56
Item 11. Executive Compensation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
No
member of the compensation committee (i) was an officer or employee
of the Company or a subsidiary of the Company during 2017, (ii) was
formerly an officer of the Company or a subsidiary of the Company,
or (iii) had any relationship required to be disclosed pursuant to
Item 404 of Regulation S-K.
During
fiscal 2017, none of the Company’s executive officers served
as (i) a member of a compensation committee of another company, one
of whose executive officers served on the Company’s
compensation committee; (ii) a director of another company, one of
whose executive officers served on the Company’s compensation
committee; or (iii) a member of a compensation committee of another
company, one of whose executive officers served as one of the
Company’s directors.
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
and General Philosophy
At
Liberated Syndication, our focus is to create value through
expanding the products and services that can utilize the services
we offer within the podcast industry. We are also focused on
growing the podcast business through new product offerings and
services for our clients. Our executive compensation program
supports this goal of value creation by:
● rewarding
executives for obtaining performance milestones;
● aligning the
interests of executives with the interests of stockholders;
and
● attracting and
retaining highly motivated and talented executives.
Our
compensation elements simultaneously fulfill one or more of these
three objectives. The elements include:
● base
salary;
● discretionary
bonuses (in the form of cash, restricted stock, and stock
options);
● benefits
programs.
The
type and amount of compensation is determined considering current
pay, competitive pay data from the external talent market and the
opportunity for future pay. We combine compensation elements for
each executive in a manner that will meet the performance,
alignment and retention goals listed above as well as eliciting the
best possible contribution from the executive.
Compensation
Objectives
Our
executive compensation philosophy is built around two objectives:
supporting stockholder value creation through, aligning the
interests of executives with the interests of stockholders, and
attracting and retaining highly motivated and talented
executives.
We use
general industry data of companies which are a similar size to us
based on market capitalization to assist with pay
levels.
Obtained
Performance Milestones:
●
We construct our
annual bonus opportunities to have appropriately aggressive targets
that require significant achievement against performance
milestones.
Aligned
Interests:
Our
base pay practices reduce fixed costs and emphasize
performance-based incentive programs, which we believe are in the
best interests of stockholders.
57
●
We base our annual
bonus opportunities on performance milestones and value to the
stockholder that focus executives on performance results that are
of common interest to stockholders.
●
We award long-term
equity incentive opportunities using restricted stock so that
appreciating stock value is a significant factor in executive
compensation.
Executive
Retention:
●
We believe our use
of base salary accompanied by an emphasis on incentive programs
attracts executives that are appropriately aggressive, innovative,
and are focused on the performance of the Company.
●
Discretionary
bonuses allow us to adjust to unique market conditions in a timely
fashion in order to retain key executives.
Compensation
Administration
General Process. Executive
compensation decisions at Liberated Syndication are the product of
several factors, modified by judgment and discretion as necessary.
The predominant factors include:
●
key performance
measurements such as revenue, and key business
developments;
●
strategic
initiatives such as acquisitions, and implementation of process
improvements;
●
achievement of
specific operational goals relating to the sphere of influence led
by the executive;
●
compensation of
other executives within the Company (to ensure internal equity);
and
For the
CEO, these factors are judged and compensation is recommended by
the Compensation Committee of the Board of Directors and approved
by the Board. For the other executive officers (including all the
named executives in the Summary Compensation Table), the factors
are considered by the CEO, who recommends compensation levels.
These judgments and recommendations are then reviewed and approved
or revised by the Compensation Committee.
Generally,
the Compensation Committee reviews and makes adjustments to base
compensation once per year, effective at the beginning of each
fiscal year (January 1). Annual incentives are typically paid
within two months of the fiscal year end.
Role of Compensation Committee. The
Compensation Committee oversees the design, development and
implementation of our compensation program. The Committee evaluates
the performance of the CEO and determines CEO compensation
consistent with the objectives of the compensation program. The
Committee also approves all incentive compensation plans and
approves or revises recommendations made by the CEO for
compensation decisions affecting other executives. The Committee
also approves all bonuses, awards and grants under all incentive
plans.
Role of CEO. Our CEO is responsible
for the implementation and administration of our compensation
program throughout the organization. The CEO evaluates the
performance of executives and, consistent with the objectives of
the compensation program, meets with the Compensation Committee to
consider and recommend compensation programs, set and evaluate
performance milestone, and make specific recommendations on the
form and amount of compensation for named
executives.
