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”), Noble Voice LLC and Compliant Lead LLC (collectively,
“Noble Voice”), PDN (Hong Kong) International Education Ltd, PDN(Hong Kong)International Education Information Co.,
Ltd, and PDN (China) International Culture Development Co. Ltd in March 2017, 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 a 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 they
were their sole shareholders; and have an exclusive option to purchase all of the equity interests in the VIE. Please refer
to footnote #3 for more details about the VIE entity. 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. Noble Voice monetizes these consultations by using proprietary technology to drive inexpensive
online traffic to our offline call center and generating value-added leads for the Company’s strategic partners who provide
continuing education and career services. The Company has begun establishing 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.
2.
Liquidity, Financial Condition and Management’s Plans
At
December 31, 2017, the Company’s principal sources of liquidity were its cash and cash equivalents.
The Company had an accumulated deficit of
approximately $69,746,000 at December 31, 2017. During the year ended December 31, 2017, the Company generated a net loss of approximately
$22,288,000, and used cash in operations of approximately $6,331,000. At December 31, 2017, the Company had a cash balance of
approximately $3,014,000. Total revenues were approximately $22,054,000 and $26,227,000 for the years ended December 31, 2017
and 2016, respectively. The Company had a working capital (deficit) of approximately $(1,139,000) and $1,000,000
at December 31, 2017 and 2016, respectively.
The Company is closely monitoring operating
costs and capital requirements and has developed an operating plan for 2018. Management of the Company also made efforts
in 2017 and first quarter of 2018 to contain and reduce cost, including implementing new approval process over travel and other
expenses, significantly reducing the cash compensation for independent board directors, terminating non-performing employees and
eliminating certain positions, replacing and negotiating with certain vendors, and consolidating our PDN and Noble Voice operations
into one location. If we are not successful in reducing our costs we may then need to dispose of certain of these assets or
discontinue certain business lines.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On
January 29, 2018, Professional Diversity Network, Inc. (the “Company”) sold 380,295 shares of common stock (each a
“Share” and collectively the “Shares”) at a price of $3.91 per Share for gross proceeds of $1,486,953.45.
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.
Management
believes that its available funds and cash flow from operations will be sufficient to meet its working capital requirements
through March 2019. However, there can be no assurances that the plans and actions proposed by management will be successful,
that the Company will generate anticipated revenues, or that unforeseen circumstances will not require additional funding
sources in the future or effectuate plans to conserve liquidity. Future efforts to raise additional funds may not be
successful or they may not be available on acceptable terms, if at all. Due to China’s foreign currency control, the
Company cannot move money between China and the U.S. freely. The People’s Bank of China (PBOC) and State Administration
of Foreign Exchange (SAFE) regulate the flow of foreign exchange in and out of the country. We need to get approval from the
Chinese government to move money from China to the U.S. which might take extra time.
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,671
|
|
|
|
-
|
|
Total assets
|
|
$
|
1,672
|
|
|
|
|
|
Total liabilities
|
|
$
|
257
|
|
|
|
-
|
|
|
|
(in thousands)
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
1,666
|
|
|
$
|
-
|
|
Net income
|
|
$
|
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, 2017 and 2016, the allowance for doubtful
accounts amounted to $33,000, and $95,000, 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 $145,292 and $423,023 at December 31, 2017 and 2016,
respectively. Amortization expense of deferred commissions amounted to $819,000 and $1,758,000 for the years ended December 31,
2017 and 2016, 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.
Prior
to January 1, 2017, when conducting its annual goodwill impairment assessment, the Company initially performed a qualitative evaluation
of whether it is more likely than not that goodwill was impaired. If it was determined by a qualitative evaluation that it was
more likely than not that goodwill was impaired, the Company then applied a two-step impairment test. The two-step impairment
test first compared the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the
reporting unit exceeded its carrying value, goodwill was not impaired and the Company was not required to perform further testing.
If the carrying value of the reporting unit exceeded its fair value, the Company determined the implied fair value of the reporting
unit’s goodwill and if the carrying value of the reporting unit’s goodwill exceeded its implied fair value, then an
impairment loss equal to the difference was recorded in the consolidated statements of operations.
Effective
January 1, 2017, the Company prospectively adopted the provisions of ASU 2017-04, ““Intangibles - Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second
step of the goodwill impairment test. Therefore, for goodwill impairment tests occurring after January 1, 2017, 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 $14,611,000 in the accompanying consolidated statement of operations and comprehensive
loss during the year ended December, 31 2017.
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.
Lead
Generation
Professional
Diversity Network provides career opportunities to our registered users. Our Career Advisors suggest job opportunities for our
registered users based on their location and profile. In certain circumstances our Career Advisers offer career support services
to our registered users, including resume writing, education opportunities and economic consultations. In certain circumstances
we receive compensation from various business partners resulting from our job seeker referrals. The Company derives lead generation
revenues pursuant to arrangements with its business partners. Under these arrangements, the Company matches its business partners
with potential candidates, pursuant to specific parameters defined in each arrangement. The Company invoices on a monthly basis
based upon the number of leads provided. Revenues related to lead generation are recognized in the month when the leads are sent
to its business partners.
The
Company’s business partners include educational institutions such as Keypath Education, QuinStreet and Education Dynamics
in Noble Voice’s traditional, core business, as well as a broad array of corporations such as Avon Products, American Airlines,
and Uber, among others.
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 and the National Urban League
|
●
|
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. A significant portion of our 2017 education and training
revenue was generated from “The International Capital Leadership Summit” that was held on December 2, 2017 and
featured Mr. Bruce Aust, Vice Chairman of the Nasdaq Exchange. Of the $2,875,000 Summit revenue, $2,565,000 was generated
from an affiliated entity that was affiliated with certain CFL shareholders who had significant influence on this
entity prior to August 2017.
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.
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, 2017 and 2016, the Company incurred advertising and marketing expenses of approximately $2,859,000 and
$2,694,000, respectively. These amounts are included in sales and marketing expenses in the accompanying consolidated statements
of operations. At December 31, 2017 and 2016, 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, 2017. 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 2017.
