PART
I
Unless
we specify otherwise, all references in this annual report on Form 10-K (the “Annual Report”) to “PDN,”
“the Company,” “we,” “our,” and “us” refer to Professional Diversity Network,
Inc. and its consolidated subsidiaries. This discussion contains forward-looking statements, which are based on our assumptions
about the future of our business.
Our actual results will likely differ materially from those contained in the forward-looking
statements
.
Please read “Special Note Regarding Forward-Looking Statements” for additional information regarding
forward-looking statements used in this Annual Report.
ITEM
1 - BUSINESS
Overview
The
Company is a dynamic operator of professional networks with a focus on diversity. We use the term “diversity” (or
“diverse”) to describe communities, or “affinities,” that are distinctly based on a wide array
of criteria which may change from time to time, including ethnic, national, cultural, racial, religious or gender classification.
We serve a variety of such communities, including Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military
Professionals, and Lesbian, Gay, Bisexual and Transgender (LGBT). Our goal is (i) to assist our registered users and members in
their efforts to connect with like-minded individuals, identify career opportunities within the network and (ii) connect members
with prospective employers while helping the employers address their workforce diversity needs. We believe that the combination
of our solutions allows us to approach recruiting and professional networking in a unique way and thus create enhanced value for
our members and clients.
On
November 7, 2016, we consummated the issuance and sale of 1,777,417 shares of our common stock, par value $0.01 per share, to
Cosmic Forward Limited (“CFL”), a Republic of Seychelles company wholly-owned by four Chinese investors. In connection
with that transaction, CFL shareholder Maoji (“Michael”) Wang was appointed as Chief Executive Officer and a Director
of the Company, and CFL shareholder Jingbo Song was appointed as a Director of the Company serving as the Company’s Co-Chairman
of the Board (Mr. Song resigned as a director of the Board on February 20, 2019). On December 1, 2016 our Board of Directors
(“Board”) authorized the proper officers of the Company to take all action required to create subsidiaries in both
Hong Kong and China in order to facilitate expansion of the Company’s business into China. In January of 2017, the Company
established two Hong Kong subsidiaries, PDN (Hong Kong) International Education Ltd and PDN (Hong Kong) International Education
Information Co., Ltd, and in March of 2017 the Company established its China subsidiary, PDN (China) International Culture Development
Co. Ltd. In November of 2017, Jiangxi PDN Culture Media Co., Ltd became a consolidated variable interest entity. 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 the CFL owners’ expertise in the China market will provide
us with an opportunity for success with our overseas expansion.
Our
Strategy
Following
CFL’s investment in the Company’s in November 2016, we began efforts to leverage PDN’s assets to maximize profitability,
beginning with refining operations and enhancing sales in order to transform the Company from historical losses to future profits.
The Company currently provides services for employers’ who want to hire diverse talent, to individuals seeking to network
on a professional level and to job seekers who desire to improve their professional situation. Since the control investment in
PDN by CFL, we have successfully expanded operations in China in three primary segments that relate to the core US operations.
In China, we have launched educational services, business and women’s networking. We now offers membership in the International
Association of Women, The Business Elite Club and Educational Services. As a result, in 2017, we began offering our educational,
business and networking services to our new members in China and also extended our reach to the Global Women’s Forum Event
in Paris, France, for elite members from China.
The
core diversity recruitment business expanded in 2017 to include executive placement services for leading companies seeking to
hire diverse talent. This new business line addresses a need for employers who want to secure leading diverse talent in management,
senior management and executive capacities. Initial efforts have been focused on securing talent in digital transformation and
finance. Our diversity recruitment business provides additional value for our other business segments by providing our registered
users and members with access to employment opportunity at leading companies.
In
2019, we plan to continue to refine the operations within the United States to become more efficient. Second, we intend to further
grow our business in China.
Our
strategy encompasses the following key elements:
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Grow
and diversify our member and client base;
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Maximize
revenue through synergies among the segments;
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Launch
new products and services;
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Streamline
infrastructure to capture efficiency; and
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Continue
to expand in diversity recruitment by growing our core offerings of recruitment advertising, The Office of Federal Contract
Compliance Programs (OFCCP) compliance offerings and now our new diversity placement services.
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Industry
Overview
The
diversity recruitment market is highly fragmented and is characterized by the following trends:
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Regulatory
Environment Favorable to Promoting Diversity in the Workplace.
In August of 2011, President Obama signed Executive Order
13583 to establish a coordinated government-wide initiative to promote diversity and inclusion in the federal workforce. This
Executive Order requires companies considering contracting with the federal government to be prepared to demonstrate the diversity
of their workforce. Certain companies that have federal contracts are subject to this Executive Order. In the public sector,
the Dodd–Frank Wall Street Reform and Consumer Protection Act (the “
Dodd-Frank Act
”) mandated that
each of the eight U.S. financial agencies, including the Department of the Treasury, the Securities and Exchange Commission,
the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, and twelve Federal Reserve banks
create Offices of Minority and Women Inclusion (“
OMWI
”) to be responsible for all agency matters relating
to diversity in management, employment and business activities. The OMWI monitor diversity within their ranks as well as within
the pool of contractors who provide goods and services to the government.
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Growing
Ethnic Diversity of the U.S. Population and Labor Force.
Multicultural groups are the fastest growing segment of the U.S.
population. Hispanics, African-Americans, Asian-Americans, and all other multicultural groups were estimated by the U.S. Census
Bureau to make up 38% of the U.S. population in 2014, with census projections showing that multicultural populations will
become a numeric majority by 2044. According to the U.S. Census Bureau, 2014 National Projections, the multicultural population
is expected to increase 95% between 2014 and 2060. In sheer numbers, Hispanic-Americans are expected to experience the most
growth among diversity groups, growing from 17% of the total population in 2014 to 29% by 2060. African-American population
is expected to increase from 14% in 2014 to 18% in 2060, and Asian-American population from 6% in 2014 to 12% in 2060. Not
surprisingly, diversity recruitment is increasingly becoming a common, if not standard, business practice by major employers.
According to the Current Population Survey conducted by the Bureau of Census for the Bureau of Labor Statistics, of the 2015
annual average of approximately 149 million employees nationwide, approximately 47% were women and approximately 34% were
Hispanic, African American or Asian American. According to a job report on private sector hiring published by the U.S. Equal
Employment Opportunity Commission in July 2015, the percentage of minority employment in the U.S. compared to overall employment
grew from 11% in 1966 to 37% in 2014. In the U.S., Hispanic-Americans had the fastest growth rate in the U.S. private sector,
with employment of Hispanic-Americans increasing from 2.5% to 13.9% between 1966 and 2013. The share of the labor force that
is Hispanic-American is projected to increase from 16.3% in 2014 to 19.8% in 2024, according to the Bureau of Labor Statistics.
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Demographic
Trend Toward Women’s Career Advancement.
According to the U.S. Bureau of Labor Statistics, there were over 74 million
women 16 years old and over in the workforce as of January 2016. The number of women in the labor force is expected to increase
to 77.2 million by 2024. In 2015, women accounted for 52% of all workers employed in management, professional, and related
occupations. According to the Current Population Survey conducted by the Bureau of Census for the Bureau of Labor Statistics,
in 2015 women also made up the majority of healthcare support occupations (87.6%) and healthcare practitioners and technical
occupations (75.1%), the occupations expected to grow most rapidly between 2014 and 2024.
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Rising
Spending Power of Diverse Population.
IPDN US segments are focused on providing professional enhancement tools to diverse
Americans including women. We believe diverse professionals are underserved and represents a very strong opportunity to enhance
our shareholders value. Published by the Selig Center for Economic Growth, the report estimates the nation’s total buying
power reached $13.9 trillion in 2016 and predicts it will hit $16.6 trillion by 2021, with minority groups making the fastest
gains. For example, African-American buying power, estimated at $1.2 trillion in 2016, will grow to $1.5 trillion by 2021,
making it the largest racial minority consumer market.
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Increasing
Socialization of the Internet.
The Internet has revolutionized how information is created and communicated - a wealth
of information is readily accessible by browsing the Internet anonymously. However, we believe the social aspect of the Internet
is emerging as an increasingly powerful influence on our lives. While an individual’s interpersonal connections traditionally
have not been visible to others, social and professional networking websites enable members to share, and thereby unlock,
the value of their connections by making them visible. Today, personal connections and other information, such as online social
and professional networking websites, are increasingly becoming a powerful tool for a growing population of users to connect
with one another.
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China
– Demand for Our Services.
Over the past two decades the Chinese economy has experienced sustained, hyper growth.
The female population in China currently exceeds 675 million women, and women control approximately 38% of business activities
and 50% of business revenue. Our Chinese officers and directors believe that China therefore presents a high demand economy
for our core services – professional networking for women and career services for job seekers and employers.
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Our
Solutions
We
currently operate in three 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, (ii)
National Association of Professional Women (“
NAPW Network
”), a women-only professional networking organization,
and (iii) China operations (“
China Operations
”). In 2018, our PDN Network, NAPW Network, and China Operations
businesses represented 33.5%, 59.3%, and 7.2% of our revenues, respectively. In 2017 we launched the International Association
of Women in China and in 2018 started transacting new memberships under the International Association of Women brand in the USA.
For
financial information about our operating segments please see Note 17 of our Consolidated Financial Statements included in this
Annual Report.
NAPW
Networking
The
NAPW Network is a professional networking organization for women, with approximately 954,000 paid and unpaid members as of December
31, 2018. We use the term “member” to describe a consumer who has viewed our marketing material, opted into membership
with the NAPW Network, provided demographic information and engaged in an onboarding call with a membership coordinator. Paid
memberships provide greater access to networking opportunities and other membership perks, including access to upgraded packages.
We believe NAPW Network is the most prominent women-only professional networking organization in the United States. Members of
the NAPW Network enjoy a wealth of resources dedicated to developing their professional networks, furthering their education and
skills and promoting their businesses and career accomplishments.
We
provide NAPW Network members with opportunities to network and develop valuable business relationships with other professionals
through NAPW’s website, as well as at events hosted at approximately 209 local chapters across the United States. PDN Network
products and services are being deployed to provide enhanced value to the NAPW membership experience, which we believe will be
an important component in increasing both the number of new memberships and renewals of existing memberships.
NAPW
eChapter.
NAPW operates a series of virtual national chapter meetings, hosted by Star Jones, President of NAPW, and Louise
Newsome, National Director of Local Chapters. The events are held online bi-weekly, and include presentations by Ms. Jones, and
a panel discussion including NAPW VIP members on topics focused on inspiring professional women to tackle and overcome challenges
encountered in their careers and businesses. Topics are aligned with NAPW’s content strategy and include discussions on
finding and igniting your passion, turning passion into opportunity, building confidence and professional growth through taking
on new challenges. The on-line events also include the opportunity for members to network with other participants in the live
chat room. The event attracts approximately 1,000 registrants and 300-350 participants. We define registrants as those who enroll
in an eChapter meeting but for some reason fail to attend, and participants as those who both enroll and attend. We track registrants,
though they do not attend, because they are an indicator of our marketing reach and membership engagement.
NAPW
eCoaching.
NAPW also operates a bi-weekly virtual coaching event, where VIP members who are personal and professional coaches
provide participants with insight and tips on how to overcome career and business challenges. Hosted by Louise Newsome, NAPW’s
National Director of Local Chapters, our unique virtual coaching platform connects our members with professional life and career
coaches from within the NAPW membership base. Through this event, members gain insight, guidance and inspiration to help them
maximize their personal and professional potential. Topics include the Power of Intentionality - Turning Good Intentions Into
Actions, The Power of Authentic Communication, and Confident Steps To Create a Thriving Life. The on-line events also include
the opportunity for members to network with other participants in the live chat room. The event attracts approximately 800 - 1,000
registrants and 250 - 300 participants.
Professional
Identity Management.
Through the NAPW Network website, NAPW Network members are able to create, manage and share their professional
identity online and promote themselves and their businesses. NAPW Network members can also promote their career achievements and
their businesses through placement on the NAPW Network website’s home page, in proprietary press releases, in the online
Member Marketplace and in monthly newsletter publications. In addition, the PDN Network provides members with direct access to
employers seeking to hire professional women at a high level of connectivity and efficiency. Our synergies enable us to match
members with our employment partners and then converse with the member to confirm such member’s desire to take the position
to which we matched them, confirm that member is qualified for the position and directly notify the employer about a member that
we have qualified and confirmed has competed an application within the employer’s recruitment system.
Networking
Events
. Historically, NAPW Network’s offline networking opportunities included monthly local chapter events and a large
National Networking Conference NAPW. In 2018, we held Power Networking event in Houston, Texas. We expect to continue to leverage
the existing PDN Network events platform to host NAPW networking events in major markets around the nation. Because PDN Network
networking career events are already being conducted we have the ability to add an additional event for NAPW at the same venue,
one hour after the PDN Network event ends, at a substantially lower cost compared to hosting a stand-alone NAPW event. Employers
who sponsor the PDN Network career networking events will have the opportunity to participate in the NAPW event and meet with
members to discuss employment opportunities in what we believe is an inviting and upscale networking environment. We believe that
providing the opportunity for NAPW Registered Users to meet, outside of the monthly local chapter events and the single national
event, will add value to all NAPW Registered Users through allowing them to attend any or all of our PDN Network events. Non-members
may also attend, subject to certain restrictions.
Access
to Knowledge
. In addition to networking and promotional opportunities, NAPW Network also provides to its members the ability
to further develop their skills and expand their knowledge base through monthly newsletters, online and in-person seminars, webinars
and certification courses.
Upgraded
Memberships and Ancillary Products
. Upgraded packages include the VIP membership, which includes additional promotional and
publicity tools as well as free access for the member and a guest to the National Networking Summits and continuing education
programs; the press release package, which provides members with the opportunity to work with professional writers to publish
personalized press releases and thereby secure valuable online presence; and the registry product, which allows members to create
a durable, historical record chronicling their career achievements.
Partner
Discounts
. We also offer to NAPW Network members exclusive discounts on third-party products and services.
IAW
Global Women’s Network
. This network offers in-person networking with like-minded women to foster enhanced career connections
and opportunities. Members can promote their brands, identify new career opportunities, and build lasting relationships at monthly
meetings and events. Hosted by Star Jones, these interactive events allow members to improve their verbal resumes, expand their
networks, and hear from inspiring speakers. Regional and National Conferences provide inspirational panels, unique networking
opportunities, and the chance for members to promote their business or services. Our partners allow members to explore events
outside the US and create opportunities to network with women around the world.
PDN
Network
Recruitment
Solutions
. The PDN Network consists of several online professional networking communities dedicated to serving diverse professionals
in the United States and employers seeking to hire diverse talent. We use the word “professional” to describe any
person interested in the Company’s websites presumably for the purpose of career advancement or related benefits offered
by the Company, whether or not such person is employed and regardless of the level of education or skills possessed by such person.
