PART
I
Unless
we specify otherwise, all references in this annual report on Form 10-K (the “Annual Report”) to “PDN,”
“the Company,” “we,” “our,” and “us” refer to Professional Diversity Network,
Inc. and its consolidated subsidiaries. This discussion contains forward-looking statements, which are based on our assumptions
about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking
statements. Please read “Special Note Regarding Forward-Looking Statements” for additional information regarding
forward-looking statements used in this Annual Report.
ITEM
1 - BUSINESS
Overview
The
Company is a dynamic operator of professional networks with a focus on diversity. We use the term “diversity” (or “diverse”)
to describe communities, or “affinities,” that are distinctly based on a wide array of criteria which may change from time
to time, including ethnic, national, cultural, racial, religious or gender classification. We serve a variety of such communities, including
Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, and Lesbian, Gay, Bisexual, Transgender
and Queer (LGBTQ). Our goal is (i) to assist our registered users and members in their efforts to connect with like-minded individuals,
identify career opportunities within the network and (ii) connect members with prospective employers while helping the employers address
their workforce diversity needs. We believe that the combination of our solutions allows us to approach recruiting and professional networking
in a unique way and thus create enhanced value for our members and clients.
Our
Strategy
Since
November 2016, we began our efforts to leverage PDN’s assets to maximize profitability, beginning with refining operations
and enhancing sales in order to transform the Company from historical losses to future profits. The Company currently provides
services for employers who want to hire diverse talent, to individuals seeking to network on a professional level and to
job seekers who desire to improve their professional situation.
The
core diversity recruitment business expanded in 2017 to include executive placement services for leading companies seeking to
hire diverse talent. This new business line addresses a need for employers who want to secure leading diverse talent in management,
senior management and executive capacities. Efforts have been focused on placing talent in IT, Finance, and similarly related
fields. Our diversity recruitment business provides additional value for our other business segments by providing our registered
users and members with access to employment opportunity at leading companies.
Our
strategy encompasses the following key elements:
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Grow
and diversify our member and client base;
Improving
branding and brand awareness
Utilize
social media to effectively engage with the community
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Maximize
revenue through synergies among the segments;
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Launch
new products and services;
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Streamline
infrastructure to capture efficiency; and
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Continue
to expand in diversity recruitment by growing our core offerings of recruitment advertising, The Office of Federal Contract
Compliance Programs (OFCCP) compliance offerings and our new diversity placement services.
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Industry
Overview
The
diversity recruitment market is highly fragmented and is characterized by the following trends:
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Regulatory
Environment Favorable to Promoting Diversity in the Workplace. In August of 2011, President Obama signed Executive Order
13583 to establish a coordinated government-wide initiative to promote diversity and inclusion in the federal workforce. This
Executive Order requires companies considering contracting with the federal government to be prepared to demonstrate the diversity
of their workforce. Certain companies that have federal contracts are subject to this Executive Order. In the public sector,
the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) mandated that
each of the eight U.S. financial agencies, including the Department of the Treasury, the Securities and Exchange Commission,
the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, and twelve Federal Reserve banks
create Offices of Minority and Women Inclusion (“OMWI”) to be responsible for all agency matters relating
to diversity in management, employment and business activities. The OMWI monitor diversity within their ranks as well as within
the pool of contractors who provide goods and services to the government.
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Growing
Ethnic Diversity of the U.S. Population and Labor Force. Multicultural groups are the fastest growing segment of the U.S.
population. Hispanics, African-Americans, Asian-Americans, and all other multicultural groups were estimated by the U.S. Census
Bureau to make up 39.6% of the U.S. population in 2018, with census projections showing that multicultural populations will
become a numeric majority by 2044. According to the U.S. Census Bureau, 2014 National Projections, the multicultural population
is expected to increase 95% between 2014 and 2060. In sheer numbers, Hispanic-Americans are expected to experience the most
growth among diversity groups, growing from 17% of the total population in 2014 to 29% by 2060. African-American population
is expected to increase from 14% in 2014 to 18% in 2060, and Asian-American population from 6% in 2014 to 12% in 2060. Not
surprisingly, diversity recruitment is increasingly becoming a common, if not standard, business practice by major employers.
According to the Current Population Survey conducted by the Bureau of Census for the Bureau of Labor Statistics, of the 2015
annual average of approximately 149 million employees nationwide, approximately 47% were women and approximately 34% were
Hispanic, African American or Asian American. According to a job report on private sector hiring published by the U.S. Equal
Employment Opportunity Commission in July 2015, the percentage of minority employment in the U.S. compared to overall employment
grew from 11% in 1966 to 37% in 2014. In the U.S., Hispanic-Americans had the fastest growth rate in the U.S. private sector,
with employment of Hispanic-Americans increasing from 2.5% to 13.9% between 1966 and 2013. The share of the labor force that
is Hispanic-American is projected to increase from 16.3% in 2014 to 19.8% in 2024, according to the Bureau of Labor Statistics.
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Demographic
Trend Toward Women’s Career Advancement. According to the U.S. Bureau of Labor Statistics, there were over 74 million
women 16 years old and over in the workforce as of January 2016. The number of women in the labor force is expected to increase
to 77.2 million by 2024. In 2019, women accounted for 57.4% of all workers employed in management, professional, and related
occupations. According to the Current Population Survey conducted by the Bureau of Census for the Bureau of Labor Statistics,
in 2018 women also made up the majority of healthcare support occupations (74%) and financial activities (53%).
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Rising
Spending Power of Diverse Population. IPDN US segments are focused on providing professional enhancement tools to diverse
Americans including women. We believe diverse professionals are underserved and represents a very strong opportunity to enhance
our shareholders value. Published by the Selig Center for Economic Growth, the report estimates the nation’s total buying
power reached $13.9 trillion in 2016 and predicts it will hit $16.6 trillion by 2021, with minority groups making the fastest
gains. For example, African-American buying power, estimated at $1.2 trillion in 2016, will grow to $1.5 trillion by 2021,
making it the largest racial minority consumer market.
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Increasing
Socialization of the Internet. The Internet has revolutionized how information is created and communicated - a wealth
of information is readily accessible by browsing the Internet anonymously. However, we believe the social aspect of the Internet
is emerging as an increasingly powerful influence on our lives. While an individual’s interpersonal connections traditionally
have not been visible to others, social and professional networking websites enable members to share, and thereby unlock,
the value of their connections by making them visible. Today, personal connections and other information, such as online social
and professional networking websites, are increasingly becoming a powerful tool for a growing population of users to connect
with one another.
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Our
Solutions
We
currently operate in two business segments: (i) Professional Diversity Network (“PDN Network”), which includes
online professional networking communities with career resources tailored to the needs of various diverse cultural groups and
(ii) National Association of Professional Women (“NAPW Network”), a women-only professional networking organization.
In 2020, our PDN Network, and NAPW Network represented 70%, and 30% of our revenues, respectively. In 2018, we started transacting
new memberships under the International Association of Women brand in the USA.
For
financial information about our operating segments please see Note 13 of our Consolidated Financial Statements included in this
Annual Report.
PDN Network
Recruitment Solutions.
The PDN Network consists of several online professional networking communities dedicated to serving diverse professionals in the United
States and employers seeking to hire diverse talent. We use the word “professional” to describe any person interested in
the Company’s websites presumably for the purpose of career advancement or related benefits offered by the Company, whether or
not such person is employed and regardless of the level of education or skills possessed by such person. Our networking communities harness
our relationship recruitment methodology to facilitate and empower professional networking within common affinities. We believe that
those within a common affinity often are more aggressive in helping others within their affinity progress professionally. We operate
these relationship recruitment affinity groups within the following sectors: Women, Hispanic-Americans, African-Americans, Asian-Americans,
Disabled, Military Professionals, Lesbians, Gay, Bisexual, Transgender and Queer (LGBTQ), and Students and Graduates seeking to transition
from education to career.
Our PDN Network has registered
users for our recruitment services. We use the term “registered user” to describe a consumer who has affirmatively visited
one of our properties, opted into an affinity group and provided us with demographic or contact information enabling us to match them
with employers and/or jobs, and to sell them ancillary products and services. We expect that continued registered user growth of the
PDN Network will enable us to further develop our list of online professional diversity networking and career placement solutions. We
currently provide access to our PDN Network websites to registered users at no cost. The Company is always exploring various partnerships
with other service providers to increase their offerings to both job seekers and employers. Our goal is to use an asset light approach
to provide quality products and services, to increase our value to those we serve and drive additional capital without significant capital
investments. For example, we announced our partnership with Web Scribble, the leading provider of career technology for professional
and trade associations. Leveraging our existing assets through relationships with other technology firms such as Web Scribble allows
us to grow our relationships with employers without investing in sophisticated, proprietary resources.
We offer employers of all
sizes seeking to diversify their employment ranks, and to third party recruiters (i) real-time solutions that deliver diverse talent,
(ii) advertising and promotion of their job opportunities to our networks of diverse professionals and (iii) assistance with posting
their job opportunities to career agencies in a manner compliant with the regulations and requirements of the Equal Employment Opportunity
OFCCP, including those of state and local governments. Our recruitment advertising solutions promote hiring and retention success by
providing job seekers with information that we believe allows them to look beyond a corporate brand, deeper into employers’ core
values. We use sophisticated technology to deliver recruitment advertising using internet banner ads and email marketing targeted by
geography and occupation, based upon data from our audiences’ profiles and job searches on our websites. As of December 31, 2020,
we had approximately 1,250 companies utilizing our products and services.
Career Fairs. Through
our events business, a part of our PDN Network business segment, we produce premier face-to-face and virtual recruiting events we call
Professional & Technical Diversity Career Fairs. The Company’s diversity events help employers connect with a new marketplace
of diverse professionals. Our events are the only events of their type endorsed by leading organizations such as the NAACP, Urban League,
BDPA and others. Participating employers range from Fortune 500 companies to federal, state and local agencies and from smaller employers
to non-profit organizations, all of which seek a proactive approach to diversity recruiting. We also produce virtual and in-person career
fairs as part of high-profile national events such as the NAACP National Convention, the Urban League National Conference and HBCU sorority
and fraternity conferences. Since 2017 we host and produce virtual career fairs serving veterans, women and STEAM professionals.
PDN (Hired). We use
matching and targeting technology to match members with our partners on a renewing license basis, designed to provide the Company with
increasing residual income as we add new partners and sell additional licenses. Though in its early stages, the PDN (Hired) product is
a significant step towards increasing online sales in a scalable and residual manner. In 2017 we combined the functionality of these
two products and relaunched them as PDN Quick. This product meets the increased demand of entry level and hourly workforce needs of our
clients. The product is a solution for America’s shrinking unemployment rate which has decreased the amount of readily available
hourly/part-time workers but driven demand higher for growing employers. The product has a unique Pay Only For Performance structure
in which employers only pay when qualified and interested candidates are delivered directly to them for specific in-demand roles. The
product utilizes SMS Texting technology to reach interested candidates which creates very little lag time and increased savings and efficiencies
for both PDN and our clients. PDN Quick is offered to employers on a Cost Per Applicant (“CPA”) basis. This enables employers
to pay only for applicants they receive, as opposed to a diversity outreach campaign that promotes job openings for a fixed amount based
on the number of jobs offered and the duration of the job promotions.
PDN Diversity Placement.
In 2018, the Company launched a diversity placement service that has initially focused on high demand positions in digital transformation
and finance. We are currently recruiting for leading employers who pay a monthly license fee and a percentage of the first year’s
annual salary plus bonus for candidates we source and they hire. We believe our superior brand positioning, large network of diverse
talent and our vast employer relationships position us well for continued growth in this segment.
NAPW
Networking
The
NAPW Network is a professional networking organization for women. We use the term “member or membership” to describe
a consumer who has viewed our marketing material, opted into membership with the NAPW Network, provided demographic information
and engaged in an onboarding call with a membership coordinator. Paid memberships provide greater access to networking opportunities
and other membership perks, including access to upgraded packages. Members of the NAPW Network enjoy a wealth of resources dedicated
to developing their professional networks, furthering their education and skills and promoting their businesses and career accomplishments.
We
provide NAPW Network members with opportunities to network and develop valuable business relationships with other professionals
through NAPW’s website, as well as at events hosted at approximately 50 local chapters across the United States. In March
2020, due to the Covid-19 pandemic, all events shifted to a virtual format hosted on Zoom platforms. PDN Network products and
services are being deployed to provide enhanced value to the NAPW membership experience, which we believe will be an important
component in increasing both the number of new memberships and renewals of existing memberships.
NAPW
eChapter. NAPW operates a series of virtual national chapter meetings, The events are held online monthly, and include presentations
by guest speakers including NAPW management, chapter presidents, or prominent members, and a panel discussion often including
NAPW members on topics focused on inspiring professional women to tackle and overcome challenges encountered in their careers
and businesses. Topics are aligned with NAPW’s content strategy and include discussions on finding and igniting your passion,
turning passion into opportunity, building confidence and professional growth through taking on new challenges. The on-line events
also include the opportunity for members to network with other participants in the live chat room. The events often attract approximately
500 registrants and 100-200 participants. We define registrants as those who enroll in an eChapter meeting but for some reason
fail to attend, and participants as those who both enroll and attend. We track registrants, though they do not attend, because
they are an indicator of our marketing reach and membership engagement.
IAW
Leadership Lab. In 2020, IAW launched the Leadership Lab platform as an enhancement to the NAPW eCoaching platform. IAW also
offers virtual networking roundtable events throughout the month where members who are established experts in their field provide
participants insight and tips on how to overcome career and business challenges. Hosted by NAPW’s VP of Marketing &
Membership Experience, our unique platform connects our members with professional life and career coaches from within the NAPW
membership base. Through these events, members gain insight, guidance and inspiration to help them maximize their personal and
professional potential. Topics include the Power of Intentionality - Turning Good Intentions Into Actions, The Power of Authentic
Communication, and Confident Steps To Create a Thriving Life. The on-line events also include the opportunity for members to network
with other participants in the live chat room. The events have attracted approximately 500 registrants and 150 - 300 participants.
