ITEM
1.
|
FINANCIAL
STATEMENTS
|
Professional
Diversity Network, Inc.
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Adjusted)
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents (Amounts related to variable interest entity of $907,590 and $1,671,378 as of September 30, 2018
and December 31, 2017, respectively)
|
|
$
|
1,653,149
|
|
|
$
|
2,926,088
|
|
Accounts
receivable, net
|
|
|
527,565
|
|
|
|
905,723
|
|
Incremental
direct costs
|
|
|
21,158
|
|
|
|
145,292
|
|
Prepaid
expenses and other current assets
|
|
|
461,931
|
|
|
|
478,379
|
|
Current
assets from discontinued operations
|
|
|
194,209
|
|
|
|
1,180,099
|
|
Total
current assets
|
|
|
2,858,012
|
|
|
|
5,635,581
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
96,553
|
|
|
|
221,184
|
|
Capitalized
technology, net
|
|
|
187,258
|
|
|
|
153,381
|
|
Goodwill
|
|
|
339,451
|
|
|
|
5,590,150
|
|
Intangible
assets, net
|
|
|
4,408,934
|
|
|
|
6,264,706
|
|
Merchant
reserve
|
|
|
760,849
|
|
|
|
760,849
|
|
Security
deposits
|
|
|
74,588
|
|
|
|
225,957
|
|
Long-term
assets from discontinued operations
|
|
|
-
|
|
|
|
137,114
|
|
Total
assets
|
|
$
|
8,725,645
|
|
|
$
|
18,988,922
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,465,890
|
|
|
$
|
1,120,444
|
|
Accrued
expenses
|
|
|
785,682
|
|
|
|
1,166,214
|
|
Deferred
revenue
|
|
|
2,440,998
|
|
|
|
4,004,015
|
|
Customer
deposits
|
|
|
14,563
|
|
|
|
-
|
|
Current
liabilities from discontinued operations
|
|
|
219,693
|
|
|
|
484,524
|
|
Total
current liabilities
|
|
|
4,926,826
|
|
|
|
6,775,197
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability
|
|
|
1,206,098
|
|
|
|
1,803,519
|
|
Deferred
rent
|
|
|
45,800
|
|
|
|
56,082
|
|
Other
liabilities
|
|
|
-
|
|
|
|
52,321
|
|
Long-term
liabilities from discontinued operations
|
|
|
7,762
|
|
|
|
-
|
|
Total
liabilities
|
|
|
6,186,486
|
|
|
|
8,687,119
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value; 45,000,000 shares authorized; 4,856,213 shares and 3,963,864
shares issued as of September 30, 2018 and December 31, 2017, respectively; and 4,855,165
shares
and 3,962,816
shares outstanding as of September 30, 2018 and December 31, 2017, respectively
|
|
|
48,562
|
|
|
|
39,639
|
|
Additional
paid in capital
|
|
|
83,566,225
|
|
|
|
80,016,218
|
|
Accumulated
other comprehensive loss
|
|
|
(13,383
|
)
|
|
|
28,848
|
|
Accumulated
deficit
|
|
|
(81,025,128
|
)
|
|
|
(69,745,785
|
)
|
Treasury
stock, at cost; 1,048 shares at September 30, 2018 and December 31, 2017
|
|
|
(37,117
|
)
|
|
|
(37,117
|
)
|
Total
stockholders' equity
|
|
|
2,539,159
|
|
|
|
10,301,803
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
8,725,645
|
|
|
$
|
19,179,065
|
|
See
Note 3 for Additional Variable Interest Entity Disclosures.
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Professional
Diversity Network, Inc.
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
1,112,042
|
|
|
$
|
2,204,909
|
|
|
$
|
4,059,989
|
|
|
$
|
7,465,202
|
|
Recruitment
services
|
|
|
705,040
|
|
|
|
694,454
|
|
|
|
2,018,832
|
|
|
|
1,977,101
|
|
Product
sales and other
|
|
|
3,180
|
|
|
|
18,285
|
|
|
|
13,197
|
|
|
|
91,226
|
|
Education
and training
|
|
|
-
|
|
|
|
68,890
|
|
|
|
16,048
|
|
|
|
898,584
|
|
Consumer
advertising and marketing solutions
|
|
|
74,360
|
|
|
|
65,188
|
|
|
|
218,637
|
|
|
|
189,217
|
|
Total
revenues
|
|
|
1,894,622
|
|
|
|
3,051,726
|
|
|
|
6,326,703
|
|
|
|
10,621,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
291,685
|
|
|
|
357,481
|
|
|
|
917,429
|
|
|
|
1,213,669
|
|
Sales
and marketing
|
|
|
977,148
|
|
|
|
1,598,530
|
|
|
|
3,093,798
|
|
|
|
5,759,849
|
|
General
and administrative
|
|
|
1,786,408
|
|
|
|
2,711,640
|
|
|
|
6,202,087
|
|
|
|
9,564,428
|
|
Litigation
settlement
|
|
|
342,472
|
|
|
|
155,216
|
|
|
|
342,472
|
|
|
|
155,216
|
|
Goodwill
impairment charge
|
|
|
5,250,699
|
|
|
|
-
|
|
|
|
5,250,699
|
|
|
|
9,920,305
|
|
Depreciation
and amortization
|
|
|
650,103
|
|
|
|
757,144
|
|
|
|
1,989,125
|
|
|
|
2,294,012
|
|
Total
costs and expenses
|
|
|
9,298,515
|
|
|
|
5,580,011
|
|
|
|
17,795,610
|
|
|
|
28,907,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(7,403,893
|
)
|
|
|
(2,528,285
|
)
|
|
|
(11,468,907
|
)
|
|
|
(18,286,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
29,549
|
|
|
|
-
|
|
|
|
29,549
|
|
|
|
(12,399
|
)
|
Interest
and other income
|
|
|
(4,368
|
)
|
|
|
4,117
|
|
|
|
299
|
|
|
|
9,218
|
|
Other
finance costs
|
|
|
-
|
|
|
|
5,318
|
|
|
|
22,558
|
|
|
|
7,082
|
|
Other
income, net
|
|
|
25,181
|
|
|
|
9,435
|
|
|
|
52,406
|
|
|
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax benefit
|
|
|
(7,378,712
|
)
|
|
|
(2,518,850
|
)
|
|
|
(11,416,501
|
)
|
|
|
(18,282,248
|
)
|
Income
tax expense (benefit)
|
|
|
(189,950
|
)
|
|
|
(201,123
|
)
|
|
|
(562,415
|
)
|
|
|
(1,126,220
|
)
|
Loss
from continuing operations
|
|
|
(7,188,762
|
)
|
|
|
(2,317,727
|
)
|
|
|
(10,854,086
|
)
|
|
|
(17,156,028
|
)
|
Loss
from discontinued operations, net of tax, including gain on sale of $63,687
|
|
|
(40,735
|
)
|
|
|
(170,358
|
)
|
|
|
(425,258
|
)
|
|
|
(508,582
|
)
|
Net
loss
|
|
|
(7,229,497
|
)
|
|
|
(2,488,085
|
)
|
|
|
(11,279,344
|
)
|
|
|
(17,664,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
(7,229,497
|
)
|
|
|
(2,488,085
|
)
|
|
|
(11,279,344
|
)
|
|
|
(17,664,610
|
)
|
Foreign
currency translation adjustment
|
|
|
(28,480
|
)
|
|
|
(3,056
|
)
|
|
|
(42,231
|
)
|
|
|
(1,435
|
)
|
Comprehensive
loss
|
|
$
|
(7,257,977
|
)
|
|
$
|
(2,491,141
|
)
|
|
$
|
(11,321,575
|
)
|
|
$
|
(17,666,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(1.48
|
)
|
|
|
(0.59
|
)
|
|
|
(2.42
|
)
|
|
|
(4.39
|
)
|
Discontinued
operations
|
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
|
|
(0.09
|
)
|
|
|
(0.13
|
)
|
Net
loss
|
|
$
|
(1.49
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(2.51
|
)
|
|
$
|
(4.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing net
loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,856,044
|
|
|
|
3,932,886
|
|
|
|
4,485,358
|
|
|
|
3,912,282
|
|
See
Note 3 for Additional Variable Interest Entity Disclosures.
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Professional
Diversity Network, Inc.
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(10,854,086
|
)
|
|
$
|
(17,156,028
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash used in operating activities– continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,989,125
|
|
|
|
2,294,012
|
|
Deferred
tax expense (benefit)
|
|
|
(374,536
|
)
|
|
|
(1,098,765
|
)
|
Goodwill
impairment charge
|
|
|
5,250,699
|
|
|
|
9,920,305
|
|
Stock-based
compensation expense
|
|
|
637,062
|
|
|
|
731,322
|
|
Provision
for bad debt
|
|
|
20,000
|
|
|
|
28,544
|
|
Write-off
of security deposit
|
|
|
149,292
|
|
|
|
-
|
|
Write-off
of property and equipment
|
|
|
51,804
|
|
|
|
-
|
|
Changes
in operating assets and liabilities, net of effects of discontinued operations:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
354,408
|
|
|
|
38,836
|
|
Prepaid
expenses and other current assets
|
|
|
11,033
|
|
|
|
474,711
|
|
Incremental
direct costs
|
|
|
124,134
|
|
|
|
181,788
|
|
Accounts
payable
|
|
|
345,575
|
|
|
|
(971,728
|
)
|
Accrued
expenses
|
|
|
(332,578
|
)
|
|
|
177,684
|
|
Deferred
revenue
|
|
|
(1,553,245
|
)
|
|
|
(1,062,884
|
)
|
Deferred
rent
|
|
|
(10,282
|
)
|
|
|
8,591
|
|
Customer
deposits
|
|
|
(32
|
)
|
|
|
-
|
|
Other
liabilities
|
|
|
(36,969
|
)
|
|
|
45,322
|
|
Net
cash used in operating activities– continuing operations
|
|
|
(4,228,596
|
)
|
|
|
(6,388,290
|
)
|
Net
cash provided by (used in) operating activities – discontinued operations
|
|
|
17,793
|
|
|
|
(91,173
|
)
|
Net
cash used in operating activities
|
|
|
(4,210,803
|
)
|
|
|
(6,479,463
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Costs
incurred to develop technology
|
|
|
(89,006
|
)
|
|
|
(122,597
|
)
|
Purchases
of property and equipment
|
|
|
(7,206
|
)
|
|
|
(156,704
|
)
|
Security
deposit
|
|
|
-
|
|
|
|
(18,305
|
)
|
Net
cash (used in) provided by investing activities– continuing operations
|
|
|
(96,213
|
)
|
|
|
(297,606
|
)
|
Net
cash provided by investing activities – discontinued operations
|
|
|
200,000
|
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
103,787
|
|
|
|
(297,606
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from the sales of common stock
|
|
|
2,921,868
|
|
|
|
3,000,000
|
|
Payment
of offering costs
|
|
|
-
|
|
|
|
(144,000
|
)
|
Merchant
reserve
|
|
|
-
|
|
|
|
646,078
|
|
Net
cash provided by financing activities
|
|
|
2,921,868
|
|
|
|
3,502,078
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate fluctuations on cash and cash equivalents
|
|
|
(87,791
|
)
|
|
|
(831
|
)
|
Net decrease
in cash and cash equivalents
|
|
|
(1,272,939
|
)
|
|
|
(3,275,822
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
2,926,088
|
|
|
|
5,855,471
|
|
Cash
and cash equivalents, end of period
|
|
$
|
$1,653,149
|
|
|
$
|
$2,579,649
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of other cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
67,954
|
|
|
$
|
1,702
|
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
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”), Noble Voice LLC and Compliant Lead LLC (collectively,
“Noble Voice”), PDN (Hong Kong) International Education Ltd, PDN (Hong Kong) International Education Information Co.,
Ltd, and PDN (China) International Culture Development Co. Ltd, each of which is a wholly-owned subsidiary of the Company and
together provide career consultation services. In November 2017, Jiangxi PDN Culture Media Co., Ltd became our consolidated variable
interest entity (VIE). Laws and regulations of the People’s Republic of China (“PRC”) prohibit or restrict companies
with foreign ownership from certain activities and benefits including eligibility for certain government grants and certain rebates
related to commercial activities. To provide the Company the expected residual returns of the VIE, the Company, through its wholly-owned
subsidiary PDN (China) International Culture Development Co., Ltd., entered into a series of contractual arrangements with the
VIE and its registered shareholders to enable the Company, to exercise effective control over the VIE, receive substantially all
of the economic benefits and residual returns, and absorb substantially all the risks of the VIE as if it were the sole shareholder;
and have an exclusive option to purchase all of the equity interests in the VIE. Please refer to Note 3 for more details about
the VIE. 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 and Transgender (LGBT), 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 an exclusive women-only professional networking
organization, 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. The Company
established business operations in China in 2017. Our business activities, similar to those in the United States, will be focused
on providing tools, products and services in China, which will assist in personal and professional development.