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, 2017.
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, 2017 and 2016 excludes the potentially dilutive securities
summarized in the table below because their inclusion would be anti-dilutive.
|
|
2017
|
|
|
2016
|
|
Warrants to purchase common stock
|
|
|
170,314
|
|
|
|
170,314
|
|
Stock options
|
|
|
246,564
|
|
|
|
69,950
|
|
Unvested restricted stock
|
|
|
15,544
|
|
|
|
2,778
|
|
|
|
|
432,422
|
|
|
|
243,042
|
|
Recently
Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,”Revenue from Contracts with
Customers,” which was subsequently modified in August 2015 by ASU No. 2015-14, “Revenue from Contracts with Customers:
Deferral of the Effective Date.” As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years and interim
periods within those years beginning after December 15, 2017. The core principle of ASU No. 2014-09 is that companies should recognize
revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects
to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows
from contracts with customers. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal
versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope
improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections
(ASU 2016-20). Since the Company is an Emerging Growth Company “EGC”, it will adopt the standard on January
1, 2019, using the modified retrospective transition method, which may result in a cumulative-effect adjustment for deferred
revenue to the opening balance sheet for 2019 and the restatement of the financial statements for all prior periods presented.
The Company continues to evaluate the impact of adoption of this standard on its consolidated financial statements and disclosures.
In
February 2016, the FASB issued new lease accounting guidance ASU No. 2016-02, “Leases” (“ASU 2016-02”).
Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an
asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance
is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for
sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified
retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period
presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the
impact of the new guidance on its consolidated financial statements.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting” (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative
and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas
as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of
cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still
qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 is effective
for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively
or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted.
The Company adopted the methodologies prescribed by ASU 2014-15 as of January 1, 2017. The adoption of ASU 2016-09 did not have
a material effect on the Company’s financial position or results of operations.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”).
ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable,
held-to-maturity debt securities and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13
also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an
entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 is effective for public business
entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application
of the guidance permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain
cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues:
debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon
interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments
made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned
life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
ASU 2016-15 is effective for annual periods beginning after December 15, 2018 and interim periods within fiscal years beginning
after December 15, 2019. Early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented.
The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces
the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity
asset transfer, other than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December
15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted using a modified
retrospective transition approach. The Company is currently assessing the impact of the adoption of this guidance on its consolidated
financial statements.
In
January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”
(“ASU 2017-01”). The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and
consolidation. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within
annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of adopting this guidance.
In
May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
“(“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and
complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of
a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for all
annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted.
The adoption of ASU 2017-09 is not expected to have an impact on the Company’s financial position or results of operations.
In
July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 eliminates
the requirement to consider “down round” features when determining whether certain equity-linked financial instruments
or embedded features are indexed to an entity’s own stock. It is effective for annual periods beginning after December 31,
2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Property and Equipment
Property
and Equipment is as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Computer hardware
|
|
$
|
418,882
|
|
|
$
|
377,185
|
|
Furniture and fixtures
|
|
|
240,143
|
|
|
|
227,828
|
|
Leasehold improvements
|
|
|
239,921
|
|
|
|
147,016
|
|
|
|
|
898,946
|
|
|
|
752,029
|
|
Less: Accumulated depreciation
|
|
|
(661,909
|
)
|
|
|
(474,495
|
)
|
|
|
$
|
237,037
|
|
|
$
|
277,534
|
|
Depreciation
expense for the years ended December 31, 2017 and 2016 was $194,618 and $172,156, 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,
|
|
|
|
2017
|
|
|
2016
|
|
Capitalized cost:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,888,791
|
|
|
$
|
1,888,791
|
|
Additional capitalized cost
|
|
|
185,114
|
|
|
|
-
|
|
Balance, end of period
|
|
$
|
2,073,905
|
|
|
$
|
1,888,791
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,715,423
|
|
|
$
|
1,432,268
|
|
Provision for amortization
|
|
|
200,340
|
|
|
|
283,155
|
|
Balance, end of period
|
|
$
|
1,915,763
|
|
|
$
|
1,715,423
|
|
Capitalized Technology, net
|
|
$
|
158,142
|
|
|
$
|
173,368
|
|
Amortization
expense of $200,340 and $283,155 for the years ended December 31, 2017 and 2016, respectively, is recorded in depreciation and
amortization expense in the accompanying statement of operations.
6.
Intangible Assets
Intangible
assets, net is as follows:
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
|
|
|
|
978,000
|
|
|
|
(978,000
|
)
|
|
|
-
|
|
Trade Name/Trademarks
|
|
|
4
|
|
|
|
480,000
|
|
|
|
(389,861
|
)
|
|
|
90,139
|
|
Customer Relationships
|
|
|
5
|
|
|
|
280,000
|
|
|
|
(172,667
|
)
|
|
|
107,333
|
|
|
|
|
|
|
|
|
15,555,000
|
|
|
|
(9,264,195
|
)
|
|
|
6,290,805
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,381,205
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
|
|
Useful Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Long-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Process
|
|
|
10
|
|
|
$
|
3,970,000
|
|
|
$
|
(898,764
|
)
|
|
$
|
3,071,236
|
|
Paid Member Relationships
|
|
|
5
|
|
|
|
890,000
|
|
|
|
(402,972
|
)
|
|
|
487,028
|
|
Member Lists
|
|
|
5
|
|
|
|
8,957,000
|
|
|
|
(4,055,531
|
)
|
|
|
4,901,469
|
|
Developed Technology
|
|
|
3
|
|
|
|
978,000
|
|
|
|
(718,166
|
)
|
|
|
259,834
|
|
Trade Name/Trademarks
|
|
|
4
|
|
|
|
480,000
|
|
|
|
(269,861
|
)
|
|
|
210,139
|
|
Customer Relationships
|
|
|
5
|
|
|
|
280,000
|
|
|
|
(116,667
|
)
|
|
|
163,333
|
|
|
|
|
|
|
|
|
15,555,000
|
|
|
|
(6,461,961
|
)
|
|
|
9,093,039
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,183,439
|
|
Future
annual estimated amortization expense is summarized as follows:
Years ending December 31,
|
|
|
|
2018
|
|
$
|
2,512,539
|
|
2019
|
|
|
1,898,030
|
|
2020
|
|
|
397,000
|
|
2021
|
|
|
397,000
|
|
2022
|
|
|
397,000
|
|
Thereafter
|
|
|
689,237
|
|
|
|
$
|
6,290,806
|
|
Amortization
expense of $2,802,233 and $2,868,400 for the years ended December 31, 2016 and 2015, respectively, is recorded in depreciation
and amortization expense in the accompanying consolidated statements of operations.
