(Registrant’s telephone number, including area
code)
(Former name or former address, if changed since last
report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
☐ Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
☐ Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
☐ Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
☐ Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Indicate by check mark whether the registrant is an emerging growth
company as defined in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities
Exchange Act of 1934 (§240.12b-2 of this
chapter).
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. ☒
Item 4.02 Non-Reliance on Previously Issued Financial Statements or
a Related Audit Report or Completed Interim Review.
As
previously disclosed on a
Current Report on Form 8-K, on March 12, 2021 the Board of
Directors (the “Board”) of Liberated
Syndication Inc., a Nevada corporation (the “Company”), determined
that the following financial
statements should no longer be relied upon due to errors in
recording local sales and income tax, errors in recording VAT and
General Sales Taxes, and errors in recording withholding tax
related to restricted stock vesting events:
●
The Consolidated
Balance Sheet as of December 31, 2019, the Consolidated Statement
of Operations for the year ended December 31, 2019, the Statement
of Stockholders’ Equity for the year ended December 31, 2019,
and the Consolidated Statement of Cash Flows for the year ended
December 31, 2019, all as presented in the Company’s Annual
Report on Form 10-K for the period ended December 31, 2019, as
filed with the Securities and Exchange Commission on May 15,2020.
●
The related interim
financial statements and interim financial statements for the first
three quarters of 2019 and 2020.
On May14, 2021, the Board determined that the following financial
statements should no longer be relied upon due to errors in
recording local sales and income tax, errors in recording VAT and
General Sales Taxes, errors in recording withholding tax related to
restricted stock vesting events, and errors associated with
deferred tax calculations:
●
The Consolidated
Balance Sheet as of December 31, 2018, the Consolidated Statement
of Operations for the year ended December 31, 2018, the Statement
of Stockholders’ Equity for the year ended December 31, 2018,
and the Consolidated Statement of Cash Flows for the year ended
December 31, 2018, all as presented in the Company’s Annual
Report on Form 10-K/A for the period ended December 31, 2018, as
filed with the Securities and Exchange Commission on May 27,2020.
●
The related interim
financial statements and interim financial statements for the first
three quarters of 2018.
Management
and the Board evaluated the Company’s financial statements
from 2015 to 2020 and determined that only the financial statements
for 2018 through 2020 require restatement.
Denis
Yevstifeyev, the Chairman of the Audit Committee of the Board, has
discussed with the Company’s independent accountant the
matters disclosed in this Item 4.02.
The
Company will correct the financial statements for 2018 and 2019 and
the quarterly reports for 2020 in forthcoming amendments to the
applicable Annual Reports on
Form 10-K and Quarterly Reports on Form 10-Q.
Item 8.01 Other Events.
Tax Update
Federal Income Taxes: In the second quarter of 2020, the
Company established an uncertain tax reserve of approximately $1.2
million related to an ongoing IRS examination. That examination was
completed in the fourth quarter of 2020. As a result, the Company filed amended
federal income tax returns for 2017, 2018, and 2019. As a result of filing amended returns the
Company will remove its uncertain tax position reserve related to
this examination in the fourth quarter of 2020.
State Sales Taxes:
In June
2018, the United States Supreme Court issued South Dakota v. Wayfair, Inc.
(Wayfair) holding that a state may require a remote seller
with no physical presence in the state to collect and remit sales
tax on goods and services provided to purchasers in the state,
overturning certain existing court precedent. This precedent also
impacted state income tax
apportionment rules.
C:
As
disclosed in the Company’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on November 16,2020, the Company failed to apportion revenue and file 2019 and
2020 state and local sales and income tax returns in the manner
required by Wayfair. Using third party
experts, the Company estimated its state income tax liability at
$159,970 for 2020 and $120,358 for 2019. The Company estimated its
state sales tax liability at $130,008 for 2020 and $119,102 for
2019. The Company began the process to normalize our related tax
practices in the fourth quarter of 2020 and the normalization
process for state sales taxes was completed in the second quarter
of 2021. All state income tax returns that the company believes it
is required to file for the 2019 tax year have been filed. 2020
state income tax returns are currently being prepared. In addition,
the Company intends to make safe harbor estimated state income tax
payments for its 2021 tax year.
