UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) Commission file number: 001-35824 Professional Diversity Network, Inc. (Exact name of Registrant as Specified in Its Charter) (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 801 W. Adams Street, Suite 600 Chicago, Illinois (312) 614-0950 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). There were ——————————————————————☒ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Quarterly Period Ended September 30, 2017 quarterly period ended March 31, 2020(OR)or[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934Transition Periodtransition period from ________ to________.——————————————————————80-0900177 80-090017760607 (Address of Principal Executive Offices) (Zip(Zip Code) Telephone: (312) 614-0950(Registrant’s Telephone Number, Including Area Code)N/A(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)Title of each class Name of each exchange on which registered Common Stock, $0.01 par value per share The Nasdaq Stock Market LLC
Yes [ ] No [X]
Yes ☒[X] No ☐☒[X] No ☐“large-accelerated“large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☐[ ] Accelerated filer ☐[ ]Non-accelerated filer ☐[ ] Smaller reporting company ☒[X]Emerging growth company [ ] Emerging growth company ☒financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Yes ☐[ ] No ☒3,931,83810,925,859 shares outstanding of the registrant’s common stock as of November 6, 2017.
Note Regarding Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this Quarterly Report contains forward-looking statements regarding:
● | |||
● | our expectations regarding continued membership growth; | ||
● | our beliefs regarding the increased value derived from the synergies among our segments; and | ||
● | our beliefs regarding our liquidity requirements, the availability of cash and capital resources to fund our business in the future and intended use of liquidity. |
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following:
● | our ability to raise funds in the future to support operations failure to realize synergies and other financial benefits from mergers and acquisitions within expected time frames, including increases in expected costs or difficulties related to integration of merger and acquisition partners; | |
● | inability to identify and successfully negotiate and complete additional combinations with potential merger or acquisition partners or to successfully integrate such businesses; | |
● | our history of operating losses; | |
● | our limited operating history in a new and unproven market; | |
● | increasing competition in the market for online professional networks; | |
● | our ability to comply with increasing governmental regulation and other legal obligations related to privacy; | |
● | our ability to adapt to changing technologies and social trends and preferences; | |
● | our ability to attract and retain a sales and marketing team, management and other key personnel and the ability of that team to execute on the Company’s business strategies and plans; | |
● | our ability to obtain and maintain intellectual property protection for our intellectual property; | |
● | any future litigation regarding our business, including intellectual property claims; | |
● | general and economic business conditions; and | |
● | legal and regulatory developments. |
The foregoing list of important factors may not include all such factors. You should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for additional factors, risks and uncertainties that may cause actual results to differ materially from those projected by the Company. Please refer to Part I, Item 1A, “Risk Factors” of our 2019 Annual Report for additional information regarding factors that could affect our results of operations, financial condition and cash flow. You should consider these factors, risks and uncertainties when evaluating any forward-looking statements and you should not place undue reliance on any forward-looking statement. Forward-looking statements represent our views as of the date of this Quarterly Report, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date of this Quarterly Report.
2 |
PROFESSIONAL DIVERSITY NETWORK, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020
TABLE OF CONTENTS
PAGE | |||
PART I | |||
ITEM 1. FINANCIAL STATEMENTS | 4 | ||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||
ITEM 4 CONTROLS AND PROCEDURES | 33 | ||
PART II | |||
ITEM 1 LEGAL PROCEEDINGS | |||
ITEM 1A RISK FACTORS | 34 | ||
ITEM | 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | ||
ITEM | 3 DEFAULTS UPON SENIOR SECURITIES | ||
ITEM | 4 MINE SAFETY | ||
ITEM | 5 OTHER INFORMATION | ||
ITEM 6 EXHIBITS |
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 2,821,729 | $ | 6,068,973 | ||||
Accounts receivable, net | 1,799,013 | 2,170,529 | ||||||
Incremental direct costs | 241,235 | 423,023 | ||||||
Prepaid expenses and other current assets | 490,581 | 957,140 | ||||||
Total current assets | 5,352,558 | 9,619,665 | ||||||
Property and equipment, net | 291,774 | 277,534 | ||||||
Capitalized technology, net | 141,573 | 173,368 | ||||||
Goodwill | 10,280,885 | 20,201,190 | ||||||
Intangible assets, net | 7,035,139 | 9,183,439 | ||||||
Merchant reserve | 780,849 | 1,426,927 | ||||||
Security deposits | 239,059 | 220,754 | ||||||
Other assets | - | 35,000 | ||||||
Total assets | $ | 24,121,837 | $ | 41,137,877 | ||||
Current Liabilities: | ||||||||
Accounts payable | $ | 1,232,510 | $ | 2,172,332 | ||||
Accrued expenses | 1,172,435 | 962,172 | ||||||
Deferred revenue | 4,422,715 | 5,485,599 | ||||||
Total current liabilities | 6,827,660 | 8,620,103 | ||||||
Deferred tax liability | 2,492,837 | 3,653,274 | ||||||
Deferred rent | 60,959 | 55,718 | ||||||
Other liabilities | 78,481 | 33,159 | ||||||
Total liabilities | 9,459,937 | 12,362,254 | ||||||
Commitments and contingencies | ||||||||
Stockholders' Equity | ||||||||
Common stock, $0.01 par value; 45,000,000 shares authorized; 3,936,399 shares and 3,623,899 shares issued as of September 30, 2017 and December 31, 2016, respectively; and 3,931,838 shares and 3,619,338 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | 39,329 | 36,204 | ||||||
Additional paid in capital | 79,783,969 | 76,234,772 | ||||||
Accumulated other comprehensive loss | (1,435 | ) | - | |||||
Accumulated deficit | (65,122,846 | ) | (47,458,236 | ) | ||||
Treasury stock, at cost; 1,048 shares at September 30, 2017 and December 31, 2016 | (37,117 | ) | (37,117 | ) | ||||
Total stockholders' equity | 14,661,900 | 28,775,623 | ||||||
Total liabilities and stockholders' equity | $ | 24,121,837 | $ | 41,137,877 |
Professional Diversity Network, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 2020 | December 31, 2019 | |||||||
(Unaudited) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,555,203 | $ | 633,615 | ||||
Accounts receivable, net | 287,354 | 720,750 | ||||||
Incremental direct costs | 26,119 | 33,258 | ||||||
Prepaid expense and other current assets | 307,182 | 240,763 | ||||||
Current assets from discontinued operations | 31,182 | 75,996 | ||||||
Total current assets | 2,207,040 | 1,704,382 | ||||||
Property and equipment, net | 13,905 | 21,188 | ||||||
Capitalized technology, net | 74,752 | 95,884 | ||||||
Goodwill | 339,451 | 339,451 | ||||||
Intangible assets, net | 433,333 | 452,385 | ||||||
Right-of-use assets | 54,149 | 93,251 | ||||||
Merchant reserve | 760,849 | 760,849 | ||||||
Security deposits | 15,033 | 15,033 | ||||||
Long-term assets from discontinued operations | 2,882,887 | 3,109,200 | ||||||
Total assets | $ | 6,781,399 | $ | 6,591,623 | ||||
Current Liabilities: | ||||||||
Accounts payable | $ | 983,713 | $ | 796,137 | ||||
Accrued expenses | 1,031,165 | 654,169 | ||||||
Deferred revenue | 1,549,165 | 1,699,001 | ||||||
Lease liability, current portion | 60,910 | 105,083 | ||||||
Current liabilities from discontinued operations | 322,709 | 564,044 | ||||||
Total current liabilities | 3,947,662 | 3,818,434 | ||||||
Deferred tax liability | 215,345 | 221,254 | ||||||
Total liabilities | 4,163,007 | 4,039,688 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity | ||||||||
Common stock, $0.01 par value; 45,000,000 shares authorized, 10,922,021 shares and 8,928,611 shares issued as of March 31 2020 and December 31, 2019, and 10,920,973 and 8,927,563 shares outstanding as of March 31, 2020 and December 31, 2019 | 109,209 | 89,286 | ||||||
Additional paid in capital | 92,625,541 | 91,126,784 | ||||||
Accumulated other comprehensive income | 84,115 | 44,242 | ||||||
Accumulated deficit | (90,163,356 | ) | (88,671,260 | ) | ||||
Treasury stock, at cost; 1,048 shares at March 31, 2020 and December 31, 2019 | (37,117 | ) | (37,117 | ) | ||||
Total stockholders’ equity | 2,618,392 | 2,551,935 | ||||||
Total liabilities and stockholders’ equity | $ | 6,781,399 | $ | 6,591,623 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Membership fees and related services | $ | 2,204,909 | $ | 3,748,334 | $ | 7,465,202 | $ | 13,047,652 | ||||||||
Lead generation | 1,370,465 | 1,554,370 | 4,699,399 | 4,489,919 | ||||||||||||
Recruitment services | 694,454 | 954,887 | 1,977,101 | 2,295,556 | ||||||||||||
Product sales and other | 18,285 | 52,857 | 91,226 | 544,440 | ||||||||||||
Education and training | 68,890 | - | 898,584 | - | ||||||||||||
Consumer advertising and marketing solutions | 65,188 | 49,719 | 189,217 | 176,771 | ||||||||||||
Total revenues | 4,422,191 | 6,360,167 | 15,320,729 | 20,554,338 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of revenues | 658,297 | 745,159 | 2,193,224 | 2,433,550 | ||||||||||||
Sales and marketing | 2,275,585 | 3,064,454 | 8,114,908 | 10,314,145 | ||||||||||||
General and administrative | 3,236,848 | 3,010,862 | 11,322,513 | 8,928,493 | ||||||||||||
Litigation settlement | 155,216 | - | 155,216 | 500,000 | ||||||||||||
Goodwill impairment charge | - | - | 9,920,305 | - | ||||||||||||
Depreciation and amortization | 806,898 | 819,894 | 2,443,511 | 2,498,136 | ||||||||||||
Total costs and expenses | 7,132,844 | 7,640,369 | 34,149,677 | 24,674,324 | ||||||||||||
Loss from operations | (2,710,653 | ) | (1,280,202 | ) | (18,828,948 | ) | (4,119,986 | ) | ||||||||
Other (expense) income | ||||||||||||||||
Interest expense | - | (215,781 | ) | (12,399 | ) | (216,948 | ) | |||||||||
Interest and other income | 4,117 | 150 | 9,218 | 801 | ||||||||||||
Other finance income | 5,318 | - | 7,082 | - | ||||||||||||
Other (expense) income, net | 9,435 | (215,631 | ) | 3,901 | (216,147 | ) | ||||||||||
Change in fair value of warrant liability | - | (401,000 | ) | - | (401,000 | ) | ||||||||||
Loss before income tax benefit | (2,701,218 | ) | (1,896,833 | ) | (18,825,047 | ) | (4,737,133 | ) | ||||||||
Income tax benefit | (213,133 | ) | (623,699 | ) | (1,160,437 | ) | (1,218,092 | ) | ||||||||
Net loss | (2,488,085 | ) | (1,273,134 | ) | (17,664,610 | ) | (3,519,041 | ) | ||||||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustment | (3,056 | ) | - | (1,435 | ) | - | ||||||||||
Comprehensive loss | $ | (2,491,141 | ) | $ | (1,273,134 | ) | $ | (17,666,045 | ) | $ | (3,519,041 | ) | ||||
Net loss per common share, basic and diluted | $ | (0.63 | ) | $ | (0.70 | ) | $ | (4.52 | ) | $ | (1.94 | ) | ||||
Weighted average shares used in computing net loss per common share: | ||||||||||||||||
Basic and diluted | 3,932,886 | 1,809,676 | 3,912,282 | 1,809,676 |
Professional Diversity Network, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues: | ||||||||
Membership fees and related services | $ | 383,831 | $ | 794,539 | ||||
Recruitment services | 566,687 | 474,260 | ||||||
Products sales and other | 1,431 | 2,812 | ||||||
Consumer advertising and marketing solutions | 30,348 | 35,716 | ||||||
Total revenues | 982,297 | 1,307,327 | ||||||
Costs and expenses: | ||||||||
Cost of revenues | 173,477 | 183,659 | ||||||
Sales and marketing | 524,969 | 695,767 | ||||||
General and administrative | 1,660,854 | 1,077,900 | ||||||
Depreciation and amortization | 52,001 | 217,183 | ||||||
Total costs and expenses | 2,411,301 | 2,174,509 | ||||||
Loss from continuing operations | (1,429,004 | ) | (867,182 | ) | ||||
Other income (expense) | ||||||||
Interest expense | - | (2,583 | ) | |||||
Interest and other income | 664 | - | ||||||
Other income (expense), net | 664 | (2,583 | ) | |||||
Loss before income tax benefit | (1,428,340 | ) | (869,765 | ) | ||||
Income tax benefit | (5,909 | ) | (65,633 | ) | ||||
Loss from continuing operations | (1,422,431 | ) | (804,132 | ) | ||||
Loss from discontinued operations | (69,665 | ) | (355,237 | ) | ||||
Net loss | $ | (1,492,096 | ) | $ | (1,159,369 | ) | ||
Other comprehensive loss: | ||||||||
Net loss | $ | (1,492,096 | ) | $ | (1,159,369 | ) | ||
Foreign currency translation adjustment | 39,873 | 23,035 | ||||||
Comprehensive loss: | $ | (1,452,223 | ) | $ | (1,136,334 | ) | ||
Basic and diluted loss per share: | ||||||||
Continuing operations | $ | (0.16 | ) | $ | (0.16 | ) | ||
Discontinued operations | $ | (0.01 | ) | $ | (0.07 | ) | ||
Net loss | $ | (0.17 | ) | $ | (0.23 | ) | ||
Weighted average outstanding shares used in computing net loss per common share: | ||||||||
Basic and diluted | 8,969,475 | 4,969,230 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (17,664,610 | ) | $ | (3,519,041 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,443,511 | 2,498,136 | ||||||
Deferred tax | (1,160,437 | ) | (1,218,092 | ) | ||||
Gain on lease cancellation | - | (423,998 | ) | |||||
Goodwill impairment charge | 9,920,305 | - | ||||||
Stock-based compensation expense | 731,322 | 217,547 | ||||||
Provision for bad debt | 155,077 | - | ||||||
Amortization of deferred financing costs | - | 156,594 | ||||||
Amortization of prepaid license fees | - | 112,500 | ||||||
Amortization of customer deposits | - | (112,500 | ) | |||||
Chang in fair value of warrant liability | - | 401,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 219,391 | 671,056 | ||||||
Prepaid expenses and other current assets | 467,339 | 181,903 | ||||||
Incremental direct costs | 181,788 | 476,300 | ||||||
Accounts payable | (940,051 | ) | 893,210 | |||||
Accrued expenses | 209,458 | 681,779 | ||||||
Deferred revenue | (1,067,652 | ) | (3,560,351 | ) | ||||
Deferred rent | 5,241 | 10,279 | ||||||
Other liabilities | 45,322 | 45,098 | ||||||
Net cash used in operating activities | (6,453,996 | ) | (2,488,580 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of short-term investments | - | 500,000 | ||||||
Costs incurred to develop technology | (122,597 | ) | - | |||||
Purchases of property and equipment | (154,295 | ) | - | |||||
Security deposit | (17,603 | ) | 194,411 | |||||
