We monitor several key metrics, including our number of members and unique visitors, in order to assess our business, identify challenges and opportunities, produce financial forecasts, formulate strategic plans and make business decisions.
We define a member of one of our websites as an individual user who has created a member profile on that website or on the website of a partner whose job board or career service center we operate, as of the date of measurement. If a member is inactive for 24 months then such person will be automatically de-registered from our database.
| · | Leverage Resunate to increase traffic, membership and revenue. Our Resunate technology is now being used to connect with new users in an effort to encourage them to become registered users of Professional Diversity Network. The company has also begun to derive modest revenue from licensing the Resunate technology to staffing firms who desire to optimize their resume data base to help increase their placement rates. Resunate is also being sold as an e-commerce product to job seekers.| | · | Strengthen and Develop Relationships with Strategic Partners. We are working to strengthen our relationships with existing strategic partners and develop new relationships with online networking websites and professional organizations, with a view toward increasing traffic to our websites and broadening our base for membership and our hiring and marketing solutions. |
| | · | Hire Strategically. As we grow, we expect to make strategic hires designed to improve efficiency and expand sales, marketing and customer service capabilities of our existing operations and to identify, pursue and manage growth opportunities. We intend to hire experienced individuals in sales, marketing and technology. |
| | · | Add Functionality to Increase Member Value and Generate Revenue. We are working to enhance the functionality of our websites, improve our applications, tools and resources and more efficiently and effectively utilize information captured on our websites. New concepts may include cultural community couponing and business directory services. Such enhancements and improvements should add value for our members and the companies and professional organizations that participate on our websites, as well as add revenue-generating opportunities for us. |
Sales, Marketing and Customer and Member Support
We believe our member base has grown virally principally through member invitations to others to join our online networks. Additionally, we seek to drive member growth through the efforts of our sales organization, media conferences, press releases, sponsored events, and email marketing, search engine optimization and social media strategies.
Our marketing team has expertise in multicultural marketing. We expect to continue to provide compelling content that underscores our mission of supporting diverse professionals and encouraging diverse browsers to visit our websites. Additionally we will continue to invest strategically in search engine optimization and search engine marketing to promote our online communities. We continually develop relationships with professional organizations and community groups, such as the National Hispanic Christian Leadership Council, to bring our services to individuals offline as well as online.
We believe consumer advertisers and agencies are increasingly seeking websites and communities that enable them to access diverse audiences. We expect to expand our efforts to connect with these advertisers and build on our consumer-advertising infrastructure. In 2011, we invested in a new online advertising hosting system that allows us to more effectively manage customer campaigns. We plan continued investment in advertising optimization tools to increase our customers’ productivity on our websites. In addition to seeking new advertising customers, we are looking to expand the marketing and advertising solutions to our existing customers. In 2013, we plan on hiring additional experienced sales professionals.
At the core of our talent recruitment groups are our expert online community managers. Our community managers encourage interaction between job seekers and recruiters, police for inappropriate online activity, optimize recruitment campaigns and provide reporting and client services for the businesses that use our hiring solutions.
The community managers for our websites respond to both business and technical inquiries from members, businesses and professional organizations relating to their accounts, including guidance on how to utilize our applications, tools and resources. Self-service support also is available on our websites and users can contact us via e-mail or telephone.
Customers
Currently, more than 3,000500 companies and organizations, including 60% of the Fortune 500 companies, have listed job postings on our websites. Following the launchThe end of our partnershiprelationship with LinkedIn will result in the loss of $1,500,000 of our projected revenue for 2014, or 37% of our revenue in 2013. The company will deploy sales resources in an effort to sell to the 1,000 companies that were reserved by LinkedIn accounts. At the same time the company will deploy a specially trained account management team to service those companies to whom LinkedIn sold Professional Diversity Network services and convert those companies to direct relationships with Professional Diversity Network.
According to the US Department of Labor, there are over 50,000 companies in the United States that are subject to OFCCP regulations, specifically relating to diversity recruitment. In 2013 the OFCCP made certain changes to their regulations including the method of job distribution to State job boards and reporting on January 1, 2013, wethe effectiveness of a company’s diversity recruitment efforts. The company believes that these changes are seekingsignificant and will encourage employers to market directlyutilize resources for diversity recruitment that aggressively promote their job openings to diverse candidates. The company will continue to communicate our unique offering to employers who desire to hire diverse talent in an OFCCP compliant manner.
The company will seek to diversify its sources of diverse employees throughrevenue in an effort to lessen our direct sales initiative and throughdependency on a small group of clients. In the fourth quarter of 2013 the company generated over $477,000 of booked revenue, in addition to the $500,000 of revenue associated with our agreement with LinkedIn although both strategies are new and untested and our ability to successfully pursue either strategy is uncertain. alliance.
A non-renewal of or a material change in our relationship with LinkedIn or Apollo Group would have a material adverse effect on our financial results. See “Risk Factors – Our revenues are highly dependent on two customers and we will likely continue to be dependent on a small number of customers.” Over the next several years, we plan to expand our efforts to secure consumer-based advertising revenues by deploying a sales force to target advertisers and agencies that are seeking to market to diverse professional audiences. Online diversity market advertising is increasing in the United States. We believe this focus is driven by the significant increases in purchasing power of ethnically diverse populations. It is estimated that from 1990 to 2014, the buying power of United States Hispanic Americans will have grown by 613%, African Americans by 257% and Asian Americans by 498%, according to a 2011 report by the Keenan-Flagler Business School at The University of North Carolina.
The Association of Hispanic Advertising Agencies, or AHAA, in its 2010 Report on Hispanic Advertising Spending, found that Hispanic advertising spending in the U.S. rose 14% to $4.3 billion in 2010 compared to 2009, reversing a two-year slowdown.
Many large corporations are increasingly setting aside advertising budgets for Hispanic-American outreach, according to an IBISWorld Inc. report published in August 2011. According to this report, since the recession of 2009, advertising spending on Hispanic-American media grew 1.9% more than that of non-Hispanic-American media, with the largest gains experienced in television, magazines and the Internet.
Technology Infrastructure
We refer to our customized relationship recruitment technology platform as Affinity Relationship Recruitment Generation V (ARR-V). Benefits of our technology platform include:
| | · | Ease of Use for Professional Networking. Our ARR-V technology emphasizes ease-of-use, allowing our members to create, manage and share their professional identity online, build and engage with their connections, access shared knowledge and insights, and find career opportunities. |
| | · | Integration with Facebook and LinkedInNew Technology Platform Launched in 2013.. Our websites are developed with Personal Home Page script (PHP),using Ruby on Rails, a commonly used,commonly-used, general-purpose server-side scriptingprogramming language, which enables our members to access and integrate their LinkedIn and Facebook communitiescontacts for a high level of professional engagement in one location on our websites. Our websites are responsively designed to support the growing mobile users’job-seeking online experience. We use semantic search to match job seekers and employers in an efficient manner. As part of our new web platform, we have deployed a series of new employer functions to assist with efficient recruitment and reporting.
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| | · | Job Searching; Employer Auto-Matching Tool, or EAMT. Our ARR-V technology is a robust platform for our members to post their resumes and search for career opportunities, and for businesses to post job openings. Our members can execute targeted matches through our customized career to employercareer-to-employer auto-matching tool. |
| | · | Member Generated Content. Our members can easily input, access, communicate, and share information, via chat, instant message, blogs, forums, and videos. Our ARR-V technology utilizes the content generated by our members, job postings by recruiters and marketing information from sponsors on our websites to provide relevant information to our visitors. We continually work to improve the pertinence of the information on our websites. |
| | · | Member Engagement. Our platform draws on the cultural affinity within our diverse communities, user generated content, job postings and relevant advertising media to encourage a high degree of member engagement on our websites. We believe that engagement enhances the value we offer to our members, as well as to the businesses and professional organizations, that use our websites. |
| | · | Advertising Media Platform. Our ARR-V technology allows us to place targeted advertising media for our advertising customers based upon information we collect from our users, including browsing history. Our advertising service technology enables us to specifically deliver advertisements to our audience by geography, via geo-targeting to specific zip codes, and to retarget relevant advertisements to our audience based upon prior activity on our websites. |
| | · | Vertical and Horizontal Scalability. Our ARR-V platform is designed to allow us to scale both “vertically” and “horizontally”. We can scale vertically, within a specific demographic group, by increasing members and visitors. We can scale horizontally, among different or additional demographic groups, by launching new community websites focused on such groups, and community websites rebranded for our strategic partners. This enables our company to quickly move into new opportunities either with strategic partners or alone without making a sizeable additional investment. |
We regularly evaluate our ARR-V technology to improve ease-of-use, enhance and expand our tools and resources, optimize user engagement, and implement industry best practices.
Operations
Our websites are hosted by EsoSoft CorporationEngine Yard based in Los Angeles,San Francisco, California. OurEngine Yard provides a robust and easy platform for our hosting has been with EsoSoft since 2008,needs, allowing us to easily scale up resources to meet our peak needs. It also allows us to quickly and we believe we have experienced positive performance results since that time.easily deploy website updates. Our websites have backup and contingency plans in place in the event that an unexpected circumstance occurs.
Intellectual Property
To protect our intellectual property rights, we rely on a combination of federal, state and common law rights, as well as contractual restrictions:
| | · | We rely on trade secret, copyright, and trademark rights to protect our intellectual property. We pursue the registration of our domain names and trademarks in the United States. Our registered trademarks in the United States include the “iHispano” mark with stylized logo, the “A Mighty River”“Black Career Network” mark with stylized logo, and the “Professional Diversity Network” mark with our tagline “the power of millions for the benefit of one,” as well as others. |
| | · | We strive to exert control over access to our intellectual property and customized technology by entering into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with third parties in the ordinary course of our business. |
Nevertheless, our efforts to protect our proprietary rights may not be successful. Any significant impairment of our intellectual property rights could adversely impact our business or our ability to compete. Also, protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and adversely affect our operating results.
Other companies in the Internet, social media, technology and other industries own patents, copyrights, and trademarks, and we expect that from time to time they may request license agreements, threaten litigation, or file suits against us for alleged infringements or other violations of intellectual property rights.
Competition
We face significant competition in all aspects of our business. Specifically, with respect to our members and our recruitment consumer advertising and marketing solutions, we compete with existing general market online professional networking websites, such as LinkedIn, as well as ethnic minority focused social networking websites, such as Black Planet and MiGente, and other companies such as Facebook, Google, Microsoft and Twitter that are developing or could develop competing solutions. Following the expiration of our agreement with Monster Worldwide on December 31, 2012, Monster Worldwide is now another competitor. We also generally compete with online and offline enterprises, including newspapers, television, direct mail marketers that generate revenue from recruiters, advertisers and marketers, and professional organizations. With respect to our hiring solutions, we also compete with traditional online recruiting companies such as Career Builder, talent management companies such as Taleo, and traditional recruiting firms.
Under the terms of our agreement with LinkedIn, we are not permitted to resell our services to any competitor of LinkedIn or to any of the 1,000 companies on the restricted account list maintained by LinkedIn (and to which companies LinkedIn itself sells our services pursuant to our agreement with LinkedIn). Subsequent to the termination of the LinkedIn agreement on March 29, 2014, these restrictions will be eliminated. Furthermore, during the term of our agreement with Apollo, we are unable to provide advertising services to any institution of higher learning, other than Apollo group.Group. Accordingly, our customer agreements restrict our ability to compete in certain important ways.
Larger, more well-established companies may focus on professional networking and could directly compete with us. Other companies might also launch new competing services that we do not offer. Nevertheless, we believe that our focus on diverse online professional networking communities is a competitive strength in our market.
Government Regulation
We are subject to a number of federal, state and foreign laws and regulations that affect companies conducting business on the Internet. These laws are still evolving and could be amended or interpreted in ways that could be detrimental to our business. In the United States and abroad, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the content provided by users. Any court ruling or other governmental action that imposes liability on providers of online services for the activities of their users and other third parties could materially harm our business. In addition, rising concern about the use of social networking technologies for illegal conduct, such as the unauthorized dissemination of national security information, money laundering or supporting terrorist activities may in the future produce legislation or other governmental action that could require changes to our products or services, restrict or impose additional costs upon the conduct of our business or cause users to abandon material aspects of our service.
In the area of information security and data protection, many states have passed laws requiring notification to users when there is a security incident, or security breach for personal data, or requiring the adoption of minimum information security standards that are often unclear and difficult to implement. The costs of compliance with these laws are significant and may increase in the future. Further, we may be subject to significant liabilities if we fail to comply with these laws.
We are also subject to federal, state, and foreign laws regarding privacy and protection of member data. We post on our websites our privacy policy and terms of use. Compliance with privacy-related laws may be costly. However, any failure by us to comply with our privacy policy or privacy-related laws could result in proceedings against us by governmental authorities or private parties, which could be detrimental to our business. Further, any failure by us to protect our members’ privacy and data could result in a loss of member confidence in us and ultimately in a loss of members and customers, which could adversely affect our business.
Because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure. Facilities We lease approximately 4,600 square feet of space for our headquarters in Chicago, Illinois under a lease that expires on June 30, 2015 and currently sublease2015. We also lease approximately 1,900 square feet of office space in Minnetonka, Minnesota for our former headquarters space of approximately 1,870 square feetEvents division under a lease that expires on October 31,September 30, 2014.
Employees
As atof December 31, 2012,2013, we have 2349 employees. From time to time, we also engage independent contractors to perform various services. None of our employees are covered by a collective bargaining agreement. We believe that we have good relationships with our employees.
Legal Proceedings
We are subject to legal proceedings and litigation arising in the ordinary course of business, although no such proceeding or litigation is currently pending.
Investing in our common stock involves a great deal of risk. You should carefully consider the following information about risks, together with all of the other information in this Annual Report, including our consolidated financial statements and related notes, before making an investment in our common stock. If any of the circumstances or events described below actually arises or occurs, our business, results of operations, cash flows and financial condition could be materially harmed. In any such case, the market price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business and Strategy
Our revenues are highly dependent on two customers, and we will likely continue to be dependent on a small number of customers. TwoOne of our customers, Monster Worldwide and Apollo Group, accounted for 65%36% and 31%, respectively, of our total revenues for the yearyears ended December 31, 2012. Monster Worldwide2013 and Apollo Group, accounted for 72% and 20%, respectively, of our total revenues for the year ended December 31, 2011.2012, respectively.
Following the expirationtermination of our agreement with Monster Worldwide,LinkedIn, we are substantially dependent on revenues generated by our agreementsagreement with LinkedIn and the University of Phoenix, at least until we are able to generate significant revenues from a large number of customers through our direct sales efforts. Therefore, we are, and will likely continue to be, dependent on both LinkedIn andthe University of Phoenix, and the loss of any suchthis customer would materially and adversely affect our business, operating results and financial condition. Furthermore, as a result of our reliance on a limited number of customers, we could face pricing and other competitive pressures, which may have a material adverse effect on our business, operating results and financial condition.
Our agreement with Monster Worldwide expiredLinkedIn will terminate on December 31, 2012,March 29, 2014, and it is uncertain when, if ever, we can replace the revenues we received through our agreement with Monster Worldwide.LinkedIn. Our agreement with Monster Worldwide expiredLinkedIn will terminate on December 31, 2012 and was not renewed. As of January 1, 2013, we no longer have in place the agreement with Monster Worldwide that has generated a substantial majority of our revenue.March 29, 2014. We expect to experience significant decreases in revenue for a period of time because (i)while our agreement withsales team attempts to directly sell those 1,000 accounts that were reserved by LinkedIn provides for fixed quarterly payments that are half ofand attempt to convert those companies to direct customers. Failure to replace the fixed quarterly payments$500,000 per quarter decrease in revenue we received from Monster Worldwide and we cannot predict how much commission revenue, if any, we will earn through LinkedIn and (ii) our sales force will require time to generate sales because we could not and did not begin to market and sell our recruitment services directly to companies until December 31, 2012. It will be difficult for us to continue our current operations over the long-term unless we are able to replace such lost revenues in a timely manner, and failure to do so would materially and adversely affect our business, operating results and financial condition.
We are seeking to generate recruitment revenue through direct sales to customers, which is a new and uncertain initiative.
We began direct sales to employers on January 2, 2013. As a result ofnew initiative for the expiration of our exclusive arrangement with Monster Worldwide on December 31, 2012, which was not renewed, our revenue and our success is dependent on an internal direct marketing andcompany, we established a sales capability that still under development. We have the rightforce to sell our services directly into companies seeking to any employer, excepthire diverse talent. During the 1,000 companies that are oncourse of 2013 the restricted account list pursuant to our agreement with LinkedIn. Under the terms of the agreement, we will not enter into additional reseller agreements during the term of our agreement with LinkedIn. While we intend to sell recruitment services to companies not subject to the exclusivity restrictions of the LinkedIn agreement, we are currently developing our directcompany optimized its sales team and our abilitycontinued to successfully develop suchrefine the manner in which its products and services were sold. While the company made progress in growing its direct sales on a sales function that is successful and cost effective is uncertain. Furthermore,quarterly basis, we have no prior experience in sellingnot matured the sales force to the point of predictability, nor have we sold enough of our products and services and we cannot predict how much revenue we will be able to generate through direct sales.achieve profitability. Therefore, there is no assurance that we will be successful in selling our services directly to employers. We face risks associated with our agreement with LinkedIn.
In November 2012, we entered into an agreement with LinkedIn Corporation that became effective on January 1, 2013. The LinkedIn agreement provides LinkedIn with the right to sell our services to its customers. LinkedIn has the exclusive right to sell our services to a restricted account list of 1,000 companies selected by LinkedIn. The agreement with LinkedIn provides for quarterly payments that are half of the fixed quarterly payments that we receive under our agreement with Monster Worldwide and provides for a percentage commission for sales of our services in excess of certain thresholds. There is no assurance that LinkedIn will be successful in selling our services, and we may not receive any commission revenue from our agreement with LinkedIn.
Our agreement with LinkedIn restricts our ability to sell our recruitment services. During the term of our agreement with LinkedIn, we cannot permit any competitor of LinkedIn to resell our diversity-based recruitment services. We cannot sell our diversity services to any employer that is listed on the restricted account list pursuant to our agreement with LinkedIn during the term of the agreement and for one year thereafter. While the term of the LinkedIn agreement is three years, LinkedIn has the right to terminate the agreement on the six-month anniversary of the effective date, and during the fourth calendar quarter of the first and second years of the term of the agreement. Termination or failure to renew or extend the LinkedIn agreement could materially harm our ability to successfully generate recruitment revenue which would in turn have a material adverse impact on our business.
Our ability to grow advertising revenue is dependent on our relationship with anddirect sales team.
In 2013, our sales team began selling diversity recruitment advertising. Our ability to increase the performanceamount of Apollo Group.diversity recruitment advertising is important to the future profitability of the company.
Our marketing media services agreementcontract with Apollo Group provides the framework for our relationship. It has no expiration date but may be terminated by either party upon thirty days’ prior written notice. Theis an annual agreement requires us to enter into separate purchase orders or statements of work, referred to as “media schedules,” which describe the services we provide to Apollo Group on a project basis and the compensation we are paid. To date, weloss of this client would have entered into two media schedules with Apollo Group. The first media schedule was a trial run that by its terms covered a period of six months ending June 30, 2011. Thereafter, basedan adverse impact on Apollo Group’s satisfaction with our performance, we entered into a media schedule which expanded the scope of our services and covers a longer period than the term of the first media schedule. company. On February 7, 2013,14, 2014, we renewed our agreement with Apollo Group, which is effective until March 31, 2014. On June 11, 2012, we agreedFebruary 28, 2015. The agreement has numerous performance requirements that must be met in order to an insertion order with Apollo Group. The insertion order provides for payment to us of up to $150,000 per month for a period of 12 months, based uponmaintain the number of persons we refer to the University of Phoenix who express an interest in obtaining information about attending the University of Phoenix. Therecontract. Furthermore, there is no guaranteed payment associated with this insertion order and for the year ended December 31, 2012, PDN generated $346,000 of revenue under the insertion order. Further, during the term ofassurance that Apollo Group will renew our agreement with Apollo Group, we may not perform advertising services for any other institution of higher education, whether for-profit or non-profit, other than Apollo Group. Because we have an exclusivity arrangement with Apollo Group, our growth in this area of revenue is therefore dependent on the volume of students interested in, and the success of, Apollo Group’s University of Phoenix.future.
There can be no assurance that Apollo Group will not terminate its agreement with us or will enter into additional media schedules with us, or that the terms on which our agreements may be proposed to be renewed or continued will be acceptable to us. In addition, there are a number of factors, including those that are not within our control that could cause our agreement with Apollo Group to be terminated or not expanded, extended or otherwise continued. Apollo Group may face financial difficulties and may not be able to pay for our services, or Monster WorldwideApollo Group may develop its own diversity platform that would replace or compete with us. Furthermore, if Apollo Group seeks to negotiate media schedules for future services under its agreement with us on terms less favorable to us, and we accept such unfavorable terms, or if we seek to negotiate better terms, but are unable to do so, then our business, operating results and financial condition would be materially and adversely affected. In addition, our customer concentration may subject us to perceived or actual leverage that our customers may have, in their dealings with us, given their relative size and importance to us. We do not know what effect, if any, this negotiating leverage may have on our business.
In the event our agreement with Apollo Group does not continue on terms favorable to us, our business, operating results and financial condition would be materially and adversely affected and we will require substantial human and capital resources to generate other sources of revenue, and ifrevenue. If we are unable to generate other sources of revenue, our business may fail.would be negatively impacted.
We have a limited operating history in the online professional networking business, which is a new and unproven market, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful. We began our operations in the online professional diversity networking business in 2007 and online professional networking within specific segments of the population is a new and unproven business concept .concept. Therefore a market for our services may not develop as expected, if at all. This limited operating history and novel business concept makes it difficult to effectively assess our future prospects. You should consider our business and prospects in light of the significant risks, expenses and difficulties frequently encountered by Internet companies, especially those dedicated to the social and/or online professional network sector, in their early stage of development. We may not be able to successfully address these risks and difficulties.
We expect to face increasing competition in the market for online professional networks from professional or social networking websites and Internet search companies, including Monster Worldwide, among others. We face significant competition in all aspects of our business, and we expect such competition to increase, particularly in the market for online professional networks. In particular, Monster Worldwide is now our competitor as of January 1, 2013, following the expiration of our agreement with them.
Our industry is rapidly evolving and is becoming increasingly competitive. Larger and more established online professional networking companies, such as LinkedIn, may focus on the online diversity professional networking market and could directly compete with us. Since the expiration of our agreement with Monster Worldwide, they are competing with us. Rival companies or smaller companies, including application developers, could also launch new products and services that could compete with us and that could gain market acceptance quickly. Individual employers have and may continue to create and maintain their own network of diverse candidates.
We also expect that our existing competitors will focus on professional diversity recruiting. A number of these companies may have greater resources than we do, which may enable them to compete more effectively. For example, our competitors with greater resources may partner with wireless telecommunications carriers or other Internet service providers that may provide Internet users, especially those that access the Internet through mobile devices, incentives to visit our competitors’ websites. Such tactics or similar tactics could decrease the number of our visits, unique visitors and number of users and members, which would materially and adversely affect our business, operating results and financial condition.
Additionally, users of online social networks, such as Facebook, may choose to use, or increase their use of, those networks for professional purposes, which may result in those users decreasing or eliminating their use of our specialized online professional network. Companies that currently do not focus on online professional diversity networking could also expand their focus to diversity networking. A current strategic partner, LinkedIn may develop its own proprietary online diversity network and compete directly against us. To the extent LinkedIn terminates its relationship with us and develops its own network or establishes alliances and relationships with others, our business, operating results and financial condition could be materially harmed. Finally, other companies that provide content for professionals could develop more compelling offerings that compete with us and adversely impact our ability to keep our members, attract new members or sell our solutions to customers.
We process, store and use personal information and other data, which subjects us to governmental regulation, enforcement actions and other legal obligations or liability related to data privacy and security, and our actual or perceived failure to comply with such obligations could materially harm our business. We receive, store and process personal information and other member data, and we enable our members to share their personal information with each other and with third parties. There are numerous federal, state, local and foreign laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other member data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and adhere to the terms of our privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other member data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our members and customers to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors or developers, violate applicable laws or our policies, such violations may also put our members’ information at risk and could in turn have an adverse effect on our business.
The effect of significant declines in our ability to generate revenue may not be reflected in our short-term results of operations. We recognize revenue from sales of our hiring solutions on a quarterly basis based on activity related to the prior quarter. As a result, a significant portion of the revenue we report in each quarter is generated from agreements entered into during previous quarters. Consequently, an adjustment, termination or non-renewal of our agreement with LinkedIn, or a termination or decline in purchase orders pursuant to our agreement with Apollo Group, in any one quarter may not significantly impact our revenue in that quarter but will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in our ability to generate revenue may not be reflected in our short-term results of operations.
Our growth strategy may fail as a result of ever-changing social trends. Our business is dependent on the continuity of certain social trends, some of which may stop abruptly. In particular, increased privacy concerns may jeopardize the growth of online social and professional network websites. Furthermore, it is possible that people may not want to identify in online social or professional networks with a focus on diversity at all. Or alternatively, people who belong to more than one diversity group (such as Hispanic-American females, among others) may not be drawn to our websites, which singularly focus on one specific diversity group. Our strategy may fail as a result of these changing social trends, and if we do not timely adjust our strategy to adapt to changing social trends, we will lose members, and our business, operating results and financial condition would be materially and adversely affected.
The regulatory environment favorable to promoting diversity in the workplace may change. Federal and state laws and regulations require certain companies engaged in business with governmental entities to report and promote diverse hiring practices. Repeal or modification of such laws and regulations could decrease the incentives for employers to actively seek diverse employee candidates through networks such as ours and materially affect our revenues.
The widespread adoption of different smart phones, smart phone operating systems and mobile applications, or apps, could require us to make substantial expenditures to modify or adapt our websites, applications and services. The number of people who access the Internet through devices other than personal computers, including personal digital assistants, smart phones and handheld tablets or computers, has increased dramatically in the past few years and we believe this number will continue to increase. Each manufacturer or distributor of these devices may establish unique technical standards, and our services may not work or be viewable on these devices as a result. Furthermore, as new devices and new platforms are continually released, it is difficult to predict the problems we may encounter in developing versions of our services for use on these alternative devices and we may need to devote significant resources to the creation, support, and maintenance of such devices. For example, we currently haveOur websites are designed using responsive technology and are built to provide a positive user experience on a user’s Internet device, whether a mobile application,phone, and tablet, laptop or app, for the iPhone and plan to build apps for other mobile devices and will need to continually adapt our website and apps to be user-friendly to different operating systems and platforms.personal computer. If we are slow to develop products and technologies that are compatible with such devices, we might fail to capture a significant share of an increasingly important portion of the market for our services.
We rely heavily on our information systems and if our access to this technology is impaired, or we fail to further develop our technology, our business could be significantly harmed. Our success depends in large part upon our ability to store, retrieve, process and manage substantial amounts of information, including our database of our members. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. Our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our information systems to evolving industry standards and to improve the performance and reliability of our information systems. This may require the acquisition of equipment and software and the development, either internally or through independent consultants, of new proprietary software. Our inability to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively would materially and adversely affect our business, financial condition and operating results.
We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our websites are accessible within an acceptable load time. An element that is key to our continued growth is the ability of our members and other users that we work with to access any of our websites within acceptable load times. We call this website performance. We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our websites simultaneously, and denial of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these website performance problems within an acceptable period of time.
If any of our websites are unavailable when users attempt to access it or do not load as quickly as users expect, users may seek other websites to obtain the information or services for which they are looking, and may not return to our websites as often in the future, or at all. This would negatively impact our ability to attract members and other users and increase engagement on our websites. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, operating results and financial condition may be materially and adversely affected.
Our systems are vulnerable to natural disasters, acts of terrorism and cyber attacks.cyber-attacks. Our systems are vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, cyber attackscyber-attacks and similar events. We have implemented a disaster recovery program, maintained by a third party vendor, which allows us to move production to a back-up data center in the event of a catastrophe. Although this program is functional, it does not yet provide a real-time back-up data center, so if our primary data center shuts down, there will be a period of time that such website will remain shut down while the transition to the back-up data center takes place. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in our services. Furthermore, we do not carry business interruption insurance or cyber security insurance. Therefore, we will not be compensated by third party insurers in the event of service interruption or cyber attack,cyber-attack, and we face the risk that our business may never recover from such an event.
