Annual report pursuant to Section 13 and 15(d)

Acquisitions

v2.4.1.9
Acquisitions (Noble Voice and NAPW [Member])
12 Months Ended
Dec. 31, 2014
Noble Voice and NAPW [Member]
 
Business Acquisition [Line Items]  
Acquisitions

4. Acquisitions

 

Acquisition of Noble Voice

 

On November 26, 2014, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Global Outreach Ventures, Inc. (“Global Outreach”), Eric Bull (“Mr. Bull”), Terri Gladwell (“Ms. Gladwell”) and Sergio Zlobin (“Mr. Zlobin,” and together with Mr. Bull and Ms. Gladwell, the “Stockholders”), pursuant to which the Company acquired all of the issued and outstanding membership interests of Noble Voice's wholly-owned subsidiaries, Noble Voice LLC (“Old Noble Voice”) and Compliant Lead LLC (“Compliant” and, together with Old Noble Voice, “Noble Voice”) for an aggregate purchase price of $1,389,386consisting of a promissory note as described below. The Company will leverage Noble Voice's technology to-date to enable the Company to roll out its HireAdvantEdge product, a product which allows the Company to deliver qualified candidates to recruiters. Management believes that the acquisition of Noble Voice provides the Company with the required scale to meet the needs of employers seeking to hire diverse talent.

 

Simultaneously with the closing of the acquisition, Old Noble Voice and Compliant entered into a non-interest bearing promissory note (“Promissory Note”) with Victory Holdings Group, LLC (“Victory Holdings”), a company owned by a former member of Noble Voice. Pursuant to Promissory Note, Old Noble Voice and Compliant agreed to pay Victory Holdings an aggregate initial amount of $1,389,386. The initial amount to be repaid under the Promissory Note is subject to modification based upon collected accounts receivable and assumed accounts payable included in the acquisition. The Promissory Note requires monthly payments, subject to the modifications as defined in the Purchase Agreement, beginning on January 2, 2015 through and including December 1, 2015. The Promissory Note is secured by a security interest in the accounts receivable as of the closing date of November 26, 2014. At December 31, 2014, the amount outstanding under the Promissory Note is $1,389,386.

 

On November 26, 2014, the Company entered into an employment agreement with each of Mr. Bull, Ms. Gladwell and Mr. Zlobin, pursuant to which Mr. Bull, Ms. Gladwell and Mr. Zlobin will serve as the Company's Vice President and General Manager, Vice President and Marketing Manager, and Vice President and Technology Manager, respectively. Pursuant to the employment agreements, each Stockholder will receive a base salary of $180,000 per annum and are eligible to receive and annual bonus determined at the discretion of the Company's Board of Directors. In addition, Mr. Zlobin is entitled to receive an additional $150,000 bonus based upon the achievement of certain targets, as defined in his employment agreement, and subject to his continued employment through the applicable payment date. The employment agreements also granted each Stockholder 100,000 restricted shares of the Company's common stock (see Note 13).

 

In connection with the acquisition, the Stockholders entered into a Lock-Up Agreement with the Company whereby the Stockholders agreed not, without prior written consent of the Company's Board of Directors offer to sell, sell or otherwise dispose of, or encumber, any shares of the Company's common stock received by them pursuant to their respective employment agreements before the expiration of twelve months following the issuance and vesting of such shares of the Company's common stock pursuant to and in accordance with such employment agreements.

 

The acquisition of Noble Voice was accounted for under the acquisition method of accounting.  Accordingly, the acquired assets and assumed liabilities were recorded at their estimated fair values, and operating results for Noble Voice are included in the consolidated financial statements from the effective date of acquisition of November 26, 2014.  Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase of a business, the acquirer must reassess the reasonableness of the values assigned to all of the net assets acquired, liabilities assumed and consideration transferred.  The Company performed such a reassessment and concluded that the values assigned for the Noble Voice acquisition result in a fair measurement of the purchase price allocation for financial statement recognition purposes.  Consequently, the Company recognized a gain on bargain purchase in the amount of $429,956 arising from the acquisition of Noble Voice, which has been recorded in the accompanying consolidated statement of comprehensive loss during the year ended December 31, 2014. The gain on bargain purchase was primarily the result of restricted stock considerations payable to the former owners, which was excluded from the purchase price, as the payment was contingent on future employment (see Note 13). There was no goodwill as a result of the acquisition.