Our networking communities harness our relationship recruitment methodology to facilitate and empower professional networking
within common affinities. We believe that those within a common affinity often are more aggressive in helping others within their
affinity progress professionally. We operate these relationship recruitment affinity groups within the following sectors: Women,
Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, Lesbians, Gay, Bisexual and Transgender
(LGBT), and Students and Graduates seeking to transition from education to career.
As
of December 31, 2018, the Company had approximately 10,695,000 registered users. We use the term “registered user”
to describe a consumer who has affirmatively visited one of our properties, opted into an affinity group and provided us with
demographic or contact information enabling us to match them with employers and/or jobs, and to sell them ancillary products and
services. We expect that continued registered user growth of the PDN Network will enable us to further develop our list of online
professional diversity networking and career placement solutions. We currently provide access to our PDN Network websites to registered
users at no cost. The Company is exploring various partnerships with other service providers to increase their offerings to both
job seekers and employers. Our goal is to use an asset light approach to provide quality products and services, to increase our
value to those we serve and drive additional capital without significant capital investments. For example, we announced our partnership
with Diverst, the leading provider of Diversity & Inclusion software. Leveraging our existing assets through relationships
with other technology firms such as Diverst allows us to grow our relationships with employers without investing in sophisticated,
proprietary resources.
We
offer to large and medium employers seeking to diversify their employment ranks, and to third party recruiters (i) real-time solutions
that deliver diverse talent, (ii) advertising and promotion of their job opportunities to our networks of diverse professionals
and (iii) assistance with posting their job opportunities to career agencies in a manner compliant with the regulations and requirements
of the Equal Employment Opportunity OFCCP, including those of state and local governments. Our recruitment advertising solutions
promote hiring and retention success by providing job seekers with information that we believe allows them to look beyond a corporate
brand, deeper into employers’ core values. We use sophisticated technology to deliver recruitment advertising using internet
banner ads and email marketing targeted by geography and occupation, based upon data from our audiences’ profiles and job
searches on our websites. As of December 31, 2018, we had over 1,000 companies utilizing our products and services.
Networking
Events
. In addition to online networking, our registered users can participate in a number of local and national events held
across the United States, including monthly NAPW local chapter meetings, business expos, charitable events and other events developed
specifically to facilitate face-to-face networking with other professionals. In 2018, we held over 20 Career Networking Conferences,
including NAPW’s three-city National Networking Summit Series and two online career fairs for veterans and their spouses.
We schedule NAPW Network events after PDN Career Networking Conferences in order to create opportunities for employers participating
in the PDN Network events to receive exposure to more candidates. In addition, we derive new members for both our PDN Network
affinities and NAPW Network membership roll from participation in the events, promote retention among paying NAPW Network members
and derive goodwill and positive publicity for our corporate brands.
Career
Fairs.
Through our events business, a part of our PDN Network business segment, we produce premier face-to-face recruiting
events we call Professional & Technical Diversity Career Fairs. The Company’s diversity events help employers connect
with a new marketplace of diverse professionals. Our events are the only events of their type endorsed by leading organizations
such as the NAACP, Urban League, BDPA and others. Participating employers range from Fortune 500 companies to federal, state and
local agencies and from smaller employers to non-profit organizations, all of which seek a proactive approach to diversity recruiting.
We also produce career fairs as part of high-profile national events such as the NAACP National Convention, the Urban League National
Conference and HBCU sorority and fraternity conferences. In 2017 we added virtual career fairs serving veterans, women and STEM
professionals.
PDN
Quick.
Our new Hire AdvantEdge product allows us to sell the qualified candidate lead referral service to employers via an
e-commerce model. Hire AdvantEdge is a data-driven product, which matches registered users with jobs offered by our employment
partners, qualifies those registered users for our partners’ jobs, secures an indication of interest, and directly provides
our partner with the registered user’s information or submits an application on behalf of the registered user to our partner’s
recruitment system. This allows us to deliver to recruiters qualified candidates in an efficient manner with very little lag in
time. Hire AdvantEdge was made possible by the combination of Professional Diversity Network’s current interaction with
job seekers seeking hourly level positions, its technology and our relationships with employers who desire to recruit qualified
diverse talent. The PDN Network Hire AdvantEdge product delivers enhanced membership value to those registered users seeking to
reenter the workforce or to upgrade their professional employment condition. This benefit comes at no additional cost to members,
reinforcing the membership value proposition and creating long-term value.
PDN(Hired).
We use matching and targeting technology to match members with our partners on a renewing license basis, designed to provide
the Company with increasing residual income as we add new partners and sell additional licenses. Though in its early stages, the
PDN(Hired) product is a significant step towards increasing online sales in a scalable and residual manner. In 2017 we combined
the functionality of these two products and relaunched them as PDN Quick. This product meets the increased demand of entry level
and hourly workforce needs of our clients. The product is a solution for America’s shrinking unemployment rate which has
decreased the amount of readily available hourly/part-time workers but driven demand higher for growing employers. PDN Quick harnesses
the 5,000 daily inbound candidate interactions PDN receives and geographically matches these candidates to our clients in real-time
while also screening for the exact job requirements needed by each client. The product has a unique Pay Only For Performance structure
in which employers only pay when qualified and interested candidates are delivered directly to them for specific in-demand roles.
The product utilizes SMS Texting technology to reach interested candidates which creates very little lag time and increased savings
and efficiencies for both PDN and our clients. PDN Quick is offered to employers on a Cost Per Applicant (“CPA”) basis.
This enables employers to pay only for applicants they receive, as opposed to a diversity outreach campaign that promotes job
openings for a fixed amount based on the number of jobs offered and the duration of the job promotions.
PDN
Diversity Placement.
In 2018, the Company launched a diversity placement service that has initially focused on high demand
positions in digital transformation and finance. We are currently recruiting for leading employers who pay a monthly license fee
and a percentage of the first year’s annual salary plus bonus for candidates we source and they hire. We believe our superior
brand positioning, large network of diverse talent and our vast employer relationships position us well for continued growth in
this segment in 2018 and beyond.
China
Operations
The
Company began establishing business operations in China in 2017. Our business activities, similar to those in the United States,
will focus on providing tools, products and services in China, which will assist in personal and professional development. Our
business plans are developed in an asset light format, with the goal of providing maximum positive results for the Company and
our customers, with the least capital investment possible. We are cooperating with existing companies and organizations in China
in a manner that will deliver best in class products and services, in a short time frame with minimum investment from the Company.
Women’s
Networking in China
The
Company’s NAPW women’s networking asset gives us the ability to develop and begin similar affinity networking operations
in China. We have named our China expansion of NAPW “The International Association of Women” (the “IAW”).
IAW will have similar elements as NAPW, but its scope has been customized and expanded to meet the particular needs of Chinese
women. The association will be supported by a proprietary web platform that will have key networking functions, including but
not limited, to members profile, with members picture and biography. The site will facilitate searching for other members, adding
members to one’s platform, posting alerts and updates, endorsing members, suggesting members to other members, job seeking
functions, job opportunity advertising from employers seeking to hire IAW members and other functions to support personal and
professional development. The IAW website will also serve as a platform for product and service offerings for training and social
networking for women in China. IAW plans to integrate various resources to build a new concept for clients : to create part of
the cross-border internet, to mix traditional models with internet models and to explore online and offline resources as well
as to allow members to build individual social circles of one’s own in the new internet age.
More
than only an online network, IAW is intended to be a bilingual, international social platform through which members can enjoy
high quality private customized service. We plan on having a very significant structure of off-line activities, events and resources,
to facilitate personal and professional development of women in China and further, to expand benefits to other women in other
nations. In the near term, we plan on leveraging our NAPW capabilities to provide benefits for our IAW members traveling in the
United States. Furthermore, IAW will provide members with personal assistance by which members can enjoy one to one high-end services
determined by members’ immediate needs. The platform will provide financial “account housekeepers”, health advisors,
exclusive image designers, legal consultations, translation orientation, child care referrals and other comprehensive high-end
services in China.
Education
and Training for Accomplished Chinese Business People
The
Company launched education and training seminars in China in 2017. The events in China feature leading experts in business, finance,
social networking and lifestyle issues. These events benefit participants by delivering timely, focused and meaningful content,
and at the same time, allow for participants to network together in a manner that will be mutually beneficial.
Operations:
Sales, Marketing and Customer Support
Sales
and Marketing
We
sell NAPW/IAW Network membership subscriptions offline through our NAPW/IAW Network sales force, which currently includes 5 sales
professionals, all of whom sell initial membership services. We developed a secure, work-from-home technology along with a training
and supervision platform aimed at reducing the overhead costs, increasing per-representative profitability, and offering our sales
professionals flexible working arrangements. All sales representatives are capable of selling upgraded memberships and ancillary
products. We believe that we maintained high visibility for the NAPW Network during 2018 through its nearly 300,000,000 advertisements
served online, in-person impressions through its live networking activities and interactions via its online properties and social
media accounts. The number was lower than previous years as we segmented ads and targeted our audiences, which was designed to
yield a lower cost per impression and provide a higher return per marketing dollar spent.
Our
PDN sales resources for recruitment and recruitment advertising products and services include a sales force with 10 sales
professionals, third-party strategic partners who deliver employers with demand for our products, and technology, which facilitates
e-commerce transactions. We market directly to employers and third-party recruiters. Our sales team uses a combination of telephone,
email and face-to-face marketing, including personal visits to companies or their recruitment agencies, as well as appearances
at industry and trade group events where diversity recruitment recruiters are in attendance. We have also formed strategic alliances
with parties who are able to help extend our organic reach. In addition, we are developing purely online marketing channels to
bring recruiters to us in bulk and use products based on a matching and targeting technology to facilitate sales. Our recruitment
and recruitment advertising sales force is divided between three groups: (i) the “table-setters,” who are responsible
for setting up first meetings with prospect companies, (ii) the career sales professionals, who conduct the first meeting and
mature the conversation to a successful conclusion, and (iii) sales professionals who provide ongoing account management and are
responsible for successful client renewals. We have specialty units within our sales force dedicated to serving: (i) federal,
state and local governments and companies and contractors who serve these governmental entities, (ii) small and medium sized businesses
as defined by companies with less than 2,500 employees and (iii) large enterprises with greater than 2,500 employees.
Customer
Support, Compliance and Testing
In
addition to our sales professionals, we also employ support teams to provide customer support, compliance and testing. Our customer
support teams work together to improve engagement with our members and to ensure a high degree of member satisfaction and retention.
Our compliance team focuses on ensuring the integrity of the NAPW Network sales process. The team works closely with customer
support and sales management to ensure that sales are conducted in an ethical manner and to identify sales representatives who
would benefit from enhanced training. Our testing team consists of representatives who work with our Development and Executive
teams to identify new lead-generation, sales and membership product opportunities, and to test those as well as new approaches
to our current sales.
Our
Strengths
We
believe the following elements give us a competitive advantage to accomplish our mission:
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Dedicated
Focus on Diverse Professionals.
Our focus on providing career opportunities for diverse professionals differentiates us
from other online social networking websites, such as Facebook. We believe our websites have a distinctly career-oriented
feel and utility when compared with other online social networking websites. We believe that users prefer to manage their
professional and social identities and contacts separately. While other online professional networking websites, such as LinkedIn,
also have a professional focus, we are singularly focused on diverse professionals in the United States. We believe that we
communicate effectively with each of our diverse communities and create environments that harness a natural affinity among
members of common culture, ethnicity, gender, orientation, nationality and experience to stimulate increased member trust,
networking and engagement.
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Online
and Offline Diversity Career Services.
The Company has a comprehensive and coordinated method of connecting diverse job
seekers with companies seeking to hire diverse employees. Our advantage comes through our call center operations which facilitate
timely, accurate matching of job seekers and employers. Many competitors do not have such a service in-house. Additionally,
we operate live and virtual job fairs which allow job seekers and employers to meet one-on-one. Many competitors also have
to outsource this service. We provide a wide continuum of contact points to facilitate employers’ desire to identify
and hire diverse talent in an OFCCP-compliant manner.
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Platform
That Harnesses the Power of Web Socialization.
We believe that our membership base will continue to grow and that our
platform will be an increasingly powerful tool that enables our members to leverage their connections and shared information
for the collective benefit of all of the participants on our platform. We believe that we are the first online professional
network to focus on the diversity recruitment sector.
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Relationships
with Strategic Partners.
We believe that our relationships with strategic partners are difficult to replicate and give
us a competitive advantage in the networking opportunities, career tools and resources we can offer to our members, as well
as the diverse audiences we can access for employers and advertisers.
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Relationships
with Professional Entities & Organizations.
Our team has experience working with multicultural professional organizations.
We partner with a number of leading minority professional organizations, including:
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DisabledPersons.com;
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Ebony
Magazine
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The
Grio
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HireVeterans.com
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National
Association of Hispanic Journalists (NAHJ)
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Illinois
Hispanic Nursing Association
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IT
Diversity Careers
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The
Commonwealth Compact
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Greek
Diversity
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Latinos
in Information Science and Technology Association (LISTA)
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Job
Opportunities for Disabled American Veterans (JOFDAV)
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Veterans
Exchange
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National
Association of African Americans in Human Resources
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National
Association for the Advancement of Colored People (NAACP)
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The
National Urban League
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VFW
Veterans Job Board Vetjobs
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Wall
Street Warfighters
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Women
in Biology
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Customized
Technology Platform
. Our technology platform has been custom-designed and built to facilitate networking engagement, job
searching, real-time job qualification and matching, and text-based communications.
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We
believe that the following elements give us a competitive advantage with respect to the NAPW Network:
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Exclusive
Focus on Professional Women
. As a result of NAPW Network’s exclusive focus on professional women, we believe that
through NAPW Network we provide a secure and less intimidating environment within which our members can successfully network
and establish new and lasting business relationships.
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Attractive
Industry Demographic Trends.
Favorable demographic trends regarding women’s participation in the labor force will
further the growth in NAPW Network’s membership base and we have first-mover advantage with respect to generalized professional
networking for women.
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Large,
growing and diverse national membership base.
We believe that NAPW Network is the largest women-only networking organization
in the United States by number of members, with approximately 954,000 members located in all 50 states, Puerto Rico and the
U.S. Virgin Islands. The membership base of the NAPW Network is diverse in terms of ethnicity, age, income, experience, industry
and occupation. It includes members from small and large corporations, as well as entrepreneurs and business owners. We believe
the diversity of the NAPW Network membership base is a key component of its value.
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Comprehensive
Product and Service Offerings to Deliver Value to Members.
We believe that our comprehensive product offerings provide
women valuable tools to help them advance their careers and expand their businesses. Through networking opportunities online
and at local chapter events in their communities, regional events and the NAPW Network national Networking Conference, discounts
provided on seminars, webinars and educational certification courses, and opportunities to promote themselves and their businesses,
NAPW members are provided the opportunities and tools for their professional development.