If our security measures are compromised, or if any of our websites are subject to attacks that degrade or deny the ability of members or customers to access our solutions, members and customers may curtail or stop use of our solutions. Our members provide us with information relevant to their career seekingcareer-seeking experience with the option of having their information become public or remain private. If we experience compromises to our security that result in website performance or availability problems, the complete shutdown of our websites, or the loss or unauthorized disclosure of confidential information, our members may lose trust and confidence in us, and will use our websites less often or stop using our websites entirely. Further, outside parties may attempt to fraudulently induce employees, members or customers to disclose sensitive information in order to gain access to our information or our members’ or customers’ information. Because the methods used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these methods or to implement adequate preventative measures. Any or all of these issues could negatively impact our ability to attract new members and increase engagement by existing members, cause existing members to close their accounts or existing customers to cancel their contracts, subject us to lawsuits, regulatory fines or other action or liability, thereby materially and adversely affecting our reputation, our business, operating results and financial condition.
The reported number of our members is higher than the number of actual individual members, and a substantial majority of our visits are generated by a minority of our members. The reported number of members in our networks is higher than the number of actual individual members because some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of members as our measure of the size of our networks. Further, a substantial majority of our members do not visit our websites on a monthly basis, and a substantial majority of our visits are generated by a minority of our members and users. If the number of our actual members does not meet our expectations or we are unable to increase the breadth and frequency of our visiting members, then our business may not grow as fast as we expect, which would materially and adversely affect our business, operating results and financial condition.
If our member profiles are out-of-date, inaccurate or lack the information that users and customers want to see, we may not be able to realize the full potential of our networks, which could adversely impact the growth of our business. If our members do not update their information or provide accurate and complete information when they join our networks or do not establish sufficient connections, the value of our networks may be negatively impacted because our value proposition as diversity professional networks and as a source of accurate and comprehensive data will be weakened. For example, our hiring solutions customers may not find that certain members misidentify their ethnic, national, cultural, racial, religious or gender classification, which could result in mismatches that erode customer confidence in our solutions. Similarly, incomplete or outdated member informationinformation would diminish the ability of our marketing solutions customers to reach their target audiences and our ability to provide research data to our customers. Therefore, we must provide features and products that demonstrate the value of our networks to our members and motivate them to add additional, timely and accurate information to their profile and our networks. If we fail to successfully motivate our members to do so, our business, operating results and financial condition could be materially and adversely affected.
Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or prevent us from providing our current products and solutions to our members and customers, thereby materially harming our business. The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain on-line tracking and targeted advertising practices. In addition, various government and consumer agencies have also called for new regulations and changes in industry practices.
Our business could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices or that require changes to these practices, the design of our websites, products, features or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to use the data that our members share with us in accordance with each of our website privacy policies and terms of use. Therefore, our business, operating results and financial condition could be materially and adversely affected by any significant change to applicable laws, regulations or industry practices regarding the use or disclosure of data our members choose to share with us, or regarding the manner in which the express or implied consent of consumers for such use and disclosure is obtained. Such changes may require us to modify our products and features, possibly in a material manner, and may limit our ability to develop new products and features that make use of the data that our members voluntarily share with us.
Our business is subject to a variety of U.S. laws and regulations, many of which are unsettled and still developing and which could subject us to claims or otherwise materially harm our business. We are subject to a variety of laws and regulations in the United States, including laws regarding data retention, privacy and consumer protection, that are continually evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the content provided by users. In addition, regulatory authorities are considering a number of legislative and regulatory proposals concerning data protection and other matters that may be applicable to our business. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject. See the discussion included in “Government Regulation” beginning on page 1311 of this Annual Report.
If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain solutions, which would materially and adversely affect our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could materially harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could materially and adversely affect our business, financial condition and results of operations.
The existing global economic and financial market environment has had, and may continue to have, a negative effect on our business and operations. Demand for our services is sensitive to changes in the level of economic activity. Many companies hire fewer employees when economic activity is slow. Since the financial crisis in 2008, unemployment in the U.S. hashad increased and hiring activity hashad been limited. IfAlthough the economy has begun to recover and unemployment in the U.S. has improved, if the economy does not fullycontinue to recover or worsens, or unemployment remains atreturns to high levels, demand for our services and our revenue may be reduced. In addition, lower demand for our services may lead to lower prices for our services. The volatility in global financial markets may also limit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react to changing economic and business conditions. Accordingly, if the economy does not fully recover or worsens, our business, results of operations and financial condition could be materially and adversely affected.
We may seek to acquire or merge with other businesses, which exposes us to certain risks. As discussed elsewhere in this Annual Report, we currently intend to use approximately 40%50% of the net proceeds of our initial public offering for strategic acquisitions. Although we currently have no agreements or commitments with respect to material acquisitions or investments in other companies, we may, from time to time, explore opportunities to acquire or consolidate some of the companies in our industry. Depending on the nature of the acquired entity or operations, integration of acquired operations into our present operations may present substantial difficulties. Even where material difficulties are not anticipated, there can be no assurance that we will not encounter such difficulties in integrating acquired operations with our operations, which may result in a delay or the failure to achieve anticipated synergies, increased costs and failures to achieve increases in earnings or cost savings. The difficulties of combining the operations of acquired companies may include, among other things:
| | · | possible conflicts and inconsistencies in information technology, or IT, infrastructures, which could make it costly or impossible to integrate our IT with the IT of our target; |
| | · | possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between us and an acquired entity; |
| | · | difficulties in the retention of existing customers and attraction of new customers; |
| | · | difficulties in retaining key employees; |
| | · | the identification and elimination of redundant and underperforming operations and assets; |
| | · | diversion of management’s attention from ongoing business concerns; |
| | · | the possibility of tax costs or inefficiencies associated with the integration of the operations; and |
| | · | loss of customer goodwill. |
For these reasons, we may fail to successfully complete the integration of an acquired entity, or to realize the anticipated benefits of the integration of an acquired entity. Actual cost savings and synergies which may be achieved from an acquired entity may be lower than we expect and may take a longer time to achieve than we anticipate. Also, there may be overlap of users and such members of an acquired entity and one of our websites that would adversely affect anticipated benefits from such acquisition. One or more of such acquisition-related risks, if realized, could have a material and adverse effect on our business, operating results and financial condition.
Our revenue growth rate will decline as the result of the termination of our agreement with Monster WorldwideLinkedIn and as our costs increase and we may not be able to maintain our profitability over the long term. Our revenue grew to approximately $6.2 million for the year ended December 31, 2012 from $5.6 million for the year ended December 31, 2011, which represented a period over period increase of approximately 10%. However, net income decreased during the same period. From 2010 to 2011, our revenue grew from approximately $4.4 million to $5.6 million, which represented a year over year increase of 27%. As a result of the termination of our agreement with Monster Worldwide, we no longer receive fixed quarterly payments of $1 million under that agreement. Under our agreement with LinkedIn, which may be terminated as early as June 30, 2013,will terminate on March 29, 2014, we receivereceived quarterly payments from LinkedIn in the amount of $500,000 (which is half the amount of our minimum payments under our prior agreement with Monster). Accordingly, we currently expect our revenues to be significantly lower in 2013 and possibly in future years.$500,000. In the future, even if our revenues increase, we may not be able to generate sufficient revenue to sustain our profitability. We also expect our costs to increase in future periods, which could negatively affect our future operating results.become profitable. In particular, in 2013,2014, our strategy is to continue to invest for future growth and we will incur additionalnumerous expenses associated with being a publicly tradedpublicly-traded company, and as a result we may not be profitable in 2013.2014. In particular, we expect to continue to expend substantial financial and other resources on:
| | · | our technology infrastructure, including website architecture, development tools scalability, availability, performance and security, as well as disaster recovery measures; |
| | · | product development, including investments in our product development team and the development of new features; |
| | · | sales and marketing; and |
| | · | general administration, including legal and accounting expenses related to being a public company. |
These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business, our business, operating results and financial condition will be harmed. If we fail to effectively manage our growth, our business and operating results could be materially harmed.
Our business depends on strong brands, and any failure to maintain, protect and enhance our brands would hurt our ability to retain or expand our base of members, enterprises and professional organizations, or our ability to increase their level of engagement. We believe we have developed strong brands, particularly “iHispano” and “A Mighty River,“Black Career Network,” which we believe have contributed significantly to the success of our business. Maintaining, protecting and enhancing our brands is critical to expanding our base of members, advertisers, corporate customers and other strategic partners and users, and increasing their engagement with our websites, and will depend largely on our ability to maintain member trust, be a technology leader and continue to provide high-quality solutions, which we may not do successfully. An inability to successfully maintain strong brands would materially and adversely affect our business, financial condition and results of operations.
Failure to protect or enforce our intellectual property rights could materially harm our business and operating results. We regard the protection of our intellectual property as critical to our success. In particular, we must maintain, protect and enhance our brands. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. In the ordinary course, we enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information and customized technology platform. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
We pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States. Effective trademark, trade dress and domain names are expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We are seeking to protect our trademarks and domain names, a process that is expensive and may not be successful.
Litigation may be necessary to enforce our intellectual property rights or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. We may incur significant costs in enforcing our trademarks against those who attempt to imitate our brands. If we fail to maintain, protect and enhance our intellectual property rights, our business, operating results and financial condition would be materially and adversely affected.
We may in the future be subject to legal proceedings and litigation, including intellectual property and privacy disputes, which are costly to defend and could materially and adversely affect our business results or operating and financial condition. We may be party to lawsuits in the normal course of business. Litigation in general is often expensive and disruptive to normal business operations. We may face in the future, allegations and lawsuits that we have infringed the intellectual property and other rights of third parties, including patents, privacy, trademarks, copyrights and other rights. For example, TQP Development, LLC recently filed claims against LinkedIn, Monster Worldwide and other Internet job recruitment and software companies alleging infringement of its patent covering data encryption technology. Litigation, particularly intellectual property and class action matters, may be protracted and expensive, and the results are difficult to predict. Adverse outcomes may result in significant settlement costs or judgments, require us to modify our products and features while we develop non-infringing substitutes or require us to stop offering certain features.
From time to time, we may face claims against companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our solutions, any of which would have a negative effect on our business and operating results.
Our success depends in large part upon our management and key personnel. Our inability to attract and retain these individuals could materially and adversely affect our business, results of operations and financial condition. We are highly dependent on our management and other key employees, including our founder, Executive Vice President and CEO of iHispano.com Division, Mr. Rudy Martinez, and our Chief Executive Officer, Mr. Jim Kirsch. The skills, knowledge and experience of these individuals, as well as other members of our management team, are critical to the growth of our company. Our future performance will be dependent upon the continued successful service of members of our management and key employees. We do not maintain key man life insurance for any of the members of our management team or other key personnel. Competition for management in our industry is intense, and we may not be able to retain our management and key personnel or attract and retain new management and key personnel in the future, which could materially and adversely affect our business, results of operations and financial condition.
If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our member engagement and number of members and users could decline. We depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic to our websites. Our ability to maintain the number of visitors directed to our websites is not entirely within our control. Our competitors’ search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their search results, which could adversely affect the placement of our search result page ranking. If search engine companies modify their search algorithms in ways that are detrimental to our new user growth or in ways that make it harder for our members to use our websites, or if our competitors’ SEO efforts are more successful than ours, overall growth in our member base could slow, member engagement could decrease, and we could lose existing members. These modifications may be prompted by search engine companies entering the online professional networking market or aligning with competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users directed to our websites would materially harm our business and operating results. Our platform includes connectivity across the social graph, including websites such as Facebook, Google+, LinkedIn and Twitter. If for any reason these websites discontinue or alter their current open platform policy it could have a negative impact on our user experience and our ability to compete in the same manner we do today.
Wireless communications providers may give their customers greater access to our competitors’ websites. Wireless communications providers may provide users of mobile devices greater access to websites whichthat compete with our websites at more favorable rates or at faster download speeds. This could have a material adverse effect on PDN’sthe company’s business, operating results and financial condition. Creation of an unequal playing field in terms of Internet access could significantly benefit larger and better capitalized companies competing with us.
We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all. We intend to continue to make investments to support our business growth and may require additional funds to increase our sales and marketing efforts and product development and acquire complementary businesses and technologies. We expect to use the proceeds from our initial public offering to make such investments and/or we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuance of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business, operating results and financial condition may be materially harmed.
Risks Related to Our Common Stock
Our directors, executive officers and significant stockholders will continue to have substantial control over us after our initial public offering and could limit your ability to influence the outcome of key transactions, including changes of control. Our directors and executive officers and their affiliated entities, in the aggregate, beneficially own 22.20%22.2% of our outstanding common stock following the completion of our initial public offering, assuming the underwriters do not exercise its option to purchase additional shares. In particular, Daniel Ladurini, who beneficially owns 33.58%36.6%, together with Mr. Kirsch, our Chairman and Chief Executive Officer and Mr. Martinez, our Executive Vice President and founder, beneficially own 55.78%53% of our outstanding common stock following the completion of our initial public offering, together are able to control or influence significantly all matters requiring approval by our stockholders. These stockholders may have interests that differ from yours, and they may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock. This concentration of ownership also limits the number of shares of stock likely to be traded in public markets and therefore will adversely affect liquidity in the trading of our common stock. This concentration of ownership of our common stock may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.
The market price for our securities may be subject to wide fluctuations and our common stock may trade below the initial public offering price. The initial public offering price of our common stock was determined by negotiations between us and representatives of the underwriter, based on numerous factors. The trading price of our common stock has been, and is likely to continue to be, volatile. Since shares of our common stock were sold in our initial public offering at a price of $8.00 per share, our stock price has ranged from $4.51$2.77 to $8.20 through March 29, 2013.15, 2014. In addition to the factors discussed in this Annual Report, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including price and volume fluctuations in the stock market, including as a result of trends in the economy as a whole or relating to companies in our industry; actual or anticipated fluctuations in our revenue, operating results or key metrics, including our number of members and unique visitors; investor sentiment with respect to our competitors, our business partners, and our industry in general; announcements by us or our competitors of significant products or features, technical innovations, strategic partnerships, joint ventures or acquisitions; additional shares of our common stock being sold into the market by us or our existing stockholders or the anticipation of such sales; and other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.
The securities of technology companies, especially Internet companies, have experienced wide fluctuations subsequent to their initial public offerings, including trading at prices below the initial public offering prices. Factors that could affect the price of our common stock include risk factors described in this section. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular industries or companies. For example, the capital and credit markets have been experiencing volatility and disruption for more than 12 months. Starting in September 2008, the volatility and disruption have reached extreme levels, developing into a global crisis. As a result, stock prices of a broad range of companies worldwide, whether or not they are related to financial services, have declined significantly. These market fluctuations may also have a material adverse effect on the market price of our common stock. The aggregate value of the shares of common stock offered by us is relatively small and may result in relatively low trading volumes in our common stock, making it more difficult for our stockholders to sell their shares.
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.
We have a small public float relative to the total number of shares of our common stock that are issued and outstanding and a substantial majority of our issued and outstanding shares are currently restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers. Immediately following the consummation of our initial public offering, we had 6,318,227 shares of common stock outstanding.
All 2,625,000 shares of common stock sold in our initial public offering are freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Upon the release of the underwriters’ lock-up from our initial public offering, expected to occur on September 4, 2013, 3,693,227 additional shares will be eligible for sale, subject in some cases to volume and other restrictions of Rule 144 under the Securities Act. Sales of substantial amounts of our common stock in the public market following the release of lock-up restrictions or otherwise, or the perception that these sales could occur, could cause the market price of our common stock to decline.
The NASDAQ Capital Market may delist our common stock from quotation on its exchange which could limit investors’ ability to trade our common stock and subject our shares to additional trading restrictions. Our common stock trades on the NASDAQ Capital Market (“NASDAQ”). However, we cannot assure you that our common stock will meet the continued listing requirements to be listed on NASDAQ in the future. The continued listing standards for the NASDAQ Capital Market include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of at least $35.0 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in the two of the last three fiscal years. If, following our initial public offering, NASDAQ decides to delist our common stock from trading on its exchange, we could face significant material adverse consequences including:
| | · | a limited availability of market quotations for our securities; |
| | · | a determination that our common stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common stock; |
| | · | a limited amount of news and analyst coverage for our company; and |
| | · | a decreased ability to issue additional securities or obtain additional financing in the future. |
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock. Provisions in our proposed amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
| | · | authorize our board of directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred stock; |
| | · | establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors, and also specify requirements as to the form and content of a stockholder’s notice; |
| | · | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent; |
| | · | provide that our directors may be removed only for cause and only by the affirmative vote of at least a majority of the total voting power of our outstanding capital stock, voting as a single class; and |
| | · | do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock voting in any election of directors to elect all of the directors standing for election, if they should so choose). |
These provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
We may invest or spend the proceeds of our initial public offering in ways with which you may not agree or in ways whichthat may not yield a return. We currently intendOur public offering net proceeds to the company were $18.1 million. The company had $2.3 million dollars in cash prior to the initial public offering. Since the public offering, the company has used $400,000 of cash to purchase the assets of CareerImp and Resunate. The company used $200,000 of cash and will use at least another $200,000 in cash during 2014 and 2015 relating to the purchase of the assets of Personnel Strategies, Incorporated, the events business purchased by the company in 2013. Up to an additional $400,000 may be used relating to the asset purchase if the operator of the events sector of our company achieves certain performance targets. Furthermore, the company utilized $446,000 of cash resulting from a loss on operations since the initial public offering. The company completed the 2013 fiscal year with $18.6 million in cash, $1.2 million of accounts receivables, and $200,000 of accounts payables. The purchase of the assets of CareerImp enabled the company to develop and deploy new products and enhance our website at a rapid pace, with cost effectiveness. This has reduced the amount of funds we require for further product development, as our web platform is new as of 2013. As of the end of 2013, the company has not utilized any of the proceeds of our public offering. The funds expended to build our sales, marketing and product capabilities, and to purchase the assets of Personnel Strategies Incorporated and CareerImp were drawn from cash and receivables in the company at the time of the initial public offering.
Our intent for the proceeds of the public offering are to utilize up to $1 million dollars to purchase stock in our company, to utilize approximately 15% of the balance of the net proceeds of our initial public offering for sales and marketing, (which, includes approximately 5% for additional payroll for additional employees in our direct sales team), 25%to utilize 10% of the net proceeds for product development, 40%to utilize 50% of the net proceeds for strategic acquisitions and reserve the remaining 20%25% of the net proceeds for future growth opportunities. From time to time, we may meet with and identify acquisition targets, and could initiate or consummate acquisitions or investments in other companies, which acquisitions or investments could be material to our business and financial condition. Our management will have considerable discretion in the application of the net proceeds and may change the proposed uses without notice. The net proceeds may be used for corporate purposes that do not increase our operating results or the market value of our securities. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.
We are obligatedhave identified a material weakness in our internal control over financial reporting related to developsegregation of incompatible duties and the application of complex accounting principles, and cannot assure you that additional material weaknesses will not be identified in the future. Our failure to implement and maintain proper and effective internal controlscontrol over financial reporting. We may not completereporting could result in material misstatements in our analysisfinancial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and could have an adverse effect on our share price or our debt ratings. Management, through documentation, testing and assessment of our internal controlscontrol over financial reporting has concluded that our internal control over financial reporting had a material weakness related to deficiencies in controls over the segregation of incompatible duties and the application of complex accounting principles as of December 31, 2013. See Item 9A - Controls and Procedures. While we believe we have other controls in place that are operating effectively and mitigate the risk of material misstatement, these control deficiencies could result in a misstatement of the presentation and disclosure of our financial statements that would result in a material misstatement in our annual or interim financial statements that would not be prevented or detected.
During 2013 and into the first quarter of 2014, we undertook certain improvements to remediate material weaknesses related to our internal control over financial reporting for the period ended December 31, 2013. Specifically, we implemented new policies to more fully segregate incompatible duties and enhance the overall internal control structure. Additional procedures were written supporting which functions employees with access to the general ledger system can access, which will provide additional internal control enhancements. In addition, we hired additional finance personnel to improve our segregation of incompatible duties within our accounting and financial reporting functions and also engaged a third party external financial reporting specialist with expertise in GAAP and SEC reporting regulations.
If we are unable to effectively remediate this material weakness in a timely manner, or these internal controls may have one or more material weaknesses, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations of the effectiveness of internal controls by independent auditors. We would be required to perform the annual review and evaluation of our internal controls for the fiscal year ending December 31, 2013. However, we initially expect to qualify as a smaller reporting company and as an emerging growth company, and thus, we would be exempt from the auditors’ attestation requirement until such time as we no longer qualify as a smaller reporting company and an emerging growth company. We would no longer qualify as a smaller reporting company if the market value of our public float exceeded $75 million as of the last day of our second fiscal quarter in any fiscal year following our initial public offering. We would no longer qualify as a emerging growth company at such time as described in the risk factor immediately below.
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to evaluate and correct a material weakness in internal controls needed to comply with Section 404. The material weakness relates to our being a small company with a limited number of employees which limits our ability to assert the controls related to the segregation of duties. During the evaluation and testing process, if we identify one or more additional material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, wethe future, investors could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.
Wecould have taken the first step towards remediating our material weakness relating to segregation of duties by hiring a Chief Financial Officer with public company reporting experience. We intend to hire additional accounting personnel prior to management’s first required review and evaluation of internal controls for the fiscal year ending December 31, 2013. The costs relating to remediating this material weakness will primarily consist of additional employment costs, which we currently do not expect to have a materialan adverse effect on our share price or our debt ratings.
We cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of operations.periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our share price.
While we currently qualify as an “emerging growth company” under the JOBS Act, we will lose that status at the latest by the end of 2017,2018, which will increase the costs and demands placed upon our management. We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1,000,000,000 (as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under this registration statement; (iii) the date on which we have, during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’ as defined by the SEC, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we would have to comply with additional disclosure and accounting requirements, particularly if our public float should exceed $75 million on the last day of our second fiscal quarter in any fiscal year following our initial public offering, which would disqualify us as a smaller reporting company.
We are an “emerging growth company” and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. The JOBS Act permits “emerging growth companies” like us to rely on some of the reduced disclosure requirements that are already available to smaller reporting companies, which are companies that have a public float of less than $75 million. As long as we qualify as an emerging growth company or a smaller reporting company, we would be permitted to omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act, as described above and are also exempt from the requirement to submit “say-on-pay”, “say-on-pay frequency” and “say-on-parachute” votes to our stockholders and may avail ourselves of reduced executive compensation disclosure that is already available to smaller reporting companies.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will cease to be an emerging growth company at such time as described in the risk factor immediately above. Until such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile and could cause our stock price to decline.
We do not intend to pay dividends for the foreseeable future. Following the completion of our offering, we do not intend to declare or pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
None.
We lease approximately 4,600 square feet of space for our headquarters in Chicago, Illinois under a lease that expires on June 30, 2015 and currently sublease2015. We also lease approximately 1,900 square feet of office space in Minnetonka, Minnesota for our former headquarters space of approximately 1,870 square feetEvents business under a lease that expires on October 31,September 30, 2014. We believe that our current facilities are adequate to meet our current needs. We may expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate ongoing operations and any such growth. However, we expect to incur additional expenses in connection with such new or expanded facilities.
We are subject to legal proceedings and litigation arising in the ordinary course of business, although no such proceedings or litigation is currently pending. We are not aware of any governmental authority contemplating any legal proceeding against us.
Not applicable.
Our common stock has been listed on the NASDAQ Capital Market under the symbol “IPDN” since March 5, 2013. Prior to that date, there was no public trading market for our common stock. Between March 5, 2013 and March 29, 2013, the high and low sales price of our common stock on NASDAQ were $4.51 and $8.20, respectively.
| | | High | | | Low | | | Year Ended December 31, 2013 | | | | | | | | | | First Quarter | | $ | 8.20 | | | $ | 4.51 | | | Second Quarter | | $ | 7.09 | | | $ | 3.84 | | | Third Quarter | | $ | 5.50 | | | $ | 4.01 | | | Fourth Quarter | | $ | 5.70 | | | $ | 4.35 | |
Holders
As of March 29, 2013,14, 2014, we had 6 holders of record of our common stock. Since certain of our shares are held by brokers and other institutions on behalf of stockholders, the foregoing number is not representative of the number of beneficial owners of our common stock.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to use the net proceeds from our initial public offering and our future earnings, if any, to finance the further development and expansion of our business and do not intend or expect to pay cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, outstanding indebtedness and plans for expansion and restrictions imposed by lenders, if any.
Recent Sales of Unregistered Securities
As part of our reorganization, we entered into a debt exchange agreement with Ferdinando Ladurini, Daniel Ladurini and James R. Kirsch whereby our three outstanding promissory notes in the principal amounts of $1,341,676, $142,000 and $37,143 plus accrued interest owed to them, respectively, were exchanged for 168,982 shares, 28,851 shares and 7,547 shares, respectively, of our common stock at the public offering price of $8.00 per share. This transaction was exempt from registration under the Securities Act pursuant to Section 4(2) thereunder.
Use of Proceeds from Sales of Registered Securities
On March 8, 2013, we consummated our initial public offering of 2,625,000 shares of our common stock at a price to the public of $8.00 per share. The aggregate offering price for shares sold in the offering was approximately $21 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to registration statements on Form S-1 (File Nos. 333-187081 and 333-181594), which were declared effective by the SEC on March 4, 2013 and March 7, 2013, respectively. Aegis Capital Corp. and Merriman Capital, Inc. acted as the underwriters for the offering. The net proceeds of the offering, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance of up to 1.5% of the gross proceeds from the sale of the firm shares and offering expenses payable by us, were approximately $18.2$18.1 million. If the underwriters exercise their option to purchase additional shares in full, our net proceeds from the offering will be approximately $21.1 million, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance and offering expenses payable by us.
We currently intend to useutilize up to $1 million dollars to purchase stock in our company, approximately 15% of the balance of the net proceeds of theour initial public offering for sales and marketing, (which includes approximately 5% for additional payroll for additional employees in our direct sales team), 25% for product development, 40% for strategic acquisitions and will reserve the remaining 20%10% of the net proceeds for general working capital.product development, 50% of the net proceeds for strategic acquisitions and reserve the remaining 25% of the net proceeds for future growth opportunities. Although from time to time, we may engage in discussionsmeet with potentialand identify acquisition targets, we currently have no agreements or have made any commitments with respect to pursue material acquisitions investor investments in other companies or enter into any form of business arrangements with possible strategic partners.companies. Management retains broad discretion in the allocation of the net proceeds of the offering. These expected uses of net proceeds from the offering representrepresents our current intentions, based upon our present plans and business conditions; however, our plans and business conditions are subject to change. Itchange and there may be circumstances where a reallocation of funds is at least reasonably possible that changes in circumstances could cause us to reallocate the funds.necessary. The amount and timing of our actual expenditures depend on numerous factors, including fluctuations in corporate hiring, economic conditions and the availability of opportunities. Accordingly, we may change the allocation of our use of these proceeds as circumstances evolve.a result of contingencies. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.| Period | | Total # of Shares Purchased | | | Average Price per Share | | | Total # of Shares Purchased as Part of a Publicly Announced Plan | | | Maximum # of Shares (or Approximate Dollar Value) That May be Purchased Under the Plan | | | | | | | | | | | | | | | | August 1, – August 31, 2013 (1) | | | 3,925 | | | $ | 4.96 | | | | 3,925 | | | None | | | | | | | | | | | | | | | | | | | December 1, - December 31, 2013 (2) | | | 2,200 | | | $ | 5.16 | | | | 2,200 | | | $ | 988,745 | |
| (1) | These shares were purchased by the company’s Chief Executive Officer, James Kirsch, pursuant to a Rule 10b5-1 purchase plan announced on May 29, 2013. |
27 | (2) | These shares were purchased by the company as part of a share repurchase program authorized and renewed by the Board of Directors in November 2013. |
Treasury Shares The company purchased treasury shares in December 2013 as part of Contents
Not Required for Smaller Reporting Companies.
The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto in Item 8, “Financial Statements and Supplementary Data,” in Part II of this Annual Report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking statements. Please read “Special Note Regarding Forward-Looking Statements” for additional information regarding forward-looking statements used in this Annual Report. Overview We generate revenue through twonumerous sources –all of which involve recruitment services. We offer job postings, recruitment advertising, semantic search technology, career and advertising. Our principal customer innetworking events. We also license our recruitment technology platform. We currently have over 500 companies utilizing our products and services. Less than 2% of our revenue is transacted online via ecommerce; the recruitment sector has been Monster Worldwide. However,majority of our agreementsales are consummated via direct interaction with Monster Worldwide expired on December 31, 2012, and was not renewed. On November 12, 2012, we entered into aour diversity recruitment partnership agreement withsales professionals. Our largest single client is LinkedIn, which became effective on January 1, 2013. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. Our principal customer in the advertising sector is Apollo Group. Our revenue has grown significantly since 2010. Total revenue for the year ended December 31, 2012 was $6.2 million, representing an increase of approximately 11% over total revenue for the year ended December 31, 2011, which was $5.6 million. 2011 total revenue was approximately 27% higher than total revenue for the year ended December 31, 2010, which was $4.4 million. Year over year net income during those periods decreased, however, to $2.4 million in 2012 from $2.7 million in 2011, which in turn was higher than net income in 2010 of $1.9 million.