Professional
Identity Management. Through the NAPW Network website, NAPW Network members are able to create, manage and share their professional
identity online and promote themselves and their businesses. NAPW Network members can also promote their career achievements and
their businesses through placement on the NAPW Network website’s home page, in proprietary press releases, in the online
Member Marketplace and in monthly newsletter publications. In addition, the PDN Network provides members with direct access to
employers seeking to hire professional women at a high level of connectivity and efficiency. Our synergies enable us to match
members with our employment partners and then converse with the member to confirm such member’s desire to take the position
to which we matched them, confirm that member is qualified for the position and directly notify the employer about a member that
we have qualified and confirmed has competed an application within the employer’s recruitment system.
Networking
Events. Historically, NAPW Network’s offline networking opportunities included monthly local chapter events and a large
National Networking Conference. Because PDN Network networking career events are already being conducted we have the ability to
add an additional event for NAPW at the same venue, one hour after the PDN Network event ends, at a substantially lower cost compared
to hosting a stand-alone NAPW event. Employers who sponsor the PDN Network career networking events will have the opportunity
to participate in the NAPW event and meet with members to discuss employment opportunities in what we believe is an inviting and
upscale networking environment. We believe that providing the opportunity for NAPW Registered Users to meet, outside of the monthly
local chapter events and the single national event, will add value to all NAPW Registered Users through allowing them to attend
any or all of our PDN Network events. Non-members may also attend, subject to certain restrictions.
Access
to Knowledge. In addition to networking and promotional opportunities, NAPW Network also provides to its members the ability
to further develop their skills and expand their knowledge base through monthly newsletters, online and in-person seminars, webinars
and certification courses.
Upgraded
Memberships and Ancillary Products. Upgraded packages include additional promotional and publicity tools as well as free access
for the member to National Summits and continuing education programs and the press release package, which provides members with
the opportunity to work with professional writers to publish personalized press releases and thereby secure valuable online presence.
Partner
Discounts. We also offer to NAPW Network members exclusive discounts on third-party products and services.
IAW
Global Women’s Network. This network offers in-person and online networking with like-minded women to foster enhanced
career connections and opportunities. Members can promote their brands, identify new career opportunities, and build lasting relationships
at monthly meetings and events. These interactive events allow members to improve their verbal resumes, expand their networks,
and hear from inspiring speakers. Regional and National Conferences provide inspirational panels, unique networking opportunities,
and the chance for members to promote their business or services. Our partners allow members to explore events outside the US
and create opportunities to network with women around the world.
Operations:
Sales, Marketing and Customer Support
Sales
and Marketing
We
sell NAPW/IAW Network membership subscriptions offline through our NAPW/IAW Network sales force, which currently includes 3 sales
professionals, all of whom sell initial membership services. We also support online membership subscriptions through online sales
via our website. We developed a secure, work-from-home technology along with a training and supervision platform aimed at reducing
the overhead costs, increasing per-representative profitability, and offering our sales professionals flexible working arrangements.
All sales representatives are capable of selling upgraded memberships and ancillary products.
Our
PDN sales resources for recruitment and recruitment advertising products and services include a sales force with 7 sales professionals,
third-party strategic partners who deliver employers with demand for our products, and technology, which facilitates e-commerce
transactions. We market directly to employers and third-party recruiters. Our sales team uses a combination of telephone, email
and face-to-face marketing, including personal visits to companies or their recruitment agencies, as well as appearances at industry
and trade group events where diversity recruitment recruiters are in attendance. We have also formed strategic alliances with
parties who are able to help extend our organic reach. In addition, we are developing purely online marketing channels to bring
recruiters to us in bulk and use products based on a matching and targeting technology to facilitate sales. We have specialty
units within our sales force dedicated to serving: (i) federal, state and local governments and companies and contractors who
serve these governmental entities, (ii) small and medium sized businesses as defined by companies with less than 2,500 employees
and (iii) large enterprises with greater than 2,500 employees.
Customer
Support, Compliance and Testing
In
addition to our sales professionals, we also employ support teams to provide customer support, compliance and testing. Our customer
support teams work together to improve engagement with our members and to ensure a high degree of member satisfaction and retention.
Our compliance team focuses on ensuring the integrity of the NAPW Network sales process. The team works closely with customer
support and sales management to ensure that sales are conducted in an ethical manner and to identify sales representatives who
would benefit from enhanced training. Our testing team consists of representatives who work with our Development and Executive
teams to identify new lead-generation, sales and membership product opportunities, and to test those as well as new approaches
to our current sales.
Our
Strengths
We
believe the following elements give us a competitive advantage to accomplish our mission:
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Dedicated
Focus on Diverse Professionals. Our focus on providing career opportunities for diverse professionals differentiates us
from other online social networking websites, such as Facebook. We believe our websites have a distinctly career-oriented
feel and utility when compared with other online social networking websites. We believe that users prefer to manage their
professional and social identities and contacts separately. While other online professional networking websites, such as LinkedIn,
also have a professional focus, we are singularly focused on diverse professionals in the United States. We believe that we
communicate effectively with each of our diverse communities and create environments that harness a natural affinity among
members of common culture, ethnicity, gender, orientation, nationality and experience to stimulate increased member trust,
networking and engagement.
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Online
and Offline Diversity Career Services. The Company has a comprehensive and coordinated method of connecting diverse job
seekers with companies seeking to hire diverse employees. Our advantage comes through our call center operations which facilitate
timely, accurate matching of job seekers and employers. Many competitors do not have such a service in-house. Additionally,
we operate live and virtual job fairs which allow job seekers and employers to meet one-on-one. Many competitors also have
to outsource this service. We provide a wide continuum of contact points to facilitate employers’ desire to identify
and hire diverse talent in an OFCCP-compliant manner.
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Platform
That Harnesses the Power of Web Socialization. We believe that our membership base will continue to grow and that our
platform will be an increasingly powerful tool that enables our members to leverage their connections and shared information
for the collective benefit of all of the participants on our platform. We believe that we are the first online professional
network to focus on the diversity recruitment sector.
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Relationships
with Strategic Partners. We believe that our relationships with strategic partners are difficult to replicate and give
us a competitive advantage in the networking opportunities, career tools and resources we can offer to our members, as well
as the diverse audiences we can access for employers and advertisers.
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Relationships
with Professional Entities & Organizations. Our team has experience working with multicultural professional organizations.
We partner with a number of leading minority professional organizations, including:
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DisabledPersons.com;
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Ebony
Magazine
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The
Grio
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HireVeterans.com
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National
Association of Hispanic Journalists (NAHJ)
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Illinois
Hispanic Nursing Association
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IT
Diversity Careers
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The
Commonwealth Compact
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Greek
Diversity
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Latinos
in Information Science and Technology Association (LISTA)
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Job
Opportunities for Disabled American Veterans (JOFDAV)
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Veterans
Exchange
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National
Association of African Americans in Human Resources
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National
Association for the Advancement of Colored People (NAACP)
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The
National Urban League
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VFW
Veterans Job Board Vetjobs
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Wall
Street Warfighters
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Women
in Biology
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Women
in Technology International (WITI)
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Customized
Technology Platform. Our technology platform has been custom-designed and built to facilitate networking engagement, job
searching, real-time job qualification and matching, and text-based communications.
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We
believe that the following elements give us a competitive advantage with respect to the NAPW Network:
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Exclusive
Focus on Professional Women. As a result of NAPW Network’s exclusive focus on professional women, we believe that
through NAPW Network we provide a secure and less intimidating environment within which our members can successfully network
and establish new and lasting business relationships.
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Attractive
Industry Demographic Trends. Favorable demographic trends regarding women’s participation in the labor force will
further the growth in NAPW Network’s membership base and we have first-mover advantage with respect to generalized professional
networking for women.
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Large,
growing and diverse national membership base. We believe that NAPW Network is the largest women-only networking organization
in the United States by number of members. The membership base of the NAPW Network is diverse in terms of ethnicity, age,
income, experience, industry and occupation. It includes members from small and large corporations, as well as entrepreneurs
and business owners. We believe the diversity of the NAPW Network membership base is a key component of its value.
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Comprehensive
Product and Service Offerings to Deliver Value to Members. We believe that our comprehensive product offerings provide
women valuable tools to help them advance their careers and expand their businesses. Through networking opportunities online
and at local chapter events in their communities, regional events and the NAPW Network national Networking Conference, discounts
provided on seminars, webinars and educational certification courses, and opportunities to promote themselves and their businesses,
NAPW members are provided the opportunities and tools for their professional development.
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Business
Model with Efficient Member Acquisition and Recurring Cash Flow. We believe that NAPW Network’s direct marketing
lead generation efforts, which utilize a combination of digital strategies, are among the most efficient in the industry as
measured by our internal response and click-through rates. This efficiency, combined with our effective call center operations,
results in what we believe to be our market leading members acquisition process and direct variable contribution. Additionally,
in addition to an evolving eCommerce model, the company has been actively growing a Member-to-member acquisition model as
we strive to move to an organic growth model. We have implemented web -technologies to assist our members recruit colleagues
and friends to the organization. Further, NAPW Network memberships renew annually, providing a valuable recurring stream of
cash flow.
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Strategic
Alliances
We
consider our partner alliances to be a key value to our clients because it enables us to expand our job distribution and outreach
efforts. We continue to expand our relationships with key strategic partners that we believe are valuable to our core clients,
as noted in section “Our Strengths” above.
Operations:
Geography
Our
headquarter is located in Chicago, Illinois, and houses our key executives, as well as many of our sales, marketing and IT personnel.
We also have an office in Minnetonka, MN where an inside sales team for our Events business is located. Websites for the PDN Network
are hosted by Web Scribble, who provides hosting and customization for the Company’s job boards. Web Scribble also provides
sales resources to help promote our PDN Network and our partners’ products. Our websites have backup and contingency plans in place
in the event that an unexpected circumstance occurs.
Intellectual
Property
To
protect our intellectual property rights, we rely on a combination of federal, state and common law rights, as well as contractual
restrictions. We rely on trade secret, copyright and trademark rights to protect our intellectual property. We pursue the registration
of our domain names and trademarks in the United States. Our registered trademarks in the United States include the “iHispano”
mark with stylized logo, the “Black Career Network” mark with stylized logo, the “Professional Diversity Network”
mark with our tagline “the power of millions for the benefit of one,” the name “National Association of Professional
Women” and “NAPW,” and the name “International Association of Women” and “IAW.” We also
own the copyrights to certain articles in NAPW publications. We strive to exert control over access to our intellectual property
and customized technology by entering into confidentiality and invention assignment agreements with our employees and contractors
and confidentiality agreements with third parties in the ordinary course of our business.
Our
efforts to protect our proprietary rights may not be successful. Any significant impairment of our intellectual property rights
could adversely impact our business or our ability to compete. In addition, protecting our intellectual property rights is costly
and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business
and adversely affect our operating results.
Competition
We
face significant competition in all aspects of our business. Specifically, with respect to our members and our recruitment consumer
advertising and marketing solutions, we compete with existing general market online professional networking websites, such as
LinkedIn and Monster Worldwide, Inc., as well as ethnic minority focused social networking websites, such as Black Planet and
LatPro, and other companies such as Facebook, Google, Microsoft and Twitter that are developing or could develop competing solutions.
We also generally compete with online and offline enterprises, including newspapers, television and direct mail marketers that
generate revenue from recruiters, advertisers and marketers, and professional organizations. With respect to our hiring solutions,
we also compete with traditional online recruiting companies such as Career Builder, talent management companies such as Taleo,
and traditional recruiting firms.
Larger,
more well-established companies may focus on professional networking and could directly compete with us. Other companies might
also launch new competing services that we do not offer. Nevertheless, we believe that our focus on diverse online professional
networking communities and the number of registered users or members, as the case may be, overall and within each affinity that
we serve, are competitive strengths in our market.
Government
Regulation
We
are subject to a number of federal, state and foreign laws and regulations that affect companies conducting business on the Internet.
These laws are still evolving and could be amended or interpreted in ways that could be detrimental to our business. In the United
States and abroad, laws relating to the liability of providers of online services for activities of their users and other third
parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair
competition, copyright and trademark infringement and other theories based on the nature and content of the materials searched,
the advertisements posted or the content provided by users. Any court ruling or other governmental action that imposes liability
on providers of online services for the activities of their users and other third parties could materially harm our business.
In addition, rising concern about the use of social networking technologies for illegal conduct, such as the unauthorized dissemination
of national security information, money laundering or supporting terrorist activities may in the future produce legislation or
other governmental action that could require changes to our products or services, restrict or impose additional costs upon the
conduct of our business or cause users to abandon material aspects of our service.
In
the area of information security and data protection, many states have passed laws requiring notification to users when there
is a security incident, or security breach for personal data, or requiring the adoption of minimum information security standards
that are often unclear and difficult to implement. The costs of compliance with these laws are significant and may increase in
the future. Further, we may be subject to significant liabilities if we fail to comply with these laws.
We
are also subject to federal, state and foreign laws regarding privacy and protection of member data. We post on our websites our
privacy policy and terms of use. Compliance with privacy-related laws may be costly. However, any failure by us to comply with
our privacy policy or privacy-related laws could result in proceedings against us by governmental authorities or private parties,
which could be detrimental to our business. Further, any failure by us to protect our members’ privacy and data could result
in a loss of member confidence in us and ultimately in a loss of members and customers, which could adversely affect our business.
Because
our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws,
including in jurisdictions where we have no local entity, employees or infrastructure.
Our
direct marketing operations with respect to the NAPW Network are subject to various federal and state “do not call”
list requirements. The Federal Trade Commission has created a national “do not call” registry. Under these federal
regulations, consumers may have their phone numbers added to the national “do not call” registry. Generally, we are
prohibited from calling anyone on that registry. In September 2003, telemarketers were granted access to the registry and are
now required to compare their call lists against the national “do not call” registry at least once every 31 days.