Net cash (used in) provided by investing activities | (294,495 | ) | 694,411 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from the sale of common stock | 3,000,000 | - | ||||||
Payment of offering costs | (144,000 | ) | - | |||||
Proceeds from line of credit | - | 1,942,625 | ||||||
Payment of deferred issuance costs related to Master Credit Facility | - | (488,082 | ) | |||||
Payment of deferred offering costs related to CFL Transaction | - | (1,049,026 | ) | |||||
Merchant reserve | 646,078 | (166,078 | ) | |||||
Net cash provided by financing activities | 3,502,078 | 239,439 | ||||||
Effect of exchange rate fluctuations on cash and cash equivalents | (831 | ) | - | |||||
Net decrease in cash and cash equivalents | (3,247,244 | ) | (1,554,730 | ) | ||||
Cash and cash equivalents, beginning of period | 6,068,973 | 2,070,693 | ||||||
Cash and cash equivalents, end of period | $ | 2,821,729 | $ | 515,963 | ||||
Supplemental disclosures of other cash flow information: | ||||||||
Cash paid for income taxes | $ | 1,702 | $ | 4,605 | ||||
Cash paid for interest | $ | - | $ | 21,740 | ||||
Issuance of warrants in connection with Master Credit Facility | $ | - | $ | 783,458 | ||||
Reclassification of derivative liability to additional paid in capital | $ | - | $ | 781,000 |
Professional Diversity Network, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Loss from continuing operations | $ | (1,422,431 | ) | $ | (804,132 | ) | ||
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities - continuing operations: | ||||||||
Depreciation and amortization | 52,001 | 217,184 | ||||||
Deferred tax benefit | (5,909 | ) | (66,844 | ) | ||||
Amortization of right-of-use asset | 39,102 | 38,003 | ||||||
Accretion of lease liability | 1,469 | 2,568 | ||||||
Stock-based compensation expense | 18,680 | 8,289 | ||||||
Write-off of property and equipment | - | 581 | ||||||
Litigation settlement reserve | 450,000 | - | ||||||
Payment of lease obligations | (45,642 | ) | (44,210 | ) | ||||
Changes in operating assets and liabilities, net of effects of discontinued operations: | - | - | ||||||
Accounts receivable | 433,396 | 370,877 | ||||||
Prepaid expenses and other current assets | (66,419 | ) | (117,950 | ) | ||||
Incremental direct costs | 7,139 | (27,357 | ) | |||||
Accounts payable | 187,576 | (145,584 | ) | |||||
Accrued expenses | (73,004 | ) | (52,235 | ) | ||||
Deferred revenue | (149,836 | ) | (206,913 | ) | ||||
Net cash used in operating activities - continuing operations | (573,878 | ) | (827,723 | ) | ||||
Net cash provided by operating activities - discontinued operations | 15,573 | 365,445 | ||||||
Net cash used in operating activities | (558,305 | ) | (462,278 | ) | ||||
Cash flows from investing activities: | ||||||||
Costs incurred to develop technology | (3,700 | ) | - | |||||
Purchases of property and equipment | (834 | ) | - | |||||
Net cash used in investing activities - continuing operations | (4,534 | ) | - | |||||
Net cash used in investing activities - discontinued operations | (171 | ) | (3,640 | ) | ||||
Net cash provided used in investing activities | (4,705 | ) | (3,640 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from the sale of common stock | 1,500,000 | 372,896 | ||||||
Repayment of note payable - related party | - | (292,882 | ) | |||||
Proceeds from line of credit - related party | - | 292,882 | ||||||
Net cash provided by financing activities - continuing operations | 1,500,000 | 372,896 | ||||||
Net cash provided by financing activities | 1,500,000 | 372,896 | ||||||
Effect of exchange rate fluctuations on cash and cash equivalents | (15,402 | ) | 20,649 | |||||
Net increase (decrease) in cash and cash equivalents | 936,990 | (93,022 | ) | |||||
Cash, cash equivalents, beginning of period | 633,615 | 105,670 | ||||||
Cash and cash equivalents, end of period | 1,555,203 | 33,297 | ||||||
Supplemental disclosures of other cash flow information: | ||||||||
Cash paid for income taxes | $ | - | $ | 6,966 |
The accompanying notes are an integral part of these unauditedconsolidated financial statements.
6 |
Professional Diversity Network, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||||||
Common Stock | Paid in | Accumulated | Treasury Stock | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Shares | Amount | Income (Loss) | Equity | |||||||||||||||||||||||||
Balance at January 1, 2020 | 8,928,611 | $ | 89,286 | $ | 91,126,784 | $ | (88,671,260 | ) | 1,048 | $ | (37,117 | ) | $ | 44,242 | $ | 2,551,935 | ||||||||||||||||
Sale of common stock | 1,939,237 | 19,392 | 1,480,608 | - | - | - | - | 1,500,000 | ||||||||||||||||||||||||
Issuance of common stock | 53,125 | 531 | (531 | ) | - | - | - | - | - | |||||||||||||||||||||||
Share-based compensation | - | - | 18,680 | - | - | - | - | 18,680 | ||||||||||||||||||||||||
Translation adjustments | - | - | - | - | - | - | 39,873 | 39,873 | ||||||||||||||||||||||||
Net loss | - | - | - | (1,492,096 | ) | - | - | - | (1,492,096 | ) | ||||||||||||||||||||||
Balance at March 31, 2020 | 10,920,973 | $ | 109,209 | $ | 92,625,541 | $ | (90,163,356 | ) | 1,048 | $ | (37,117 | ) | $ | 84,115 | $ | 2,618,392 |
Additional | ||||||||||||||||||||||||||||||||
Common Stock | Paid in | Accumulated | Treasury Stock | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Shares | �� | Amount | Income (Loss) | Equity | ||||||||||||||||||||||||
Balance at January 1, 2019 | 4,856,213 | $ | 48,562 | $ | 83,728,903 | $ | (84,826,796 | ) | 1,048 | $ | (37,117 | ) | $ | (24,340 | ) | $ | (1,110,788 | ) | ||||||||||||||
Sale of common stock | 203,963 | 2,040 | 370,856 | - | - | - | - | 372,896 | ||||||||||||||||||||||||
Share-based compensation | - | - | 8,289 | - | - | - | - | 8,289 | ||||||||||||||||||||||||
Translation adjustments | - | - | - | - | - | - | 23,035 | 23,035 | ||||||||||||||||||||||||
Net loss | - | - | - | (1,159,369 | ) | - | - | - | (1,159,369 | ) | ||||||||||||||||||||||
Balance at March 31, 2019 | 5,060,176 | $ | 50,602 | $ | 84,108,048 | $ | (85,986,165 | ) | 1,048 | $ | (37,117 | ) | $ | (1,305 | ) | $ | (1,865,937 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
7 |
Professional Diversity Network, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation and Description of Business
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
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:
In March 2020, our Board decided to suspend all China operations generated by the former CEO, Michael Wang. The Company intendsresults of China operations are presented in the condensed consolidated statements of operations and comprehensive loss as net loss from discontinued operations. On March 19, 2020, Jiangxi PDN Culture Media Co., Ltd. (“Jiangxi PDN”), a company established under the laws of the People’s Republic of China and a variable interest entity (VIE) controlled by Professional Diversity Network, Inc. (“PDN”), issued a Notice of Termination of the Agreement of Acquisition and Equity Transfer (the “Termination”). This Notice was exercised under Jiangxi PDN’s unilateral right and was delivered on March 19, 2020. Under the terms of the Termination, no additional due diligence shall be completed, any materials shall be returned to cooperatethe respective owners, and there shall be no breakup fee or penalty associated with existing companies and organizationsthis Termination. We expect no further involvement in China to efficiently and promptly deliver valuable products and services to its registered users. The Chinese operations focus on the following areas:
2. Liquidity, Financial ConditionGoing Concern and Management’s Plans
At September 30, 2017,March 31, 2020, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds from the closingssale of common stock during the CFL Transaction (as defined in Note 7).
The Company had an accumulated deficit of approximately $65,123,000($90,163,356) at September 30, 2017.March 31, 2020. During the ninethree months ended September 30, 2017,March 31, 2020, the Company generated a net loss from continuing operations of approximately $17,665,000 (including a goodwill impairment charge of $9,920,000),($1,422,000) and used cash in continuing operations of approximately $6,454,000, which includes $1,450,000 paid to LinkedIn as a litigation settlement, and the Company expects that it will continue to generate operating losses for the foreseeable future.$574,000. At September 30, 2017,March 31, 2020, the Company had a cash balance of approximately $2,822,000.$1,555,000. Total revenues were approximately $4,422,000$982,000 and $6,360,000$1,307,000 for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and approximately $15,321,000 and $20,554,000 for the nine months ended September 30, 2017 and 2016, respectively.2019. The Company had a working capital deficiency from continuing operations of approximately ($1,475,000)1,741,000) and $1,000,000($2,114,000) at September 30, 2017March 31, 2020 and December 31, 2016, respectively.
Management believes that its available funds cash on hand and cash generatedflow from operations willmay not be sufficient to meet itsour working capital requirements at leastfor the twelve month period subsequent to the issuance of our financial statements. In order to accomplish our business plan objectives, the Company will need to continue its cost reduction efforts, increase revenues, raising capital through November 2018.the issuance of common stock, or through a strategic merger or acquisition. However, there can be no assurances that theour business plans and actions proposed by management will be successful, that the Companywe 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 fundsimprove liquidity through the issuance of our common stock may not be successful or they may not be available on acceptable terms, if at all.
On March 22, 2020, the Company entered into an agreement with Malven Group Limited, a company established under the laws of the British Virgin Islands, in connection with the purchase of 1,939,237 shares of common stock of the Company at a price of $0.7735 per share for gross proceeds of $1,500,000. The closing of the transaction took place on March 31, 2020.
3. Summary of Significant Accounting Policies
BasisPrinciples of Presentation–Consolidation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentationthe accounts of the financial position, operating resultsCompany, its wholly-owned subsidiaries and cash flows for the periods presented.
Use of Estimates– The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates underlying the financial statements include the fair value of acquired assets and liabilities associated with acquisitions; the assessment of goodwill for 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.
5Cash 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 March 31, 2020 and December 31, 2019, the allowance for doubtful accounts amounted to $47,639 and $20,007.
PrinciplesIncremental Direct Costs - Incremental direct costs incurred in connection with enrolling members in the NAPW Network consist of Consolidationsales commissions paid to the Company’s direct sales agents. Incremental direct costs associated with the PDN Network consists of commissions paid to third-party agencies. Commissions associated with the NAPW Network are deferred and amortized over the term of the membership, which is a 12-month period and agency commissions associated with the PDN Network are deferred and amortized over the membership service period. Total incremental direct costs related to the NAPW and PDN Network amounted to $29,000 and $32,000 during the three months ended March 31, 2020 and 2019.
–Property and Equipment - Property and equipment is stated at cost, including any cost to place the property into service, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which currently range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The accompanying unaudited condensed consolidatedcost 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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, the Company capitalizes certain external and internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally not exceeding three years.
Business Combinations - ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements include the accountsidentifiable 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 wholly-owned subsidiaries. All significant intercompany balancesbest estimates and transactions have been eliminated in consolidation.
Goodwill and Intangible Assets - The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill is tested for impairment at the reporting unit level on an annual basis (December 31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test.
When conducting its annual goodwill impairment assessment, the Company initially performedperforms a qualitative evaluation of whether it is more likely than not that goodwill wasis impaired. If it wasis determined by a qualitative evaluation that it wasis more likely than not that goodwill wasis impaired, the Company then applied a two-step impairment test. The two-step impairment test first comparedcompares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceededexceeds its carrying value, goodwill wasis not impaired and the Company wasis 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.
10 |
Treasury Stock – Treasury stock is recorded at cost as a resultreduction of the recurring operating losses incurred in NAPW since its acquisition in September 2014, the Company undertook a review of the carrying amount of its goodwill as of June 30, 2017. 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 $9,920,305stockholders’ equity in the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2017.
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 month12-month membership period. At the time of enrollment, membership fees are recorded as deferred revenue and are recognized as revenue ratably over the 12 month12-month membership period. Members who are enrolled in this plan may cancel their membership in the program at any time and receive a partial refund (amount remaining in deferred revenue) or due to consumer protection legislation, a full refund based on the policies of the member’s credit card company.
We also offer a monthly membership for which we collect fees on a monthly basis and we recognize revenue in the same month as we collect the monthly fees.
Revenue from related membership services are derived from fees for development and set-up of a member’s personal on-line profile and/or press release announcements. Fees related to these services are recognized as revenue at the time the on-line profile is complete and press release is distributed.