We expect revenues and net income to be lower in 2013 than in prior periods, primarily as a result of the termination as of December 31, 2012represented 50% of our agreement with Monster Worldwide, pursuant to which we received fixed quarterly payments of $1 million and also as we incur expenses to implement our business strategies and to meet the requirements of being a publicly traded company. Our agreement with LinkedIn, which became effective as of January 1, 2013, provides us with fixed quarterly payments of $500,000 compared to $1 million from Monster Worldwide. Our agreement with LinkedIn has a term of three years, but may be terminated as early as June 30, 2013. Accordingly, we currently expect that our recruitment revenue in 2013, and possibly in future years, may be significantly lower than in prior years. Our agreement with LinkedIn allows us to earn commission revenue over and above the fixed quarterly payment of $500,000 if LinkedIn's revenue from its sale2013. Apollo Education Group, is our second largest client which represented 36% of our services exceeds $10 millionrevenue in any calendar year as follows: we earn a 20% commission on annual sales over $10 million and less than $50 million and a 15% commission on annual sales over $50 million. LinkedIn will report to us information about its sales2013. Our next largest client represents 2% of our services on a quarterly basis within 60 days of the end of each quarter. The first quarter under our agreement with LinkedIn was completed on March 31, 2013, accordingly, we expect to have information about LinkedIn's sales of our services during that quarter by May 30, 2013. revenue
Market Directly to Recruiters We commenced development of an internal business plan to market diversity recruitment services to businesses directly prior to December 31, 2012 due to uncertainty of whether our agreement with Monster Worldwide would expire. Following the expiration of that agreement as of January 1, 2013, we began using certain existing employees and hired additional personnel to focus on these direct marketing activities. We currently employ 21 professionals in sales, sales support and marketing who are all trained in selling our products and services. We have one group that is responsible for setting up first meetings with prospect companies, another group that conducts the first meeting and matures the conversation to what we hope is a successful conclusion, and a third group of sales professionals who provide ongoing account management and are responsible for successful client renewals.
We believe favorable market conditions will be necessary for us to succeed infollowing the termination of our new relationship with LinkedIn and the initiation of our direct marketing initiative. We will need lead time to develop the new sales group and it will require significant additional investments to successfully market and sell our recruiting services directly to employers and our ability to succeed is uncertain.
We have segmentedsegregated the diversity recruitment market into three sectors:
| | · | Federal, state and local governments and companies and contractors who serve these governmental entities. |
| | · | Small and medium sized businesses as defined by companies with less than 2,500 employeesemployees. |
| | · | Large enterprises with greater than 2,500 employees. |
Our sales team will approach these markets using a combination of telephone and email marketing as well as, in some cases, personal visits to companies and or their recruitment agencies. We also plan to attend major recruitment conferences where diversity recruitment recruiters are in attendance. Our sales team will not have the ability to sell to any of the 1,000 companies that are listed on the restricted account list pursuant to our agreement with LinkedIn. The companies in such restricted accounts list are of varying sizes, operate in diverse geographical locations and conduct business in different sectors. We believe LinkedIn designated these particular companies in its restricted account list because LinkedIn has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services. We are permitted, however, to market and sell our products to any company that is not on such restricted account list after our exclusive agreement with Monster Worldwide expired on December 31, 2012. Our agreement with Monster Worldwide requires us to maintain the diversity-based job postings that originated from Monster Worldwide prior to December 31, 2012. We are not restricted to sell those companies any additional products or services nor are we prevented from selling those companies directly upon the end of the fulfillment period. We have invested in our direct sales infrastructure and expect to continue to do so in the future. We have budgeted approximately 15% of the net proceeds of the offering forThe sales and marketing expenses, including approximately 5% for additional payroll for additional employeesteam consists of 21 professionals. We plan to continue to invest in our direct sales team.and marketing team in 2014, as they mature to a self-supporting group of professionals. These costs are primarily for sales personnel and to support the sales team with tools such as client relationship management systems, personal computers and travel expenses. The sales expenses are variable and can be adjusted to meet market conditions. However, there is a risk that we
Our agreement with LinkedIn will terminate as of March 29, 2014. Upon termination the company will be not successfullybe restricted to sell ourany company its products and services directlyservices. The agreement the company had with Monster Worldwide expired on December 31, 2012. The company has no restrictions or obligations relating to employers at a level that supports the cost of providing those services.its former agreement with Monster Worldwide. We will not be able to generate any recruitment revenue unless and until we are able to market our diversity recruitment services to businesses directly, or alternatively, successfully develop our relationship with LinkedIn Corporation.
Revenue from our recruitment sector will be impacted positively and negatively by certain general macroeconomic conditions, such as the national unemployment rate. An increase in demand for employees should create market conditions favorable to recruitment companies like ourselves.PDN. Conversely, a weak employment environment should have a negative impact. We believe that our focus on diverse professionals mitigates this risk because of the social and political environment in the United States. We believe recent trends indicate an increased focus by companies on hiring diverse Americans for both compliance and business reasons. For example, as the Hispanic population grows and companies seek to conduct business with this population, we expect companies will hire aggressively within the Hispanic community, resulting in a robust demand for bilingual English/Spanish speakers and writers. Because of our specialization and focus in diversity recruitment, as opposed to general recruitment, we have not yet experienced negative pricing pressure associated with product commoditization (which is the act of making a product or service easy to obtain by making it as uniform, plentiful and affordable as possible).
On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn, which became effective on January 1, 2013. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. Our agreement with LinkedIn provides that LinkedIn will make fixed quarterly paymentsterminate on March 29, 2014. There are no post termination restrictions on our ability to us in the amount of $500,000 per quarter. This amount is half of the fixed quarterly payments we received from Monster Worldwide. Under the LinkedIn agreement, we will also earn commission for salessell any employers our diversity recruitment services. As part of our services in excess of certain thresholds. The fixed quarterly payments are payable regardless of sales volumes or any other performance metric. Although such fixed quarterly payments are significantly less than the fixed quarterly payments that we receive from Monster Worldwide, we believe that we have the potential to exceed our revenues from our previous agreement with Monster Worldwide because (i) we may earn additional commission payments with LinkedIn, if certain sales levels are achieved, and (ii) we may earn revenue by selling our services directly, as described above. Under our agreementtermination with LinkedIn we will receive (i) no commissions on the first $10 million of LinkedIn’s revenue from the sale ofprovide ongoing job postings and reporting for those employers to whom LinkedIn sold our services during each calendar year, (ii) 20% commission on LinkedIn’s revenue from the sale of our services during each calendar year that is in excess of $10 million and less than $50 million, and (iii) 15% commission on LinkedIn’s revenue from the sale of our services during each calendar year that is in excess of $50 million. However, there can be no assurance that we will meet or exceed revenues earned through Monster Worldwide in prior periods. As an example solely to illustrate the stair-step structure of our commission schedule with LinkedIn, if LinkedIn sells $60 million of our services during any calendar year, we would receive $9.5 million in commission revenue for such year, in addition to our fixed payments, because we would earn no commission revenue for the first $10 million of LinkedIn sales of our services, $8 million in commission revenue for the next $40 million of LinkedIn sales of our services and $1.5 million in commission revenue for the remaining $10 million of LinkedIn sales of our services. We will not obtain information about commissions earned from LinkedIn, if any, until within 60 days following the end of any fiscal quarter. Because our agreement with LinkedIn became effective on January 1, 2013, we do not expect to have information about first quarter commissions, if any, until May 30, 2013.
During the term of our agreement with LinkedIn, we may not permit any competitor of LinkedIn to resell our diversity-based recruitment services. Our agreement does not prohibit LinkedIn from selling its own or any third party’s diversity recruitment services, However, during the term of our agreement with LinkedIn and for a period of one year thereafter, we may not sell our diversity-based recruitment services, directly or indirectly, to any of the 1,000 companies on LinkedIn’s restricted account list. The companies in such restricted accounts list range are of varying sizes, operate in diverse geographical locations and conduct business in different sectors. We believe LinkedIn designated these particular companies in its restricted account list because LinkedIn has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services. We are permitted, however, to market and sellnot restricted from entering into a direct recruitment relationship with those companies that are using our products to any company that is not on such restricted account list after our exclusive agreement with Monster Worldwide expired on December 31, 2012.
The term of our agreement withand services via the LinkedIn is three years, subject to LinkedIn’s right, in its sole and absolute discretion, to terminate our agreement on the six-month anniversary of the effective date, January 1, 2013, upon not less than 30 days’ prior notice and during the fourth calendar quarter of the first and second years of the term of our agreement upon not less than 90 days’ prior notice.
If not terminated sooner, the term of our agreement with LinkedIn will automatically renew for successive one-year terms unless either party delivers a notice of non-renewal with 90 days’ prior notice. For additional information about our business arrangements with LinkedIn, please see the section entitled “Business - LinkedIn.”reseller agreement.
Recruitment Advertising. We generate most of ourDiversity recruitment advertising revenue from our exclusive advertising relationship with Apollo Group, for whichenables recruiters to communicate their career opportunities to diverse candidates using Internet banner ads and email marketing. In the past year we place advertising on our websites and to whose website we direct our members to help advance their education. Under our agreement with Apollo Group, we may not providehave provided diversity recruitment advertising services for any other institution of higher education, whether for-profit or non-profit, other than Apollo Group. Because we have an exclusivity arrangement with Apollo Group, our revenue growth in this market segmentto numerous employers. We use sophisticated technology to delivery advertising targeted by geography and occupation. Our targeting is dependent on the volume of students interested in, and the success of, Apollo Group’s University of Phoenix and their use of our websites. Please see the section entitled “Business - Advertising Revenue - University of Phoenix” for further information about our business arrangement with Apollo Group. The majority of our advertising revenue from Apollo Group is recognized based upon fixed fees with certain minimum monthly website visits or fixed fee for revenue sharing agreements in which payment is required at the time of posting. Unless we earn additional advertising revenue from clients outside of the higher education sector, our ability to generate additional advertising revenue is limited, unless we are able to negotiate more favorable terms with Apollo Group.
We believedata that we have an opportunity for long-term growth with Apollo Group. In the short term, we are focusedaccumulated relevant to our audiences’ job searches on maintaining our relationship with Apollo Group. If our relationship with Apollo Group is discontinued, we would suffer a loss in advertising revenue in the short-term. However, in the long-term, we feel that the for-profit education market sector is large enoughsites and competitive enough to allow us to positively adjust to the potential loss of this client because we believe our target audience of diverse professionals is highly sought after. We believe we have significant opportunities to grow our advertising revenue from clients outside of the education sector.vast profiles based upon those user experiences.
Cost of Growth In the fiscal year ended December 31, 2012, we began to increase our sales and marketing, as well as product development expenses. We continued making these investments in people and technology in 2013 as we refined and focused our sales, marketing and technology teams. Such expenses willwere not be capitalized under our financial statements in accordance with generally accepted accounting principles, and we do not expect to see significantly increased revenues resulting from these investments until the first quarter of 2013 at the earliest.2014. Therefore, as we execute our strategy to increase advertising and recruitment revenue by hiring additional personnel, expanding our marketing efforts and building a sales team, our profitability has declined and may continue to decline in the short-term. We may increase our office space to accommodate additional personnel.near-term. Results of Operations The following tables set forth our results of operations for the periods presented (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results. Comparison of the Year Ended December 31, 20122013 with the Year Ended December 31, 2011 | | | Year Ended December 31, | | | December 31, 2011 to 2012 % change | | | | | 2012 | | | 2011 | | | | | | (in thousands) | | | | | | Revenue: | | | | | | | | | | | | | | Recruitment services | | $ | 4,000 | | | $ | 4,000 | | | | - | | | Consumer advertising and consumer marketing solutions | | | 2,154 | | | | 1,569 | | | | 37.3 | | | | | | | | | | | | | | | | | Total revenue | | | 6,154 | | | | 5,569 | | | | 10.5 | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | Cost of services | | | 805 | | | | 817 | | | | 11.2 | | | Sales and marketing | | | 1,483 | | | | 1,022 | | | | 45.1 | | | General and administrative | | | 1,222 | | | | 723 | | | | 69.7 | | | Depreciation and amortization | | | 113 | | | | 109 | | | | 4.0 | | | | | | | | | | | | | | | | | Total operating expenses | | | 3,623 | | | | 2,671 | | | | 39.7 | | | | | | | | | | | | | | | | | Income from operations | | | 2,531 | | | | 2,898 | | | | (16.4) | | | | | | | | | | | | | | | | | Other income (expense): | | | | | | | | | | | | | | Interest and other income | | | 13 | | | | 18 | | | | (25.3) | | | Interest expense | | | (172 | ) | | | (170 | ) | | | 1.1 | | | | | | | | | | | | | | | | | Other expense, net | | | (159 | ) | | | (152 | ) | | | 4.1 | | | | | | | | | | | | | | | | | Net income | | $ | 2,372 | | | $ | 2,746 | | | | 17.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue2012
The following tables set forth our results of operations for the periods presented as a percentage of revenue for those periods (certain items may not foot due to rounding). The period to period comparison of financial results is not necessarily indicative of future results.
| | | 2012 | | | 2011 | | | Percentage of revenue by product: | | | | | | | | | | Recruitment revenue | | | 65 | % | | | 72 | % | | Consumer advertising and consumer marketing solutions revenue | | | 35 | % | | | 28 | % |
| | | Years Ended December 31, | | | Change | | | Change | | | | | 2013 | | | 2012 | | | (Dollars) | | | (Percent) | | | | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | Recruitment services | | $ | 2,468 | | | $ | 4,000 | | | $ | (1,532 | ) | | | (38.3 | %) | Consumer advertising and consumer marketing
solutions revenue | | | 1,566 | | | | 2,154 | | | | (588 | ) | | | (27.3 | %) | | Total revenues | | | 4,035 | | | | 6,154 | | | | (2,119 | ) | | | (34.4 | %) | | | | | | | | | | | | | | | | | | | | Costs and expenses: | | | | | | | | | | | | | | | | | | Cost of services | | | 1,153 | | | | 805 | | | | 347 | | | | 43.1 | % | | Sales and marketing | | | 2,347 | | | | 1,483 | | | | 864 | | | | 58.3 | % | | General and administrative | | | 2,268 | | | | 1,222 | | | | 1,046 | | | | 85.6 | % | | Depreciation and amortization | | | 282 | | | | 113 | | | | 169 | | | | 149.4 | % | | Gain on sale of property and equipment | | | (4 | ) | | | 0 | | | | (4 | ) | | | (100.0 | %) | | Total costs and expenses | | | 6,045 | | | | 3,623 | | | | 2,422 | | | | 66.8 | % | | (Loss) income from operations | | | (2,010 | ) | | | 2,531 | | | | (4,541 | ) | | | (179.4 | %) | | | | | | | | | | | | | | | | | | | | Other expense, net | | | (137 | ) | | | (159 | ) | | | 22 | | | | (14.0 | %) | | Change in fair value of warrant liability | | | 330 | | | | 0 | | | | 330 | | | | 100.0 | % | | Income tax benefit | | | (381 | ) | | | 0 | | | | (381 | ) | | | (100.0 | %) | | Net (loss) income | | $ | (1,436 | ) | | $ | 2,372 | | | $ | (3,808 | ) | | | (160.6 | %) |
Revenue
| | | Years Ended December 31, | | | | | 2013 | | | 2012 | | | Percentage of revenue by product: | | | | | | | | Recruitment services | | | 61 | % | | | 65 | % | Consumer advertising and consumer marketing solutions revenue | | | 39 | % | | | 35 | % |
Total recruitment services revenue was $6,154,111, an increase of $584,769, or 10.5%,decreased 38% for the year ended December 31, 20122013, compared to $5,569,342the same period in the prior year. Revenue from our recruitment solutions decreased $1,532,000 for the year ended December 31, 2011. Revenue from our recruitment solutions remained flat2013, compared to the prior year, as our basethe fixed fee we receive pursuant to our contract withLinkedIn agreement is half of the fixed fee we received pursuant to our Monster did not changeWorldwide agreement prior to its termination at the end of 2012. Partially offsetting this decrease was $167,000 of revenues generated from 2011our Events Division. At the end of the third quarter of 2013, we completed the purchase of the assets of Personnel Strategies, Inc. (“PSI”). PSI had been operating diversity focused Job Fairs throughout the country for over 20 years. We are operating this business as the Events Division of the company.
Additionally, during the year ended December 31, 2013, we recognized $230,000 of revenues related to 2012 and we did not exceed the numberdirect sales of applications required to receive additional revenue from Monster. our recruitment services. Revenue from our consumer advertising and consumer marketing solutions was $2,154,111, an increase$1,566,000 for the year ended December 31, 2013, compared to $2,154,000 for the year ended December 31, 2012. The year over year decrease was primarily the result of $584,769, or 37.3%,changes in our agreements with Apollo Group and a decrease in media revenue as we changed our product offerings. The revenue from our Apollo Education to Careers Agreement, which consists of a fixed monthly fee of $116,667, remained the same. However, the advertising and promotion campaign for Apollo Group's Education to Education Affinity Networking Portal Site ended in June 2012 and such termination resulted in a decrease in revenue of $150,000 for the year ended December 31, 2013. Additionally, we mutually ended our insertion order agreement with the Apollo Group for lead generation for the University of Phoenix in June 2013 and such termination resulted in a decrease in revenue of $307,000 for the year ended December 31, 2013. Our media revenue for the year ended December 31, 2013 was $0, compared to $126,000 for the year ended December 31, 2012, compared to $1,569,342 for the year ended December 31, 2011. The period over period increase was a result of three amendments toas our agreements with Apollo Group; the Apollo Education to Careers Agreement that commenced in the third quarter of 2011, which resulted in additional revenue of $269,333, an agreement entered into with Apollo Group to provide advertising and promotion services for its Education to Education Affinity Networking Portal Site, which resulted in additional revenue of $150,000 and an insertion order from Apollo Group which resulted in additional revenue of $346,321 based upon the number of persons we referred to the University of Phoenix who expressed an interest in obtaining information about attending the University of Phoenix. These increases were offset by a $172,391 decrease in advertising revenue and a $8,495 decrease in partner job posting revenue. The reasons for these decreases was that we allocated additional advertising inventory to the Monster Worldwide2013 efforts focused on growing our recruitment channel, which is covered by our flat fee arrangement with Monster Worldwide, and demand for media and partner services is slightly softer in 2012 than 2011.solutions products.
Operating Expenses
Cost of services expense: OurThe increase in cost of services expense for the year ended December 31, 20122013 was $805,447,due to (i) a decrease of $11,807, or 1.4%, as compared to $817,254$207,000 increase in salaries and benefits for the year ended December 31, 2011. The year over year decrease was primarily attributable to net decrease of $34,000 related to the maintenance and operation of our systems and websites consisting of computer programmer services expense decrease of $5,000 and web hosting expense increase of $47,000, both due to increased traffic and functionality for our websites, offset by a decrease in web development expense $76,000 as we brought more of those expenses in-house in 2012 and this amount is now included in salaries and wages. Offsetting the decrease in cost of services above was an increase in consulting expense related to our advertising and media services and our Apollo Group agreement which increased $71,000, and an increase in salaries and benefits of $59,0002013 resulting from hiring additional operations personnel in the fourththird quarter of 20112012 to support our expected revenue and traffic growth in 2013 and (ii) $203,000 of direct costs incurred in connection with our Events Division. Due to the seasonality of the events industry and the hiringprocess of additional operations personnelintegrating this business, we had expected a significant cost for this division in the second quarterfourth quarter. Additionally, higher maintenance and operation expenses related to our systems and websites resulted in an increase of 2012.$56,000 of expenses during the year ended December 31, 2013. The increase in cost of services expense was offset by a $109,000$73,000 decrease in revenue sharing costs as we focusedexpenses for the year ended December 31, 2013 due to more favorable terms negotiated with partners and changes in partner relationships. A $49,000 decrease in consulting expenses for the year ended December 31, 2013 was the result of a decrease in our advertising and recruitment efforts onmedia services due to the change in our Monster and Apollo agreements and less on promoting partner advertising revenue.product offerings.
Sales and marketing expense:Sales and marketing expense for the year ended December 31, 2013 was $2,347,000, an increase of $864,000, or 58%, compared to $1,483,000 for the year ended December 31, 2012. The increase primarily consisted of an increase of $762,000 for the year ended December 31, 2013 in sales and marketing salaries, commissions and benefits and a $84,000 increase in travel, meals and entertainment expense for the year ended December 31, 2013 which resulted from hiring additional staff to support our 2013 direct sales capabilities. Additionally, marketing and consulting expenses increased $168,000 and $70,000, respectively, during the year ended December 31, 2013 primarily related to customer database management tools. The increases were partially offset by a $205,000 decrease in online marketing expense during the year ended December 31, 2013 as a result of the 2013 initiative to market and sell directly to potential customers. General and administrative expense: The increase in general and administrative expenses for the year ended December 31, 2013, compared to the year ended December 31, 2012, was $1,482,556, an increaseprimarily due to the additional costs incurred of $460,717, or 45.1%, as comparedapproximately $661,000 during the year ended December 31, 2013 related to $1,021,839being a public company, including costs associated with audit, legal, directors and officers insurance, investor relations and filing fees and registration. Additionally, personnel expenses increased by $70,000 for the year ended December 31, 2011. The year over year increase consisted of $91,000 in sales and marketing salaries and benefits which resulted from hiring additional staff in the fourth quarter of 2012 to support our 2013 direct sales capabilities, a $226,000 increase in online marketing expense to generate and support lead generation and additional website traffic, an $103,000 investment in customer database management tools, $30,000 to consultants and interns to assist with data mining to clean up our customer database and $11,000 to support our commitment to the University of Phoenix for student scholarships. . General and administrative expense: Our general and administrative expense for the year ended December 31, 2012 were $1,222,158, an increase of $499,065, or 69.0%, as compared to $723,093 for the year ended December 31, 2011. The year over year increase in general and administrative expense was primarily due to an increase of approximately $275,000 in additional compensation payments paid to one of the members. The increase in additional compensation payments consists of $263,000 to compensate the member for additional income taxes resulting from money paid in 2010 for a condominium apartment in Miami, Florida which was primarily used by the company and an increase of $12,000 in expenses related to the condominium (please see “Agreements with Directors and Executive Officers” for further information regarding the additional compensation payments), an increase in audit and accounting fees of approximately $141,000, increases in personnel expenses of $83,000 related to the hiring of additional personnel to support our planned initial public offeringoffering. In connection with the acquisition of the software technology from Careerimp in June 2013, we committed to pay Careerimp an additional $200,000 contingent upon the former CEO’s continued employment with PDN through December 31, 2013. Additionally, in connection with the acquisition of PSI, we committed to pay the former CEO an additional $100,000 on each of September 20, 2014 and 2015 contingent upon his continued employment with PDN on each of those respective dates. We recorded $225,000 of these contingent liabilities during the year ended December 31, 2013. We also experienced an increase of $122,000 for the year ended December 31, 2013 in occupancy, technology and communication costs as we moved our corporate headquarters to a larger space and hired additional employees. The increase was offset by a $43,000 decrease in travel, meals and entertainment expense for the year ended December 31, 2013 and a $49,000 increasedecrease in bad debt expense as we determinedfor the outstanding balance of certain advertising revenue invoices were uncollectible, offset by a decrease in public relations expense of $14,000 as we scaled back our press release efforts due to the IPO process and a decrease in CAM charges related to our office lease of $35,000.year ended December 31, 2013.
Depreciation and amortization expense:expense: The $4,351 increase in depreciation and amortization expense for the year ended December 31, 2012, as2013, compared to the year ended December 31, 20112012, was primarily due to a $3,000$164,000 increase in amortization expense for additions to capitalized software related to updates and enhancements to our technology platforms and a $1,000 increase in depreciation expense related to computer equipment purchased in 2012.
Other Expenses and Income
Interest and other income: Interest and other income for the year ended December 31, 2013 related to the costs incurred to update the technology stack of our web product platform to support emerging technologies. We switched over to the platform, dubbed “V2,” at the end of 2012, decreased $4,444, or 25.3%, to $13,096, as compared to $17,540though the development continued through the first quarter of 2013. Amortization expense also reflects the amortization of the software technology acquired from Careerimp in June 2013.
Other Expenses Included in other expenses, net, for the yearyears ended December 31, 2011. The year over year decrease was2013 and 2012 is interest expense in the amount of $155,000 and $172,000, respectively. Interest expense is primarily attributable to a decrease in interest and dividend income on our cash balances as we have liquidated our bond investments and currently hold only one exchange traded fund and the majorityamortization of our investments are in a money market account. Interest expense: The increase in interest expense of $1,959, or 1.15%, to $172,411 for the year ended December 31, 2012, compared to $170,452 for the year ended December 31, 2011, was attributable to an increase in accretiondiscount on the note payable to one of the note holders as the note moves closerwas exchanged to maturity. Interest expense includesequity upon our reorganization on March 4, 2013. Amortization of the amortization of a discount of $70,385amounted to $138,000 and $66,259 at$70,000 for the year ended December 31, 20122013 and 2011,2012, respectively, for the note pursuantnote.
Change in Fair Value of Warrant Liability The change in the fair value of the warrant liability is related to whichthe common stock purchase warrants issued to underwriters in the Company’s IPO on March 4, 2013. During the year ended December 31, 2013, we maderecorded a principal reduction payment. Paymentsnon-cash gain of $330,000 related to changes in the fair value of our warrant liability liabilities. The change in the fair value of our warrant liability for the year ended December 31, 2013 was primarily the result of changes in our stock price. Income Tax (Benefit) Expense As a result of the Company’s completion of its IPO, the Company’s results of operations are taxed as a C Corporation. Prior to the IPO, the Company’s operations were taxed as a limited liability company, whereby the Company elected to be taxed as a partnership and the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes was recorded for periods prior to March 4, 2013. This change in tax status to a taxable entity resulted in the recognition of deferred tax assets and liabilities based on the notes were $176,000expected tax consequences of temporary differences between the book and $192,000tax basis of the Company’s assets and liabilities at the date of the IPO. This resulted in a net deferred tax benefit of $381,000 being recognized and included in the tax provision for the year ended December 31, 2013. The tax benefit was determined using an effective tax rate of 40.6% for the period from March 4, 2013 (the date on which the tax status changed to a C Corporation) to December 31, 2013.
The unaudited pro forma computation of income tax benefit included in the statements of comprehensive (loss) income, represents the tax effects that would have been reported had the Company been subject to U.S. federal and state income taxes as a corporation for all periods presented. The company provided the pro forma income tax disclosures for the years ended of December 31, 2013 and 2012 to illustrate what the company’s net (loss) income would have been had income tax expense been provided for at an effective tax rate of 40.6% and 2011, respectively.41.0%, respectively. Pro forma taxes are based upon the statutory income tax rates and adjustments to income for estimated permanent differences occurring during each period. Actual rates and expenses could have differed had the Company actually been subject to U.S. federal and state income taxes for all periods presented. Therefore, the unaudited pro forma amounts are for informational purposes only and are intended to be indicative of the results of operations had the Company been subject to U.S. federal and state income taxes as a corporation for all periods presented. Critical Accounting Policies and Estimates On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may delay adoption of new or revised accounting standards applicable to public companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Upon issuance of new or revised accounting standards that apply to our financial statements, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting guidelines. Our management’s discussion and analysis of financial condition and results of operations is based on our 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 financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. 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. Actual results and experiences may differ materially from these estimates. While our significant accounting policies are more fully described in Note 3 to our financial statements included at the end of this Annual Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements. Accounts Receivable Our policy is to reserve for uncollectible accounts based on itsour best estimate of the amount of probable credit losses in itsour existing accounts receivable. We periodically reviewsreview our 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. Goodwill and Intangible Assets We account for goodwill and intangible assets in accordance with Accounting Standards Codification (“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. We evaluate goodwill for impairment annually (December 31) and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. Pursuant to recent authoritative accounting guidance, we elect to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-stepWhen conducting our annual goodwill impairment test. We are not required to calculateassessment, we apply the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than its carrying amount. If we determine that it is more likely than not that its fair value is less than its carrying amount, then we will perform the two-step goodwill impairment test. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value.