Compensation
Components
Short-Term Compensation. Consistent
with our stated compensation philosophy, our key metric for
executive short-term compensation is annual total cash
compensation. Discretionary bonuses provide significant upside
potential which results in targeted annual total cash
compensation.
Our
performance for fiscal 2017 was on targeted levels.
Base Salary. We consider base salary
a tool to provide executives with a base level of income relative
to the scope of the positions they hold. Base salaries are
established based on the level of responsibility for the position.
With the exception of the CEO and named executives all base
salaries are reviewed annually, and are adjusted from time to time
to reflect changes in responsibility level.
In
2017, our named executives’ salaries ranged from $350,000 to
$400,000. There was no increase in salary during 2017.
58
Annual Bonus. Currently, there is not
an established annual incentive bonus plan.
Discretionary Bonuses. Because there
is not an annual incentive plan, the Compensation Committee may
determine a discretionary bonus is to be awarded to appropriately
reward senior executives. In these cases, discretionary bonuses are
used to assure that executives are appropriately rewarded. The
Committee determines discretionary bonuses for the CEO. The CEO
recommends discretionary bonuses for all other named executives,
which are then approved or adjusted by the Committee.
In
fiscal year 2017, discretionary bonuses were not awarded to the
executive officers.
Our
Compensation Committee believes that we have executed on our
compensation philosophy given the level of Company performance in
fiscal 2017.
Long-Term Incentive Compensation. In 2017,
we did not have any such compensation plan.
In
fiscal 2018, we plan to execute a long-term incentive design that
will utilize stock options or restricted stock. For senior
management, including named executives, the primary emphasis will
be on stock awards. This results primarily in senior management
focus on stock price performance, directly aligning the interests
of executives with the interests of stockholders. It also puts a
higher percentage of long-term compensation at risk as the design
delivers less immediate value to executives.
All
stock granted to the named executives by the Company must have
prior Compensation Committee approval. The exercise price for all
stock-based awards coincides with the date the Committee approves
the award grant. It is against Company policy to back-date
stock-based awards or to try to time stock-based awards for any
reason and we have never engaged in these practices.
Award Adjustment or Recovery. We do
not have a policy to recover or otherwise adjust payments made or
awards earned as a result of changes in subsequent periods relating
to performance measures upon which such payments or awards are
based, sometimes referred to as a “clawback” policy. We
have not required any named executive to return any award or repay
any payment received in any fiscal year.
Tax Deductibility of
Compensation. Section 162(m) of
the Internal Revenue Code of 1986, as amended, imposes a $1,000,000
limit on the amount that a public company may deduct for
compensation paid to named executives unless compensation is based
on an individual’s meeting pre-established performance goals
determined by a compensation committee and approved by
stockholders.
Retirement
and Other Benefits
Generally,
we view retirement savings as a personal matter. We currently offer
401(k) retirement savings plan to all employees of the
Company.
Perquisites. Eligible employees,
including named executives, participate in various other employee
benefit plans, including medical and dental care plans; flexible
spending accounts for health care; life, accidental death and
dismemberment and disability insurance; and vacation plans. The
primary purpose of providing these plans and limited perquisites to
senior executives is to attract and retain talented executives to
manage the Company. With respect to non-insurance perquisites, we
prefer to take a minimalist approach. For fiscal 2017, the Company
did not have executive non-insurance perquisites.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis set forth in this Annual Report with our
management. Based on such review and discussions, the Compensation
Committee recommended to our Board of Directors that the
Compensation Discussion and Analysis be included in this Annual
Report on Form 10-K.
Compensation
Committee
Denis
Yevstifeyev, Chairman
J.
Gregory Smith
Douglas
Polinsky
59
EXECUTIVE COMPENSATION
Summary Compensation Table
The
following sets forth the compensation of Liberated
Syndication’s Chief Executive Officer during fiscal 2017, and
the other persons who served as executive officers during fiscal
2017. Unless otherwise noted, the amounts shown represent what was
earned in fiscal 2017.
