Liberated Syndication (LSYN) is an exciting company that has just made a game-changing acquisition, explains Thomas Rice, editor of The Bowser Report, a specialized newsletter which focuses on micro-cap and low-priced stocks.

Liberated Syndication provides podcast hosting services, media distribution statistics and tools in the U.S. It currently hosts over 50,000 podcasts, including about 35% of the top 200 podcasts in iTunes.

Before diving into fundamentals, it's important to note that the company's financial statements are offset by its recent acquisition of Pair Networks, which provides web hosting services and domain name registrations.

Liberated paid $13.5 million in cash and issued 1.5 million shares of restricted common stock valued at $2.5 million to acquire 100% of Pair Networks. The acquisition was financed by borrowing $10 million with an interest rate of 3.44%.

The combined business represented approximately $23 million in revenue and $7 million in EBITA for 2017. Although it was a costly acquisition, both are Pittsburgh-based companies, and there are clear synergies.

Monthly subscribers combined for 82,000 for hosting services and management believes there are cross-selling opportunities including website and blog hosting services for podcasters, domain registration and hosting, as well as co-location hosting.

The acquisition is tough to evaluate due to the huge potential long-term value creation. It's also unusual for a small cap company to make such as a large acquisition relative to its size — because most companies don't have the fundamental stability to take excessive long-term debt.

Although this debt may seem like a red flag, the synergies and strong financials of the combined companies mitigate the immediate concerns.

Aside from the new long-term debt burden, the company's financials are solid. Revenue for the fiscal first quarter of 2018 jumped to $5.1 million from $2.5 million in the same period of the prior year. Revenue has been growing about 20% year-over-year and has accelerated since the acquisition.

The company's cash position of $6.5 million has grown 26% since the last quarter and 23% year-over-year. Its free cash flow of $1.8 million in the first quarter of fiscal 2018 was the highest recorded in its history. This has allowed LYSN to start chipping away at its debt, paying off almost 5% immediately.

This continued growth is a direct result of podcasts playing an integral role in online brand strategy and customer outreach.

The outlook for the industry is positive and it's likely that more Fortune 500 brands will start allocating funds to podcast advertising. Noteworthy new customers include Facebook (FB), NYSE, Jack Daniel's, Trader Joe's, and Skullcandy.

There are two major risks First, as noted, the company has considerable long-term debt. Second, management is overcompensated. Stock rewards can be seen in a positive light as they motivate management to increase value. However, this company should not be paying its CEO and CFO almost $500,000 each. If salaries increase further without any substantial improvements to the company's bottom line, then it will raise a red flag.

For now, the company's sales are growing at an unbelievable rate and the podcasting industry is exploding. Although there are a couple of risks that could hinder value creation, we are optimistic about the synergies with Pair Network and its numerous competitive advantages in the podcasting industry.

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