Capitalized Technology Costs We account for capitalized technology costs in accordance with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”)ASC 350-40, Internal-Use Software,Software. 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. Included in capitalized software at December 31, 2012 are internal personnel costs and external costs which were properly capitalized in accordance with SoP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and/or FASB Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
We update our technology platform continuously, with new releases occurring approximately every 3 – 4 days. The majority of the costs incurred to create these updates are personnel costs for which we have a dedicated team of employees. A portion of the salaries & benefits for these employees are the costs that are capitalized. We continuously document all changes and enhancements made to our software platforms, track the internal hours incurred to complete such changes and enhancements and capitalize changes and enhancements that meet the criteria under SoP 98-1 or FASB Statement No. 86.
From time to time, we incur significant consulting costs and/or costs for materials that are related to major site enhancements or platform upgrades. These costs are typically 50% to 80% of our total new annual capitalized software costs. Consulting costs are also capitalized in accordance with the above pronouncements.
Revenue Recognition Our principal sources of revenue are recruitment revenue and consumer marketing and consumer advertising revenue. Our recruitment revenue prior to January 1, 2013 was derived from our strategic partnership agreement with Monster Worldwide. Beginning as of January 1, 2013, our recruiting revenue is generated under our agreement with LinkedIn. 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. We apply the revenue recognition principles set forth in Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 104 “Revenue Recognition” with respect to all of its revenue. Accordingly, the company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of its services has occurred, (iii) fees for services are fixed or determinable, and (iv) collectability of the sale is reasonably assured.
Fair Value Measurement
U.S. GAAP establishes a hierarchal disclosure framework which ranks the “observability” of inputs used in measuring financial instruments at fair value. The observability of inputs is impacted by a number of factors, including the type of financial instruments and their specific characteristics. Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, generally will have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.
The three-level hierarchy for fair value measurement is defined as follows:
Level I — inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date. The type of financial instruments included in Level I include unrestricted securities, including equities and derivatives, listed in active markets. We do not adjust the quoted price for these instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level II — inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. The type of financial instruments in this category includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs.
Level III — inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category include investments in privately-held entities, non-investment grade residual interests in securitizations, collateralized loan obligations, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. Investments in fund of funds are generally included in this category.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to any of our fair value measurements requires judgment and considers factors specific to each relevant investment where the fair value is based on unobservable inputs.
Income Taxes Prior to reorganization,Until March 5, 2013, the companyCompany was a limited liability company thatwhich elected to be taxed as a partnership. As such the company’sCompany’s income or loss iswas required to be reported by each respective member on itstheir separate income tax returns. Therefore, no provision for income taxes hashad been provided in the accompanying financial statements. The pro forma income tax disclosure presented in the accompanying statements of comprehensive income for the year ended December 31, 2012 is provided to illustrate what the Company’s net income (loss) would have been had income tax expense (benefit) been provided for as a C Corporation for the full reporting period.
Upon the consummation of our reorganization (from an Illinois limited liability company into a Delaware corporation) on March 5, 2013, Professional Diversity Network, Inc. will bethe Company is now taxed as a “C” Corporation from the time of reorganization through December 31, 2013. The Company provides for income taxes using an asset and liability approach, under which deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the future. taxes become payable. As of December 31, 2013, the Company is in a net deferred tax asset position.
In accounting for uncertainty in income taxes, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. The companyCompany recognizes interest and penalties on any unrecognized tax benefits as a component of income tax expense. Based on an evaluation of the company’sCompany’s tax positions, management believes all positions taken would be upheld under an examination. Liquidity and Capital Resources The following table summarizes our liquidity and capital resources as of and for the years ended December 31, 20122013 and 2011,2012, respectively, and is intended to supplement the more detailed discussion that follows:
| Liquidity and Capital Resources | | Year Ended December 31, | | | | | | | December 31, | | | | | | 2013 | | | 2012 | | | | | 2012 | | | | 2011 | | | (in thousands) | | | | | (in thousands) | | | | | | | | | Cash and cash equivalents | | $ | 868 | | | $ | 2,254 | | | $ | 18,736 | | | $ | 868 | | | Short-term investments | | | 251 | | | | 375 | | | $ | 0 | | | $ | 251 | | | Working capital | | | 2,256 | | | | 3,829 | | | $ | 18,533 | | | $ | 2,256 | |
Our principal sources of liquidity are our cash and cash equivalents, marketable securities, and cash generated from operations.operations and the net proceeds from our initial public offering. Our payment terms for one former and one current customer are 45 andour customers range from 30 to 60 days, respectively. Average days to pay are 58 and 72 days, respectively.days. We consider the difference between the payment terms and payment receipts a result of transit time for invoice and payment processing and to date have not experienced any liquidity issues as a result of the payments extending past the specified terms. Cash and cash equivalents and short term investments consist primarily of cash on deposit with banks and investments in money market funds, corporate and municipal debt and U.S. government and U.S. government agency securities. In March 2013, we received an approximately $18.1 million cash infusion in connection with the completion of our IPO. The non-renewal of our agreement with Monster Worldwide will haveand the commencement of our business relationship with LinkedIn had a material impact on revenue and operating cash flow commencing in 2013. Under our agreement with Monster Worldwide, we have agreed to provide limited support and access to data to permit Monster Worldwide to continue to meet certain obligations to its customers in 2013. With respect to job postings that Monster sold prior toduring the expiration of our agreement on December 31, 2012, we are permitting Monster to maintain such postings on our websites until the earlier of (a) the date that Monster Worldwide’s obligation to maintain such posting expires or (b)year ended December 31, 2013. In addition,This is due to the fact that the LinkedIn agreement provides that LinkedIn makes fixed quarterly payments to us in the amount of $500,000 per quarter, which is half of the $1,000,000 fixed quarterly payments we will continue to provide Monster with access to our data until December 31, 2013. We expect to incur only de minimis additional labor and de minimis additional costs, and will not receive any additional paymentsreceived from Monster Worldwide subsequent toWorldwide. Our agreement with LinkedIn will end March 29, 2014, along with the expiration of our agreement. Additionally, as of January 1, 2013, we will be permitted to sell our products and services directly to employers, except for those identified as restricted by LinkedIn.related $500,000 fixed quarterly payments. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our working capital requirements for the next twelve months.
| | | Year Ended December 31 | | | Years Ended December 31, | | | Cash Flow Data | | 2012 | | | 2011 | | | | | | | 2013 | | | 2012 | | | | | (in thousands) | | | (in thousands) | | | Cash provided by (used in): | | | | | | | | | | | | | | Operating activities | | $ | 2,618 | | | $ | 2,852 | | | $ | (415 | ) | | $ | 2,618 | | | Investment activities | | | (230 | ) | | | 262 | | | | Investing activities | | | | (470 | ) | | | (230 | ) | | Financing activities | | | (3,774 | ) | | | (1,772 | ) | | | 18,753 | | | | (3,774 | ) | | | | | | | | | | | | | Net (decrease) increase in cash and cash equivalents | | $ | (1,386 | ) | | $ | 1,342 | | | | Net increase (decrease) in cash and cash equivalents | | | $ | 17,868 | | | $ | (1,386 | ) |
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) Provided by Operating Activities Net cash used in operating activities for the year ended December 31, 2013 was $415,000. The cash flow used in operations during 2013 was primarily attributable to changes in our assets and liabilities, mainly consisting of a decrease to accounts receivable of $756,000 and an increase in deferred revenue of $524,000. Accounts receivable decreased approximately 37% in 2013 while our revenue declined 34%. The decrease in accounts receivable was due to the collection of outstanding receivables. We had a net loss of $1,436,000 which included non-cash depreciation and amortization of $282,000, non-cash interest and accretion added to our notes payable of $155,000, a non-cash deferred tax benefit of $381,000, and a decrease in the fair value of a warrant liability of $330,000.
Net cash provided by operating activities during the year ended December 31, 2012 was $2,617,770,$2,618,000, primarily due to our increased revenue and continued operating efficiencies. The cash flow provided from operations induring 2012 was due to changes in our assets and liabilities consisting of an increase in accounts receivable of $18,041,$18,000, an increase in prepaid expenses of $63,982$64,000 and a decrease in accounts payable and accrued expenses of $11,946.$12,000. Accounts receivable, adjusted for deferred revenue in accounts receivable, decreased approximately 2.2% in 2012, while our revenue grew 10.5%. The decrease in accounts receivable was due to lower media and advertising sales in the fourth quarter of 2012 as we channelledchanneled our fourth quarter efforts to preparing our sales team for direct sales in 2013 and our media and marketing team on testing and perfecting our new technology platform to go live on January 2, 2013, the2013. The increase in prepaid expenses consisted of prepaid business insurance, prepaid health insurance and prepaid rent, while the decrease in accounts payable and accrued expenses consists of a decrease in accrued operating expenses. We had net income in 2012 of $2,615,556$2,372,000 which included non-cash depreciation and amortization of $112,943$113,000 and non-cash interest and accretion added to our notes payable of $172,411$172,000 and $49,462$49,000 of bad debt expense. Net cash provided by operating activities during the year ended December 31, 2011 was $2,851,921, primarily resulting from our increased revenue and increase in operating performance. The cash flow from operations provided in 2011 was primarily due to changes in our assets and liabilities consisting of an increase in accounts receivable of $328,000, an increase in other assets of $5,882 and an increase in accounts payable of $126,281. Accounts receivable, adjusted for deferred revenue in accounts receivable, increased approximately 20% in 2011 while our revenue grew 27%. The increase in accounts receivable and deferred revenue was due to our revenue growth in 2011 as compared to 2010. We had net income in 2011 of $2,745,652 which included non-cash depreciation and amortization of $108,592, a non-cash net loss on the sale of investments of $32,588 and non-cash interest and accretion added to our notes payable of $170,452. Net Cash Provided by/Used in Investment Activities
Net cash used in investing activities duringfor the year ended December 31, 20122013 was $230,108.$470,000. The cash used in investing activities primarily consisted of $150,796 in proceeds from$200,000 paid for the saleacquisition of investments offset by $358,247technology, $355,000 invested in developed technology as we incurred costs to update and enhance our websites, $20,513 in purchases of property and equipment and a $2,144 increase in security deposits. Beginning the third quarter of 2012, the Company embarked on updating the technology stack of its web product platform to support emerging technologies.technologies, $136,000 of net cash paid for the acquisition of PSI, and $38,000 in purchases of property and equipment. This was offset by proceeds from the sale of marketable securities of $242,000.
Net cash used in investing activities during the year ended December 31, 2012 was $230,000. The newcash used in investing activities primarily consisted of $151,000 in proceeds from the sale of investments, offset by $358,000 invested in developed technology stack employed in V2, will completely switch over the platformas we incurred costs to object-oriented programming that will make it easier for components of the platform to be modular,update and integrate with other services as and when needed.enhance our websites. Net Cash Provided by (Used in) Financing Activities Net cash provided by investingfinancing activities was $18,753,000 for the year ended December 31, 2011 was $262,061.2013. The cash provided by investingfinancing activities consisted of an increase of $325,155$19,475,000 in the net proceeds from our investmentsinitial public offering less $510,000 in marketable securities andinitial public offering costs paid by the releaseCompany. We paid $200,000 in distributions to members of restricted cash relatedthe Company prior to our operating leasereorganization and $11,000 in payments for the repurchase of $45,288, offset by an increased investment of $92,658 in developed technology as we incur increased costs to update and enhance our websites and $15,724 for purchases of computer hardware. Net Cash Used in Financing Activitiescommon stock.
Net cash used in financing activities was $3,773,730$3,774,000 during the year ended December 31, 2012. The cash used in financing activities consisted of $2,900,000 in distributions to members of the company, of which $2,400,000 were distributions to cover taxes since the company was an LLC, $176,000 in payments on our notes payable to founding members of the company and $697,730$698,000 of our public offering costs, which were deferred.
Net cash used in financing activities was $1,772,192 for the year ended December 31, 2011. The cash used in financing activities for 2011 consisted of $1,553,292 in distributions to members of the company, $192,000 in principal payments on our notes payable to members of the company and $26,900 of our public offering costs, which were deferred.
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). Recent Accounting Pronouncements In June 2011, the Financial Accounting Standards Board (“FASB”) issued amended standards that eliminated the option to report other comprehensive income in the statement of stockholders’ equity and require companies to present the components of net income and other comprehensive income as either one continuous statement of comprehensive income or two separate but consecutive statements. The amended standards do not affect the reported amounts of comprehensive income. In December 31, 2011, the FASB deferred the requirement to present components of reclassifications of other comprehensive income on the face of the income statement that had previously been included in the June 2011 amended standard. These amended standards are to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The company adopted these standards on January 1, 2012 and the adoption will not impact the company’s financial results or disclosures, but will have an impact on the presentation of comprehensive income.
In May 2011, the FASB issued amended standards to achieve common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. The standards include amendments that clarify the intent behind the application of existing fair value measurements and disclosures and other amendments which change principles or requirements for fair value measurements or disclosures. The amended standards are to be applied prospectively for interim and annual periods beginning after December 15, 2011. The company adopted these standards on January 1, 2012 and the adoption of this guidance did not have a material impact on the company’s financial position, results of operations or disclosures.
In July 2012, the FASB amended the standards for testing indefinite-lived intangible assets for impairment to guidance that is similar to the guidance for goodwill impairment testing. An entity will have the option not to calculate annually the fair value of an indefinite-lived intangible asset if an entity determines that it is more likely than not that the asset is impaired. The objective of the amendment is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. These amended standards are to be applied for fiscal years beginning after September 15, 2012, including interim periods with early adoption permitted. The company has elected to early adopt these standards for the year ending December 31, 2012. The adoption of this pronouncement did not have a material impact on the company’s financial results or disclosures.
In February 2013, the FASB issued amended standards to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company does not expect the adoption of the provisions in this update willdid not have a significant impact on itsour consolidated financial statements.
Not applicable.
See the F-Pages contained herein, which include our audited consolidated financial statements and are incorporated by reference in this Item 8.
None.
Evaluation of Disclosure Controls and Procedures AsUnder the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of the end of the period covered by this Annual Report, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operationreport, of our disclosure controls and procedures, as such term is defined in RuleRules 13a-15(e) ofand 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),. The purpose of this evaluation was to determine whether as of December 31, 2012. Based upon thatthe evaluation our Chief Executive Officer and Chief Financial Officer concluded thatdate our disclosure controls and procedures were effective as ofto provide reasonable assurance that the end of the period covered by this report in ensuring that information we are required to be disclosed wasdisclose in our filings with the Securities and Exchange Commission, (“SEC”) under the Exchange Act: (1) is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms and to provide reasonable assurance that information required to be disclosed by us in such reports is(2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation and because of the material weakness described below, our 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 in this Annual Report on Form 10-K.
Management’s Assessment ofReport on Internal Control Over Financial Reporting
This Annual Report does not include a reportOur management, with the participation of management’s assessment regardingour Chief Executive Officer and Chief Financial Officer (principal executive officer and principal financial officer, respectively), is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. We have designed our internal controls to provide reasonable assurance that our financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP), and include those policies and procedures that:
| · | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management conducted an evaluation of the effectiveness of our internal controls based on the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992 framework) as of December 31, 2013, the end of the period covered in this Annual Report on Form 10-K.
Based on this evaluation and because of the material weakness described below, our 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 in this Annual Report on Form 10-K. To address the material weakness described below, we have expanded our disclosure controls and procedures to include additional analysis and other procedures over the preparation of the financial statements included in this report. Accordingly, our management has concluded that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
This Annual Report on Form 10-K does not include an attestation report of the company’s registered public accounting firm dueregarding internal control over financial reporting. Management’s report was not subject to a transition period establishedattestation by the company’s registered public accounting firm pursuant to rules of the SEC for newly public companies.that permit the company to provide only management’s report in this Annual Report on Form 10-K.
Material Weakness in Internal Control Over Financial Reporting We will be required to perform
A material weakness is a control deficiency or a combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management has concluded that, as of December 31, 2013, we did not maintain effective controls over the preparation, review, presentation and evaluationdisclosure of our internal controls starting for the fiscal year ending December 31, 2013. However, as an emerging growth company,financial statements. Specifically, we are exempt from the auditors’ attestation requirement until such time as we no longer qualify as a smaller reporting company and an emerging growth company. We areidentified deficiencies in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to evaluate and correct a material weakness in internal controls needed to comply with Section 404 of the Sarbanes-Oxley Act. The material weakness relates to our being a small company with a limited number of employees which limits our ability to assert the controls related to the segregation of duties. Duringincompatible duties and the evaluationapplication of complex accounting principles. While we believe we have other controls in place that are operating effectively and testing process, if we identify onemitigate the risk of material misstatement, these control deficiencies could result in a misstatement of the presentation and disclosure of our financial statements that would result in a material misstatement in our annual or more additionalinterim financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies constitute a material weaknessesweakness in our internal control over financial reporting as of December 31, 2013.
Plan for Remediation of Material Weakness
During 2013 and into the first quarter of 2014, we will be unableundertook certain improvements to assert thatremediate material weaknesses related to our internal controls are effective.control over financial reporting for the period ended December 31, 2013.
Specifically, the company implemented new policies to more fully segregate incompatible duties and enhance the overall internal control structure. Additional procedures were written supporting which functions employees with access to the general ledger system can access, which will provide additional internal control enhancements. In addition, we hired additional finance personnel to improve our segregation of incompatible duties within our accounting and financial reporting functions and also engaged a third party external financial reporting specialist with expertise in GAAP and SEC reporting regulations.
We have takenanticipate that the first step towards remediating ouractions 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 weakness relating to segregationweakness. However, because many of duties by hiring a Chief Financial Officer with public company reporting experience. We intend to hire additional accounting personnel prior to management’s first required review and evaluationthe 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 the fiscal year ending December 31, 2013. The costs relatingseveral quarters prior to remediating thismanagement being able to conclude that the material weakness will primarily consist of additional employment costs, which we do not expect to have a material effect on our results of operations.has been remediated. Limitations on the Effectiveness of Controls It should be noted thatThe effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls howeverand procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide only reasonable, and not absolute assuranceassurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the objectivesdegree of compliance with the systempolicies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be met. In addition, the design of anysufficient to provide us with effective internal control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.over financial reporting.
Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarterperiod ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. On March 28, 2013, our board of directors authorized an increase to the compensation of Myrna Newman, our Chief Financial Officer. As a result of this increase, Ms. Newman’s annual compensation is $175,000 per year, retroactive to March 8, 2013.
None. PART III
Directors and Executive Officers of the Registrant
The following table provides the name, age and position of each of our directors and executive officers and directors as of March _24_, 2014. There are as follows:no family relationships between our executive officers and directors. | Name | | Age | | | Position | | James Kirsch | | | 5253 | | | Chief Executive Officer and Chairman of the Board | | Rudy Martinez | | | 5556 | | | Executive Vice President, CEO of iHispano.com Division | Myrna NewmanDavid Mecklenburger | | | 5653 | | | Chief Financial Officer and Secretary | | Chad Hoersten | | | 3637 | | | Chief Technology Officer | | Daniel Sullivan | | | 4344 | | | Chief Revenue Officer | Ayan KishoreKevin Williams | | | 2753 | | | Executive Vice President – Operations and Technology | Kevin McFall | | | 49 | | | Executive Vice President, Head of AMightyRiver.com DivisionChief Marketing Officer | | Tandalea Mercer | | | 3536 | | | Executive Vice President – Compliance | | Daniel Marovitz | | | 4041 | | | Director (1) | | Stephen Pemberton | | | 4546 | | | Director (1) | | Barry Feierstein | | | 5253 | | | Director (1) | | Andrea Sáenz | | | 4041 | | | Director |
| (1) | Member of our audit, compensation and nominating and corporate governance committees. |
James Kirsch (52) has served as our Chief Executive Officer, as a member of our management board since 2008 and as the Chairman of the Board since the consummation of our initial public offering. Mr. Kirsch served as Chief Strategic Officer at AMightyRiver.com, a division of PDN from 2004 to 2008 and from 1996 to 2001 as Chief Executive Officer of eSpecialty Brands a online retail company. Previously, Mr. Kirsch served as Chief Executive Officer at iMaternity.com, the ecommerce partner of iVillage.com from 1983 to 1996 and Manager, Vice President and Chief Operating Officer at Dan Howard Industries, a vertically integrated retailer of apparel. He holds a B.S. in Economics and Political Science from University of Arizona. We believe Mr. Kirsch is a valuable asset to the board of directors because of his experience and vision in leading the company since 2008. Rudy Martinez (55) is one of our founders, Executive Vice President and a member of our management board, and has lead our iHispano.com division since 2000. Prior to joining the company, Mr. Martinez served from 1995 to 1998 as Division President for Trilogy Consulting, a firm which specialized in Pharmaceutical and Healthcare consulting. Mr. Martinez graduated from Indiana University, Bloomington with a B.A. in Forensics and completed the Dartmouth Tuck School of Business – Building High Performance Business Program. Myrna NewmanDavid Mecklenburger (56) has been our Chief Financial Officer and Secretary since February 2012. July 2013. Prior to joining PDN, Ms. Newmanthe company, Mr. Mecklenburger served as interimVice President of Business Integration for General Cable Corporation, a publicly traded global provider of wire and cable products, from 2009 to 2012. From 1989 to 2009, Mr. Mecklenburger served as Chief Financial Officer for Jewish Vocational Services of Chicago from 2009 to 2010. From 2008 to 2009, Ms. Newman was Corporate Controller for Atlas Material Testing L.L.C., a manufacturer of weathering and material testing solutions. She served as Controller, Chief Accounting Officer and Principal FinancialOperating Officer of Motient Corporation,Gepco International, Inc. and Isotec, Inc., manufacturers and distributors of high end electronic cables which were acquired by General Cable Corp in 2009. Mr. Mecklenburger has a wireless data communications networkbachelor’s degree in Accountancy from April 2003 until June 2007. Prior to that, Ms. Newman was Vice Presidentthe University of FinanceIllinois at HeadsUrbana-Champaign and Threads International LLC, an importer and distributor of metal fasteners. Ms. Newmana master’s degree in Business Administration from Northwestern University. Mr. Mecklenburger is a Certified Public Accountant and received an M.B.A. from the University of Chicago Graduate School of Business and her B.S. in Accountancy from DePaul University.Accountant.
Chad Hoersten (36) serves as Chief Technology Officer of PDN, a position he has held since 2008. He was the lead web developer of iHispano.com, a division of PDN, from 2004 to 2008. Mr. Hoersten served as a senior software engineer at Rockwell Automation from 1999 to 2002. Mr. Hoersten holds a B.S. in computer engineering from the University of Cincinnati. Daniel Sullivan(43) has served as Chief Revenue Officer at Professional Diversity Network since October, 2011. Prior to joining PDN, Mr. Sullivan worked in a number of sales related roles at Monster Worldwide from January of 2000 to September of 2011. Mr. Sullivan worked as a Sales Manager with Akzo Nobel from January 1998 to January 2000. Mr. Sullivan graduated from the University of Massachusetts, Boston with a B.S. in Political Science. Ayan Kishore (27) has served as Executive Vice President—Operations and Technology since July 2012. Prior to joining the company, Mr. Kishore served from 2009 to 2012 as the Chief Executive Officer and founder of Careerimp, a technology firm specializing in advanced web tools for jobseekers. Mr. Kishore was a business technology consultant at Deloitte Consulting from 2006 to 2008. He holds a Masters in Human-Computer Interaction (Computer Science) from Carnegie Mellon University and a B.S. in Computer Engineering from Georgia Tech.
Kevin McFallWilliams (49) isbecame our Chief Marketing Officer in December 2013. Previously Mr. Williams was the Executive Vice President and headManaging Director of our AMightyRiver.com division,Matlock Advertising and has lead AMightyRiver.com since 2010. Mr. McFall isPublic Relations in Atlanta, Georgia from 2010 to 2011. He had also currently founder and practice leader at Red Clay Digital , LLC, a digital publishing consulting firm, since June 2009. We intend to employ Mr. McFall on a full-time basis prior tobeen the commencement of the offering. Previously, Mr. McFall served asSenior Vice President Global Business Development and Product Strategyof Client Services at CisionGlobalhue, a multicultural advertising agency from December 2009-June 2011. He was co-founder and vice president of products and business development for RushmoreDrive.com,2005 to 2009. Kevin holds a social and vertical search business of IAC CorporationB.A. in Marketing from 2007-2009. Prior to joining IAC, he directed the digital product and affiliate network programs for Zap2it.com, an entertainment news and information website that is a wholly-owned subsidiary of the Tribune Company. Mr. McFall graduated from University of Illinois at Urbana-Champaign with a B.S. in Mathematics and Computer Science..
Tandalea Mercer (35) is our Executive Vice President of Compliance, and has held this position since September 2011. Ms. Mercer is currently also Senior Manager of Diversity and Inclusion at HCL Technologies, Inc., an information and technology services company, and has held that position since October 2011. We intend to employ Ms. Mercer on a full-time basis prior to the commencement of the offering. From January 2010 to January 2011, Ms. Mercer was a diversity specialist consultant for the New York City Department of Education. Prior to that, Ms. Mercer was Senior Manager of Affirmative Action/Diversity Metrics at Verizon, a global telecommunications company. Ms. Mercer has also been an Equal Employment Opportunity Specialist at the county government of Fairfax, Virginia from 2005 to 2006 and Equal Employment Opportunity Compliance Officer at the Office of Federal Contract Compliance Programs of the U.S. Department of Labor from 2003 to 2005. Ms. Mercer earned a B.A. in Political Science and English from Delaware State University, and an M.S./M.P.A. Dual Degree in Urban Policy Analysis and Management from The New School University. Daniel Marovitz (40) has been a director, chairman of our audit committee and a member of our compensation and nominating and corporate governance committees since the consummation of our initial public offering. He is the founder of Buzzumi, a software platform that helps consulting and advice-based businesses operate online. From 2007 to 2011, he served as Head of Product Management and member of the board of Deutsche Bank’s Global Transaction Bank. Previously, Daniel served as Chief Information Officer for Investment Banking of Deutsche Bank and the Chief Operating Officer of technology from 2002 to 2007. Mr. Marovitz joined Deutsche Bank in 2000 as Managing Director and Chief Operating Officer of the eGCI group at Deutsche Bank. Previously, he was Vice President of Commerce at iVillage, an online women’s network from 1998 to 2000. Mr. Marovitz also worked for Gateway 2000 where he served as the head of Gateway.com from 1996 to 1998 and was the co-founder of Gateway’s Japanese subsidiary in Tokyo from 1994 to 1996. Mr. Marovitz earned a B.A. in Romance Studies and Asian Studies and graduated cum laude from Cornell University in 1994. Mr. Marovitz is an experienced operational and theoretical thought leader regarding Internet companies. We believe that as a member on our board of directors, he brings valuable advice relating to Internet activities, user experience and online marketing to the company. Stephen Pemberton(45) has been a director, chairman of our nominating and corporate governance committee and a member of our audit and compensation committees since the consummation of our initial public offering. In 2011, he joined Walgreen Co., a retail pharmacy company, as Divisional Vice-President and Chief Diversity Officer. From 2005 to 2010, Mr. Pemberton was Chief Diversity Officer and Vice-President of Diversity and Inclusion at Monster Worldwide.com. Mr. Pemberton received a B.A. in Political Science from Boston College in 1989. We believe Mr. Pemberton is a respected authority on diversity and inclusion matters in the workplace. We believe that as a member on our board of directors, he adds value by providing the board of directors with insight and experience he has gained from his service as a Chief Diversity Officer at two public companies. Barry Feierstein (52) has been a director, chairman of our compensation committee and a member of our audit and nominating and corporate governance committees since the consummation of our initial public offering. He has been employed at the University of Phoenix, an online institution of higher learning and a wholly owned subsidiary of the Apollo Group since 2010, and appointed Chief Business Operating Officer in 2011. Prior to that, he served as Executive Vice President of Sales & Marketing for Sallie Mae, a student loan service company, from December 2007 to November 2009, and Senior Vice President of Private Credit Lending at Sallie Mae from January 2007 to December 2007. Mr. Feierstein graduated with a B.A. in Economics and History from Tufts University and earned an M.B.A. from Harvard Business School. Mr. Feierstein has expertise in online marketing, with a specific concentration in online education and marketing. We believe his ability to analyze complex Internet marketing strategies, and experience in connecting education to careers is an asset to the board of directors. Andrea Sáenz (40) has been a director since the consummation of our initial public offering. Since May 2011, she has served as Chief of Staff for the Chicago Public Schools. From August 2010 to May 2011, Ms. Sáenz was Board Resident at the U.S. Department of Education. From July 2006 to August 2010, Ms. Sáenz was executive director for the Hispanic Alliance for Career Enhancement, a nonprofit organization dedicated to the advancement of Latino professionals. Prior to holding that position, she was a fellow at the University of Pennsylvania Fels Institute of Government. Ms. Sáenz began her career at Congreso de Latinos Unidos, an organization focusing on Latino-American communities. She holds a B.A. in Latin American studies from Scripps College and a Master’s Degree in government administration from the University of Pennsylvania. We believe Ms. Sáenz is an accomplished leader in the field of professional and educational advancement with expertise in educational and career access for minorities, with particular experience in the Not-For-Profit and government sectors.