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Business
Model with Efficient Member Acquisition and Recurring Cash Flow.
We believe that NAPW Network’s direct marketing
lead generation efforts, which utilize both direct mail and digital strategies, are among the most efficient in the industry
as measured by our internal response and click-through rates. This efficiency, combined with our effective call center operations,
results in what we believe to be our market leading members acquisition process and direct variable contribution. Further,
NAPW Network memberships renew annually, providing a valuable recurring stream of cash flow.
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Strategic
Alliances
We
consider our partner alliances to be a key value to our clients because it enables us to expand our job distribution and outreach
efforts. We continue to expand our relationships with key strategic partners that we believe are valuable to our core clients,
as noted in section “
Our Strengths
” above.
Operations:
Geography
Our
headquarters is located in Chicago, Illinois, and houses our CFO, as well as many of our sales, marketing and IT personnel. We
also have an office in Minnetonka, MN where our telesales team for our Events business is located. Websites for the PDN Network
are hosted by Engine Yard. Engine Yard provides a robust and easy platform for our hosting needs, allowing us to scale up resources
to meet our peak needs. It also allows us to quickly and easily deploy website updates. Our websites have backup and contingency
plans in place in the event that an unexpected circumstance occurs.
Our
headquarters in China is located in Guangzhou, Guangdong Province, China. We also have an office in Jiangxi, China.
Intellectual
Property
To
protect our intellectual property rights, we rely on a combination of federal, state and common law rights, as well as contractual
restrictions. We rely on trade secret, copyright and trademark rights to protect our intellectual property. We pursue the registration
of our domain names and trademarks in the United States. Our registered trademarks in the United States include the “iHispano”
mark with stylized logo, the “Black Career Network” mark with stylized logo, the “Professional Diversity Network”
mark with our tagline “the power of millions for the benefit of one,” the name “National Association of Professional
Women” and “NAPW,” and the name “International Association of Women” and “IAW.” We also
own the copyrights to certain articles in NAPW publications. We strive to exert control over access to our intellectual property
and customized technology by entering into confidentiality and invention assignment agreements with our employees and contractors
and confidentiality agreements with third parties in the ordinary course of our business.
Our
efforts to protect our proprietary rights may not be successful. Any significant impairment of our intellectual property rights
could adversely impact our business or our ability to compete. In addition, protecting our intellectual property rights is costly
and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business
and adversely affect our operating results.
Competition
We
face significant competition in all aspects of our business. Specifically, with respect to our members and our recruitment consumer
advertising and marketing solutions, we compete with existing general market online professional networking websites, such as
LinkedIn and Monster Worldwide, Inc., as well as ethnic minority focused social networking websites, such as Black Planet and
LatPro, and other companies such as Facebook, Google, Microsoft and Twitter that are developing or could develop competing solutions.
We also generally compete with online and offline enterprises, including newspapers, television and direct mail marketers that
generate revenue from recruiters, advertisers and marketers, and professional organizations. With respect to our hiring solutions,
we also compete with traditional online recruiting companies such as Career Builder, talent management companies such as Taleo,
and traditional recruiting firms.
Larger,
more well-established companies may focus on professional networking and could directly compete with us. Other companies might
also launch new competing services that we do not offer. Nevertheless, we believe that our focus on diverse online professional
networking communities and the number of registered users or members, as the case may be, overall and within each affinity that
we serve, are competitive strengths in our market.
Government
Regulation
We
are subject to a number of federal, state and foreign laws and regulations that affect companies conducting business on the Internet.
These laws are still evolving and could be amended or interpreted in ways that could be detrimental to our business. In the United
States and abroad, laws relating to the liability of providers of online services for activities of their users and other third
parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair
competition, copyright and trademark infringement and other theories based on the nature and content of the materials searched,
the advertisements posted or the content provided by users. Any court ruling or other governmental action that imposes liability
on providers of online services for the activities of their users and other third parties could materially harm our business.
In addition, rising concern about the use of social networking technologies for illegal conduct, such as the unauthorized dissemination
of national security information, money laundering or supporting terrorist activities may in the future produce legislation or
other governmental action that could require changes to our products or services, restrict or impose additional costs upon the
conduct of our business or cause users to abandon material aspects of our service.
In
the area of information security and data protection, many states have passed laws requiring notification to users when there
is a security incident, or security breach for personal data, or requiring the adoption of minimum information security standards
that are often unclear and difficult to implement. The costs of compliance with these laws are significant and may increase in
the future. Further, we may be subject to significant liabilities if we fail to comply with these laws.
We
are also subject to federal, state and foreign laws regarding privacy and protection of member data. We post on our websites our
privacy policy and terms of use. Compliance with privacy-related laws may be costly. However, any failure by us to comply with
our privacy policy or privacy-related laws could result in proceedings against us by governmental authorities or private parties,
which could be detrimental to our business. Further, any failure by us to protect our members’ privacy and data could result
in a loss of member confidence in us and ultimately in a loss of members and customers, which could adversely affect our business.
Because
our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws,
including in jurisdictions where we have no local entity, employees or infrastructure.
Our
direct marketing operations with respect to the NAPW Network are subject to various federal and state “do not call”
list requirements. The Federal Trade Commission has created a national “do not call” registry. Under these federal
regulations, consumers may have their phone numbers added to the national “do not call” registry. Generally, we are
prohibited from calling anyone on that registry. In September 2003, telemarketers were granted access to the registry and are
now required to compare their call lists against the national “do not call” registry at least once every 31 days.
Telemarketers are required to pay a fee to access the registry. Enforcement of the “do not call” provisions began
in late 2003, and the rule provides for fines of up to $16,000 per violation and other possible penalties. These rules may be
construed to limit our ability to market our products and services to new customers. Further, we may incur penalties if we do
not conduct our telemarketing activities in compliance with these rules.
Seasonality
Our
quarterly operating results are affected by the seasonality of employers’ businesses. Historically, demand for employment
hiring is lower during the first quarter and typically increases during the remainder of the year.
Employees
As
of December 31, 2018, we had a total of 94 employees; 60 were full time employees in various U.S. locations and 27 full-time employees
in China. We also regularly engage independent contractors to perform various services. As of December 31, 2018, we engaged 7
independent contractors. None of our employees are covered by a collective bargaining agreement. We believe that we have good
relationships with our employees.
Corporate
History
We
were incorporated in Illinois in October 2003 under the name of IH Acquisition, LLC and changed our name to iHispano.com LLC in
February 2004. In 2007, we changed our business platform and implemented technology to become the operator of communities of professional
networking sites for diverse professionals. In March 2012, we changed our name to Professional Diversity Network, LLC. In March
2013, we completed our initial public offering and converted from an Illinois LLC to a Delaware corporation. In September 2014
we acquired the NAPW Network through a merger of NAPW, Inc., a New York corporation (“Old NAPW”) with and into NAPW
Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”). Upon the closing of the merger
under the Agreement and Plan of Merger, between Merger Sub, Old NAPW and Matthew B. Proman, the sole shareholder of Old NAPW,
dated July 11, 2014 (the “Merger Agreement”), Old NAPW ceased to exist and Merger Sub continued as the surviving corporation,
and a wholly-owned subsidiary of the Company, which was renamed to NAPW, Inc.
We
started our operations in China in March 2017. We established two entities in Hong Kong, PDN (Hong Kong) International Education
Ltd and PDN(Hong Kong)International Education Information Co., Ltd in January 2017, and the Company established its China subsidiary,
PDN (China) International Culture Development Co. Ltd in March 2017. In November of 2017, Jiangxi PDN Culture Media Co., Ltd became
a consolidated variable interest entity.
Our
principal executive offices are located at 801 W. Adams Street, Suite 600, Chicago, Illinois, 60607 and our telephone number is
(312) 614-0950. Our website address is
www.ipdnusa.com
. References to our website addressed in this report are provided
as a convenience and do not constitute, and should not be viewed as an incorporation by reference of the information contained
on, or available through, the website. Therefore, such information should not be considered part of this report.
ITEM
1A - RISK FACTORS
Investing
in our common stock involves a high degree of risk.
You should carefully consider the risks and uncertainties described below,
together with all of the other information in this Annual Report, including our consolidated financial statements and related
notes, before making an investment in our common stock
.
If any of the following risks are realized, our business, results
of operations, cash flows and financial condition could be materially and adversely affected
.
In that event, the market
price of our common stock could decline, and you may lose all or part of your investment.
Risks
Related to Our Business and Financial Condition
We
have incurred net losses, our liquidity has been significantly reduced and we could continue to incur losses and negative cash
flow in the future.
We
recorded net loss from continuing operations of approximately $14.6 million for the year ended December 31, 2018 and $21.6 million
for the year ended December 31, 2017. Our revenue declined from $16.1 million to $8.5 million during 2018, however, our costs
and expenses substantially decreased from $39.3 million to $24.6 million, and as a result our losses from operations also decreased
from $23.3 million to $16.2 million during 2018. Included in the year ended December 31, 2018 is a $5.3 million impairment
charge on goodwill, and $2.8 million impairment charge on our long-lived intangible assets. In addition, we used $5.0 million
in cash flow from operations during the year ended December 31, 2018. We will need to generate increased revenues and implement
aggressive cost management to achieve profitability and positive cash flow from operations. Despite our efforts, including our
restructuring and cost-cutting program, we may not achieve profitability or positive cash flow in the future, and even if we do,
we may not be able to sustain being profitable.
The
market for online professional networks is highly competitive, and if we are unable to compete effectively our sales and results
of operations will suffer.
We
face significant competition in all aspects of our business, and we expect such competition to increase, particularly in the market
for online professional networks.
Our
industry is rapidly evolving and is becoming increasingly competitive. Larger and more established online professional networking
companies, such as LinkedIn or Monster Worldwide, may focus on the online diversity professional networking market and could directly
compete with us. Rival companies or smaller companies, including application developers, could also launch new products and services
that could compete with us and gain market acceptance quickly. Individual employers have and may continue to create and maintain
their own network of diverse candidates.
We
also expect that our existing competitors will focus on professional diversity recruiting. A number of these companies may have
greater resources than we do, which may enable them to compete more effectively. For example, our competitors with greater resources
may partner with wireless telecommunications carriers or other Internet service providers that may provide Internet users, especially
those that access the Internet through mobile devices, incentives to visit our competitors’ websites. Such tactics or similar
tactics could decrease the number of our visits, unique visitors and number of users and members, which would materially and adversely
affect our business, operating results and financial condition.
Additionally,
users of online social networks, such as Facebook, may choose to use, or increase their use of, those networks for professional
purposes, which may result in those users decreasing or eliminating their use of our specialized online professional network.
Companies that currently do not focus on online professional diversity networking could also expand their focus to diversity networking.
LinkedIn may develop its own proprietary online diversity network and compete directly against us. To the extent LinkedIn develops
its own network or establishes alliances and relationships with others, our business, operating results and financial condition
could be materially harmed. Finally, other companies that provide content for professionals could develop more compelling offerings
that compete with us and adversely impact our ability to keep our members, attract new members or sell our solutions to customers.
If
we do not continue to attract new members to the NAPW Network, or if existing NAPW Network members do not renew their subscriptions,
renew at lower levels or on less favorable terms, or fail to purchase additional offerings, we may not achieve our revenue projections,
and our operating results would be harmed.
In
order to grow the NAPW Network, we must continually attract new members to the NAPW Network, sell additional product and service
offerings to existing NAPW Network members and increase the level of renewals. Our ability to do so depends in large part on the
success of our sales and marketing efforts. Unlike companies that provide more tangible products, the nature of our product and
service offerings is such that members may decide to terminate or not renew their agreements because they do not see their cancellation
as causing significant disruptions to their own businesses.
We
must demonstrate to NAPW Network members that our product and service offerings provide them with access to an audience of influential,
affluent and highly-educated women. However, potential members may not be familiar with our product and service offerings or may
prefer other more traditional products and services for their professional advancement and networking needs. The rate at which
we expand the NAPW Network’s membership base or increase its members’ renewal rates may decline or fluctuate because
of several factors, including the prices of product and service offerings, the prices of products and services offered by competitors
or reductions in their professional advancement and networking spending levels due to macroeconomic or other factors and the efficacy
and cost-effectiveness of our offerings. If we do not attract new members to the NAPW Network or if NAPW Network members do not
renew their agreements for our product and service offerings, renew at lower levels or on less favorable terms or do not purchase
additional offerings, our revenue may grow more slowly than expected or decline.
We
may not be able to successfully identify and complete sufficient acquisitions to meet our growth strategy, and even if we are
able to do so, we may not realize the anticipated benefits of these acquisitions.
Part
of our growth strategy is to acquire companies that we believe will add to and/or expand our service offerings.
Identifying
suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates
or complete acquisitions in a timely manner, on a cost-effective basis or at all. Even if we complete an acquisition, we may not
realize the anticipated benefits of such acquisition. Actual cost savings and synergies which may be achieved from an acquired
entity may be lower than expected and may take a longer time to achieve than we anticipate. Our acquisitions have previously required,
and any similar future transactions may also require, significant efforts and expenditures, in particular with respect to integrating
the acquired business with our historical business. We may encounter unexpected difficulties, or incur unexpected costs, in connection
with acquisition activities and integration efforts, which include:
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conflicts
and inconsistencies in information technology and infrastructures;
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inconsistencies
in standards, controls, procedures and policies, business cultures and compensation structures between us and an acquired
entity;
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difficulties
in the retention of existing customers and attraction of new customers;
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overlap
of users and members of an acquired entity and one of our websites;
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difficulties
in retaining key employees;
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the
identification and elimination of redundant and underperforming operations and assets;
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diversion
of management’s attention from ongoing business concerns;
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the
possibility of tax costs or inefficiencies associated with the integration of the operations; and
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loss
of customer goodwill.
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If
we fail to successfully complete the integration of an acquired entity, or to realize the anticipated benefits of the integration
of an acquired entity, our financial condition and results of operations could be materially and adversely affected.
We
rely heavily on our information systems and if our access to this technology is impaired, or we fail to further develop our technology,
our business could be significantly harmed.
Our
success depends in large part upon our ability to store, retrieve, process and manage substantial amounts of information, including
our database of our members. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance
our information systems. Our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our
information systems to evolving industry standards and to improve the performance and reliability of our information systems.
This may require the acquisition of equipment and software and the development, either internally or through independent consultants,
of new proprietary software. Our inability to design, develop, implement and utilize, in a cost-effective manner, information
systems that provide the capabilities necessary for us to compete effectively would materially and adversely affect our business,
financial condition and operating results.
Our
direct sales strategy, which requires personal interaction with employers and third party recruiters, may limit our ability to
grow recruitment revenue and recruitment advertising revenue.