7.
Goodwill
Goodwill
is summarized as follows:
|
|
2017
|
|
|
2016
|
|
Balance at January 1,
|
|
$
|
20,201,190
|
|
|
$
|
20,201,190
|
|
Impairment expense on NAPW
|
|
|
(14,611,040
|
)
|
|
|
-
|
|
Balance at December 31,
|
|
$
|
5,590,150
|
|
|
$
|
20,201,190
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
Master Credit Facility
On
March 30, 2016, the Company entered into a Master Credit Facility with White Winston Select Asset Funds, LLC (“White Winston”),
a private investment fund, pursuant to which the Company was granted a revolving credit facility (the “Master Credit Facility”)
in the aggregate amount of up to $5,000,000. On June 30, 2016 (the “Closing Date”), the Company closed the Master
Credit Facility and an initial disbursement of $1,572,576 (before reduction of related fees and expenses, or $1,022,623 of net
proceeds) was made pursuant to the Master Credit Facility. Advances under the Master Credit Facility were issued at 95% of par
value (the “Debt Discount”), with such Debt Discount deducted from the gross amount of the proceeds available under
the Master Credit Facility at Closing and recorded as a debt issuance cost. White Winston could make advances under the Master
Credit Facility provided that the aggregate principal amount outstanding under the Master Credit Facility did not exceed 75% of
the then-outstanding balance of the Company’s customer receivables (as defined in the Master Credit Facility). During the
year ended December 31, 2016, the Company received additional advances in the aggregate amount of $586,786. The Master Credit
Facility was to mature on June 30, 2018 and bore interest at a rate of 8.0% per annum. Interest was payable monthly in arrears.
In addition, from and after the first anniversary of the date of the Master Credit Facility and continuing until the Master Credit
Facility was repaid in full, the Company was required to pay an additional fee of 3.0% on the average daily unborrowed portion
of the Master Credit Facility. The fee was payable quarterly in arrears. On November 7, 2016, in connection with the closing of
the CFL Transaction described below, the Company (i) repaid in full amounts owed under the Master Credit Facility and (ii) terminated
the Master Credit Facility and related agreements between the Company and White Winston, including the Board Representation Agreement.
All security interest created under the Master Credit Facility were released upon repayment of the amounts due under and the termination
of the Master Credit Facility.
Pursuant
to the terms of the Master Credit Facility, on June 30, 2016, the Company issued to White Winston warrants to purchase up to (i)
125,000 shares of the Company’s common stock at a price of $2.00 per share (the “Fixed $2.00 Warrant”); (ii)
218,750 shares of the Company’s common stock at a price of $2.00 per share (the “Pro Rata Warrant”), provided
that the number of shares for which the Pro Rata Warrants were exercisable would be pro-rata based on the ratio of the actual
advances made under the Master Credit Facility to the aggregate face amount of the Master Credit Facility and (iii) 125,000 shares
of the Company’s common stock at a price of $20.00 per share (the “Fixed $20.00 Warrant”). The Fixed $2.00 Warrant
and the Pro Rata Warrant were exercisable for five years from the date of issuance and the Fixed $20.00 Warrant is exercisable
for five years beginning on December 30, 2016.
Pursuant
to the terms of a Board Representation Agreement between the Company and White Winston, White Winston had the right to designate
nominees for election to the Company’s Board of Directors from the date the principal amount outstanding under the Master
Credit Facility first exceeded $2,000,000 until such time as White Winston’s interest (as defined in the Board Representation
Agreement) fell below five percent for 60 consecutive days. The number of nominees that White Winston was entitled to designate
was determined in accordance with the terms of the Board Representation Agreement and, provided that no event of default had occurred,
could not exceed two nominees. If an event of default had occurred and was continuing, White Winston had the right to designate
two additional nominees for election to the Company’s Board of Directors. However, the aggregate number of nominees that
White Winston was entitled to designate in no event could exceed (i) 50 percent of the number of directors, rounded down to the
nearest whole number, if the Board is comprised of an odd number of Directors, and (ii) one less than half of the number of Directors,
if the Board is comprised of an even number of Directors.
The
Company determined the fair value of the Fixed $2.00 Warrant and Fixed $20.00 Warrant issued to White Winston to be $272,133 using
the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 54.63%, (2) risk-free interest
rate of 1.01% and (3) expected life of five years.
The
Company determined that the Pro Rata Warrant should be treated as a derivative liability in accordance with ASC 815-40, “Derivatives
and Hedging, Contracts in Entity’s Own Equity,” due to the variable number of shares issuable. Accordingly, the Pro
Rata Warrant was initially recorded at fair value, with changes in the fair value of the liability recorded in other income/expense
in the accompanying consolidated statements of operations. The Company determined the fair value of the Pro Rata Warrant issued
to White Winston on June 30, 2016 to be $511,325, of which $380,000 was valued as the portion attributable to the unexercisable
Pro Rata Warrant using the Monte Carlo model with the following assumptions: (1) expected volatility of 100.00%, (2) risk-free
interest rate of 1.01% and (3) expected life of five years. The Company recorded a $401,000 change in the fair value of the liability
during the year ended December 31, 2016 (see Note 16).
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company recorded the value of $131,325 attributable to the 68,800 exercisable Pro Rata Warrants at June 30, 2016 as a component
of additional paid in capital in the accompanying consolidated balance sheets.