Section 16(a) Beneficial Ownership Reporting Compliance
Prior to the consummation of our initial public offering on March 8, 2013, we did not have a class of equity securities registered pursuant to Section 12 of the Exchange Act and as a result the requirements of Section 16(a) of the Securities Exchange Act were not applicable toof 1934 requires that our directors, executive officers and directors, and persons who own more than 10%ten percent of a registered class of our equity securities, forfile reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. Based solely on our most recent fiscal year.review of the copies of the forms received by us and written representations from certain reporting persons that they have complied with the relevant filing requirements, we believe that, during the year ended December 31, 2013, all of our executive officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics is available on our corporate website at www.prodivnet.com. Any amendment to, or waiver from, a provision of such codescode of ethics will be posted on our website.
Audit Committee
Our audit committee is comprised of Mr. Marovitz, Chairman of the audit committee, Mr. Pemberton and Mr. Feierstein. We believe that the composition of our audit committee meets the independence requirements of the applicable rules of the SEC and NASDAQ. Our board of directors has determined that Mr. Marovitz is an audit committee financial expert, as defined by the rules of the SEC.
Overview In this section, we describe our compensation programs and policies and the material elements of compensation for the year ended December 31, 20122013 for our Chairman and Chief Executive Officer, and our most highly compensated executive officers, other than our Chief Executive Officer, whose total compensation was in excess of $100,000. Other than as disclosed below, we did not have any other employee whose compensation was such that executive compensation disclosure would be required but for the fact that they were not executive officers as of the end of the last fiscal year. We refer to the all individuals whose executive compensation is disclosed in this Annual Report as our “named executive officers.” Our compensation committee is responsible for reviewing and evaluating the components of our compensation programs, including employee base salaries and benefit plans. The compensation committee will provide advice and recommendations to the board of directors on such matters. See “Committees of the Board of Directors — Compensation Committee” for further details on the role of the compensation committee. Summary Compensation Table The following table provides information regarding the compensation earned during the years ended December 31, 2013 and December 31, 2012 by our Chairman and Chief Executive Officer, and our most highly compensated executive officers, other than our Chief Executive Officer, whose total compensation was in excess of $100,000. We refer to these persons as our “named executive officers” elsewhere in this Annual Report. | Name and Principal Position | Year | | Salary ($) | | | All Other Compensation ($) (1) | | | Total ($) | | | James Kirsch, | 2013 | | $ | 200,000 | | | $ | 17,383 | (2)(3) | | $ | 217,383 | | | Chairman and Chief Executive Officer | 2012 | | | 200,000 | | | | 372,993 | (2)(3) | | | 572,993 | | | | | | | | | | | | | | | | | | Rudy Martinez, | 2013 | | | 200,000 | | | | 22,664 | | | | 222,664 | | Executive Vice President and CEO of iHispano.com division | 2012 | | | 200,000 | | | | 17,511 | | | | 217,511 | | | | | | | | | | | | | | | | | | Daniel Sullivan | 2013 | | | 150,000 | | | | 25,868 | | | | 175,868 | | | Chief Revenue Officer | 2012 | | | 150,000 | | | | 1,500 | | | | 151,500 | | | | | | | | | | | | | | | | | | David Mecklenburger | 2013 | | | 81,750 | | | | - | | | | 81,750 | | | Chief Financial Officer | | | | | | | | | | | | | |
| (1) | Other compensation consists of: (i) car allowance in the amount of $9,472 and $10,152 respectively, in 2013 and 2012 for Mr. Kirsch, and in the amount of $9,589 and $11,508 respectively in 2013 and 2012 for Mr. Martinez and (ii) an annual Health Savings Account contribution of $6,000 in each of 2013 and 2012 for Mr. Martinez. In 2013 and 2012, Mr. Sullivan received Health Savings Account contributions of $1,500. Additionally, Mr. Martinez received $7,075 of commissions and bonus in 2013 and Mr. Sullivan received $24,368 of commissions and bonus in 2013. | | (2) | In 2010, Mr. Kirsch purchased a condominium apartment in Miami, Florida, which was primarily used by the Company and was financed by obtaining a bank loan providing initially for interest only payments. Following the closing, the Company made payments of interest on the mortgage, condominium association dues, real estate taxes, maintenance and upkeep, purchased furniture and other related expenses on the apartment (collectively, “Condominium Costs”) in the amount of $7,411 in 2013 and $46,927 in 2012. The Company recorded these payments as additional compensation payments to Mr. Kirsch for 2013 and 2012. In 2013 and 2012, the Company paid $0 and $263,109 in additional compensation as a reimbursement for the additional taxes owed by Mr. Kirsch with respect to guaranteed payments related to the Miami condominium. The Company has discontinued payments relating to the condominium costs prior to the closing of the offering. | | (3) | For the year ended December 31, 2012, Mr. Kirsch received $52,800 in additional compensation payments, which represent 30% of the $176,000 in principal payments on our notes payable to one of the founding members of the company, as part of his compensation. |
�� Employment Agreements We entered into employment agreements with Messrs. James Kirsch and Rudy Martinez prior to the commencement of our initial public offering. Mr. Kirsch serves as our Chief Executive Officer and Mr. Martinez serves as our Executive Vice President and CEO of our iHispano.com division, at annual base salaries of $200,000 each.and $200,000, respectively. Mr. Kirsch’s employment agreement is for one year and Mr. Martinez’s employment agreement isagreements were for one year, with employment on an at-will basis thereafter. The agreements also provide for a discretionary annual bonus and benefits provided to other employees. If we terminate either named executive officer without cause (as defined in the employment agreement) but not due to death or disability, the company will pay as severance continued salary for six (6) months to the terminated executive upon delivery of a release of claims against the company. No severance payment will be paid if termination is for cause or if the executive resigns. During each named executive officer’s employment and for two (2) years thereafter, each named executive officer will agree not to disclose confidential information and will be subject to restrictions on competing or interfering with our business and business relationships and soliciting the services of our employees or independent contractors. OnBoth agreements expired March 28, 2013, our board5, 2014, however the company is honoring the terms of directors authorized an increase to the compensation of Myrna Newman, our Chief Financial Officer. As a result of this increase, Ms. Newman’s annual compensation is $175, 000 per year, retroactive to March 8, 2013. Base Salary
Base salaries for our named executive officersprevious agreements until there are established based on the executive’s level of responsibility and years of experience, taking into account competitive factors. Base salaries of all employees, including executive officers, are reviewed annually and may be increased for merit reasons or due to overall company performance.new agreements in place.
Additional Compensation Payments
Pursuant to an investment agreement entered into in 2004 (the “Investment Agreement”) by and among the company, Daniel L. Ladurini, the Daniel L. Ladurini GST Trust (“Ladurini Family Trust”), James R. Kirsch and Rudy Martinez, Mr. Kirsch received additional compensation payments equal to 30% of the principal payments made by the company under the promissory notes payable to Ferdinando Ladurini in the principal amount of $1,341,676. The promissory notes payable to Ferdinando and the additional compensation payments described above were extinguished in connection with our initial public offering.
Equity Awards
We did not award any equity incentive compensation to any of our named executive officers in 2012, However, we expect to implement the 2013 Equity Compensation Plan in the second quarter of 2013.
Non-Equity Incentive Compensation
We did not award any non-equity incentive compensation to any of our named executive officers in 2012.
Retirement Plan and Other Benefits
We currently do not have any retirement plans or provide any other retirement benefits for our employees, except as under the 2013 equity compensation plan.
Nonqualified Deferred Compensation
None of our named executive officers participates in or has account balances in nonqualified defined contribution plans or other deferred compensation plans maintained by us.
Perquisites and Other Personal Benefits
We provide Mr. Kirsch with a car allowance of $846 per month and Mr. Martinez a car allowance of $959 per month.
Severance Benefits and Change in Control Arrangements
Except as described under “Employment Agreements” above, none of our named executive officers has any other severance benefits or change in control arrangements.
Summary Compensation Table
The following table provides information regarding the compensation earned during the years ended December 31, 2012 and December 31, 2011 by our Chairman and Chief Executive Officer, and our most highly compensated executive officers, other than our Chief Executive Officer, whose total compensation was in excess of $100,000. We refer to these persons as our “named executive officers” elsewhere in this Annual Report.
| Name and Principal Position | | Year | | | Salary ($) | | | All Other Compensation ($) (1) | | | Total ($) | | | James Kirsch, | | 2012 | | | $ | 200,000 | | | $ | 372,993 | (2)(3) | | $ | 572,993 | | | Chairman and Chief Executive Officer | | 2011 | | | | 200,000 | | | | 98,401 | (2)(3) | | | 298,401 | | | | | | | | | | | | | | | | | | | | Rudy Martinez, | | 2012 | | | | 200,000 | | | | 17,511 | | | | 217,511 | | Executive Vice President and CEO of iHispano.com division | | 2011 | | | | 200,000 | | | | 17,511 | | | | 217,511 | | | | | | | | | | | | | | | | | | | | Dan Sullivan, | | 2012 | | | | 150,000 | | | | 1,500 | | | | 151,500 | | | Chief Revenue Officer | | 2011 | | | | 37,500 | | | | — | | | | 37,500 | |
(1) | Other compensation consists of: (i) car allowance in the amount of $846 per month in 2011 and 2012 for Mr. Kirsch, and in the amount of $959 per month in 2011 and 2012 for Mr. Martinez and (ii) an annual Health Savings Account contribution of $6,000 in each of 2012 and 2011 for Mr. Martinez. In 2012, Mr. Sullivan received Health Savings Account contributions of $1,500. |
(2) | In 2010, Mr. Kirsch purchased a condominium apartment in Miami, Florida, which was primarily used by the company and was financed by obtaining a bank loan providing initially for interest only payments. Following the closing, the company made payments of interest on the mortgage, condominium association dues, real estate taxes, maintenance and upkeep, purchased furniture and other related expenses on the apartment (collectively, “Condominium Costs”) in the amount of $30,465 in 2011 and $46,927 in 2012. The company recorded these payments as additional compensation payments to Mr. Kirsch in the accompanying statements of comprehensive income as part of his compensation for 2011 and 2012. In 2012, the company paid $263,109 in additional compensation as a reimbursement for the additional taxes owed by Mr. Kirsch with respect to guaranteed payments related to the Miami condominium. The company has discontinued payments relating to the condominium costs prior to the closing of the offering.
| (3) | For the year ended December 31, 2012, Mr. Kirsch received $52,800 in additional compensation payments, which represent 30% of the $176,000 in principal payments on our notes payable to one of the founding members of the company, as part of his compensation. For the year ended December 31, 2011, Mr. Kirsch received $57,600 in additional compensation payments, which represent 30% of the $192,000 in principal payments on our notes payable to one of the founding members of the company, as part of his compensation. |
Outstanding Equity Awards at December 31, 20122013 We did not have any outstanding equity awards to our named executive officers as at December 31, 2012.2013. Director Compensation James Kirsch is the chairman of our board of directors. As one of our executive officers, Mr. Kirsch will not be compensated for his services as a director. The following table details the total compensation earned by the Company’s non-employee directors in 2013:
| Name | | Fees Earned or Paid in Cash ($) | | | Option Awards ($) | | | All Other Compensation ($) | | | Total ($) | | | Daniel Marovitz | | | 9,500 | | | | - | | | | - | | | | 9,500 | | | Stephen Pemberton | | | 7,000 | | | | - | | | | - | | | | 7,000 | | | Barry Feierstein (1) | | | 8,500 | | | | - | | | | - | | | | 8,500 | | | Andrea Sáenz | | | 5,500 | | | | - | | | | - | | | | 5,500 | | | Total | | | 30,500 | | | | - | | | | - | | | | 30,500 | |
The general policy of our Board is that compensation for non-employee directors should be a mix of cash and equity based compensation. We expectdo not pay management directors for Board service in addition to compensate Messrs. Marovitz, Pemberton, Feierstein and Ms. Sáenztheir regular employee compensation. Our directors are also reimbursed for travel expenses associated with attendance at Board meetings. There were no reimbursements for travel expenses for the following amounts for service on our board of directors:fiscal year ended December 31, 2013.
| | ·(1) | an annualMr. Feierstein earned this compensation in 2013, but elected not to receive payment in 2013. The Company has accrued a liability for the full amount of $5,000; andhis 2013 compensation. |
| · | stipends of $1,500 and $1,000 for the chairmen of the compensation and audit committees, respectively.
|
At this time, we do not have a policy regarding annual grants of common stock to our non-employee directors, however, we intend to establish such a policy prior to the end of 2013.
Security Ownership of Management and Certain Beneficial Owners The following table sets forth information regarding the beneficial ownership of our common stock as of March 29, 2013:24, 2014: | | · | each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock; |
| | · | each of our named executive officers; | | | |
| | · | each of our directors and prospective directors; and | | |
| | · | all of our directors and executive officers as a group. | |
The percentage ownership information shown in the table is based upon 3,693,227a total of 6,316,027 shares of common stock outstanding after giving effect to our reorganization, and the issuance of 2,625,000 shares of common stock in our initial public offering for a total of 6,318,227 shares outstanding. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options that are either immediately exercisable or exercisable on or before that date that is 60 days after the date of this Annual Report. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws. Unless otherwise noted below, the address for each person or entity listed in the table is c/o Professional Diversity Network, 801 W. Adams Street, Suite 600, Chicago, Illinois 60667. | Name of Beneficial Owner | | Number of Shares
Beneficially Owned | | | Percentage of Shares Outstanding | | | 5% Stockholders | | | | | | | | | | Daniel Ladurini (1) | | | 2,290,541 | | | | 36.6 | % | | Ronald Chez | | | 466,765 | | | | 7.4 | % | | | | | | | | | | | | Executive Officers and Directors | | | | | | | | | | James Kirsch (2)(3) | | | 1,057,826 | | | | 16.7 | % | | Rudy Martinez | | | 344,385 | | | | 5.5 | % | | David Mecklenburger | | | - | | | | | - | | Chad Hoersten | | | - | | | | | - | | Daniel Sullivan | | | - | | | | | - | | Kevin Williams | | | - | | | | | - | | Tandalea Mercer | | | - | | | | | - | | Daniel Marovitz | | | - | | | | | - | | Stephen Pemberton | | | - | | | | | - | | Barry Feierstein | | | - | | | | | - | | Andrea Sáenz | | | - | | | | | - | | | | | | | | | | | | Named directors and officers as a group (11 persons) | | | 1,402,211 | | | | 22.2 | % |
| | | Beneficial Ownership | | | Percentage of Shares Beneficially Owned | | | Beneficial Owner | | Number of Shares Held | | | After this Offering | | | 5% Stockholders | | | | | | | | | | Daniel Ladurini (1) | | | 2,121,559 | | | | 33.58 | % | | Directors and Named Executive Officers | | | | | | | | | | James Kirsch (2)(3) | | | 1,053,901 | | | | 16.68 | % | | Rudy Martinez | | | 348,785 | | | | 5.52 | % | | Myrna Newman | | | - | | | | | | | Chad Hoersten | | | - | | | | | | | Daniel Sullivan | | | - | | | | | | | Kevin McFall | | | - | | | | | | | Tandalea Mercer | | | - | | | | | | | Daniel Marovitz | | | - | | | | | | | Stephen Pemberton | | | - | | | | | | | Barry Feierstein | | | - | | | | | | | Andrea Sáenz | | | - | | | | | | All directors, prospective directors and executive officers as a group (2 persons) | % | | | 22.20 | % |
| (1) | Includes 28,851 shares that were issued pursuant to the Note Conversion (as defined in “— Equity Issuances to Directors, Executive Officers and 5% Stockholders” below, and 2,071,781 shares held by Ladurini Family Trust, for which Mr. Ladurini is Trustee. Daniel Ladurini holds voting and dispositive power over the shares held by Ladurini Family Trust. The Ladurini Family Trust has entered into option agreements (the “Ladurini Options”) with certain of our directors and officers pursuant to which such directors and officers may purchase, during a ten year exercise period, from Ladurini Family Trust up to 10% shares of our common stock, at a price per share equal to the offering price. The options are not exercisable until the expiration of the lock-up agreement entered into by Ladurini Family Trust with the underwriters in connection with our initial public offering. | | (2) | Includes 7,547 shares issued pursuant to the Note Conversion. | | (3) | Does not include 369,322 shares issuable pursuant to the Ladurini Options because such options arehave not exercisable until the expirationbeen exercised as of the lock-up agreement entered into by Ladurini Family Trust with the underwriters in connection with our initial public offering.December 31, 2013. |
Securities Authorized for Issuance under Equity Compensation Plans As at December 31, 2012, we did not have any equity incentive plans. Prior to the consummation of our initial public offering, we adopted the 2013 Equity Compensation Plan under which we reserved 500,000 shares of our common stock for the purpose of providing equity incentives to our 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 plan provides for a maximum of 500,000 shares that could be acquired upon the exercise of a stock option or the vesting of restricted stock. The plan was approved by our stockholders prior to the consummation of our initial public offering. As of December 31, 2013, there were no securities granted under the plan.
Certain Relationships and Related Party Transactions The following is a summary of transactions for the past two fiscal years to which we have been a party in which the amount involved exceeded the lesser of $120,000 or 1% of the average of our total assets at December 31, 20112012 and December 31, 2012,2013, and in which any of our directors, executive officers or beneficial holders of more than 5% of our capital stock had or will have a direct or indirect material interest, other than compensation arrangements that are described under the section of this Annual Report entitled “Executive Compensation.” .” Equity Issuances to Directors, Executive Officers and 5% Stockholders We did not issue any common stock during the past two fiscal years to our directors, executive officers or holders of more than 5% of our capital stock, except in connection with the reorganization of the companyCompany from a limited liability company into a corporation. Prior to the consummation of our initial public offering, the company effected a reorganization pursuant to which each holder of an outstanding membership interest in the predecessor limited liability company contributed to the company all of the right, title and interest in and to such holder’s entire ownership interest in the company in exchange for a proportionate number of shares of common stock of the company immediately after conversion into a Delaware corporation.
Upon consummation of our initial public offering, Ferdinando Ladurini, Daniel Ladurini and James R. Kirsch entered into a debt exchange agreement with us whereby our three outstanding promissory notes in the principal amounts of $1,341,676, $142,000 and $37,143 plus accrued interest owed to them, respectively, were exchanged for shares of common stock at a price per share equal to the offering price (the “Note Conversion”). Such shares are subject to the lock-up agreement entered into with the underwriters in connection with our initial public offering and may not be sold until the expiration of such lock-up period.
Prior to the consummation of our initial public offering, Ladurini Family Trust entered into option agreements (the “Ladurini Options”) with certain of our directors and officers pursuant to which such directors and officers may purchase, during a ten year exercise period, from Ladurini Family Trust up to 10% shares of our common stock, at a price per share equal to the offering price. TheAs of December 31, 2013, none of those options are not exercisable until the expiration of the lock-up agreement entered into by Ladurini Family Trust with the underwriters in connection with our initial public offering.have been exercised. Agreements with Directors and Executive Officers Pursuant to the Investment Agreement, Mr. Kirsch received additional compensation payments equal to 30% of the principal payments made by the companyCompany under the promissory notes payable to Ferdinando Ladurini in the principal amount of $1,341,676. Additional compensation payments are recorded to expense in the statements of comprehensive income and are reported as income to the member of the limited liability company operating agreement, in this case, Mr. Kirsch. Prior to commencement of our initial public offering, we obtained a binding agreement from our noteholders to convert their outstanding debt into equity in connection with our reorganization and initial public offering. As part of the reorganization, such debt was converted into equity and no further payments to Mr. Kirsch will be made pursuant to the agreement. In 2010, Mr. Kirsch purchased a condominium apartment in Miami, Florida, which was primarily used by the company and was financed by obtaining a bank loan providing initially for interest only payments. The companyCompany paid for the down payment and earnest money on the apartment in the amount of $221,679. Following the closing, the company made payments of interest on the mortgage, condominium association dues, real estate taxes, maintenance and upkeep, purchased furniture and other related expenses on the apartment (collectively, “Condominium Costs”) in the amount of $52,070 in 2010 and $30,465 in 2011. In 2012, the companyCompany paid Mr. Kirsch $263,109 in additional compensation payment to compensate Mr. Kirsch for additional income taxes resulting from the amounts paid in 2010 for the condominium apartment in Miami, Florida. The companyCompany discontinued paying the Condominium Costscondominium costs prior to closing of the company’sCompany’s initial public offering. Please see “Executive Compensation” for information regarding the employment agreements with, and compensation of, our executive officers. Please see “Executive Compensation” for information regarding the employment agreements with, and compensation of, our executive officers. On October 15, 2012, we entered into a letter of intent with Careerimp, Inc. to acquire substantially all of the assets of Careerimp on such terms and conditions as Careerimp and we may agree. The letter of intent does not create any binding obligation on us to acquire Careerimp’s assets, nor does it create any binding obligation on Careerimp to sell its assets to us. During the term of the letter of intent, Careerimp agrees not to sell its assets or business to any other party. Further, we have employed certain employees or former employees of Careerimp, including Ayan Kishore, our Executive Vice President—Operations and Technology, to integrate Careerimp’s technology platforms into our technology platform and implement, maintain and operate such technology platforms. During the term of the letter of intent, Careerimp agreed to grant us a royalty-free license to utilize its technology platforms. We or Careerimp may terminate the letter of intent upon written notice to the other if the parties have not entered into a definitive agreement for the sale and purchase of Careerimp’s assets on or before December 31, 2012; provided, however, that in such event Careerimp agrees to extend the license to Careerimp’s technology platforms for three more years for a fee of $5,000 per year. Ayan Kishore, our Executive Vice President - Operations and Technology, is an equity holder of Careerimp, Inc
Agreements with 5% Stockholders Other than as disclosed in the section above entitled “Equity Issuances to Directors, Executive Officers and 5% Stockholders”and“Agreements “Agreements with Directors and Executive Officers” there are no agreements between or among the company and any holder of more than 5% of our capital stock.
Director Independence
Our board of directors has reviewed the materiality of any relationship that each of our directors has with us, either directly or indirectly. Based on this review, our board has determined that Messrs. Marovitz, Pemberton and Feierstein and Ms. Sáenz will be “independent directors” as defined by Rule 5605(a)(2) of the Marketplace Rules of NASDAQ. We do not have any oral or written agreement with any company including, Monster Worldwide and Apollo Group, for representatives from any company to serve on our board of directors.
FEES PAID TO INDEPENDENT AUDITORS The audit committee retained Marcum, LLP as independent registered public accountants to audit the company’sCompany’s consolidated financial statements for the fiscal yearyears ended December 31, 2011,2013 and for the fiscal year ending December 31, 2012. The following table summarizes fees for professional services rendered to the companyCompany by Marcum, LLP for the fiscal years ended December 31, 20122013 and 2011,2012, respectively. | Fees: | | 2012 | | | 2011 | | | 2013 | | 2012 | | | Audit Fees | | $ | 97,000 | | | $ | --- | | | $ | 115,000 | | | $ | 97,000 | | | Audit-Related Fees | | | 61,500 | | | | --- | | | | 144,450 | | | | 61,500 | | | Tax Fees | | | --- | | | | --- | | | | --- | | | | --- | | | All Other Fees | | | | | | | --- | | | | Total | | $ | 158 ,500 | | | $ | --- | | | $ | 259,450 | | | $ | 158,500 | |
Audit Fees. For the fiscal years ended December 31, 20122013 and 2011,2012, the “Audit Fees” reported above were billed by Marcum, LLP for professional services rendered for the audit of the company’s annual financial statements, reviews of the company’s quarterly financial statements, and for services normally provided by the independent auditors in connection with statutory and regulatory filings and engagements. Audit-Related Fees. Audit related fees consistfor the fiscal year ended December 31, 2013 and 2012 relate to the review and consent of Marcum, LLP for our Registration Statements on Form S-1. Tax Fees. The Companycompany did not pay any tax related fees to Marcum, LLP in 20112013 or 2012. All Other Fees.
The Company did not pay any other fees to Marcum, LLP in 2011 or 2012.
Pre-Approval Policy and Independence
The audit committee has a policy requiring the pre-approval of all audit and permissible non-audit services provided by the company’s independent auditors. Under the policy, the audit committee is to specifically pre-approve any recurring audit and audit-related services to be provided during the following fiscal year. The audit committee also may generally pre-approve, up to a specified maximum amount, any nonrecurring audit and audit-related services for the following fiscal year. All pre-approved matters must be detailed as to the particular service or category of services to be provided, whether recurring or non-recurring, and reported to the audit committee at its next scheduled meeting. Permissible non-audit services are to be pre-approved on a case-by-case basis. The audit committee may delegate its pre-approval authority to any of its members, provided that such member reports all pre-approval decisions to the audit committee at its next scheduled meeting. The Company’scompany’s independent auditors and members of management are required to report periodically to the audit committee the extent of all services provided in accordance with the pre-approval policy, including the amount of fees attributable to such services. In accordance with Section 10A of the Securities Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002, the company is required to disclose the approval by the audit committee of the board of non-audit services performed by the company’s independent auditors. Non-audit services are services other than those provided in connection with an audit review of the financial statements. During the period covered by this filing, all audit-related fees, tax fees and all other fees, and the services rendered in connection with those fees, as reported in the table shown above, were approved by the company’s audit committee. The audit committee considered the fact that Marcum, LLP has not provided non-audit services to us, which the committee determined was compatible with maintaining auditor independence. PART IV
The following documents are filed as part of this report:
1. Our audited consolidated financial statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012 and 2011
Consolidated Statements of Member’s Equity for the years ended December 31 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
NotesSee Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
| 2. | Financial Statement Schedules are omitted because they are not applicable or because the required information is given in the consolidated financial statements and notes thereto. |
See the Exhibit Index included as the last part of this report (following the signature page), which is incorporated herein by reference.
| | Page | | F-2 | | 2012 | F-3 | | 2012 | F-4 | | 2012 | F-5 | | 2012 | F-6 | | F-7 |
To the Board of Directors and Stockholders of Professional Diversity Network, Inc. We have audited the accompanying balance sheets of Professional Diversity Network, Inc., (the “Company”) as of December 31, 20122013 and 2011,2012, and the related statements of comprehensive (loss) income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Professional Diversity Network, Inc., as of December 31, 20122013 and 2011,2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The Company completed an initial public offering (“IPO”) of its common stock on March 8, 2013. The Company concurrently converted its legal form of ownership into that of a c corporation from a limited liability company upon the completion of its IPO. The accompanying financial statements give retroactive effect to the recapitalization of the Company for all periods presented. /s/ Marcum, LLP
Marcum, LLP New York,. NY April 1, 2013
March 27, 2014
Professional Diversity Network, Inc. |
| | | December 31, | | | | | 2013 | | | 2012 | | | | | | | | | | | Current Assets: | | | | | | | | Cash and cash equivalents | | $ | 18,736,495 | | | $ | 868,294 | | | Accounts receivable | | | 1,218,112 | | | | 1,923,048 | | | Marketable securities, at fair value | | | - | | | | 251,349 | | | Prepaid expense | | | 99,094 | | | | 63,982 | | | Total current assets | | | 20,053,701 | | | | 3,106,673 | | | | | | | | | | | | | Property and equipment, net | | | 54,781 | | | | 34,863 | | | Security deposits | | | 12,644 | | | | 23,711 | | | Deferred costs - initial public offering | | | - | | | | 832,240 | | | Capitalized technology, net | | | 692,511 | | | | 402,890 | | | Goodwill | | | 735,328 | | | | 635,671 | | | Trade name | | | 90,400 | | | | 90,400 | | | Deferred tax asset | | | 380,832 | | | | - | | | Total assets | | $ | 22,020,197 | | | $ | 5,126,448 | | | | | | | | | | | | | Current Liabilities: | | | | | | | | | | Accounts payable | | $ | 222,961 | | | $ | 265,013 | | | Accrued expenses | | | 188,462 | | | | 85,327 | | | Deferred revenue | | | 1,024,420 | | | | 500,000 | | | Warrant liability | | | 85,221 | | | | - | | | Total current liabilities | | | 1,521,064 | | | | 850,340 | | | | | | | | | | | | Notes payable - members, net of original issue discount of $0 and $138,256 as of December 31, 2013 and 2012, respectively | | | - | | | | 1,487,900 | | | Total liabilities | | | 1,521,064 | | | | 2,338,240 | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | | Stockholder's Equity | | | | | | | | | Common stock, $0.01 par value, 25,000,000 shares authorized, 6,318,227 and 3,487,847 shares issued and 6,316,027 and 3,487,847 outstanding as of December 31, 2013 and 2012, respectively | | | 63,182 | | | | 34,878 | | | Additional paid in capital | | | 21,883,593 | | | | 2,751,827 | | | Accumulated deficit | | | (1,436,387 | ) | | | - | | Treasury stock, at cost; 2,200 and 0 shares at December 31, 2013 and 2012, respectively | | | (11,255 | ) | | | | | | Accumulated other comprehensive income | | | - | | | | 1,503 | | | Total stockholders' equity | | | 20,499,133 | | | | 2,788,208 | | | | | | | | | | | | | Total liabilities and stockholders' equity | | $ | 22,020,197 | | | $ | 5,126,448 | |
| | | December 31, | | | | | 2012 | | | 2011 | | | | | | | | | | | Current Assets: | | | | | | | | Cash and cash equivalents | | $ | 868,294 | | | $ | 2,254,431 | | | Accounts receivable | | | 1,923,048 | | | | 1,604,470 | | | Marketable securities, at fair value | | | 251,349 | | | | 375,156 | | | Prepaid expense | | | 63,982 | | | | - | | | Total Current Assets | | | 3,106,673 | | | | 4,234,057 | | | | | | | | | | | | | Property and equipment, net | | | 34,863 | | | | 25,789 | | | Security deposits | | | 23,711 | | | | 21,568 | | | Deferred offering costs - initial public offering | | | 832,240 | | | | 26,900 | | | Developed technology, net | | | 402,890 | | | | 146,146 | | | Goodwill | | | 635,671 | | | | 635,671 | | | Trade name | | | 90,400 | | | | 90,400 | | | Total assets | | $ | 5,126,448 | | | $ | 5,180,531 | | | | | | | | | | | | | | | | | | | | | | | Current Liabilities: | | | | | | | | | | Accounts payable | | $ | 265,013 | | | $ | - | | | Accrued Expenses | | | 85,327 | | | | 254,674 | | | Deferred revenue | | | 500,000 | | | | 150,000 | | | Total current liabilities | | | 805,340 | | | | 404,674 | | | | | | | | | | | | Notes payable - net of original issue discount of $138,256 and $211,225, as of December 31, 2012 and December 31, 2011, respectively | | | 1,487,900 | | | | 1,491,488 | | | Total liabilities | | | 2,388,240 | | | | 1,896,162 | | | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | | Stockholders’ Equity | | | | | | | | | Common stock $0.01 par value, 25,000,000 shares authorized, 3,487,847 shares issued and outstanding, as of December 31, 2012 and 2011 | | | 34,878 | | | | 34,878 | | | Additional paid-in capital | | | 2,751,827 | | | | 3,280,136 | | | Accumulated other comprehensive income/(loss) | | | 1,503 | | | | (30,645 | ) | | Total stockholders’ equity | | | 2,788,208 | | | | 3,284,369 | | | Total liabilities and stockholders’ equity | | $ | 5,126,448 | | | $ | 5,180,531 | |
The accompanying notes are an integral part of these financial statements.