As
part of our strategy to market our products and services directly to employers and third party recruiters, we rely on our direct
sales force for recruitment revenue and recruitment advertising revenue. We currently employ professionals in sales, sales support
and marketing who are trained in selling our products and services. Since its creation in 2013, we have been optimizing the direct
sales team and refining the manner in which our products and services are sold. While the Company made progress in growing its
direct sales, we have not matured the sales force to the point of predictability, nor have we sold enough services to achieve
profitability. There is no assurance that our direct sales strategy we will yield sufficient recruitment revenue and recruitment
advertising revenue in the future.
We
may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our websites
are accessible within an acceptable load time.
An
element that is key to our continued growth is the ability of our members and other users that we work with to access any of our
websites within acceptable load times. We call this website performance. We have experienced, and may in the future experience,
website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human
or software errors, capacity constraints due to an overwhelming number of users accessing our websites simultaneously, and denial
of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website
performance problems within an acceptable period of time.
If
any of our websites are unavailable when users attempt to access them or they do not load as quickly as users expect, users may
seek other websites to obtain the information or services for which they are looking, and may not return to our websites as often
in the future, or at all. This would negatively impact our ability to attract members and other users and increase engagement
on our websites. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually
develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, operating
results and financial condition may be materially and adversely affected.
Our
systems are vulnerable to natural disasters, acts of terrorism and cyber-attacks.
Our
systems are vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, cyber-attacks and similar events. For systems which are not based in cloud storage,
we have implemented a disaster recovery program, maintained by a third party vendor, which allows us to move production to a back-up
data center in the event of a catastrophe. Although this program is functional, it does not yet provide a real-time back-up data
center, so if our primary data center shuts down, there will be a period of time that such website will remain shut down while
the transition to the back-up data center takes place. Despite any precautions we may take, the occurrence of a natural disaster
or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. Although we carry
cyber security insurance our claims may exceed the insurance coverage, and we may not be fully compensated by third party insurers
in the event of service interruption or cyber-attack. Furthermore, our business may never recover from such an event.
If
our security measures are compromised, or if any of our websites are subject to attacks that degrade or deny the ability of members
or customers to access our solutions, members and customers may curtail or stop use of our solutions.
Our
members provide us with information relevant to their professional networking and/or career-seeking experience with the option
of having their information become public or remain private. If we experience compromises to our security that result in website
performance or availability problems, the complete shutdown of our websites or the loss or unauthorized disclosure of confidential
information, our members may lose trust and confidence in us, and will use our websites less often or stop using our websites
entirely. Further, outside parties may attempt to fraudulently induce employees, members or customers to disclose sensitive information
in order to gain access to our information or our members’ or customers’ information. Because the methods used to
obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until
launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively
address these methods or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability
to attract new members and increase engagement by existing members, cause existing members to close their accounts or existing
customers to cancel their contracts, subject us to lawsuits, regulatory fines or other action or liability, thereby materially
and adversely affecting our reputation, our business, operating results and financial condition.
The
widespread adoption of different smart phones, smart phone operating systems and mobile applications, or apps, could require us
to make substantial expenditures to modify or adapt our websites, applications and services.
The
number of people who access the Internet through devices other than personal computers, including personal digital assistants,
smart phones and handheld tablets or computers, has increased dramatically in the past few years and we believe this number will
continue to increase. Each manufacturer or distributor of these devices may establish unique technical standards, and our services
may not work or be viewable on these devices as a result. Furthermore, as new devices and new platforms are continually released,
it is difficult to predict the problems we may encounter in developing versions of our services for use on these alternative devices
and we may need to devote significant resources to the creation, support and maintenance of such devices. Our websites are designed
using responsive technology and are built to provide a positive user experience on a user’s Internet device, whether a mobile
phone, and tablet, laptop or personal computer. If we are slow to develop products and technologies that are compatible with such
devices, we might fail to capture a significant share of an increasingly important portion of the market for our services.
If
Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our member
engagement and number of members and users could decline.
We
depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic
to our websites. Our ability to maintain the number of visitors directed to our websites is not entirely within our control. Our
competitors’ search engine optimization (“
SEO
”) efforts may result in their websites receiving a higher
search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their
search results, which could adversely affect the placement of our search result page ranking. If search engine companies modify
their search algorithms in ways that are detrimental to our new user growth or in ways that make it harder for our members to
use our websites, or if our competitors’ SEO efforts are more successful than ours, overall growth in our member base could
slow, member engagement could decrease, and we could lose existing members. These modifications may be prompted by search engine
companies entering the online professional networking market or aligning with competitors. Our websites have experienced fluctuations
in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users
directed to our websites would materially harm our business and operating results. Our platform includes connectivity across the
social graph, including websites such as Facebook, Google+, LinkedIn and Twitter. If for any reason these websites discontinue
or alter their current open platform policy it could have a negative impact on our user experience and our ability to compete
in the same manner we do today.
Wireless
communications providers may give their customers greater access to our competitors’ websites.
Wireless
communications providers may provide users of mobile devices greater access to websites that compete with our websites at more
favorable rates or at faster download speeds. This could have a material adverse effect on the Company’s business, operating
results and financial condition. Creation of an unequal playing field in terms of Internet access could significantly benefit
larger and better capitalized companies competing with us.
The
effect of significant declines in our ability to generate revenue may not be reflected in our short-term results of operations.
We
recognize revenue from sales of our hiring solutions over the life of a contract (typically 12 months) beginning the first month
after the contract is signed. As a result, a significant portion of the revenue we report in each quarter is generated from agreements
entered into during previous quarters. In addition, we may be unable to adjust our fixed costs in response to reduced revenue.
Accordingly, the effect of significant declines in our ability to generate revenue may not be reflected in our short-term results
of operations.
The
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.
The
reported number of members in our networks is higher than the number of actual individual members because some members have multiple
registrations, other members have died or become incapacitated, and others may have registered under fictitious names. Given the
challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual
members, and thus we rely on the number of members as our measure of the size of our networks. Further, a substantial majority
of our members do not visit our websites on a monthly basis, and a substantial majority of our visits are generated by a minority
of our members and users. If the number of our actual members does not meet our expectations or we are unable to increase the
breadth and frequency of our visiting members, then our business may not grow as fast as we expect, which would materially and
adversely affect our business, operating results and financial condition.
The
existing global economic and financial market environment has had, and may continue to have, a negative effect on our business
and operations.
Demand
for our services is sensitive to changes in the level of economic activity. Many companies hire fewer employees when economic
activity is slow. Following the financial crisis in 2008, unemployment in the U.S. increased and hiring activity was limited.
Although the economy has begun to recover and unemployment in the U.S. has improved, if the economy does not continue to recover
or worsens, or unemployment returns to high levels, demand for our services and our revenue may be reduced. In addition, lower
demand for our services may lead to lower prices for our services. The volatility in global financial markets may also limit our
ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our
ability to react to changing economic and business conditions. Accordingly, if the economy does not fully recover or worsens,
our business, results of operations and financial condition could be materially and adversely affected.
Our
growth strategy may fail as a result of changing social trends.
Our
business is dependent on the continuity of certain social trends, such as the increasing socialization of the Internet, the demographic
trend towards women’s career advancement, the growing ethnic diversity of the United States population and labor force,
a regulatory environment that promotes diversity in the workplace, the growing ethnic population’s spending power and the
acceptance and growth of online recruitment and advertising. Some or all of these trends may change overtime. For example, increased
privacy concerns may jeopardize the growth of online social and professional network websites. Furthermore, it is possible that
people may not want to identify in online social or professional networks with a focus on diversity at all. Or alternatively,
people who belong to more than one diversity group (such as Hispanic-American females, among others) may not be drawn to our websites,
which singularly focus on one specific diversity group. Our strategy may fail as a result of these changing social trends, and
if we do not timely adjust our strategy to adapt to changing social trends, we will lose members, and our business, operating
results and financial condition would be materially and adversely affected.
The
regulatory environment favorable to promoting diversity in the workplace may change.
Federal
and state laws and regulations require certain companies engaged in business with governmental entities to report and promote
diverse hiring practices. Repeal or modification of such laws and regulations could decrease the incentives for employers to actively
seek diverse employee candidates through networks such as ours and materially affect our revenues.
If
our member profiles are out-of-date, inaccurate or lack the information that users and customers want to see, we may not be able
to realize the full potential of our networks, which could adversely impact our future growth.
We
do not impose any selective or qualification criteria on membership and do not verify that any member of a particular Company
website qualifies as a member of the ethnic, cultural or other group identified by that website. If our members do not update
their information or provide accurate and complete information when they join our networks or do not establish sufficient connections,
the value of our networks may be negatively impacted because our value proposition as diversity professional networks and as a
source of accurate and comprehensive data will be weakened. For example, our hiring solutions customers may find that certain
members misidentify their ethnic, national, cultural, racial, religious or gender classification, which could result in mismatches
that erode customer confidence in our solutions. Similarly, incomplete or outdated member information would diminish the ability
of our marketing solutions customers to reach their target audiences and our ability to provide research data to our customers.
Therefore, we must provide features and products that demonstrate the value of our networks to our members and motivate them to
add additional, timely and accurate information to their profile and our networks. If we fail to successfully motivate our members
to do so, our business, operating results and financial condition could be materially and adversely affected.
Our
business depends on strong brands, and any failure to maintain, protect and enhance our brands would hurt our ability to retain
or expand our base of members, enterprises and professional organizations, or our ability to increase their level of engagement.
We
have devoted significant resources to develop our brands, particularly NAPW. That brand is predicated on the idea that professional
women will trust it and find value in building and maintaining their professional identities and reputations on the NAPW Network
platform. Maintaining, protecting and enhancing all of our brands is critical to expanding the base of members for the NAPW Network
and PDN Network and increasing their engagement with the product and services offerings of the Company, and will depend largely
on our ability to maintain member trust, be a technology leader and continue to provide high-quality offerings, which we may not
do successfully in the future. Despite our efforts to protect our brands and prevent their misuse, if others misuse any of our
brands or pass themselves off as being endorsed or affiliated with the NAPW Network or the PDN Network, it could harm our reputation
and our business could suffer. If members of any of our networks or potential members determine that they can use other platforms,
such as social networks, for the same purposes as or as a replacement for the NAPW Network or the PDN Network, or if they choose
to blend their professional and social networking activities, our brands and the business of the Company could be harmed. Members
of any of our networks could find that new product or service offerings that are introduced are difficult to use or may feel that
they degrade their experience with our organization, which could harm the reputation of the networks and the Company for delivering
high-quality offerings. Our brands are also important in attracting and maintaining high performing employees. If we do not successfully
maintain strong and trusted brands for our networks, our business can be materially and adversely affected.
Failure
to protect or enforce our intellectual property rights could materially harm our business and operating results.
We
regard the protection of our intellectual property as critical to our success. In particular, we must maintain, protect and enhance
our brands. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well
as contractual restrictions. In the ordinary course, we enter into confidentiality and invention assignment agreements with our
employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access
to, and disclosure and use of, our proprietary information and customized technology platform. However, these contractual arrangements
and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary
information or deter independent development of similar technologies by others.
We
pursue the registration of our domain names, trademarks and service marks in the United States and in certain locations outside
the United States. Effective trademark, trade dress and domain names are expensive to develop and maintain, both in terms of initial
and ongoing registration requirements and the costs of defending our rights. We are seeking to protect our trademarks and domain
names, a process that is expensive and may not be successful.
Litigation
may be necessary to enforce our intellectual property rights or determine the validity and scope of proprietary rights claimed
by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management
and technical resources, any of which could adversely affect our business and operating results. We may incur significant costs
in enforcing our trademarks against those who attempt to imitate our brands. If we fail to maintain, protect and enhance our intellectual
property rights, our business and financial condition could be materially and adversely affected.
We
process, store and use personal information and other data, which subjects us to governmental regulation, enforcement actions
and other legal obligations or liability related to data privacy and security, and our actual or perceived failure to comply with
such obligations could materially and adversely affect our business.
We
receive, store and process personal information and other member data, and we enable our members to share their personal information
with each other and with third parties. There are numerous federal, state, local and foreign laws regarding privacy and the storing,
sharing, use, processing, disclosure and protection of personal information and other member data, the scope of which are changing,
subject to differing interpretations and may be inconsistent between countries or conflict with other rules. We generally comply
with industry standards and adhere to the terms of our privacy policies and privacy-related obligations to third parties (including
voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations
and industry codes of conduct relating to privacy and data protection. However, it is possible that these obligations may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.
Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other
third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release
or transfer of personally identifiable information or other member data, may result in governmental enforcement actions, litigation
or public statements against us by consumer advocacy groups or others and could cause our members and customers to lose trust
in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors
or developers, violate applicable laws or our policies, such violations may also put our members’ information at risk and
could in turn have an adverse effect on our business.
Public
scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or
prevent us from providing our current products and solutions to our members and customers, thereby materially harming our business.
The
regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future.
Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over
the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and
the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information
concerning consumer behavior on the Internet, including regulation aimed at restricting certain on-line tracking and targeted
advertising practices. In addition, various government and consumer agencies have also called for new regulations and changes
in industry practices.
Our
business could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is
inconsistent with our current business practices or that require changes to these practices, the design of our websites, products,
features or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven
by our ability to use the data that our members share with us in accordance with each of our website privacy policies and terms
of use. Therefore, our business, operating results and financial condition could be materially and adversely affected by any significant
change to applicable laws, regulations or industry practices regarding the use or disclosure of data our members choose to share
with us, or regarding the manner in which the express or implied consent of consumers for such use and disclosure is obtained.
Such changes may require us to modify our products and features, possibly in a material manner, and may limit our ability to develop
new products and features that make use of the data that our members voluntarily share with us.
Our
business is subject to a variety of U.S. laws and regulations, many of which are unsettled and still developing and which could
subject us to claims or otherwise materially harm our business.
We
are subject to a variety of laws and regulations in the United States, including laws regarding data retention, privacy and consumer
protection, which are continually evolving and developing. The scope and interpretation of the laws that are or may be applicable
to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services
for activities of their users and other third parties are currently being tested by a number of claims, including actions based
on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on
the nature and content of the materials searched, the ads posted or the content provided by users. In addition, regulatory authorities
are considering a number of legislative and regulatory proposals concerning data protection and other matters that may be applicable
to our business. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may
become subject. See the discussion included in “
Business – Government Regulation
” beginning on page 12
of this Annual Report.
If
we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be harmed,
and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial
resources or to discontinue certain solutions, which would materially and adversely affect our business, financial condition and
results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative
proposals could materially harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result
of this potential liability could materially and adversely affect our business, financial condition and results of operations.
We
are currently party to litigation and may in the future be subject to additional legal proceedings and litigation which may be
costly to defend and could materially and adversely affect our business results or operating and financial condition.