Telemarketers are required to pay a fee to access the registry. Enforcement of the “do not call” provisions began
in late 2003, and the rule provides for fines of up to $16,000 per violation and other possible penalties. These rules may be
construed to limit our ability to market our products and services to new customers. Further, we may incur penalties if we do
not conduct our telemarketing activities in compliance with these rules.
Seasonality
Our
quarterly operating results are affected by the seasonality of employers’ businesses. Historically, demand for employment
hiring is lower during the first quarter and typically increases during the remainder of the year.
Employees
As
of December 31, 2020, we had a total of 39 employees; 36 were full time employees in various U.S. locations. We also regularly
engage independent contractors to perform various services. As of December 31, 2020, we engaged 3 independent contractors. None
of our employees are covered by a collective bargaining agreement. We believe that we have good relationships with our employees.
Corporate
History
We
were incorporated in Illinois in October 2003 under the name of IH Acquisition, LLC and changed our name to iHispano.com LLC in
February 2004. In 2007, we changed our business platform and implemented technology to become the operator of communities of professional
networking sites for diverse professionals. In March 2012, we changed our name to Professional Diversity Network, LLC. In March
2013, we completed our initial public offering and converted from an Illinois LLC to a Delaware corporation. In September 2014
we acquired the NAPW Network through a merger of NAPW, Inc., a New York corporation (“Old NAPW”) with and into NAPW
Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”). Upon the closing of the merger
under the Agreement and Plan of Merger, between Merger Sub, Old NAPW and Matthew B. Proman, the sole shareholder of Old NAPW,
dated July 11, 2014 (the “Merger Agreement”), Old NAPW ceased to exist and Merger Sub continued as the surviving corporation,
and a wholly-owned subsidiary of the Company, which was renamed to NAPW, Inc.
We
started our operations in China in March 2017. We established two entities in Hong Kong, PDN (Hong Kong) International Education
Ltd and PDN (Hong Kong) International Education Information Co., Ltd in January 2017, and the Company established its China subsidiary,
PDN (China) International Culture Development Co. Ltd in March 2017. In November of 2017, Jiangxi PDN Culture Media Co., Ltd became
a consolidated variable interest entity controlled by the Company. On March 4, 2020, the Company’s Board of Directors approved
a motion decided to discontinue all China operations. Accordingly, all historical operating results for the Company’s China
operations are now reflected in loss from discontinued operations, net of tax, in the accompanying consolidated statement of operations.
Please refer to Note 3 - Operating Results of Discontinued Operations in this Annual Report for more details.
Our
principal executive offices is located at 55 E. Monroe Street, Suite 2120, Chicago, Illinois, 60603 and our telephone number is
(312) 614-0950. Our website address is www.ipdnusa.com. References to our website addressed in this report are provided as a convenience
and do not constitute, and should not be viewed as an incorporation by reference of the information contained on, or available through,
the website. Therefore, such information should not be considered part of this report.
ITEM
1A - RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below,
together with all of the other information in this Annual Report, including our consolidated financial statements and related
notes, before making an investment in our common stock. If any of the following risks are realized, our business, results
of operations, cash flows and financial condition could be materially and adversely affected. In that event, the market
price of our common stock could decline, and you may lose all or part of your investment.
Risks
Related to Our Business and Financial Condition
We
have incurred net losses, our liquidity has been significantly reduced and we could continue to incur losses and negative cash
flow in the future.
We
recorded a net loss from continuing operations of approximately $4.2 million for the year ended December 31, 2020 and $2.8 million for
the year ended December 31, 2019. Our revenues declined from $5.0 million to $4.5 million during 2020, however, our costs and expenses
increased from $8.0 million during the year ended December 31, 2019, to $9.3 million during the year ended December 31, 2020.
In addition, we used $2.7 million in cash flow from continuing operations during the year ended December 31, 2020. We will need to increase
revenues and reduce our corporate operating expenses to achieve profitability and positive cash flow from operations. Despite our efforts,
including our restructuring and cost-cutting program, we may not achieve profitability or positive cash flow in the future, and even
if we do, we may not be able to sustain being profitable.
The
market for online professional networks is highly competitive, and if we are unable to compete effectively our sales and results
of operations will suffer.
We
face significant competition in all aspects of our business, and we expect such competition to increase, particularly in the market
for online professional networks.
Our
industry is rapidly evolving and is becoming increasingly competitive. Larger and more established online professional networking
companies, such as LinkedIn or Monster Worldwide, may focus on the online diversity professional networking market and could directly
compete with us. Rival companies or smaller companies, including application developers, could also launch new products and services
that could compete with us and gain market acceptance quickly. Individual employers have and may continue to create and maintain
their own network of diverse candidates.
We
also expect that our existing competitors will focus on professional diversity recruiting. A number of these companies may have
greater resources than we do, which may enable them to compete more effectively. For example, our competitors with greater resources
may partner with wireless telecommunications carriers or other Internet service providers that may provide Internet users, especially
those that access the Internet through mobile devices, incentives to visit our competitors’ websites. Such tactics or similar
tactics could decrease the number of our visits, unique visitors and number of users and members, which would materially and adversely
affect our business, operating results and financial condition.
Additionally,
users of online social networks, such as Facebook, may choose to use, or increase their use of, those networks for professional
purposes, which may result in those users decreasing or eliminating their use of our specialized online professional network.
Companies that currently do not focus on online professional diversity networking could also expand their focus to diversity networking.
LinkedIn may develop its own proprietary online diversity network and compete directly against us. To the extent LinkedIn develops
its own network or establishes alliances and relationships with others, our business, operating results and financial condition
could be materially harmed. Finally, other companies that provide content for professionals could develop more compelling offerings
that compete with us and adversely impact our ability to keep our members, attract new members or sell our solutions to customers.
If
we do not continue to attract new members to the NAPW Network, or if existing NAPW Network members do not renew their subscriptions,
renew at lower levels or on less favorable terms, or fail to purchase additional offerings, we may not achieve our revenue projections,
and our operating results would be harmed.
In
order to grow the NAPW Network, we must continually attract new members to the NAPW Network, sell additional product and service
offerings to existing NAPW Network members and increase the level of renewals. Our ability to do so depends in large part on the
success of our sales and marketing efforts. Unlike companies that provide more tangible products, the nature of our product and
service offerings is such that members may decide to terminate or not renew their agreements because they do not see their cancellation
as causing significant disruptions to their own businesses.
We
must demonstrate to NAPW Network members that our product and service offerings provide them with access to an audience of influential,
affluent and highly-educated women. However, potential members may not be familiar with our product and service offerings or may
prefer other more traditional products and services for their professional advancement and networking needs. The rate at which
we expand the NAPW Network’s membership base or increase its members’ renewal rates may decline or fluctuate because
of several factors, including the prices of product and service offerings, the prices of products and services offered by competitors
or reductions in their professional advancement and networking spending levels due to macroeconomic or other factors and the efficacy
and cost-effectiveness of our offerings. If we do not attract new members to the NAPW Network or if NAPW Network members do not
renew their agreements for our product and service offerings, renew at lower levels or on less favorable terms or do not purchase
additional offerings, our revenue may grow more slowly than expected or decline.
We
may not be able to successfully identify and complete sufficient acquisitions to meet our growth strategy, and even if we are
able to do so, we may not realize the anticipated benefits of these acquisitions.
Part
of our growth strategy is to acquire companies that we believe will add to and/or expand our service offerings.
Identifying
suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates
or complete acquisitions in a timely manner, on a cost-effective basis or at all. Even if we complete an acquisition, we may not
realize the anticipated benefits of such acquisition. Actual cost savings and synergies which may be achieved from an acquired
entity may be lower than expected and may take a longer time to achieve than we anticipate. Our acquisitions have previously required,
and any similar future transactions may also require, significant efforts and expenditures, in particular with respect to integrating
the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection
with acquisition activities and integration efforts, which include:
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conflicts
and inconsistencies in information technology and infrastructures;
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inconsistencies
in standards, controls, procedures and policies, business cultures and compensation structures between us and an acquired
entity;
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difficulties
in the retention of existing customers and attraction of new customers;
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overlap
of users and members of an acquired entity and one of our websites;
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difficulties
in retaining key employees;
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the
identification and elimination of redundant and underperforming operations and assets;
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diversion
of management’s attention from ongoing business concerns;
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the
possibility of tax costs or inefficiencies associated with the integration of the operations; and
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loss
of customer goodwill.
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If
we fail to successfully complete the integration of an acquired entity, or to realize the anticipated benefits of the integration
of an acquired entity, our financial condition and results of operations could be materially and adversely affected.
We
rely heavily on our information systems and if our access to this technology is impaired, or we fail to further develop our technology,
our business could be significantly harmed.
Our
success depends in large part upon our ability to store, retrieve, process and manage substantial amounts of information, including
our database of our members. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance
our information systems. Our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our
information systems to evolving industry standards and to improve the performance and reliability of our information systems.
This may require the acquisition of equipment and software and the development, either internally or through independent consultants,
of new proprietary software. Our inability to design, develop, implement and utilize, in a cost-effective manner, information
systems that provide the capabilities necessary for us to compete effectively would materially and adversely affect our business,
financial condition and operating results.
Our
direct sales strategy, which requires personal interaction with employers and third-party recruiters, may limit our ability to
grow recruitment revenue and recruitment advertising revenue.
As
part of our strategy to market our products and services directly to employers and third-party recruiters, we rely on our direct
sales force for recruitment revenue and recruitment advertising revenue. We currently employ professionals in sales, sales support
and marketing who are trained in selling our products and services. Since its creation in 2013, we have been optimizing the direct
sales team and refining the manner in which our products and services are sold. While the Company made progress in growing its
direct sales, we have not matured the sales force to the point of predictability, nor have we sold enough services to achieve
profitability. There is no assurance that our direct sales strategy we will yield sufficient recruitment revenue and recruitment
advertising revenue in the future.
We
may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our websites
are accessible within an acceptable load time.
An
element that is key to our continued growth is the ability of our members and other users that we work with to access any of our
websites within acceptable load times. We call this website performance. We have experienced, and may in the future experience,
website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human
or software errors, capacity constraints due to an overwhelming number of users accessing our websites simultaneously, and denial
of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website
performance problems within an acceptable period of time.
If
any of our websites are unavailable when users attempt to access them or they do not load as quickly as users expect, users may
seek other websites to obtain the information or services for which they are looking, and may not return to our websites as often
in the future, or at all. This would negatively impact our ability to attract members and other users and increase engagement
on our websites. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually
develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, operating
results and financial condition may be materially and adversely affected.
Our
systems are vulnerable to natural disasters, acts of terrorism and cyber-attacks.
Our
systems are vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, cyber-attacks and similar events. For systems which are not based in cloud storage,
we have implemented a disaster recovery program, maintained by a third-party vendor, which allows us to move production to a back-up
data center in the event of a catastrophe. Although this program is functional, it does not yet provide a real-time back-up data
center, so if our primary data center shuts down, there will be a period of time that such website will remain shut down while
the transition to the back-up data center takes place. Despite any precautions we may take, the occurrence of a natural disaster
or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. Although we carry
cyber security insurance our claims may exceed the insurance coverage, and we may not be fully compensated by third party insurers
in the event of service interruption or cyber-attack. Furthermore, our business may never recover from such an event.
If
our security measures are compromised, or if any of our websites are subject to attacks that degrade or deny the ability of members
or customers to access our solutions, members and customers may curtail or stop use of our solutions.
Our
members provide us with information relevant to their professional networking and/or career-seeking experience with the option
of having their information become public or remain private. If we experience compromises to our security that result in website
performance or availability problems, the complete shutdown of our websites or the loss or unauthorized disclosure of confidential
information, our members may lose trust and confidence in us, and will use our websites less often or stop using our websites
entirely. Further, outside parties may attempt to fraudulently induce employees, members or customers to disclose sensitive information
in order to gain access to our information or our members’ or customers’ information. Because the methods used to
obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until
launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively
address these methods or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability
to attract new members and increase engagement by existing members, cause existing members to close their accounts or existing
customers to cancel their contracts, subject us to lawsuits, regulatory fines or other action or liability, thereby materially
and adversely affecting our reputation, our business, operating results and financial condition.
The
widespread adoption of different smart phones, smart phone operating systems and mobile applications, or apps, could require us
to make substantial expenditures to modify or adapt our websites, applications and services.
The
number of people who access the Internet through devices other than personal computers, including personal digital assistants,
smart phones and handheld tablets or computers, has increased dramatically in the past few years and we believe this number will
continue to increase. Each manufacturer or distributor of these devices may establish unique technical standards, and our services
may not work or be viewable on these devices as a result. Furthermore, as new devices and new platforms are continually released,
it is difficult to predict the problems we may encounter in developing versions of our services for use on these alternative devices
and we may need to devote significant resources to the creation, support and maintenance of such devices. Our websites are designed
using responsive technology and are built to provide a positive user experience on a user’s Internet device, whether a mobile
phone, and tablet, laptop or personal computer. If we are slow to develop products and technologies that are compatible with such
devices, we might fail to capture a significant share of an increasingly important portion of the market for our services.
If
Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our member
engagement and number of members and users could decline.
We
depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic
to our websites. Our ability to maintain the number of visitors directed to our websites is not entirely within our control. Our
competitors’ search engine optimization (“SEO”) efforts may result in their websites receiving a higher
search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their
search results, which could adversely affect the placement of our search result page ranking. If search engine companies modify
their search algorithms in ways that are detrimental to our new user growth or in ways that make it harder for our members to
use our websites, or if our competitors’ SEO efforts are more successful than ours, overall growth in our member base could
slow, member engagement could decrease, and we could lose existing members. These modifications may be prompted by search engine
companies entering the online professional networking market or aligning with competitors. Our websites have experienced fluctuations
in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users
directed to our websites would materially harm our business and operating results. Our platform includes connectivity across the
social graph, including websites such as Facebook, Google+, LinkedIn and Twitter. If for any reason these websites discontinue
or alter their current open platform policy it could have a negative impact on our user experience and our ability to compete
in the same manner we do today.