6
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 monthtwelve-month contract for services and as such the revenue for each contract is recognized ratably over its twelve monthtwelve-month term. Event revenue is recognized in the month that the event takes place and e-commerce sales are for one monthone-month job postings and the revenue from those sales are recognized in the month the sale is made. Our recruitment services mainly consist of the following products:
● | On-line job postings to our diversity sites and to our broader network of websites including the National Association for the Advancement of Colored People, National Urban League and over 20 other partner organizations |
● | OFCCP job promotion and recordation services |
● | Diversity job fairs, both in person and virtual fairs |
● | Diversity recruitment job advertising services |
● | Cost per application, a service that employers can purchase whereby PDN sources qualified candidates and charges only for those applicants who meet the employers’ minimum qualifications |
● | Diversity executive staffing services |
11 |
Product Sales and Other Revenue
Products offered to members relate to custom made plaques. Product sales are recognized as deferred revenue at the time the initial order is placed. Revenue is then recognized at the time these products are shipped. The Company’s shipping and handling costs are included in cost of sales in the accompanying consolidated statements of operations.
Education and Training
The Company works with its business partners to provide education and training seminars to business people in China. Revenues are recognized in the month when the seminar takes place.
Consumer Advertising and Marketing Solutions
The Company provides career opportunity services to its various partner organizations through advertising and job postings on their websites. The Company works with its partners to develop customized websites and job boards where the partners can generate advertising, job postings and career services to their members, students and alumni. PartnerConsumer advertising and marketing solutions revenue is recognized as jobs are posted to their hosted sites.
The Company'sCompany’s partner organizations include NAACP and National Urban League,VetJobs, among others.
7Discontinued Operations
China Operations
On November 25, 2019, PDN China received a Seizure Decision Notice (the “Notice”) from the Yuexiu District Branch of the Police Department of Guangzhou City, the People’s Republic of China. The Notice stated that it is necessary to seize the assets of PDN China in connection with the criminal investigation of alleged illegal public fund raising by Gatewang Group (the “Gatewang Case”), a separate company organized under the laws of the People’s Republic of China (“Gatewang”), with which Mr. Maoji (Michael) Wang, the former Chairman and CEO of the Company (“Michael Wang”) is affiliated, who was subsequently held in custody by the local police department.
In response to such events, on December 12, 2019 the Company’s Board of Directors (the “Board”) established the Special Committee to investigate the situation, and retained the international law firm of King & Wood Mallesons (“KWM”) to assist the Special Committee in connection with the Special Committee’s investigation of the Company’s operations in the People’s Republic of China and related events, in collaboration with the Company’s external auditor Ciro E. Adams CPA LLC. KWM conducted extensive research into public records in China, and interviewed the relevant divisions of the Public Security Bureau in China and any related witnesses in relation to the operations and specific transactions that had some relationship to the Gatewang entities. On April 16, 2020, based upon the information obtained, the investigation team concluded that it did not found any evidence that the Company or PDN China has engaged in the alleged illegal fund-raising by Gatewang.
The Investigation also revealed that three entities and two individuals (the “Payors”), who appeared to be related to Gatewang, collectively paid RMB 14.25 million to PDN China on behalf of EGBT Foundation Ltd., a private placement investor that purchased 1,265,823 shares of the Company’s common stock (approximately 11.6%) in September 2019 (the “EGBT Transaction”). To the knowledge of the Investigation team, the bank account holding the proceeds of the EGBT Transaction is still frozen by the Chinese authorities, although the seizure of PDN China by the local police had been lifted on March 23, 2020. Such funds may continue to be subject to the PRC government’s jurisdiction if the source of funds is actually (or perceived to be) connected to Gatewang, which will likely complicate the decision by the Chinese authorities to unfreeze PDN China’s bank account. If and when the bank account is unfrozen, the Company will consider whether the EGBT Transaction needs to be unwound or further documented to be in full compliance with applicable law.
The Company’s operations in China have been suspended since December 2019. On March 4, 2020 the Board decided to discontinue all of the Company’s operations in the People’s Republic of China, namely PDN (China) International Culture Development Co. Ltd., a wholly owned subsidiary of the Company, Jiangxi PDN Culture Media Co., Ltd. (“PDN Jiangxi”), a variable interest entity controlled by of the Company, and the joint venture between PDN Jiangxi, Guangzhou Zengcheng District Zhili Education Training Center and Guangzhou Angyue Education Consulting Co. Ltd.
All historical operating results for the Company’s China operations are included in a loss from discontinued operations, net of tax, in the accompanying statement of operations. For the three months ended March 31, 2020, loss from discontinued operations was approximately ($70,000) compared to a loss from discontinued operations of ($355,000) for the three months ended March 31, 2019.
Assets and liabilities of China operations are now included in current assets and long-term assets from discontinued operations, and current liabilities and long-term liabilities from discontinued operations. As of March 31, 2020, current assets from discontinued operations were approximately $31,000, compared to approximately $76,000 as of December 31, 2019, and long-term assets from discontinued operations were approximately $2,883,000 at March 31, 2020, compared to approximately $3,109,000 as of December 31, 2019. As of March 31, 2020, current liabilities from discontinued operations were approximately $323,000, compared to approximately $564,000 as of December 31, 2019.
Operating Results of Discontinued Operations
The following table represents the components of operating results from discontinued operations, as presented in the statements of operations and comprehensive loss for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | - | $ | 39,178 | ||||
Cost of Sales | 7,356 | 16,598 | ||||||
Depreciation and amortization | - | 4,239 | ||||||
Sales and marketing | 1,695 | 84,980 | ||||||
General and administrative | 60,614 | 283,048 | ||||||
Non-operating income (expense) | - | (5,550 | ) | |||||
Loss from discontinued operations before income tax | (69,665 | ) | (355,237 | ) | ||||
Income tax expense (benefit) | - | - | ||||||
Net loss from discontinued operations | $ | (69,665 | ) | $ | (355,237 | ) |
Advertising and Marketing Expenses– Advertising and marketing expenses are expensed as incurred or the first time the advertising takes place. The production costs of advertising are expensed the first time the advertising takes place. For the three months ended September 30, 2017March 31, 2020 and 2016,2019, the Company incurred advertising and marketing expenses of approximately $658,000$158,000 and $657,000, respectively. For the nine months ended September 30, 2017 and 2016, the Company incurred advertising and marketing expenses of approximately $2,246,000 and $1,842,000, respectively.$137,000. These amounts are included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive loss.operations. At September 30, 2017March 31, 2020 and December 31, 2016,2019, there were no prepaid advertising expenses recorded in the accompanying condensed 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.
13 |
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 March 31, 2020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company may be subject to potential income tax examinations by federal or state authorities. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. Management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 2016 through 2019.
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 March 31, 2020.
Fair Value of Financial Assets and Liabilities - Financial instruments, including cash and cash equivalents, short-term investments and accounts payable, are carried at cost. Management believes that the recorded amounts approximate fair value due to the short-term nature of these instruments.
Net Loss per Share– - The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic net loss per share for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.
As of September 30, | ||||||||
2017 | 2016 | |||||||
Warrants to purchase common stock | 170,314 | 514,064 | ||||||
Stock options | 284,897 | 72,886 | ||||||
Restricted stock units | 15,544 | - | ||||||
Unvested restricted stock | 2,778 | 5,556 | ||||||
Total dilutive securities | 473,533 | 592,506 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Warrants to purchase common stock | 125,000 | 170,314 | ||||||
Stock options | 39,126 | 409,126 | ||||||
Unvested restricted stock units | - | 83,057 | ||||||
Unvested restricted stock | - | 4,886 | ||||||
Total dilutive securities | 164,126 | 667,383 |
Recent Accounting Pronouncements
In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (ASU 2019-02): Simplifying the Accounting Standards Update (“ASU”) No. 2014-09,”Revenue from Contracts with Customers,”for Income Taxes which was subsequently modifiedsimplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in August 2015an interim period, and by clarifying and amending existing guidance in order to improve consistent application of and simplify GAAP for other areas of Topic 740. ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date.” As a result, the ASU No. 2014-092019-12 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). The Company will adopt the standard on January 1, 2018, using the full retrospective transition method, which may result in a cumulative-effect adjustment for deferred revenue to the opening balance sheet for 2018 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 March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modification and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of adopting this guidance.ASU on its condensed consolidated financial statements.
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4. Capitalized Technology
Capitalized technology,Technology, net is as follows:
September 30, 2017 | December 31, 2016 | |||||||
Capitalized cost: | ||||||||
Balance, beginning of period | $ | 1,888,791 | $ | 1,888,791 | ||||
Additional capitalized cost | 122,597 | - | ||||||
Balance, end of period | $ | 2,011,388 | $ | 1,888,791 | ||||
Accumulated amortization: | ||||||||
Balance, beginning of period | $ | 1,715,423 | $ | 1,432,268 | ||||
Provision for amortization | 154,392 | 283,155 | ||||||
Balance, end of period | $ | 1,869,815 | $ | 1,715,423 | ||||
Capitalized Technology, net | $ | 141,573 | $ | 173,368 |
March 31, 2020 | December 31, 2019 | |||||||
Capitalized cost: | ||||||||
Balance, beginning of period | $ | 2,165,545 | $ | 2,163,044 | ||||
Additional capitalized cost | 3,700 | 2,501 | ||||||
Balance, end of period | 2,169,245 | 2,165,545 | ||||||
Accumulated amortization: | ||||||||
Balance, beginning of period | $ | 2,087,886 | $ | 1,968,213 | ||||
Provision for amortization | 6,607 | 101,448 | ||||||
Balance, end of period | 2,094,493 | 2,069,661 | ||||||
Capitalized Technology, net | 74,752 | 95,884 |
For the three months ended September 30, 2017March 31, 2020 and 2016,2019, amortization expense was $6,605 and $25,000, respectively, and approximately $154,000 and $216,000 for the nine months ended September 30, 2017 and 2016, respectively, is recorded in depreciation and amortization expense in the accompanying condensed consolidated statements of operations and comprehensive loss.
9
Intangible assets, net iswas as follows:
Useful Lives | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
March 31, 2020 | (Years) | Amount | Amortization | Amount | ||||||||||||
Long-lived intangible assets: | ||||||||||||||||
Sales Process | 10 | $ | 2,130,956 | $ | (1,788,023 | ) | $ | 342,933 | ||||||||
Paid Member Relationships | 5 | 803,472 | (803,472 | ) | - | |||||||||||
Member Lists | 5 | 8,086,181 | (8,086,181 | ) | - | |||||||||||
Developed Technology | 3 | 648,000 | (648,000 | ) | - | |||||||||||
Trade Name/Trademarks | 4 | 440,000 | (440,000 | ) | - | |||||||||||
12,108,609 | (11,765,676 | ) | 342,933 | |||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Trade name | 90,400 | |||||||||||||||
Intangible assets, net | $ | 433,333 |
15 |
September 30, 2017 | Useful Lives (Years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||
Long-lived intangible assets: | ||||||||||||||||
Sales Process | 10 | $ | 3,970,000 | $ | (1,196,514 | ) | $ | 2,773,486 | ||||||||
Paid Member Relationships | 5 | 890,000 | (536,472 | ) | 353,528 | |||||||||||
Member Lists | 5 | 8,957,000 | (5,399,081 | ) | 3,557,919 | |||||||||||
Developed Technology | 3 | 978,000 | (959,666 | ) | 18,334 | |||||||||||
Trade Name/Trademarks | 4 | 480,000 | (359,861 | ) | 120,139 | |||||||||||
Customer Relationships | 5 | 280,000 | (158,667 | ) | 121,333 | |||||||||||
$ | 15,555,000 | $ | (8,610,261 | ) | 6,944,739 | |||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Trade Name | 90,400 | |||||||||||||||
Intangible assets, net | $ | 7,035,139 |
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 |
Useful Lives | Gross Carrying | Accumulated | Net Carrying | |||||||||||||
December 31, 2019 | (Years) | Amount | Amortization | Amount | ||||||||||||
Long-lived intangible assets: | ||||||||||||||||
Sales Process | 10 | $ | 2,130,956 | $ | (1,768,971 | ) | $ | 361,985 | ||||||||
Paid Member Relationships | 5 | 803,472 | (803,472 | ) | - | |||||||||||
Member Lists | 5 | 8,086,181 | (8,086,181 | ) | - | |||||||||||
Developed Technology | 3 | 648,000 | (648,000 | ) | - | |||||||||||
Trade Name/Trademarks | 4 | 440,000 | (440,000 | ) | - | |||||||||||
12,108,609 | (11,746,624 | ) | 361,985 | |||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||
Trade name | 90,400 | |||||||||||||||
Intangible assets, net | $ | 452,385 |
As of March 31, 2020, estimated amortization expense in future fiscal years is summarized as follows:
Years ending December 31, | ||||
2017 (three months) | $ | 653,933 | ||
2018 | 2,563,872 | |||
2019 | 1,846,697 | |||
2020 | 397,000 | |||
2021 | 397,000 | |||
2022 | 397,000 | |||
Thereafter | 689,237 | |||
$ | 6,944,739 |
Year ended December 31, | ||||
Remaining of 2020 | $ | 57,155 | ||
2021 | 76,207 | |||
2022 | 76,207 | |||
2023 | 76,207 | |||
2024 and thereafter | 57,157 | |||
$ | 342,933 |
For the three months ended September 30, 2017March 31, 2020 and 2016,2019, amortization expense was $19,052 and $183,000, respectively, and $2,148,000 and $2,151,000 for the nine months ended September 30, 2017 and 2016, respectively, is recorded in depreciation and amortization expense in the accompanying condensed consolidated statements of operationsoperations.
