Description

The Business:

· Liberated Syndication (fka Webmayhem) operates its business under the Libsyn brand name.

· Libsyn is a podcast service provider offering all-in-one hosting and distribution tools, which include storage, bandwidth, RSS creation, distribution, and statistics tracking.

· Podcasts are typically audio files, which listeners can download or subscribe to, in an episodic manner.

Potential Opportunity:

· Small, underfollowed: the company has no sell-side coverage, no message board following, a small capitalization, and low liquidity.

· Spinoff from a parent amidst controversy that keeps most away:

       o On August 1, 2016, Libsyn operations were spun­off in a 1 for 1 dividend to the shareholders of record of FAB Universal on July 20, 2016, the record date.

       o FAB had a checkered past, including claims of fraud, issuance of debt without disclosure, and evidence that the business in China had been essentially abandoned.

       o Despite this, the Libsyn business is real and growing, and the management team that is currently involved does not appear to have been part of the fraud of FAB, rather         unsophisticated Americans dealing with a Chinese company. Still, this is a major binary risk.

· Growing business in an interesting niche:

      o The podcast industry is still in its early stages and reaches just 13% of Americans who listen once a week or more (as of 2016), up from 7% in 2013.

      o Measured as a percent of listening time, podcasts represented only 2% (as of 2015), versus radio at 54%. Podcasts offer much more targeted content and while it may not       ever replace radio, it is likely the usage gap between the two will narrow, offering a meaningful runway for growth.

Recommendation:

· At the current price (closing price on Jan. 22) of $1.23/sh, this provides the opportunity to purchase shares at 8x earnings adjusted for future tax rates and annualizing the current run-rate performance.

· The company grew revenues YTD in 2017 20% on top of 22% growth in 2016 and continues to enable an investor to capture substantially greater podcast market penetration (10-20x) in the future.

· This is an opportunity to purchase a good, high growth business as a result of a spin-off, small size, and optics, at a bargain multiple.

Risks:

· Low - the spin­off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor or an entity vested with the power of such creditor (such as a trustee) could claim that the spin­off left FAB Universal Corp without sufficient capital.

· Medium – our impression of management not being involved in the fraud in FAB Universal could be wrong and they leave Liberated Syndication in a similar position. However, channel checks and customer interviews have suggested this business is in fact real and growing.

· Medium – management compensation is relatively high and there is dilution risk in the compensation structure. See below.

Management:

· Christopher Spencer has been the CEO of Libsyn since its inceptions on September 29, 2015. Previously he was the CEO of FAB Universal Corp. since February 7, 2001. As mentioned there is no evidence he specifically was involved in the Chinese fraudulent activity at the company, but the risk that he was is not negligible and cause for concern.

· Prior to 2017, management just received salaries. In fiscal 2017, they executed a long-term incentive plan to utilize stock options or restricted stock. For senior management, including named executives, the primary emphasis will be on stock awards. They remarked “this results primarily in senior management focus on stock price performance, directly aligning the interests of executives with the interests of stockholders.”

· While initially the dilution looks high, the vesting conditions are reasonable, require management to perform well, and are aligned with shareholders. While market cap is potentially something that can be achieved by mergers, those would require shareholder approval. 

· On April 13, 2017 (stock $0.90/sh, market cap $19m), issued 3.65m shares which vest in 25% tranches upon achieving the following milestones or the stock will be forfeited:

       o Up-list to NASDAQ within 24 months;

       o Market cap of $25 Million for 5 consecutive days within 12 months;

       o Market cap of $50 Million for 5 consecutive days within 18 months:

       o Market cap of $75 Million for 5 consecutive days within 24 months

· On December 15, 2017 (stock $1.52/sh, market cap $37m), issued 2.6m shares which vest in 50% tranches upon achieving the following milestones:

      o Average closing price of $5.00/sh for 10 consecutive days within 30 months of the date of grant;

      o Average closing price of $7.00/sh for 10 consecutive days within 36 months of the date of grant.

· On December 28, 2017 (stock $1.57/sh, market cap $38m) issued 1m shares to operational employees which vest in 25% tranches upon achieving the following milestones or the stock will be forfeited:

     o Up-list to NASDAQ within 24 months;

     o Average closing price of $5.00/sh for 10 consecutive days within 24 months;

     o Market cap of $50 Million for 5 consecutive days within 18 months:

     o Market cap of $75 Million for 5 consecutive days within 24 months.

· Each of the three independent directors own around 300k shares of stock they were awarded, which is worth approximately 6-7x their annual director compensation, so they should be appropriately focused on long-term appreciation.

Value:

· When approaching valuation first we adjust the share count to back out unvested shares and then add in shares we think will be vested. For example, the shares contingent on a share price of $7.00 per share are substantially out of the money and if they do vest, it would be in conjunction with a much higher stock price (over 5x today’s price). As a result, we have added 2.33m shares to the share count.

· In regard to the earnings power, this is not a cyclical business and so the last quarter (Q3) operating results are most reflective of the current business profitability.

o Annualizing this earnings number presents $4.65m in earnings, which tax-adjusted (when the NOLs run out), will be $3.68m. This is a P/E multiple of 7.7x and net of cash P/E of 5.7x.

o If you account for easy-moderately achievable vesting on the stock issued as additional compensation, and assume in a downside scenario this continues un-abated at the same level (which seems to be overly punitive), this lowers earnings to $2.6m. This is a P/E multiple of 11.1x and net of cash P/E of 8.3x.

· Regardless of the view, for a business growing sales north of 20% per annum, profitable, in a market which can grow multiples (as is it is barely penetrated), this is a low multiple.

· At year-end 2017 the company announced the acquisition of pair Networks, funded by cash on hand and a debt facility totaling $16m. Based on the financial statements if consummated we believe almost half of the operating costs can be eliminated, thereby cutting the effective purchase multiple for pair from 11x earnings to 6-7x (versus the company pro-forma of 10x).

Catalyst

Continued growth at a low multiple and utilization of the cash flow should recognize value.

Makes strategic sense to be purchased by a traditional radio company and syndicate their content out using the Libsyn brand and platform.

The company has announced plans to uplist to the NASDAQ in the first half of 2018, which should increase recognition in a meaningful way.