SUMMARY
COMPENSATION TABLE – FISCAL 2017
|
Name and
principal position
|
Salary
($)
|
Bonus
($)
|
Stock awards
($)
|
Non-equity
incentive plan compensation ($)
|
All other
compensation ($)
|
Total
($)
|
|
Christopher Spencer
– Chief Executive Officer
|
|
|
|
|||
|
2017
|
400,000
|
-
|
2,392,000
|
-
|
-
|
2,792,000
|
|
2016
|
400,000
|
150,000
|
-
|
-
|
-
|
550,000
|
|
2015
|
400,000
|
-
|
-
|
-
|
-
|
400,000
|
|
John
Busshaus – Chief Financial Officer
|
|
|
|
|||
|
2017
|
350,000
|
-
|
1,968,000
|
-
|
-
|
2,318,000
|
|
2016
|
350,000
|
125,000
|
-
|
-
|
-
|
475,000
|
|
2015
|
350,000
|
-
|
-
|
-
|
-
|
350,000
|
The
bonuses represent discretionary awards during the respective year
by the compensation committee and the board of
directors
Outstanding Equity Awards at Fiscal Year End
The
following table sets forth information concerning outstanding
equity awards for the named executives as of December 31,
2017.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2017
|
|
Option
awards
|
Stock
awards
|
||||||
|
Name
|
Number
of securities underlying unexercised options (#)
exercisable
|
Number of
securities underlying unexercised options (#)
unexercisable
|
Equity
incentive plan awards: number of securities underlying unexercised
unearned options (#)
|
Option
exercise price ($)Optionexpiration date
|
Number
of shares or units of stock that have not vested
(#)
|
Market value
of shares or units of stock that have not vested
($)
|
Equity
incentive plan awards: number of unearned shares, units or other
rights that have not vested (#)
|
Equity
incentive plan awards: market or payout value of unearned shares,
units or other rights that have not vested ($)
|
|
John L.
Busshaus
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Chris
Spencer
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Grants of Plan-Based Awards for 2017
There
were no plan-based equity awards made to our executive officers
during fiscal 2017.
60
Option Exercises and Stock Vested
The
following table sets forth information concerning fiscal 2017
option exercises and restricted stock that vested during fiscal
2017 for the named executives.
OPTION
EXERCISES AND STOCK VESTED DURING FISCAL 2017
|
|
Option
awards
|
Stock
awards
|
||
|
Name
|
Number
of
shares
acquired
on exercise
(#)
|
Value
realized on
exercise
($)
|
Number
of shares
acquiredon vesting
(#)
|
Value
realized
on vesting
($)
|
|
Christopher
Spencer
|
0
|
0
|
0
|
0
|
|
John L.
Busshaus
|
0
|
0
|
0
|
0
|
Pension Benefits
Liberated
Syndication does not have any plans that provide for payments or
other benefits at, following, or in connection with
retirement.
Nonqualified Deferred Compensation
Liberated
Syndication does not have a Deferred Compensation Plan for its
executive officers.
Other Potential Post-Employment Payments
As of
December 31, 2017, there were no named executives with
employment contracts that require or required severance or other
post-employment payments.
Summary Information about Equity Compensation Plans
As of
December 31, 2017, Liberated Syndication does not have any
Stock Option Compensation Plans.
Stockholder Approval of Equity Compensation
Plans. The following table presents
information as of December 31, 2017, about Liberated
Syndication’s common stock that may be issued upon the
exercise of options granted to employees, consultants or members of
the Board of Directors under all of our existing equity
compensation plans and individual arrangements. As described above,
Liberated Syndication does not have any stock option plans under
which options have been granted.
|
Plan
Category
|
Maximum sharesto
be issued uponexercise of options
|
Weighted-averageexercise
price ofoutstanding options
|
Shares remainingavailable for futureissuance
underexisting
equitycompensation plans(excluding sharesreflected infirst column)
|
|
Plans approved by
stockholders
|
-
|
$-
|
-
|
|
Plans not approved
by stockholders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
-
|
$-
|
-
|
61
DIRECTOR COMPENSATION
In
2018, the Board of Directors will consider stock options or other
appropriate equity incentive grants to the outside directors.
Liberated Syndication reimburses directors for out-of-pocket
expenses they incur when attending meetings of the Board. Salaried
executives who serve as directors are not paid for their services
as directors and accordingly, Christopher Spencer is not included
in the director compensation table below.
The
following table sets forth the compensation Liberated Syndication
paid its non-employee directors in 2017. Unless otherwise noted,
the amounts shown represent what was earned in fiscal
2017.