6. Revolving Credit Facility – Related Party
On November 16, 2018, the Company entered into a revolving credit facility agreement with GNet Tech Holdings Public Limited Company (GNet), “), that matures on May 31, 2020, under which we can draw up to GBP £1,500,000 (approximately $2,000,000). Interest is payable on any outstanding principal balance at a rate equal to the LIBOR rate plus 4%. Amounts drawn under this facility are payable at the end of one, three, or six months periods at the election of the Company. On January 14, 2019, the Company drew $293,000 under this facility and comprehensive loss.
10
Lease Obligations– - The Company leases office space and equipment under various operating lease agreements, including an office for its headquarters, as well as office spaces for its events business, sales and administrative offices under non-cancelable lease arrangements that provide for payments on a graduated basis with various expiration dates.
As of March 31, 2020, right of use assets were $54,149 and $258,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $811,000 and $808,000 for the nine months ended September 30, 2017 and 2016, respectively, is included in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. Included in rent expense is sublease incomecurrent lease obligations were $60,910.
PDN China’s bank account with balance of approximately $96,000 and $90,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $288,000 and $279,000 for the nine months ended September 30, 2017 and 2016, respectively.
16 |
The amount of back pay and other potential liabilities ordered by NLRB is $146,000.
Legal Proceedings
In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of a claimto assert claims against the Company. The letter allegesCompany in excess of $2 million based on White Winston’s contention that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay indelayed White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30, 2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No. 18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed with the court on Monday, March 25, 2019. This motion was not granted. We have since then substantially completed all of the discovery process and will begin expert witness disclosures. The Company denies liability for all claims.
NAPW is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018, with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord is suing NAPW for the balance of the rent due under the Lease Term. The case is currently being litigated, and we are currently in the fact damages phase of the litigation.
The Company is a party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (U.S. Dist. Ct., N.D. Ill.), a putative class action alleging violations of the Telephone Consumer Protection Act. A settlement has been reached and case has been dismissed by the court. The Company believes that its practices and procedures were compliant with the Telephone Consumer Protection Act and admitted no fault.
The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc. and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed on June 20, 2018 and alleging violations of the Fair Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its subsidiary violated the applicable laws or that either entity has any such claim.
We are also generally subject to legal proceedings and litigation arising in the ordinary course of business.
General Legal Matters
From time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
8. CFL Transaction
On January 13, 2017,August 12, 2016, the Company entered into a stock purchase agreement (the “Purchase Agreement”), with Cosmic Forward Ltd. (“CFL”), pursuantCFL, a Republic of Seychelles company wholly-owned by a group of Chinese investors. Pursuant to which,the Purchase Agreement, the Company agreed to issue and sell to CFL (the “Second Share Issuance”“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, 312,500a number of shares of the Company’s common stock. 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”).
17 |
On January 18, 2017,November 7, 2016, the Company consummated the Second Share Issuance. AsIssuance and Sale of 1,777,417 shares of its common stock to CFL at a resultprice of $9.60 per share, pursuant to the terms of the completionPurchase Agreement, dated August 12, 2016. In addition, on November 7, 2016, the Company completed the purchase of the Second Share Issuance, as of January 18, 2017, CFL beneficially owned 54.64% of the Company’s outstanding312,500 shares of its common stock onat a fully diluted basis.
At the closing of the SecondCFL 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 as contemplatedSale (see Note 13).
On November 15, 2019, CFL purchased additional 1,142,857 shares of the Company’s common stock for $1.75 per share for gross proceeds of $2,000,000 from an existing shareholder.
9. 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 Purchase Agreement,stockholders, up to 1,000,000 shares of undesignated preferred stock.
Common Stock – The Company has one class of common stock outstanding with a total number of shares authorized of 45,000,000. As of March 31, 2020, the Company had 10,920,973 shares of common stock outstanding.
On March 22, 2020, the Company entered into an amendment, dated asagreement with Malven Group Limited, a company established under the laws of January 18, 2017 (the “Amendment”), to the Stockholders’ AgreementBritish Virgin Islands, in connection with CFL and the CFL shareholders. The Amendment increased the cap on the amountpurchase of common stock that CFL, the CFL shareholders and their respective affiliates (collectively, the “CFL Group”) may, directly or indirectly acquire, agree to acquire or publicly propose or offer to acquire from the Company, or pursuant to a tender or exchange offer for any1,939,237 shares of common stock from 51% of the then outstandingCompany at a price of $0.7735 per share for gross consideration of $1,500,000. The closing of the transaction took place on March 31, 2020.
10. Stock-Based Compensation
Equity Incentive Plans – The Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for the purpose of providing equity incentives to employees, officers, directors and consultants including options, restricted stock, restricted stock units, stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The Company amended the 2013 Plan to increase the number of authorized shares of common stock under the Plan from 225,000 shares to 615,000 shares, which the Company’s stockholders approved on a fully-diluted basis,June 26, 2017. The Company further amended the 2013 Plan to 54.64%increase the number of the then outstandingauthorized shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders approved and ratified on November 8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan.
Stock Options
The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing model is affected by the Company’s stock price as well as assumptions regarding a fully-diluted basis. The Amendment also clarifies thatnumber of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the 312,500 shares of common stock purchased by CFL in the Second Share Issuance are subject to allterm of the restrictions contained inawards, and actual and projected employee stock option exercise behaviors. The risk free rate is based on the Stockholders’ Agreement, as amended. All other terms and conditionsU.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 Stockholders’ Agreement remain in full forcelife of options using the simplified method, and effect and were ratified and affirmed byforfeitures are estimated on the parties indate of grant based on certain historical data. The Company utilizes the Amendment.
18 |
Forfeitures are required to an employment contract withbe estimated at the Company dated September 30, 2016. As the Company previously reportedtime of grant and revised, if necessary, 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.
The following table summarizes 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.
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Average | Contractual | Aggregate | ||||||||||||||
Number of | Exercise | Life | Intrinsic | |||||||||||||
Options | Price | (in Years) | Value | |||||||||||||
Outstanding - January 1, 2020 | 295,793 | $ | 8.88 | 7.5 | $ | - | ||||||||||
Granted | - | - | - | |||||||||||||
Exercised | - | - | - | |||||||||||||
Forfeited | (256,667 | ) | 9.28 | - | ||||||||||||
Outstanding - March 31, 2020 | 39,126 | $ | 6.27 | 8.1 | $ | - | ||||||||||
Exercisable at March 31, 2020 | 29,126 | $ | 7.65 | 7.8 | $ | - |
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | |||||||||||||||
Average | Contractual | Aggregate | ||||||||||||||
Number of | Exercise | Life | Intrinsic | |||||||||||||
Options | Price | (in Years) | Value | |||||||||||||
Outstanding - January 1, 2019 | 499,439 | $ | 6.94 | $ | 9.0 | $ | - | |||||||||
Granted | 30,000 | 2.23 | - | |||||||||||||
Exercised | - | - | - | |||||||||||||
Forfeited | (120,313 | ) | 2.88 | - | ||||||||||||
Outstanding - March 31, 2019 | 409,126 | $ | 7.78 | 8.4 | $ | 80,520 | ||||||||||
Exercisable at March 31, 2019 | 330,959 | $ | 9.01 | 8.2 | $ | 32,710 |
During the ninethree months ended September 30, 2017March 31, 2020, vested stock options of 256,667 with a weighted average exercise price of $9.28 were forfeited Total unrecognized pre-tax stock-based compensation expense related to unvested stock options at March 31, 2020 was $16,321, which is expected to be recognized through the first quarter of 2021.
Warrants
As of March 31, 2020 and 2016December 31, 2019, 125,000 warrants were outstanding and exercisable with an exercise price of $20.00 per share. The aggregate intrinsic value was 6.2%$0 and 25.7%, respectively, resultingthe warrants are scheduled to expire on December 27, 2021.
19 |
Restricted Stock
As of March 31, 2020 and 2019, the following is a summary of restricted stock activity:
Number of | ||||
Shares | ||||
Outstanding - January 1, 2020 | 27,319 | |||
Granted | - | |||
Forfeited | - | |||
Vested | (27,319 | ) | ||
Outstanding - March 31, 2020 | - |
Number of | ||||
Shares | ||||
Outstanding - January 1, 2019 | 60,651 | |||
Granted | 8,090 | |||
Forfeited | (22,730 | ) | ||
Vested | - | |||
Outstanding - March 31, 2019 | 46,011 |
During the three months ended March 31, 2020, 27,319 in a $1,160,000restricted stock vested. Additionally, the Company recorded non-cash pre-tax stock-based compensation expense of $0 and $1,218,000 income tax benefit, respectively. The difference in the effective income tax rate$3,000 for the three months ended September 30, 2017, comparedMarch 31, 2020 and March 31, 2019, as a component of general and administrative expenses in the accompanying statements of operations, pertaining to restricted stock.
Total unrecognized pre-tax stock-based compensation expense related to unvested restricted stock at March 31, 2020 was $0.
11. Income Taxes
The Company’s quarterly income tax provision is based upon an estimated annual income tax rate. The Company’s quarterly provision for income taxes also includes the tax impact of discrete items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
During the three months ended September 30, 2016, is mainly attributableMarch 31, 2020 and 2019, the Company recorded a benefit for income tax of $5,900 and $66,000. The decrease in income tax benefit during the current period was primarily due to thea reduction in discrete tax item associated with stock-based compensation expense in addition to a reduction in our valuation allowance
The valuation allowance at March 31, 2020 was approximately $7,701,000. The net change in the valuation allowance. The difference inallowance during the effective income tax rate for the ninethree months ended September 30, 2017, compared to the nine months ended September 30, 2016, is mainly attributable to the impairment charge recognized on NAPW’s goodwill and the change in the valuation allowance.March 31, 2020 was a decrease of approximately $41,000. 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 the consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a valuation allowance as of September 30, 2017 and DecemberMarch 31, 2016.
12. Segment Information
Beginning on the undistributed earnings of its foreign subsidiaries. The amount of such earnings was insignificant. These earnings have been permanently reinvested andMay 26, 2018, the Company does not plan to initiate action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed earnings of its foreign subsidiaries.
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding - December 31, 2016 | 69,950 | $ | 12.07 | 9.0 | $ | 156,975 | ||||||||||
Granted | 240,000 | 10.72 | ||||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited/Canceled/Expired | (25,053 | ) | (13.93 | ) | ||||||||||||
Outstanding – September 30, 2017 | 284,897 | $ | 10.77 | 9.3 | $ | - | ||||||||||
Exercisable – September 30, 2017 | 124,897 | $ | 10.83 | 9.2 | $ | - |
20 |
The following tables present key financial information of the Company’s reportable segments as of March 31, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2017March 31, 2020 and 2016:
Three Months Ended September 30, 2017 | ||||||||||||||||||||
United States | ||||||||||||||||||||
PDN Network | NAPW Network | Noble Voice | China Operations | Consolidated | ||||||||||||||||
Membership fees and related services | $ | - | $ | 2,204,909 | $ | - | $ | - | $ | 2,204,909 | ||||||||||
Lead generation | - | - | 1,370,465 | - | 1,370,465 | |||||||||||||||
Recruitment services | 694,454 | - | - | - | 694,454 | |||||||||||||||
Products sales and other | - | 18,285 | - | - | 18,285 | |||||||||||||||
Education and training | - | - | - | 68,890 | 68,890 | |||||||||||||||
Consumer advertising and marketing solutions | 65,188 | - | - | - | 65,188 | |||||||||||||||
Total revenues | 759,642 | 2,223,194 | 1,370,465 | 68,890 | 4,422,191 | |||||||||||||||
Loss from operations | (249,017 | ) | (1,651,322 | ) | (448,310 | ) | (362,004 | ) | (2,710,653 | ) | ||||||||||
Depreciation and amortization | 13,213 | 740,489 | 49,754 | 3,442 | 806,898 | |||||||||||||||
Income tax expense (benefit) | (17,311 | ) | (123,091 | ) | (29,688 | ) | (43,043 | ) | (213,133 | ) | ||||||||||
Net loss | (217,589 | ) | (1,528,231 | ) | (418,622 | ) | (323,643 | ) | (2,488,085 | ) | ||||||||||
Capital expenditures | 93,676 | - | (5,575 | ) | 12,356 | 100,457 |
Three Months Ended March 31, 2020 | ||||||||||||||||
PDN | NAPW | Corporate | ||||||||||||||
Network | Network | Overhead | Consolidated | |||||||||||||
Membership fees and related services | $ | - | $ | 383,831 | $ | - | $ | 383,831 | ||||||||
Recruitment services | 566,687 | - | - | 566,687 | ||||||||||||
Products sales and other | - | 1,431 | - | 1,431 | ||||||||||||
Consumer advertising and marketing solutions | 30,348 | - | - | 30,348 | ||||||||||||
Total revenues | 597,035 | 385,262 | - | 982,297 | ||||||||||||
Loss from continuing operations | (150,024 | ) | (68,110 | ) | (1,210,870 | ) | (1,429,004 | ) | ||||||||
Depreciation and amortization | 14,675 | 37,326 | - | 52,001 | ||||||||||||
Income tax benefit | (951 | ) | (407 | ) | (4,551 | ) | (5,909 | ) | ||||||||
Net loss from continuing operations | (148,409 | ) | (67,703 | ) | (1,206,319 | ) | (1,422,431 | ) |
As of March 31, 2020 | ||||||||||||||||
Goodwill | $ | 339,451 | $ | - | $ | - | $ | 339,451 | ||||||||
Intangibles assets, net | 90,400 | 342,933 | - | 433,333 | ||||||||||||
Assets from continuing operations | 2,625,138 | 1,242,192 | - | 3,867,330 |
Three Months Ended March 31, 2019 | ||||||||||||||||
PDN | NAPW | Corporate | ||||||||||||||
Network | Network | Overhead | Consolidated | |||||||||||||
Membership fees and related services | $ | - | $ | 794,539 | $ | - | $ | 794,539 | ||||||||
Recruitment services | 474,260 | - | - | 474,260 | ||||||||||||
Products sales and other | - | 2,812 | - | 2,812 | ||||||||||||
Consumer advertising and marketing solutions | 35,716 | - | - | 35,716 | ||||||||||||
Total revenues | 509,976 | 797,351 | - | 1,307,327 | ||||||||||||
Loss from continuing operations | (171,416 | ) | (107,731 | ) | (587,975 | ) | (867,122 | ) | ||||||||
Depreciation and amortization | 15,741 | 201,442 | - | 217,183 | ||||||||||||
Income tax benefit | (8,129 | ) | (13,135 | ) | (44,369 | ) | (65,633 | ) | ||||||||
Net loss from continuing operations | (160,924 | ) | (99,602 | ) | (543,606 | ) | (804,132 | ) |
As of December 31, 2019 | ||||||||||||||||
Goodwill | $ | 339,451 | $ | - | $ | - | $ | 339,451 | ||||||||
Intangibles assets, net | 90,400 | 361,985 | - | 452,385 | ||||||||||||
Assets from continuing operations | 2,151,734 | 1,254,693 | - | 3,406,427 |
1413. Subsequent Events
The CARES Act was enacted on March 27, 2020. Among the provisions contained in the CARES Act was the creation of the Paycheck Protection Program (“PPP”) that provides for under the Small Business Administration (“SBA”) Section 7(a) loans for qualified small businesses. PPP loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves, rent, utilities and interest on certain other outstanding debt. The amount that will be forgiven will be calculated in part with reference to the Company’s full-time headcount during the eight-week period following the funding of the PPP loan. The Company applied for the PPP loan and on May 5, 2020, the Company received total proceeds of $651,077 from the SBA. In accordance with the loan forgiveness requirements under the CARES Act, the Company intends to use the proceeds from the PPP Loan primarily for payroll costs, rent and utilities, thus the Company anticipates that 100% of the loan will be forgiven.