Professional Diversity Network, Inc.
|
| | | For the Years Ended December 31, | | | | | 2012 | | | 2011 | | | Revenues | | | | | | | | Recruitment services | | $ | 4,000,000 | | | $ | 4,000,000 | | Consumer advertising and marketing solutions revenue | | | 2,154,111 | | | | 1,569,342 | | | Total revenues | | | 6,154,111 | | | | 5,569,342 | | | | | | | | | | | | | Costs and expenses: | | | | | | | | | | Cost of services | | | 805,447 | | | | 817,254 | | | Sales and marketing | | | 1,482,556 | | | | 1,021,839 | | | General and administrative | | | 1,222,158 | | | | 723,093 | | | Depreciation and amortization | | | 112,943 | | | | 108,592 | | | Total costs and expenses | | | 3,623,104 | | | | 2,670,778 | | | Income from operations | | | 2,531,007 | | | | 2,898,564 | | | | | | | | | | | | | | | | | | | | | | | Other income (expense) | | | | | | | | | | Interest expense | | | (172,411 | ) | | | (170,452 | ) | | Interest and other income | | | 13,095 | | | | 17,540 | | | Other expense, net | | | (159,316 | ) | | | (152,912 | ) | | | | | | | | | | | | Net Income | | $ | 2,371,691 | | | $ | 2,745,652 | | | | | | | | | | | | | Other comprehensive income: | | | | | | | | | | Net Income | | $ | 2,371,691 | | | $ | 2,745,652 | | | Unrealized gains (losses) on marketable securities | | | 29,699 | | | | (40,128 | ) | Reclassification adjustments for gains on marketable securities included in net income | | | 2,449 | | | | 10,987 | | | Comprehensive income | | $ | 2,403,839 | | | $ | 2,716,511 | | Unaudited Pro Forma Income Tax Computation for Assumed Conversion to a Corporation: | | | | | | | | | | Historical Net Income | | $ | 2,371,691 | | | $ | 2,745,652 | | | Pro-forma Income Tax Provision | | | 979,708 | | | | 1,127,491 | | | Pro forma Net Income | | $ | 1,391,983 | | | $ | 1,618,161 | | | Unaudited Pro Forma Income Net Income per Common Share: | | | 0.38 | | | | 0.44 | | | Basic and diluted | | | | | | | | | Shares used in computing pro forma net income per common share: | | | | | | | | | | Basic and diluted | | | 3,693,227 | | | | 3,693,227 | |
The accompanying notes are an integral part of these financial statements
Professional Diversity Network, Inc. |
| | | Years Ended December 31, | | | | | 2013 | | | 2012 | | | | | | | | | | | Revenues | | | | | | | | Recruitment services | | $ | 2,468,382 | | | $ | 4,000,000 | | Consumer advertising and consumer marketing solutions revenue | | | 1,566,262 | | | | 2,154,111 | | | Total revenues | | | 4,034,644 | | | | 6,154,111 | | | | | | | | | | | | | Costs and expenses: | | | | | | | | | | Cost of services | | | 1,152,544 | | | | 805,447 | | | Sales and marketing | | | 2,346,847 | | | | 1,482,556 | | | General and administrative | | | 2,268,118 | | | | 1,222,158 | | | Depreciation and amortization | | | 281,648 | | | | 112,943 | | | Gain on sale of property and equipment | | | (4,158 | ) | | | - | | | Total costs and expenses | | | 6,044,999 | | | | 3,623,104 | | | | | | | | | | | | | (Loss) income from operations | | | (2,010,355 | ) | | | 2,531,007 | | | | | | | | | | | | | Other income (expense) | | | | | | | | | | Interest expense | | | (155,136 | ) | | | (172,411 | ) | | Interest and other income | | | 25,765 | | | | 13,095 | | | Loss on sale of marketable securities | | | (7,640 | ) | | | - | | | Other expense, net | | | (137,011 | ) | | | (159,316 | ) | | | | | | | | | | | | Change in fair value of warrant liability | | | 330,147 | | | | - | | | | | | | | | | | | | (Loss) income before income taxes | | | (1,817,219 | ) | | | 2,371,691 | | | Income tax benefit | | | (380,832 | ) | | | - | | | Net (loss) income | | $ | (1,436,387 | ) | | $ | 2,371,691 | | | | | | | | | | | | | Other comprehensive (loss) income: | | | | | | | | | | Net (loss) income | | $ | (1,436,387 | ) | | $ | 2,371,691 | | | Unrealized (losses) gains on marketable securities | | | - | | | | 29,699 | | Reclassification adjustments for losses on marketable securities included in net income | | | 7,640 | | | | 2,449 | | | Comprehensive (loss) income | | $ | (1,428,747 | ) | | $ | 2,403,839 | | | | | | | | | | | | | Net (loss) income per common share, basic and diluted | | $ | (0.23 | ) | | $ | 0.65 | | | | | | | | | | | | Shares used in computing pro forma net (loss) income per common share: | | | | | | | | | | Basic and diluted | | | 6,318,085 | | | | 3,693,227 | | | | | | | | | | | | Pro-forma computation related to conversion to a C corporation upon completion of initial public offering: | | | | | | | | | | Historical pre-tax net (loss) income before taxes | | $ | (1,817,219 | ) | | $ | 2,371,691 | | | Pro-forma tax (benefit) provision | | | (740,939 | ) | | | 979,708 | | | Pro-forma net (loss) income | | $ | (1,076,280 | ) | | $ | 1,391,983 | | | Pro-forma (loss) earnings per share - basic and diluted | | | | | | | | | | Unaudited pro-forma (loss) earnings per share | | $ | (0.17 | ) | | $ | 0.38 | | | Weighted average number of shares outstanding | | | 6,318,085 | | | | 3,693,227 | |
| | | Common Stock | | | | | | | | | | | | | | Shares | | | Par Value | | | Additional Paid In
Capital | | | Accumulated other comprehensive income (loss) | | | Total Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | January 1, 2011 | | | 3,487,847 | | | $ | 34,878 | | | $ | 2,087,776 | | | $ | (1,504 | ) | | $ | 2,121,150 | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding loss on
marketable securities | | | | | | | | | | | | | | | (40,128 | ) | | | (40,128 | ) | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustments for
gains on marketable securities
included in net income | | | | | | | | | | | | | | | 10,987 | | | | 10,987 | | | | | | | | | | | | | | | | | | | | | | | | | Distributions to members | | | | | | | | | | | (1,553,292 | ) | | | | | | | (1,553,292 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 2,745,652 | | | | | | | | 2,745,652 | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2011 | | | 3,487,847 | | | | 34,878 | | | | 3,280,136 | | | | (30,645 | ) | | | 3,284,369 | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding gain on
marketable securities | | | | | | | | | | | | | | | 29,699 | | | | 29,699 | | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustments for
gains on marketable securities
included in net income | | | | | | | | | | | | | | | 2,449 | | | | 2,449 | | | | | | | | | | | | | | | | | | | | | | | | | Distributions to members | | | | | | | | | | | (2,900,000 | ) | | | | | | | (2,900,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 2,371,691 | | | | | | | | 2,371,691 | | | Balance at December 31, 2012 | | | 3,487,847 | | | $ | 34,878 | | | $ | 2,751,827 | | | $ | 1,503 | | | $ | 2,788,208 | |
The accompanying notes are an integral part of these financial statements.
Professional Diversity Network, Inc. |
| | | Common Stock | | | Additional
Paid In | | | Accumulated | | | Treasury Stock | | | Accumulated
Other
Comprehensive | | | Total
Stockholders' | | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Shares | | | Amount | | | Income (Loss) | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2011 | | | 3,487,847 | | | $ | 34,878 | | | $ | 3,280,136 | | | $ | - | | | | - | | | $ | - | | | $ | (30,645 | ) | | $ | 3,284,369 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustments for gains on marketable securities included in net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,449 | | | | 2,449 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding gain on marketable securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 29,699 | | | | 29,699 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Distributions to members | | | - | | | | - | | | | (2,900,000 | ) | | | - | | | | - | | | | - | | | | - | | | | (2,900,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | 2,371,691 | | | | - | | | | - | | | | - | | | | - | | | | 2,371,691 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2012 | | | 3,487,847 | | | | 34,878 | | | | 2,751,827 | | | | - | | | | - | | | | - | | | | 1,503 | | | | 2,788,208 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Conversion of debt to equity | | | 205,380 | | | | 2,054 | | | | 1,640,982 | | | | - | | | | - | | | | - | | | | - | | | | 1,643,036 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net proceeds from initial public offering | | | 2,625,000 | | | | 26,250 | | | | 17,690,784 | | | | - | | | | - | | | | - | | | | - | | | | 17,717,034 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustments for losses on marketable securities included in net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7,640 | | | | 7,640 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized holding loss on marketable securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9,143 | ) | | | (9,143 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase of common stock | | | - | | | | - | | | | - | | | | - | | | | 2,200 | | | | (11,255 | ) | | | - | | | | (11,255 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Distribution to members | | | - | | | | - | | | | (200,000 | ) | | | - | | | | - | | | | - | | | | - | | | | (200,000 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss | | | - | | | | - | | | | - | | | | (1,436,387 | ) | | | - | | | | - | | | | - | | | | (1,436,387 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2013 | | | 6,318,227 | | | $ | 63,182 | | | $ | 21,883,593 | | | $ | (1,436,387 | ) | | | 2,200 | | | $ | (11,255 | ) | | $ | - | | | $ | 20,499,133 | |
| | | For the Years Ended December 31, | | | | | 2012 | | | 2011 | | | Cash flows from operating activities: | | | | | | | | Net Income | | $ | 2,371,691 | | | $ | 2,745,652 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | Depreciation and amortization expense | | | 112,943 | | | | 108,592 | | | Realized loss on sale of investments, net | | | 5,530 | | | | 32,588 | | | Amortization of discount/premium on investments | | | (370 | ) | | | (9,525 | ) | | Provision for doubtful accounts | | | 49,462 | | | | - | | | Interest added to notes payable | | | 102,026 | | | | 104,193 | | | Accretion added to notes payable | | | 70,385 | | | | 66,259 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | (18,041 | ) | | | (328,001 | ) | | Accounts payable and accrued expenses | | | (11,944 | ) | | | 126,281 | | | Prepaid expenses | | | (63,982 | ) | | | 5,882 | | | Net cash provided by operating activities | | | 2,617,700 | | | | 2,851,921 | | | Cash flows from investing activities: | | | | | | | | | | Proceeds from sales of marketable securities | | | 150,796 | | | | 575,000 | | | Purchases of marketable securities | | | - | | | | (249,845 | ) | | Costs incurred to develop technology | | | (358,247 | ) | | | (92,658 | ) | | Release of restricted cash | | | - | | | | 45,288 | | | Purchases of property and equipment | | | (20,513 | ) | | | (15,724 | ) | | Security deposits | | | (2,144 | ) | | | - | | | Net cash provided by investing activities | | | (230,108 | ) | | | 262,061 | | | Cash flows from financing activities: | | | | | | | | | | Distributions to members | | | (2,900,000 | ) | | | (1,553,292 | ) | | Repayments of notes payable | | | (176,000 | ) | | | (192,000 | ) | | Deferred Initial public offering costs | | | (697,730 | ) | | | (26,900 | ) | | Net cash used in financing activities | | | (3,773,730 | ) | | | (1,772,192 | ) | | Net (decrease) increase in cash and cash equivalents | | | (1,386,136 | ) | | | 1,341,790 | | | Cash and cash equivalents, beginning of year | | | 2,254,431 | | | | 912,641 | | | Cash and cash equivalents, end of period | | $ | 868,295 | | | $ | 2,254,431 | | | Supplemental disclosures of other cash flow information: | | | | | | | | | | Cash paid for income taxes | | $ | - | | | $ | - | | | Cash paid for interest | | $ | - | | | $ | - | | | Non-cash disclosures: | | | | | | | | | | Deferred IPO costs in accounts payable | | $ | 107,610 | | | $ | - | | | Deferred revenue in accounts receivable | | $ | 500,000 | | | $ | 150,000 | |
The accompanying notes are an integral part of these financial statements.
Professional Diversity Network, Inc. STATEMENTS OF CASH FLOWS |
| | | Years Ended December 31, | | | | | 2013 | | | 2012 | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | Net (loss) income | | $ | (1,436,387 | ) | | $ | 2,371,691 | | Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | | | | | | | Depreciation and amortization expense | | | 281,648 | | | | 112,943 | | | Deferred tax benefit | | | (380,832 | ) | | | - | | | Change in fair value of warrant liability | | | (330,147 | ) | | | - | | | Loss on sale of investments, net | | | 7,640 | | | | 5,530 | | | Amortization of discount/premium on investments | | | - | | | | (370 | ) | | Provision for bad debts | | | - | | | | 49,462 | | | Gain on sale of property and equipment | | | (4,158 | ) | | | - | | | Interest added to notes payable | | | 16,881 | | | | 102,026 | | | Accretion of interest on notes payable | | | 138,255 | | | | 70,385 | | | Changes in operating assets and liabilities: | | | | | | | | | | Accounts receivable | | | 756,122 | | | | (18,041 | ) | | Accounts payable | | | (46,294 | ) | | | 157,403 | | | Accrued expenses | | | 85,812 | | | | (169,346 | ) | | Prepaid expenses | | | (28,445 | ) | | | (63,982 | ) | | Deferred income | | | 524,420 | | | | - | | | Net cash (used in) provided by operating activities | | | (415,485 | ) | | | 2,617,701 | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | Proceeds from sale of marketable securities | | | 242,206 | | | | 150,796 | | | Cash paid to purchase technology | | | (200,000 | ) | | | - | | | Cash paid for acquisition, net of cash acquired | | | (135,945 | ) | | | - | | | Costs incurred to develop technology | | | (354,808 | ) | | | (358,247 | ) | | Sale of property and equipment | | | 6,203 | | | | - | | | Purchases of property and equipment | | | (38,424 | ) | | | (20,513 | ) | | Security deposits | | | 11,067 | | | | (2,144 | ) | | Net cash used in investing activities | | | (469,701 | ) | | | (230,108 | ) | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | Distributions to members | | | (200,000 | ) | | | (2,900,000 | ) | | Proceeds from IPO, net of offering costs | | | 19,474,565 | | | | - | | | Repayments of notes payable | | | - | | | | (176,000 | ) | | Deferred IPO costs | | | (509,923 | ) | | | (697,730 | ) | | Repurchase of common stock | | | (11,255 | ) | | | - | | | Net cash provided by (used in) financing activities | | | 18,753,387 | | | | (3,773,730 | ) | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 17,868,201 | | | | (1,386,137 | ) | | Cash and cash equivalents, beginning of year | | | 868,294 | | | | 2,254,431 | | | Cash and cash equivalents, end of year | | $ | 18,736,495 | | | $ | 868,294 | | | | | | | | | | | | | Supplemental disclosures of other cash flow information: | | | | | | | | | | Cash paid for income taxes | | $ | - | | | $ | - | | | Cash paid for interest | | $ | - | | | $ | - | | | Non-cash disclosures: | | | | | | | | | | IPO costs in accounts payable | | $ | - | | | $ | 107,610 | | | Deferred revenue in accounts receivable | | $ | - | | | $ | 500,000 | | | Conversion of notes payable to equity | | $ | 1,643,036 | | | $ | - | | | Reduction of additional paid-in capital for deferred IPO costs | | $ | 1,342,163 | | | $ | - | | | Fair value of warrant liabilities | | $ | 415,368 | | | $ | - | |
The accompanying notes are an integral part of these financial statements.
Professional Diversity Network, Inc. |
Notes to Financial Statements 1. Description of Business Professional Diversity Network, Inc. d/b/a Professional(the “Company,” “Professional Diversity Network, (the “Company”” “we,” “our” and “us”) is a corporation organized under the laws of Delaware, originally formed as IH Acquisition, LLC under the laws of the State of Illinois on October 3, 2003. The Company commenced business following its acquisition of the assets, trade name, uniform resource locator (URL) and certain developed technology of iHispano.com, Inc. Aggregate consideration in this transaction amounted to $887,000, including the assumption of a note payable to one of the Company’s founding members that had an acquisition date fair value of $692,614 (Note 8). The Company recorded an aggregate of $635,671 of goodwill with respect to this transaction (Note 3). In 2004, the Company changed its name to iHispano.com, LLC and in 2012 the Company changed its name to Professional Diversity Network, LLC and on March 8, 2013 completed a recapitalization as part of an Initial Public Offering. The Company operates an online professional networking communitycommunities with career resources specifically tailored to the needs of seven different diverse cultural groups including: Women, Hispanic Americans, African Americans, Asian Americans, differently-abled, veterans, lesbians, gay, bisexualHispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, Lesbians, Gay, Bisexual and transgenderTransgender (LGBT), and students,Students and graduatesGraduates seeking to transition from education to career. The network’snetworks’ purposes, among others, are to assist its members in their efforts to connect with like-minded individuals, identify career opportunities within the network and connect members with prospective employers. The Company’s technology platforms areplatform is integral to the operation of its business. As of December 2011, the Company launched professional networking sites that serve diverse communities - including women (WomensCareerChannel.com), Asians (ACareers.net), lesbian, gay, bisexual and transgender (OutProNet.com), enlisted and veteran military personnel (Military2Career.com) and differently-abled (ProAble.net) professionals. These additional professional networking sites are in the very early stages of development.
2. Liquidity, Financial Condition and Management’s Plans The Company has historically fundedfunds its operations principally from cash flows generatedon hand and accounts receivable collected. The Company completed an initial public offering (“IPO”) of its equity securities (Note 12) on March 8, 2013 and received $19,474,565 in proceeds, net of offering costs. The Company incurred approximately $1.3 million of IPO expenses through December 31, 2013 in its operating activities. efforts to complete the IPO. Expenses incurred in connection with the IPO were accounted for as a reduction of the offering proceeds. We havehad been dependent on Monster Worldwide, Inc. (“Monster Worldwide” or “Monster”) for all of our recruitment revenue pursuant to an alliance agreement that expired on December 31, 2012. Because our agreement with Monster Worldwide was exclusiveAs more fully described in so far as it prohibited us from selling our recruitment services to anyone other than Monster Worldwide, the growth the Company had been dependant on the growth of Monster Worldwide’s diversity recruitment business. We believe that by expanding on the sources of our recruitment revenue, which we intend to do by entering into non-exclusive agreements with new strategic business partners or agreements that provide for limited exclusivity, such as the oneNote 13 below, we entered into a diversity recruitment partnership agreement with LinkedIn Corporation in(“LinkedIn”) on November 12, 2012, which became effective on January 1, 2013 and by increasingterminated on March 29, 2014. Pursuant to the agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment and advertising on our sales forcewebsites. LinkedIn notified the Company of its decision to commence direct salesterminate its agreement with the Company effective March 29, 2014, and as a result, LinkedIn will no longer be a reseller of ourthe Company’s diversity recruitment products and services, we have an opportunity to provide better services to our customers and achieve revenues and margins that are greater than those achieved duringservices. As part of the termtermination notice, LinkedIn waived their right under the termination conditions of our agreement with Monster Worldwide.the contract preventing the Company management anticipates thatfrom soliciting the business will continue to provide sufficient cash from operations as it relates to1,000 accounts on the ongoing conductLinkedIn protected list for a period of its business.one year.
The non-renewal of our agreement with Monster Worldwide will havehad a material impact on revenue and operating cash flow commencing in 2013. Under our agreement with Monster Worldwide, we have agreed to provide limited support and access to data to permit Monster Worldwide to continue to meet certain obligations to its customers induring the year ended December 31, 2013. With respect to job postings that Monster sold prior to the expiration of our agreement on December 31, 2012, we are permittingmutually agreed with Monster to maintain such postings on our websites until the earlier of (a) the date that Monster Worldwide’s obligation to maintain such posting expires or (b) December 31,June 30, 2013. In addition, we willagreed to continue to provide Monster with access to ourcertain data until December 31, 2013. We have incurred and expect to continue to incur only de minimis additional labor and de minimis additional costs, and will not receive any additional payments from Monster Worldwide subsequent to the expiration of our agreement. Additionally, as of January 1, 2013, we will be permittedhave begun to sell our products and services directly to employers, except for those identified as restricted by LinkedIn.
The termination of our agreement with LinkedIn on March 29, 2014 will have a material impact on revenue and operating cash flow during the year ended December 31, 2014. In response to this and to help mitigate the impact of the loss of revenue, the Company is adjusting its business plan and focusing on its key areas of strength, including, but not limited to: | · | Our ability to sell directly and earn 100% of each sale; |
| · | Eliminate key account restrictions imposed on us during the effective time of the LinkedIn agreement; |
| · | Benefit from new enhanced OFCCP regulations enhancing demand for our products and services; |
| · | Benefit from the strength of our business foundation and management team; and |
| · | Pursue potential acquisition opportunities in the recruitment industry. |
The Company completed an initial public offering (“IPO”) of its equity securities (Note 12). The Company incurred approximately $832,000 of offering expences through December 31, 2012 in its efforts to complete the IPO. The Company incurred approximately $400,000 of additional expenses subsequent to December 31, 2012 in connection with the IPO that were accounted for as a reduction of the offering proceeds.
As of December 31, 2012, there have been no immediate or material changes to the core operations of our business; however,2013, we have incurred various expenses associated with our efforts to become a public company. These expenses include increases in professional fees and the hiring of additional administrative staff that are customarily associated with establishing a public company compliance structure. We have also made investments in technologies that we need to support the evolution of our business from a fixed fee recruitment service with an exclusive source of revenue to a platform that uses social media to promote the integration of diverse groups into the workforce. We believe that the planned evolution of our business, we are launching in 2013, will enable to diversify our revenue sources and customer base over time. We currently intend to use approximately 15% of the net proceeds of the offering forbusiness. These costs include public company compliance expenses, sales and marketing (which includes approximately 5% for additional payroll for additional employeesexpenses to access recruiting customers directly and investments in our direct sales team), 25% for product development, 40% for strategic acquisitions and will reserve the remaining 20% of the net proceeds for general working capital. Although from timerecruiting platform to time, we may engage in discussions with potential acquisition targets, we currently have no agreements or have made any commitments to pursue material acquisitions, invest in other companies or enter into any form of business arrangements with possible strategic partners. Management retains broad discretion in the allocation of the net proceeds of the offering. These expected uses of net proceeds from the offering representbetter serve our current intentions, based upon our present plans and business conditions; however, our plans and business conditions are subject to change. It is at least reasonably possible that changes in circumstances could cause us to reallocate the funds. The amount and timing of our actual expenditures depend on numerous factors, including fluctuations in corporate hiring, economic conditions and the availability of opportunities. Accordingly, we may change the allocation of our use of these proceeds as circumstances evolve.diverse job seekers.
Professional Diversity Network, Inc. Notes to Financial Statements 3. Summary of Significant Accounting Policies Basis of Presentation -The accompanying financial statements for the years ended December 31, 20122013 and 20112012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accounting Estimates -The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amount of revenues and expenses during the reporting period. Significant areas that required management to make estimates and assumption that affect the amounts and disclosures in the financial statements include revenue recognition, valuation of goodwill, trade name and URL, costs capitalized to develop technology and the Company’s estimated useful lives of assets. Actual results could differ from those estimates. Revenue Recognition -The Company applies the revenue recognition principles set forth in Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) 104 “Revenue Recognition” with respect to all of its revenue. Accordingly, the Company records revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery of its services has occurred, (iii) fees for services are fixed or determinable, and (iv) collectability of the sale is reasonable assured. The Company’s principal sources of revenue include certain minimum fixed fees that it earns from two distinct customers (Note 11). One contract is an annual agreement that is billed pro rata on a monthly basis. The Company uses proprietary technology to monitor the volume of members that actually apply for employment using these resources. The second contract is billed based upon fixed fees with certain minimum monthly website visits. The Company also earns advertising revenues from providing media space on its website directly to advertisers and consumer marketers. Consumer advertising clients (or their designated agents) contact us to purchase media (advertisements for their advertising campaign, goods or services) to be placed on one of our seven websites. The Company invoices the advertising client or its agent monthly for the media placed. Consumer advertising that the Company sells may be placed on one of its websites and on the website of professional organizations that it is strategic partners with. Advertisers pay the Company directly for the ads that it sells, as the Company is the primary obligor in the transaction. The Company’s strategic partners invoice the Company monthly for their share of the revenue for the advertisements that run on its partner websites and the Company records these amounts as an expense to its revenue sharing account within Cost of Services under Costs and Expenses in its Statementstatements of Comprehensive Income.comprehensive income. Consumer advertising may be sold by the professional organizations that the Company has strategic partnerships with, and placed on one of its websites. In this case, the Company would invoice such strategic partner directly for the advertising space and on a case by case basis, rather than a monthly basis. Advertising revenue is recognized after the advertisements have run and results have been approved by an outside service. Advance payments received from customers for advertising services are recorded as deferred revenue. 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 recorded on the websites as specified in the customer agreement.
Events revenue is recognized in the period in which the event occurs. Sales for each event are made prior to the event date. Revenue for that event is deferred until the event takes place upon which revenue is recognized for that event.