On
May 25, 2018, the Company sold Noble Voice to a long-time customer of the Company and exited the business segment conducted by
Noble Voice. See Note 3 for additional information.
2.
Liquidity, Financial Condition and Management’s Plans
At
September 30, 2018, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds
from the sales of shares of common stock in the first nine months of 2018.
The
Company had an accumulated deficit of approximately $81,025,000 at September 30, 2018. During the nine months ended September
30, 2018, the Company generated a net loss from continuing operations of approximately $10,854,000, used cash in continuing
operations of approximately $4,229,000, and the Company expects that it will continue to generate operating losses for
the foreseeable future. At September 30, 2018, the Company had a cash balance of approximately $1,653,000. Total revenues were
approximately $1,895,000 and $3,052,000 for the three months ended September 30, 2018 and 2017, respectively, and approximately
$6,327,000 and $10,621,000 for the nine months ended September 30, 2018 and 2017, respectively. The Company had working capital
deficiency of approximately $2,069,000 and $1,140,000 at September 30, 2018 and December 31, 2017, respectively. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. In order to alleviate the substantial
doubt, the Company has approved and undertaken several measures.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
The
Company is closely monitoring operating costs and capital requirements. Management of the Company also made efforts in 2017 and
first three quarters of 2018 to contain and reduce cost, including implementing a new approval process over travel and
other expenses, significantly reducing the cash compensation for independent board directors, terminating non-performing employees
and eliminating certain positions, and replacing and negotiating with certain vendors. We also sold our Noble Voice business on
May 25, 2018 to reduce operating losses and cash burns. If we are still not successful in sufficiently reducing our costs,
we may then need to dispose our other assets or discontinue business lines.
On
January 29, 2018, the Company sold 380,295 shares of common stock at a price of $3.91 per share for gross proceeds of $1,486,953.
The per share purchase price reflected the closing price of the Company’s shares of common stock on January 24, 2018. The
purchaser is Mr. Shengqi Cai, an individual and a resident of the People’s Republic of China.
On
June 25, 2018, the Company sold 496,510 shares of common stock at a price of $2.89 per share for gross proceeds of $1,434,914.
The purchaser is China EWI International Finance Group Co., Limited, a limited liability company based in the People’s Republic
of China.
On
November 5, 2018, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with GNet Tech
Holdings Public Limited Company (the “GNet Tech”), a related party through one of the Company’s shareholders,
Cosmic Forward Limited (“CFL”), pursuant to which the Company issued to GNet Tech a $500,000 convertible promissory
note with an interest rate of 6% per annum (the “Note”). The Note shall mature six months after the date of issuance
(the “Maturity Date”). Pursuant to the Note Purchase Agreement and the Note, at any time on or after the Maturity
Date, at the election of the note holder, the Note will convert into the Company’s common stock (the “Common Stock”)
at a conversion price of the lower of (i) the closing price of the Common Stock on NASDAQ immediately preceding the date of issuance
or the date of conversion, as applicable, or (ii) the average closing price of the Common Stock on NASDAQ for the five trading
days immediately preceding the date of issuance or the date of conversion, as applicable (the “Minimum Price”). However,
in no event shall the conversion price be less than the Minimum Price on the date of issuance. The issuance of the Note is exempt
from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public
offering.
On
November 16, 2018, the Company entered into a revolving credit facility agreement (the “Revolving Credit Facility Agreement”)
with GNet Tech, pursuant to which GNet Tech has agreed to provide the Company with working capital to support its business. The
availability period of the Revolving Credit Facility (“RCF”) is the date of the Revolving Credit Facility Agreement
until May 31, 2020. GNet Tech agreed to provide the Company with a RCF with a maximum of GBP £1,500,000 at interest of LIBOR
rate plus 4% per annum, payable at the end of one, three or six months (specified by the Company) after the loan is drawn. The
Company shall repay the loan on May 31, 2020, or any other date which may be agreed in writing between the parties.
Management
believes that its available funds will be sufficient to meet its working capital requirements through November 2019. However,
there can be no assurances that the plans and actions proposed by management will be successful, that the Company will generate
anticipated revenues, or that unforeseen circumstances will not require additional funding sources in the future or effectuate
plans to conserve liquidity. Future efforts to raise additional funds may not be successful or they may not be available on acceptable
terms, if at all. Due to China’s foreign currency control, the Company may not be able to move money between China and the
U.S. freely. The People’s Bank of China (PBOC) and State Administration of Foreign Exchange (SAFE) regulate the flow of
foreign exchange in and out of the country. We need to get approval from the Chinese government to move money from China to the
U.S. which might take extra time. As of September 30, 2018 we had a $1,332,000 cash balance in China.
3.
Summary of Significant Accounting Policies
Basis
of Presentation
–
The accompanying unaudited interim condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for
interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States
Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for
interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive
presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the
accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring
nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods
presented.
The
accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on March 30, 2018 (the “Annual Report”),
which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis, for
the years ended December 31, 2017 and 2016. The financial information as of December 31, 2017 is derived from the audited financial
statements presented in the Annual Report. The interim results for the three and nine months ended September 30, 2018 are not
necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any future interim periods.
Use
of Estimates
–
The preparation of unaudited condensed 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 unaudited condensed 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 unaudited interim condensed 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, the valuation of stock-based compensation and the valuation
of stock warrants.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
Principles
of Consolidation
–
The accompanying unaudited condensed consolidated financial statements include the accounts
of the Company, its wholly-owned subsidiaries and its VIE, Jiangxi PDN Culture & Media Co. All significant intercompany balances
and transactions have been eliminated in consolidation.
Variable
Interest Entity – (VIE)
Financial
Information of VIE
In
November 2017, Jiangxi PDN Culture Media Co., Ltd became a consolidated VIE. Liabilities recognized as a result of consolidating
this VIE do not represent additional claims on the Company’s general assets. VIE assets can be used to settle obligations
of the primary beneficiary. The financial information of Jiangxi PDN Culture & Media Co., which was included in the accompanying
condensed financial statements, is presented as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
908
|
|
|
|
1,671
|
|
Total
assets
|
|
$
|
1,234
|
|
|
|
1,672
|
|
Total
liabilities
|
|
$
|
18
|
|
|
|
257
|
|
|
|
Three
Months Ended
|
|
|
Nine
months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Total
net revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net
loss
|
|
$
|
(23
|
)
|
|
$
|
-
|
|
|
$
|
(132
|
)
|
|
$
|
-
|
|
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.
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.
Starting
January 2, 2018, 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 press release is distributed.
Deferred
Revenue – Deferred revenue includes customer deposits received prior to performing services which are recognized as revenue
when revenue recognition criteria are met, and membership fees for annual memberships that are collected at the time of enrollment
and are recognized as revenue ratably over the 12 month membership period.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
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 in the accompanying consolidated statements of operations.
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.
Discontinued
Operations
On
May 25, 2018, the Company sold Noble Voice to a long-time customer of the Company and exited the business segment previously
conducted by Noble Voice. The sales included all property, equipment, intangible assets, and other long-term assets.
The Company retained cash, receivables, payables, and other current and non-current assets and liabilities.
The purchase price was $200,000 and the gain on the transaction was approximately $64,000.
All
historical operating results for Noble Voice are included in a loss from discontinued operations, net of tax, in the accompanying
consolidated statement of operations. During the three months ended September 30, 2018, loss from discontinued operations was
$41,000, net of tax expense of $26,000, compared to a loss of $170,000, net of tax benefit of $12,000 during same period
in the prior year. During the nine months ended September 30, 2018, loss from discontinued operations was $425,000, net
of tax benefit of $25,000 compared to a loss of $509,000, net of tax benefit of $34,000 during same period in the prior year.
Assets
and liabilities that the Company retained, which were previously reported in the Noble Voice operating segment, are now included
in current assets from discontinued operations, current liabilities from discontinued operations, and long-term liabilities
from discontinued operations. As of September 30, 2018, the current assets from discontinued operations were $194,000,
compared to $1,180,000 as of December 31, 2017. As of September 30, 2018, current liabilities from discontinued operations were
$220,000 compared to $485,000 as of December 31, 2017. As of September 30, 2018, long-term liabilities from discontinued
operations were $8,000. There were no long-term liabilities from discontinued operations as of December 31, 2017.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
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
three months ended September 30, 2018 and 2017, the Company incurred advertising and marketing expenses of approximately $565,000
and $658,000, respectively. For the nine months ended September 30, 2018 and 2017, the Company incurred advertising and marketing
expenses of approximately $1,238,000 and $2,246,000, respectively. These amounts are included in sales and marketing expenses
in the accompanying condensed consolidated statements of comprehensive loss. At September 30, 2018 and December 31, 2017, there
were no prepaid advertising expenses recorded in the accompanying condensed consolidated balance sheets.
Net
Loss per Share
–
The Company computes basic net loss per share by dividing net loss per share 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 three and nine months ended
September 30, 2018 and 2017 excludes the potentially dilutive securities summarized in the table below because their inclusion
would be anti-dilutive.
|
|
As
of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
to purchase common stock
|
|
|
170,314
|
|
|
|
170,314
|
|
Stock
options
|
|
|
499,439
|
|
|
|
284,897
|
|
Unvested
Restricted stock units
|
|
|
42,727
|
|
|
|
15,544
|
|
Unvested
restricted stock
|
|
|
9,886
|
|
|
|
2,778
|
|
Total
dilutive securities
|
|
|
722,366
|
|
|
|
473,533
|
|
Recently
Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers,” which was subsequently modified in August 2015 by ASU No. 2015-14,
“Revenue from Contracts with Customers: Deferral of the Effective Date.” As a result, the ASU No. 2014-09 is effective
retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The core principle
of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs
in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount,
timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs that
clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations
and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue
recognition criteria and other technical corrections (ASU 2016-20). Since the Company is an Emerging Growth Company “EGC”,
it will adopt the standard on January 1, 2019, using the modified retrospective transition method, which may result in a cumulative-effect
adjustment for deferred revenue to the opening balance sheet for 2019 and the restatement of the financial statements for all
prior periods presented. The Company continues to evaluate the impact of adoption of this standard on its consolidated financial
statements and disclosures.
In
February 2016, the FASB issued new lease accounting guidance ASU No. 2016-02, “Leases” (“ASU 2016-02”),
as amended by ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic
842): Targeted Improvements.” Under the new guidance, at the commencement date, lessees will be required to recognize a
lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;
and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is
largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital
and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”).
ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable,
held-to-maturity debt securities and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13
also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an
entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 is effective for public business
entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application
of the guidance permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain
cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues:
debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned
life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
ASU 2016-15 is effective for annual periods beginning after December 15, 2018 and interim periods within fiscal years beginning
after December 15, 2019. Early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces
the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity
asset transfer, other than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December
15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted using a modified
retrospective transition approach. The Company is currently assessing the impact of the adoption of this guidance on its consolidated
financial statements.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”
(“ASU 2017-01”). The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and
consolidation. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within
annual periods beginning after December 15, 2019. The Company does not expect that the ASU will have a material impact on our
financial condition or results of operations.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment,
which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment
test. Therefore, any carrying amount which exceeds the reporting unit’s fair value (up to the amount of goodwill recorded)
will be recognized as an impairment loss. The ASU is effective for annual reporting periods beginning after December 15, 2019,
including interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance.
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 eliminates
the requirement to consider “down round” features when determining whether certain equity-linked financial instruments
or embedded features are indexed to an entity’s own stock. It is effective for annual periods beginning after December 15,
2018. Early adoption is permitted. The Company does not expect that the ASU will have a material impact on our financial condition
or results of operations.