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
United States | ||||||||||||||||||||
PDN Network | NAPW Network | Noble Voice | China Operations | Consolidated | ||||||||||||||||
Membership fees and related services | $ | - | $ | 7,465,202 | $ | - | $ | - | $ | 7,465,202 | ||||||||||
Lead generation | - | - | 4,699,399 | - | 4,699,399 | |||||||||||||||
Recruitment services | 1,977,101 | - | - | - | 1,977,101 | |||||||||||||||
Products sales and other | - | 91,226 | - | - | 91,226 | |||||||||||||||
Education and training | - | - | - | 898,584 | 898,584 | |||||||||||||||
Consumer advertising and marketing solutions | 189,217 | - | - | - | 189,217 | |||||||||||||||
Total revenues | 2,166,318 | 7,556,428 | 4,699,399 | 898,584 | 15,320,729 | |||||||||||||||
Loss from operations | (2,001,870 | ) | (14,969,177 | ) | (1,449,279 | ) | (408,622 | ) | (18,828,948 | ) | ||||||||||
Depreciation and amortization | 67,099 | 2,220,806 | 149,499 | 6,107 | 2,443,511 | |||||||||||||||
Income tax expense (benefit) | (125,444 | ) | (943,633 | ) | (91,360 | ) | - | (1,160,437 | ) | |||||||||||
Net loss | (1,864,520 | ) | (14,025,544 | ) | (1,357,919 | ) | (416,627 | ) | (17,664,610 | ) | ||||||||||
Capital expenditures | 100,823 | 10,646 | (5,234 | ) | 48,060 | 154,295 |
September 30, 2017 | ||||||||||||||||||||
Goodwill | $ | 339,451 | $ | 9,941,434 | $ | - | $ | - | $ | 10,280,885 | ||||||||||
Intangible assets, net | 90,400 | 6,793,406 | 151,333 | - | 7,035,139 | |||||||||||||||
Total assets | 1,814,350 | 18,425,123 | 1,624,568 | 2,257,796 | 24,121,837 |
Three Months Ended September 30, 2016 | ||||||||||||||||
PDN Network | NAPW Network | Noble Voice | Consolidated | |||||||||||||
Membership fees and related services | $ | - | $ | 3,748,334 | $ | - | $ | 3,748,334 | ||||||||
Lead generation | - | - | 1,554,370 | 1,554,370 | ||||||||||||
Recruitment services | 954,887 | - | - | 954,887 | ||||||||||||
Products sales and other | - | 52,857 | - | 52,857 | ||||||||||||
Consumer advertising and marketing solutions | 49,719 | - | - | 49,719 | ||||||||||||
Total revenues | 1,004,606 | 3,801,191 | 1,554,370 | 6,360,167 | ||||||||||||
Loss from operations | (118,948 | ) | (894,361 | ) | (266,893 | ) | (1,280,202 | ) | ||||||||
Depreciation and amortization | 33,471 | 738,473 | 47,950 | 819,894 | ||||||||||||
Income tax expense (benefit) | (222,808 | ) | (289,767 | ) | (111,124 | ) | (623,699 | ) | ||||||||
Net loss | (512,771 | ) | (604,594 | ) | (155,769 | ) | (1,273,134 | ) |
Nine Months Ended September 30, 2016 | ||||||||||||||||
PDN Network | NAPW Network | Noble Voice | Consolidated | |||||||||||||
Membership fees and related services | $ | - | $ | 13,047,652 | $ | - | $ | 13,047,652 | ||||||||
Lead generation | - | - | 4,489,919 | 4,489,919 | ||||||||||||
Recruitment services | 2,295,556 | - | - | 2,295,556 | ||||||||||||
Products sales and other | - | 544,440 | - | 544,440 | ||||||||||||
Consumer advertising and marketing solutions | 176,771 | - | - | 176,771 | ||||||||||||
Total revenues | 2,472,327 | 13,592,092 | 4,489,919 | 20,554,338 | ||||||||||||
Loss from operations | (839,840 | ) | (2,173,251 | ) | (1,106,895 | ) | (4,119,986 | ) | ||||||||
Depreciation and amortization | 130,121 | 2,207,703 | 160,312 | 2,498,136 | ||||||||||||
Income benefit | (373,717 | ) | (557,439 | ) | (286,936 | ) | (1,218,092 | ) | ||||||||
Net loss | (1,083,270 | ) | (1,615,812 | ) | (819,959 | ) | (3,519,041 | ) |
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 |
16
This MD&A should be read in conjunction with ourthe accompanying condensed consolidated financial statements and the related notes thereto, and the audited consolidated financial statements and notes thereto included in Item 1, “Financial Statements,”our 2019 Form 10-K.
Forward-looking statements in Part Ithis MD&A are not guarantees of this Quarterly Report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Ourperformance and may involve risks and uncertainties that could cause actual results will likelyto differ materially from those contained inprojected. Refer to the forward-looking statements. Please read “Special Note Regarding Forward-Looking“Forward-Looking Statements” section of this MD&A and Item 1A. Risk Factors of our 2019 Form 10-K for additional information regarding forward-looking statements used in this Quarterly Report.
Overview
We are an operator of professional networks with a focus on diversity, employment, education and training. We use the term “diversity” (or “diverse”) to describe communities, or “affinities,” that are distinct based on a wide array of criteria, including ethnic, national, cultural, racial, religious or gender classification. We serve a variety of such communities, including Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, and Lesbian, Gay, Bisexual and Transgender (LGBT+).
We currently operate in fourtwo business segments: (i) Professional Diversity Network (“(“PDN Network ”)Network”), which includes online professional networking communities with career resources tailored to the needs of various diverse cultural groups and employers looking to hire members of such groups, and (ii) National Association of Professional Women (“(“NAPW Network ”)Network”), a women-only professional networking organization, (iii) Noble Voiceorganization. On March 4, 2020 the Board decided to discontinue all of the Company’s operations (“ Noble Voice ”)in the People’s Republic of China, (“China Operations”), a career consultation and lead generation service, and (iv) China operations ( “China Operations” ), which focusfocused on providing tools, products and services in China which willto assist women, students and business professionals in personal and professional development.
Our value proposition is simple: (i) we provide a robust online and in-person network for our women members to make professional and personal connections for our diverse audience of women: African Americans, Hispanics, Asians, Veterans, individuals with disabilities and members of the Gaygay community (with the ability to roll out to our other affinities); (ii) we assist our registered users, or members, in their efforts to connect with like-minded individuals and identify career opportunities within the network; (iii) we help employers address their workforce diversity needs by connecting them with the right candidates; and (iv) we leverage our U.S. expertise and China connections to deliver these values to China, one of the world’s fastest-growing market.
During the first two quarters of 2017, we held seven events as part of our education and training business line’s “Shared Economy” summit series, attracting over 7,800 paid attendees. Additionally, during the second quarter of 2017, we held a selective marketing event to introduce IAW, the PDN China women’s networking business.
On March 4, 2020, our Board of Directors (the “Board”) decided to discontinue all operations in China. The resolution approved by the Board does not contemplate a sale of the business unit or a sale of any assets to a third-party for its China operations, but to effectively cease operations, which will commence during the second quarter of 2020. Accordingly, all historical financial results associated with the China operations have been reclassified to discontinued operations and current and prior period financial results have been reclassified. China operations were previously disclosed as a reportable operating segment as “China Operations”.
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17Impact of COVID-19
The outbreak of the novel coronavirus (COVID-19) has resulted and will continue to result in disruptions to our business and operations. In March 2020, we began to experience reductions in new memberships and enrollment renewals due to COVID-19 as customers deferred our services due to financial and economic concerns. Additionally, revenues associated with our events business may be delayed or cancelled due to social distancing measures currently in place as well as travel restrictions. General business and customer financial uncertainty may negatively impact new and existing customers that could result in a reduction in expected revenues and an increase in certain costs.
We are focused on ensuring that our employees are safe and transitioned our workforce to work from home. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities are uncertain and cannot be predicted.
We believe that our existing cash balances will provide us the necessary capital to navigate the COVID-19 pandemic.
Sources of Revenue
We generate revenue from (i) paid membership subscriptions and related services, (ii) lead generation, (iii) recruitment services, (iv)(iii) product sales, (v)(iv) education and training and (vi)(v) consumer advertising and consumer marketing solutions. The following table sets forth our revenues from each product as a percentage of total revenue for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Percentage of revenue by product: | ||||||||||||||||
Membership fees and related services | 49.9 | % | 58.9 | % | 48.7 | % | 63.5 | % | ||||||||
Lead generation | 31.0 | % | 24.5 | % | 30.7 | % | 21.8 | % | ||||||||
Recruitment services | 15.7 | % | 15.0 | % | 12.9 | % | 11.2 | % | ||||||||
Products sales and other | 0.4 | % | 0.8 | % | 0.6 | % | 2.6 | % | ||||||||
Education and training | 1.5 | % | 0.0 | % | 5.9 | % | 0.0 | % | ||||||||
Consumer advertising and consumer marketing solutions | 1.5 | % | 0.8 | % | 1.2 | % | 0.9 | % |
Paid Membership Subscriptions and Related Services.Services.Paid Membership Subscriptions and Related Services. We offer paid membership subscriptions through our NAPW Network, a women-only professional networking organization, operated by our wholly-owned subsidiary. Members gain access to networking opportunities through a members-only website at www.napw.comwww.iawomen.com and “virtual” eChapter events which occur in a webcast setting as well as through in-person networking at approximately 190100 local chapters nationwide, additional career and networking events such as the National Networking Summit Series, Power Networking Events and the PDN Network events. NAPW members also receive ancillary (non-networking) benefits such as educational discounts, shopping, and other membership perks. Upgraded packages include (i)The basic package is the VIP membership,Initiator level, which provides members with additional promotional and publicity toolsonline benefits only. Upgrades to an Innovator membership include the Initiator benefits as well as freemembership in local chapters, and access (including guest) to live in-person events. The most comprehensive level, the National Networking SummitsInfluencer, provides all the aforementioned benefits plus admission to exclusive “live” events and free continuing education programsexpanded opportunities for marketing and (ii)promotion, including the creation and distribution of a press release, package, which provides members with the opportunity to work withis prepared by professional writers to publish personalized press releases and thereby secure valuable online presence.sent over major newswires. Additionally, all memberships offer educational programs with discounts or at no cost, based on the membership level. NAPW Membership is renewable and fees are payable on an annual or monthly basis, with the first annual fee payable at the commencement of the membership. NAPW Membership subscriptions represented approximately 99.2% and 98.6%, respectively,
As part of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2017 and 2016, and 98.8% and 96.0%, respectively, for the nine months ended September 30, 2017 and 2016.
Recruitment Services. We provide recruitment services through PDN Network to medium and large employers seeking to diversify their employment ranks. Our recruitment services include recruitment advertising, job postings, semantic search technology and paid access to, and placement in, or advertising around our career and networking events. The majority of recruitment services revenue comes from job recruitment advertising. We also offer to businesses subject to the regulations and requirements of the Equal Employment Opportunity Office of Federal Contract Compliance Program (“OFCCP ”)”) our OFCCP compliance product, which combines diversity recruitment advertising with job postings and compliance services. Recruitment advertising revenue constituted approximately 91.4% and 95.0%, respectively, of revenue attributable to the PDN Network business segment for the three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, recruitment advertising revenue constituted approximately 91.3% and 92.8%, respectively, of the revenue attributable to the PDN Network business segment.
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Product Sales. We offer to new purchasers of our NAPW Network memberships the opportunity to purchase up to twoa commemorative wall plaquesplaque at the time of membership purchase. Product sales represented approximately 0.8% and 1.4%, respectively, of revenue attributableThey may purchase up to the NAPW Network business segment for the three months ended September 30, 2017 and 2016, and 1.2% and 4.0%, respectively, of revenue attributable to the NAPW Network business segment for the nine months ended September 30, 2017 and 2016.
Education and Training. In March of 2017 we began our China Operations by creating a Shared Economy summit series designed to provide education and training to Chinese business people. Our initial event was a paid event which generated revenue through paid event admission fees. Education and training represented 100% of the revenue attributable to China Operations for the three months ended September 30, 2017. Because China Operations first began in March of 2017 there is no period-over-period comparison.