Wireless
communications providers may give their customers greater access to our competitors’ websites.
Wireless
communications providers may provide users of mobile devices greater access to websites that compete with our websites at more
favorable rates or at faster download speeds. This could have a material adverse effect on the Company’s business, operating
results and financial condition. Creation of an unequal playing field in terms of Internet access could significantly benefit
larger and better capitalized companies competing with us.
The
effect of significant declines in our ability to generate revenue may not be reflected in our short-term results of operations.
We
recognize revenue from sales of our hiring solutions over the life of a contract (typically 12 months) beginning the first month
after the contract is signed. As a result, a significant portion of the revenue we report in each quarter is generated from agreements
entered into during previous quarters. In addition, we may be unable to adjust our fixed costs in response to reduced revenue.
Accordingly, the effect of significant declines in our ability to generate revenue may not be reflected in our short-term results
of operations.
The
existing global economic and financial market environment has had, and may continue to have, a negative effect on our business
and operations.
Demand
for our services is sensitive to changes in the level of economic activity. Many companies hire fewer employees when economic
activity is slow. Following the financial crisis in 2008, unemployment in the U.S. increased and hiring activity was limited.
Although the economy has begun to recover and unemployment in the U.S. has improved, if the economy does not continue to recover
or worsens, or unemployment returns to high levels, demand for our services and our revenue may be reduced. In addition, lower
demand for our services may lead to lower prices for our services. The volatility in global financial markets may also limit our
ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our
ability to react to changing economic and business conditions. Accordingly, if the economy does not fully recover or worsens,
our business, results of operations and financial condition could be materially and adversely affected.
Our
growth strategy may fail as a result of changing social trends.
Our
business is dependent on the continuity of certain social trends, such as the increasing socialization of the Internet, the demographic
trend towards women’s career advancement, the growing ethnic diversity of the United States population and labor force,
a regulatory environment that promotes diversity in the workplace, the growing ethnic population’s spending power and the
acceptance and growth of online recruitment and advertising. Some or all of these trends may change overtime. For example, increased
privacy concerns may jeopardize the growth of online social and professional network websites. Furthermore, it is possible that
people may not want to identify in online social or professional networks with a focus on diversity at all. Or alternatively,
people who belong to more than one diversity group (such as Hispanic-American females, among others) may not be drawn to our websites,
which singularly focus on one specific diversity group. Our strategy may fail as a result of these changing social trends, and
if we do not timely adjust our strategy to adapt to changing social trends, we will lose members, and our business, operating
results and financial condition would be materially and adversely affected.
The
regulatory environment favorable to promoting diversity in the workplace may change.
Federal
and state laws and regulations require certain companies engaged in business with governmental entities to report and promote
diverse hiring practices. Repeal or modification of such laws and regulations could decrease the incentives for employers to actively
seek diverse employee candidates through networks such as ours and materially affect our revenues.
If
our member profiles are out-of-date, inaccurate or lack the information that users and customers want to see, we may not be able
to realize the full potential of our networks, which could adversely impact our future growth.
We
do not impose any selective or qualification criteria on membership and do not verify that any member of a particular Company
website qualifies as a member of the ethnic, cultural or other group identified by that website. If our members do not update
their information or provide accurate and complete information when they join our networks or do not establish sufficient connections,
the value of our networks may be negatively impacted because our value proposition as diversity professional networks and as a
source of accurate and comprehensive data will be weakened. For example, our hiring solutions customers may find that certain
members misidentify their ethnic, national, cultural, racial, religious or gender classification, which could result in mismatches
that erode customer confidence in our solutions. Similarly, incomplete or outdated member information would diminish the ability
of our marketing solutions customers to reach their target audiences and our ability to provide research data to our customers.
Therefore, we must provide features and products that demonstrate the value of our networks to our members and motivate them to
add additional, timely and accurate information to their profile and our networks. If we fail to successfully motivate our members
to do so, our business, operating results and financial condition could be materially and adversely affected.
Our
business depends on strong brands, and any failure to maintain, protect and enhance our brands would hurt our ability to retain
or expand our base of members, enterprises and professional organizations, or our ability to increase their level of engagement.
We
have devoted significant resources to develop our brands, particularly NAPW. That brand is predicated on the idea that professional
women will trust it and find value in building and maintaining their professional identities and reputations on the NAPW Network
platform. Maintaining, protecting and enhancing all of our brands is critical to expanding the base of members for the NAPW Network
and PDN Network and increasing their engagement with the product and services offerings of the Company, and will depend largely
on our ability to maintain member trust, be a technology leader and continue to provide high-quality offerings, which we may not
do successfully in the future. Despite our efforts to protect our brands and prevent their misuse, if others misuse any of our
brands or pass themselves off as being endorsed or affiliated with the NAPW Network or the PDN Network, it could harm our reputation
and our business could suffer. If members of any of our networks or potential members determine that they can use other platforms,
such as social networks, for the same purposes as or as a replacement for the NAPW Network or the PDN Network, or if they choose
to blend their professional and social networking activities, our brands and the business of the Company could be harmed. Members
of any of our networks could find that new product or service offerings that are introduced are difficult to use or may feel that
they degrade their experience with our organization, which could harm the reputation of the networks and the Company for delivering
high-quality offerings. Our brands are also important in attracting and maintaining high performing employees. If we do not successfully
maintain strong and trusted brands for our networks, our business can be materially and adversely affected.
Failure
to protect or enforce our intellectual property rights could materially harm our business and operating results.
We
regard the protection of our intellectual property as critical to our success. In particular, we must maintain, protect and enhance
our brands. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well
as contractual restrictions. In the ordinary course, we enter into confidentiality and invention assignment agreements with our
employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access
to, and disclosure and use of, our proprietary information and customized technology platform. However, these contractual arrangements
and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary
information or deter independent development of similar technologies by others.
We
pursue the registration of our domain names, trademarks and service marks in the United States and in certain locations outside
the United States. Effective trademark, trade dress and domain names are expensive to develop and maintain, both in terms of initial
and ongoing registration requirements and the costs of defending our rights. We are seeking to protect our trademarks and domain
names, a process that is expensive and may not be successful.
Litigation
may be necessary to enforce our intellectual property rights or determine the validity and scope of proprietary rights claimed
by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management
and technical resources, any of which could adversely affect our business and operating results. We may incur significant costs
in enforcing our trademarks against those who attempt to imitate our brands. If we fail to maintain, protect and enhance our intellectual
property rights, our business and financial condition could be materially and adversely affected.
We
process, store and use personal information and other data, which subjects us to governmental regulation, enforcement actions
and other legal obligations or liability related to data privacy and security, and our actual or perceived failure to comply with
such obligations could materially and adversely affect our business.
We
receive, store and process personal information and other member data, and we enable our members to share their personal information
with each other and with third parties. There are numerous federal, state, local and foreign laws regarding privacy and the storing,
sharing, use, processing, disclosure and protection of personal information and other member data, the scope of which are changing,
subject to differing interpretations and may be inconsistent between countries or conflict with other rules. We generally comply
with industry standards and adhere to the terms of our privacy policies and privacy-related obligations to third parties (including
voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations
and industry codes of conduct relating to privacy and data protection. However, it is possible that these obligations may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other
third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release
or transfer of personally identifiable information or other member data, may result in governmental enforcement actions, litigation
or public statements against us by consumer advocacy groups or others and could cause our members and customers to lose trust
in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors
or developers, violate applicable laws or our policies, such violations may also put our members’ information at risk and
could in turn have an adverse effect on our business.
Public
scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or
prevent us from providing our current products and solutions to our members and customers, thereby materially harming our business.
The
regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future.
Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over
the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and
the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information
concerning consumer behavior on the Internet, including regulation aimed at restricting certain on-line tracking and targeted
advertising practices. In addition, various government and consumer agencies have also called for new regulations and changes
in industry practices.
Our
business could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is
inconsistent with our current business practices or that require changes to these practices, the design of our websites, products,
features or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven
by our ability to use the data that our members share with us in accordance with each of our website privacy policies and terms
of use. Therefore, our business, operating results and financial condition could be materially and adversely affected by any significant
change to applicable laws, regulations or industry practices regarding the use or disclosure of data our members choose to share
with us, or regarding the manner in which the express or implied consent of consumers for such use and disclosure is obtained.
Such changes may require us to modify our products and features, possibly in a material manner, and may limit our ability to develop
new products and features that make use of the data that our members voluntarily share with us.
Our
business is subject to a variety of U.S. laws and regulations, many of which are unsettled and still developing and which could
subject us to claims or otherwise materially harm our business.
We
are subject to a variety of laws and regulations in the United States, including laws regarding data retention, privacy and consumer
protection, which are continually evolving and developing. The scope and interpretation of the laws that are or may be applicable
to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services
for activities of their users and other third parties are currently being tested by a number of claims, including actions based
on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on
the nature and content of the materials searched, the ads posted or the content provided by users. In addition, regulatory authorities
are considering a number of legislative and regulatory proposals concerning data protection and other matters that may be applicable
to our business. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may
become subject. See the discussion included in “Business – Government Regulation” beginning on page 11
of this Annual Report.
If
we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be harmed,
and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial
resources or to discontinue certain solutions, which would materially and adversely affect our business, financial condition and
results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative
proposals could materially harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result
of this potential liability could materially and adversely affect our business, financial condition and results of operations.
We
are currently party to litigation and may in the future be subject to additional legal proceedings and litigation which may be
costly to defend and could materially and adversely affect our business results or operating and financial condition.
We
are currently party to litigation and may be party to additional lawsuits in the normal course of business. Results of the litigation
to which we are a party cannot be predicted with certainty and there can be no assurance that this litigation will be resolved
in our favor. These matters are described in more detail under the heading “Legal Proceedings.” Litigation
in general is often expensive and disruptive to normal business operations. We may face in the future allegations and lawsuits
that we have infringed the intellectual property and other rights of third parties, including patents, privacy, trademarks, copyrights
and other rights. Litigation, particularly intellectual property and class action matters, may be protracted and expensive, and
the results are difficult to predict. Adverse outcomes may result in significant settlement costs or judgments, require us to
modify our products and features while we develop non-infringing substitutes or require us to stop offering certain features.
From
time to time, we may face claims against companies that incorporate open source software into their products, claiming ownership
of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such
software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation,
require us to purchase a costly license or require us to devote additional research and development resources to change our solutions,
any of which could have a negative effect on our business and operating results.
Our
success depends in large part upon our management and key personnel. Our inability to attract and retain these individuals could
materially and adversely affect our business, results of operations and financial condition.
We
are highly dependent on our management and other key employees. The skills, knowledge and experience of our management team, are
critical to the growth of our business. In particular, Mr. Adam He, our Chief Executive Officer, provides significant leadership
in every aspect of our business operations and strategic direction. Mr. He is supported by a talented group of knowledgeable executives
in business operations, sales and marketing, and information technology including Charles OBrien our Interim Chief Financial Officer,
Joseph Bzdyl our Executive VP of Operations and Chad Hoersten our Chief technology Officer. Our future performance will be dependent
upon the continued successful service of members of our management and key employees. We do not maintain life insurance for any
of the members of our management team or other key personnel. Competition for management in our industry is intense, and although
we have entered into employment agreements with certain members of our management team, we may not be able to retain our management
and key personnel or attract and retain new management and key personnel in the future, which could materially and adversely affect
our business, results of operations and financial condition.
The
impact of the COVID-19 pandemic has had, and is expected to continue to have, an adverse effect on our business and our financial
results.
The
COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains and created
significant volatility and disruption of financial markets. The COVID-19 pandemic may have an adverse effect on our business and
financial performance. The extent of the impact of the COVID-19 pandemic, including our ability to execute our business strategies
as planned, will depend on future developments, including the duration and severity of the pandemic, which are highly uncertain
and cannot be predicted. In response to mandates and recommendations from federal, state and local authorities, as well as decisions
we have made to protect the health and safety of our employees with respect to the COVID-19 pandemic, we temporarily closed our
offices and had our employees work remotely. We may face more closure requirements and other operation restrictions for prolonged
periods of time due to, among other factors, evolving and stringent public health directives, quarantine policies, social distancing
measures, or other governmental restrictions, which could have a further material impact on our sales and profits. The COVID-19
pandemic could also adversely affect our liquidity and ability to access the capital markets. Uncertainty regarding the duration
of the COVID-19 pandemic may adversely impact our ability to raise additional capital, or require additional capital, or require
additional reductions in capital expenditures that are otherwise needed to implement our strategies.
The
extent of the impact of COVID-19 on our business and financial results will also depend on future developments, including the
duration and spread of the pandemic, the implementation or recurrence of shelter in place or similar orders in the future.
Risks
Related to Our Common Stock
Our
significant stockholder and our directors and executive officers have substantial control over the Company and could limit your
ability to influence the outcome of key transactions, including changes of control.
Cosmic
Forward Limited (“CFL”) beneficially owned approximately 25.5% of our common stock as of March 31, 2021. As a result
of its ownership CFL is able to influence significantly all matters requiring approval by our stockholders, including the election of
directors. In addition, our directors and executive officers and their affiliated entities, in the aggregate, beneficially own approximately
1.70% of our outstanding common stock as of March 31, 2021. Stockholders other than these principal stockholders are therefore likely
to have little influence on decisions regarding such matters. These stockholders may have interests that differ from yours, and they
may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our common stock
may have the effect of delaying, preventing or deterring a change of control of our Company, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale of our Company and may affect the market price of our common stock. This
concentration of ownership also limits the number of shares of stock likely to be traded in public markets and therefore will adversely
affect liquidity in the trading of our common stock. This concentration of ownership of our common stock may also have the effect of
influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.
The
market price for our securities may be subject to wide fluctuations and the value of an investment in our common stock may decline.