On August 10, 2016, the Company entered into
an Amendment to Master Credit Facility and Consent and Waiver Agreement (the “Amendment”) with White Winston in connection
with the CFL Transaction (see Note 11). Pursuant to the Amendment, White Winston consented to the CFL Transaction and waived
its participation rights and board representation rights under the Board Representation Agreement in connection with the CFL Transaction.
In consideration for the Amendment, the Company agreed that the Pro Rata Warrant would be fully exercisable, notwithstanding the
pro rata formula set forth in the warrant, and paid a fee of $15,000. In addition, White Winston granted the Company an option
to repurchase its outstanding, in-the-money warrants following consummation of the Tender Offer on the terms set forth in the
Amendment.
As
a result of the Amendment, all 218,750 Pro Rata Warrants became exercisable and the derivative liability in the amount of $781,000
pertaining to the Pro Rata Warrants was reclassified to additional paid in capital (see Note 16).
The
issuance of the Fixed $2.00 Warrant, the Fixed $20.00 Warrant and the Pro Rata Warrant was treated as a debt issue cost and, accordingly,
was recorded as a direct deduction from the carrying amount of Master Credit Facility and was being amortized to interest expense
over the contractual term of the Master Credit Facility. During the year ended December 31, 2016, accretion of the costs amounted
to $97,933.
The
Company incurred cash fees associated with the closing of the Master Credit Facility of $744,214. These amounts were treated as
a debt issue cost and, accordingly, were recorded as a direct deduction from the carrying amount of Master Credit Facility and
were being amortized to interest expense over the contractual term of the Master Credit Facility. During the year ended December
31, 2016, accretion of the fees amounted to $58,661.
Contractual
interest expense on the Master Credit Facility amounted to $37,000 for the year ended December 31, 2016.
On
November 7, 2016, in connection with the closing of the CFL Transaction described below, the Company (i) repaid in full amounts
owed under the Master Credit Facility and (ii) terminated the Master Credit Facility and related agreements between the Company
and White Winston, including the Board Representation Agreement. All security interest created under the Master Credit Facility
were released upon repayment of the amounts due under and the termination of the Master Credit Facility. Accordingly, the Company
amortized the remaining balance of the debt issue costs, amounting to $1,371,078, to interest expense in the accompanying consolidated
statements of operations.
The
Fixed $20.00 Warrant issued to White Winston is still held by White Winston and remains outstanding. On November 7, 2016, White
Winston exercised the Fixed $2.00 Warrant and the Pro Rata Warrant to purchase an aggregate of 343,750 shares of common stock.
9.
Promissory Note
The Company had an outstanding promissory
note in the amount of $445,000 (the “Promissory Note”) payable to Matthew Proman (“Proman”), the Company’s
former Executive Vice President and Chief Operating Officer (see Note 11). The stated interest rate of the Promissory Note
was 0.35%, which was determined to be below the Company’s expected borrowing rate of 4.80%, therefore the Promissory Note
was discounted by $10,418 using a 4.45% imputed annual interest rate. The discount was amortized over the term of the Promissory
Note as non-cash interest expense in the consolidated statements of operations.
The
discount was fully amortized at December 31, 2015. Interest expense amounted to $1,167 for the year ended December 31, 2016.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On November 4, 2016, the Company paid
Mr. Proman $300,000 in full satisfaction of the Promissory Note, inclusive of accrued interest. As such, the Company recorded
a gain on the settlement of debt of $148,112 in the accompanying consolidated statements of operations.
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.
We
lease approximately 20,000 square feet of office space in Garden City, New York, under a lease that expires on June 30, 2019,
which is used by NAPW Network membership coordinators and executive and administrative staff.
We
lease approximately 15,000 square feet of office space in Jericho, New York, under a lease that ends on June 30, 2018. We currently
sub-lease that property to a tenant under a landlord-approved sublease that is coterminous with our prime lease.
We
leased approximately 16,500 square feet of office space in Darien, Illinois, which served as the headquarters and sales center
of Noble Voice. The lease expired on August 31, 2017 and we didn’t renew the Darien lease. We moved our Noble Voice operations
to our Chicago office.
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 $1,219,013 and $1,059,749 for the years ended December 31, 2017 and 2016, respectively, is included in general
and administrative expense in the consolidated statements of operations. Included in rent expense is sublease income of $384,000
and $363,000 for the years ended December 31, 2017 and 2016, respectively.
Future
annual minimum payments net of sublease income due under the leases are summarized as follows:
Year ending December 31,
|
|
|
|
2018
|
|
$
|
983,053
|
|
2019
|
|
|
675,773
|
|
2020
|
|
|
105,846
|
|
|
|
$
|
1,764,672
|
|
Legal
Proceedings
The
Company has previously disclosed that it and its wholly-owned subsidiary, NAPW, Inc., are parties to litigation captioned Gauri
Ramnath, et al. v. Professional Diversity Network, Inc., et al., No. BC604153 (Los Angeles Superior Ct.), a putative class action
filed in January 2016 alleging violations of various California Labor Code (wage & hour) sections. During the first quarter
of 2016, the Company executed a settlement agreement, subject to later Court approval, in which the Company agreed in principle
to pay $500,000 for a global settlement of the class action. During the first quarter of 2016, the Company also recorded a litigation
settlement expense in the amount of $500,000. On November 28, 2016, the Court approved the proposed settlement. In December of
2016 the Company paid the settlement amount in the Court’s fund and the third-party administrator began distributing payments
to class members. On August 2, 2017, the Court notified the parties that the case is “reported as complete without the need
for a further status conference.” This matter is therefore concluded and will not be further reported.
The
Company and its wholly-owned subsidiary, NAPW, Inc., became parties during the year ended December 31, 2016 to an action captioned
LinkedIn Corp. v. NAPW, Inc. and Professional Diversity Network, Inc., No. 16-CV-299784 (Santa Clara Superior Ct.). The complaint
was filed on September 12, 2016. The plaintiff, LinkedIn Corp. (“LinkedIn”), sought payment of outstanding amounts
it claimed were owed under a marketing agreement between LinkedIn and NAPW. The Company presented LinkedIn with a counter-claim
and the matter was mediated. On December 20, 2016, the parties settled and released all claims against one another for the Company’s
payment of $1,450,000, which the Company paid in full on January 10, 2017.