Consumer Advertising and Consumer Marketing Solutions. We work with partner organizations to provide them with integrated job boards on their websites which offer their members or customers the ability to post recruitment advertising and job openings. We generate revenue from fees charged for those postings. Consumer advertising and marketing solutions represented approximately 8.6% and 5.0%, respectively, of the revenue attributable to the PDN Network business segment for the three months ended September 30, 2017 and 2106. For the nine months ended September 30, 2017 and 2016, consumer advertising and consumer marketing solutions revenue constituted approximately 8.7% and 7.2%, respectively, of the revenue attributable to the PDN Network business segment.
18
Cost of revenue primarily consists of data and related costs to generate leads for our Noble Voice customers, costs of producing job fair and other events, revenue sharing with partner organizations, costs of producing education and training events, and costs of web hosting and operating our websites for the PDN Network. Costs of producing wall plaques, hosting member conferences and local chapter meetings are also included in the cost of revenue for NAPW Network.
During the quarter and nine months ended September 30, 2017, we experienced losses as we continued our efforts to integrate new management and China Operations, reduce costs and streamline our business. For the three months ended September 30, 2017, we realized a net loss of approximately $2,489,000, a $1,216,000 increase from the comparable prior year period. This increase in net loss was primarily driven by a decrease of $1,578,000 in NAPW segment revenues from membership fees, related services and product sales period-over-period, partially offset by a decrease of $788,000 in overall sales and marketing expenses. For the nine months ended September 30, 2017, we realized a net loss of approximately $17,666,000, a $14,147,000 increase from the comparable prior year period. This increase in net loss is primarily related to goodwill impairment charge of $9,920,000, the decrease in membership fees and related services revenue, an increase in stock-based compensation, and an increase in legal expenses.
We believe that one of the key metrics in evaluating and measuring our performance is the number of registered users or members.users. We offer free memberships and in our NAPW segment we also offer a paid membership, one that provides a greater leveldefine the number of services and networking potential. The vast majority of our registered users are non-paid members. We define a registered user as an(i) the number of individual job seekerseekers who affirmatively visited one of PDN Network’s properties, opted into an affinity group and provided us with demographic or contact information enabling us to match him or herthem with employers and/or jobs (“PDN(PDN Network registered user”). We believe that a higherusers); and (ii) the number of registered users will result in increased sales of our products and services, as employers willconsumers who have access to a larger pool of professional talent.
The following table sets forth the number of registered users on our PDN Network and total membership on our NAPW Network as of the periods presented:
As of September 30, | Change | |||||||||||
2017 | 2016 | (Percent) | ||||||||||
(in thousands) | ||||||||||||
PDN Network Registered Users (1) | 9,975 | 8,951 | 11.4 | % | ||||||||
NAPW Network Total Membership (2) | 952 | 880 | 8.2 | % |
As of March 31, | Change | |||||||||||
2020 | 2019 | (Percent) | ||||||||||
(in thousands) | ||||||||||||
PDN Network Registered Users(1) | 10,826 | 10,695 | 1.2 | % | ||||||||
NAPW Network Total Membership(2) | 948 | 952 | -0.4 | % |
19(1) The number of registered users may be higher than the number of actual users due to various factors. For more information, see“Risk Factors page #17 —The reported number of our registered users is higher than the number of actual individual users, and a substantial majority of our visits are generated by a minority of our users” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Annual Report” as filed with the SEC on May 4, 2020).
(2) Includes both Paid Members and Unpaid Members. There were 5,000 and 9,000 Paid Members as of March 31, 2020 and 2019.
Non-GAAP Financial Measure
Adjusted EBITDA
We believe Adjusted EBITDA provides a meaningful representation of our operating performance that provides useful information to investors regarding our financial condition and results of operations. Adjusted EBITDA is commonly used by financial analysts and others to measure operating performance. Furthermore, management believes that this non-GAAP financial measure may provide investors with additional meaningful comparisons between current results and results of prior periods as they are expected to be reflective of our core ongoing business. However, while we consider Adjusted EBITDA to be an important measure of operating performance, Adjusted EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Further, Adjusted EBITDA, as we define it, may not be comparable to EBITDA, or similarly titled measures, as defined by other companies.
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The following table provides a reconciliation of Net Lossnet loss from continuing operations to Adjusted EBITDA for the three months ended March 31, 2020 and 2019, the most directly comparable GAAP measure reported in our consolidated financial statements:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Net loss | $ | (2,488 | ) | $ | (1,273 | ) | $ | (17,665 | ) | $ | (3,519 | ) | ||||
Stock-based compensation expense | 146 | 118 | 731 | 218 | ||||||||||||
Goodwill impairment charge | - | - | 9,920 | - | ||||||||||||
Litigation Settlement | 155 | - | 155 | 500 | ||||||||||||
Gain on lease cancellation | - | - | - | (424 | ) | |||||||||||
Depreciation and amortization | 807 | 820 | 2,444 | 2,498 | ||||||||||||
Change in fair value of Warrant Liability | - | 401 | - | 401 | ||||||||||||
Interest Expense | - | 216 | 12 | 217 | ||||||||||||
Interest and other income | (4 | ) | - | (9 | ) | (1 | ) | |||||||||
Income tax benefit | (213 | ) | (624 | ) | (1,160 | ) | (1,218 | ) | ||||||||
Adjusted EBITDA | $ | (1,597 | ) | $ | (342 | ) | $ | (5,572 | ) | $ | (1,328 | ) |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Loss from Continuing Operations | $ | (1,422 | ) | $ | (804 | ) | ||
Stock-based compensation | 19 | 8 | ||||||
Litigation settlement reserve | 450 | - | ||||||
Depreciation and amortization | 52 | 217 | ||||||
Interest expense | - | 3 | ||||||
Interest and other income | 1 | - | ||||||
Income tax benefit | (6 | ) | (66 | ) | ||||
Adjusted EBITDA | $ | (906 | ) | $ | (642 | ) |
Results of Operations
Revenues
Total Revenues
The following tables set forth our revenuesrevenue for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended | ||||||||||||||||
September 30, | Change | Change | ||||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues | ||||||||||||||||
Membership fees and related services | $ | 2,205 | $ | 3,748 | $ | (1,543 | ) | (41.2 | )% | |||||||
Lead generation | 1,370 | 1,554 | (184 | ) | (11.8 | )% | ||||||||||
Recruitment services | 694 | 955 | (261 | ) | (27.3 | )% | ||||||||||
Products sales and other | 18 | 53 | (35 | ) | (66.0 | )% | ||||||||||
Education and training | 69 | - | 69 | 100.0 | % | |||||||||||
Consumer advertising and marketing solutions | 65 | 50 | 15 | 30.0 | % | |||||||||||
Total revenues | $ | 4,421 | $ | 6,360 | $ | (1,939 | ) | (30.5 | )% |
Nine Months Ended | ||||||||||||||||
September 30, | Change | Change | ||||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues | ||||||||||||||||
Membership fees and related services | $ | 7,465 | $ | 13,048 | $ | (5,583 | ) | (42.8 | )% | |||||||
Lead generation | 4,699 | 4,490 | 209 | 4.7 | % | |||||||||||
Recruitment services | 1,977 | 2,295 | (318 | ) | (13.9 | )% | ||||||||||
Products sales and other | 91 | 544 | (453 | ) | (83.3 | )% | ||||||||||
Education and training | 899 | - | 899 | 100.0 | % | |||||||||||
Consumer advertising and marketing solutions | 189 | 177 | 12 | 6.8 | % | |||||||||||
Total revenues | $ | 15,320 | $ | 20,554 | $ | (5,234 | ) | (25.5 | )% |
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
Revenues: | ||||||||||||||||
Membership fees and related services | $ | 384 | $ | 794 | $ | (410 | ) | -51.6 | % | |||||||
Recruitment services | 567 | 474 | 93 | 19.6 | % | |||||||||||
Products sales and other | 1 | 3 | (2 | ) | -66.7 | % | ||||||||||
Consumer advertising and marketing solutions | 30 | 36 | (6 | ) | -16.7 | % | ||||||||||
Total revenues | $ | 982 | $ | 1,307 | $ | (325 | ) | -24.9 | % |
Total revenues decreased $1,939,000,$325,000, or 30.5% for24.9%, from $1,307,000 during the three months ended September 30, 2017, comparedMarch 31, 2019, to $982,000 during the same prior year period, and $5,234,000, or 25.5%, for the ninethree months ended September 30, 2017, comparedMarch 31, 2020. The decrease was primarily attributable to the same prior year period, due primarily to decreasea $410,000 decline in new membership fees and products sales as the management focuses on cost reduction efforts, including the reductionrelated services revenues in the salesforce.
Revenues by Segment
The following table sets forth each operating segment’s revenues for the periods presented. The period-to-period comparison is not necessarily indicative of future results.
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Three Months Ended | ||||||||||||||||
September 30, | Change | Change | ||||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
NAPW Network | $ | 2,223 | $ | 3,801 | $ | (1,578 | ) | (41.5 | )% | |||||||
PDN Network | 759 | 1,005 | (246 | ) | (24.5 | )% | ||||||||||
Noble Voice | 1,370 | 1,554 | (184 | ) | (11.8 | )% | ||||||||||
China | 69 | - | 69 | 100.0 | % | |||||||||||
Total revenues | $ | 4,421 | $ | 6,360 | $ | (1,939 | ) | (30.5 | )% |
Nine Months Ended | ||||||||||||||||
September 30, | Change | Change | ||||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
NAPW Network | $ | 7,556 | $ | 13,592 | $ | (6,036 | ) | (44.4 | )% | |||||||
PDN Network | 2,166 | 2,472 | (306 | ) | (12.4 | )% | ||||||||||
Noble Voice | 4,699 | 4,490 | 209 | 4.7 | % | |||||||||||
China | 899 | - | 899 | 100.0 | % | |||||||||||
Total revenues | $ | 15,320 | $ | 20,554 | $ | (5,234 | ) | (25.5 | )% |
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
PDN Network | $ | 597 | $ | 510 | $ | 87 | 17.1 | % | ||||||||
NAPW Network | 385 | 797 | (412 | ) | -51.7 | % | ||||||||||
Total revenues | $ | 982 | $ | 1,307 | $ | (325 | ) | -24.9 | % |
During the three months ended September 30, 2017,March 31, 2020, our NAPWPDN Network generated $2,223,000$597,000 in revenue from membership fees and related services and product sales,revenues compared to $3,801,000 for$510,000 in revenues during the same periodthree months ended March 31, 2019, an increase of $87,000 or 17.1%. The increase in revenues was primarily of an increase in recruitment revenues generated in the prior year, a decrease of $1,578,000, or 41.5%. During the nine months ended September 30, 2017, our NAPW Network generated $7,556,000 in revenue from membership fees and related services and product sales and other, compared to $13,592,000 for the same period in the prior year, a decrease of $6,036,000, or 44.4%. The decrease was mainly attributable to reductions of the NAPW sales staff while the Company re-tooled its lead-generation and other marketing activities and replaced and re-trained sales staff on new sales practices we expect to lead to improved long-term productivity. During the third quarter, the Company formed a transition team and tasked the team on transitioning NAPW to long-term profitability. The core transition team’s objections are to increase the value for members, enhance membership sales productivity and to develop new methods of deriving revenue. To date the transition team has revamped membership outreach, new membership marketing and reducing indirect labor costs. In 2018 the Company will be investing in increasing women’s networking membership sales and expanding from NAPW (National Association of Professional Women), a national organization to IAW (International Association of Women), an international women’s networking organization. The Company believes that in a global market place, the IAW organization can offer all the value of today’s NAPW and add an international platform to enhance membership value.
During the three months ended September 30, 2017,March 31, 2020, our PDNNAPW Network generated $759,000 in revenue,revenues were $385,000, compared to $1,005,000 for the same period in the prior year, a decreaserevenues of $246,000, or 24.5%. During the nine months ended September 30, 2017, our PDN Network generated $2,166,000 in revenue, compared to $2,472,000 for the same period in the prior year, a decrease of $306,000, or 12.4%.
recognize ratably over the membership period (ranging from 12 to 36 months).
The following tables set forth our costs and expenses for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended | ||||||||||||
September 30, | Change | Change | ||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||
(in thousands) | ||||||||||||
Costs and expenses: | ||||||||||||
Cost of revenue | $ | 658 | $ | 745 | $ | (87 | ) | (11.7 | )% | |||
Sales and marketing | 2,276 | 3,064 | (788 | ) | (25.7 | )% | ||||||
General and administrative | 3,237 | 3,011 | 226 | 7.5 | % | |||||||
Litigation settlement | 155 | - | 155 | 100.0 | % | |||||||
Depreciation and amortization | 807 | 820 | (13 | ) | (1.6 | )% | ||||||
Total costs and expenses | $ | 7,133 | $ | 7,640 | $ | (507 | ) | (6.6 | )% |
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
Cost and expenses: | ||||||||||||||||
Cost of revenues | $ | 173 | $ | 184 | $ | (11 | ) | -6.0 | % | |||||||
Sales and marketing | 525 | 696 | (171 | ) | -24.6 | % | ||||||||||
General and administrative | 1,661 | 1,078 | 583 | 54.1 | % | |||||||||||
Depreciation and amortization | 52 | 217 | (165 | ) | -76.0 | % | ||||||||||
Total cost and expenses: | $ | 2,411 | $ | 2,175 | $ | 236 | 10.9 | % |
Total costs and expenses increased during the three months ended September 30, 2017, totalMarch 31, 2020 to $2,411,000 compared to $2,175,000 during the three months ended March 31, 2019. The increase was primarily the result of $450,000 litigation settlement reserve and $251,000 in higher legal and accounting fees, partially offset by lower intangible amortization expense of $165,000 in the current period. The litigation settlement reserve is reflected in our Corporate Overhead segment in general and administrative expenses.
Costs and Expenses by Segment
The following table sets forth each operating segment’s costs and expenses were $7,133,000, compared to $7,640,000 for same periodthe periods presented. The period-to-period comparison is not necessarily indicative of future results.