The
trading price of our common stock has been, and is likely to continue to be, volatile. Since shares of our common stock were sold
in our initial public offering at a price of $64.00 per share, our stock price has ranged from $0.91 to $5.56 during the fiscal
year of 2020. In addition to the factors discussed in this Annual Report, the trading price of our common stock may fluctuate
significantly in response to numerous factors, many of which are beyond our control, including:
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price
and volume fluctuations in the stock market, including as a result of trends in the economy as a whole or relating to companies
in our industry;
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actual
or anticipated fluctuations in our revenue, operating results or key metrics, including our number of members and unique visitors;
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investor
sentiment with respect to our competitors, our business partners and our industry in general;
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announcements
by us or our competitors of significant products or features, technical innovations, strategic partnerships, joint ventures
or acquisitions;
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additional
shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales;
and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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The
securities of technology companies, especially Internet companies, have experienced wide fluctuations subsequent to their initial
public offerings, including trading at prices below the initial public offering prices. Factors that could affect the price of
our common stock include risk factors described in this section. In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating performance of particular industries or companies.
These market fluctuations may also have a material adverse effect on the market price of our common stock.
Substantial
future sales of shares of our common stock could cause the market price of our common stock to decline.
The
market price of our common stock could decline as a result of (i) substantial sales of our common stock, particularly sales by
CFL and/or our directors, executive officers, employees, or other significant stockholders, (ii) a large number of shares of our
common stock becoming available for sale, or (iii) the perception in the market that holders of a large number of shares intend
to sell their shares. As a result of the consummation of the issuance and sale of 1,777,417 shares of our common stock to CFL
in November 2016, and a subsequent issuance to CFL of an additional 312,500 shares in January 2017, and additional purchase of
1,142,857 shares from another shareholder in November 2019, CFL owns approximately 25.5% of our outstanding common stock as of
March 31, 2021, with respect to which CFL has the right to require the Company to register the public resale under a registration
statement filed with the SEC. The eventual resale of some or all of such shares, or the perception that such sale or sales could
be imminent, could result in a material decline in the market value of our common stock. We have also filed a universal shelf
registration statement on Form S-3, with the SEC on September 7, 2018, which was declared effective on September 18, 2018. This
registration statement provides for the issuance of shares of our common stock, preferred stock, depositary shares, rights, warrants,
units and debt securities up to an aggregate amount of $25,000,000.
In
addition, the Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for the purpose of providing
equity incentives to employees, officers, directors and consultants including options, restricted stock, restricted stock units,
stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The Company amended the 2013
Plan to increase the number of authorized shares of common stock under the Plan from 225,000 shares to 615,000 shares, which the
Company’s stockholders approved on June 26, 2017. The Company further amended the 2013 Plan to increase the number of authorized
shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders approved and ratified on November
8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan. For more information about our 2013
Equity Compensation Plan, please see Note 11 of our Consolidated Financial Statements included in this Annual Report.
Anti-takeover
provisions in our charter documents and under Delaware law could make an acquisition of our Company more difficult, limit attempts
by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions
in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing
a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated
bylaws include provisions that:
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authorize
our board of directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred
stock;
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establish
an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations
of persons for election to our board of directors, and also specify requirements as to the form and content of a stockholder’s
notice;
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that
our directors may be removed only for cause and only by the affirmative vote of at least a majority of the total voting power
of our outstanding capital stock, voting as a single class; and
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do
not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock voting
in any election of directors to elect all of the directors standing for election, if they should so choose).
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These
provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our
management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations
with any “interested” stockholder for a period of three years following the date on which the stockholder became an
“interested” stockholder. Finally, because CFL holds a majority of our outstanding shares of common stock, CFL’s
approval will be necessary to effect any change in control.
Our
failure to implement and maintain effective internal control over financial reporting could result in material misstatements in
our financial statements, which could require us to restate financial statements, cause investors to lose confidence in our reported
financial information and could have an adverse effect on our stock price or our debt ratings.
Our management determined
that as of December 31, 2020, our internal controls over financial reporting had material weaknesses. Specifically, (i) policies and
procedures were not implemented to recognize revenue equal to the amount allocated from revenue sharing agreements with partners, (ii)
accounting policies and procedures associated with its revenue sharing agreement were not implemented to properly estimate allowance
for doubtful accounts and bad debt expense, and (iii) accounting procedures were not sufficiently formal that management can determine
whether the control objective is met, documentation supporting the procedures is in place, and personnel routinely know the procedures
that need to be performed. During 2020, we completed certain measures to remediate material weaknesses related to our internal control
over financial reporting that had been identified as of December 31, 2019. Specifically, we (i) improved the use of relevant operating
information to adequately develop accounting and financial information to serve as our basis for reliable financial reporting, (ii) hired
experienced staff and utilized third party consultants to provide technical competencies necessary for the nature and complexity of the
entity’s activities, and (iii) performed supporting analysis for each non-routine event or transaction that required management’s
judgement and/or estimate. Although these measures improved our internal controls over financial reporting, they did not fully remediate
deficiencies in controls.
Additional
material weaknesses in our internal control over financial reporting may be identified in the future. Any failure to maintain
existing or implement required new or improved controls, or any difficulties we encounter in their implementation, or in remediating
identified weakness, could result in additional control deficiencies, cause us to fail to meet our periodic reporting obligations
or result in material misstatements in our financial statements. The existence of a material weakness could result in errors in
our financial statements that could result in a restatement of financial statements and cause us to fail to meet our reporting
obligations. If we are unable to effectively remediate material weaknesses in a timely manner, investors could lose confidence
in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
We
do not intend to pay dividends in the foreseeable future.
We
do not intend to declare or pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future
earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in
the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
CFL
holds participation rights and other rights that could affect our ability to raise funds.
Under
our stockholders agreement with CFL and each of its shareholders (collectively, the “CFL Shareholders”), we granted
to CFL and the CFL Shareholders a participation right with respect to any future issuances of common stock by the Company, such
that CFL and the CFL Shareholders may purchase an amount of shares necessary to maintain CFL’s then-current beneficial ownership
interest, up to a maximum of 54.64% of our then-outstanding common stock, on a fully-diluted basis, subject to certain exceptions.
This participation right could limit our ability to enter into equity financings and to raise funds from third parties.
In
connection with the stockholders agreement with CFL and the CFL Shareholders, we also granted to CFL and the CFL Shareholders
unlimited demand, shelf and piggyback registration rights, effective upon the expiration of CFL’s initial lock-up period,
to require us to effect a registration under the Securities Act of a resale of the shares of common stock held by CFL. This may
create the perception of a large number of shares of our common stock becoming available for sale or the perception in the market
that holders of a large number of shares intent to sell their shares, especially if CFL were to exercise its registration rights,
thereby potentially further limiting our ability to enter into equity financings and to raise funds from third parties.
Techniques
employed by short sellers may drive down the market price of the Company’s common stock.
Short
selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s
best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish,
or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create
negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed
shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise
of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”)
have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called
research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts.
These
short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers who
have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks can be particularly
vulnerable to such short attacks.
Reports
and information have been published about us which have occasionally been followed by a decline in our stock price. It is not
clear what additional effects the negative publicity will have on the Company, if any, other than potentially affecting the market
price of our common stock. Additionally, such allegations against the Company could negatively impact its business operations
and stockholders’ equity, and the value of any investment in the Company’s stock could be reduced.
ITEM
1B - UNRESOLVED STAFF COMMENTS
None.
ITEM
2 - PROPERTIES
We
lease approximately 4,902 square feet of space for our headquarter in Chicago, Illinois under a lease that expires on September
30, 2027. We also lease approximately 300 square feet of office space in Minnetonka, Minnesota for our Events division under a
quarter-to-quarter lease.
We
believe that our current facilities are adequate to meet our current needs. We may expand our facilities or add new facilities
as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available
as needed to accommodate ongoing operations and any such growth. However, we expect to incur additional expenses in connection
with such new or expanded facilities.
ITEM
3 - LEGAL PROCEEDINGS
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened to assert claims against
the Company in excess of $2 million based on White Winston’s contention that the Company’s conduct delayed White Winston’s
ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30,
2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No.
18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting
federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston
is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White
Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim.
On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is
a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that
complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed
the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in
Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once
again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s
motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed
with the court on Monday, March 25, 2019. This motion was not granted.
On
October 28, 2020, the Company and White Winston reached a settlement agreement, in which the Company made a cash payment of $250,000
on October 29, 2020 and a second cash payment of $350,000 was paid on February 16, 2021. In addition, the Company issued 150,000
shares of the Company’s common stock to White Winston in January 2021.
NAPW
is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018,
with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord
has obtained a judgment against NAPW in the amount of $746,142.41. As a result of the judgement order, the Company recorded a
$780,000 litigation settlement reserve in the second quarter of 2020, which reflected the judgement order in addition to imputed
interest costs and legal fees. NAPW is currently negotiating a settlement with the Landlord.
The
Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc.
and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed on June 20, 2018 and alleging violations of the Fair
Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its subsidiary violated
the applicable laws or that either entity has any liability and intends to vigorously defend against these claims. The matter
is in the final stages of discovery and we have completed depositions of relevant witnesses. During the first quarter of 2020,
the Company recorded a $450,000 litigation settlement reserve in the event of an unfavorable outcome in this proceeding. In November
2020, both parties entered into mediation proceedings but a settlement was not reached. This matter is scheduled to go to trial
in 2021.
We
are also generally subject to legal proceedings and litigation arising in the ordinary course of business.
ITEM
4 - MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business
Professional
Diversity Network, Inc. is both the operator of the Professional Diversity Network (the “Company,” “we,” “our,”
“us,” “PDN Network,” “PDN” or the “Professional Diversity Network”) and a holding company
for NAPW, Inc., a wholly-owned subsidiary of the Company and the operator of the National Association of Professional Women (the “NAPW
Network” or “NAPW”). The PDN Network operates online professional networking communities with career resources specifically
tailored to the needs of different diverse cultural groups including: Women, Hispanic-Americans, African-Americans, Asian-Americans,
Disabled, Military Professionals, Lesbians, Gay, Bisexual, Transgender and Queer (LGBTQ), and Students and Graduates seeking
to transition from education to career. The networks’ purposes, among others, are to assist its registered users in their efforts
to connect with like-minded individuals, identify career opportunities within the network and connect with prospective employers. The
Company’s technology platform is integral to the operation of its business. The NAPW Network is networking organization for professional
women, whereby its members can develop their professional networks, further their education and skills, and promote their business and
career accomplishments. NAPW provides its members with opportunities to network and develop valuable business relationships with other
professionals through its website, as well as at events hosted at its local chapters across the country.
In
March 2020, our Board of Directors decided to suspend all China operations generated by the former CEO, Michael Wang. The results
of China operations are presented in the consolidated statements of operations and comprehensive loss as net loss from discontinued
operations. On March 19, 2020, Jiangxi PDN Culture Media Co., Ltd. (“Jiangxi PDN”), a company established under the
laws of the People’s Republic of China and a variable interest entity (VIE) controlled by Professional Diversity Network,
Inc. (“PDN”), issued a Notice of Termination of the Agreement of Acquisition and Equity Transfer (the “Termination”).
This Notice was exercised under Jiangxi PDN’s unilateral right and was delivered on March 19, 2020. Under the terms of the
Termination, no additional due diligence shall be completed, any materials shall be returned to the respective owners, and there
shall be no breakup fee or penalty associated with this Termination. We expect no further involvement in this matter.
2.
Going Concern and Management’s Plans
At
December 31, 2020, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds
from the sale of common stock during the twelve months ended December 31, 2020.
The
Company had an accumulated deficit of ($93,022,835) at December 31, 2020. During the year ended December 31, 2020, the Company
generated a net loss from continuing operations of approximately ($4,158,000) and used cash in continuing operations during the
twelve months ended December 31, 2020 of approximately $3,337,000. At December 31, 2020, the Company had a cash balance
of $2,117,569. Total revenues during the year ended December 31, 2020 were approximately $4,457,000 compared to total revenues
of approximately $5,025,000 during the year ended December 31, 2019. The Company had a working capital deficiency from continuing
operations of approximately ($1,156,000) and ($2,114,000) at December 31, 2020 and 2019. These conditions raise substantial doubt
about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is
dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues. The consolidated
financial information contained herein does not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
Management
believes that its available cash on hand and cash flows from operations may not be sufficient to meet our working capital requirements
for the next twelve months. In order to accomplish our business plan objectives, the Company will need to continue its cost reduction
efforts, increase revenues, raise capital through the issuance of common stock, or through a strategic merger or acquisition.
However, there can be no assurances that our business plans and actions will be successful, that we will generate anticipated
revenues, or that unforeseen circumstances will not require additional funding sources or impact plans to conserve liquidity.
Future efforts to improve liquidity through the issuance of our common stock may not be successful, or if available, they may
not be negotiable on acceptable terms.
On
March 22, 2020, the Company entered into an agreement with Malven Group Limited, a company established under the laws of the British
Virgin Islands (“Malven”), in connection with the purchase by Malven of 1,939,237 shares of common stock of the Company
(collectively the “Shares”) at a price of $0.7735 per share for gross proceeds of $1,500,000. The closing of the transaction
took place on March 30, 2020.On June 26, 2020, Malven purchased additional 312,500 shares of common stock of the Company at a
price of $3.20 per share for gross proceeds of $1,000,000. The closing date of the transaction was June 29, 2020 and gross proceeds
of $1,000,000 were received in July 2020.
On
July 27, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with three institutional
accredited investors. Pursuant to the Agreement, the Company offered and sold 1,481,484 shares of its common stock at a per share
price of $1.35 for gross proceeds of approximately $2,000,000 pursuant to the Company’s Registration Statement on Form S-3
(Registration Statement No. 333-227249) (the “Transaction”). The Transaction closed on July 29, 2020 and the Company
received net proceeds of $1,814,353, after deducting financial advisory, legal and escrow related fees.