The Company has also developed an internal sales and marketing force that sells products and services directly to employers that are not serviced by its fixed fee customers. Career and job opportunity boards are made accessible to registered members of the Company’s online community. The Company uses proprietary technology to monitor the volume of the members that actually apply for employment using these resources. Revenue from sales of its hiring solutions are recognized by the Company over the term of the agreement, which is typically twelve months. The primary product offered to these employers is for a negotiated number of spots to post their recruitment ads, known as job slots. These job slots can be purchased as a stand-alone product or combined with other services the company offers, meant to enhance the performance of the recruitment ad. Examples of products that may be included in a bundle are: email blasts, ad network media, newsletters, diversity talent recruitment groups, and a product to assist the customer with their efforts to comply with Federal requirements of companies that are contractors or subcontractors of the Federal government. Since the additional services or products offered by the Company are bundled with, and run contemporaneously with, the job slots, the Company does not separate such services and/or products for revenue recognition purposes. Advertising and Marketing Expenses -Advertising and Marketingmarketing expenses are expensed as incurred. During the years ended December 31, 20122013 and 20112012 the Company incurred advertising and marketing expenses of approximately $750,000$813,000 and $398,000,$780,000, respectively. 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.
Professional Diversity Network, Inc. Notes to Financial Statements Accounts Receivable -Accounts receivable represent receivables generated from licensing 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. The Company has had a low occurrence of credit losses through December 31, 2012 and therefore deemed it unnecessary to establish an allowance for doubtful accounts.accounts as of December 31, 2013 and 2012. Marketable Securities -Marketable securities consistconsisted of investments in exchange traded shares designed to track the Wells Fargo Hybrid and Preferred shares index (WHPSF Financial Index). The Company accounts for its marketable securities in accordance with the provisions of ASCAccounting Standards Codification (“ASC”) 320-10. The Company classifies these securities as available for sale, and as such, they are reported at fair value. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income and excluded from net income, except for unrealized losses determined to be other-than-temporary, which are recorded as interest and other income, net. The Company had accumulated unrealized gains/(losses) of $1,503$0 and $(30,645)$1,503 relating to investments in marketable securities for the years ended December 31, 2013 and 2012, and 2011, respectively. Property and Equipment -Property and equipment is stated at cost, including any cost to place the property into service, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which currently range from 3 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The cost of any assets sold or retired and related accumulated depreciation are removed from the accounts at the time of disposition, and any resulting profit or loss is reflected in income or expense for the period. 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.
With respect to accounts receivables, concentrations of credit risk are limited to two customers in the on-line employment and distance education industries (Note 11).
Income Taxes - The Company is a limited liability company and has elected to be taxed as a partnership. As such the Company’s income or loss is required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying financial statements. The Company provided the pro-forma income tax disclosures presented in the accompanying statements of comprehensive income for the years ended December 31, 2012 and 2011 to illustrate what the Company’s net income would have been had income tax expense been provided for at an effective rate of 41.01%, 40.46%, respectively.
In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. The Company recognizes interest and penalties on any unrecognized tax benefits as a component of income tax expense. Based on an evaluation of the Company’s tax positions, management believes all positions taken would be upheld under an examination. Therefore, no provision for the effects of uncertain tax positions has been recorded for the periods ended December 31, 2012 or 2011. The Company’s federal and state tax returns are potentially open to examinations for the years 2009 through 2011.
Upon the consummation of our reorganization (from an Illinois limited liability company into a Delaware corporation) on March 5, 2013, Professional Diversity Network, Inc. will be taxed a “C” Corporation in the future.
The Company periodically evaluates whether its uncertain tax positions require recognition or disclosure in the financial statements.
Capitalized Technology Costs -In accordance with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”)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. Goodwill and Intangible Assets -The Company accounts for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”)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 evaluated for impairment annually (December 31 for the Company) and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. Pursuant to recent authoritative accounting guidance,When conducting its annual goodwill impairment assessment, the Company elects to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to performapplied the two-step goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless the Company determines that it is more likely than not that its fair value is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying value exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. Through December 31, 2012, noNo impairment of goodwill has been identified.was identified as of December 31, 2013 and 2012.
The Company allocated a portion of the purchase of iHispano.com, Inc. to trade name and uniform resource locator. These assets have an indefinite life, and thus are not being amortized. The Company has performed its annual impairment evaluation for its other intangible assets with indefinite lives and determined that these were not impaired as of December 31, 2013 and 2012. The Company amortizes the cost of other intangibles over their estimated useful lives. Amortizable intangible assets may also be tested for impairment if indications of impairment exist.
Deferred Revenue - Deferred revenue includes customer deposits received prior to performing services which are recognized as revenue when revenue recognition criteria are met.
Professional Diversity Network, Inc. Notes to Financial Statements Treasury Stock – Treasury stock is recorded at cost as a reduction of stockholders’ equity in the accompanying 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. With respect to accounts receivables, concentrations of credit risk are limited to two customers in the on-line employment and distance education industries (Note 13). Income Taxes - As a result of the Company’s completion of its IPO, the Company’s results of operations are taxed as a C Corporation. Prior to the IPO, the Company’s operations were taxed as a limited liability company, whereby the Company elected to be taxed as a partnership and the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying financial statements for periods prior to March 31, 2013. This change in tax status to a taxable entity resulted in the recognition of deferred tax assets and liabilities based on the expected tax consequences of temporary differences between the book and tax basis of the Company’s assets and liabilities as of the date of the IPO. This resulted in a net deferred tax benefit of $380,832 being recognized and included in the tax provision for the year ended December 31, 2013. The tax benefit was determined using an effective tax rate of 40.6% for the period from March 4, 2013 (the date on which the tax status changed to a C Corporation) to December 31, 2013. The unaudited pro forma computation of income tax benefit included in the statements of comprehensive (loss) income, represents the tax effects that would have been reported had the Company been subject to U.S. federal and state income taxes as a corporation for all periods presented. The company provided the pro forma income tax disclosures for the years ended December 31, 2013 and 2012 to illustrate what the company’s net (loss) income would have been had income tax expense been provided for at an effective tax rate of 40.6% and 41.0%, respectively. Pro forma taxes are based upon the statutory income tax rates and adjustments to income for estimated permanent differences occurring during each period. Actual rates and expenses could have differed had the Company actually been subject to U.S. federal and state income taxes for all periods presented. Therefore, the unaudited pro forma amounts are for informational purposes only and are intended to be indicative of the results of operations had the Company been subject to U.S. federal and state income taxes as a corporation for all periods presented. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference 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.
The Company has adopted the FASB guidance on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with other authoritative U.S. GAAP, 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. The guidance also addresses derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of the guidance did not have a significant effect on its accounting and disclosures for income taxes. Interest and penalties related to uncertain tax positions, if any, are recorded in income tax expense. Tax years that remain open for assessment for federal and state tax purposes include the year ended December 31, 2013.
Fair Value Measurementsof Financial Assets and Liabilities -Financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, which are carried at historical cost, which managementcost. Management believes that the recorded amounts approximate fair value due to the short-term nature of these instruments. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:
Professional Diversity Network, Inc. Notes to Financial Statements Level 1 — quoted prices in active markets for identical assets or liabilities Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptionsassumptions) Financial assets measured at fair value on a recurring basis are summarized below: | | | December 31, 2013 | | | Quoted prices in active
markets for
identical assets
(Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | | | Fair value of warrant obligations (Note 11) | | $ | 85,221 | | | $ | - | | | $ | - | | | $ | 85,221 | |
| | | December 31, 2012 | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | | | Marketable securities | | $ | 251,349 | | | $ | 251,349 | | | $ | - | | | $ | - | |
| | | December 31, 2012 | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | | | Marketable securities | | $ | 251,349 | | | $ | 251,349 | | | $ | - | | | $ | - | |
| | | December 31, 2011 | | | Quoted prices in active markets for identical assets (Level 1) | | | Significant other observable inputs (Level 2) | | | Significant unobservable inputs (Level 3) | | | Marketable securities | | $ | 375,156 | | | $ | 221,650 | | | $ | 153,506 | | | $ | - | |
The Company considers its investments in exchange traded shares to be Level 1,1.
Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
Level 3 Valuation Techniques:
Level 3 financial liabilities consist of warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in corporatefair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and municipal bondsrecorded as appropriate.
The Company uses the Black-Scholes option valuation model to bevalue Level 2.3 financial liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility.
A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “(Loss) gain due to change in fair value of derivative instruments” in the Company’s consolidated statements of operations.
As of December 31, 2013, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy. Deferred RevenueNet (Loss) Earnings per Share - Deferred revenue includes customer deposits received priorThe Company computes basic net (loss) earnings per share by dividing net (loss) earnings per share available to performing services which are recognizedcommon 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 revenue when revenue recognition criteria are met.applicable. The computation of basic net (loss) income per share for the years ended December 31, 2013 and 2012 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive.
Professional Diversity Network, Inc. Notes to Financial Statements | | | 2013 | | | 2012 | | | Warrants to purchase common stock | | | 131,250 | | | | --- | |
TableRecent Accounting Pronouncements - In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of ContentsAmounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this ASU supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2013-05 and ASU 2013-12. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013 and the adoption did not have an impact on the Company’s financial statements but may have an impact in future periods.
In July 2013, the FASB ASU, No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company intends to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and does not expect the adoption of this standard will have a material impact on its financial statements.
4. Acquisition
On September 20, 2013, the Company completed its acquisition of Personnel Strategies, Inc. (“PSI”) pursuant to an Asset Purchase Agreement, dated September 18, 2013, by and among the Company and PSI, pursuant to which the Company acquired certain assets and assumed certain liabilities of PSI for an aggregate purchase price of $200,000. The Company concurrently hired PSI’s former CEO and committed to pay him an additional $100,000 on each of September 20, 2014 and 2015, contingent upon the former CEO’s continued employment on each of those respective dates. Additionally, the former CEO may receive up to an additional $100,000 on each of September 20, 2014 and 2015, provided certain cash flow targets are met. The Company recorded $25,000 of this contingent liability, which is included as a component of accrued expenses in the accompanying balance sheet at December 31, 2013 and also included in general and administrative expenses in the accompanying statements of comprehensive (loss) income for the year ended December 31, 2013. The Company acquired PSI in order to expand its networking capabilities and enhance the Company’s diversity recruitment offerings by creating networking events that assist corporations in their compliance initiatives while providing diverse professionals with face-to-face time with corporate recruiters.
The acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values. The operating results for PSI are included in the financial statements from the effective date of acquisition of September 20, 2013 and did not have a material impact for the year ended December 31, 2013.
The allocation of the purchase price is summarized as follows:
| Cash consideration paid by the Company | | $ | 200,000 | | | | | | | | | Allocated to: | | | | | | Cash | | $ | 64,055 | | | Accounts receivable | | | 51,186 | | | Prepaid expenses | | | 6,667 | | | Accounts payable | | | (4,242 | ) | | Accrued expenses | | | (17,323 | ) | | Net assets acquired | | | 100,343 | | | Goodwill | | | 99,657 | | | | | $ | 200,000 | |
Professional Diversity Network, Inc. Notes to Financial Statements Goodwill arising from the acquisition mainly consists of the synergies of an ongoing business and an experienced workforce. The Company’s goodwill is deductible for tax purposes and will be amortized over a period of 15 years. Goodwill is subject to a test for impairment on an annual basis. Supplemental pro forma information has not been presented because the effect of this acquisition was not material to the Company’s financial results.
5. Marketable Securities The Company did not have any investments in marketable securities at December 31, 2013. Investments in marketable securities at December 31, 2012 are as follows:
| | | December 31, 2012 | | | | | Amortized cost | | | Gross unrealized gains | | | Gross unrealized losses | | | Estimated fair value | | | Equity | | | | | | | | | | | | | | Exchange traded fund | | $ | 249,846 | | | $ | 1,503 | | | $ | - | | | $ | 251,349 | |
6. Capitalized Technology Capitalized technology, net is as follows: | | | December 31, | | | | | 2013 | | | 2012 | | | Capitalized cost: | | | | | | | | Balance, beginning of period | | $ | 734,291 | | | $ | 376,044 | | | Additional capitalized cost | | | 354,808 | | | | 358,247 | | | Purchased technology | | | 200,000 | | | | - | | | Balance, end of period | | $ | 1,289,099 | | | $ | 734,291 | | | | | | | | | | | | | Accumulated amortization: | | | | | | | | | | Balance, beginning of period | | $ | 331,401 | | | $ | 229,897 | | | Provision for amortization | | | 265,187 | | | | 101,504 | | | Balance, end of period | | $ | 596,588 | | | $ | 331,401 | | | Net Capitalized technology | | $ | 692,511 | | | $ | 402,890 | |
Beginning the third quarter of 2012, the Company embarked on updating the technology stack of its web product platform to support emerging technologies. The Company switched over to the platform, dubbed “V2,” at the end of year 2012, though the development and improvement will continue on an ongoing basis.
On June 14, 2013, the Company completed the purchase of a proprietary software technology from Careerimp, Inc. (“Careerimp”) for $200,000. The Company concurrently hired Careerimp’s former CEO and committed to pay Careerimp an additional $200,000 contingent upon the former CEO’s continued employment through December 31, 2013. The Company recorded the $200,000 payment in general and administrative expenses in the accompanying statements of comprehensive (loss) income for the year ended December 31, 2013. Careerimp’s former CEO was responsible for assisting the Company with the technical integration of the acquired technology platform. Amortization expense of $265,187 and $101,504 for the years ended December 31, 2013 and 2012, respectively, is recorded in depreciation and amortization expense in the accompanying statement of comprehensive (loss) income.
Professional Diversity Network, Inc. Notes to Financial Statements 7. Property and Equipment Property and Equipment is as follows: | | | December 31, | | | | | 2013 | | | 2012 | | | Computer hardware | | $ | 74,462 | | | $ | 64,759 | | | Furniture and fixtures | | | 28,076 | | | | 19,884 | | | Leasehold improvements | | | 18,171 | | | | 13,876 | | | | | | 120,709 | | | | 98,519 | | | Less: Accumulated depreciation | | | 65,928 | | | | 63,656 | | | | | $ | 54,781 | | | $ | 34,863 | |
Depreciation expense for the years ended December 31, 2013 and 2012 was $16,461 and $11,439 respectively, and is recorded in depreciation and amortization expense in the accompanying statements of comprehensive (loss) income. 8. Accrued Expenses
Accrued expenses consist of the following:
| | | December 31, | | | | | 2013 | | | 2012 | | | Consulting | | $ | 60,000 | | | $ | - | | | Payroll liabilities | | | 41,930 | | | | 1,094 | | | Deferred payment from acquisition | | | 25,000 | | | | - | | | Deferred rent | | | 13,932 | | | | 6,149 | | | Sales and marketing | | | 11,250 | | | | 18,541 | | | Taxes | | | - | | | | 28,199 | | | Other | | | 36,350 | | | | 31,344 | | | | | $ | 188,462 | | | $ | 85,327 | |
9. Notes Payable As of December 31, 2013, no notes payable are outstanding. As part of our reorganization in connection with our IPO, we entered into a debt exchange agreement with the three founders of the Company, whereby three outstanding promissory notes in the principal amounts of $1,341,676, $142,000 and $37,143 plus accrued interest owed to them, respectively, were exchanged for 168,982 shares, 28,851 shares and 7,547 shares of common stock, respectively, at a price per share equal to the initial public offering price, which was $8.00 per share. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). At December 31, 2012, notes payable included the three notes described above. The interest rate on the notes was 6% per annum, with all unpaid interest and principal due on November 1, 2014. The Company assumed one of such notes payable at an acquisition date fair value of $692,614 and a face value of $1,341,676. The discount on the note was recorded at 6.055%. The remaining unamortized discount was $0 and $138,255 at December 31, 2013 and 2012, respectively. Total notes payable including accrued but unpaid interest amounted to $0 and $1,487,900 as of December 31, 2013 and 2012, respectively. Interest expense on these note obligations amounted to $155,136 and $172,411 for the years ended December 31, 2013 and 2012, respectively. Interest expense includes the amortization of the debt discount of $138,255 and $70,385 for the years ended December 31, 2013 and 2012, respectively. Payments on the notes were $0 and $176,000 for the years ended December 31, 2013 and 2012, respectively.
Professional Diversity Network, Inc. Notes to Financial Statements 10. Commitments and Contingencies Lease Obligations - The Company leases office space under a non-cancelabletwo operating lease with an expiration dateagreements. A lease for our former headquarters, was scheduled to expire in 2014 and provided for monthly rent of $4,048. On January 18, 2013, we entered into a sublease agreement for our former headquarters space of approximately 1,870 square feet. The sublease provided $3,000 per month rent and expired on October 31, 2014.2013. In January 2013, we exercised an early termination option clause and, accordingly, that lease expired in October 2013. The operatingCompany paid a lease agreement contained an abatementtermination fee of $13,090 in connection with the exercise of the first three months’ rent, in the amount of $12,623, rent escalation provisions and tenant improvement allowances of $15,895, which expired in 2012. The rent abatement is considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. At December 31, 2012 and 2011 deferred rent amounted to $6,149 and $9,558, respectively and is recorded in accounts payable and accrued expenses in the accompanying balance sheets. Renewals are not included in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception.early termination clause.
On December 16, 2012 the Company entered into ana separate operating lease agreement commencing on January 1, 2013 to lease 4,600 square feet of office space. The Company took occupancy of this space on January 2, 2013.which became our new headquarters. The lease expires on June 30, 2015 and provides for monthly rent of $4,064 for the first 10 months and $6,386 per month for the remaining 20 months of the lease. The Company also leases approximately 1,900 square feet of office space for its events business in Minnesota. The lease provides for monthly rental payments of $2,551 and is scheduled to expire on September 30, 2014. Recent Accounting Pronouncements - In June 2011, the Financial Accounting Standards Board (“FASB”) issued amended standards, ASU 2011-05, that eliminated the optionRent expense, amounting to report other comprehensive income in the statement of stockholders’ equity$76,000 and require companies to present the components of net income and other comprehensive income as either one continuous statement of comprehensive income or two separate but consecutive statements. The amended standards do not affect the reported amounts of comprehensive income. In December 31, 2011, the FASB deferred the requirement to present components of reclassifications of other comprehensive income on the face of the income statement that had previously been included in the June 2011 amended standard. These amended standards are to be applied retrospectively for interim and annual periods beginning after December 15, 2011. The Company adopted these standards on January 1, 2012 and the adoption will not impact the Company’s financial results or disclosures, the adoption of ASU 2011-05 only changed the presentation of comprehensive income.
In May 2011, the FASB issued amended standards to achieve common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. The standards include amendments that clarify the intent behind the application of existing fair value measurements and disclosures and other amendments which change principles or requirements for fair value measurements or disclosures. The amended standards are to be applied prospectively for interim and annual periods beginning after December 15, 2011 The Company adopted these standards on January 1, 2012 and the adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or disclosures.
In July 2012, the FASB amended the standards for testing indefinite-lived intangible assets for impairment to guidance that is similar to the guidance for goodwill impairment testing. An entity will have the option not to calculate annually the fair value of an indefinite-lived intangible asset if an entity determines that it is more likely than not that the asset is impaired. The objective of the amendment is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. These amended standards are to be applied for fiscal years beginning after September 15, 2012, including interim periods with early adoption permitted. The Company has elected to early adopt these standards for the year ending December 31, 2012. The adoption of this pronouncement did not have a material impact on the Company’s financial results or disclosures.
4. Marketable Securities
Investments in Marketable Securities are as follows:
| | | 2012 | | | 2011 | | | | | Amortized cost | | | Gross unrealized gains | | Gross unrealized losses | | Estimated fair value | | | Amortized cost | | | Gross Unrealized Gains | | | Gross unrealized losses | | | Estimated fair value | | | December 31 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt | | | | | | | | | | | | | | | | | | | | | | | | Debt - U.S. corporate | | | | | | | | | | | | $ | 10,320 | | | $ | 665 | | | | | | $ | 10,985 | | | State and municipal | | | | | | | | | | | | | 145,635 | | | | | | | $ | (3,114 | ) | | | 142,521 | | | Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | Exchange traded fund | | $ | 249,846 | | | $ | 1,503 | | | | $ | 251,349 | | | | 249,846 | | | | | | | | (28,196 | ) | | | 221,650 | | | | | $ | 249,846 | | | $ | 1,503 | | | | $ | 251,349 | | | $ | 405,801 | | | $ | 665 | | | $ | (30,645 | ) | | $ | 375,156 | |
5. Capitalized Technology
Capitalized Technology is as follows:
| | | December 31, | | | | | 2012 | | | 2011 | | | Capitalized cost: | | | | | | | | Balance, beginning of period | | $ | 376,043 | | | $ | 283,385 | | | Additional capitalized cost | | | 358,247 | | | | 92,658 | | | Balance, end of period | | $ | 734,291 | | | $ | 376,043 | | | Accumulated amortization: | | | | | | | | | | Balance, beginning of period | | $ | 229,897 | | | $ | 131,718 | | | Provision for amortization | | | 101,504 | | | | 98,179 | | | Balance, end of period | | $ | 331,401 | | | $ | 229,897 | | | Net Capitalized Technology | | $ | 402,890 | | | $ | 146,146 | |
Beginning the third quarter of 2012, the Company embarked on updating the technology stack of its web product platform to support emerging technologies. Dubbed "V2", the platform was switched over to at the end of year 2012, though the development is anticipated to continue through the first quarter of 2013. The new technology stack employed in V2, completely switch over the platform to object-oriented programming that will make it easier for components of the platform to be modular, and integrate with other services as and when needed. Further, automated testing tools are being set up on new technology stack, which will add more stability to the sites, and make it easier to identify bugs.
The front end of the V2 product platform follows responsive web design, allowing it to serve up a web experience optimized for devices of different screen sizes such as mobile phones and tablets, which is in line with the shift of internet usage to mobile. Further, the design of all the websites is being changed to simplify the user experience and makes the websites visually more modern.
Talent recruitment communities or groups on the Company’s websites are an integral product for employers to brand themselves for social diversity recruitment and build a diverse talent pool. The setup of these groups involves custom programming by software developers. V2 improves the setup process by employing a Content Management System that allows for Client Services personnel to themselves set up a group, much like setting up web pages on a blog.
V2 also unifies the different diversity sites of the Company, by tying them together with a common login and enabling a user that identifies with multiple affinities to easily change between sites they are members of. This unified experience also allows for online traffic to be driven to a single site, and then redirected automatically to the appropriate network.
6. Property and Equipment
Property and Equipment is as follows:
| | | December 31, | | | | | 2012 | | | 2011 | | | Computer hardware | | $ | 64,759 | | | $ | 58,122 | | | Furniture and Fixtures | | | 19,884 | | | | 19,884 | | | Leashold improvements | | | 13,876 | | | | --- | | | | | | 98,519 | | | | 78,006 | | | Less: Accumulated Depreciation | | | 63,656 | | | | 52,217 | | | | | $ | 34,863 | | | $ | 25,789 | |
Depreciation expense$43,000 for the years ended December 31, 2013 and 2012, respectively, is included in general and 2011 was $11,440 and $10,413 respectively, and is recorded in depreciation and amortizationadministrative expense in the accompanying statements of comprehensive (loss) income.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
| | | | | | | | 2012 | | | 2011 | | | Accounts payable trade | | $ | 265,013 | | | $ | --- | | | Deferred rent | | | 6,149 | | | | 9,558 | | | Accrued expenses | | | 78,084 | | | | 239,152 | | | Payroll liabilities | | | 1,094 | | | | 5,964 | | | Total accounts payable and accrued expenses | | $ | 350,340 | | | $ | 254,674 | | | | | | | | | | | |
Included in Accounts Payable Trade at December 31, 2012 are $107,610 in Deferred IPO costs. 8. Notes Payable
Notes Payable includes three separate notes, each with identical terms payable to the three founding members of the Company. The notes bear interest at the rate of 6% per annum, with all unpaid interest and principal due on November 1, 2014. As discussed in Note 1 above, the Company assumed a note payable to one of its founding members (who has since transferred his equity interest to a family trust but retained the note) that had an acquisition date fair value of $692,614 and a face value of $1,341,676. The discount on the note is being recorded at 6.055%.
The remaining unamortized discount was $138,256 and $211,225 at December 31, 2012 and 2011, respectively. The balance on this note was $1,199,703 and $1,219,954 at December 2012 and 2011, respectively. The Company may prepay any amount of outstanding interest and principal, without a prepayment penalty. The second note payable, including accrued but unpaid interest, was $228,443 and $215,235 at December 31, 2012 and 2011, respectively. The third note payable was in the amount of $59,753 and $56,299 at December 31, 2012 and 2011, respectively. The total notes payable including accrued but unpaid interest amounted to $1,487,899 and $1,491,488 as of December 31, 2012 and 2011, respectively. Interestrent expense on these note obligations amounted to $172,411 and $170,452 for the yearsyear ended December 31, 2012 and 2011, respectively. Interest expense includes the amortization2013 is $27,000 of the debt discount of $70,385 and $66,259 at December 31, 2012 and 2011 respectively. Payments on the notes were $176,000 and $192,000 for the years ended of December 31, 2011 and 2010, respectively.
Our promissory notes were non-convertible, however, we had an informal agreement with our founding members that the outstanding notes, including accrued but unpaid interest, would be exchanged for shares of our common stock at a price per share equal to the initial public offering price, without payment of any additional consideration. Prior to the consummation of our initial public offering, our founding members entered into a debt exchange agreement whereby our three outstanding promissory notes were exchanged in the reorganization (as described in Notes 1 and 12) for 205,380 shares of common stock at a price per share equal to the initial public offering price.
9. Commitments and Contingencies
Lease Obligations - The Company leases office space under two operating lease agreements. The first agreement expires in 2014. During the years ended December 31, 2012 and 2011 the Company incurred $43,029 and $39,712, respectively of rent expense under the first lease agreement. On January 18, 2013, we entered into a sublease agreement for our former headquarters space of approximately 1,870 square feet. On December 16, 2012 the Company entered into a second and separate operating lease agreement commencing on January 1, 2013 to lease 4,600 square feet of office space. The lease expires on June 30, 2015 and provides for monthly rent of $4,064 for the first 10 months and $6,386 per month for the remaining 20 months of the lease.income.
Future minimum payments under the leases at December 31, 20122013 are as follows: | Year ending December 31, | | | | | | | | 2013 | | | 104,987 | | | | 2014 | | | 120,259 | | | $ | 99,589 | | | 2015 | | | 38,313 | | | | 38,313 | | | Total | | $ | 263,559 | | | $ | 137,902 | |
Executive Compensation - Executive compensation totaled $362,836, of which $284,400 was paid in the fourth quarter of 2012, and $88,245 for the years ended December 31, 2012 and 2011, respectively, and is recorded in general and administrative expenses in the accompanying statements of comprehensive income. Executive Compensation consists of two components: (1) a contractual component, which consists of a payment to a certain member of the Company of 30% of principal payments made to a noteholder of the Company pursuant to the Company’s investment agreement entered into in 2004 and (2) a discretionary component, which represents payments to third parties on behalf of a member of the Company in exchange for the use of certain real property. No further payments are required under component number 1 above after the completion of the initial public offering as the outstanding notes were converted into equity in connection with the initial public offering, as discussed in note 8.
10. Stockholders’ Equity
Initial Public Offering– On March 8, 2013, we consummated our initial public offering of 2,625,000 shares of our common stock at a price to the public of $8.00 per share. The aggregate offering price for shares sold in the offering was approximately $21 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to registration statements on Form S-1 (File Nos. 333-187081 and 333-181594), which were declared effective by the SEC on March 4, 2013 and March 7, 2013, respectively. Aegis Capital Corp. and Merriman Capital, Inc. acted the underwriters for the offering. The net proceeds of the offering, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance of up to 1.5% of the gross proceeds from the sale of the firm shares and offering expenses payable by us, were approximately $18.2 million. If the underwriters exercise their option to purchase additional shares in full, our net proceeds from the offering will be approximately $21.1 million, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance and offering expenses payable by us.
Preferred Stock- Prior to its IPO the Company had no preferred stock issued. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that allows the company’s Board of Directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred stock;
Warrant – In connection with the IPO, the Company issued a warrant for 131,250 shares of common stock to the underwriter in connection with this offering that will remain outstanding after this offering at an exercise price of $10.00 per share, equal to 125% of the initial public offering price with an expiration date of March 4, 2019.
Common Stock- Following its IPO, the Company had one class of common stock outstanding with a total number of shares authorized of 25,000,000. As of December 31, 2012, the Company had outstanding 3,487,847 shares of common stock.
Equity Incentive Plans - As at December 31, 2012, we did not have any equity incentive plans. Prior to the consummation of our initial public offering, we adopted the 2013 Equity Compensation Plan under which we reserved 500,000 shares of our common stock for the purpose of providing equity incentives to our 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 plan provides for a maximum of 500,000 shares that could be acquired upon the exercise of a stock option or the vesting of restricted stock. The plan was approved by our stockholders prior to the consummation of our initial public offering.