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
PDN Network | $ | 747 | $ | 681 | $ | 66 | 9.7 | % | ||||||||
NAPW Network | 453 | 905 | (452 | ) | -49.9 | % | ||||||||||
Corporate Overhead | 1,211 | 589 | 622 | 105.6 | % | |||||||||||
Total cost and expenses: | $ | 2,411 | $ | 2,175 | $ | 236 | 10.9 | % |
Costs and expenses decreased $452,000, or 49.9%, in the prior year,our NAPW Network segment primarily as a decreaseresult of $507,000 or 6.6%. The decrease is mainly attributable to $788,000 or 25.7%lower intangible amortization expense of $165,000, $95,000 decrease in sales and marketing expense mostly due to reduction in sales force,expenses as a decreaseresult of $87,000 or 11.7% in cost of revenue, andstaffing reductions, a slight decrease of $13,000 or 1.6% in depreciation and amortization. The$56,000 decrease in expenses was partially offset by an decrease of $226,000 or 7.5%digital advertising and marketing initiatives and $50,000 in lower general and administrative personnel costs.
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Costs and expenses increased $66,000, or 9.7%, in the PDN Network segment primarily due to an increase in bad debt expense of $28,000 and $155,000 litigation settlement$11,000 in higher rent expenses.
Corporate overhead expenses in Q3 2017, of which $146,000 was accrued forincreased $622,000 during the potential back pay related to the “NLRB” legal proceeding (please refer to “Legal Proceedings” for details).
Nine Months Ended | ||||||||||||
September 30, | Change | Change | ||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||
(in thousands) | ||||||||||||
Costs and expenses: | ||||||||||||
Cost of revenue | $ | 2,193 | $ | 2,434 | $ | (241 | ) | (9.9 | )% | |||
Sales and marketing | 8,115 | 10,314 | (2,199 | ) | (21.3 | )% | ||||||
General and administrative | 11,323 | 8,928 | 2,395 | 26.8 | % | |||||||
Litigation settlement | 155 | 500 | (345 | ) | (69.0 | )% | ||||||
Goodwill impairment charge | 9,920 | - | 9,920 | 100.0 | % | |||||||
Depreciation and amortization | 2,444 | 2,498 | (54 | ) | (2.2 | )% | ||||||
Total costs and expenses | $ | 34,150 | $ | 24,674 | $ | 9,476 | 38.4 | % |
Operating Expenses
Cost of revenue:revenues: Cost of revenues during the three months ended September 30, 2017 were $658,000, compared to $745,000 for the same period in the prior year,March 31, 2020 was $173,000, a decrease of $87,000,$11,000, or 11.7%6.0%, from $184,000 during the three months ended March 31, 2019 as a result of lower revenues of $325,000, or 24.9%, which resulted in a corresponding decrease in cost of revenue.
Sales and marketing expense: Sales and marketing expense during the three months ended March 31, 2020 was $525,000, a decrease of $171,000, or 24.6%, from $696,000 during the three months ended March 31, 2019. The decrease is mainly attributable to a decrease of $85,000$95,000 in personnel cost, a $36,000 reduction in digital marketing spending and $20,000 in lower branding and marketing costs in the PDN segmentcurrent period.
General and a decrease of $44,000 in the Noble Voice segment dueadministrative expense: General and administrative expenses increased by $583,000, or 54.1%, to decline in revenue, partially offset by an increase of $70,000 related to our China Operations that was launched in March 2017. Cost of revenues during the nine months ended September 30, 2017 were $2,193,000, compared to $2,434,000 for the same period in the prior year, a decrease of $241,000, or 9.9%, mainly attributable to a decrease of $271,000 in the PDN segment as a result of improved efficiencies in spending, and a decrease of $221,000 in the Noble Voice segment as a result of improved efficiencies in lead data sourcing and spending, partially offset by an increase of $338,000 related to our China Operations that was launched in March 2017.
Depreciation and amortization expense: Depreciation and amortization expense during the three months ended March 31, 2020 was $52,000, compared to $3,064,000 for$217,000 during the same period in the prior year,three months ended March 31, 2019, a decrease of $788,000,$165,000, or 25.7%76.0%. SalesThe decrease was primarily attributable to $165,000 in lower intangible amortization expense due to a $2,796,000 impairment charge recorded in the fourth quarter of 2018 in our NAPW segment.
Income Tax Benefit
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
Income tax benefit | $ | (6 | ) | $ | (66 | ) | $ | 60 | -90.9 | % |
During the three months ended March 31, 2020 and marketing2019, we recorded a benefit for income tax of $6,000 and $66,000, respectively. The decrease in income tax benefit during the nine months ended September 30, 2017 were $8,115,000, compared to $10,314,000 for the samecurrent period in the prior year, a decrease of $2,199,000, or 21.3%. The decreases for the three and nine months ended September 30, 2017 arewas primarily due to a reduction in a discrete tax item associated with stock-based compensation expense in addition to a reduction in our valuation allowance
Discontinued Operations
In March 2020, our Board decided to suspend all China operations generated by the NAPWformer CEO, Michael Wang. The results of operations for China operations are presented in the statements of operation and comprehensive loss as loss from discontinued operations. In May 2018, we sold Noble Voice to a long-time customer of the Company and exited the business segment sales forcepreviously conducted by Noble Voice. For the three months ended March 31, 2019, results from 64 sales representatives as of September 30, 2016 to 51 as of September 30, 2017. discontinued operations incudes costs and expenses associated with Noble Voice.
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The following table presents results from discontinued operations for the three months ended September 30, 2017 was $3,237,000, compared to $3,011,000 for the same period in the prior year, an increase of 226,000 or 7.5%. The increase was mainly attributable to a $268,000 generalMarch 31, 2020 and administrative expense related to our China Operations that were launched in March 2017, a $183,000 rent liability accrual related to the unused space at our Garden City office related to NAPW segment, a $183,000 severance accrual for reduction in force in NAPW segment, and a $115,000 increase in compensation to independent board directors. This was partially offset by a $106,000 decrease in credit card fees due to lower sales and lower credit card rates, a $101,000 decrease in legal expenses, an $83,000 decrease in salaries and benefits, an $83,000 decrease in corporate insurance expenses, and a $52,000 decrease in consulting fees. General and administrative expense for the nine months ended September 30, 2017 was $11,323,000, compared to $8,928,000 for the same period in the prior year, an increase of $2,395,000 or 26.8%. The increase was mainly attributable to a $774,000 increase related to our China Operations that was launched in March 2017, a $616,000 increase in legal fees, a $514,000 increase in stock based compensation, 2019:
a gain on lease cancellation of $424,000 related to the closing of its Los Angeles, CA office recorded in prior year, and a $364,000 increase in compensation to independent board directors. This was partially offset by a $253,000 decrease in credit card fees due to lower sales volume, and a $92,000 decrease in professional fees.
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues | $ | - | $ | 39 | ||||
Cost of Sales | 7 | 17 | ||||||
Depreciation and amortization | - | 4 | ||||||
Sales and marketing | 2 | 85 | ||||||
General and administrative | 61 | 283 | ||||||
Non-operating income (expense) | - | (6 | ) | |||||
Loss from discontinued operations before income tax | (70 | ) | (356 | ) | ||||
Income tax expense (benefit) | - | - | ||||||
Net loss from discontinued operations | $ | (70 | ) | $ | (356 | ) |
Litigation settlement:
Litigation settlement for the three and nine months ended September 30, 2017 represents primarily $146,000 expense that was accrued for the potential back-pay related to the “NLRB” legal proceeding (please refer to “Legal Proceedings” for details). Litigation settlement for the nine months ended September 30, 2016 represents the expense related to a $500,000 settlement of a class action lawsuit that was recorded during the first quarter of 2016.
Three Months Ended | ||||||||||||||
September 30, | Change | Change | ||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||
(in thousands) | ||||||||||||||
Total | $ | (213 | ) | $ | (624 | ) | $ | 411 | (65.9 | )% |
Nine Months Ended | ||||||||||||||
September 30, | Change | Change | ||||||||||||
2017 | 2016 | (Dollars) | (Percent) | |||||||||||
(in thousands) | ||||||||||||||
Total | $ | (1,160 | ) | $ | (1,218 | ) | $ | 58 | (4.8 | )% |
The following table sets forth each operating segment’s net income or loss for the periods presented. The period-to-period comparison is not necessarily indicative of future results.
Three Months Ended | |||||||||||||||
September 30, | Change | Change | |||||||||||||
2017 | 2016 | (Dollars) | (Percent) | ||||||||||||
(in thousands) | |||||||||||||||
NAPW Network | $ | $(1,528 | ) | $ | (604 | ) | $ | (924 | ) | 153.0 | % | ||||
PDN Network | (218 | ) | (513 | ) | 295 | (57.5 | )% | ||||||||
Noble Voice | (419 | ) | (156 | ) | (263 | ) | 168.6 | % | |||||||
China | (324 | ) | - | (324 | ) | 100.0 | % | ||||||||
Consolidated Net Loss | $ | (2,489 | ) | $ | (1,273 | ) | $ | (1,216 | ) | 95.5 | % |
Nine Months Ended | |||||||||||||||
September 30, | Change | Change | |||||||||||||
2017 | 2016 | (Dollars) | (Percent) | ||||||||||||
(in thousands) | |||||||||||||||
NAPW Network | $ | (14,026 | ) | $ | (1,616 | ) | $ | (12,410 | ) | 767.9 | % | ||||
PDN Network | (1,865 | ) | (1,083 | ) | (782 | ) | 72.2 | % | |||||||
Noble Voice | (1,358 | ) | (820 | ) | (538 | ) | 65.6 | % | |||||||
China | (417 | ) | - | (417 | ) | 100.0 | % | ||||||||
Consolidated Net Loss | $ | (17,666 | ) | $ | (3,519 | ) | $ | (14,147 | ) | 402.0 | % |
Three Months Ended March 31, | Change | Change | ||||||||||||||
2020 | 2019 | (Dollars) | (Percent) | |||||||||||||
(in thousands) | ||||||||||||||||
PDN Network | $ | (148 | ) | $ | (161 | ) | $ | 13 | -8.1 | % | ||||||
NAPW Network | (68 | ) | (100 | ) | 32 | -32.0 | % | |||||||||
Corporate Overhead | (1,206 | ) | (543 | ) | (663 | ) | 122.1 | % | ||||||||
Consolidated net loss from continuing operations | $ | (1,422 | ) | $ | (804 | ) | $ | (618 | ) | 76.9 | % |
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NAPW segment revenues from membership fees, related services and product sales period-over-period, partially offset by a decrease of $734,000 in sales and marketing expenses. The $12,410,000 increase in net loss for the nine months ended September 30, 2017 was primarily driven by a decrease of $6,036,000 in NAPW segment revenues from membership fees, related services and product sales period-over-period, along with NAPW segment goodwill impairment charge of $9,920,000, and partially offset by a decrease of $2,479,000 in sales and marketing expenses.
PDN Network Net Loss.During the ninethree months ended September 30, 2017,March 31, 2020, we incurred a net loss of $1,865,000,$148,000 compared to the net loss of $1,083,000 for$161,000 incurred during the ninethree months ended September 30, 2016,March 31, 2019. This decrease in net loss was primarily attributable to lower revenues in the current year, partially offset by lower personnel costs.
Corporate Overhead.During the three months ended March 31, 2020, we incurred a net loss of $1,206,000, an increase of $782,000, or 72.2%.$663,000, compared to a net loss of $543,000 incurred during the three months ended March 31, 2019. The increase in net loss was primarily attributable to $616,000a result of a litigation settlement reserve of $450,000 recorded in the first quarter of 2020, $251,000 increase in non recurring legal expense, $513,000 increase in stock based compensation, along with a $306,000 decrease in revenues,and accounting fees, which was partially offset by a $216,000 interest expense, and $401,000 changereduction of $133,000 in fair value of warrant liability, both recorded during three months ended September 30, 2016.personnel costs.
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During the three and nine months ended September 30, 2017, we incurred a net loss of $419,000 and $1,358,000, respectively, attributable to the Noble Voice segment, compared to $156,000 and $820,000 for the three and nine months ended September 30, 2016, respectively. The increase in net loss was primarily attributable to by higher corporate overhead allocation.
The following table summarizes our liquidity and capital resources as of September 30, 2017March 31, 2020 and December 31, 2016, respectively,2019:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Cash and cash equivalents | $ | 1,555 | $ | 634 | ||||
Working capital (deficiency) | $ | (1,741 | ) | $ | (2,114 | ) |
As of March 31, 2020, we had cash and is intendedcash equivalents of $1,555,000 compared to supplement the more detailed discussion that follows:
September 30, | December 31, | ||||||
2017 | 2016 | ||||||
(in thousands) | |||||||
Cash and cash equivalents | $ | 2,822 | $ | 6,069 | |||
Working capital (deficiency) | $ | (1,475 | ) | $ | 1,000 |
While we have aggressively reduced operating and overhead expenses, and while we continue to LinkedIn relatedfocus on our overall profitability, we have continued to litigation that was settled in 2016,generate negative cash flows from operations, and we expect that we will continue to generate operatingincur net losses for the foreseeable future.
We are closely monitoring operating costs and capital requirementsrequirements. Our Management also made efforts in 2019 and have developed2018 to contain and reduce cost, including terminating non-performing employees and eliminating certain positions, replacing and negotiating with certain vendors, implementing a new approval process overseeing travel and other expenses, and significantly reducing the cash compensation for independent board directors. If we are still not successful in sufficiently reducing our costs, we may then need to dispose of our other assets or discontinue business lines.
On March 22, 2020, we entered into an operating plan for 2017. We have had cost reductionsagreement with Malven Group Limited, a company established under the laws of the British Virgin Islands (“Malven”), in connection with the areaspurchase by Malven of staffing levels and operating budgets.