We
are currently party to litigation and may be party to additional lawsuits in the normal course of business. Results of the litigation
to which we are a party cannot be predicted with certainty and there can be no assurance that this litigation will be resolved
in our favor. These matters are described in more detail under the heading “
Legal Proceedings
.” Litigation
in general is often expensive and disruptive to normal business operations. We may face in the future allegations and lawsuits
that we have infringed the intellectual property and other rights of third parties, including patents, privacy, trademarks, copyrights
and other rights. Litigation, particularly intellectual property and class action matters, may be protracted and expensive, and
the results are difficult to predict. Adverse outcomes may result in significant settlement costs or judgments, require us to
modify our products and features while we develop non-infringing substitutes or require us to stop offering certain features.
From
time to time, we may face claims against companies that incorporate open source software into their products, claiming ownership
of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such
software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation,
require us to purchase a costly license or require us to devote additional research and development resources to change our solutions,
any of which could have a negative effect on our business and operating results.
Our
success depends in large part upon our management and key personnel. Our inability to attract and retain these individuals could
materially and adversely affect our business, results of operations and financial condition.
We
are highly dependent on our management and other key employees. The skills, knowledge and experience of our management team, are
critical to the growth of our business. In particular, Mr. Michael Wang, our Chief Executive Officer, provides significant leadership
in every aspect of our business operations and strategic direction. In the United States we have a diversified and strong group
of experienced and talented leaders, including Ms. Star Jones our President, who is an expert in issues relating to diversity
and networking. Ms. Jones is supported by a talented group of knowledgeable executives in business operations, sales and marketing,
including Joseph Bzdyl our Executive VP of Operations. Our future performance will be dependent upon the continued successful
service of members of our management and key employees. We do not maintain life insurance for any of the members of our management
team or other key personnel. Competition for management in our industry is intense, and although we have entered into employment
agreements with certain members of our management team, we may not be able to retain our management and key personnel or attract
and retain new management and key personnel in the future, which could materially and adversely affect our business, results of
operations and financial condition.
We
have expanded our business into the Peoples’ Republic of China and Hong Kong, which could subject us to risks which could
negatively affect our business
.
Following
the investment in our business by CFL, we expanded our business into China and Hong Kong, which may expose us to risks uniquely
affecting the Chinese market. These risks include, among others, changes in economic conditions in China and Hong Kong (including
consumer spending, unemployment levels and wage and commodity inflation), local consumer preferences, the regulatory environment,
as well as increased media scrutiny of our business and industry, fluctuations in foreign exchange rates and increased competition.
In addition, any significant or prolonged deterioration in U.S.-China relations could adversely affect our China operations if
Chinese consumers become reluctant to use our websites or become registered users or members of our networks. Chinese law may
regulate the scope of our business conducted within China. Our business is therefore subject to numerous uncertainties based on
the policies of the Chinese government, as they may change from time to time.
Regulation
and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable
for information displayed on, retrieved from, or linked to our Internet websites.
The
government of China has adopted certain regulations governing Internet access and the distribution of news and other information
over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or
displaying over the Internet content that, among other things, violates Chinese laws and regulations, impairs the national dignity
of China, or is obscene, superstitious, fraudulent or defamatory as determined by the applicable Chinese regulatory authorities.
Failure to comply with these requirements, even inadvertently, could result in the revocation of required licenses and the closure
of our websites. The website operator may also be held liable for such prohibited information displayed on, retrieved from or
linked to such website. In addition, the Ministry of Industry and Information Technology has published regulations that subject
website operators to potential liability for content included on their websites and the actions of users and others using their
websites, including liability for violations of Chinese laws prohibiting the dissemination of content deemed to be socially destabilizing.
The Ministry of Public Security has the authority to order any local Internet service provider, to block any Internet website
maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination over
the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible
for the protection of State secrets of the Chinese government, is authorized to block any website it deems to be leaking state
secrets or failing to meet the relevant regulations relating to the protection of state secrets in the dissemination of online
information. If we are determined to violate these regulations, even if the offending content is not generated by us, we could
be subject to civil or criminal penalties, fines, revocation of our Internet service provider license and other penalties which
could materially impair our operations and our ability to continue in business. As these regulations are subject to interpretation
by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in
liability for us as a website operator. Further, to the extent that the regulations relate to information contained on a website
regardless of whether the information is placed on the Internet by the website owner or by a third party, we may not be able to
control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated
or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities
find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information
or otherwise curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse
effect on our financial condition and results of operations. In addition, we may be subject to significant penalties for violations
of those regulations arising from information displayed on, retrieved from or linked to our websites, including a suspension or
shutdown of our operations.
Risks
Related to Our Common Stock
Our
significant stockholder and our directors and executive officers have substantial control over the Company and could limit your
ability to influence the outcome of key transactions, including changes of control.
Cosmic
Forward Limited (“CFL”) beneficially owned approximately 47.27% of our common stock on a non-diluted basis
and 40.7% on a diluted basis as of April 12, 2019. As a result of its ownership CFL is able to influence significantly
all matters requiring approval by our stockholders, including the election of directors. In addition, our directors and executive
officers and their affiliated entities, in the aggregate, beneficially own approximately 9.95% of our outstanding common
stock as of April 12, 2019. Stockholders other than these principal stockholders are therefore likely to have little influence
on decisions regarding such matters. These stockholders may have interests that differ from yours, and they may vote in a way
with which you disagree and that may be adverse to your interests. The concentration of ownership of our common stock may have
the effect of delaying, preventing or deterring a change of control of our Company, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale of our Company and may affect the market price of our common stock.
This concentration of ownership also limits the number of shares of stock likely to be traded in public markets and therefore
will adversely affect liquidity in the trading of our common stock. This concentration of ownership of our common stock may also
have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all
of our stockholders.
The
market price for our securities may be subject to wide fluctuations and the value of an investment in our common stock may decline.
The
trading price of our common stock has been, and is likely to continue to be, volatile. Since shares of our common stock were sold
in our initial public offering at a price of $64.00 per share, our stock price has ranged from $0.88 to $5.24 during the fiscal
year of 2018. In addition to the factors discussed in this Annual Report, the trading price of our common stock may fluctuate
significantly in response to numerous factors, many of which are beyond our control, including:
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price
and volume fluctuations in the stock market, including as a result of trends in the economy as a whole or relating to companies
in our industry;
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actual
or anticipated fluctuations in our revenue, operating results or key metrics, including our number of members and unique visitors;
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investor
sentiment with respect to our competitors, our business partners and our industry in general;
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announcements
by us or our competitors of significant products or features, technical innovations, strategic partnerships, joint ventures
or acquisitions;
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additional
shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales;
and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
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The
securities of technology companies, especially Internet companies, have experienced wide fluctuations subsequent to their initial
public offerings, including trading at prices below the initial public offering prices. Factors that could affect the price of
our common stock include risk factors described in this section. In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating performance of particular industries or companies.
These market fluctuations may also have a material adverse effect on the market price of our common stock.
Substantial
future sales of shares of our common stock could cause the market price of our common stock to decline.
The
market price of our common stock could decline as a result of (i) substantial sales of our common stock, particularly sales by
CFL and/or our directors, executive officers, employees, or other significant stockholders, (ii) a large number of shares of our
common stock becoming available for sale, or (iii) the perception in the market that holders of a large number of shares intend
to sell their shares. As a result of the consummation of the issuance and sale of 1,777,417 shares of our common stock to CFL
in November 2016, and a subsequent issuance to CFL of an additional 312,500 shares in January 2017, CFL owns 47.3% of our
outstanding common stock as of April 12, 2019, with respect to which CFL has the right to require the Company to register the
public resale under a registration statement filed with the SEC. The eventual resale of some or all of such shares, or the perception
that such sale or sales could be imminent, could result in a material decline in the market value of our common stock. We have
also filed a universal shelf registration statement on Form S-3, with the SEC on September 7, 2018, which was declared effective
on September 18, 2018. This registration statement provides for the issuance of shares of our common stock, preferred stock, depositary
shares, rights, warrants, units and debt securities up to an aggregate amount of $25,000,000.
In
addition, the Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for the purpose of providing
equity incentives to employees, officers, directors and consultants including options, restricted stock, restricted stock units,
stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The Company amended the 2013
Plan to increase the number of authorized shares of common stock under the Plan from 225,000 shares to 615,000 shares, which the
Company’s stockholders approved on June 26, 2017. The Company further amended the 2013 Plan to increase the number of authorized
shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders approved and ratified on November
8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan. For more information about our 2013
Equity Compensation Plan, please see Note 14 of our Consolidated Financial Statements included in this Annual Report. Finally,
in February 2017 we registered the public resale of up to 246,445 shares of our common stock by White Winston Select Asset Funds
LLC. This registration statement was declared effective on February 13, 2017.
Anti-takeover
provisions in our charter documents and under Delaware law could make an acquisition of our Company more difficult, limit attempts
by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions
in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing
a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated
bylaws include provisions that:
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authorize
our board of directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred
stock;
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establish
an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations
of persons for election to our board of directors, and also specify requirements as to the form and content of a stockholder’s
notice;
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that
our directors may be removed only for cause and only by the affirmative vote of at least a majority of the total voting power
of our outstanding capital stock, voting as a single class; and
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do
not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock voting
in any election of directors to elect all of the directors standing for election, if they should so choose).
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These
provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more
difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our
management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations
with any “interested” stockholder for a period of three years following the date on which the stockholder became an
“interested” stockholder. Finally, because CFL holds a majority of our outstanding shares of common stock, CFL’s
approval will be necessary to effect any change in control.
Our
failure to implement and maintain effective internal control over financial reporting could result in material misstatements in
our financial statements, which could require us to restate financial statements, cause investors to lose confidence in our reported
financial information and could have an adverse effect on our stock price or our debt ratings.
Our
management determined that as of December 31, 2018, our internal control over financial reporting had a material weakness related
to deficiencies in controls over the application of complex accounting principles, timely and complete financial statement reviews
and procedures to ensure all required disclosures are made in our financial statements. Specifically, (i) relevant operating information
was not adequately used to develop accounting and financial information and serve as a basis for accounting estimates, (ii) debt
agreements were not fully reviewed for appropriate classification of outstanding debt. During 2018, we completed certain measures
to remediate material weaknesses related to our internal control over financial reporting that had been identified as of December
31, 2017. Specifically, (i) we centralized the US accounting and HR operations, (ii) improved segregation of duties within our
accounting and financial reporting functions, (iii) improved GAAP training of internal staff, and (iv) engaged an outside consultant
to assist the Company on complex GAAP matters. Although these measures greatly helped improve our internal controls, they did
not fully remediate deficiencies in controls. Additional material weakness identified as of December 31, 2017 in our China operations
that was related to control design with contract administration was fully addressed and remediated in 2018
.
Additional
material weaknesses in our internal control over financial reporting may be identified in the future. Any failure to maintain
existing or implement required new or improved controls, or any difficulties we encounter in their implementation, or in remediating
identified weakness, could result in additional control deficiencies, cause us to fail to meet our periodic reporting obligations
or result in material misstatements in our financial statements. The existence of a material weakness could result in errors in
our financial statements that could result in a restatement of financial statements, and cause us to fail to meet our reporting
obligations. If we are unable to effectively remediate material weaknesses in a timely manner, investors could lose confidence
in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
We
have lost our “emerging growth company” status under the JOBS Act, which could increase the costs and demands placed
upon our management.
We
were deemed an emerging growth company until December 31, 2018. Since we have lost emerging growth company status, we expect the
costs and demands placed upon our management to increase, as we would have to comply with additional disclosure and accounting
requirements, particularly if our public float should exceed $250 million on the last day of our second fiscal quarter in any
fiscal year following our initial public offering, which would disqualify us as a smaller reporting company.
We
do not intend to pay dividends in the foreseeable future.
We
do not intend to declare or pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future
earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in
the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock
after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
You
will have limited ability to bring an action against certain of our directors and officers, or to enforce a judgment against them,
because the majority of our directors and officers reside outside the United States.
A
significant number of our directors and officers reside outside the United States and substantially all of the assets of those
persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against
these individuals in China in the event that you believe your rights have been infringed under the applicable securities laws
or otherwise. Even if you are successful in bringing an action of this kind, the laws of China may render you unable to enforce
a judgment against the assets of our directors and officers.
CFL
holds participation rights and other rights that could affect our ability to raise funds.
Under
our stockholders agreement with CFL and each of its shareholders, Maoji (Michael) Wang, Jingbo Song, Yong Xiong Zheng and Nan
Nan Kou (collectively, the “CFL Shareholders”), we granted to CFL and the CFL Shareholders a participation right with
respect to any future issuances of common stock by the Company, such that CFL and the CFL Shareholders may purchase an amount
of shares necessary to maintain CFL’s then-current beneficial ownership interest, up to a maximum of 54.64% of our then-outstanding
common stock, on a fully-diluted basis, subject to certain exceptions. This participation right could limit our ability to enter
into equity financings and to raise funds from third parties.
In
connection with the stockholders agreement with CFL and the CFL Shareholders, we also granted to CFL and the CFL Shareholders
unlimited demand, shelf and piggyback registration rights, effective upon the expiration of CFL’s initial lock-up period,
to require us to effect a registration under the Securities Act of a resale of the shares of common stock held by CFL. This may
create the perception of a large number of shares of our common stock becoming available for sale or the perception in the market
that holders of a large number of shares intent to sell their shares, especially if CFL were to exercise its registration rights,
thereby potentially further limiting our ability to enter into equity financings and to raise funds from third parties.
Techniques
employed by short sellers may drive down the market price of the Company’s common stock.
Short
selling is the practice of selling securities that the seller does not own, but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a
decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares,
as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s
best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish,
or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create
negative market momentum and generate profits for themselves after selling a stock short. While traditionally these disclosed
shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise
of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”)
have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called
research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts.
These
short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers who
have limited trading volumes and are susceptible to higher volatility levels than U.S. domestic large-cap stocks can be particularly
vulnerable to such short attacks.
Reports
and information have been published about us which have occasionally been followed by a decline in our stock price. It is not
clear what additional effects the negative publicity will have on the Company, if any, other than potentially affecting the market
price of our common stock. Additionally, such allegations against the Company could negatively impact its business operations
and stockholders equity, and the value of any investment in the Company’s stock could be reduced.
ITEM
1B - UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2 - PROPERTIES
We
lease approximately 11,454 square feet of space for our headquarters in Chicago, Illinois under a lease that expires on June 30,
2020. We also lease approximately 1,800 square feet of office space in Minnetonka, Minnesota for our Events division under a month-to-month
lease.
We
lease approximately 7,970
square feet office space in Guangzhou, China under a non-cancelable lease arrangement that provides for payments on a graduated
basis through December 31, 2019.
We
lease approximately 1,950
square feet of office space in Jiangxi Province, China under a non-cancelable lease arrangement that expires on January 30, 2020.
We
believe that our current facilities are adequate to meet our current needs. We may expand our facilities or add new facilities
as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available
as needed to accommodate ongoing operations and any such growth. However, we expect to incur additional expenses in connection
with such new or expanded facilities.