The Company and its wholly-owned subsidiary,
NAPW, Inc., are parties to a proceeding captioned In re Professional Diversity Network, Cases 31-CA-159810 and 31-CA-162904, filed
with the National Labor Relations Board (“NLRB”) in June 2015 and alleging violations of the National Labor Relations
Act (“NLRA”) against the Company and its wholly-owned subsidiary, NAPW, Inc., where employee was allegedly terminated
for asserting rights under Section 7 of the NLRA. While the Company disputes that any rights were impacted, the NLRB has issued
its order requiring the Company to take certain remedial actions in the form of posting notices and revising certain policies,
as well as to pay the claimant certain back pay and offer reinstatement. The Company has complied with the order by posting notices,
revising certain policies and offering the claimant reinstatement. In March of 2018 the Company settled the remaining backpay
portion of the case. Management does not expect the resolution of this case to have a material impact on the Company’s financial
condition.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Company is a party to a proceeding captioned Paul Sutcliffe v. Professional Diversity Network, Inc., No. 533-2016-00033 (EEOC),
filed with the Equal Employment Opportunity Commission (“EEOC”) in April 2016 and alleging violations of Title VII
and the Age Discrimination in Employment Act, where employee was allegedly terminated due to his race (Caucasian) and his age
(over 40). The EEOC has not yet notified the Company that it has issued a right-to-sue letter, and the complainant has not yet
filed a lawsuit.
In
a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of a claim
against the Company. The letter alleges that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged
conduct that caused a delay in White Winston’s ability to sell shares in the Company during a period when the Company’s
stock price was generally falling. The Company investigated the assertions in the letter and communicated to White Winston that
the Company denies liability for any such claim.
NAPW
is a named Respondent in a Nassau County District Court Landlord/Tenant Summary Proceeding, and is being sued by TL Franklin Avenue
Plaza LLC. The Petitioner, TL Franklin Avenue Plaza LLC, is alleging that NAPW is in breach of its Lease Agreement, and the matter
involves the payment of back rent owing to Petitioner. The case is on-going, and settlement discussions are underway.
NAPW
and PDN are two of the named Respondents in a Nassau County District Court Landlord/Tenant Summary Proceeding, and they are being
sued by Hoegh Autoliners Inc. The Petitioner in this matter, Hoegh Autoliners Inc., is alleging that both NAPW and PDN are in
breach of its Lease Agreement, and the matter involves the payment of back rent owing to the Petitioner. In this matter, Intercontinental
Capital Group, Inc., an Under-Subtenant of PDN, is also named in the action. The case is on-going, and settlement discussions
are taking place in an effort to bring any rental obligations current.
The
Company is a party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (Cook County Cir. Ct.), a
putative class action alleging violations of the Telephone Consumer Protection Act. This matter is in a very early stage
and the Company has not yet had any discovery to allow it to assess the quality of the plaintiff’s claims. However,
the Company generally believes that its practices and procedures are compliant with the Telephone Consumer Protection Act.
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.
Pursuant
to the terms of the Escrow Agreement, dated as of August 12, 2016 (the “Escrow Agreement”), by and among the Company,
CFL and Wilmington Trust, N.A., as escrow agent (the “Escrow Agent”), CFL deposited approximately $1.7 million (the
“Escrow Amount”) into an escrow account with the Escrow Agent as security for CFL’s potential termination fee
obligations under the Purchase Agreement described below. The Escrow Amount was being held by the Escrow Agent in accordance with,
and was released pursuant to the terms and subject to the conditions set forth in, the Escrow Agreement.
The
Purchase Agreement contained customary representations, warranties, covenants and agreements of the parties thereto, and completion
of the Share Issuance and Sale was subject to the approval of the Company’s stockholders at a special meeting of stockholders.
The Purchase Agreement also contained other customary closing conditions, including, among others, the execution of certain ancillary
agreements and documentation; all receipt of all required consents and approvals necessary to consummate the Share Issuance and
Sale; the absence of any injunction or proceeding by a government entity seeking to restrain or prohibit consummation of the CFL
Transaction; the absence of any change or event that has had or would reasonably be expected to have a material adverse effect
on the Company; and receipt of a clearance by the Committee on Foreign Investment in the United States.
The
Purchase Agreement also contained customary indemnification and termination provisions.
Under
the terms of the Purchase Agreement and as a condition to consummating the Share Issuance and Sale, at the closing of the Share
Issuance and Sale, the Company, CFL and each of the shareholders of CFL (the “CFL Shareholders”) agreed to enter into
a stockholders’ agreement (“Stockholders’ Agreement”). The Stockholders’ Agreement provides certain
limitations on the ability of CFL and the CFL Shareholders to acquire additional securities from the Company, and provides for
certain participation rights to CFL, to enable CFL to participate in future equity issuances by the Company, in order to maintain
its then-current beneficial ownership interest in the Company, up to the CFL Shareholders’ then-current ownership percentage
based on the number of shares of Common Stock then-outstanding, but no greater than 51.0% of the outstanding shares of Common
Stock, determined on a fully-diluted basis, on a given date. The Stockholders’ Agreement also provides for certain “standstill”
covenants prohibiting CFL or the CFL Shareholders or their respective affiliates from taking certain actions with respect to the
Company or the Board of Directors. Under the Stockholders’ Agreement, CFL is entitled to nominate individuals reasonably
acceptable to the Nominating and Governance Committee of the Board of Directors for election as directors of the Company, so long
as CFL’s beneficial ownership level exceeds certain predefined percentage thresholds of the Company’s issued and outstanding
Common Stock. The Stockholders’ Agreement provides that, upon the closing of the Share Issuance and Sale and for so long
as CFL’s beneficial ownership level exceeds 49.5% of the Company’s issued and outstanding Common Stock, CFL is entitled
to nominate five of nine directors on the Board of Directors. The Stockholders’ Agreement further provides certain restrictions
on the transfer of the Common Shares issued and sold to CFL in the Share Issuance and Sale, including, among other restrictions,
a lock-up during the one-year period following the closing of the Share Issuance and Sale. The Stockholders’ Agreement also
provides certain demand, shelf and piggyback registration rights to CFL that require the Company to effect the registration under
the Securities Act of 1933, as amended (the “Securities Act”), of the resale of the Common Shares and other shares
of Common Stock (including the Call Option Shares) acquired by CFL.