 

The allocation of the purchase price is summarized as follows:

 

Promissory note issued

  $ 1,389,386  
         

Allocated to:

       

Cash and cash equivalents

    439,156  

Accounts receivable

    2,248,537  

Prepaid expenses and other current assets

    23,026  

Property and equipment

    13,040  

Security deposits

    16,476  

Accounts payable

    (1,111,669 )

Accrued expenses

    (186,638 )

Deferred tax liability

    (272,586 )

Net assets acquired

    1,169,342  
         

Excess of purchase price over net assets acquired before allocation to identifiable intangible assets and gain on bargain purchase of business

  $ 220,044  

 

Because this acquisition was a stock purchase for tax purposes, the Company did not obtain a stepped-up tax basis in Noble Voice's assets. A deferred tax liability of $272,586 was established as part of the acquisition accounting to reflect the income tax effect of the acquisition date difference between the carryover income tax and fair value financial reporting bases of the tangible and intangible assets acquired and liabilities assumed. The deferred tax liability was calculated using a 38.8% effective tax rate. Management made the initial determination that the fair values of the assets acquired and liabilities assumed which are principally short term, are approximately equal to their cost bases. Management has made a determination that approximately $650,000 of the excess of the purchase price over the net assets acquired should be allocated to the following identifiable intangible assets.

 

Amount

   

Estimated Useful Life (Years)

 

Developed Technology

$ 330,000       3  

Customer Relationships

  280,000       5  

Trade Name/Trademarks

  40,000       4  

Amortizable Intangible Assets

    650,000          

Gain on Bargain Purchase of Business

    (429,956 )        
    $ 220,044          

 

The Company incurred legal and other costs related to the transaction of approximately $137,948, which is reflected as acquisition related costs in the accompanying consolidated statements of comprehensive loss during the year ended December 31, 2014.

 

Total revenues and income from continuing operations since the date of the acquisition of Noble Voice, included in the consolidated statements of comprehensive loss for the year ended December 31, 2014, are $1,061,041 and $277,375, respectively.

 

Acquisition of NAPW

 

On September 24, 2014 (the “Closing Date”), NAPW, Inc., operator of the National Association of Professional Women, became part of the Company upon the closing of the Company's merger transaction with NAPW Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), NAPW, Inc., a New York corporation (“Old NAPW”), and Matthew B. Proman, the sole shareholder of Old NAPW (“Mr. Proman”), pursuant to an Agreement and Plan of Merger, dated as of July 11, 2014 (the “Merger Agreement”). In accordance with the terms of the Merger Agreement, on the Closing Date, Old NAPW merged with and into Merger Sub (the “Merger”). As a result of the Merger, the separate corporate existence of Old NAPW ceased and Merger Sub continues as the surviving corporation, a wholly-owned subsidiary of the Company and was renamed “NAPW, Inc.”

 

Pursuant to the Merger Agreement, the Company acquired all issued and outstanding shares of Old NAPW's common stock for an aggregate purchase price consisting of (i) 5,110,975 shares of Common Stock of the Company, which were issued to Mr. Proman, (ii) 959,096 shares of Common Stock, which were issued pursuant to a subscription agreement to Star Jones, NAPW's President and National Spokeswoman, (iii) 239,774 shares of Common Stock, which were issued pursuant to a subscription agreement to Christopher Wesser, NAPW's General Counsel (together with the shares issued to Mr. Proman and Ms. Jones, the “Merger Shares”), (iv) cash of $3,555,000, (v) a promissory note in the original principal amount of $445,000 payable to Mr. Proman (see Note 9) (vi) an option for Mr. Proman to purchase 183,000 shares of the Company's Common Stock at a price of $3.45 per share (see Note 13), (vi) a warrant for Mr. Proman to purchase 50,000 shares of the Company's Common Stock at a price of $4.00 per share (see Note 13) and (vii) a warrant for Mr. Proman to purchase 131,250 shares of the Company's Common Stock at a price of $10.00 per share (see Note 13).

 

As a condition to the closing of the Merger, Messrs. Proman and Wesser, Ms. Jones and the Company entered into a registration rights and lock-up agreement (the “Registration Rights Agreement”), pursuant to which the Company is required, not later than nine months following the closing date, to file a shelf registration statement on Form S-3 with the SEC with respect to the Merger Shares issued in connection with the Merger. The Company is further required to use its best efforts to have such registration statement declared effective not later than 12 months following the Closing Date and kept effective until the earlier of three years thereafter or when each of the parties to the Registration Rights Agreement (other than the Company) can sell all of his or her shares without the need for current public information or other restrictions pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Under the terms of the Registration Rights Agreement, each of Messrs. Proman and Wesser and Ms. Jones (collectively, the “NAPW Affiliates”) agreed not, without the consent of the Company, to offer to sell, sell or otherwise dispose of, or encumber any shares of the Company's Common Stock received by such person in connection with the Merger during the 12 months following the Closing Date, except under certain circumstances.