ITEM
3 - LEGAL PROCEEDINGS
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened to assert claims against
the Company in excess of $2 million based on White Winston’s contention that the Company’s conduct delayed White Winston’s
ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30,
2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC, No. 18-cv-10844, (the “Federal Action”)
in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship.
The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233,
plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company
moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss,
the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship
of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had
jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston
filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as
in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim.
The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s
opposition, and the Company’s reply brief, were filed with the court on Monday, March 25, 2019. The Company denies liability
for all claims.
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 council fees, interest, 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 final 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.
We
are also generally subject to legal proceedings and litigation arising in the ordinary course of business.
ITEM
4 - MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business
Professional
Diversity Network, Inc. is both the operator of the Professional Diversity Network (the “Company,” “we,”
“our,” “us,” “PDN Network,” “PDN” or the “Professional Diversity Network”)
and a holding company for NAPW, Inc., a wholly-owned subsidiary of the Company and the operator of the National Association of
Professional Women (the “NAPW Network” or “NAPW”), 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.
Going Concern and Management’s Plans
At
December 31, 2018, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds
from the sales of shares in 2018.
The
Company had an accumulated deficit of approximately $(84,827,000) at December 31, 2018. During the year ended December 31, 2018,
the Company generated a net loss from continuing operations of $(14,572,000), and used cash in continuing operations of $5,057,000.
At December 31, 2018, the Company had a cash balance of approximately $1,442,000. Total revenues were approximately $8,453,000
and $16,080,000 for the years ended December 31, 2018 and 2017. The Company had a working capital deficiency of approximately
$(3,384,000) and $(1,140,000) at December 31, 2018 and 2017. These conditions raise substantial doubt about its ability to
continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to
further implement its business plan, raise capital, and generate revenues. The consolidated financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
The
Company is closely monitoring operating costs and capital requirements. Management of the Company also made efforts in 2018 and
2017 to contain and reduce cost, including terminating non-performing employees and eliminating certain positions, replacing and
negotiating with certain vendors, implementing a new approval process over travel and other expenses, and significantly reducing
the cash compensation for independent board directors. 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 of our other
assets or discontinue business lines.
On
November 16, 2018, the Company entered into a revolving credit facility agreement that matures on May 31, 2020, under which we
can draw up to GBP £1,500,000 (approximately $2,000,000). Interest is payable on any outstanding principal balance at a
rate equal to the LIBOR rate plus 4%. Amounts drawn under this facility are payable at the end of one, three, or six months periods
at the election of the Company. At December 31, 2018, there were no outstanding amounts drawn under this facility. At March 31,
2019, approximately $1,707,000 was available for us to draw.
From January 9, 2019 to April 2, 2019,
the Company sold an aggregate of 232,515 shares of its common stock at a purchase price ranging from $1.146 to $3.85 per share,
representing 120% of the closing price the trading day immediately prior to the date of subscription. As of the date of this annual
report, the Company has received an aggregate gross proceeds of $479,931 under this private placement. All of the purchasers are
citizens of the People’s Republic of China.
Management
believes that its available funds and cash flow from operations may not be sufficient to meet its working capital requirements
through April 2020. In order to fund its operations, the Company will need to either raise capital via stock issuances, utilizing
its revolving credit facility, or securing other financing in the US or China.
There
are 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. In addition, due to China’s foreign currency control, the Company cannot move money between China and the USA 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 strictly. We need to get approval from Chinese government to move money from China to the U.S. which
might take extra time. As of December 31, 2018 we had a $1,336,000 cash balance in China. The independent registered public
accounting firm's report on our financial statements as of December 31, 2018, includes a "going concern" explanatory
paragraph that describes substantial doubt about our ability to continue as a going concern
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
Summary of Significant Accounting Policies
Basis
of Presentation -
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”).
Use
of Estimates
–
The preparation of consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible
that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated
financial statements, which management considered in formulating its estimate, could change in the near term due to one or more
future intervening events. Accordingly, the actual results could differ significantly from estimates.
Significant
estimates underlying the financial statements include the fair value of acquired assets and liabilities associated with acquisitions;
assessment of goodwill impairment, other intangible assets and long-lived assets for impairment; allowances for doubtful accounts
and assumptions related to the valuation allowances on deferred taxes, impact of applying the revised federal tax rates on deferred
taxes, the valuation of stock-based compensation and the valuation of stock warrants.
Principles
of Consolidation -
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned
subsidiaries and a variable interest entity. All significant intercompany balances and transactions have been eliminated in consolidation.
Variable
Interest Entity
Basic
Information
The
Company follows the guidance of accounting for variable interest entities, which requires certain variable interest entities to
be consolidated by the primary beneficiary of the entities.
The
Company’s management evaluated the relationships between the Company and Jiangxi PDN Culture & Media Co., and the economic
benefits flow of the applicable contractual arrangements. The Company concluded that it is the primary beneficiary of Jiangxi
PDN Culture & Media Co.. As a result, the results of operations, assets and liabilities of Jiangxi PDN Culture & Media
Co. have been included in the Company’s consolidated financial statements as of November 16, 2017.
The
significant agreements through which the Company exercises effective control over Jiangxi PDN Culture & Media Co. are:
●
Agreement on Exclusive Technical Support, Consultation and Service, dated as of November 16, 2017 between PDN (China) International
Culture Development Co., Ltd. and Jiangxi PDN Culture & Media Co., Ltd.
●
Business Operation Agreement, dated as of November 16, 2017 between PDN (China) International Culture Development Co., Ltd. and
Jiangxi PDN Culture & Media Co., Ltd.
●
Equity Interest Pledge Agreement, dated as of February 26, 2018 between PDN (China) International Culture Development Co., Ltd.,
Maoji (Michael) Wang and Anyong Wu.
●
Exclusive Stock Option Agreement, dated as of November 16, 2017 between PDN (China) International Culture Development Co., Ltd.,
Maoji (Michael) Wang and Anyong Wu.
●
Intellectual Property Licensing Agreement, dated as of November 16, 2017 between PDN (China) International Culture Development
Co., Ltd. and Jiangxi PDN Culture & Media Co., Ltd.
Financial
Information of 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 consolidated financial statements, is presented as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in
thousands)
|
|
Cash and cash equivalents
|
|
$
|
683
|
|
|
|
1,671
|
|
Total assets
|
|
$
|
1,180
|
|
|
|
1,672
|
|
Total liabilities
|
|
$
|
65
|
|
|
|
257
|
|
|
|
(in
thousands)
|
|
|
|
Year
ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
-
|
|
|
$
|
1,666
|
|
Net income (loss)
|
|
$
|
(232
|
)
|
|
$
|
1,392
|
|
Cash
Equivalents -
The Company considers cash equivalents to include all short-term, highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three months or less.
Accounts
Receivable -
Accounts receivable represent receivables generated from fees earned from customers and advertising revenue.
The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit
losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance
for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization
of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. As of December 31, 2018 and 2017, the allowance for doubtful
accounts amounted to $75,000, and $33,000, respectively.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Incremental
Direct Costs
- Incremental direct costs incurred in connection with enrolling members in the NAPW Network consist of sales
commissions paid to the Company’s direct sales agents. The commissions are deferred and amortized over the term of membership,
which is a 12 month period. Amortization of deferred commissions is included in sales and marketing expense in the accompanying
consolidated statements of operations. Incremental direct costs amounted to $21,000 and $145,000 at December 31, 2018 and 2017,
respectively. Amortization expense of deferred commissions amounted to $239,000 and $819,000 for the years ended December 31,
2018 and 2017, respectively.
Property
and Equipment -
Property and equipment is stated at cost, including any cost to place the property into service, less
accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which
currently range from 3 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the
term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments
are capitalized. The cost of any assets sold or retired and related accumulated depreciation are removed from the accounts at
the time of disposition, and any resulting profit or loss is reflected in income or expense for the period.
Capitalized
Technology Costs -
In accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software,
the Company capitalizes certain external and internal computer software costs incurred during the application development stage.
The application development stage generally includes software design and configuration, coding, testing and installation activities.
Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that
such expenditures will result in additional functionality. Capitalized software costs are amortized over the estimated useful
lives of the software assets on a straight-line basis, generally not exceeding three years.
Business
Combinations -
ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for
business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration
was exchanged. ASC 805 establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes
and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information
to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
Accounting for acquisitions requires the Company to recognize, separately from goodwill, the assets acquired and the liabilities
assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration
transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company
uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the
estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one
year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
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.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. The Company performed its review based on both qualitative and quantitative factors and
determined that carrying value of NAPW’s goodwill exceeded its implied fair value. Accordingly, the Company recorded
a goodwill impairment charge of $5,251,000, and $14,611,000 in the accompanying consolidated statement of operations and comprehensive
loss during the year ended December, 31 2018 and 2017, respectively.
Treasury
Stock
– Treasury stock is recorded at cost as a reduction of stockholders’ equity in the accompanying consolidated
balance sheets.
Revenue
Recognition
–
Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of
an arrangement exists, (2) services are performed, (3) the sales price is fixed or determinable, and (4) collectability is reasonably
assured.
Membership
Fees and Related Services
Membership
fees are collected up-front and member benefits become available immediately; however those benefits must remain available over
the 12 month membership period. At the time of enrollment, membership fees are recorded as deferred revenue and are recognized
as revenue ratably over the 12 month membership period. Members who are enrolled in this plan may cancel their membership in the
program at any time and receive a partial refund (amount remaining in deferred revenue) or due to consumer protection legislation,
a full refund based on the policies of the member’s credit card company.
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.
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
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The
Company’s partner organizations include NAACP and National Urban League,VetJobs, among others.
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. Certain reclassifications have been made to the 2017 consolidated financial statements
to conform to the 2018 discontinued operations presentation. For the year ended December 31, 2018, loss from discontinued
operations was $509,000, net of tax benefit of $52,000, compared to a loss of $711,000, net of tax benefit of $58,000 for
the year ended December 31, 2017.
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, and current liabilities from discontinued operations. As of December 31, 2018,
the current assets from discontinued operations were $126,000, compared to $1,180,000 as of December 31, 2017. As of December
31, 2018, current liabilities from discontinued operations were $347,000 compared to $485,000 as of December 31, 2017.
Advertising
and Marketing Expenses
–
Advertising and marketing expenses are expensed as incurred or the first time the
advertising takes place. The production costs of advertising are expensed the first time the advertising takes place. For the
years ended December 31, 2018 and 2017, the Company incurred advertising and marketing expenses of approximately $1,375,000 and
$2,859,000, respectively. These amounts are included in sales and marketing expenses in the accompanying consolidated statements
of operations. At December 31, 2018 and 2017, there were no prepaid advertising expenses recorded in the accompanying consolidated
balance sheets.
Concentrations
of Credit Risk -
Financial instruments, which potentially subject the Company to concentration of credit risk, consist
principally of cash and cash equivalents and accounts receivable. The Company places its cash with high credit quality institutions.
At times, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such accounts
and believes that it is not exposed to any significant credit risk on the account.
Income
Taxes -
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company
recognize deferred tax liabilities and assets based on the differences between the financial statement basis and tax basis of
assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company
estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by
tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more
likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely
than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
ASC
740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance
with ASC 740-20 and prescribes a recognition threshold and measurement process for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December 31, 2018. The Company
is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from
its position.
The
Company may be subject to potential income tax examinations by federal or state authorities. These potential examinations may
include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with
federal and state tax laws. Management does not expect that the total amount of unrecognized tax benefits will materially change
over the next twelve months. Tax years that remain open for assessment for federal and state tax purposes include the years ended
December 31, 2013 through 2018.
The
Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of
income tax expense. There were no amounts accrued for penalties or interest as of December 31, 2018.
Fair
Value of Financial Assets and Liabilities -
Financial instruments, including cash and cash equivalents, short-term investments
and accounts payable, are carried at cost. Management believes that the recorded amounts approximate fair value due to the short-term
nature of these instruments.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Net
Loss per Share -
The Company computes basic net loss per share by dividing net loss available to common stockholders by
the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially
dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The computation of basic net loss per share for the years ended December 31, 2018 and 2017 excludes the potentially dilutive securities
summarized in the table below because their inclusion would be anti-dilutive.
|
|
2018
|
|
|
2017
|
|
Warrants to purchase common
stock
|
|
|
170,314
|
|
|
|
170,314
|
|
Stock options
|
|
|
499,439
|
|
|
|
246,564
|
|
Unvested restricted
stock
|
|
|
60,651
|
|
|
|
15,544
|
|
|
|
|
730,404
|
|
|
|
432,422
|
|
Recently
Issued Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (“ASC 606” or “ASU 2014-09”).
ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost
guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.”
The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in
an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also
requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs
incurred to obtain or fulfill a contract. In July 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year
to the first quarter of 2018 to provide companies sufficient time to implement the standards. ASU 2014-09 provides two methods
of retrospective application, either the full retrospective or cumulative effect transition method. The first method would require
the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively
apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASC 606 requires companies to identify
contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on
when control of goods and services transfer to a customer. The Company has completed its initial assessment of the new standard
and is in the process of assessing its contracts with customers, through a detailed review of their contract portfolio and comparing
its historical accounting policies and practices to the new standard. The Company will continue to assess the impact through its
implementation process. The Company expects to adopt ASC 606 using the modified retrospective transition method in the quarter
ending March 31, 2019. The financial presentation and results of operations for reporting periods after January 1, 2019 will be
presented under the new guidance, while financial presentation and results of operations for prior periods presented will continue
to be reported in accordance with the legacy standard and the Company’s historical accounting policy. The Company’s
adoption of ASU 2014-09 in 2019 did not have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
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. ASC 842 was previously
required to be adopted using the modified retrospective approach. However, in July 2018, the FASB issued ASU 2018-11, which allows
for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. Under this option, entities would not need to apply ASC 842 (along with its disclosure requirements)
to the comparative prior periods presented. Management expects that most of its operating leases (primarily office space) will
be recognized as operating lease liabilities and right of use assets on its consolidated balance sheet. The Company has elected
to adopt certain of the optional practical expedients, including the package of practical expedients, which, among other things,
gives the option to not reassess: 1) whether expired or existing contracts are or contain leases; 2) the lease classification
for expired or existing leases; and 3) initial direct costs for existing leases. Management has evaluated the impact of the adoption
of this standard and expects to record right of use assets of $440,000 and lease obligations of $454,000.
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 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 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.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 does not expect that the ASU will have
a material impact on our financial condition or results of operations.