DIRECTOR COMPENSATION TABLE – FISCAL 2017
|
Name
|
Fees earnedor
paidin cash($)
|
Stock awards ($)
|
Option awards ($)
|
Non-equity
incentive plan compensation ($)
|
Nonqualified
deferred compensation earnings ($)
|
All other
compensation ($)
|
Total($)
|
|
Doug
Polinsky
|
42,000
|
448,000
|
0
|
0
|
0
|
0
|
490,000
|
|
J. Gregory
Smith
|
42,000
|
448,000
|
0
|
0
|
0
|
0
|
490,000
|
|
Denis
Yevstifeyev
|
42,000
|
448,000
|
0
|
0
|
0
|
0
|
490,000
|
All
outside directors will receive a base annual cash compensation of
$36,000, which will be paid monthly.
Security Ownership of Certain Beneficial Owners
The
following table sets forth certain information as of March 22, 2018
regarding the beneficial ownership of our common stock,
for:
●
each person (or
group of affiliated persons) who, insofar as we have been able to
ascertain, beneficially owned more than 5% of the outstanding
shares of our common stock:
●
each
director;
●
each named
executive; and
●
all directors and
executive officers as a group.
We
relied on information received from each stockholder as to
beneficial ownership, including information contained on Schedules
13D and 13G and Forms 3, 4 and 5. As of March 22, 2018 there
were 29,595,473 shares of common stock outstanding.
|
Name of
Beneficial Owner (1)
|
Amount and Nature of
Beneficial Ownership
|
Owner
%
|
|
10%
Stockholders:
|
|
|
|
None
|
|
|
|
Directors:
|
|
|
|
Douglas
Polinsky
|
504,241
|
1.7%
|
|
J. Gregory
Smith
|
541,000
|
1.7%
|
|
Denis
Yevstifeyev
|
500,000
|
1.7%
|
|
Executive
Officers:
|
|
|
|
Christopher
Spencer, Chief Executive Officer
|
2,834,392
|
9.5%
|
|
John L.
Busshaus
|
2,207,524
|
7.4%
|
|
All directors and
executive officers as a group (5 persons)
|
6,587,157
|
22.1%
|
* Less
than 1%
(1) The
address of each director and officer is c/o Liberated Syndication,
5001 Baum Blvd. Suite 770, Pittsburgh, Pennsylvania
15213.
62
Changes in Control
There
are no known arrangements known to the Company, including any
pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
Company.
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Transactions with Related Persons.
During
the fiscal years ended December 31, 2017 and 2016, there were no
transactions, and there are no currently proposed transactions, in
which the Company was or is to be a participant and the amount
involved exceeds the lesser of $120,000 or one percent of the
average of the Company’s total assets at year end for the
last two completed fiscal years, and in which any related person
had or will have a direct or indirect material
interest.
Director independence.
The
Board of Directors has determined that each of J. Gregory Smith,
Denis Yevstifeyev and Douglas Polinsky has no material relationship
with us (either directly or as a partner, stockholder or officer of
an organization that has a relationship with us) and satisfies the
independence requirements. The non-management independent directors
meet in executive session, without management, at least annually.
Mr. Polinsky, an independent non-management director, chairs all
executive session meetings of directors.
Item 14. Principal Accountant Fees and Services.
The
following is a summary of the fees billed to Liberated Syndication
by its principal auditor during the calendar years ended December
31, 2017 and 2016:
|
Fee
category
|
2017
|
2016
|
|
Audit Fees
(1)
|
$70,000
|
$45,000
|
|
Audit –
related fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
All other
fees
|
-
|
-
|
|
Total
fees
|
$70,000
|
$45,000
|
|
(1)
|
Consists of fees
for audit of the Company's annual financial statements, audit of
the financial statements of acquired subsidiaries, the review of
interim financial statements included in the Company's quarterly
reports, and the review of other documents filed with the
Securities and Exchange Commission.
|
|||||
Audit
fees - Consists of fees for professional services rendered by our
principal auditor for the audit of our annual financial statements
and the review of financial statements included in our Forms 10-Q
or services that are normally provided by our principal accountants
in connection with statutory and regulatory filings or
engagements.
Audit-related
fees - Consists of fees for assurance and related services by our
principal accountants that are reasonably related to the
performance of the audit or review of Liberated Syndication’s
financial statements and are not reported under "Audit
fees."
Tax
fees - Consists of fees for professional services rendered by our
principal accountants for tax compliance, tax advice and tax
planning.
All
other fees - Consists of fees for products and services provided by
our principal accountants, other than the services reported under
"Audit fees," "Audit-related fees" and "Tax fees"
above.