On
February 1, 2021, the Company entered into a private placement with Ms. Yiran Gu, in which the Company sold 500,000 shares of
its common stock at a price per share of $2.00 for gross proceeds of $1,000,000.
3.
Summary of Significant Accounting Policies
Basis
of Presentation - The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”).
Use
of Estimates – The preparation of consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible
that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated
financial statements, which management considered in formulating its estimate, could change in the near term due to one or more
future intervening events. Accordingly, the actual results could differ significantly from estimates.
Significant
estimates underlying the financial statements include the fair value of acquired assets and liabilities associated with acquisitions;
assessment of goodwill impairment, other intangible assets and long-lived assets for impairment; allowances for doubtful accounts
and assumptions related to the valuation allowances on deferred taxes, impact of applying the revised federal tax rates on deferred
taxes, the valuation of stock-based compensation and the valuation of stock warrants.
Principles
of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash
Equivalents - The Company considers cash equivalents to include all short-term, highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three months or less.
Accounts
Receivable - Accounts receivable represent receivables generated from fees earned from customers and advertising revenue.
The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit
losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance
for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization
of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. As of December 31, 2020 and 2019, the allowance for doubtful
accounts was $156,927 and $20,007.
Incremental
Direct Costs - Incremental direct costs incurred in connection with enrolling members in the NAPW Network consist of sales
commissions paid to the Company’s direct sales agents. Incremental direct costs associated with the PDN Network consists
of commissions paid to third-party agencies. Commissions associated with the NAPW Network are deferred and amortized over the
term of membership, which is a 12-month period and agency commissions associated with the PDN Network are deferred and amortized
over the membership service period. Total incremental direct costs related to the NAPW and PDN Network during the years ended
December 31, 2020 and 2019 was $107,000 and $33,000.
Property
and Equipment - Property and equipment is stated at cost, including any cost to place the property into service, less
accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which
currently range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives
or the term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements
and betterments are capitalized. The cost of any assets sold or retired and related accumulated depreciation are removed from
the accounts at the time of disposition, and any resulting profit or loss is reflected in income or expense for the period. Depreciation
expense for the years ended December 31, 2020 and 2019 was $19,978 and $33,711, and is recorded in depreciation and amortization
expense in the accompanying consolidated statements of operations.
Lease
Obligations - The Company leases office space and equipment under various operating lease agreements, including an office
for its corporate headquarters, as well as office spaces for its events business, sales and administrative offices under non-cancelable
lease arrangements that provide for payments on a graduated basis with various expiration dates.
On
September 23, 2020, the Company entered into a new office lease agreement for its corporate headquarters. The office lease is
for 4,902 square feet of office space and the lease term is for 84 months, commencing on October 1, 2020. Additionally, the office
lease required a security deposit of $66,340 and the lease agreement provided for a rent abatement of twelve months beginning
in October 2020.
Capitalized
Technology Costs - In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 350-40, Internal-Use Software, the Company capitalizes certain external and internal computer
software costs incurred during the application development stage. The application development stage generally includes software
design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred,
while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.
Capitalized software costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally
not exceeding three years.
Business
Combinations - ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for
business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration
was exchanged. ASC 805 establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes
and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information
to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Accounting for acquisitions requires the Company to recognize, separately from goodwill, the assets acquired and the liabilities
assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration
transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company
uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the
estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one
year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded in the interim financial information.
Goodwill
and Intangible Assets - The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles
– Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives
should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an
asset has decreased below its carrying value.
Goodwill
is tested for impairment at the reporting unit level on an annual basis (December 31 for the Company) and between annual tests
if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including
goodwill, when performing its goodwill impairment test.
When
conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is
more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not
that goodwill is impaired, the Company then compares the fair value of the Company’s reporting unit to its carrying or book
value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required
to perform further testing. If the carrying value of a reporting unit exceeds its fair value, the Company will measure any goodwill
impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total
amount of goodwill allocated to that reporting unit.
Treasury
Stock – Treasury stock is recorded at cost as a reduction of stockholders’ equity in the accompanying balance
sheets.
Revenue
Recognition – Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of
an arrangement exists, (2) services are performed, (3) the sales price is fixed or determinable, and (4) collectability is reasonably
assured.
Membership
Fees and Related Services
Membership
fees are collected up-front and member benefits become available immediately; however those benefits must remain available over
the 12-month membership period. At the time of enrollment, membership fees are recorded as deferred revenue and are recognized
as revenue ratably over the 12-month membership period. Members who are enrolled in this plan may cancel their membership in the
program at any time and receive a partial refund (amount remaining in deferred revenue) or due to consumer protection legislation,
a full refund based on the policies of the member’s credit card company.
We
also offer a monthly membership for which we collect fees on a monthly basis and we recognize revenue in the same month as we
collect the monthly fees.
Revenue
from related membership services are derived from fees for development and set-up of a member’s personal on-line profile
and/or press release announcements. Fees related to these services are recognized as revenue at the time the on-line profile is
complete and a press release is distributed.
Deferred
Revenue – Deferred revenue includes customer payments which are received prior to performing services and revenues
are recognized upon the completion of these services. Annual membership fees collected at the time of enrollment are recognized
as revenue ratably over the membership period, which are typically for a 12-month membership period.
Recruitment
Services
The
Company’s recruitment services revenue is derived from the Company’s agreements through single and multiple job postings,
recruitment media, talent recruitment communities, basic and premier corporate memberships, hiring campaign marketing and advertising,
e-newsletter marketing and research and outreach services. Recruitment revenue includes revenue recognized from direct sales to
customers for recruitment services and events, as well as revenue from the Company’s direct e-commerce sales. Direct sales
to customers are most typically a twelve-month contract for services and as such the revenue for each contract is recognized ratably
over its twelve-month term. Event revenue is recognized in the month that the event takes place and e-commerce sales are for one-month
job postings and the revenue from those sales are recognized in the month the sale is made. Our recruitment services mainly consist
of the following products:
●
|
On-line
job postings to our diversity sites and to our broader network of websites including the National Association for the Advancement
of Colored People, National Urban League and over 20 other partner organizations
|
●
|
OFCCP
job promotion and recordation services
|
|
|
●
|
Diversity
job fairs, both in person and virtual fairs
|
|
|
●
|
Diversity
recruitment job advertising services
|
|
|
●
|
Cost
per application, a service that employers can purchase whereby PDN sources qualified candidates and charges only for those
applicants who meet the employers’ minimum qualifications
|
|
|
●
|
Diversity
executive staffing services
|
Product
Sales and Other Revenue
Products
offered to members relate to custom made plaques. Product sales are recognized as deferred revenue at the time the initial order
is placed. Revenue is then recognized at the time these products are shipped. The Company’s shipping and handling costs
are included in cost of sales.
Education
and Training
The
Company works with its business partners to provide education and training seminars to business people in China. Revenues are
recognized in the month when the seminar takes place.
Consumer
Advertising and Marketing Solutions
The
Company provides career opportunity services to its various partner organizations through advertising and job postings on their
websites. The Company works with its partners to develop customized websites and job boards where the partners can generate advertising,
job postings and career services to their members, students and alumni. Consumer advertising and marketing solutions revenue is
recognized as jobs are posted to their hosted sites.
The
Company’s partner organizations include NAACP and National Urban League,VetJobs, among others.
Discontinued
Operations
China
Operations
On
November 25, 2019, PDN China received a Seizure Decision Notice (the “Notice”) from the Yuexiu District Branch of
the Police Department of Guangzhou City, the People’s Republic of China. The Notice stated that it is necessary to seize
the assets of PDN China in connection with the criminal investigation of alleged illegal public fund raising by Gatewang Group
(the “Gatewang Case”), a separate company organized under the laws of the People’s Republic of China (“Gatewang”),
with which Mr. Maoji (Michael) Wang, the former Chairman and CEO of the Company (“Michael Wang”) is affiliated, who
was subsequently held in custody by the local police department.
In
response to such events, on December 12, 2019 the Company’s Board of Directors (the “Board”) established the
Special Committee to investigate the situation, and retained the international law firm of King & Wood Mallesons (“KWM”)
to assist the Special Committee in connection with the Special Committee’s investigation of the Company’s operations
in the People’s Republic of China and related events, in collaboration with the Company’s external auditor Ciro
E. Adams CPA LLC. KWM conducted extensive research into public records in China, and interviewed the relevant divisions of the
Public Security Bureau in China and any related witnesses in relation to the operations and specific transactions that had some
relationship to the Gatewang entities. On April 16, 2020, based upon the information obtained, the investigation team concluded
that it did not find any evidence that the Company or PDN China engaged in any criminal activity of illegal fund raising as alleged
against Gatewang.
The
Investigation also revealed that three entities and two individuals (the “Payors”), who appeared to be related
to Gatewang, collectively paid RMB 14.25 million to PDN China on behalf of EGBT Foundation Ltd., a private placement investor
that purchased 1,265,823 shares of the Company’s common stock (approximately 11.6%) in September 2019 (the “EGBT
Transaction”). To the knowledge of the Investigation team, the bank account holding the proceeds of the EGBT Transaction
is still frozen by the Chinese authorities. The seizure of PDN China office by the local police was lifted on March 23, 2020.
These funds, approximately $2.89 million dollars (USD) continue to be subject to the PRC government’s jurisdiction. If the
source of funds is actually (or perceived to be) connected to Gatewang, the Chinese authorities may not unfreeze PDN China’s
bank account. If and when the bank account is unfrozen, the Company will consider whether the EGBT Transaction needs to be unwound
or further documented to be in full compliance with applicable law.
The
Company’s operations in China have been suspended since December 2019. On March 4, 2020 the Board decided to discontinue
all of the Company’s operations in the People’s Republic of China, namely PDN (China) International Culture Development
Co. Ltd., a wholly owned subsidiary of the Company, Jiangxi PDN Culture Media Co., Ltd. (“PDN Jiangxi”),
a variable interest entity controlled by of the Company, and the joint venture between PDN Jiangxi, Guangzhou Zengcheng
District Zhili Education Training Center, and Guangzhou Angye Education Consulting Co. Ltd.
All
historical operating results for the Company’s China operations are included in loss from discontinued operations, net of
tax, in the accompanying consolidated statement of operations. For the year ended December 31, 2020, loss from discontinued operations
was approximately ($216,000) compared to a loss from discontinued operations of ($1,052,000) for the year ended December 31, 2019.
Assets
and liabilities of China operations are now included in current assets and long-term assets from discontinued operations, and
current liabilities and long-term liabilities from discontinued operations. As of December 31, 2020, current assets from discontinued
operations were approximately $6,900, compared to approximately $76,000 as of December 31, 2019, and long-term assets from discontinued
operations were approximately $3,085,000 at December 31, 2020, compared to approximately $3,109,000 as of December 31, 2019. As
of December 31, 2020, current liabilities from discontinued operations were approximately $375,000, compared to approximately
$564,000 as of December 31, 2019.
Operating
Results of Discontinued Operations
The
following table represents the components of operating results from discontinued operations, as presented in the consolidated
statements of operations and comprehensive loss for the years ended December 31, 2020 and 2019:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
107,584
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
12,963
|
|
|
|
33,803
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
16,626
|
|
Sales and marketing
|
|
|
2,856
|
|
|
|
315,713
|
|
General and administrative
|
|
|
170,196
|
|
|
|
842,667
|
|
Non-operating (expense) income
|
|
|
(8,301
|
)
|
|
|
195,593
|
|
Loss from discontinued operations before income tax
|
|
|
(193,613
|
)
|
|
|
(905,632
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
146,702
|
|
Net loss from discontinued operations
|
|
$
|
(193,613
|
)
|
|
$
|
(1,052,334
|
)
|
Advertising
and Marketing Expenses – Advertising and marketing expenses are expensed as incurred or the first time the
advertising takes place. The production costs of advertising are expensed the first time the advertising takes place. For the
years ended December 31, 2020 and 2019, the Company incurred advertising and marketing expenses of approximately $681,000 and
$649,000. These amounts are included in sales and marketing expenses in the accompanying statements of operations.
Concentrations
of Credit Risk - Financial instruments, which potentially subject the Company to concentration of credit risk, consist
principally of cash and cash equivalents and accounts receivable. The Company places its cash with high credit quality institutions.
At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such accounts
and believes that it is not exposed to any significant credit risk on the account.
Income
Taxes - The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company
recognize deferred tax liabilities and assets based on the differences between the financial statement basis and tax basis of
assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company
estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by
tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more
likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely
than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
ASC
740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance
with ASC 740-20 and prescribes a recognition threshold and measurement process for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2020. The Company
is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from
its position.
The
Company may be subject to potential income tax examinations by federal or state authorities. These potential examinations may
include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with
federal and state tax laws. Management does not expect that the total amount of unrecognized tax benefits will materially change
over the next twelve months. Tax years that remain open for assessment for federal and state tax purposes include the years ended
December 31, 2017 through 2020.
The
Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of
income tax expense. There were no amounts accrued for penalties or interest as of September 30, 2020.
Fair
Value of Financial Assets and Liabilities - Financial instruments, including cash and cash equivalents, short-term investments
and accounts payable, are carried at cost. Management believes that the recorded amounts approximate fair value due to the short-term
nature of these instruments.
Net
Loss per Share - The Company computes basic net loss per share by dividing net loss available to common stockholders by
the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic net loss per share for the years ended December 31, 2020 and 2019 excludes the potentially dilutive securities
summarized in the table below because their inclusion would be anti-dilutive.
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
|
125,000
|
|
|
|
125,000
|
|
Stock options
|
|
|
66,126
|
|
|
|
295,793
|
|
Unvested restricted stock
|
|
|
206,775
|
|
|
|
27,319
|
|
Total dilutive securities
|
|
|
397,901
|
|
|
|
448,112
|
|
Recent
Accounting Pronouncements
In
December 2019, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) ASU 2019-12, Simplifying
the Accounting for Income Taxes, as part of its Simplification Initiative to reduce the cost and complexity in accounting
for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.
ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of Generally Accepted
Accounting Principles. The guidance is effective for interim and annual period beginning after December 15, 2020, with early adoption
permitted. The Company will adopt ASU 2019-12 during the first quarter of 2021 and the adoption of ASU 2019-12 will effect the
classification of income taxes, but is not expected to impact reported results in the consolidated financial statements.
4.
Capitalized Technology
Capitalized
Technology, net is as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Capitalized cost:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
2,165,545
|
|
|
$
|
2,163,044
|
|
Additional capitalized cost
|
|
|
3,700
|
|
|
|
2,501
|
|
Balance, end of period
|
|
|
2,169,245
|
|
|
|
2,165,545
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
2,130,037
|
|
|
$
|
1,968,213
|
|
Provision for amortization
|
|
|
13,341
|
|
|
|
101,448
|
|
Balance, end of period
|
|
|
2,143,378
|
|
|
|
2,069,661
|
|
Capitalized Technology, net
|
|
|
25,867
|
|
|
|
95,884
|
|
Amortization
expense of $13,341 and $101,448 for the years ended December 31, 2020 and 2019, respectively, is recorded in depreciation
and amortization expense in the accompanying consolidated statements of operations.
5.
Intangible Assets
Intangible
assets, net is as follows:
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
December 31, 2020
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Long-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Process
|
|
|
10
|
|
|
$
|
2,130,956
|
|
|
$
|
(1,845,178
|
)
|
|
$
|
285,778
|
|
Paid Member Relationships
|
|
|
5
|
|
|
|
803,472
|
|
|
|
(803,472
|
)
|
|
|
-
|
|
Member Lists
|
|
|
5
|
|
|
|
8,086,181
|
|
|
|
(8,086,181
|
)
|
|
|
-
|
|
Developed Technology
|
|
|
3
|
|
|
|
648,000
|
|
|
|
(648,000
|
)
|
|
|
-
|
|
Trade Name/Trademarks
|
|
|
4
|
|
|
|
440,000
|
|
|
|
(440,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
12,108,609
|
|
|
|
(11,822,831
|
)
|
|
|
285,778
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
376,178
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
December 31, 2019
|
|
(Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Long-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Process
|
|
|
10
|
|
|
$
|
2,130,956
|
|
|
$
|
(1,768,971
|
)
|
|
$
|
361,985
|
|
Paid Member Relationships
|
|
|
5
|
|
|
|
803,472
|
|
|
|
(803,472
|
)
|
|
|
-
|
|
Member Lists
|
|
|
5
|
|
|
|
8,086,181
|
|
|
|
(8,086,181
|
)
|
|
|
-
|
|
Developed Technology
|
|
|
3
|
|
|
|
648,000
|
|
|
|
(648,000
|
)
|
|
|
-
|
|
Trade Name/Trademarks
|
|
|
4
|
|
|
|
440,000
|
|
|
|
(440,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
12,108,609
|
|
|
|
(11,746,624
|
)
|
|
|
361,985
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
452,385
|
|
Future
annual estimated amortization expense is summarized as follows:
Year ended December 31,
|
|
|
|
2021
|
|
$
|
76,207
|
|
2022
|
|
|
76,207
|
|
2023
|
|
|
76,207
|
|
2024 and thereafter
|
|
|
57,157
|
|
|
|
$
|
285,778
|
|
Amortization
expense of $76,207 and $568,558 for the years ended December 31, 2020 and 2019, respectively, is recorded in depreciation and
amortization expense in the accompanying consolidated statements of operations.
6.
PPP Loan
The
CARES Act was enacted on March 27, 2020. Among the provisions contained in the CARES Act was the creation of the Paycheck Protection
Program (“PPP”) that provides for under the Small Business Administration (“SBA”) Section 7(a) loans for
qualified small businesses. PPP loan proceeds are available to be used to pay for payroll costs, including salaries, commissions,
and similar compensation, group health care benefits, and paid leaves, rent, utilities and interest on certain other outstanding
debt. The amount that will be forgiven will be calculated in part with reference to the Company’s full-time headcount during
the eight-week period following the funding of the PPP loan. The Company applied for the PPP loan and on May 5, 2020, the Company
received total proceeds of $651,077 from the SBA. In accordance with the loan forgiveness requirements under the CARES Act, the
Company utilized the proceeds from the PPP Loan for payroll costs, rent and utilities.
The
Company accounted for the proceeds received from the PPP loan as debt in accordance with ASC 470, Debt. Accordingly, the
Company accounted for the proceeds received as short-term and long-term loan in its consolidated balance sheets until forgiveness
of the PPP loan was received. The Company applied for loan forgiveness during the fourth quarter of 2020 and the PPP loan was
fully forgiven by the SBA. Upon receiving forgiveness of the PPP loan, the Company eliminated the short-term and long-term loan
debt liability and the loan forgiveness amount of $651,077 was applied as PPP loan forgiveness in the other income section of
the Company’s consolidated statements of operations during the fourth quarter of 2020.
7.
Accrued Liabilities
As
of December 31, 2020 and 2019, accrued liabilities consisted of the following:
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Litigation reserve
|
|
|
1,412,502
|
|
|
|
348,000
|
|
Accrued payroll
|
|
|
75,263
|
|
|
|
72,166
|
|
Accrued legal fees
|
|
|
-
|
|
|
|
69,896
|
|
Accrued Board of Director fees
|
|
|
61,277
|
|
|
|
50,364
|
|
Accrued revenue sharing agreements
|
|
|
53,266
|
|
|
|
43,844
|
|
Other
|
|
|
23,856
|
|
|
|
69,899
|
|
Total accrued liabilities
|
|
$
|
1,626,164
|
|
|
$
|
654,169
|
|
8.
Commitments and Contingencies
PDN
China’s bank account with a balance of approximately $3.1 million was frozen by Guangzhou Police due to the Gatewang Case.
The Company has classified this entire cash balance as a long-term asset and is classified in discontinued operations.
Legal
Proceedings
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened to assert claims against
the Company in excess of $2 million based on White Winston’s contention that the Company’s conduct delayed White Winston’s
ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30,
2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No.
18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting
federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston
is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White
Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim.
On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is
a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that
complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed
the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in
Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once
again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s
motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed
with the court on Monday, March 25, 2019. This motion was not granted.
On
October 28, 2020, the Company and White Winston reached a settlement agreement, in which the Company made a cash payment of $250,000
on October 29, 2020 and a second cash payment of $350,000 was paid on February 16, 2021. In addition, the Company
issued 150,000 shares of the Company’s common stock in January 2021.
NAPW
is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018,
with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord
has obtained a judgment against NAPW in the amount of $746,142.41. As a result of the judgement order, the Company recorded a
$780,000 litigation settlement reserve in the second quarter of 2020, which reflected the judgement order in addition to imputed
interest costs and legal fees. NAPW is currently negotiating a settlement with the Landlord.
The
Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc.
and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed on June 20, 2018 and alleging violations of the Fair
Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its subsidiary violated
the applicable laws or that either entity has any liability and intends to vigorously defend against these claims. The matter
is in the final stages of discovery and we have completed depositions of relevant witnesses. During the first quarter of 2020,
the Company recorded a $450,000 litigation settlement reserve in the event of an unfavorable outcome in this proceeding. In November
2020, both parties entered into mediation proceedings but a settlement was not reached. This matter is scheduled to go to trial
in 2021.
We
are also generally subject to legal proceedings and litigation arising in the ordinary course of business.
General
Legal Matters
From
time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes
that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business
for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial
condition or results of operations.
9.
CFL Transaction
On
August 12, 2016, the Company entered into a stock purchase agreement (the “Purchase Agreement”), with CFL, a Republic
of Seychelles company wholly-owned by a group of Chinese investors. Pursuant to the Purchase Agreement, the Company agreed to
issue and sell to CFL (the “Share Issuance and Sale”), and CFL agreed to purchase, at a price of $9.60 per share (the
“Per Share Price”), upon the terms and subject to the conditions set forth in the Purchase Agreement, a number of
shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), such that CFL will hold
shares of Common Stock equal to approximately 51% of the outstanding shares of Common Stock, determined on a fully-diluted basis,
after giving effect to the consummation of the transactions contemplated by the Purchase Agreement, including the Tender Offer
described below (the “CFL Transaction”).
Pursuant
to a co-sale right, an existing shareholder of the Company would have the right to sell up to 205,925 shares of Common Stock to
CFL as of the date of the Purchase Agreement (the “Co-Sale Right”), and such Co-Sale Right, to the extent exercised,
would reduce the number of shares of Common Stock to be purchased by CFL directly from the Company. The Company also commenced
a partial issuer tender offer to purchase up to 312,500 shares of Common Stock (the “Tender Offer”). The number of
shares of Common Stock that CFL agreed to purchase was that amount that would allow it to hold 51% of the outstanding shares of
Common Stock, determined on a fully-diluted basis, after giving effect to the number of shares of Common Stock (if any) the Company
purchases in the Tender Offer, and any shares sold to CFL pursuant to the co-sale right (collectively, the “Common Shares”).
The parties agreed that, if, immediately following the consummation of the Tender Offer and after giving effect to the purchase
by the Company of all shares of Common Stock validly tendered and not withdrawn in the Tender Offer, the Common Shares amount
to less than 51% of the then-outstanding shares of Common Stock, determined on a fully-diluted basis, then CFL shall have an option
(the “Call Option”) to purchase, at a price per share equal to the Per Share Price, such additional number of shares
of Common Stock (the “Call Option Shares”) as are necessary for the previously issued Common Shares plus the Call
Option Shares to equal 51% of the then-outstanding shares of Common Stock determined on a fully-diluted basis, taking into account
the issuance of the Call Option Shares.
On
November 7, 2016, the Company consummated the Share Issuance and Sale of 1,777,417 shares of its common stock to CFL at a price
of $9.60 per share, pursuant to the terms of the Purchase Agreement, dated August 12, 2016. In addition, on November 7, 2016,
the Company completed the purchase of 312,500 shares of its common stock at a price of $9.60 per share, net to the seller in cash,
pursuant to the Tender Offer. The Company received approximately $9,000,000 in net proceeds from the Share Issuance and Sale,
after the payment for the shares repurchased in the Tender Offer, the repayment of all amounts outstanding under the Master Credit
Facility and the payment of transaction-related expenses.
At
the closing of the CFL Transaction, the Company entered into a Stockholders’ Agreement, dated November 7, 2016 (the “Stockholders’
Agreement”) with CFL and each of its shareholders: Maoji (Michael) Wang, Jingbo Song, Yong Xiong Zheng and Nan Kou (the
“CFL Shareholders”). The Stockholders’ Agreement sets forth the agreement of the Company, CFL and the CFL Shareholders
relating to board representation rights, transfer restrictions, standstill provisions, voting, registration rights and other matters
following the closing of the Share Issuance and Sale (see Note 13).
On
November 15, 2019, CFL purchased additional 1,142,857 shares of the Company’s common stock for $1.75 per share for gross
proceeds of $2,000,000 from an existing shareholder.
10.
Stockholders’ Equity
Preferred
Stock – The Company has no preferred stock issued. The Company’s amended and restated certificate of incorporation
and amended and restated bylaws include provisions that allow the Company’s Board of Directors to issue, without further
action by the stockholders, up to 1,000,000 shares of undesignated preferred stock.
Common
Stock – The Company has one class of common stock outstanding with a total number of shares authorized of 45,000,000.
As of December 31, 2020, the Company had 12,819,843 shares of common stock outstanding.
On
March 22, 2020, the Company entered into an agreement with Malven Group Limited, a company established under the laws of the British
Virgin Islands, in connection with the purchase of 1,939,237 shares of common stock of the Company at a price of $0.7735 per share
for gross proceeds of $1,500,000. On June 26, 2020, Malven purchased additional 312,500 shares of common stock of the Company
at a price of $3.20 per share for gross proceeds of $1,000,000.
On July 27, 2020, the Company entered into
a Securities Purchase Agreement with three institutional accredited investors, in which the Company sold 1,481,484 shares of the
Company’s common stock at a per share price of $1.35 for net proceeds of $1,814,353,
after deducting financial advisory, legal and escrow related fees. The Company’s sale of common stock sale was completed
pursuant to the Company’s Registration Statement filed on Form S-3.
11.
Stock-Based Compensation
Equity
Incentive Plans – The Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for
the purpose of providing equity incentives to employees, officers, directors and consultants including options, restricted stock,
restricted stock units, stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The
Company amended the 2013 Plan to increase the number of authorized shares of common stock under the Plan from 225,000 shares to
615,000 shares, which the Company’s stockholders approved on June 26, 2017. The Company further amended the 2013 Plan to
increase the number of authorized shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders
approved and ratified on November 8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan.
Stock
Options
The
fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined
by the Black-Scholes pricing model is affected by the Company’s stock price as well as assumptions regarding a number of
highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over
the term of the awards, and actual and projected employee stock option exercise behaviors. The risk-free rate is based on the
U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities
of peer companies, the expected life is based on the estimated average of the life of options using the simplified method, and
forfeitures are estimated on the date of grant based on certain historical data. The Company utilizes the simplified method to
determine the expected life of its options due to insufficient exercise activity during recent years as a basis from which to
estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of
dividend payouts.
Forfeitures
are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
The
following table summarizes the Company’s stock option activity for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregrate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Value
|
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
(in thousands)
|
|
Outstanding - January 1, 2020
|
|
|
295,793
|
|
|
$
|
8.88
|
|
|
|
7.5
|
|
|
$
|
-
|
|
Granted
|
|
|
30,000
|
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(259,667
|
)
|
|
|
9.21
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2020
|
|
|
66,126
|
|
|
$
|
5.24
|
|
|
|
8.3
|
|
|
$
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
26,126
|
|
|
$
|
8.18
|
|
|
|
7.0
|
|
|
$
|
7.2
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregrate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(in Years)
|
|
|
Value
|
|
Outstanding - January 1, 2019
|
|
|
499,439
|
|
|
$
|
6.94
|
|
|
|
9.0
|
|
|
$
|
-
|
|
Granted
|
|
|
30,000
|
|
|
|
2.23
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(233,646
|
)
|
|
|
3.87
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2019
|
|
|
295,793
|
|
|
$
|
8.88
|
|
|
|
7.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
|
275,793
|
|
|
$
|
9.37
|
|
|
|
7.4
|
|
|
$
|
-
|
|
On
June 25, 2020, the Company granted 30,000 stock options. The stock option exercise price was $3.69 and the grant date fair value
of this award was $90,840.