In
February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income” (“ASU 2018-02”). ASU 2018-02 allows for the reclassification of certain income tax effects related to
the Tax Cuts and Jobs Act between “Accumulated other comprehensive income” and “Retained earnings.” This
ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates
to be included in “Income from continuing operations”, even in situations where the related items were originally
recognized in “Other comprehensive loss” (rather than in “Loss from operations”). ASU 2018-02 is effective
for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early
adoption permitted. Adoption of ASU 2018-02 is to be applied either in the period of adoption or retrospectively to each period
in which the effect of the change in the tax laws or rates were recognized. The Company is evaluating the effect of this guidance.
In
June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include all share-based
payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based
payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing
share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of
a contract accounted for under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those
years, beginning after December 15, 2018. The Company does not expect that the ASU will have a material impact on our financial
condition or results of operations.
In
August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns
the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, regardless of whether
they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service
contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim
period. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements.
In
October 2018, the FASB released ASU No. 2018-17, Consolidation (ASC 810): Targeted Improvements to Related Party Guidance for
Variable Interest Entities, which improves the consistency of the application of the variable interest entity (VIE) related party
guidance for common control arrangements. The amendments require reporting entities to consider indirect interests held through
related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety
(as currently required in GAAP) when determining whether a decision-making fee is a variable interest. ASU 2018-17 will be effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is
permitted. The amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning
of the earliest period presented. The Company does not expect that the ASU will have a material impact on our financial condition
or results of operations.
4.
Capitalized Technology
Capitalized
technology, net is as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Capitalized
cost:
|
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
2,043,122
|
|
|
$
|
1,860,558
|
|
Additional
capitalized cost
|
|
|
88,868
|
|
|
|
182,564
|
|
Balance,
end of period
|
|
$
|
2,131,990
|
|
|
$
|
2,043,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
amortization:
|
|
|
|
|
|
|
|
|
Balance, beginning
of period
|
|
$
|
1,889,741
|
|
|
$
|
1,698,954
|
|
Provision
for amortization
|
|
|
54,991
|
|
|
|
190,787
|
|
Balance,
end of period
|
|
$
|
1,944,732
|
|
|
$
|
1,889,741
|
|
Capitalized
Technology, net
|
|
$
|
187,258
|
|
|
$
|
153,381
|
|
Amortization
expense were approximately $21,000 and $39,000 for the three months ended September 30, 2018 and 2017, respectively, and
approximately $55,000 and $147,000 for the nine months ended September 30, 2018 and 2017, respectively, and are recorded
in depreciation and amortization expenses in the accompanying condensed consolidated statements of operations and comprehensive
loss.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
5.
Intangible Assets
Intangible
assets, net is as follows:
September
30, 2018
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Long-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Process
|
|
|
10
|
|
|
$
|
3,970,000
|
|
|
$
|
(1,593,514
|
)
|
|
$
|
2,376,486
|
|
Paid
Member Relationships
|
|
|
5
|
|
|
|
890,000
|
|
|
|
(714,472
|
)
|
|
|
175,528
|
|
Member
Lists
|
|
|
5
|
|
|
|
8,957,000
|
|
|
|
(7,190,480
|
)
|
|
|
1,766,520
|
|
Developed
Technology
|
|
|
3
|
|
|
|
648,000
|
|
|
|
(648,000
|
)
|
|
|
-
|
|
Trade
Name/Trademarks
|
|
|
4
|
|
|
|
440,000
|
|
|
|
(440,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
$
|
14,905,000
|
|
|
$
|
(10,586,466
|
)
|
|
|
4,318,534
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,408,934
|
|
December
31, 2017
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Long-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Process
|
|
|
10
|
|
|
$
|
3,970,000
|
|
|
$
|
(1,295,764
|
)
|
|
$
|
2,674,236
|
|
Paid
Member Relationships
|
|
|
5
|
|
|
|
890,000
|
|
|
|
(580,972
|
)
|
|
|
309,028
|
|
Member
Lists
|
|
|
5
|
|
|
|
8,957,000
|
|
|
|
(5,846,931
|
)
|
|
|
3,110,069
|
|
Developed
Technology
|
|
|
3
|
|
|
|
648,000
|
|
|
|
(648,000
|
)
|
|
|
-
|
|
Trade
Name/Trademarks
|
|
|
4
|
|
|
|
440,000
|
|
|
|
(359,027
|
)
|
|
|
80,973
|
|
|
|
|
|
|
|
$
|
14,905,000
|
|
|
$
|
(8,730,694
|
)
|
|
|
6,174,306
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,264,706
|
|
Future
annual estimated amortization expense is summarized as follows:
Years
ending December 31,
|
|
|
|
2018
(three months)
|
|
$
|
591,600
|
|
2019
|
|
|
1,846,697
|
|
2020
|
|
|
397,000
|
|
2021
|
|
|
397,000
|
|
2022
|
|
|
397,000
|
|
Thereafter
|
|
|
689,237
|
|
|
|
$
|
4,318,534
|
|
Amortization
expenses of $618,000 and $670,000 were the three months ended September 30, 2018 and 2017, respectively, and $1,866,000 and $2,016,000
for the nine months ended September 30, 2018 and 2017, respectively, and are recorded in depreciation and amortization expenses
in the accompanying condensed consolidated statements of operations and comprehensive loss.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
6.
Commitments and Contingencies
Lease
Obligations
–
The Company leases office space and equipment under various operating lease agreements, including
an office for its 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.
Rent
expense, amounting to approximately $87,000 and $401,000 for the three months ended September 30, 2018 and 2017, respectively,
and approximately $495,000 and $847,000 for the nine months ended September 30, 2018 and 2017, respectively, and are included
in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.
Legal
Proceedings
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of claims
against the Company. The letter alleges that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged
conduct that caused a delay in White Winston’s ability to sell shares in the Company during a period when the Company’s
stock price was generally falling. The Company investigated White Winston’s claims and communicated to White Winston that
the Company denies liability for any such claims. White Winston filed an action, entitled White Winston Select Asset Funds, LLC
v. Professional Diversity Network, Inc., No. 18-cv-10844, on April 30, 2018 in the United States District Court for the District
of Massachusetts making similar claims and alleging that it suffered a loss of $1,708,233 as a result of the delay in selling
shares. White Winston seeks to recover compensatory damages, double or treble damages under M.G.L. ch. 93A, and costs and attorneys’
fees. White Winston informed the Company on October 23, 2018 that they cannot meet the jurisdiction requirement for federal court
and are therefore voluntarily dismissing this federal court case and re-filing a new case in state court.
NAPW
is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW with respect to
NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord is suing NAPW
for the balance of the rent due under the Lease Term – which term is less than one year remaining. The case is currently
being litigated, and we are currently in the pleadings phase of the litigation.
The
Company is a party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (U.S. Dist. Ct., N.D. Ill.),
a putative class action alleging violations of the Telephone Consumer Protection Act. A settlement has been reached and case has
been dismissed by the court. The Company believes that its practices and procedures were compliant with the Telephone Consumer
Protection Act and admitted no fault.
NAPW
and PDN are two of the named Respondents in a Superior Court of New Jersey Proceeding, and they are being sued by Shore Digital
LLC. The Petitioner in this matter, Shore Digital LLC is alleging that both NAPW and PDN are in breach of contract, and the matter
involves the payment of the entire value of the contract plus counsel feels, interests, and costs owing to the Petitioner. The
case is on-going, and discussions are taking place to assess the company’s options to settle the matter without further
litigation.
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 in June of 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 earliest stages of discovery. The potential financial impact on the Company is inherently uncertain at this point.
The
Company is a party to a proceeding captioned Jacqueline M. Jefferson v. Noble Voice, No. 440-2018-06979 (EEOC), filed with the
Equal Employment Opportunity Commission (“EEOC”) on July 10, 2018 and alleging violations of Title VII and the Equal
Pay Act of 1963, where an employee alleges she was terminated by the Company due to her age on May 25, 2018. Ms. Jefferson’s
termination was as a result of the sale of the Noble Voice business on May 25, 2018. The Company and Jacqueline Jefferson are
in the process of mediation.
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.
7.
Income Taxes
The
effective income tax rate for the three months ended September 30, 2018 and 2017 was 2.6% and 8.0%, respectively, resulting
in a $190,000, and $201,000 income tax benefit, respectively. The effective income tax rate for the nine months ended September
30, 2018 and 2017 was 4.9% and 6.2%, respectively, resulting in a $562,000 and $1,126,000 income tax benefit, respectively.
The difference in the effective income tax rate for the three and nine months ended September 30, 2018, compared to the three
and nine months ended September 30, 2017, is mainly attributable to the decrease in tax rates pursuant to the U.S. Tax Cuts and
Jobs Act, an impairment charge recognized on NAPW’s goodwill, and a change in the valuation allowance. 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 the 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 full valuation allowance
as of September 30, 2018 and December 31, 2017.
The
U.S. Tax Cuts and Jobs Act subjects a U.S. parent shareholder to current tax on its “global intangible low-taxed income”
(GILTI). We are allowed under ASC 740 to elect an accounting policy choice of either (1) treating taxes due on future U.S. inclusions
in taxable income related to GILTI as a current period expense when incurred or (2) factoring such amounts into the Company’s
measurement of its deferred taxes. Because of the complexity of these rules, and anticipated guidance from U.S. Treasury we will
continue to evaluate the impact on the Company’s financial statements. Therefore, we have not recorded any deferred taxes
related to GILTI and have not made a policy decision regarding whether to record deferred taxes on GILTI.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
8.
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
following table summarizes the Company’s stock option activity for the nine months ended September 30, 2018:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in
Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
– January 1, 2018
|
|
|
246,564
|
|
|
$
|
11.17
|
|
|
|
9.1
|
|
|
$
|
-
|
|
Granted
|
|
|
253,000
|
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled/Expired
|
|
|
(125
|
)
|
|
|
27.6
|
|
|
|
|
|
|
|
|
|
Outstanding
– September 30, 2018
|
|
|
499,439
|
|
|
$
|
6.94
|
|
|
|
9.0
|
|
|
$
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– September 30, 2018
|
|
|
251,272
|
|
|
$
|
8.49
|
|
|
|
8.8
|
|
|
$
|
2,500
|
|
On
April 19, 2018, the Company granted 75,000, 75,000, 70,000 and 30,000 stock options to Executive Chairman Jingbo Song, Non-executive
Chairman James Kirsch, CEO Michael Wang and CFO Gary Xiao, respectively, in connection with their employment agreements. On September
7, 2018, the Company granted 3,000 stock options to an employee, in connection with his employment agreement. These options had
an aggregate fair value of $547,000, using the Black-Scholes option-pricing model with the following assumptions:
Risk-free
interest rate
|
|
|
2.77%
to 2.82
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
Expected
volatility
|
|
|
97.4%
to 98.8
|
%
|
Expected
term
|
|
|
5.4
to 5.5 years
|
|
The
April 19, 2018 options granted are exercisable at an exercise price of $2.82 per share over a ten-year term and vest over two
years, with one-third vested upon grant, while the September 7, 2018 options granted are exercisable at an exercise price of $3.07
per share over a ten-year term and vest over two years, with one-third vested upon grant.
The
Company recorded non-cash compensation expense, which is included in general and administrative expenses in the accompanying condensed
consolidated statement of operations, of approximately $137,000 and $88,000 for the three months ended September 30, 2018 and
2017, respectively, and approximately $524,000 and $618,000 for the nine months ended September 30, 2018 and 2017, respectively,
related to stock option grants.
Total
unrecognized compensation expense related to unvested stock options at September 30, 2018 amounted to approximately $435,000 and
is expected to be recognized over a remaining weighted average period of 1.2 years.
Warrants
As
of September 30, 2018, there were 170,314 warrants outstanding and exercisable, with a weighted average exercise price of $32.44
per share. The weighted average remaining contractual life of the warrants at September 30, 2018 and December 31, 2017 was 2.6
and 3.3 years, respectively, and the aggregate intrinsic value was 0.
The
Company did not grant any warrants to purchase shares of common stock during the nine months ended September 30, 2018.
No
compensation cost was recognized for the three and nine months ended September 30, 2018 and 2017 pertaining to warrants.