The
Audit Committee is informed of and approves all services Gregory
& Associates provides. The Audit Committee pre-approves
the annual audit fee, tax services, and non-routine SEC filing
reviews, as well as the fees for all large projects that are
expected to cost more than $35,000. In addition, it has
pre-approved $15,000 for items that relate to routine accounting
services related to items such as new, routine SEC filings
requiring consents, and routine tax
consultations.
Upon
performance of such services, the Audit Committee is informed of
and approves the matters to which such consultations
relate. Upon approval by the Audit Committee, the amount is
added back to the pre-approved $15,000.
63
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
Financial Statements.
Consolidated
Balance Sheets of Liberated Syndication Inc. and subsidiaries as of
December 31, 2017 and 2016
Consolidated
Statements of Operations of Liberated Syndication Inc. and
subsidiaries for the years ended December 31, 2017 and
2016
Consolidated
Statements of Stockholders' Equity of Liberated Syndication Inc.
and subsidiaries for the years ended December 31, 2017 and
2016
Consolidated
Statements of Cash Flows of Liberated Syndication Inc. and
subsidiaries for the years ended December 31, 2017 and
2016
Notes
to Consolidated Financial Statements
(b)
Exhibits. (1)
Exhibit
Number Description
|
Exhibit Number
|
|
Description
|
|
|
Share
Purchase Agreement among Liberated Syndication, Inc. and Kevin
Martin dated December 21, 2017 (2)
|
|
|
|
Articles
of Incorporation (3)
|
|
|
|
Bylaws
(3)
|
|
|
|
Tax
Matters Agreement (3)
|
|
|
|
Stock
Agreement of Christopher J. Spencer dated April 13,
2017(4)*
|
|
|
|
Stock
Agreement of John Busshaus dated April 13, 2017(4)*
|
|
|
|
Stock
Agreement of Douglas Polinsky dated April 13, 2017(4)*
|
|
|
|
Stock
Agreement of Denis Yevstifeyev dated April 13,
2017(4)*
|
|
|
|
Stock
Agreement of John G. Smith dated April 13, 2017(4)*
|
|
|
|
Stock
Agreement of Christopher J. Spencer dated December 15,
2017(5)*
|
|
|
|
Stock
Agreement of John Busshaus dated December 15, 2017(5)*
|
|
|
|
Stock
Agreement of Douglas Polinsky dated December 15,
2017(5)*
|
|
|
|
Stock
Agreement of Denis Yevstifeyev dated December 15,
2017(5)*
|
|
|
|
Stock
Agreement of John G. Smith dated December 15, 2017(5)*
|
|
|
|
Loan
Agreement among Liberated Syndication, Webmayhem, Inc., Pair
Networks, Inc. and First Commonwealth Bank dated December 27, 2017
(2)
|
|
|
|
Subsidiaries
of Registrant
|
|
|
|
302
Certification of Christopher J. Spencer
|
|
|
|
302
Certification of John Busshaus
|
|
|
|
906
Certification
|
*
Indicates a management contract or compensatory plan or
arrangement.
(1)
Summaries of all
exhibits contained within this Report are modified in their
entirety by reference to these Exhibits.
(2)
Incorporated by
reference to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 3, 2018.
(3)
Incorporated by
reference to our Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on February 19,
2016.
(4)
Incorporated by
reference to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 13, 2017.
(5)
Incorporated by
reference to our Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 21,
2017.
(c)
Financial Statement Schedules.
The
following documents are filed as part of this Report:
1.
Consolidated
Financial Statements
See
Index to Consolidated Financial Statements
2.
Financial Statement
Schedules:
All
financial statement schedules have been omitted because they are
not applicable or the required information is presented in the
financial statements or the notes to the consolidated financial
statements.
Item 16. Form 10-K Summary.
None.
64
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
LIBERATED
SYNDICATION INC.
|
Date:
|
3/26/18
|
|
By:
|
/s/ Christopher J. Spencer
|
|
|
|
|
|
Christopher J. Spencer
|
|
|
|
|
|
Chief Executive Officer and President
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Date:
|
3/26/18
|
|
By:
|
/s/ Christopher J. Spencer
|
|
|
|
|
|
Christopher J. Spencer
|
|
|
|
|
|
Chief Executive Officer and President
|
|
Date:
|
3/26/18
|
|
|
/s/ John Busshaus
|
|
|
|
|
|
John Busshaus
|
|
|
|
|
|
Chief Financial Officer
|
65