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
On
March 7, 2017, the Company entered into an employment agreement (the “Xiao Employment Agreement) with Jiangping (Gary) Xiao,
the Company’s new Chief Financial Officer. The Xiao Employment Agreement continues until terminated in writing by either
party or earlier terminated pursuant to the provisions of the Xiao Employment Agreement. Under the Xiao Employment Agreement,
Mr. Xiao 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. Mr. Xiao 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. In
addition, Mr. Xiao is entitled to severance pay if he is terminated without “cause” or resigns for “good reason,”
each as defined in the Xiao Employment Agreement. Upon such termination, provided that he executes a release and waiver agreement,
Mr. Xiao will be entitled to receive an amount equal to six months of his base salary, any earned but unpaid bonus for the year
prior to the year of termination, and the pro rata portion of any bonus earned for the year in which termination occurs, as well
as continuation of applicable benefits for a period of six months following his termination. In connection with the approval of
the Xiao Employment Agreement, Mr. Xiao also received a non-qualified stock option to purchase 30,000 shares of the Company’s
common stock.
On
March 9, 2017, the Company also entered into an employment agreement effective as of December 22, 2016 (the “Wang Employment
Agreement”) with Maoji (Michael) Wang, the Company’s Chief Executive Officer. The Wang Employment Agreement continues
until terminated in writing by either party or earlier terminated pursuant to the provisions of the Wang Employment Agreement.
Under the Wang Employment Agreement, Mr. Wang will receive an annual base salary of $320,000, 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 until the first anniversary of the effective date of the Wang Employment Agreement. Mr. Wang will be eligible to receive
an annual incentive bonus, at a target amount of not less than his base salary, based upon the achievement of one or more performance
goals, targets, measurements and other factors, established for such year by the Board or the Compensation Committee. In addition,
Mr. Wang is entitled to severance pay if he is terminated without “cause” or resigns for “good reason,”
each as defined in the Wang Employment Agreement. Upon such termination, provided that he executes a release and waiver agreement,
Mr. Wang will be entitled to receive an amount equal to the sum of his base salary, any earned but unpaid bonus for the year prior
to the year of termination, and the pro rata portion of any bonus earned for the year in which termination occurs, as well as
continuation of applicable benefits for a period of 12 months following his termination. In connection with the approval of the
Wang Employment Agreement, Mr. Wang also received a non-qualified stock option to purchase 210,000 shares of the Company’s
common stock.
On
June 19, 2017, the Company entered into an employment agreement (the “Song Employment Agreement”) effective as of
January 12, 2017 (the “Effective Date”) with Jingbo (James) Song, the Company’s Executive Co-Chairman. The Song
Employment Agreement continues until the three (3) year anniversary of the Effective Date. Under the Song Employment Agreement,
Mr. Song will receive an annual base salary of $325,000 (“Base Salary”). Mr. Song’s Base Salary shall be increased
on each anniversary of the Effective Date by the greater of (i) three percent (3%) multiplied by his then-current Base Salary,
or (ii) the annual percentage increase in Consumer Price Index over the one-year period prior to the applicable anniversary of
the Effective Date, as measured by the Bureau of Labor Statistics, multiplied by his then-current Base Salary. Mr. Song will be
eligible for an annual bonus according to the terms and conditions of a bonus plan that is based upon the financial results achieved
by the Company for the fiscal year or such other performance goals established by the Board (or the Compensation Committee), in
its sole discretion. In addition, Mr. Song is entitled to severance pay if he is terminated without “cause” or resigns
for “good reason,” each as defined in the Song Employment Agreement. Upon such termination, provided that he executes
a release and waiver agreement, Mr. Song will be entitled to receive an amount equal to six months of his base salary, any earned
but unpaid bonus for the year prior to the year of termination, and the pro rata portion of any bonus earned for the year in which
termination occurs, as well as continuation of applicable benefits for a period of 12 months following his termination.
Katherine
Butkevich, formerly Chief Executive Officer of the Company’s wholly-owned subsidiary, NAPW, Inc., was party to an employment
contract with the Company dated September 30, 2016. As the Company previously reported in its August 30, 2017 Form 8-K, Ms. Butkevich
notified the Company that she was resigning her employment effective September 18, 2017, thereby terminating the employment contract
as of the resignation date.
Chris
Wesser, formerly the Company’s Executive Vice President, General Counsel and Corporate Secretary, was party to an employment
contract with the Company dated September 24, 2014. Mr. Wesser’s employment contract expired on September 24, 2017. As the
Company previously published via press release and reported in its September 29, 2017 Form 8-K, on September 26, 2017 Mr. Wesser
and the Company entered into an Employment Separation and Consulting Agreement having a one-year term, under which Mr. Wesser
will provide the Company with consulting services on an independent contractor basis.
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, 2017, the Company had 3,962,816 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.
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 by 390,000 shares, which
the Company’s stockholders approved on June 26, 2017. The Company is now authorized to issue 615,000 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 year ended December 31, 2017:
|
|
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
In
March 2017, the
Company granted 210,000 and 30,000 stock options
to Messrs. Wang and Xiao, respectively, in connection with their employment agreements. These options had an aggregate fair value
of $1,060,800, using the Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate
|
|
|
2.13
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
41.78
|
%
|
Expected term
|
|
|
5.5 years
|
|
The
options are exercisable at an exercise price of $10.72 per share over a ten-year term and vest over two years, with one-third
vesting upon grant. The Company recorded $648,000 as compensation expense during the year ended December 31, 2017 pertaining to
these grants.
The
Company recorded non-cash compensation expense of approximately $706,000 and $154,000 as a component of general and administrative
expenses in the accompanying consolidated statements of operations for the years ended December 31, 2017 and 2016, respectively,
pertaining to stock options.