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
Restricted
Stock and Restricted Stock Units
During
the first nine months of 2018, the Company granted 42,727 restricted stock units (“RSUs”) to certain Board members
and 9,886 restricted stock to senior management. The RSUs vest one year after they were awarded, subject to continued service
on the vesting date. The RSUs have no voting or dividend rights. The fair value of the common stock on the dates of grant were
$2.82 and $3.07 per share, based upon the closing market price on the grant dates. The aggregate grant date fair value of the
combined awards amounted to $154,000.
A
summary of the restricted stock award activity for the nine months ended September 30, 2018 is as follows:
|
|
Number
of
Shares
|
|
|
|
|
|
Unvested
Outstanding at December 31, 2017
|
|
|
15,544
|
|
Granted
|
|
|
52,613
|
|
Forfeited
|
|
|
-
|
|
Vested
|
|
|
(15,544
|
)
|
Unvested
Outstanding at September 30, 2018
|
|
|
52,613
|
|
On
June 26, 2017, the Company granted 15,544 RSUs to certain Board members. The RSUs vested on June 28, 2018. The RSUs have no voting
or dividend rights. The fair value of the common stock on the date of grant was $7.72 per share, based upon the closing market
price on the grant date. The aggregate grant date fair value of the combined awards amounted to $120,000.
The
Company recorded non-cash compensation expenses of approximately $34,000 and $58,000 for the three months ended September
30, 2018 and 2017, respectively, and approximately $113,000 and $113,000 for the nine months ended September 30, 2018 and 2017,
respectively, related to restricted stock grants.
Total
unrecognized compensation expense related to unvested restricted stock and unvested restricted stock units at September 30, 2018
amounts to approximately $101,000 and is expected to be recognized over a weighted average period of 0.5 year.
9.
Segment Information
Beginning
on May 26, 2018, the Company operates in the following segments: (A) United States: (i) PDN Network and (ii) NAPW Network, and
(B) China Operations. The segments are categorized based on their business activities and organization. Prior to May 26, 2018,
the Company operated in the following segments: (A) United States: (i) PDN Network, (ii) NAPW Network, and (B) China Operations.
The following tables present key financial information of the Company’s reportable segments as of and for the three and
nine months ended September 30, 2018 and 2017:
|
|
Three
Months Ended September 30, 2018
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
NAPW
Network
|
|
|
China
Operations
|
|
|
Corporate
Overhead
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
-
|
|
|
$
|
1,058,443
|
|
|
$
|
53,599
|
|
|
$
|
-
|
|
|
$
|
1,112,042
|
|
Recruitment
services
|
|
|
705,040
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
705,040
|
|
Products
sales and other
|
|
|
-
|
|
|
|
3,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,180
|
|
Consumer
advertising and marketing solutions
|
|
|
74,360
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,360
|
|
Total
revenues
|
|
|
779,400
|
|
|
|
1,061,623
|
|
|
|
53,599
|
|
|
|
-
|
|
|
|
1,894,622
|
|
(Loss)
income from continuing operations
|
|
|
67,617
|
|
|
|
(6,163,059
|
)
|
|
|
(448,714
|
)
|
|
|
(859,737
|
)
|
|
|
(7,403,893
|
)
|
Depreciation
and amortization
|
|
|
15,757
|
|
|
|
631,485
|
|
|
|
2,861
|
|
|
|
-
|
|
|
|
650,103
|
|
Income
tax expense (benefit)
|
|
|
6,510
|
|
|
|
(269,371
|
)
|
|
|
-
|
|
|
|
72,913
|
|
|
|
(189,950
|
)
|
Net
(loss) income from continuing operations
|
|
|
66,807
|
|
|
|
(5,893,686
|
)
|
|
|
(429,233
|
)
|
|
|
(932,650
|
)
|
|
|
(7,188,762
|
)
|
Capital
expenditures
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,639
|
)
|
|
|
-
|
|
|
|
(3,639
|
)
|
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
|
|
Nine
Months Ended September 30, 2018
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
NAPW
Network
|
|
|
China
Operations
|
|
|
Corporate
Overhead
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
-
|
|
|
$
|
3,878,875
|
|
|
$
|
181,114
|
|
|
$
|
-
|
|
|
$
|
4,059,989
|
|
Recruitment
services
|
|
|
2,018,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,018,832
|
|
Products
sales and other
|
|
|
-
|
|
|
|
13,197
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,197
|
|
Education
and training
|
|
|
-
|
|
|
|
-
|
|
|
|
16,048
|
|
|
|
-
|
|
|
|
16,048
|
|
Consumer
advertising and marketing solutions
|
|
|
218,637
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
218,637
|
|
Total
revenues
|
|
|
2,237,469
|
|
|
|
3,892,072
|
|
|
|
197,162
|
|
|
|
-
|
|
|
|
6,326,703
|
|
Loss
from continuing operations
|
|
|
15,858
|
|
|
|
(7,360,589
|
)
|
|
|
(1,273,897
|
)
|
|
|
(2,850,279
|
)
|
|
|
(11,468,907
|
)
|
Depreciation
and amortization
|
|
|
49,722
|
|
|
|
1,926,366
|
|
|
|
13,037
|
|
|
|
-
|
|
|
|
1,989,125
|
|
Income
tax expense (benefit)
|
|
|
1,832
|
|
|
|
(408,375
|
)
|
|
|
2,265
|
|
|
|
(158,137
|
)
|
|
|
(562,415
|
)
|
Net
loss from continuing operations
|
|
|
31,183
|
|
|
|
(6,952,214
|
)
|
|
|
(1,240,913
|
)
|
|
|
(2,692,142
|
)
|
|
|
(10,854,086
|
)
|
Capital
expenditures
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,206
|
)
|
|
|
-
|
|
|
|
(7,206
|
)
|
|
|
September
30, 2018
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339,451
|
|
Intangible
assets, net
|
|
|
90,400
|
|
|
|
4,318,534
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,408,934
|
|
Assets
from continuing operations
|
|
|
1,542,973
|
|
|
|
5,423,600
|
|
|
|
1,564,863
|
|
|
|
-
|
|
|
|
8,531,436
|
|
|
|
Three
Months Ended September 30, 2017
|
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
|
NAPW
Network
|
|
|
|
China
Operations
|
|
|
|
Corporate
Overhead
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
-
|
|
|
$
|
2,204,909
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,204,909
|
|
Recruitment
services
|
|
|
694,454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
694,454
|
|
Products
sales and other
|
|
|
-
|
|
|
|
18,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,285
|
|
Education
and training
|
|
|
-
|
|
|
|
-
|
|
|
|
68,890
|
|
|
|
-
|
|
|
|
68,890
|
|
Consumer
advertising and marketing solutions
|
|
|
65,188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,188
|
|
Total
revenues
|
|
|
759,642
|
|
|
|
2,223,194
|
|
|
|
68,890
|
|
|
|
-
|
|
|
|
3,051,726
|
|
(Loss)
income from continuing operations
|
|
|
40,429
|
|
|
|
(1,219,722
|
)
|
|
|
(348,630
|
)
|
|
|
(1,000,362
|
)
|
|
|
(2,528,285
|
)
|
Depreciation
and amortization
|
|
|
13,213
|
|
|
|
740,489
|
|
|
|
3,442
|
|
|
|
-
|
|
|
|
757,144
|
|
Income
tax expense (benefit)
|
|
|
3,283
|
|
|
|
(93,955
|
)
|
|
|
(43,043
|
)
|
|
|
(67,408
|
)
|
|
|
(201,123
|
)
|
Net
(loss) income from continuing operations
|
|
|
51,263
|
|
|
|
(1,125,767
|
)
|
|
|
(310,269
|
)
|
|
|
(932,954
|
)
|
|
|
(2,317,727
|
)
|
Capital
expenditures
|
|
|
93,676
|
|
|
|
-
|
|
|
|
12,356
|
|
|
|
-
|
|
|
|
106,032
|
|
|
|
Nine
Months Ended September 30, 2017
|
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
|
NAPW
Network
|
|
|
|
China
Operations
|
|
|
|
Corporate
Overhead
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
-
|
|
|
$
|
7,465,202
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,465,202
|
|
Recruitment
services
|
|
|
1,977,101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,977,101
|
|
Products
sales and other
|
|
|
-
|
|
|
|
91,226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,226
|
|
Education
and training
|
|
|
-
|
|
|
|
-
|
|
|
|
898,584
|
|
|
|
-
|
|
|
|
898,584
|
|
Consumer
advertising and marketing solutions
|
|
|
189,217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
189,217
|
|
Total
revenues
|
|
|
2,166,318
|
|
|
|
7,556,428
|
|
|
|
898,584
|
|
|
|
-
|
|
|
|
10,621,330
|
|
(Loss)
income from continuing operations
|
|
|
(66,187
|
)
|
|
|
(13,185,268
|
)
|
|
|
(286,957
|
)
|
|
|
(4,747,737
|
)
|
|
|
(18,286,149
|
)
|
Depreciation
and amortization
|
|
|
67,099
|
|
|
|
2,220,806
|
|
|
|
6,107
|
|
|
|
-
|
|
|
|
2,294,012
|
|
Income
tax expense (benefit)
|
|
|
(3,422
|
)
|
|
|
(831,178
|
)
|
|
|
-
|
|
|
|
(291,620
|
)
|
|
|
(1,126,220
|
)
|
Net
(loss) income from continuing operations
|
|
|
(50,859
|
)
|
|
|
(12,354,090
|
)
|
|
|
(294,962
|
)
|
|
|
(4,456,117
|
)
|
|
|
(17,156,028
|
)
|
Capital
expenditures
|
|
|
100,823
|
|
|
|
10,646
|
|
|
|
48,060
|
|
|
|
-
|
|
|
|
159,529
|
|
Professional
Diversity Network, Inc.
|
Condensed
Consolidated Notes to Financial Statements (Unaudited)
|
|
|
December
31, 2017
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
5,250,699
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,590,150
|
|
Intangible
assets, net
|
|
|
90,400
|
|
|
|
6,174,306
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,264,706
|
|
Assets
from continuing operations
|
|
|
1,726,061
|
|
|
|
12,889,367
|
|
|
|
3,056,281
|
|
|
|
-
|
|
|
|
17,671,709
|
|
10.
Subsequent Events
The
Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the condensed
consolidated financial statements were issued for potential recognition or disclosure. On November 5, 2018, the Company entered
into a note purchase agreement (the “Note Purchase Agreement”) with GNet Tech Holdings Public Limited Company (the
“GNet Tech”), pursuant to which the Company issued to GNet Tech a $500,000 convertible promissory note with an interest
rate of 6% per annum (the “Note”). The Note shall mature six months after the date of issuance (the “Maturity
Date”). Pursuant to the Note Purchase Agreement and the Note, at any time on or after the Maturity Date, at the election
of the note holder, the Note will convert into the Company’s common stock (the “Common Stock”) at a conversion
price of the lower of (i) the closing price of the Common Stock on NASDAQ immediately preceding the date of issuance or the date
of conversion, as applicable, or (ii) the average closing price of the Common Stock on NASDAQ for the five trading days immediately
preceding the date of issuance or the date of conversion, as applicable (the “Minimum Price”). However, in no event
shall the conversion price be less than the Minimum Price on the date of issuance. The issuance of the Note is exempt from registration
pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering.
On November 16, 2018, the Company entered
into a revolving credit facility agreement (the “Revolving Credit Facility Agreement”) with GNet Tech, pursuant to
which GNet Tech has agreed to provide the Company with working capital to support its business. The availability period of the
Revolving Credit Facility (“RCF”) is the date of the Revolving Credit Facility Agreement until May 31, 2020. GNet
Tech agreed to provide the Company with a RCF with a maximum of GBP £1,500,000 at interest of LIBOR rate plus 4% per annum,
payable at the end of one, three or six months (specified by the Company) after the loan is drawn. The Company shall repay the
loan on May 31, 2020, or any other date which may be agreed in writing between the parties.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Unless
we specify otherwise, all references in this Quarterly Report on Form 10-Q (the “
Quarterly Report
”) to “PDN,”
“the Company,” “we,” “our,” and “us” refer to Professional Diversity Network,
Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and the related notes thereto in Item 1, “Financial
Statements,” in Part I of this Quarterly Report. 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 Quarterly Report.
Overview
We
are an operator of professional networks with a focus on diversity, employment, education and training. We use the term “diversity”
(or “diverse”) to describe communities, or “affinities,” that are distinct based on a wide array of criteria,
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 and
Transgender (LGBT+).