Distributions to Members of the LLC–In 2012 the Company made pro rata distributions to the members of the LLC in the amount of $2,900,000 of which $2,400,000 of such payments were pro rata distributions for income taxes due by members of the LLC as the LLC has elected to be taxed as a partnership. In 2011 the Company made pro rata distributions to the members of the LLC in the amount of $1,553,292 of which $903,000 of such payments were pro rata distributions for income taxes due by members of the LLC as the LLC has elected to be taxed as a partnership.
11. Customer Concentration
The Company’s revenues are currently highly dependent on two customers, Monster and Apollo Group, and the loss of either major customer would materially and adversely affect the Company’s business, operating results and financial condition. Our agreement with Monster Worldwide, which expired on December 31, 2012, provided for an annual fixed fee of $4 million that was subject to adjustment based on certain criteria, e.g. the flat fee could have been decreased by 10% for any calendar quarter where the ratio of our job applicants to jobs posted falls below a certain threshold. The flat fee could have been increased if Monster Worldwide’s gross revenue from diversity and inclusion services (e.g., job postings, resume search services and recruitment media advertising) exceeded a certain threshold. Monster Worldwide’s gross revenue subject to the agreement was monitored through an automated daily export of views and applications related to the postings to ensure that contract minimums were met or additional fees were to be billed. Our agreement with Monster Worldwide expired on December 31, 2012 and will not be renewed. On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn Corporation (“LinkedIn”), which became effective on January 1, 2013. Our agreement with LinkedIn provides that LinkedIn will make fixed quarterly payments to us in the amount of $500,000 per quarter during the term of the agreement. (This amount is half of the fixed quarterly payments we received from Monster Worldwide, which equaled $1 million per quarter.) Under the LinkedIn agreement, we will also earn commission for sales of our services by LinkedIn in excess of certain thresholds. The fixed quarterly payments are payable regardless of sales volumes or any other performance metric. If Apollo Group seeks to negotiate their agreements on terms less favorable to the Company and the Company accepts such unfavorable terms, or if the Company seeks to negotiate better terms, but is unable to do so, then the Company’s business, operating results and financial condition would be materially and adversely affected. Selected terms of the agreements are as follows:
Recruitment Revenue
Revenues from the Company’s recruitment services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectability is probable. The Company’s recruitment revenue is derived from the Company’s agreement through single and multiple job postings, recruitment media, access to the Company’s resume database, talent recruitment communities, basic and premier corporate memberships, hiring campaign marketing and advertising, e-newsletter marketing and research and outreach services. Revenue under this agreement is monitored through an automated daily export of views and applies related to the postings to ensure that contract minimums are met or additional revenue is to be billed. The contract is an annual agreement that is billed on a pro rata monthly basis.
The Company’s agreement with Monster Worldwide, expired on December 31, 2012. On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn, which became effective on January 1, 2013. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. We expect to experience a significant decrease in revenue until such time as LinkedIn and our sales team are able to generate sufficient sales to replace the revenue previously generated by our agreement with our customer, described above.
Consumer Advertising and Consumer Marketing Solutions Revenue
The businesses and organizations that use the Company’s marketing solutions are enabled to target and reach large audiences of diverse professionals and connect to relevant services with solutions that include email marketing, social media, search engines, traffic aggregators and strategic partnerships. At December 31, 2012 and December 31, 2011, the Company recorded $0 and $150,000, respectively, of deferred revenue related to the Apollo Group’s University of Phoenix “Education to Education” Second Schedule, as defined below. Advertising revenue is recognized based upon fixed fees with certain minimum monthly website visits, 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 recorded on the websites as specified in the customer agreement. For the years ended December 31, 2012 and 2011, advertising revenue accounted for 35% and 28% of total revenues, respectively. The Agreement’s First Media Schedule (the “First Schedule”) was entered into on January 19, 2011 and provided for the placement of ad units and the development of a networking portal site. The First Schedule was for a period of six months at a monthly fee of $83,000, and did not require any minimum volume commitments; however, the networking portal site must be functional for no less than 99.9% of the time.
The Agreement’s Second Media Schedule (the “Second Schedule”) was entered into on September 12, 2011 and provided for the placement of ad units and the creation, administration, hosting and promotion of Co-Branded Affinity Networking Portal Sites. The Second Schedule provides an E2E and an E2C component for a total of $1,550,000 of income annually, contains two year performance audit rights, fixed monthly amounts and 99.9% site availability other than scheduled maintenance. The 99.9% site availability provision requires that the networking portal sites that we maintain for the University of Phoenix must be functional no less than 99.9% of the time in any given month, exclusive of certain pre-scheduled down times.
Under the Second Schedule, the Company provides two separate and distinct networking portal site services to the University of Phoenix: (1) the E2E Site, in which users who click on Ad Units are directed to land on either iHispano.com or AMightyRiver.com, depending on the site where the user came from and (2) the E2C Site, from which University of Phoenix students or alumni are directed to a landing page with a featured employer group.
Performance under the E2E Site with Apollo Group commenced in January 2012, at which time the Company launched the advertising and promotion of the E2E Site containing digital banners, dedicated email blasts and weekly blogs. The Company has the guaranteed Apollo Group at least 30,000 visits to the sites over a six month period or must refund any shortfall at $5.00 per visit less than 30,000 visits or extend the agreement until the 30,000 visit guarantee is reached. Site visits for the number of users are measured through an outside service which monitors the Company’s compliance with such minimum visits requirement. Total fees payable under the Second Schedule cannot exceed $150,000. The Company recognizes the lesser of (i) 1/6th of the $150,000 fee per month for each of the 6 months during the minimum measurement period of January 1, 2012 through June 30, 2012, or (ii) the cumulative number of visits through the end of such month. Revenues under the Second Schedule were being recognized at the lesser of these two amounts to ensure that revenue does not exceed actual visits or the requirement to maintain the portal for the minimum period of six months.
The Second Schedule with Apollo Group is an agreement that may be renewed annually and provides for a fixed fee of $1,400,000 annually. E2C Site users are current students or alumni of the University of Phoenix, or its affiliates, that choose to land on an Employer Group Page that is controlled and hosted by the Company for the purpose of searching job opportunities and descriptions posted by a University of Phoenix Alliance Partner. We invoice Apollo and recognize 1/12th of the contract revenue ratably over the term of the contract on the last day of the month to ensure that all performance requirements have been met. There are no guarantees or required numbers of visits under the E2C agreement. We are subject to a significantly limited performance measure that requires the E2C Site to be operational for 99.9% of the time in each month (other than for scheduled maintenance). This E2C Site was operational prior to the start of the measurement period by utilizing our preexisting platform.
On June 11, 2012, we agreed to an insertion order with Apollo Group. The insertion order provides for payment to us of up to $150,000 per month for a period of 12 months based upon the number of persons we refer to the University of Phoenix who express an interest in obtaining information about attending the University of Phoenix. There is no guaranteed payment associated with this insertion order and for the year ended December 31, 2012, the Company generated $346,000 of revenue under the insertion order.
The two customers have accounted for 96%, or approximately $5.8 million, of total gross sales with one customer representing 65% and the other representing 31% of total gross sales for the year ended December 31, 2012. The two customers have accounted for 92%, or approximately $5.1 million, of total gross sales with one customer representing 72% and the other representing 20% of total gross sales for the year ended December 31, 2011. In addition, two customers accounted for 72% or approximately $1.4 million of accounts receivable with one customer representing 52% and the other representing 20% at December 31, 2012. Two customers accounted for 92% or approximately $1.5 million of accounts receivable with one customer representing 62% and the other representing 30% at December 31, 2011.
12. Subsequent Events
Management has evaluated all subsequent events and transactions for potential recognition or disclosure through April 1, 2013, the date the financial statements were available to be issued.
Corporate Reorganization - On March 5, 2013 we reorganized from an Illinois limited liability company to a Delaware corporation. The Delaware corporation has succeeded to the obligations of the Illinois limited liability company. The limited liability company board of managers has been dissolved and replaced with a board of directors of the corporation. The new corporation is authorized to issue up to 25,000,000 shares of $.01 par value common stock and up to 1,000,000 shares of $.01 par value preferred stock. On the date of the reorganization the Company’s members equity was converted into 3,487,847 shares of the Company’s common stock and the remaining balance was converted into additional paid in capital.
Conversion of Notes Payable to Equity – At the time of the IPO the three founding members of the Company entered into a debt exchange agreement whereby the members converted their outstanding notes plus accrued interest into shares of the Company at the $8.00 IPO price. This transaction resulted in the Company issuing 205,380 shares in exchange for debt and accrued interest totaling approximately $1,643,000. The recapitalization of these notes results in an increase to equity of approximately $1,643,000 and an increase in interest expense due to the accelerated accretion of the notes in the amount of approximately $138,300. Ferdinando Ladurini, Daniel Ladurini and James R. Kirsch entered into a debt exchange agreement whereby our three promissory notes in the principal amounts of $1,341,676, $142,000 and $37,143 plus any accrued interest owed to them, respectively, were converted into LLC membership interests and exchanged for 205,380 shares of common stock at a price per share equal to the offering price. Such shares will be subject to the lock-up agreements entered into with the underwriters in connection with this offering and may not be sold until the expiration of the lock-up period thereunder.| | | Members’ Equity | | | Common Stock | | | Par Value | | | Additional Paid In Capital | | | Accumulated Other Comprehensive Income | | | Total | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2010 | | | 2,122,654 | | | | | | | | | | | | | | (1,504 | ) | | | 2,121,150 | | | | | | | | | | | | | | | | | | | | | | | | | | | Recapitalization at December 31, 2010 | | | (2,122,654 | ) | | | 3,487,847 | | | | 34,878 | | | | 2,087,776 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2010 | | | | | | | 3,487,847 | | | | 34,878 | | | | 2,087,776 | | | | (1,504 | ) | | | 2,121,150 | |
Initial Public Offering– On March 8, 2013, the Company consummated an initial public offering of 2,625,000 shares of our common stock at a price to the public of $8.00 per share. The aggregate offering price for shares sold in the offering was approximately $21 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to registration statements on Form S-1 (File Nos. 333-187081 and 333-181594), which were declared effective by the SEC on March 4, 2013 and March 7, 2013, respectively. The net proceeds of the offering, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance of up to 1.5% of the gross proceeds from the sale of the firm shares and offering expenses payable by us, were approximately $18.2 million. We have granted the underwriters an option for a period of 45 days to purchase on the same terms and conditions as our IPO, up to an additional 393,750 shares to cover over-allotments. If the underwriters choose to exercise their option to purchase additional shares in full, our net proceeds from the offering will amount to approximately $21.1 million, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance and offering expenses payable by us.
Employment Agreements - On March 5, 2013, the Company entered into two employment agreements with the Chief Executive Officer and the Chief Executive of the iHispano.com division (the “Executives”). The agreements arewere for a one year period and requirerequired annual base salaries of $200,000 and an annual bonus as determined by the Compensation Committee. In the event that either of the Executives are terminated without cause (as defined in the employment agreement) but not due to death or disability, the company will pay as severance continued salary for six (6) months to the terminated executive upon delivery of a release of claims against the company. No severance payment will be paid if termination is for cause or if the executive resigns. During each named Executive’s employment and for two (2) years thereafter, each Executive will agree not to disclose confidential information and will be subject to restrictions on competing or interfering with our business and business relationships and soliciting the services of our employees or independent contractors. Both of these contracts expired March 5, 2014 and the Executives continue to be compensated under the same terms as stated in the contract until new agreements are in place. 11. Warrant Liability
The common stock purchase warrants issued to the underwriters in the Company’s IPO in March 2013 have certain cash settlement features that require them to be recorded as liability instruments. At issuance, a portion of the proceeds from the IPO were allocated to the value of the warrant and recorded as an offering cost, reducing the proceeds from the IPO. Accordingly, as a liability, the warrant obligations are adjusted to fair value at the end of each reporting period with the change in value reported in the statement of operations. Such fair values were estimated using the Black-Scholes valuation model. The Company will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise, at which time the liability will be reclassified to stockholders’ equity, or expiration of the warrants.
Professional Diversity Network, Inc. Notes to Financial Statements
The warrant liability was valued using the Black-Scholes option valuation model and the following assumptions on the following dates: | | | December 31,
2013 | | | March 4,
2013 | | | Strike price | | $ | 10.00 | | | $ | 10.00 | | | Market price | | $ | 4.61 | | | $ | 8.00 | | | Expected life | | 5.17 years | | | 6.00 years | | | Risk-free interest rate | | | 0.86 | % | | | 0.86 | % | | Dividend yield | | | 0.00 | % | | | 0.00 | % | | Volatility | | | 39 | % | | | 48 | % | | Warrants outstanding | | | 131,250 | | | | 131,250 | | | Fair value of warrants | | $ | 85,221 | | | $ | 415,368 | |
The fair value of the warrant liability decreased to $85,221 at December 31, 2013 from $415,368 at March 4, 2013. Accordingly, the Company decreased the warrant liability by $330,147 to reflect the change in the fair value of the warrant instruments for the period ended December 31, 2013, which is included in the accompanying statements of comprehensive (loss) income for the year ended December 31, 2013. The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:
| Beginning balance | | $ | - | | | Initial warrant valuation | | | (415,368 | ) | | Decrease in net value of warrant liability | | | 330,147 | | | Ending balance | | $ | (85,221 | ) |
12. Stockholders’ Equity Initial Public Offering – On March 8, 2013, we consummated our initial public offering of 2,625,000 shares of our common stock at a price to the public of $8.00 per share. The aggregate offering price for shares sold in the offering was $21 million. The offer and sale of all of the shares in the offering were registered under the Securities Act pursuant to registration statements on Form S-1 (File Nos. 333-187081 and 333-181594), which were declared effective by the SEC on March 4, 2013 and March 7, 2013, respectively. Aegis Capital Corp. and Merriman Capital, Inc. acted the underwriters for the offering. The net proceeds of the offering, after deducting the underwriting discounts and commissions, the underwriters’ accountable expense allowance of up to 1.5% of the gross proceeds from the sale of the firm shares and offering expenses payable by us, were approximately $18.1 million.
Preferred Stock – The Company has no preferred stock issued. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that allow the Company’s Board of Directors to issue, without further action by the stockholders, up to 1,000,000 shares of undesignated preferred stock.
Warrant – In connection with the IPO, the Company issued a warrant for 131,250 shares of common stock to the underwriter in connection with this offering that will remain outstanding after this offering at an exercise price of $10.00 per share, equal to 125% of the initial public offering price with an expiration date of March 4, 2019.
Common Stock– Following its IPO, the Company had one class of common stock outstanding with a total number of shares authorized of 25,000,000. As of December 31, 2013, the Company has 6,316,027 shares of common stock outstanding.
Equity Incentive Plans – Prior to the consummation of our initial public offering, we adopted the 2013 Equity Compensation Plan under which we reserved 500,000 shares of our common stock for the purpose of providing equity incentives to our 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 plan provides for a maximum of 500,000 shares that could be acquired upon the exercise of a stock option or the vesting of restricted stock. The plan was approved by our stockholders prior to the consummation of our initial public offering. As of December 31, 2013, there were no securities granted under the plan.
Professional Diversity Network, Inc. Notes to Financial Statements TableDistributions to Members of Contentsthe LLC – In 2013, prior to the reorganization on March 5, 2013, the Company made pro rata distributions to the members of the LLC in the amount of $200,000. In 2012 the Company made pro rata distributions to the members of the LLC in the amount of $2,900,000, of which $2,400,000 of such payments were pro rata distributions for income taxes due by members of the LLC as the LLC has elected to be taxed as a partnership.Share Repurchase Program – On April 29, 2013, the Company announced that its Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to $1 million of its outstanding common stock. The program was renewed by the Board of Directors on November 30, 2013. The repurchases under the program will be made from time to time over a six month period at prevailing market prices in open market or privately negotiated transactions, depending upon market conditions. The manner, timing and amount of any repurchases will be determined by the Company based on an evaluation of market conditions, stock price and other factors. Under the program, the purchases will be funded from available working capital, and the repurchased shares will be held in treasury. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. As of December 31, 2013, the Company acquired 2,200 shares of its outstanding common stock in exchange for $11,255. The share repurchase has been recorded as treasury stock, at cost, in the accompanying balance sheet at December 31, 2013. 13. Customer Concentration The Company’s revenues are highly dependent on two customers, LinkedIn and Apollo Group, Inc. (“Apollo Group” or “Apollo”). The loss of either major customer would materially and adversely affect the Company’s business, operating results and financial condition. If Apollo seeks to negotiate its agreement on terms less favorable to the Company and the Company accepts such unfavorable terms, or if the Company seeks to negotiate better terms but is unable to do so, then the Company’s business, operating results and financial condition would be materially and adversely affected. As discussed below, our agreement with LinkedIn will terminate on March 24, 2014.
The following table shows significant concentrations in our revenues and accounts receivable for the periods indicated.
| | | Percentage of Revenue During the Years Ended | | | Percentage of Accounts Receivable at | | | | | December 31, | | | December 31, | | | | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | LinkedIn | | | 50 | % | | | - | | | | 41 | % | | | - | | | Monster | | | - | | | | 65 | % | | | - | | | | 52 | % | | Apollo | | | 36 | % | | | 31 | % | | | 19 | % | | | 20 | % |
Recruitment Revenue Revenues from the Company’s recruitment services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed or determinable and collectability is probable. The Company’s recruitment 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. Our agreement with Monster Worldwide, which expired on December 31, 2012, provided for an annual fixed fee of $4 million that was subject to adjustment based on certain criteria.
On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn, which became effective on January 1, 2013 and will terminate on March 29, 2014. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. Our agreement with LinkedIn provided that LinkedIn make fixed quarterly payments to us in the amount of $500,000 per quarter. The fixed quarterly payments were payable regardless of sales volumes or any other performance metric. Under the LinkedIn agreement, we also may have earned commissions for sales of our services by LinkedIn in excess of certain thresholds. We do not obtain information about commissions earned from LinkedIn, if any, until within 60 days following the end of any fiscal quarter. During 2013, we did not receive any additional commissions from LinkedIn. Our revenue derived from the LinkedIn contract during the year ended December 31, 2013 was $2,000,000, the amount of the guaranteed payment.
Professional Diversity Network, Inc. Notes to Financial Statements On December 31, 2013, LinkedIn served the Company notice of termination, effective as of March 29, 2014. LinkedIn did not provide a reason for the termination of the agreement. As part of the termination notice, LinkedIn waived their right under the termination conditions of the contract, to prevent the Company from soliciting the 1,000 accounts on the LinkedIn protected list for a period of one year.
In connection with its acquisition of PSI on September 30, 2013, the Company enhanced its diversity recruitment offerings by creating networking events that assist corporations in their compliance initiatives, while providing diverse professionals with face-to-face time with corporate recruiters. Revenue from the events business was $167,482 for the year ended December 31, 2013. Consumer Advertising and Consumer Marketing Solutions Revenue The businesses and organizations that use the Company’s marketing solutions are enabled to target and reach large audiences of diverse professionals and connect to relevant services with solutions that include email marketing, social media, search engines, traffic aggregators and strategic partnerships. Advertising revenue is recognized based upon fixed fees with certain minimum monthly website visits, a fixed fee for revenue sharing agreements in which payment is required at the time of posting, billed based upon the number of impressions recorded on the websites as specified in the customer agreement or through our business relationships with Apollo Group. In September 2011, the Company entered into an agreement with Apollo Group that provides for a fixed monthly fee of $116,667 for services and technical solutions provided by the Company to the University of Phoenix and its students and alumni. The agreement may be renewed annually. The agreement was most recently renewed on February 14, 2014 and will expire on February 28, 2015, unless it is renewed. The primary service provided is for recruitment solutions for the University of Phoenix student and alumni career services. The Company recognized revenue under this agreement in the amount of $1,400,000 during the years ended December 31, 2013 and 2012.
In January 2012, the Company launched an advertising and promotion campaign for the University of Phoenix containing digital banners, dedicated email blasts and weekly blogs. The Company guaranteed at least 30,000 visits to the sites over a six month period or was required to refund any shortfall at $5.00 per visit less than 30,000 visits or extend the agreement until the 30,000 visit guarantee is reached. Site visits for the number of users were measured through an outside service which monitored the Company’s compliance with such minimum visits requirement. Total fees payable could not exceed $150,000. The Company recognized the lesser of (i) 1/6th of the $150,000 fee per month for each of the 6 months during the minimum measurement period of January 1, 2012 through June 30, 2012, or (ii) the cumulative number of visits through the end of such month. The Company recognized revenue under this agreement of $0 and $150,000 during the years ended December 31, 2013 and 2012, respectively. On June 11, 2012, we agreed to an insertion order with Apollo Group that replaced the above January 2012 advertising and promotion campaign for the University of Phoenix. The insertion order provided for payment to us of up to $150,000 per month for a period of 12 months based upon the number of persons we referred to the University of Phoenix who expressed an interest in obtaining information about attending the University of Phoenix. There was no guaranteed payment associated with the insertion order for the lead generation for the University of Phoenix. The Company recognized revenue under the insertion order of $39,039 and $346,321 for the years ended December 31, 2013 and 2012, respectively. The insertion order for the lead generation for the University of Phoenix ended by mutual agreement as of June 30, 2013.
Professional Diversity Network, Inc. Notes to Financial Statements 14. Income Taxes
The Company has the following net deferred tax assets at December 31, 2013:
| Deferred tax assets: | | | | | Net operating loss | | $ | 848,781 | | | Other deferred tax assets | | | 617 | | | Total deferred tax assets | | | 849,398 | | | | | | | | | Deferred tax liabilities: | | | | | | Goodwill and trade name | | | (120,223 | ) | | Developed technology | | | (199,840 | ) | | Derivative liability | | | (133,959 | ) | | Property and equipment | | | (14,544 | ) | | Total deferred tax liabilities | | | (468,566 | ) | | | | | | | | Net deferred tax asset | | $ | 380,832 | |
The benefit for income taxes for the year ended December 31, 2013 consists of the following:
| Federal: | | | | | Current provision | | $ | - | | | Deferred benefit | | | 319,114 | | | | | | 319,114 | | | State: | | | | | | Current provision | | | - | | | Deferred benefit | | | 61,718 | | | | | | 61,718 | | | | | $ | 380,832 | |
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| Expected federal statutory rate | | | 34.00 | % | | State income taxes, net of federal benefit | | | 6.58 | % | | Tax exempt interest income | | | 0.32 | % | | Meals and entertainment | | | -0.38 | % | | Dividends received deduction | | | 0.12 | % | | Deferred | | | -20.95 | % | | Other | | | 1.26 | % | | | | 20.95 | % |
At December 31, 2013, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $2,092,000. The federal and state net operating loss carryforwards will expire, if not utilized, beginning December 31, 2033. There were no net operating losses in periods prior to the year ended December 31, 2013.
15. Related Party Transactions
Pursuant to an Investment Agreement, Mr. Kirsch received additional compensation payments equal to 30% of the principal payments made by the Company under the promissory notes payable to Ferdinando Ladurini in the principal amount of $1,341,676 (see Note 9). Additional compensation payments are recorded to expense in the accompanying statements of comprehensive (loss) income. Prior to commencement of our initial public offering, we obtained a binding agreement from our noteholders to convert their outstanding debt into equity in connection with our reorganization and initial public offering. As part of the reorganization, such debt was converted into equity and no further payments to Mr. Kirsch will be made pursuant to the agreement.
Professional Diversity Network, Inc. Notes to Financial Statements In 2010, Mr. Kirsch purchased a condominium apartment in Miami, Florida, which was primarily used by the Company and was financed by obtaining a bank loan providing initially for interest only payments. The Company paid for the down payment and earnest money on the apartment in the amount of $221,679. In 2012, the Company paid Mr. Kirsch $263,109 in additional compensation payment to compensate Mr. Kirsch for additional income taxes resulting from the amounts paid in 2010 for the condominium apartment in Miami, Florida. The Company discontinued paying the condominium costs prior to closing of the Company’s initial public offering.
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, on April 1, 2013.March 27, 2014. | | PROFESSIONAL DIVERSITY NETWORK, INC. | | | | | | | | | By: | /s/ James Kirsch | | | | | James Kirsch | | | | | Chief Executive Officer | |
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James Kirsch and Myrna Newman,David Mecklenburger, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all and any other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signature | | Title | Date | | | | | | /s/ James Kirsch | | Chief Executive Officer and Chairman of the Board | April 1, 2013March 27, 2014 | | James Kirsch | | (Principal Executive Officer) | | | | | | | /s/ Myrna NewmanDavid Mecklenburger | | Chief Financial Officer and Secretary (Principal | April 1, 2013March 27, 2014 | Myrna NewmanDavid Mecklenburger | | Financial Officer and Principal Accounting Officer) | | | | | | | /s/ Daniel Marovitz | | Director | April 1, 2013March 27, 2014 | | Daniel Marovitz | | | | | | | | | /s/ Stephen Pemberton | | Director | April 1, 2013March 27, 2014 | | Stephen Pemberton | | | | | | | | | /s/ Barry Feierstein | | Director | April 1, 2013March 27, 2014 | | Barry Feierstein | | | | | | | | | /s/ Andrea Sáenz | | Director | April 1, 2013March 27, 2014 | | Andrea Sáenz | | | |
Exhibit Number | | Description of Exhibit | 1.1 | | Form of Underwriting Agreement (incorporated herein by reference to Exhibit 1.1 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | 3.1 | | Amended and Restated Certificate of Incorporation of the registrant (incorporated herein by reference to Exhibit 3.1 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | | 3.2 | | Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | | 4.1 | | Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | | 4.2 | | Form of Underwriters’ Warrant (included in(incorporated herein by reference to Exhibit 1.1)1.1 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.1† | | Agreement between Monster Worldwide Inc. and the registrant (incorporated herein by reference to Exhibit 10.1 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) | | | | | 10.2† | | First Amendment to the Alliance Agreement between Monster Worldwide Inc. and the Registrant, dated April 18, 2008 (incorporated herein by reference to Exhibit 10.2 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) | | | | | 10.3† | | Second Amendment to the Alliance Agreement between Monster Worldwide Inc. and the Registrant, dated January 31, 2009 (incorporated herein by reference to Exhibit 10.3 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) | | | | | 10.4† | | Third Amendment to the Alliance Agreement between Monster Worldwide Inc. and the Registrant, dated February 2010 (incorporated herein by reference to Exhibit 10.4 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) | | | | | 10.5 | | Fourth Amendment to the Alliance Agreement between Monster Worldwide Inc. and the Registrant, dated September 16, 2011 (incorporated herein by reference to Exhibit 10.5 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) | | | | | 10.6 | | Master Services Agreement between Apollo Group and the Registrant, dated October 1, 2012, (incorporated herein by reference to Exhibit 10.6 of Amendment No. 9 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on January 16, 2013) | | | | | 10.7# | | Form of Employment Agreement entered into between the registrant and James Kirsch (incorporated herein by reference to Exhibit 10.7 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.8# | | Form of Employment Agreement entered into between the company and Rudy Martinez(incorporated herein by reference to Exhibit 10.8 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.9 | | Form of Contribution and Reorganization Agreement (incorporated herein by reference to Exhibit 12 of Amendment No. 10.9 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.10 | | Form of Debt Exchange Agreement (incorporated herein by reference to Exhibit 10.10 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.11 | | Insertion Order between Apollo Group and the Registrant, dated June 11, 2012 (incorporated herein by reference to Exhibit 10.11 of Amendment No. 4 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on September 7, 2012) |
| 10.12† | | Diversity Recruitment Partnership Agreement between the Registrant and LinkedIn Corporation, dated as of November 6, 2012 (incorporated herein by reference to Exhibit 10.12 of Amendment No. 9 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on January 16, 2013) | | | | | 10.13 | | Statement of Work by and between the Registrant and Apollo Group, dated October 1, 2012 (incorporated herein by reference to Exhibit 10.13 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.14 | | Statement of Work by and between the Registrant and Apollo Group, dated April 1, 2013 (incorporated herein by reference to Exhibit 10.14 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) |
| | | | 10.15# | | Professional Diversity Network, Inc. 2013 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.15 of Amendment No. 12 to the registrant’s Registration Statement on Form S-1 (No. 333-181594) filed with the SEC on February 28, 2013) | | | | | 10.16* | | Asset Purchase Agreement among Professional Diversity Network, Inc. and Careerimp, Inc., dated as of June 14, 2013 | | | | | 10.17* | | Asset Purchase Agreement among Professional Diversity Network, Inc. and Personnel Strategies, Inc., dated as of September 18, 2013 | | | | | 21 | | Subsidiaries of the Registrant - 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 |
| * | Filed herewith | | † | Confidential treatment requested as to certain portions of this exhibit. Such portions have been redacted and submitted separately to the SEC. | | # | Denotes a management contract or compensation plan or arrangement |
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