On
March 11, 2019, the Company granted 30,000 stock options at a stock option exercise price of $2.23 and the grant date fair value
was $53,400. The Company computes the grant date fair value of stock option awards using the Black-Scholes option-pricing model
and the fair value of stock option awards are amortized on a straight-line basis over the requisite service period of the stock
option awards.
The
following assumptions were utilized in the Black-Scholes option pricing for the stock option grants for the years ended December
31, 2020 and 2019:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.33
|
%
|
|
|
2.44
|
%
|
Expected volatility
|
|
|
111.55
|
%
|
|
|
102.71
|
%
|
Expected term (in years)
|
|
|
5.75
|
|
|
|
5.75
|
|
Grant-date fair value of stock options awarded
|
|
$
|
3.03
|
|
|
$
|
1.78
|
|
The
Company recorded non-cash stock-based compensation expense of approximately $33,000 and $24,000 as a component of general and
administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2020 and 2019,
pertaining to stock options awards.
Total
unrecognized stock-based compensation expense related to unvested stock options at December 31, 2020 was approximately $78,000
and is expected to be recognized through the second quarter of 2023.
Warrants
As
of December 31, 2020 and 2019, there were 125,000 warrants outstanding and exercisable, with a weighted average exercise price
of $20.00 per share and these warrants are scheduled to expire on June 30, 2021.
Restricted
Stock
A
summary of restricted stock activity for the years ended December 31, 2020 and 2019 is as follows:
|
|
Number of
|
|
|
|
Shares
|
|
Outstanding - January 1, 2019
|
|
|
60,651
|
|
Granted
|
|
|
47,568
|
|
Forfeited
|
|
|
(13,865
|
)
|
Vested
|
|
|
(67,035
|
)
|
Outstanding - December 31, 2019
|
|
|
27,319
|
|
Granted
|
|
|
306,775
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(127,319
|
)
|
Outstanding - December 31, 2020
|
|
|
206,775
|
|
During
the year ended December 31, 2020, the Company granted 300,000 restricted stock units (“RSUs”) to the Company’s
Chief executive Officer Xin (Adam) He and 6,775 RSUs to a newly elected Board of Director. The RSU award grant to Mr. He vest
1/3 on grant date and the remaining 2/3 to vest equally on the annual grant date anniversary of the award over the next two years.
The RSU award to the Board member fully vests on the one-year anniversary of the RSU award. The aggregate grant date fair value
of the combined awards amounted to $1,132,000.
During
the year ended December 31, 2019, the Company granted 46,402 to certain Board of Directors and 1,166 RSUs to Mr. He for their
board services. The RSUs awards had no voting or dividend rights. The fair value of the common stock on the dates of grant were
$3.09 and $3.32 per share, based upon the closing market price on the grant dates. The aggregate grant date fair value of the
combined awards amounted to $156,000.
The
Company recorded non-cash stock-based compensation expense of approximately $587,000 and $201,000 as a component of general and
administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2020 and 2019,
respectively, pertaining to restricted stock awards.
Total
unrecognized stock-based compensation expense related to unvested restricted stock at December 31, 2020 was $559,000 and is expected
to be recognized through the second quarter of 2022.
12.
Income Taxes
The
Company has the following net deferred tax assets and liabilities at December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Goodwill and intangible assets
|
|
$
|
(41,780
|
)
|
|
$
|
(44,715
|
)
|
Developed technology
|
|
|
(7,010
|
)
|
|
|
(25,985
|
)
|
Derivative liability
|
|
|
(112,564
|
)
|
|
|
(112,564
|
)
|
Property and equipment
|
|
|
3,378
|
|
|
|
18,399
|
|
Other deferred tax assets
|
|
|
23,627
|
|
|
|
42,678
|
|
Settlements
|
|
|
473,302
|
|
|
|
150,290
|
|
Stock based compensation
|
|
|
95,103
|
|
|
|
331,731
|
|
Net operating loss
|
|
|
8,017,170
|
|
|
|
7,161,406
|
|
Valuation allowance
|
|
|
(8,637,265
|
)
|
|
|
(7,742,494
|
)
|
Net deferred tax liability
|
|
$
|
(186,039
|
)
|
|
$
|
(221,254
|
)
|
The
benefit for income taxes for the years ended December 31, 2020 and 2019 consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax benefit
|
|
|
(27,288
|
)
|
|
|
(134,163
|
)
|
|
|
$
|
(27,288
|
)
|
|
$
|
(134,163
|
)
|
State:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax benefit
|
|
|
(7,927
|
)
|
|
|
(43,338
|
)
|
|
|
$
|
(7,927
|
)
|
|
$
|
(43,338
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax expense benefit
|
|
$
|
(35,215
|
)
|
|
$
|
(177,501
|
)
|
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
|
|
6.1
|
%
|
|
|
6.1
|
%
|
Impairment charge
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Valuation allowance
|
|
|
-21.4
|
%
|
|
|
-13.5
|
%
|
Permanent items
|
|
|
-3.4
|
%
|
|
|
-0.1
|
%
|
Rate change
|
|
|
0.0
|
%
|
|
|
-2.6
|
%
|
Other
|
|
|
-1.5
|
%
|
|
|
-4.9
|
%
|
|
|
|
0.8
|
%
|
|
|
6.0
|
%
|
The
valuation allowance at December 31, 2020 was approximately $8,637,000. The net change in the valuation allowance during the year
ended December 31, 2020 was an increase of approximately $895,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items,
management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances
to warrant the application of a valuation allowance as of December 31, 2020.
At
December 31, 2020, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$29,584,000. Of this amount, $20,476,000 expires between 2034 and 2038, and $9,108,000 has an indefinite carryforward period.
Certain tax attributes are subject to an annual limitation as a result of changes in ownership as defined under Internal Revenue
Code Section 382. The Company files tax returns in multiple jurisdictions and is subject to examination in these jurisdictions.
Significant jurisdictions in the U.S. include New York, Illinois and California.
The
U.S. Tax Cuts and Jobs Act of 2017 provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign E&P
through the year ended December 31, 2017. The Company had an estimated $332,000 of undistributed foreign E&P subject to the
deemed mandatory repatriation, this income was offset by U.S. operating losses. As of December 31, 2020, foreign withholding taxes
have not been provided on the undistributed E&P of its foreign subsidiaries as the Company intend to permanently reinvest
these foreign earnings in those businesses outside the U.S.
Beginning
in 2018, the Tax Act includes a new U.S. tax base erosion provision designed to tax the global intangible low-taxed income (“GILTI”).
The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable
return on the foreign subsidiary’s tangible assets. The Company has elected to recognize the tax on GILT as a period expense
in the period the tax is incurred.
13.
Segment Information
The
Company operates in the following segments: (i) NAPW Network, (ii) PDN Network and (iii) Corporate Overhead. The financial results
of China Operations have been reclassified from the Company’s reportable segments to discontinued operations for all periods
presented.
The
following tables present key financial information of the Company’s reportable segments as of and for the years ended December
31, 2020 and 2019:
|
|
Year Ended December 31, 2020
|
|
|
|
PDN
|
|
|
NAPW
|
|
|
Corporate
|
|
|
|
|
|
|
Network
|
|
|
Network
|
|
|
Overhead
|
|
|
Consolidated
|
|
Membership fees and related services
|
|
$
|
-
|
|
|
$
|
1,345,707
|
|
|
$
|
-
|
|
|
$
|
1,345,707
|
|
Recruitment services
|
|
|
2,962,275
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,962,275
|
|
Products sales and other
|
|
|
-
|
|
|
|
4,820
|
|
|
|
-
|
|
|
|
4,820
|
|
Consumer advertising and marketing solutions
|
|
|
143,934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,934
|
|
Total revenues
|
|
|
3,106,209
|
|
|
|
1,350,527
|
|
|
|
-
|
|
|
|
4,456,736
|
|
Income (loss) from continuing operations
|
|
|
197,739
|
|
|
|
(543,706
|
)
|
|
|
(4,499,250
|
)
|
|
|
(4,845,217
|
)
|
Depreciation and amortization
|
|
|
32,885
|
|
|
|
137,017
|
|
|
|
-
|
|
|
|
169,902
|
|
Income tax expense (benefit)
|
|
|
9,119
|
|
|
|
(4,797
|
)
|
|
|
(39,537
|
)
|
|
|
(35,215
|
)
|
Net income (loss) from continuing operations
|
|
|
840,660
|
|
|
|
(538,909
|
)
|
|
|
(4,459,713
|
)
|
|
|
(4,157,962
|
)
|
|
|
As of December 31, 2020
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339,451
|
|
Intangibles assets, net
|
|
|
90,400
|
|
|
|
285,778
|
|
|
|
-
|
|
|
|
376,178
|
|
Assets from continuing operations
|
|
|
4,455,262
|
|
|
|
1,126,005
|
|
|
|
-
|
|
|
|
5,581,267
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
PDN
|
|
|
NAPW
|
|
|
Corporate
|
|
|
|
|
|
|
Network
|
|
|
Network
|
|
|
Overhead
|
|
|
Consolidated
|
|
Membership fees and related services
|
|
$
|
-
|
|
|
$
|
2,428,060
|
|
|
$
|
-
|
|
|
$
|
2,428,060
|
|
Recruitment services
|
|
|
2,450,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,450,742
|
|
Products sales and other
|
|
|
-
|
|
|
|
5,644
|
|
|
|
-
|
|
|
|
5,644
|
|
Consumer advertising and marketing solutions
|
|
|
140,766
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,766
|
|
Total revenues
|
|
|
2,591,508
|
|
|
|
2,433,704
|
|
|
|
-
|
|
|
|
5,025,212
|
|
Loss from continuing operations
|
|
|
(357,067
|
)
|
|
|
(272,528
|
)
|
|
|
(2,366,540
|
)
|
|
|
(2,996,135
|
)
|
Depreciation and amortization
|
|
|
62,064
|
|
|
|
641,653
|
|
|
|
-
|
|
|
|
703,717
|
|
Income tax (benefit) expense
|
|
|
(162,281
|
)
|
|
|
46,778
|
|
|
|
(61,998
|
)
|
|
|
(177,501
|
)
|
Net (loss) income from continuing operations
|
|
|
(168,281
|
)
|
|
|
(319,306
|
)
|
|
|
(2,304,542
|
)
|
|
|
(2,792,129
|
)
|
|
|
As of December 31, 2019
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339,451
|
|
Intangibles assets, net
|
|
|
90,400
|
|
|
|
361,985
|
|
|
|
-
|
|
|
|
452,385
|
|
Assets from continuing operations
|
|
|
2,151,734
|
|
|
|
1,254,693
|
|
|
|
-
|
|
|
|
3,406,427
|
|
14.
Employee benefit plans
The
Company’s employee benefit plans currently consist of a defined contribution plan for all U.S. employees. The Company does
not offer any other postretirement benefit plans, such as retiree medical and dental benefits or deferred compensation agreements
to its employees or officers.
U.S.
regular, full-time employees are eligible to participate in the Professional Diversity Network Inc. 401(k) Plan, which is a qualified
defined contribution plan under section 401(k) of the Internal Revenue Service Code. Under the Professional Diversity Networks
Inc. 401(k) Plan, employees are eligible to participate after meeting eligibility requirements and employees are always fully
vested in their own contributions. The Company currently did not make any matching contributions during the year ended December
31, 2020, but effective on January 1 2021, the Company has elected to match 4% of eligible employee contributions.
15.
Subsequent Events
On
February 1, 2021, the Company entered into a private placement with Ms. Yiran Gu, in which the Company sold 500,000 shares of
its common stock at a price per share of $2.00 for gross proceeds of $1,000,000.
On
February 22, 2021, the Company issued a press release announcing a business and operational strategy change with respect to its
NAPW Network. Prior to its scheduled launch of a new membership website, the NAPW Network is transitioning to an online membership
acquisition model utilizing ecommerce-centric technology to replace the previous telemarketing business model. This change in
business strategy is expected to increase productivity and reduce membership acquisition costs. As a result of the change to an
ecommerce business model, there was an approximate 50% reduction in customer service representatives in the Company’s NAPW
Network during the first quarter of 2021.
On
March 24, 2021, Professional Diversity Network, Inc. (“PDN”) entered into a stock purchase agreement to acquire equity
interests (the “Transaction”) in RemoteMore USA, Inc., a Delaware corporation (“RemoteMore”). At
the closing, PDN, through a newly formed subsidiary, will own approximately 45.625% of the total outstanding capital stock of
RemoreMore and will have the power to appoint two directors on the three-person board of directors of RemoteMore. In addition,
PDN will have the option to acquire an additional 20% of RemoreMore’s outstanding capital stock after 24 months. At the
closing of the Transaction, the two founders of RemoteMore, Mr. Boris Krastev and Mr. Boris Borisov (the “Founders”),
will enter into employment agreements with RemoreMore, and pursuant to such agreements each Founder will be entitled to receive
that number of newly-issued shares of PDN common stock with an aggregate value of $200,000.00, as determined by the average price
of the closing trading prices of PDN common stock on the NASDAQ Global Market in the ten consecutive (10) business days immediately
prior to the closing date. The grant of such incentive stock will be subject to approval of the Compensation Committee of
PDN’s Board of Directors and other conditions. The Transaction is subject to satisfaction of closing conditions and
is expected to close in the second quarter of 2021.
ITEM
16. FORM 10-K SUMMARY.
Not
applicable.