We
operated in four 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 employers
looking to hire members of such groups, (ii) National Association of Professional Women (“
NAPW Network
”), a
women-only professional networking organization, (iii) Noble Voice operations (“
Noble Voice
”) until May 25,
2018, a career consultation and lead generation service, and (iv) China operations (
“China Operations”
),
which focuses on providing tools, products and services in China which will assist women, students and business professionals
in personal and professional development.
On
May 25, 2018, the Company sold Noble Voice to a long-time customer of the Company and exited the business segment. The Company
retained all receivables and payables prior to the May 25, 2018 closing date and as a result of this divestiture, ceased operating
losses on that division immediately upon the sale. Management believes that education lead generation business is not important
to the Company’s long-term strategy and with the sale of the Noble Voice division, the Company is now able to focus on executing
its long term plan for its PDN jobs recruitment division and NAPW.
Our
value proposition is simple: (i) we provide a robust online and in-person network for our women members to make professional and
personal connections for our diverse audience of women: African Americans, Hispanics, Asians, Veterans, individuals with disabilities
and members of the gay community (with the ability to roll out to our other affinities); (ii) we assist our registered users,
or members, in their efforts to connect with like-minded individuals and identify career opportunities within the network; (iii)
we help employers address their workforce diversity needs by connecting them with the right candidates; and (iv) we leverage our
U.S. expertise and China connections to deliver these values to China, one of the world’s fastest-growing markets for professional
networking.
In
January of 2017, the Company established PDN Hong Kong through its two wholly-owned subsidiaries there and in March of 2017 the
Company established PDN China through its subsidiary there. We are currently executing our strategic plan to build in China entirely
new networking, training and education businesses. We believe that coupling the Company’s expertise in networking and careers
with our Chinese executives’ expertise in the China market will provide us with an opportunity for success with our overseas
expansion. During the first two quarters of 2017, we held seven events as part of our education and training business line’s
“Shared Economy” summit series, attracting over 7,800 paid attendees. Additionally, during the second quarter of 2017,
we held a selective marketing event to introduce IAW, the PDN China women’s networking business.
In
the third quarter of 2017, PDN China began to transact IAW annual memberships in China, ranging from RMB 20,000 to RMB 200,000
(approximately $3,000 to $30,000). Additionally IAW China held its first IAW VIP China event at the Women’s Forum Global
Meeting, in Paris, France. Also, on December 2, 2017, PDN China held its largest education and training event of the year. The
event, “The International Capital Leadership Summit”, took place in Beijing, China. Among its many notable speakers
was Mr. Bruce Aust, Vice Chairman of the Nasdaq Exchange, who was featured at the event. In the fourth quarter of 2017, PDN China
began to transact annual business club memberships in China, ranging from RMB 20,000 to RMB 100,000 (approximately $3,000 to $15,000).
Through
the third quarter of 2018, our PDN Network, NAPW Network, and China Operations businesses represented 41.2%, 56.0%, and 2.8% of
our revenues, respectively. As of September 30, 2018, we had approximately 10.7 million registered users in our PDN Network and
approximately 954,000 registered users, or members, in the NAPW Network. 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
customers.
Sources
of Revenue
We
generate revenue from (i) paid membership subscriptions and related services, (ii) recruitment services, (iii) product sales,
(iv) education and training and (v) consumer advertising and consumer marketing solutions. The following table sets forth our
revenues from each product as a percentage of total revenue for the periods presented. The period-to-period comparison of financial
results is not necessarily indicative of future results.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Percentage
of revenue by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
|
58.7
|
%
|
|
|
72.3
|
%
|
|
|
64.1
|
%
|
|
|
70.3
|
%
|
Recruitment
services
|
|
|
37.2
|
%
|
|
|
22.7
|
%
|
|
|
31.9
|
%
|
|
|
18.6
|
%
|
Products
sales and other
|
|
|
0.2
|
%
|
|
|
0.6
|
%
|
|
|
0.2
|
%
|
|
|
0.8
|
%
|
Education
and training
|
|
|
-
|
%
|
|
|
2.3
|
%
|
|
|
0.3
|
%
|
|
|
8.5
|
%
|
Consumer
advertising and consumer marketing solutions
|
|
|
3.9
|
%
|
|
|
2.1
|
%
|
|
|
3.5
|
%
|
|
|
1.8
|
%
|
Paid
Membership Subscriptions and Related Services.
Paid Membership Subscriptions and Related Services. We offer paid membership
subscriptions through our NAPW Network, a women-only professional networking organization, operated by our wholly-owned subsidiary.
Members gain access to networking opportunities through a members-only website at www.iawomen.com and “virtual”
eChapter events which occur in a webcast setting as well as through in-person networking at approximately 100 local chapters nationwide,
additional career and networking events such as the National Networking Summit Series, Power Networking Events and the PDN Network
events. NAPW members also receive ancillary (non-networking) benefits such as educational discounts, shopping, and other membership
perks. The basic package is the Initiator level, which provides online benefits only. Upgrades to an Innovator membership include
the Initiator benefits as well as membership in local chapters, and access to live in-person events. The most comprehensive
level, the Influencer, provides all the aforementioned benefits plus admission to exclusive “live” events and
expanded opportunities for marketing and promotion, including the creation and distribution of a press release, which is prepared
by professional writers and sent over major newswires. Additionally, all memberships offer educational programs with discounts
or at no cost, based on the membership level. NAPW Membership is renewable and fees are payable on an annual or monthly basis,
with the first fee payable at the commencement of the membership. NAPW Membership subscriptions represented approximately 99.7%
and 99.2%, respectively, of revenue attributable to the NAPW Network business segment for the three months ended September 30,
2018 and 2017, and 99.7% and 98.8%, respectively, for the nine months ended September 30, 2018 and 2017.
As
part of the launch of IAW in the United States, the Company began to offer a monthly membership option in January 2018, in addition
to an annual membership option. While this has increased the number of new members registering, membership revenue
is received on a monthly rather than an annual basis. The new IAW is focused on delivering member benefits and providing
value to those who join as paid members.
In
the third quarter of 2017, PDN China began to transact IAW annual memberships in China, ranging from RMB 20,000 to RMB 200,000
(approximately $3,000 to $30,000). In the fourth quarter of 2017, PDN China began to transact annual business club memberships
in China, ranging from RMB 20,000 to RMB 100,000 (approximately $3,000 to $15,000). IAW memberships comprised approximately 100%
of revenue attributable to China Operations for the three months ended September 30, 2018, and 91.9% for the nine months ended
September 30, 2018.
Recruitment
Services
. We provide recruitment services through PDN Network to medium and large employers seeking to diversify their employment
ranks. Our recruitment services include recruitment advertising, job postings, semantic search technology and paid access to,
and placement in, or advertising around our career and networking events. The majority of recruitment services revenue comes from
job recruitment advertising. We also offer to businesses subject to the regulations and requirements of the Equal Employment Opportunity
Office of Federal Contract Compliance Program (“
OFCCP
”) our OFCCP compliance product, which combines diversity
recruitment advertising with job postings and compliance services. Recruitment advertising revenue constituted approximately 90.5%
and 91.4%, respectively, of revenue attributable to the PDN Network business segment for the three months ended September 30,
2018 and 2017. For the nine months ended September 30, 2018 and 2017, recruitment advertising revenue constituted approximately
90.2% and 91.3%, respectively, of the revenue attributable to the PDN Network business segment.
Product
Sales
. We offer to new purchasers of our NAPW memberships the opportunity to purchase a commemorative wall plaque at the time
of purchase. They may purchase up to two plaques at that time. Product sales represented approximately 0.3% and 0.8%, respectively,
of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2018 and 2017, and 0.3%
and 1.2%, respectively, of revenue attributable to the NAPW Network business segment for the nine months ended September 30, 2018
and 2017.
Education
and Training
. In March of 2017 we began our China Operations by creating a Shared Economy summit series designed to provide
education and training to Chinese business people. Our initial event was a paid event which generated revenue through paid event
admission fees. Education and training represented approximately 0% and 100%, respectively, of the revenue attributable to China
Operations for the three months ended September 30, 2018 and 2017, and 8.1% and 100%, respectively, of revenue attributable to
China Operations for the nine months ended September 30, 2018 and 2017.
Consumer
Advertising and Consumer Marketing Solutions
. We work with partner organizations to provide them with integrated job
boards on their websites which offer their members or customers the opportunity to post recruitment advertising and job
openings. We generate revenue from fees charged for those postings. Consumer advertising and marketing solutions represented
approximately 9.5% and 8.6%, respectively, of the revenue attributable to the PDN Network business segment for the three months
ended September 30, 2018 and 2017. For the nine months ended September 30, 2018 and 2017, consumer advertising and consumer marketing
solutions revenue constituted approximately 9.8% and 8.7%, respectively, of the revenue attributable to the PDN Network business
segment.
Cost
of Revenue
Cost
of revenue primarily consists of costs of producing job fair and other events, revenue sharing with partner organizations, costs
of web hosting and operating our websites for the PDN Network, and costs of producing education and training events and serving
IAW members for our China business. Costs of producing wall plaques, hosting member conferences and local chapter meetings are
also included in the cost of revenue for NAPW Network.
Financial
Overview
During
the three and nine months ended September 30, 2018, we experienced losses as we continued our efforts to develop China Operations,
reduce costs and streamline our business. For the three months ended September 30, 2018, we realized a net loss from continuing
operations of approximately $7,189,000, a $4,870,000 increase from the comparable prior year period. This
increase in net loss was primarily a result of a $5,251,000 goodwill impairment charge that was recorded during third quarter
of 2018, and a decrease of $1,093,000 in revenues from membership fees, partially offset by a decrease of $926,000 in overall
general and administrative expenses, and a decrease of $622,000 in overall sales and marketing costs. For the nine months ended
September 30, 2018, we realized a net loss from continuing operations of approximately $10,854,000, a $6,302,000
decrease from the comparable prior year period. This decrease in net loss is primarily a result of a $4,669,000 decrease
in goodwill impairment charge related to our NAPW segment, a decrease of $3,362,000 in overall general and administrative expenses,
and a decrease of $2,666,000 in overall sales and marketing costs, partially offset by a decrease of $3,405,000 in revenues from
membership fees, and a decrease of $883,000 in revenues from education and training.
Key
Metrics
We
believe that one of the key metrics in evaluating and measuring our performance is the number of registered users. We define the
number of registered users as (i) the number of individual job seekers who affirmatively visited one of PDN Network’s properties,
opted into an affinity group and provided us with demographic or contact information enabling us to match them with employers
and/or jobs (PDN Network registered users); and (ii) the number of consumers who have viewed our marketing material, opted into
membership in the NAPW Network, provided demographic information and engaged in an onboarding call with a membership coordinator
(NAPW Network registered users). We believe that a higher number of registered users will result in increased sales of our products
and services, as customers will have access to a larger pool of professional talent. However, a higher number of registered users
will not immediately translate to increased revenue, as there is a lag between the time we acquire a registered user through our
lead-generation process and the time we generate revenue from a registered user by selling them one of our paid products or services.
The
following table sets forth the number of registered users on our PDN Network and total membership on our NAPW Network as of the
periods presented:
|
|
As
of September 30,
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
PDN
Network Registered Users (1)
|
|
|
10,659
|
|
|
|
9,975
|
|
|
|
6.9
|
%
|
NAPW
Network Total Membership (2)
|
|
|
954
|
|
|
|
952
|
|
|
|
0.2
|
%
|
(1)
|
The
number of registered users may be higher than the number of actual users due to various factors. For more information, see
“ Risk Factors page #18 —The reported number of our registered users is higher than the number of actual individual
users, and a substantial majority of our visits are generated by a minority of our users ”
in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Annual Report” as filed with the SEC on March
30, 2018).
|
|
|
(2)
|
Includes
both Paid Members and Unpaid Members.
|
Non-GAAP
Financial Measure
Adjusted
EBITDA
We
believe Adjusted EBITDA provides a meaningful representation of our operating performance that provides useful information to
investors regarding our financial condition and results of operations. Adjusted EBITDA is commonly used by financial analysts
and others to measure operating performance. Furthermore, management believes that this non-GAAP financial measure may provide
investors with additional meaningful comparisons between current results and results of prior periods as they are expected to
be reflective of our core ongoing business. However, while we consider Adjusted EBITDA to be an important measure of operating
performance, Adjusted EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in
isolation or as a substitute for analysis of our results as reported under GAAP. Further, Adjusted EBITDA, as we define it, may
not be comparable to EBITDA, or similarly titled measures, as defined by other companies.