Withholding Tax Related to Restricted Stock:
As
disclosed in the Company’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on November 16,2020, during the third quarter of 2020, the Company determined that
it had incorrectly reported the personal income related to its
restricted stock vesting events in 2017, 2018, and 2019. The
Company underreported such personal income, failed to report the
income in a timely fashion and
failed to withhold Federal withholding taxes at an appropriate
level. The total amount of underreported employee personal income
across the three years is $3,373,250. In addition, the Company
failed to properly withhold taxes on $1,775,000 of reported
employee personal income. As a result,
the Company has amended its local, state and federal
quarterly payroll tax filings for the third quarter of 2017, the
second quarter of 2018, the fourth quarter of 2018, the second
quarter of 2019, and the fourth quarter of 2019 and issued amended
W2 reports of income to the impacted employees, officers, and
directors. The Company is waiting for tax assessments associated
with those amended reports and must estimate the liability for
financial reporting purposes until it receives those assessments.
The Company has completed the estimate of taxes, penalties and
interest and estimates the net combined liability related to this
error as of December 31, 2020 at approximately $2.1 million in
taxes and $650 thousand in penalties and interest, of which $493
thousand was remitted in
connection with its quarterly payroll tax filing
amendments.
The
Company will seek to obtain documentation from former officers
that those individuals have
made the appropriate income filings and payments. If the
appropriate documentation is obtained, the Company anticipates
receiving a credit for withholding taxes paid by the Company on
behalf of the former officers against future payroll withholding
tax liabilities.
The
errors in Withholding Tax Related to Restricted Stock did not
materially affect share count in any period.
VAT and Other Sales Use Taxes:
Effective
January 1, 2015, the European Union (“EU”) began applying Value Added Taxes
(“VAT”) to digital goods and services. Several
additional countries where the Company has customers, such as
Australia, have followed with indirect taxation of digital goods
and services. These rules require a remote seller with no physical
presence in the country to collect and remit VAT or General Sales
Taxes (“GST”) on goods and services provided to
purchasers in that country.
The
Company has determined that its Webmayhem subsidiary (dba Libsyn)
(“Webmayhem”) erroneously
has failed to apportion revenue and file VAT and GST tax returns
for the years 2015-2020 in the manner required by the EU and at
least 3 non-EU jurisdictions. The Company has determined that its
Pair Networks subsidiary (“Pair”) is VAT compliant
in the EU and is evaluating three non-EU jurisdictions which have
implemented VAT/GST on digital goods. The Company has engaged an
international indirect tax compliance firm and is conducting an
effort to accomplish appropriate apportionment and normalize its
filings for international indirect taxes. Pair anticipates being
fully normalized by the fourth quarter 2021. While the Company has
initiated the VAT/GST normalization process for Webmayhem, the
Company cannot estimate when this normalization effort will be
completed. Webmayhem has completed its first step in normalization
in the EU which is registration for VAT in the EU.
Using
outside experts, the Company has completed its preliminary
estimates for Webmayhem for 2015-2020 tax, penalty and interest
liability and estimates the tax liability as of December 31, 2020
at approximately $1.35 million dollars and penalties and interest
as being at least $725 thousand dollars. The Company has completed
its preliminary estimates for its Pair subsidiary for 2015-2020
tax, penalty and interest liability and estimates that liability as
of December 31, 2020 at approximately $150 thousand dollars in
taxes and approximately $70 thousand dollars in penalties and
interest.