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.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Property and Equipment
Property
and Equipment is as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Computer hardware
|
|
$
|
140,523
|
|
|
$
|
397,528
|
|
Furniture and fixtures
|
|
|
42,153
|
|
|
|
216,473
|
|
Leasehold improvements
|
|
|
111,076
|
|
|
|
239,921
|
|
|
|
|
293,752
|
|
|
|
853,922
|
|
Less: Accumulated
depreciation
|
|
|
(210,145
|
)
|
|
|
(632,738
|
)
|
|
|
$
|
83,607
|
|
|
$
|
221,184
|
|
|
|
|
|
|
|
|
|
|
Assets abandoned or disposed
|
|
$
|
51,804
|
|
|
|
-
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $92,000 and $181,000, respectively, and is recorded in depreciation
and amortization expense in the accompanying consolidated statements of operations.
5.
Capitalized Technology
Capitalized
Technology, net is as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Capitalized cost:
|
|
|
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
2,043,122
|
|
|
$
|
1,860,558
|
|
Additional
capitalized cost
|
|
|
119,922
|
|
|
|
182,564
|
|
Balance, end
of period
|
|
$
|
2,163,044
|
|
|
$
|
2,043,122
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,889,741
|
|
|
$
|
1,698,954
|
|
Provision
for amortization
|
|
|
78,472
|
|
|
|
190,787
|
|
Balance, end
of period
|
|
$
|
1,968,213
|
|
|
$
|
1,889,741
|
|
Capitalized Technology,
net
|
|
$
|
194,831
|
|
|
$
|
153,381
|
|
Amortization expense of $2,447,372 and
$2,635,400 for the years ended December 31, 2018 and 2017, respectively, is recorded in depreciation and amortization expense
in the accompanying consolidated statements of operations.
6.
Intangible Assets
In
fourth quarter of 2018, the Company undertook a review of the carrying amount of its long-lived intangible assets. The Company
performed its review based on both qualitative and quantitative factors and determined that carrying value of long-lived intangible
assets exceeded its implied fair value, and as of December 31, 2018 recorded impairment charge of $2,796,000.
Intangible
assets, net is as follows:
December
31, 2018
|
|
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Long-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Process
|
|
|
10
|
|
|
$
|
2,130,956
|
|
|
$
|
(1,692,764
|
)
|
|
$
|
438,192
|
|
Paid Member Relationships
|
|
|
5
|
|
|
|
803,472
|
|
|
|
(758,972
|
)
|
|
|
44,500
|
|
Member Lists
|
|
|
5
|
|
|
|
8,086,181
|
|
|
|
(7,638,331
|
)
|
|
|
447,850
|
|
Developed Technology
|
|
|
3
|
|
|
|
648,000
|
|
|
|
(648,000
|
)
|
|
|
-
|
|
Trade Name/Trademarks
|
|
|
4
|
|
|
|
440,000
|
|
|
|
(440,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
12,108,609
|
|
|
|
(11,178,067
|
)
|
|
|
930,542
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,020,942
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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,
|
|
|
|
2019
|
|
$
|
568,557
|
|
2020
|
|
|
76,207
|
|
2021
|
|
|
76,207
|
|
2022
|
|
|
76,207
|
|
Thereafter
|
|
|
133,364
|
|
|
|
$
|
930,542
|
|
|
|
2018
|
|
|
2017
|
|
Impairment
charge on NAPW
|
|
$
|
2,796,391
|
|
|
$
|
-
|
|
Amortization
expense of $2,802,233 and $2,868,400 for the years ended December 31, 2018 and 2017, respectively, is recorded in depreciation
and amortization expense in the accompanying consolidated statements of operations.
7.
Goodwill
Goodwill
is summarized as follows:
|
|
2018
|
|
|
2017
|
|
Balance
at January 1,
|
|
$
|
5,590,150
|
|
|
$
|
20,201,190
|
|
Impairment
charge on NAPW
|
|
|
(5,250,699
|
)
|
|
|
(14,611,040
|
)
|
Balance
at December 31,
|
|
$
|
339,451
|
|
|
$
|
5,590,150
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Note Payable – Related Party
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.
9.
Revolving Credit Facility – Related Party
On
November 16, 2018, the Company entered into a revolving credit facility agreement with GNet Tech, a related party through one
of the Company’s shareholders, Cosmic Forward Limited (“CFL”), that matures on May 31, 2020, under which we
can draw up to GBP £1,500,000 (approximately $2,000,000). Interest is payable on any outstanding principal balance at a
rate equal to the LIBOR rate plus 4%. Amounts drawn under this facility are payable at the end of one, three, or six months periods
at the election of the Company. At December 31, 2018, there were no outstanding amounts drawn under this facility. At April
12, 2019, approximately $1,707,000 was available for us to draw.
As
of 4/12/2019, the Company has drawn down $293,000 under this facility.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10.
Commitments and Contingencies
Lease
Obligations -
The Company leases office space, a corporate apartment, office furniture and equipment under various operating
lease agreements.
We
lease approximately 11,454 square feet of space for our headquarters in Chicago, Illinois under a lease that expires on June 30,
2020. We also lease approximately 1,800 square feet of office space in Minnetonka, Minnesota for our Events division under a month-to-month
lease.
Beginning
January 1, 2017, the Company leases approximately 7,970 square feet office space in Guangzhou, China under a non-cancelable lease
arrangement that provides for payments on a graduated basis through December 31, 2019.
Beginning
November 15, 2017, the Company leases approximately 1,950 square feet of office space in Jiangxi Province, China under a non-cancelable
lease arrangement that expires on January 30, 2020.
Rent
expense, amounting to $498,232 and $904,135 for the years ended December 31, 2018 and 2017, respectively, is included in
general and administrative expense in the consolidated statements of operations. Included in rent expense for the year ended December
31, 2017 is sublease income of $384,000.
Future
annual minimum payments net of sublease income due under the leases are summarized as follows:
Year
ending December 31,
|
|
|
|
2019
|
|
$
|
395,176
|
|
2020
|
|
|
303,995
|
|
|
|
$
|
699,171
|
|
Legal
Proceedings
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened to assert claims against
the Company in excess of $2 million based on White Winston’s contention that the Company’s conduct delayed White Winston’s
ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30,
2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC, No. 18-cv-10844, (the “Federal Action”)
in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship.
The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233,
plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company
moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss,
the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship
of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had
jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston
filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as
in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim.
The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s
opposition, and the Company’s reply brief, was filed with the court on Monday, March 25, 2019. The Company denies liability
for all claims.
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 council feels, interest, 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 final 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.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
11.
CFL Transaction
On
August 12, 2016, the Company entered into a stock purchase agreement (the “Purchase Agreement”), with CFL, a Republic
of Seychelles company wholly-owned by a group of Chinese investors. Pursuant to the Purchase Agreement, the Company agreed to
issue and sell to CFL (the “Share Issuance and Sale”), and CFL agreed to purchase, at a price of $9.60 per share (the
“Per Share Price”), upon the terms and subject to the conditions set forth in the Purchase Agreement, a number of
shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), such that CFL will hold
shares of Common Stock equal to approximately 51% of the outstanding shares of Common Stock, determined on a fully-diluted basis,
after giving effect to the consummation of the transactions contemplated by the Purchase Agreement, including the Tender Offer
described below (the “CFL Transaction”).
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant
to a co-sale right, an existing shareholder of the Company would have the right to sell up to 205,925 shares of Common Stock to
CFL as of the date of the Purchase Agreement (the “Co-Sale Right”), and such Co-Sale Right, to the extent exercised,
would reduce the number of shares of Common Stock to be purchased by CFL directly from the Company. The Company also commenced
a partial issuer tender offer to purchase up to 312,500 shares of Common Stock (the “Tender Offer”). The number of
shares of Common Stock that CFL agreed to purchase was that amount that would allow it to hold 51% of the outstanding shares of
Common Stock, determined on a fully-diluted basis, after giving effect to the number of shares of Common Stock (if any) the Company
purchases in the Tender Offer, and any shares sold to CFL pursuant to the co-sale right (collectively, the “Common Shares”).
The parties agreed that, if, immediately following the consummation of the Tender Offer and after giving effect to the purchase
by the Company of all shares of Common Stock validly tendered and not withdrawn in the Tender Offer, the Common Shares amount
to less than 51% of the then-outstanding shares of Common Stock, determined on a fully-diluted basis, then CFL shall have an option
(the “Call Option”) to purchase, at a price per share equal to the Per Share Price, such additional number of shares
of Common Stock (the “Call Option Shares”) as are necessary for the previously issued Common Shares plus the Call
Option Shares to equal 51% of the then-outstanding shares of Common Stock determined on a fully-diluted basis, taking into account
the issuance of the Call Option Shares.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
November 7, 2016, the Company consummated the Share Issuance and Sale of 1,777,417 shares of its common stock to CFL at a price
of $9.60 per share, pursuant to the terms of the Purchase Agreement, dated August 12, 2016. In addition, on November 7, 2016,
the Company completed the purchase of 312,500 shares of its common stock at a price of $9.60 per share, net to the seller in cash,
pursuant to the Tender Offer. The Company received approximately $9,000,000 in net proceeds from the Share Issuance and Sale,
after the payment for the shares repurchased in the Tender Offer, the repayment of all amounts outstanding under the Master Credit
Facility and the payment of transaction-related expenses.
At
the closing of the CFL Transaction, the Company entered into a Stockholders’ Agreement, dated November 7, 2016 (the “Stockholders’
Agreement”) with CFL and each of its shareholders: Maoji (Michael) Wang, Jingbo Song, Yong Xiong Zheng and Nan Kou (the
“CFL Shareholders”). The Stockholders’ Agreement sets forth the agreement of the Company, CFL and the CFL Shareholders
relating to board representation rights, transfer restrictions, standstill provisions, voting, registration rights and other matters
following the closing of the Share Issuance and Sale (see Note 18).
12.
Employment Agreement
James
Kirsch, formerly Co-Executive Chairman of the Company, was party to an employment contract with the Company dated September 24,
2014. As the Company previously reported in its March 8, 2018 Form 8-K, Mr. Kirsch tendered his resignation as Co-executive Chairman
on March 6, 2018. Mr. Kirsch’s decision to resign was due to his personal reasons and was not a result of any dispute with
the Company. No compensation was provided in connection with his departure.
Jiangping
(Gary) Xiao, formerly Chief Financial Officer of the Company, was party to an employment contract with the Company dated March
7, 2017. As the Company previously reported in its February 12, 2019 Form 8-K, Mr. Xiao tendered his resignation on February 6,
2019 as Chief Financial Officer, effective March 19, 2019. Mr. Xiao’s decision to resign was due to his personal reasons
and was not a result of any dispute with the Company. No compensation was provided in connection with his departure.
Jingbo
(James) Song, formerly Co-Executive Chairman of the Company, was party to an employment contract with the Company dated January
12, 2017. As the Company previously reported in its February 22, 2019 Form 8-K, Mr. Song tendered his resignation on February
20, 2019 as Executive Chairman of the Board of Directors and director of the Company, effective immediately. Also on February
20, 2019, the Board of Directors resolved to accept Mr. Song’s resignation with immediate effect. Mr. Song’s resignation
from the Board of Directors of the Company was for personal health reasons. Mr. Song served as a valued member of the Board since
November, 2016, and his decision to resign was not due to any disagreement with the Company. No compensation was provided in connection
with his departure.
On
March 11, 2019 (the “He Effective Date”), the Company entered into an employment agreement (the “He Employment
Agreement”) with Mr. He, which He Employment Agreement continues until terminated in writing by either party or earlier
terminated pursuant to the provisions of the He Employment Agreement. Under the He Employment Agreement, Mr. He will receive an
annual base salary of $200,000, subject to adjustment in the sole discretion of the Board or the Compensation Committee of the
Board; provided however, that such annual base salary may not be decreased during Mr. He’s employment period. Mr. He will
be eligible to receive an annual incentive bonus in an amount equal to up to fifty percent (50%) of his base salary, based upon
the achievement of one or more performance goals, targets, measurements and other factors, established for such year by the Compensation
Committee. Mr. He will also participate in all benefit plans and programs, subject to certain conditions and exceptions, as are
generally provided by the Company to its other senior executive employees.
13.
Stockholders’ Equity
Preferred
Stock
– The Company has no preferred stock issued. The Company’s amended and restated certificate of incorporation
and amended and restated bylaws include provisions that allow the Company’s Board of Directors to issue, without further
action by the stockholders, up to 1,000,000 shares of undesignated preferred stock.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Common
Stock
– The Company has one class of common stock outstanding with a total number of shares authorized of 45,000,000.
As of December 31, 2018, the Company had 4,855,165 shares of common stock outstanding.
On
January 13, 2017, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Cosmic Forward
Ltd. (“CFL”), pursuant to which, the Company agreed to issue and sell to CFL (the “Second Share Issuance”),
and CFL agreed to purchase, at a price of $9.60 per share (the “Per Share Price”), upon the terms and subject to the
conditions set forth in the Purchase Agreement, 312,500 shares of the Company’s common stock.
On
December 8, 2017, Professional Diversity Network, Inc. (the “Company”) sold 18,200 shares of common stock (each a
“Share” and collectively the “Shares”) at a price of $3.49 per Share for gross proceeds of $63,518.00.
The per Share purchase price reflected a ten percent (10%) discount from the closing price of the Company’s common stock
on December 7, 2017.
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.
From January 9, 2019 to April 2, 2019,
the Company sold an aggregate of 232,515 shares of its common stock at a purchase price ranging from $1.146 to $3.85 per share,
representing 120% of the closing price the trading day immediately prior to the date of subscription. As of the date of this annual
report, the Company has received an aggregate gross proceeds of $479,931 under this private placement. All of the purchasers are
citizens of the People’s Republic of China.
14.
Stock-Based Compensation
Equity
Incentive Plans
– The Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for
the purpose of providing equity incentives to employees, officers, directors and consultants including options, restricted stock,
restricted stock units, stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The
Company amended the 2013 Plan to increase the number of authorized shares of common stock under the Plan from 225,000 shares to
615,000 shares, which the Company’s stockholders approved on June 26, 2017. The Company further amended the 2013 Plan to
increase the number of authorized shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders
approved and ratified on November 8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan.
Stock
Options
The
fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined
by the Black-Scholes pricing model is affected by the Company’s stock price as well as assumptions regarding a number of
highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over
the term of the awards, and actual and projected employee stock option exercise behaviors. The risk free rate is based on the
U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities
of peer companies, the expected life is based on the estimated average of the life of options using the simplified method, and
forfeitures are estimated on the date of grant based on certain historical data. The Company utilizes the simplified method to
determine the expected life of its options due to insufficient exercise activity during recent years as a basis from which to
estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of
dividend payouts.