The
following table provides a reconciliation of Net Loss from continuing operations to Adjusted EBITDA, the most directly comparable
GAAP measure reported in our consolidated financial statements:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Loss
from Continuing Operations
|
|
$
|
(7,189
|
)
|
|
$
|
(2,318
|
)
|
|
$
|
(10,854
|
)
|
|
$
|
(17,156
|
)
|
Stock-based
compensation expense
|
|
|
171
|
|
|
|
146
|
|
|
|
637
|
|
|
|
731
|
|
Goodwill
impairment charge
|
|
|
5,251
|
|
|
|
-
|
|
|
|
5,251
|
|
|
|
9,920
|
|
Depreciation
and amortization
|
|
|
650
|
|
|
|
757
|
|
|
|
1,989
|
|
|
|
2,294
|
|
Litigation
settlement
|
|
|
342
|
|
|
|
155
|
|
|
|
342
|
|
|
|
155
|
|
Interest
Expense
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
12
|
|
Interest
and other income
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
Income
tax expense (benefit)
|
|
|
(190
|
)
|
|
|
(201
|
)
|
|
|
(562
|
)
|
|
|
(1,126
|
)
|
Adjusted
EBITDA
|
|
$
|
(991
|
)
|
|
$
|
(1,465
|
)
|
|
$
|
(3,227
|
)
|
|
$
|
(5,179
|
)
|
Results
of Operations
Revenues
Total
Revenues
The
following tables set forth our revenues for the periods presented. The period-to-period comparison of financial results is not
necessarily indicative of future results.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
1,112
|
|
|
$
|
2,205
|
|
|
$
|
(1,093
|
)
|
|
|
(49.6
|
)%
|
Recruitment
services
|
|
|
705
|
|
|
|
694
|
|
|
|
11
|
|
|
|
1.6
|
%
|
Products
sales and other
|
|
|
3
|
|
|
|
18
|
|
|
|
(15
|
)
|
|
|
(83.3
|
)%
|
Education
and training
|
|
|
-
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
(100.0
|
)%
|
Consumer
advertising and marketing solutions
|
|
|
74
|
|
|
|
65
|
|
|
|
9
|
|
|
|
13.8
|
%
|
Total
revenues
|
|
$
|
1,894
|
|
|
$
|
3,051
|
|
|
$
|
(1,157
|
)
|
|
|
(37.9
|
)%
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
fees and related services
|
|
$
|
4,060
|
|
|
$
|
7,465
|
|
|
$
|
(3,405
|
)
|
|
|
(45.6
|
)%
|
Recruitment
services
|
|
|
2,019
|
|
|
|
1,976
|
|
|
|
42
|
|
|
|
2.1
|
%
|
Products
sales and other
|
|
|
13
|
|
|
|
91
|
|
|
|
(78
|
)
|
|
|
(85.7
|
)%
|
Education
and training
|
|
|
16
|
|
|
|
899
|
|
|
|
(883
|
)
|
|
|
(98.2
|
)%
|
Consumer
advertising and marketing solutions
|
|
|
219
|
|
|
|
189
|
|
|
|
30
|
|
|
|
15.9
|
%
|
Total
revenues
|
|
$
|
6,327
|
|
|
$
|
10,620
|
|
|
$
|
(4,294
|
)
|
|
|
(40.4
|
)%
|
Total
revenues decreased $1,157,000, or 37.9% for the three months ended September 30, 2018, compared to the same prior year period,
and $4,294,000, or 40.4%, for the nine months ended September 30, 2018, compared to the same prior year period, due primarily
to management’s focus on reduction in sales and operations workforce as a means to cost savings and rebranding the business.
Revenues
by Segment
The
following table sets forth each operating segment’s revenues for the periods presented. The period-to-period comparison
is not necessarily indicative of future results.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
1,062
|
|
|
$
|
2,223
|
|
|
$
|
(1,161
|
)
|
|
|
(52.2
|
)%
|
PDN
Network
|
|
|
779
|
|
|
|
759
|
|
|
|
20
|
|
|
|
2.6
|
%
|
China
|
|
|
54
|
|
|
|
69
|
|
|
|
(15
|
)
|
|
|
(21.7
|
)%
|
Total
revenues
|
|
$
|
1,895
|
|
|
$
|
3,051
|
|
|
$
|
(1,157
|
)
|
|
|
(37.9
|
)%
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
3,892
|
|
|
$
|
7,556
|
|
|
$
|
(3,664
|
)
|
|
|
(48.5
|
)%
|
PDN
Network
|
|
|
2,237
|
|
|
|
2,165
|
|
|
|
72
|
|
|
|
3.2
|
%
|
China
|
|
|
197
|
|
|
|
899
|
|
|
|
(702
|
)
|
|
|
(78.1
|
)%
|
Total
revenues
|
|
$
|
6,326
|
|
|
$
|
10,620
|
|
|
$
|
(4,294
|
)
|
|
|
(40.4
|
)%
|
During
the three months ended September 30, 2018, our NAPW Network generated $1,062,000 in revenue from membership fees and related services
and product sales, compared to $2,223,000 for the same period in the prior year, a decrease of $1,161,000, or 52.2%. During the
nine months ended September 30, 2018, our NAPW Network generated $3,892,000 in revenue from membership fees and related services
and product sales and other, compared to $7,556,000 for the same period in the prior year, a decrease of $3,664,000, or 48.5%.
The decrease was mainly attributable to reductions in NAPW sales staff from 37 sales representatives on average during
the first nine months of 2017 to 17 sales representatives on average during the first nine months of 2018. As a part of rebranding
the NAPW business, the Company also re-tooled its lead-generation and other marketing activities.
During
the three months ended September 30, 2018, our PDN Network generated $779,000 in revenue, compared to $759,000 for the same period
in the prior year, an increase of $20,000, or 2.6%. During the nine months ended September 30, 2018, our PDN Network generated
$2,237,000 in revenue, compared to $2,165,000 for the same period in the prior year, an increase of $72,000, or 3.3%. The increase
was a result of improved operational efficiencies and improvement in concerted efforts in sales growth, client retention, and
customer satisfaction
During
the three months ended September 30, 2018, our China Operations generated $54,000 in revenue, compared to $69,000
for the same period in the prior year, a decrease of $15,000 or 21.7%. During the nine months ended September 30, 2018, our
China Operations generated $197,000 in revenue, compared to $899,000 for the same period in the prior year, a decrease
of $702,000 or 78.1%. We did not hold any major paid events in the first nine months of 2018 as most our efforts were devoted
to future business development.
Costs
and Expenses
The
following tables set forth our costs and expenses for the periods presented. The period-to-period comparison of financial results
is not necessarily indicative of future results.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
292
|
|
|
$
|
357
|
|
|
$
|
(65
|
)
|
|
|
(18.2
|
)%
|
Sales
and marketing
|
|
|
977
|
|
|
|
1,599
|
|
|
|
(622
|
)
|
|
|
(38.9
|
)%
|
General
and administrative
|
|
|
1,786
|
|
|
|
2,712
|
|
|
|
(926
|
)
|
|
|
(34.1
|
)%
|
Litigation
settlement
|
|
|
342
|
|
|
|
155
|
|
|
|
187
|
|
|
|
120.6
|
%
|
Goodwill
impairment charge
|
|
|
5,251
|
|
|
|
-
|
|
|
|
5,251
|
|
|
|
100.0
|
%
|
Depreciation
and amortization
|
|
|
650
|
|
|
|
757
|
|
|
|
(107
|
)
|
|
|
(14.1
|
)%
|
Total
costs and expenses
|
|
$
|
9,298
|
|
|
$
|
5,580
|
|
|
$
|
(3,718
|
)
|
|
|
(66.6
|
)%
|
During
the three months ended September 30, 2018, total costs and expenses were $9,298,000, compared to $5,580,000 for same period in
the prior year, an increase of $3,718,000 or 66.6%. We recorded a $5,251,000 goodwill impairment charge in our NAPW segment in
September 2018. Excluding goodwill impairment charge, the total costs and expenses were $4,047,000, a decrease of $1,533,000 compared
to the same period in the prior year, primarily due to $926,000 or 34.1% decrease in general and administrative expenses
and a $622,000 or 38.9% decrease in sales and marketing expenses.
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
917
|
|
|
$
|
1,214
|
|
|
$
|
(297
|
)
|
|
|
(24.5
|
)%
|
Sales
and marketing
|
|
|
3,094
|
|
|
|
5,760
|
|
|
|
(2,666
|
)
|
|
|
(46.3
|
)%
|
General
and administrative
|
|
|
6,202
|
|
|
|
9,564
|
|
|
|
(3,362
|
)
|
|
|
(35.2
|
)%
|
Litigation
settlement
|
|
|
342
|
|
|
|
155
|
|
|
|
187
|
|
|
|
120.6
|
%
|
Goodwill
impairment charge
|
|
|
5,251
|
|
|
|
9,920
|
|
|
|
(4,669
|
)
|
|
|
(47.1
|
)%
|
Depreciation
and amortization
|
|
|
1,989
|
|
|
|
2,294
|
|
|
|
(305
|
)
|
|
|
(13.3
|
)%
|
Total
costs and expenses
|
|
$
|
17,795
|
|
|
$
|
28,907
|
|
|
$
|
(11,112
|
)
|
|
|
(38.4
|
)%
|
During
the nine months ended September 30, 2018, total costs and expenses were $17,795,000, compared to $28,907,000 for the same period
in the prior year, a decrease of $11,112,000, or 38.4%. The decrease is primarily a result of a $4,669,000 or 47.1% decrease in
goodwill impairment charge related to our NAPW segment, a $3,362,000 or 35.2% decrease in general and administrative expenses,
and a $2,666,000 or 46.3% decrease in sales and marketing expenses.
Operating
Expenses
Cost
of revenue
: Cost of revenues decreased during the three months ended September 30, 2018 to $292,000, compared to $357,000
for the same period in the prior year, a decrease of $65,000, or 18.2%. During nine months ended September 30, 2018, cost of revenues
was $917,000, compared to $1,214,000 for the same period in the prior year, a reduction of $297,000 or 24.5%. The decrease
is
in tandem
with lower revenues.
Sales
and marketing expenses
: Sales and marketing expenses during the three months ended September 30, 2018 were $977,000,
compared to $1,599,000 for the same period in the prior year, a decrease of $622,000, or 38.9%. The decrease was mostly attributable
to a $239,000 decrease in personnel cost due to sales force reduction in our NAPW segment, a $154,000 reduction in sales commission
expenses, and a $153,000 reduction in lead spending in our NAPW segment. Sales and marketing expenses for the nine months
ended September 30, 2018 were $3,094,000, compared to $5,760,000 for the same period in the prior year, a decrease of $2,666,000,
or 46.3%. The decrease was primarily due to a $962,000 reduction in lead spending in our NAPW segment, an $869,000 decrease
in personnel costs due to sales force reduction in our NAPW segment, and a $461,000 reduction in sales commission expenses.
General
and administrative expenses
: General and administrative expenses for the three months ended September 30, 2018 were
$1,786,000, compared to $2,712,000 for the same period in the prior year, a decrease of $926,000 or 34.1%. The decrease was mainly
attributable to a $480,000 reduction in personnel costs primarily due to a large reduction in force in our NAPW
segment in September 2017, a $314,000 reduction in rent expenses because we centralized our US operations in Chicago and
executed a work-from-home model for certain employees at our NAPW segment in 2018, and a $115,000 decrease in compensation
to our independent board directors. General and administrative expenses for the nine months ended September 30, 2018 were $6,602,000,
compared to $9,564,000 for the same period in the prior year, a decrease of $3,362,000 or 35.2%. The decrease was mainly attributable
to an $890,000 reduction in legal expenses, an $888,000 reduction in personnel costs, a $366,000 decrease in compensation
to our independent board directors, a $352,000 reduction in rent expenses, and a $263,000 decrease in consulting fees.
Litigation
settlement
: Litigation settlement for the three and nine months ended September 30, 2018 represents primarily potential settlement
accrued for various cases. Litigation settlement for the three and nine months ended September 30, 2017 represents primarily $146,000
in expenses that were accrued for the potential back-pay related to the “NLRB” legal proceeding (please refer to “Legal
Proceedings” for details in the previous 10-Q). Since then, the Company settled its “NLRB” litigation and paid
full settlement amount of $139,000 as of September 30, 2018.