One or
more jurisdictions not included in the above estimates may assert
that the Company may have liability for periods for which the
Company has not collected VAT, GST, or other similar taxes, and if
such an assertion or assertions succeeded it could materially hurt
our business, financial condition, and operating results. In
addition, one or more jurisdictions may change their laws or
policies to apply their sales, use or other similar taxes to our
operations, and if such changes were made it could materially hurt
our business, financial condition, and operating
results.
Conclusion:
The
Company has performed a materiality assessment concerning the cumulative and combined tax
errors as they relate to 2018-2019 financial statements and
determined those errors, in total were material.
As a result of this materiality assessment and determination
concerning the tax accounting
errors, the Company also is reviewing and evaluating related
internal controls and its recording and reporting of other personal
income and payroll related information.
Loans
On
December 27, 2017, the Company entered into a loan agreement (the
“Loan
Agreement”) among the Company, Webmayhem, Pair and
First Commonwealth Bank, a Pennsylvania bank and trust company (the
“Bank”).
As a result of the Company’s tax errors, the Company
has several loan agreement
non-compliance issues and was unable to provide 2020 audited
financials to the Bank in a timely
fashion. In addition, the Company is not in compliance with its Fixed Charges
Coverage Ratio (as defined in the Loan Agreement). The
Company has provided the required notice and explanation to the
Bank. In response, the Bank provided a “Reservation of
Rights” response to the Company. The Company has adequate
cash to repay the remaining loan balance under the Loan Agreement
if required by the Bank.
As of
March 31, 2021, the balance on the Term Loan was $2,800,000 and the
associated revolver was fully drawn at $2,000,000.
Legal Update
On
April 24, 2020, John Busshaus, the Company’s former Chief
Financial Officer, filed a complaint against the Company with the
American Arbitration Association (AAA) asserting claims arising
from his employment relationship with the Company, including
severance claims for wages, compensation and benefits, and claims
of unlawful discharge and wrongful termination. Mr. Busshaus claims
he resigned for “Good Reason” as defined in Section
8(c) of his employment agreement. The Company denies Mr.
Busshaus’ claims in their entirety and is vigorously
defending its position, including by asserting that certain
failures by Mr. Busshaus while serving as CFO (including, but not
limited to, the issues surrounding tax, withholding, and VAT
described herein) preclude any severance award under his employment
agreement. The Company has also asserted counterclaims for breach
of fiduciary duty, professional negligence, fraud, unjust
enrichment, and conversion.
The
Company’s contingent liability related to this case consists
of $1,195,833 in salary payments, 1,062,650 shares of Company
stock, $1,400,000 bonuses, health care benefits, liquidated
damages, back pay and front pay related to his February 2020
termination, and attorneys’ fees and expenses. Arbitration
hearings have been scheduled for June 2021. The 1,062,650 shares of
Company stock claimed by Mr. Busshaus are included in the
Company’s shares outstanding.
On November 25, 2020, the Company, as plaintiff, on its own behalf
and derivatively on behalf of its former parent company, FAB
Universal Corporation (“FAB”), filed a complaint (the
“Action”) in a Federal District Court against Hongcheng
Zhang et al. The Action alleges that the defendants and certain
companies owned by them (the “BVI Entities”) have
committed, against the Company and derivatively on behalf of FAB,
among other things, securities fraud under Colorado law, fraudulent
concealment or nondisclosure of material information, and
fraudulent representations. The Company successfully served the BVI
entities and is in process of serving other defendants. The BVI
Entities failed to satisfy the May 17, 2021 deadline for filing an
answer to the Action.
Item 5.02 Departure of Directors or Certain Officers; Election of
Directors; Appointment of Certain Officers; Compensatory
Arrangements of Certain Officers.
On May12, 2021, Richard Heyse resigned as Chief Financial Officer of the
Company effective immediately. Mr. Heyse has agreed to remain with
the Company as a consultant to assist in the preparation of the
company's 2018 and 2019 restated financial statements and
normalization of its outstanding tax compliance issues.
Mr. Heyse had no
disagreements with the Company’s Management, directors, or
its outside auditors.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.