Forfeitures
are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
The
following table summarizes the Company’s stock option activity for the years ended December 31, 2018 and 2017
:
|
|
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
or Canceled
|
|
|
(125
|
)
|
|
|
27.6
|
|
|
|
|
|
|
|
|
|
Outstanding – December 31,
2018
|
|
|
499,439
|
|
|
$
|
6.94
|
|
|
|
9.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December 31,
2018
|
|
|
251,272
|
|
|
|
8.49
|
|
|
|
8.8
|
|
|
$
|
-
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding – January 1, 2017
|
|
|
69,950
|
|
|
$
|
12.07
|
|
|
|
9.0
|
|
|
$
|
-
|
|
Granted
|
|
|
240,000
|
|
|
|
10.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
or Canceled
|
|
|
(63,386
|
)
|
|
|
(10.46
|
)
|
|
|
|
|
|
|
|
|
Outstanding – December
31, 2017
|
|
|
246,564
|
|
|
$
|
11.17
|
|
|
|
9.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – December
31, 2017
|
|
|
86,564
|
|
|
|
12.00
|
|
|
|
9.0
|
|
|
$
|
-
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 agreements. These options had
an aggregate fair value of $54
7
,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 garnted 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 of approximately $659,000 and $706,000 as a component of general and administrative
expenses in the accompanying consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively,
pertaining to stock options.
Total
unrecognized compensation expense related to unvested stock options at December 31, 2018 amounts to approximately $301,000 and
is expected to be recognized over a remaining weighted average period of 1.2 years.
Warrants
As
of December 31, 2018 and 2017, 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 outstanding and exercisable at December 31,
2018 and 2017 was 2.6 and 3.3 years, respectively, and the aggregate intrinsic value was $0.
Restricted
Stock
A
summary of restricted stock activity for the year ended December 31, 2018 is as follows:
|
|
Number
of
Shares
|
|
Unvested - December 31, 2017
|
|
|
15,544
|
|
Granted
|
|
|
60,651
|
|
Vested
|
|
|
(15,544
|
)
|
Forfeited
or Canceled
|
|
|
-
|
|
Unvested – December 31, 2018
|
|
|
60,651
|
|
On
June 26, 2017, the Company granted 15,544 restricted stock units (“RSUs”) to certain Board members. The RSUs vest
on June 28, 2018, 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 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 expense of $141,000 and $161,000 as a component of general and administrative expenses
in the accompanying consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively, pertaining
to restricted stock.
Total
unrecognized compensation expense related to unvested restricted stock at December 31, 2018 amounts to $98,000 and is expected
to be recognized over a weighted average period of 0.4 year.
15.
Income Taxes
The
Company has the following net deferred tax assets and liabilities at December 31, 2018 and 2017:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Goodwill and intangible
assets
|
|
$
|
(183,082
|
)
|
|
$
|
(1,591,326
|
)
|
Developed technology
|
|
|
(53,384
|
)
|
|
|
(42,698
|
)
|
Derivative liability
|
|
|
(113,811
|
)
|
|
|
(112,149
|
)
|
Property and equipment
|
|
|
12,140
|
|
|
|
85,351
|
|
Other deferred tax assets
|
|
|
44,654
|
|
|
|
47,879
|
|
Settlements
|
|
|
191,781
|
|
|
|
39,442
|
|
Lease liability
|
|
|
-
|
|
|
|
23,081
|
|
Stock based compensation
|
|
|
403,587
|
|
|
|
214,610
|
|
Net operating loss
|
|
|
6,843,840
|
|
|
|
5,536,896
|
|
Valuation allowance
|
|
|
(7,340,511
|
)
|
|
|
(6,004,605
|
)
|
Net
deferred tax liability
|
|
$
|
(194,786
|
)
|
|
$
|
(1,803,519
|
)
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
benefit for income taxes for the years ended December 31, 2018 and 2017 consists of the following:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
provision (benefit)
|
|
|
(1,097,974
|
)
|
|
|
(1,798,585
|
)
|
|
|
|
(1,097,974
|
)
|
|
|
(1,798,585
|
)
|
State:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
provision (benefit)
|
|
|
(307,901
|
)
|
|
|
(51,170
|
)
|
|
|
|
(307,901
|
)
|
|
|
(51,170
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
(210,177
|
)
|
|
$
|
104,241
|
|
Deferred
provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(210,177
|
)
|
|
|
104,241
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
(1,616,052
|
)
|
|
$
|
(1,745,514
|
)
|
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Expected federal statutory
rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
6.4
|
%
|
|
|
4.8
|
%
|
Change in expected future federal tax
rate
|
|
|
0.0
|
%
|
|
|
-7.6
|
%
|
Impairment charge
|
|
|
-8.6
|
%
|
|
|
-23.6
|
%
|
Valuation allowance
|
|
|
-8.0
|
%
|
|
|
0.9
|
%
|
Permanent items
|
|
|
0.0
|
%
|
|
|
-0.1
|
%
|
Rate change
|
|
|
0.4
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
-1.5
|
%
|
|
|
-1.1
|
%
|
|
|
|
9.7
|
%
|
|
|
7.3
|
%
|
The
valuation allowance at December 31, 2018 was approximately $7,340,000. The net change in the valuation allowance during the year
ended December 31, 2018 was an increase of approximately $1,335,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items,
management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances
to warrant the application of a valuation allowance as of December 31, 2018.
At
December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$24,237,000. The federal and state net operating loss carryforwards will expire, if not utilized, beginning in 2034.
A
tax benefit from uncertain tax positions may be recognized when it is more likely than not that the position that a tax position
will be sustained upon examination. Management makes judgments as to the interpretation of the tax laws that may be challenged
upon an audit and cause a change of tax liability. As of December 31, 2018 and 2017, the Company did not maintain a reserve for
uncertain tax positions.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company files tax returns in multiple jurisdictions and is subject to examination in these jurisdictions. Significant jurisdictions
in the U.S. include New York, Illinois and California. In May 2016, the Company received notice that the 2014 consolidated tax
return of the Company is being audited by the Internal Revenue Service. During April 2017, the Internal Revenue Service notified
the Company that their audit has been completed and that no change is being made to the Company’s consolidated tax return.
Section
382 of the Internal Revenue Code (Section 382) imposes a limitation on a corporation’s ability to utilize net operating
loss carryforwards (NOLS) if it experiences an “ownership change” as defined within the Code. In general, an ownership
change may result from transactions increasing the ownership of certain shareholders in the stock of a corporation by more than
50 percentage points over a three year period. In connection with the 2016 CFL Transaction, the Company issued CFL 1,777,417 shares
of common stock. The Company evaluated the ownership change pertaining to this issuance and determined that in accordance with
the rules related to Section 382 and certain built in gain allowances pursuant to the Code and subsequent Internal Revenue Code
Rulings and Notices, the Company did experience an ownership change that would limit the Company’s ability to utilize its
net operating losses. In accordance with Section 382 and certain built in gain allowances pursuant to the Code and subsequent
Internal Revenue Code Rulings and Notices, utilization of the Company’s NOL will be limited. An analysis has determined
the limitation to be $1,800,000 annually through 2021 and $273,000 thereafter. During 2017 312,500 of shares of common stock were
issued to CFL, the limitation imposed by Section 382 were reevaluated. No adjustment to the previously computed limitation is
required. As a result of this ownership change, no NOL is expected to be lost and not utilized. In the event the Company experiences
another ownership change in the future, the NOL may, once again, be further limited.
On
December 22, 2017 the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. As a result of the Tax Act,
the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires
companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue
its deferred tax liabilities at the new rate. As a result of the reduction in the U.S. corporate income tax rate, we re-measured
our ending net deferred tax liabilities at December 31, 2017 at the rate at which they are expected to reverse in the future and
recognized a tax benefit of $788,000.
Additionally,
Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when
a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail
to complete the accounting for certain income tax effects of the Tax Act. December 22, 2018 marked the end of the measurement
period for purposes of SAB 118. As such, the Company completed the provision calculations with its federal tax return.
The
Tax Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign E&P through the year ended
December 31, 2017. We had an estimated $332,000 of undistributed foreign E&P subject to the deemed mandatory repatriation,
this income was offset by U.S. operating losses. As of December 31, 2018, foreign withholding taxes have not been provided on
the undistributed E&P of our foreign subsidiaries as we intend to permanently reinvest these foreign earnings in those businesses
outside the U.S.
Beginning
in 2018, the Tax Act includes a new U.S. tax base erosion provision designed to tax the global intangible low-taxed income (“GILTI”).
The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable
return on the foreign subsidiary’s tangible assets. The Company has elected to recognize the tax on GILT as a period expense
in the period the tax is incurred.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
17.
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 years ended
December 31, 2018 and 2017:
|
|
Year
ended December 31, 2018
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
NAPW
Network
|
|
|
China
Operations
|
|
|
Corporate
Overhead
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related
services
|
|
$
|
-
|
|
|
$
|
4,766,798
|
|
|
$
|
225,152
|
|
|
$
|
-
|
|
|
$
|
4,991,950
|
|
Recruitment services
|
|
|
2,571,935
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,571,935
|
|
Products sales and other
|
|
|
-
|
|
|
|
19,239
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,239
|
|
Education and training
|
|
|
-
|
|
|
|
-
|
|
|
|
606,557
|
|
|
|
|
|
|
|
606,557
|
|
Consumer advertising
and marketing solutions
|
|
|
262,946
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
262,946
|
|
Total
revenues
|
|
|
2,834,881
|
|
|
|
4,786,037
|
|
|
|
53,599
|
|
|
|
-
|
|
|
|
8,452,627
|
|
(Loss) income from continuing operations
|
|
|
(150,810
|
)
|
|
|
(10,775,648
|
)
|
|
|
(1,615,105
|
)
|
|
|
(3,612,228
|
)
|
|
|
(16,153,791
|
)
|
Depreciation and amortization
|
|
|
65,479
|
|
|
|
2,534,515
|
|
|
|
17,780
|
|
|
|
-
|
|
|
|
2,617,774
|
|
Income tax expense (benefit)
|
|
|
2,796
|
|
|
|
(1,004,453
|
)
|
|
|
(210,177
|
)
|
|
|
(351,878
|
)
|
|
|
(1,563,712
|
)
|
Net (loss) income from continuing operations
|
|
|
(135,536
|
)
|
|
|
(9,771,195
|
)
|
|
|
(1,404,778
|
)
|
|
|
(3,260,350
|
)
|
|
|
(14,571,859
|
)
|
Capital expenditures
|
|
|
-
|
|
|
|
568
|
|
|
|
(7,369
|
)
|
|
|
-
|
|
|
|
(6,802
|
)
|
|
|
At
December 31, 2018
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339,451
|
|
Intangible assets, net
|
|
|
90,400
|
|
|
|
930,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,020,943
|
|
Assets from continuing operations
|
|
|
1,654,346
|
|
|
|
1,970,594
|
|
|
|
1,486,891
|
|
|
|
-
|
|
|
|
5,111,831
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year
Ended December 31, 2017
|
|
|
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
NAPW
Network
|
|
|
China
Operations
|
|
|
Corporate
Overhead
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related
services
|
|
$
|
-
|
|
|
$
|
9,371,843
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,371,843
|
|
Recruitment services
|
|
|
2,578,597
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,578,597
|
|
Products sales and other
|
|
|
-
|
|
|
|
100,289
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,289
|
|
Education and training
|
|
|
-
|
|
|
|
-
|
|
|
|
3,776,546
|
|
|
|
-
|
|
|
|
3,776,546
|
|
Consumer advertising
and marketing solutions
|
|
|
252,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
252,980
|
|
Total
revenues
|
|
|
2,831,577
|
|
|
|
9,472,132
|
|
|
|
3,776,546
|
|
|
|
-
|
|
|
|
16,080,255
|
|
Loss from continuing operations
|
|
|
(265,451
|
)
|
|
|
(18,428,010
|
)
|
|
|
917,015
|
|
|
|
(5,491,652
|
)
|
|
|
(23,268,098
|
)
|
Depreciation and amortization
|
|
|
83,367
|
|
|
|
2,914,076
|
|
|
|
10,221
|
|
|
|
-
|
|
|
|
3,007,664
|
|
Income tax expense (benefit)
|
|
|
(18,490
|
)
|
|
|
(1,393,055
|
)
|
|
|
104,241
|
|
|
|
(380,066
|
)
|
|
|
(1,687,370
|
)
|
Net loss from continuing operations
|
|
|
(226,108
|
)
|
|
|
(17,034,955
|
)
|
|
|
796,108
|
|
|
|
(5,111,586
|
)
|
|
|
(21,576,541
|
)
|
Capital expenditures
|
|
|
100,823
|
|
|
|
10,646
|
|
|
|
49,793
|
|
|
|
-
|
|
|
|
161,262
|
|
|
|
At
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
|
|
18.
Subsequent Events
The
Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated
financial statements were issued for potential recognition or disclosure. Other than as described below, the Company did not identify
any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
Stock
Purchase Agreement
From January 9, 2019 to April 2, 2019,
the Company sold an aggregate of 232,515 shares of its common stock at a purchase price ranging from $1.146 to $3.85 per share,
representing 120% of the closing price the trading day immediately prior to the date of subscription. As of the date of this annual
report, the Company has received an aggregate gross proceeds of $479,931 under this private placement. All of the purchasers are
citizens of the People’s Republic of China.
Employment
Agreement
Jiangping
(Gary) Xiao, formerly Chief Financial Officer of the Company, was party to an employment contract with the Company dated March
7, 2017. As the Company previously reported in its February 12, 2019 Form 8-K, Mr. Xiao tendered his resignation on February 6,
2019 as Chief Financial Officer, effective March 19, 2019. Mr. Xiao’s decision to resign was due to his personal reasons
and was not a result of any dispute with the Company. No compensation was provided in connection with his departure.
Jingbo
(James) Song, formerly Co-Executive Chairman of the Company, was party to an employment contract with the Company dated January
12, 2017. As the Company previously reported in its February 22, 2019 Form 8-K, Mr. Song tendered his resignation on February
20, 2019 as Executive Chairman of the Board of Directors and director of the Company, effective immediately. Also on February
20, 2019, the Board of Directors resolved to accept Mr. Song’s resignation with immediate effect. Mr. Song’s resignation
from the Board of Directors of the Company was for personal health reasons. Mr. Song served as a valued member of the Board since
November, 2016, and his decision to resign was not due to any disagreement with the Company. No compensation was provided in connection
with his departure.
On
March 11, 2019 (the “He Effective Date”), the Company entered into an employment agreement (the “He Employment
Agreement”) with Mr. He, which He Employment Agreement continues until terminated in writing by either party or earlier
terminated pursuant to the provisions of the He Employment Agreement. Under the He Employment Agreement, Mr. He will receive an
annual base salary of $200,000, subject to adjustment in the sole discretion of the Board or the Compensation Committee of the
Board; provided however, that such annual base salary may not be decreased during Mr. He’s employment period. Mr. He will
be eligible to receive an annual incentive bonus in an amount equal to up to fifty percent (50%) of his base salary, based upon
the achievement of one or more performance goals, targets, measurements and other factors, established for such year by the Compensation
Committee. Mr. He will also participate in all benefit plans and programs, subject to certain conditions and exceptions, as are
generally provided by the Company to its other senior executive employees.
ITEM
16. FORM 10-K SUMMARY.
Not
applicable.