Goodwill
impairment charge
: As a result of the recurring operating losses incurred in NAPW since its acquisition in September 2014,
the Company undertook a review of the carrying amount of its goodwill as of June 30, 2017, and as of September 30, 2018. Accordingly,
the Company recorded a goodwill impairment charge of $9,920,000 for the nine months ended September 30, 2017, and $5,251,000 for
the three and nine months ended September 30, 2018.
Depreciation
and amortization expenses
: Depreciation and amortization expenses for the three months ended September 30, 2018
were $650,000, compared to $757,000 for the same period in the prior year, a decrease of $107,000 or 14.1%. Depreciation
and amortization expenses for the nine months ended September 30, 2018 were $1,989,000, compared to $2,294,000 for the same period
in the prior year, a decrease of $305,000 or 13.3%. The decrease for the three and nine months ended September 30, 2018 was mainly
attributable to a reduction in amortization expenses resulting from the amortization of the intangible assets as listed in Note
5 on page 10 of this quarterly report.
Costs
and Expenses by Segment
The
following table sets forth each operating segment’s costs and expenses for the periods presented. The period-to-period comparison
is not necessarily indicative of future results.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
7,225
|
|
|
$
|
3,443
|
|
|
$
|
3,782
|
|
|
|
109.8
|
%
|
PDN
Network
|
|
|
712
|
|
|
|
719
|
|
|
|
(7
|
)
|
|
|
(1.0
|
)%
|
China
|
|
|
502
|
|
|
|
418
|
|
|
|
85
|
|
|
|
20.4
|
%
|
Corporate
Overhead
|
|
|
860
|
|
|
|
1,000
|
|
|
|
(141
|
)
|
|
|
(14.1
|
)%
|
Total
costs and expenses
|
|
$
|
9,299
|
|
|
$
|
5,580
|
|
|
$
|
3,719
|
|
|
|
66.6
|
%
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
11,253
|
|
|
$
|
20,742
|
|
|
$
|
(9,489
|
)
|
|
|
(45.7
|
)%
|
PDN
Network
|
|
|
2,222
|
|
|
|
2,233
|
|
|
|
(11
|
)
|
|
|
(0.5
|
)%
|
China
|
|
|
1,471
|
|
|
|
1,186
|
|
|
|
286
|
|
|
|
24.1
|
%
|
Corporate
Overhead
|
|
|
2,850
|
|
|
|
4,748
|
|
|
|
(1,897
|
)
|
|
|
(40.0
|
)%
|
Total
costs and expenses
|
|
$
|
17,796
|
|
|
$
|
28,907
|
|
|
$
|
(11,111
|
)
|
|
|
(38.4
|
)%
|
NAPW
Network:
During the three months ended September 30, 2018, total costs and expenses
in our NAPW segment were $7,225,000, compared to $3,443,000 for the same period in the prior year, an increase of $3,782,000 or
109.8%. The increase was primarily due to a $5,251,000 goodwill impairment charge recorded on September 30, 2018. Excluding this
non-recurring and non-cash expense, the total costs and expenses were $1,974,000 for the three months ended September 30, 2018,
a decrease of $1,469,000 compared to the same period in the prior year. The decrease was a result of continued cost cutting efforts
that began in the third quarter of 2017, mainly reduction in the work force that resulted in a $423,000 decrease in personnel
costs, a $327,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home
model for certain employees at our NAPW segment in 2018, a $276,000 reduction in lead generation spending, a $140,000 decrease
in sales commission expense, and a $61,000 decrease in consulting and outside services costs. During the nine months ended September
30, 2018, total costs and expenses were $11,253,000, compared to $20,742,000 for the same period in the prior year, a decrease
of $9,489,000 or 45.7%. The decrease was a result of a $4,669,000 decrease in goodwill impairment charge, a $1,835,000 reduction
in personnel costs, a $962,000 savings in lead generation spending, a $462,000 reduction in sales commissions expenses,
a $388,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home
model for certain employees at our NAPW segment in 2018, a $258,000 decrease in consulting and outside services costs,
and a $156,000 decrease in credit card fees.
PDN
Network:
During the three months ended September 30, 2018, total costs and expenses in our PDN segment were flat compared
to the same period in the prior year, totaling $712,000, and $719,000, respectively. During the nine months ended September 30,
2018, total costs and expenses were also flat compared to the same period in the prior year, totaling $2,222,000, and $2,233,000,
respectively.
China
Operations:
During the three months ended September 30, 2018, total costs and expenses in our China operations were $502,000,
compared to $418,000 for the same period in the prior year, an increase of $85,000 or 20.4%. The primary reason for the increase
was a $61,000 increase in marketing and advertising expenses. During the nine months ended September 30, 2018, total costs
and expenses were $1,471,000, compared to $1,186,000 for the same period in the prior year, an increase of $286,000 or 24.1%.
The increase was primarily driven by a $290,000 increase in personnel costs and a $102,000 increase in marketing and advertising
costs, partially offset by lower cost of sales due to a reduction in revenue.
Corporate
Overhead:
During the three months ended September 30, 2018, total costs and expenses incurred by our Corporate Overhead segment
were $860,000, compared to $1,000,000 for the same period in the prior year, a decrease of $141,000 or 14.1%. As we continue our
efforts to reduce corporate level expenses, during the third quarter of 2018, we reduced compensation to our independent
board directors by $115,000, and corporate personnel cost by $104,000. During the nine months ended September 30, 2018, total
costs and expenses were $2,850,000, compared to $4,748,000 during the same period in the prior year, a decrease of $1,897,000
or 40.0%. Such a large decrease is a result of a decrease in legal costs by $974,000, reduction in compensation to our
independent board directors by $366,000, reduction of $200,000 in corporate personnel costs, a $94,000 reduction
of stock-based compensation, an $89,000 decrease of audit and accounting fees, and an $85,000 reduction in corporate
travel costs.
Income
Tax Expense (Benefit)
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(190
|
)
|
|
$
|
(201
|
)
|
|
$
|
11
|
|
|
|
(5.5
|
)%
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Total
|
|
$
|
(562
|
)
|
|
$
|
(1,126
|
)
|
|
$
|
564
|
|
|
|
(50.1
|
)%
|
The
effective income tax rate for the three months ended September 30, 2018 and 2017 was 2.6% and 8.0%, respectively, resulting
in a $190,000, and $201,000 income tax benefit, respectively. The effective income tax rate for the nine months ended September
30, 2018 and 2017 was 4.9% and 6.2%, respectively, resulting in a $562,000 and $1,126,000 income tax benefit, respectively.
The difference in the effective income tax rate for the three and nine months ended September 30, 2018, compared to the three
and nine months ended September 30, 2017, is mainly attributable to the decrease in tax rates pursuant to the U.S. Tax Cuts and
Jobs Act, an impairment charge recognized on NAPW’s goodwill, change in the valuation allowance and the foreign tax rate
differential due to the Company’s China Operations. 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 September
30, 2018 and December 31, 2017.
Net
Loss from Continuing Operations by Segment
The
following table sets forth each operating segment’s net loss from continuing operations for the periods presented. The period-to-period
comparison is not necessarily indicative of future results.
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
(5,894
|
)
|
|
$
|
(1,126
|
)
|
|
$
|
(4,768
|
)
|
|
|
423.5
|
%
|
PDN
Network
|
|
|
67
|
|
|
|
51
|
|
|
|
16
|
|
|
|
31.2
|
%
|
China
|
|
|
(429
|
)
|
|
|
(310
|
)
|
|
|
(119
|
)
|
|
|
38.4
|
%
|
Corporate
Overhead
|
|
|
(933
|
)
|
|
|
(933
|
)
|
|
|
-
|
|
|
|
0.0
|
%
|
Consolidated
Net Loss from continuing operations
|
|
$
|
(7,189
|
)
|
|
$
|
(2,318
|
)
|
|
$
|
(4,871
|
)
|
|
|
210.2
|
%
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
2018
|
|
|
2017
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
NAPW
Network
|
|
$
|
(6,952
|
)
|
|
$
|
(12,354
|
)
|
|
$
|
5,402
|
|
|
|
(43.7
|
)%
|
PDN
Network
|
|
|
31
|
|
|
|
(51
|
)
|
|
|
82
|
|
|
|
(161.2
|
)%
|
China
|
|
|
(1,241
|
)
|
|
|
(295
|
)
|
|
|
(946
|
)
|
|
|
320.7
|
%
|
Corporate
Overhead
|
|
|
(2,692
|
)
|
|
|
(4,456
|
)
|
|
|
1,764
|
|
|
|
(39.6
|
)%
|
Consolidated
Net Loss from continuing operations
|
|
$
|
(10,854
|
)
|
|
$
|
(17,156
|
)
|
|
$
|
6,302
|
|
|
|
(36.7
|
)%
|
As
the result of the factors discussed above, during the three and nine months ended September 30, 2018 we incurred a net loss
from continuing operations of $7,189,000 and $10,854,000 respectively, an increase of 210.2% and a decrease
of 36.7% from net loss from continuing operations of $2,318,000 and $17,156,000 during the three and nine months ended
September 30, 2017, respectively. The $4,871,000 increase in net loss for the three months ended September 30, 2018
was primarily driven by a $5,251,000 goodwill impairment charge for our NAPW segment that we recorded on September 30, 2018, and
a $1,161,000 decrease in revenues from membership fees, related services at our NAPW segment, partially offset by our continuous
cost cutting efforts, primarily a decrease of $926,000 in general and administrative expenses and a decrease of $622,000
in sales and marketing expenses. The $6,302,000 decrease in net loss for the nine months ended September 30, 2018 was primarily
a result of a $4,669,000 decrease in goodwill impairment charge related to our NAPW segment, a $3,362,000 decrease in general
and administrative expenses, and a $2,666,000 decrease in sales and marketing expenses, partially offset by a $4,294,000
decrease in overall revenue period-over-period, mainly a $3,664,000 reduction in NAPW segment revenues from membership fees, related
services and product sales, and a $702,000 reduction in China Operations revenues from events and IAW memberships.
NAPW
Network
. During the three and nine months ended September 30, 2018, our NAPW segment incurred a net loss of $5,894,000
and $6,952,000, respectively, compared to a net loss of $1,126,000 and $12,354,000 for the three and nine months ended
September 30, 2017, respectively. The $4,768,000 increase in net loss for the three months ended September 30, 2018
was primarily driven by a $5,251,000 goodwill impairment charge recorded on September 30, 2018, and a $1,161,000 decrease in
revenues from membership fees, related services and product sales period-over-period, partially offset by continuing decrease
in overall spending, mainly a $423,000 decrease in personnel costs due to sales force reduction, a $327,000 reduction in
rent expenses because we centralized our US operations in Chicago and executed a work-from-home model for certain employees
at our NAPW segment in 2018, and a $276,000 reduction in lead generation spending. The $5,402,000 decrease in net
loss for the nine months ended September 30, 2018 was primarily driven by a $4,669,000 decrease in goodwill impairment charge
related to our NAPW segment, and overall cost cutting efforts, mainly a $1,835,000 reduction in personnel costs, a $962,000
savings in lead generation spending, a $462,000 reduction in sales commissions expenses, a $388,000 reduction in rent expenses
because we centralized our US operations in Chicago and executed a work-from-home model for certain employees at our NAPW
segment in 2018, partially offset by a $3,664,000 decrease in revenues from membership fees, related services and product
sales period-over-period.
PDN
Network
. During the three months ended September 30, 2018, our PDN segment generated a net income of $67,000, compared
to a net income of $51,000 for the three months ended September 30, 2017. The increase in net income of $16,000 was mainly
a result of a $20,000 increase in revenue, while the overall costs and expenses decreased period-to-period by $7,000. During the
nine months ended September 30, 2018, we generated a net income of $31,000, compared to a net loss of $51,000 for
the nine months ended September 30, 2017. The increase in net income of $82,000 was primarily attributable to a $71,000
increase in revenue, a $40,000 decrease in sales and marketing expenses, and a $17,000 decrease in depreciation and
amortization expenses.
China
Operations.