Due to COVID-19 and the financial impact and business interruption that this pandemic will have, we applied for the Paycheck Protection Program (“PPP”) under the Small Business Administration (“SBA”) Section 7(a) loans for qualified small businesses. On May 5, 2020, we received total proceeds of $651,077 from the Share Issuance, or $14.1 million after giving effectSBA. In accordance with the loan forgiveness requirements under the SBA CARES Act, we intend to use the payment for 312,500 shares of Common Stock tendered and not withdrawn in the Tender Offer. We received approximately $9.0 million in net proceeds from the Share Issuance, after repayment of outstanding indebtednessPPP loan primarily for payroll costs, rent and utilities and we anticipate that the payment of transaction-related expenses atPPP loan will be forgiven by the closing.
We currently anticipate that our available funds
and cash29 |
We collect NAPW Network membership fees generally at the commencement of the membership term or at renewal periods thereafter. The memberships we sell are for one year and we defer recognition of the revenue from membership sales and renewals and recognize it ratably over the twelve monthtwelve-month period. Starting January 2, 2018, we also offer a monthly membership for IAW USA for which we collect a fee on a monthly basis. Our PDN Network also sells recruitment services to employers, generally on a one yearone-year contract basis. This revenue is also deferred and recognized over the life of the contract. Our payment terms for PDN Network and Noble Voice customers range from 30 to 60 days. We consider the difference between the payment terms and payment receipts a result of transit time for invoice and payment processing and to date have not experienced any liquidity issues as a result of the payments extending past the specified terms. Cash and cash equivalents and short termshort-term investments consist primarily of cash on deposit with banks and investments in money market funds, corporate and municipal debt and U.S. government and U.S. government agency securities.
Nine Months Ended | |||||||
September 30, | |||||||
2017 | 2016 | ||||||
(in thousands) | |||||||
Cash provided by (used in): | |||||||
Operating activities | $ | (6,454 | ) | $ | (2,489 | ) | |
Investing activities | (294 | ) | 694 | ||||
Financing activities | 3,502 | 239 | |||||
Effect of exchange rate fluctuations on cash and cash equivalents | (1 | ) | - | ||||
Net decrease in cash and cash equivalents | $ | (3,247 | ) | $ | (1,556 | ) |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash provided by (used in) continued operations | (in thousands) | |||||||
Operating activities | $ | (574 | ) | $ | (828 | ) | ||
Investing activities | (5 | ) | - | |||||
Financing activities | 1,500 | 373 | ||||||
Effect of exchange rate fluctuations on cash and cash equivalents | (15 | ) | 21 | |||||
Cash provided by (used in) discontinued operations | ||||||||
Operating activities | 16 | 365 | ||||||
Investing activities | - | (4 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | 922 | $ | (73 | ) |
Cash and Cash Equivalents
The Company considers cash and 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.
Net Cash Used in Operating Activities
Net cash used in operating activities from continuing operations during the three months ended March 31, 2002 was $6,454,000.$574,000. We had a net loss of $17,665,000,$1,422,000 during the three months ended March 31, 2020, which included a deferred income tax benefitnon-cash litigation settlement reserve of $1,160,000, which was offset by non-cash NAPW goodwill impairment charge$450,000, depreciation of $9,920,000, depreciationamortization expense of $52,000 and amortization of $2,444,000 and stock-based compensation expenseright-of-use assets of $731,000.$39,000, which was partially offset by payments of lease obligations of $46,000. Changes in operating assets and liabilities used $879,000$339,000 of cash during the ninethree months ended September 30, 2017,March 31, 2020, consisting primarily of increases in accounts receivable, accounts payable, deferred revenue and accrued expenses, partially offset by decreases in deferred revenue and accrued expenses.
Net cash used in operating activities from continuing operations for the three months ended March 31, 2019 was $828,000. We had a net loss of $804,000 during the three months ended March 31, 2019, which included depreciation and amortization expense of $217,000 and amortization of right-of-use assets of $38,000, which was partially by a deferred tax benefit of $69,000 and payments of lease obligations of $44,000. Changes in operating assets and liabilities used $179,000 of cash during the three months ended March 31, 2019, consisting primarily of decreases in deferred revenue, and accounts payable, partially offset by increases in accruedprepaid expenses and decreases in accounts receivable and prepayments.
Net Cash (Used in) Provided byUsed in Investing Activities
Net cash used in investing activities forfrom continuing operations during the ninethree months ended September 30, 2017March 31, 2020 was $294,000, consisting$4,500, which consisted of $123,000 invested to developinvestments in developed technology $154,000 in purchases of property and computer equipment partially offset by $18,000 of returned security deposits.
26
Net cash provided by financing activities from continuing operations during the ninethree months ended September 30, 2017March 31, 2020 was $3,502,000, consisting of the $3,000,000 in gross$1,500,000 and which reflected proceeds from the January 18, 2017 issuance, $646,000 refundsale of merchant reserve, partially offset bycommon stock. On March 22, 2020, we entered into an agreement with Malven Group Limited, a company established under the $144,000 paymentlaws of offering costs to third-party professionals.the British Virgin Islands, in connection with the purchase of 1,939,237 shares of our common stock at a price of $0.7735 per share for gross proceeds of $1,500,000. The closing of the transaction took place on March 30, 2020.
30 |
Net cash provided by financing activities from continuing operations during the ninethree months ended September 30, 2016March 31, 2019 was $239,000,$373,000, consisting of $1,943,000$373,000 in gross proceeds from the sale of proceeds drawn on203,963 shares of our Master Credit Facility, partially offset by $488,000common stock at a purchase price ranging from $1.42 to $3.85 per share, representing 120% of costs related to securing that facility, payment of $1,049,000 of costs relatedthe closing price the trading day immediately prior to the CFL Transaction and $166,000 duedate of subscription to citizens of the increase in the merchant reserve for NAPW Network.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities as defined in Regulation S-K Item 303(a)(4).
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these consolidated financial statements requires us to exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the consolidated financial statements.
We base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
While our significant accounting policies and estimates as compared to the critical accounting policies and estimatesare more fully described in Note 3 to our consolidated financial statements included at the 2016end of this Annual Report, which we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our business and the understanding of ourreported financial results of operations and affect the more significant judgments and estimates that we use in the preparation of our consolidated financial statements.
Accounts Receivable
Our policy is to reserve for uncollectible accounts based on our best estimate of the Securities Actamount of 1933, as amended,probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and Section 21Eother 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.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill is tested for impairment at the reporting unit level on an annual basis (December 31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test.
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When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then compares the fair value of the Securities Exchange ActCompany’s reporting unit to its carrying or book value. If the fair value of 1934,the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of a reporting unit exceeds its fair value, the Company will measure any goodwill impairment losses as amended. Thesethe 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.
Capitalized Technology Costs
We account for capitalized technology costs in accordance with ASC 350-40, Internal-Use Software (“ASC 350-40”). In accordance with ASC 350-40, we capitalize 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 concern expectations, beliefs, projections, plansthe identifiable assets acquired, the liabilities assumed, and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this Quarterly Report contains forward-looking statements regarding:
Revenue Recognition
Our principal sources of revenue are recruitment revenue, consumer marketing and consumer advertising revenue, membership subscription fees, and product sales. Recruitment revenue includes revenue recognized from direct sales to customers for recruitment services and events, as well as revenue from our direct ecommerce sales. Revenues from recruitment services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed or determinable and collectability is probable. Our recruitment revenue is derived from 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.
Consumer marketing and consumer advertising revenue is recognized either based upon a fixed fee for revenue sharing agreements in which payment is required at the time of posting, or billed based upon the number of impressions (the number of times an advertisement is displayed) recorded on the websites as specified in the customer agreement.
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Revenue generated from NAPW Network membership subscriptions is recognized ratably over the 12-month membership period, although members pay their annual fees at the commencement of the membership period. Starting January 2, 2018, we also offer a monthly membership for which we collect fees on a monthly basis and we undertake no obligationrecognize revenue in the same month as the fees are collected. 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 update any forward-looking statementthese services are recognized as revenue at the time the on-line profile is complete and press release is distributed.
Recent Accounting Pronouncements
See Note 3 to reflect the impactour financial statements.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of circumstances or events that arise after the date of this Quarterly Report.
As of September 30, 2017,March 31, 2020, our management conducted an evaluation, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures; as is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “ Exchange“Exchange Act”). We recognize that there are material weaknesses related to our internal controls. Therefore, our Interim Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, as of the end of the period covered by this Quarterly Report. This includes ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Furthermore, to provide reasonable assurance that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controlinternal control over Financial Reporting
During the thirdfirst quarter of 2017,2020, we continued to undertake certain initiatives to improve and remediate material weaknesses related to our internal control over financial reporting that were identified for the year ended December 31, 2016. We2019. Specifically, we continued making necessary changesto implement more effective financial reporting process and implementing new policies to enhance the overall internal control structure, including requiring pre-approval for travelprocedures that included monthly and certain purchasesquarterly closing check-lists and ensuring employees are cross trained for certain key tasks.monthly review of the financial reports by the Company’s Finance Department. We also continued improving GAAP training of internal staff and to utilize third-party consultants to assist in the review and preparation of complex accounting transaction and financial statement reports. There have been no other changes in our internal control over financial reporting during the thirdfirst quarter of 20172020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Our management has concluded that, as of March 31, 2020, we did not maintain effective controls over the preparation, review, presentation and disclosure of our financial statements. Specifically, we noted the following:
● | Relevant operating information is not adequately used to develop accounting and financial information and serve as a basis for reliable financial reporting. This same operating information is also used as the basis for accounting estimates. Specifically, financial and nonfinancial indicators of going concern and impairment of assets were not completely assessed by management. | |
● | Employees lack full technical competence and training necessary for the nature and complexity of the entity’s activities. Specifically, Company personnel could not perform purchase accounting or fair value measurements with Company’s acquisitions. | |
● | Supporting analysis is not prepared for each non-routine event or transaction that requires management’s judgement and/or estimate. Specifically, no analysis is prepared to document compliance with relevant GAAP and entity’s accounting policies. | |
● | Accounting procedures relevant to foreign subsidiaries are not sufficiently formal that management can determine whether the control objective is met, documentation supporting the procedures is in place, and personnel routinely know the procedures that need to be performed. Specifically, data from foreign subsidiaries underlying financial statements is not captured completely, accurately, and timely, in accordance with the entity’s policy and procedures. |
28Limitations on effectiveness of controls and procedures
We anticipate that the actions described above and resulting improvements in controls will strengthen the Company’s internal control over financial reporting and will, over time, address the related material weaknesses. However, because many of the controls in the Company’s system of internal controls rely extensively on manual review and approval, the successful operation of these controls may be required for several quarters prior to management being able to conclude that the material weaknesses have been remediated.
The amount of back pay and other potential liabilities ordered by NLRB is $146,000.PART II
In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of a claimto assert claims against the Company. The letter allegesCompany in excess of $2 million based on White Winston’s contention that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay indelayed White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30, 2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No. 18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed with the court on Monday, March 25, 2019. This motion was not granted. We have since then substantially completed all of the discovery process and will begin expert witness disclosures. The Company denies liability for any such claim.
NAPW is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018, with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and should be read in conjunction with, the risk factors and information disclosed in our 2016 Annual Report.
The Company is controlleda party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (U.S. Dist. Ct., N.D. Ill.), a putative class action alleging violations of the Telephone Consumer Protection Act. A settlement has been reached and case has been dismissed by CFL,the court. The Company believes that its practices and CFL’s interests may differ from the interests of our other stockholders.
The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc. and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed on June 20, 2018 and alleging violations of our other stockholders. By virtuethe Fair Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its ownership of a majority of our Common Stocksubsidiary violated the applicable laws or that either entity has any liability and the powerintends to designate the majority of our Board of Directors, CFLvigorously defend against these claims. The matter is in a position to influence the Company’s actions for its own benefit.
We are also generally subject to a one-year lock-up with respect to all shares of Common Stock owned by members of the CFL Group, subject to certain exceptions. However, after the one-year period, it may generally sell its shareslegal proceedings and litigation arising in the public markets, subject to applicable securities laws. Furthermore, we have granted CFL and the CFL shareholders certain registration rights that provide them the ability to register for resale, fromordinary course of business.
General Legal Matters
From time to time, andthe Company is involved in accordance with the terms of the registration rights agreement, all shares of Common Stock owned by members of the CFL Group, subject to certain exceptions. Sales of a substantial number of shares of our Common Stocklegal matters arising in the public marketordinary 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 the perception that these sales might occur, could depress the market price of our Common Stock and couldbe, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
Smaller reporting companies are not required to provide the trading price of our Common Stock.information required by this item.
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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 31, 2020 the Company closed a majority stockholder, our public float is more limited which could impact your ability to sell your shares and could result in increased volatility in our stock price.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101. | INS XBRL Instance Document | |
101. | SCH XBRL Taxonomy Extension Schema Document | |
101. | CAL XBRL Taxonomy Extension Calculation Linkbase Document | |
101. | DEF XBRL Taxonomy Extension Definition Linkbase Document | |
101. | LAB XBRL Taxonomy Extension Labels Linkbase Document | |
101. | PRE XBRL Taxonomy Extension Presentation Linkbase Document |
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30SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PROFESSIONAL DIVERSITY NETWORK, INC. | ||||
Date: | By: | /s/ Xin (Adam) He | ||
Xin (Adam) He | ||||
Title: | Interim Chief Executive Officer and Chief Financial Officer | |||
(On behalf of the Registrant and as principal financial | ||||
officer and principal accounting officer) |
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31
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101. | INS XBRL Instance Document | |
101. | SCH XBRL Taxonomy Extension Schema Document | |
101. | CAL XBRL Taxonomy Extension Calculation Linkbase Document | |
101. | DEF XBRL Taxonomy Extension Definition Linkbase Document | |
101. | LAB XBRL Taxonomy Extension Labels Linkbase Document | |
101. | PRE XBRL Taxonomy Extension Presentation Linkbase Document |
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