Total
unrecognized compensation expense related to unvested stock options at December 31, 2017 amounts to approximately $413,000 and
is expected to be recognized over a remaining weighted average period of 1.2 years.
Warrants
As
of December 31, 2017 and 2016, 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,
2017 and 2016 was 3.3 and 4.3 years, respectively, and the aggregate intrinsic value was $0.
On
June 30, 2016, the Company granted warrants to purchase 468,750 shares of common stock. The fair value of the warrants issued
of $783,458 was recorded as a direct deduction from the carrying amount of Master Credit Facility.
On
November 7, 2016, warrants to purchase an aggregate of 343,750 shares of common stock were exercised for an aggregate exercise
price of $687,500.
Restricted
Stock
A
summary of restricted stock activity for the year ended December 31, 2017 is as follows:
|
|
Number of
Shares
|
|
Unvested - December 31, 2016
|
|
|
2,778
|
|
Granted
|
|
|
15,544
|
|
Vested
|
|
|
(2,778
|
)
|
Forfeited or Canceled
|
|
|
-
|
|
Unvested – December 31, 2016
|
|
|
15,544
|
|
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 $161,000 and $111,000 as a component of general and administrative expenses
in the accompanying consolidated statements of operations for the years ended December 31, 2017 and 2016, respectively, pertaining
to restricted stock.
Total
unrecognized compensation expense related to unvested restricted stock at December 31, 2017 amounts to $60,000 and is expected
to be recognized over a weighted average period of 0.5 years.
15.
Income Taxes
The
Company has the following net deferred tax assets and liabilities at December 31, 2017 and 2016:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Goodwill and intangible assets
|
|
$
|
(1,591,326
|
)
|
|
$
|
(3,313,564
|
)
|
Developed technology
|
|
|
(42,698
|
)
|
|
|
(50,708
|
)
|
Derivative liability
|
|
|
(112,149
|
)
|
|
|
(5,575
|
)
|
Property and equipment
|
|
|
85,351
|
|
|
|
100,922
|
|
Other deferred tax assets
|
|
|
87,321
|
|
|
|
62,955
|
|
Lease liability
|
|
|
23,081
|
|
|
|
34,919
|
|
Stock based compensation
|
|
|
214,610
|
|
|
|
103,877
|
|
Net operating loss
|
|
|
5,536,896
|
|
|
|
5, 632,345
|
|
Valuation allowance
|
|
|
(6,004,605
|
)
|
|
|
(6, 218,445
|
)
|
Net deferred tax liability
|
|
$
|
(1,803,519
|
)
|
|
$
|
(3,653,274
|
)
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
benefit for income taxes for the years ended December 31, 2017 and 2016 consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Federal:
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred provision (benefit)
|
|
|
(1,798,585
|
)
|
|
|
(1,130,090
|
)
|
|
|
|
(1,798,585
|
)
|
|
|
(1,130,090
|
)
|
State:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred provision (benefit)
|
|
|
(51,170
|
)
|
|
|
(159,544
|
)
|
|
|
|
(51,170
|
)
|
|
|
(159,544
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
Current provision
|
|
$
|
104,241
|
|
|
$
|
-
|
|
Deferred provision (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
104,241
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(1,745,514
|
)
|
|
$
|
(1,289,634
|
)
|
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
Year Ended December31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
4.8
|
%
|
|
|
4.8
|
%
|
Change in expected future federal tax rate
|
|
|
-7.6
|
%
|
|
|
0.0
|
%
|
Impairment expense
|
|
|
-23.6
|
%
|
|
|
0.0
|
%
|
Valuation allowance
|
|
|
0.9
|
%
|
|
|
-8.4
|
%
|
Permanent items
|
|
|
-0.1
|
%
|
|
|
-3.3
|
%
|
Other
|
|
|
-1.1
|
%
|
|
|
-3.2
|
%
|
|
|
|
7.3
|
%
|
|
|
23.9
|
%
|
The valuation allowance at December 31, 2017
was approximately $6,005,000. The net change in the valuation allowance during the year ended December 31, 2017 was a decrease
of approximately $ 213,000. 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, 2017.
At
December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$20,507,000. 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, 2017 and 2016, 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 US 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 Reform”) was signed into law. As a result of Tax Reform,
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.
On
December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US 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. As we collect and prepare necessary
data and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting
bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes
and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will
be completed in 2018.
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, 2017, 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. We do not expect GILTI to be material in the future.
16.
Fair Value of Financial Instruments
The
Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs
and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used
to measure fair value:
Level
1 — quoted prices in active markets for identical assets or liabilities
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy,
the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies
and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value
calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial
Officer.
Level
3 Valuation Techniques:
Level
3 financial liabilities consist of warrant liabilities for which there is no current market for these securities such that the
determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The
Company uses the Monte Carlo model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This
model is a discrete-time model that allows for sources of uncertainty and simulates the movements of the underlying asset and
calculates the resulting derivative value for each trial. Such simulations are performed for a number of trials and the average
value across all trials is determined in order to arrive at the concluded value of such derivative. The model incorporates transaction
details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility. A significant
decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly
lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “change in fair value
of warrant liability” in the Company’s condensed consolidated statements of operations.
As
of December 31, 2016, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
warrant liability was valued using the Monte Carlo model and the following assumptions:
|
|
August 10,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Strike price
|
|
$
|
2.00
|
|
|
$
|
2.00
|
|
Market price
|
|
$
|
6.08
|
|
|
$
|
3.20
|
|
Expected life
|
|
|
5
years
|
|
|
|
5
years
|
|
Risk-free interest rate
|
|
|
1.07
|
%
|
|
|
1.01
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Volatility
|
|
|
100
|
%
|
|
|
100
|
%
|
The
following table sets forth a summary of the changes in the fair value of the Level 3 financial liabilities that are measured at
fair value on a recurring basis:
Balance – January 1, 2016
|
|
$
|
-
|
|
Initial value of derivative liability
|
|
|
380,000
|
|
Change in fair value of derivative liability
|
|
|
401,000
|
|
Reclassification of derivative liability to additional paid in capital
|
|
|
(781,000
|
)
|
Balance – December 31, 2016
|
|
$
|
-
|
|
As
discussed in Note 8, on August 10, 2016, the Company entered into an Amendment with White Winston pursuant to which the Company
agreed that the Pro Rata Warrant would be fully exercisable, notwithstanding the pro rata formula set forth in the warrant. Accordingly,
as the derivative liability was eliminated on August 10, 2016, the Company reclassified $781,000 to additional paid in capital.