During the three months ended September 30, 2018, our China Operations incurred a net loss of $429,000,
compared to a net loss of $310,000 for the comparable period in the prior year. The increase in net loss of $119,000 was
mainly a result of a $15,000 decrease in revenue, while overall expenses were higher by $85,000, mainly due to a $61,000
increase in marketing and advertising expenses. During the nine months ended September 30, 2018, we incurred a net loss of $1,241,000,
compared to a net loss of $295,000 for the prior year period. The increase in net loss of $946,000 was primarily driven by a $701,000
decrease in revenue, while overall expenses grew by $286,000, mainly due to a $290,000 increase in personnel costs and
a $102,000 increase in marketing and advertising costs, partially offset by lower cost of sales due to a reduction in revenue.
Corporate
Overhead.
During the three months ended September 30, 2018, our Corporate Overhead segment incurred same amount of
net loss of $933,000, compared to the same period ended September 30, 2017. While the overall costs of expenses
actually decreased by $141,000 period over period as we continued our efforts to reduce corporate level expenses, primarily
compensation to our independent board directors (reduction in $115,000), and corporate personnel costs (reduction in
$104,000), in the third quarter of 2018 we recorded an adjustment to income tax expenses of $73,000,
due to a change in the projected full-year tax rate. During the nine months ended September 30, 2018, we incurred a net
loss of $2,692,000, compared to a net loss of $4,456,000 for the prior year’s corresponding period. The decrease
in net loss of $1,764,000 was primarily driven by a reduction in legal costs by $974,000, reduction of compensation
to our independent board directors by $366,000, reduction in $200,000 in corporate personnel costs, $94,000 reduction
in stock-based compensation, an $89,000 decrease of audit and accounting fees, and an $85,000 reduction in
corporate travel costs.
Liquidity
and Capital Resources
The
following table summarizes our liquidity and capital resources as of September 30, 2018 and December 31, 2017, respectively, and
is intended to supplement the more detailed discussion that follows:
|
|
September
30, 2018
|
|
|
December
31,
2017
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
1,653
|
|
|
$
|
2,926
|
|
Working
(deficiency) capital
|
|
$
|
(2,069
|
)
|
|
$
|
(1,140
|
)
|
Our
principal sources of liquidity are our cash and cash equivalents, including the net proceeds from the issuances of common stock
to CFL and other investors. As of September 30, 2018 and December 31, 2017, we had working capital deficiency of approximately
$2,069,000 and $1,140,000. During the nine months ended September 30, 2018, we generated a net loss from continuing operations
of approximately $10,854,000 (including $5,251,000 goodwill impairment charge recorded during third quarter of 2018), used
cash in continuing operations of approximately $4,229,000, and we expect that we will continue to generate operating losses
for the foreseeable future.
We
are closely monitoring operating costs and capital requirements. We also had cost reductions in the areas of staffing levels
and operating budgets.
On
January 29, 2018, the Company sold 380,295 shares of common stock at a price of $3.91 per share for gross proceeds of $1,486,953.
The per share purchase price reflected the closing price of the Company’s common stock on January 24, 2018. The purchaser
is Mr. Shengqi Cai, an individual and a resident of the People’s Republic of China.
On
June 25, 2018, the Company sold 496,510 shares of common stock at a price of $2.89 per share for gross proceeds of $1,434,914.
The purchaser is China EWI International Finance Group Co., Limited, a limited liability company based in the People’s Republic
of China.
We
currently anticipate that our available funds will be sufficient to meet our working capital requirements through November of
2019. Since the Company expects that it will continue to generate operating losses for the mid-term, the Company may require additional
funding sources or need to further decrease expenses in order to conserve liquidity. Future efforts to raise additional funds
may not be successful or they may not be available on acceptable terms, if at all. In addition, due to China’s foreign currency
control, the Company may not be able to move money between China and the U.S. freely. The People’s Bank of China
(PBOC) and State Administration of Foreign Exchange (SAFE) regulate the flow of foreign exchange in and out of the country. We
need to get approval from Chinese government to move money from China to the U.S. which might take extra time.
We
collect membership fees generally at the commencement of the membership term or at renewal periods thereafter. The memberships
we sell are for one year and we defer recognition of the revenue from membership sales and renewals and recognize it ratably over
the twelve month period. Starting January 2, 2018, we also offer a monthly membership for IAW in the USA for which we collect
a fee on a monthly basis. Our PDN Network also sells recruitment services to employers, generally on a one year contract basis.
This revenue is also deferred and recognized over the life of the contract. Our payment terms for PDN Network and Noble Voice
customers range from 30 to 60 days. We consider the difference between the payment terms and payment receipts a result of transit
time for invoice and payment processing and to date have not experienced any liquidity issues as a result of the payments extending
past the specified terms. Cash and cash equivalents and short term investments consist primarily of cash on deposit with banks
and investments in money market funds, corporate and municipal debt and U.S. government and U.S. government agency securities.
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
Cash
provided by (used in) continuing operations
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(4,229
|
)
|
|
$
|
(6,388
|
)
|
Investing
activities
|
|
|
(96
|
)
|
|
|
(298
|
)
|
Financing
activities
|
|
|
2,922
|
|
|
|
3,502
|
|
Effect
of exchange rate fluctuations on cash and cash equivalents
|
|
|
(88
|
)
|
|
|
(1
|
)
|
Cash
provided by (used in) discontinued operations:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
18
|
|
|
|
(91
|
)
|
Investing
activities
|
|
|
200
|
|
|
|
-
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(1,273
|
)
|
|
$
|
(3,276
|
)
|
Net
Cash Used in Operating Activities
For
the nine months ended September 30, 2018, net cash used in operating activities in continuing operations was $4,229,000.
We had a net loss of $10,854,000, deferred tax benefit of $375,000 which was offset by non-cash NAPW goodwill impairment
charge of $5,251,000, depreciation and amortization of $1,989,000, stock-based compensation expense of $637,000, and a write off
of security deposit of $149,000. Changes in operating assets and liabilities used $1,098,000 of cash during the nine months ended
September 30, 2018, consisting primarily of decreases in deferred revenue and accrued expenses, partially offset by increases
in accounts receivable and accounts payable.
Net
cash used in operating activities in continuing operations for the nine months ended September 30, 2017 was $6,388,000. We had
a net loss of $17,156,000 during the nine months ended September 30, 2017, a deferred tax benefit of $1,099,000 which was offset
by non-cash NAPW goodwill impairment charge of $9,920,000, depreciation and amortization of $2,294,000, and stock-based compensation
expense of $731,000. Changes in operating assets and liabilities used $1,108,000 of cash during the nine months ended September
30, 2017, consisting primarily of decreases in accounts payable and deferred revenue, partially offset by increases in prepayments,
and accrued expenses.
Net
Cash (Used in) Provided by Investing Activities
Net
cash used in investing activities in continuing operations for the nine months ended September 30, 2018 was $96,000, mainly consisting
of $89,000 invested to develop technology.
Net
cash used in investing activities in continuing operations for the nine months ended September 30, 2017 was $298,000, consisting
of $157,000 invested in property and equipment, and $123,000 invested to develop new technology.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities in continuing operations during the nine months ended September 30, 2018 was $2,922,000,
consisting of $1,487,000 in gross proceeds from the January 29, 2018 issuance and sale of 380,295 shares of common stock
at a price of $3.91 per share to Mr. Shengqi Cai, an individual and a resident of the People’s Republic of China, and $1,435,000
in gross proceeds from the June 25, 2018 sale of 496,510 shares of common stock at a price of $2.89 per share to China
EWI International Finance Group Co., Limited, a limited liability company based in the People’s Republic of China.
Net
cash provided by financing activities in continuing operations during the nine months ended September 30, 2017 was $3,502,000,
consisting of $3,000,000 in gross proceeds from the January 18, 2017 issuance, $646,000 refund of merchant reserve, partially
offset by a $144,000 payment of offering costs to third-party professionals.
Net
Cash Used in Discontinued Operations
On
May 25, 2018 we sold our Noble Voice operations.
Net
cash provided by operating activities in discontinued operations for the nine months ended September 30, 2018 was $18,000.
Net cash provided by investing activities for the same period was $200,000, consisting of $200,000 in gross proceeds from the
sale of Noble Voice operations.
Net
cash used in operating activities in discontinued operations for the nine months ended September 30, 2017 was $91,000.
Off-Balance
Sheet Arrangements
Since
inception, we have not engaged in any off-balance sheet activities as defined in Regulation S-K Item 303(a)(4).
Critical
Accounting Policies and Estimates
Pursuant
to the provisions of the Jumpstart Our Business Startups Act (the “
JOBS Act
”), as an “emerging growth
company,” we may delay adoption of new or revised accounting standards applicable to public companies until the earlier
of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended
transition period for complying with such new or revised accounting standards. We have elected to take advantage of the benefits
of this extended transition period. Our consolidated financial statements may therefore not be comparable to those of companies
that comply with such new or revised accounting standards. Upon issuance of new or revised accounting standards that apply to
our consolidated financial statements, we will disclose the date on which adoption is required for non-emerging growth companies
and the date on which we will adopt the recently issued accounting guidelines.
Our
management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S.
GAAP. The preparation of these consolidated financial statements requires us to exercise considerable judgment with respect to
establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets
and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the
consolidated financial statements.
We
base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions,
the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically
re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate
that modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
While
we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies,
we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise
of judgment, actual results could differ from such estimates.
There
have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting
policies and estimates described in the 2017 Annual Report, which we believe are the most critical to our business and the understanding
of our results of operations and affect the more significant judgments and estimates that we use in the preparation of our financial
statements.
Recent
Accounting Pronouncements
See
Note 3 to our unaudited condensed consolidated financial statements regarding recent accounting pronouncements.
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern expectations, beliefs,
projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical
facts. Specifically, this Quarterly Report contains forward-looking statements regarding:
|
●
|
our
beliefs regarding our ability to create enhanced value for our members and customers;
|
|
●
|
our
beliefs regarding the relation between the number of members or registered users and our revenues;
|
|
●
|
our
expectations regarding future changes in our salesforce;
|
|
●
|
our
expectations regarding the changes in revenues in 2018, 2019 and 2020;
|
|
●
|
our
expectations regarding future increases in sales and marketing costs and general and administrative expenses; and
|
|
●
|
our
beliefs regarding our liquidity requirements, the availability of cash and capital resources to fund our business in the future
and intended use of liquidity.
|
These
forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions.
We wish to caution readers that certain important factors may have affected and could in the future affect our actual results
and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important
factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the
actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not
limited to, the following:
|
●
|
our
ability to raise funds in the future to support operations failure to realize synergies and other financial benefits from
mergers and acquisitions within expected time frames, including increases in expected costs or difficulties related to integration
of merger and acquisition partners;
|
|
●
|
inability
to identify and successfully negotiate and complete additional combinations with potential merger or acquisition partners
or to successfully integrate such businesses;
|
|
●
|
our
history of operating losses;
|
|
●
|
we
may not be able to reverse the significant decline in our revenues;
|
|
●
|
our
limited operating history in a new and unproven market;
|
|
●
|
increasing
competition in the market for online professional networks;
|
|
●
|
our
ability to comply with increasing governmental regulation and other legal obligations related to privacy;
|
|
●
|
our
ability to adapt to changing technologies and social trends and preferences;
|
|
●
|
our
ability to attract and retain a sales and marketing team, management and other key personnel and the ability of that team
to execute on the Company’s business strategies and plans;
|
|
●
|
our
ability to obtain and maintain protection for our intellectual property;
|
|
●
|
any
future litigation regarding our business, including intellectual property claims;
|
|
●
|
general
and economic business conditions; and
|
|
●
|
legal
and regulatory developments.
|
The
foregoing list of important factors may not include all such factors. You should consult other disclosures made by the Company
(such as in our other filings with the SEC or in company press releases) for additional factors, risks and uncertainties that
may cause actual results to differ materially from those projected by the Company. Please refer to Part II, Item 1A, “
Risk
Factors ”
of this Quarterly Report and to Part I, Item 1A, “
Risk Factors ”
of our 2017 Annual Report
for additional information regarding factors that could affect our results of operations, financial condition and cash flow. You
should consider these factors, risks and uncertainties when evaluating any forward-looking statements and you should not place
undue reliance on any forward-looking statement. Forward-looking statements represent our views as of the date of this Quarterly
Report, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events
that arise after the date of this Quarterly Report.