17.
Segment Information
Beginning
in January 2017, the Company operates in the following segments: (A) United States: (i) PDN Network, (ii) NAPW Network and (iii)
Noble Voice operations, and (B) China Operations. The segments are categorized based on their business activities and organization.
Prior to January 2017, the Company operated solely in the United States in the following segments: (i) PDN Network, (ii) NAPW
Network and (iii) Noble Voice operations. The following tables present key financial information of the Company’s reportable
segments as of and for the years ended December 31, 2017 and 2016:
|
|
Year Ended December 31, 2017
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
PDN
Network
|
|
|
NAPW
Network
|
|
|
Noble Voice
|
|
|
China Operations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related services
|
|
$
|
-
|
|
|
$
|
9,371,843
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,371,843
|
|
Lead generation
|
|
|
-
|
|
|
|
-
|
|
|
|
5,973,964
|
|
|
|
-
|
|
|
|
5,973,964
|
|
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
|
|
|
|
5,973,964
|
|
|
|
3,776,546
|
|
|
|
22,054,219
|
|
Income (Loss) from operations
|
|
|
(2,270,138
|
)
|
|
|
(20,411,655
|
)
|
|
|
(1,808,521
|
)
|
|
|
453,064
|
|
|
|
(24,037,250
|
)
|
Depreciation and amortization
|
|
|
83,367
|
|
|
|
2,914,076
|
|
|
|
189,527
|
|
|
|
10,221
|
|
|
|
3,197,191
|
|
Income tax expense (benefit)
|
|
|
(154,826
|
)
|
|
|
(1,583,553
|
)
|
|
|
(111,376
|
)
|
|
|
104,241
|
|
|
|
(1,745,514
|
)
|
Net loss
|
|
|
(2,094,459
|
)
|
|
|
(18,828,102
|
)
|
|
|
(1,697,145
|
)
|
|
|
332,157
|
|
|
|
(22,287,549
|
)
|
Capital expenditures
|
|
|
100,823
|
|
|
|
10,646
|
|
|
|
(7,634
|
)
|
|
|
49,793
|
|
|
|
153,628
|
|
|
|
At December 31, 2017
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
5,250,699
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,590,150
|
|
Intangible assets, net
|
|
|
90,400
|
|
|
|
6,174,306
|
|
|
|
116,500
|
|
|
|
-
|
|
|
|
6,381,206
|
|
Total assets
|
|
|
1,726,061
|
|
|
|
12,889,367
|
|
|
|
1,317,213
|
|
|
|
3,056,281
|
|
|
|
18,988,922
|
|
Professional
Diversity Network, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year Ended December 31, 2016
|
|
|
|
PDN Network
|
|
|
NAPW
Network
|
|
|
Noble Voice
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related services
|
|
$
|
-
|
|
|
$
|
16,254,932
|
|
|
$
|
-
|
|
|
$
|
16,254,932
|
|
Lead generation revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
6,239,057
|
|
|
|
6,239,057
|
|
Recruitment services
|
|
|
2,931,642
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,931,642
|
|
Product sales and other revenue
|
|
|
-
|
|
|
|
578,466
|
|
|
|
-
|
|
|
|
578,466
|
|
Consumer advertising and consumer marketing solutions
|
|
|
222,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
222,969
|
|
Total revenues
|
|
|
3,154,611
|
|
|
|
16,833,398
|
|
|
|
6,239,057
|
|
|
|
26,227,066
|
|
Income (Loss) from operations
|
|
|
(997,569
|
)
|
|
|
(1,458,503
|
)
|
|
|
(1,130,391
|
)
|
|
|
(3,586,463
|
)
|
Depreciation and amortization
|
|
|
168,192
|
|
|
|
2,946,323
|
|
|
|
209,196
|
|
|
|
3,323,711
|
|
Income tax expense (benefit)
|
|
|
(671,665
|
)
|
|
|
(348,145
|
)
|
|
|
(269,824
|
)
|
|
|
(1,289,634
|
)
|
Net (loss) income
|
|
|
(2,137,577
|
)
|
|
|
(1,110,358
|
)
|
|
|
(860,567
|
)
|
|
|
(4,108,502
|
)
|
Capital expenditures
|
|
|
-
|
|
|
|
5,292
|
|
|
|
-
|
|
|
|
5,292
|
|
|
|
At December 31, 2016
|
|
Goodwill
|
|
$
|
339,451
|
|
|
$
|
19,861,739
|
|
|
$
|
-
|
|
|
$
|
20,201,190
|
|
Intangible assets, net
|
|
|
90,400
|
|
|
|
8,809,706
|
|
|
|
283,333
|
|
|
|
9,183,439
|
|
Total assets
|
|
|
7,643,471
|
|
|
|
31,457,958
|
|
|
|
2,036,448
|
|
|
|
41,137,877
|
|
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
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 $1,486,953.45.
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.
Employment
Agreement
On
March 6, 2018, Jim Kirsch, the Co-Executive Chairman of the Board, notified the Company of his intent to resign as Co-Executive
Chairman of the Board. This notification triggered a ninety-day notice period at the expiration of which Mr. Kirsch shall no longer
serve as Co-Executive Chairman. During the ninety-day notice period, Mr. Kirsch shall continue to serve at the discretion of the
Company. As such, Mr. Kirsch’s last day as Co-Executive Chairman shall be June 4, 2018 unless earlier terminated by the
Company. Following Mr. Kirsch’s resignation as Co-Executive Chairman he shall continue to serve as a director and non-executive
Chairman of the Company and Mr. James Song shall be sole Executive Chairman of the Board.