 

In connection with the Merger, the Company paid Aegis Capital Corp. (“Aegis”), financial advisor to the Company, a fee of $100,000 for rendering and delivering its fairness opinion to the Board of Directors. The Company also paid Aegis a fee of $374,000 on the Closing Date as consideration for providing financial advisory services to the Company in connection with the Merger and issued to affiliates of Aegis a warrant to purchase 50,000 shares of the Company's Common Stock at an exercise price of $4.00 per share (see Note 13).

 

Professional Diversity Network provides NAPW members with direct access to employers seeking to hire professional women at a high level of connectivity and efficiency. The Merger enables the Company to match members with its employment partners, and then converse with the member to confirm such member's desire to take the position the Company matched them to, confirm such member is qualified for the position and directly notify the employer about a member that the Company has qualified and confirmed has completed an application within the employer's recruitment system.

 

The acquisition was accounted for under the acquisition method of accounting, whereby the Company was treated as the acquirer and NAPW was treated as the acquired company. This determination was primarily based on the Company's majority representation on the Board of Directors, the Company comprising key management positions of the Company, and the fact that the Company paid a premium for the equity interests in NAPW. Accordingly, the acquired assets and assumed liabilities of NAPW were recorded at their estimated fair values, and operating results for NAPW are included in the consolidated financial statements from the effective date of acquisition of September 24, 2014.

 

The preliminary allocation of the purchase price is summarized as follows:

 

 

Fair value of common stock issued (6,309,845 shares)

  $ 35,272,033  

Cash paid

    3,555,000  

Promissory note issued

    434,582  

Stock options issued (183,000 options)

    556,496  

Common stock purchase warrants issued (181,250 warrants)

    294,342  

Total consideration

    40,112,453  
         

Allocated to:

       

Cash and cash equivalents

  $ 5,198  

Accounts receivable

    353,377  

Incremental direct costs

    931,126  

Prepaid expenses and other current assets

    297,904  

Property and equipment

    795,618  

Security deposits

    342,190  

Merchant reserve

    1,528,558  

Other assets

    159,412  

Accounts payable

    (6,153,564 )

Accrued expenses

    (1,954,036 )

Deferred revenue

    (8,880,000 )

Deferred tax liability

    (6,193,765 )

Merchant cash advances

    (447,371 )

Capital lease obligations

    (22,397 )

Net liabilities assumed

    (19,237,750 )
         

Excess of purchase price over net liabilities assumed before allocation to identifiable intangible assets and goodwill

  $ 59,350,203  

 

The fair value of deferred revenue was determined to be $8,880,000, based upon management's estimate of how much it would cost to transfer the liability. The liability is measured as the direct, incremental cost to fulfill the legal performance obligation, plus a reasonable profit margin. Because this acquisition was a stock purchase for tax purposes, the Company did not obtain a stepped-up tax basis in NAPW's assets. A deferred tax liability of $6,193,765 was established as part of the acquisition accounting to reflect the income tax effect of the fair value of the acquired intangible assets. The deferred tax liability was calculated using a 40.6% effective tax rate. Management has also made the initial determination that the fair values of substantially all other assets acquired and liabilities assumed are approximately equal to their recorded cost. Management has made a determination that approximately $14,905,000 of the excess of the purchase price over the net liabilities assumed should be allocated to identifiable intangible assets. The unidentified excess of the purchase price over the fair value of the net liabilities assumed has been recorded as goodwill.

 

Amount

   

Estimated Useful Life (Years)

 

Sales Process

$ 3,970,000       10  

Paid Member Relationships

  890,000       5  

Member Lists

  8,957,000       5  

Developed Technology

    648,000       3  

Trade Name/Trademarks

    440,000       4  

Amortizable Intangible Assets

    14,905,000          

Goodwill

    44,445,203          
    $ 59,350,203          

 

Goodwill arising from the acquisition mainly consists of the synergies of enhanced recruitment solutions for the Company's diverse client base. The Company's goodwill is not deductible for tax purposes. Goodwill and intangible assets are subject to a test for impairment on an annual basis.

 

The Company incurred legal and other costs related to the transaction of approximately $1,057,247, which is reflected as acquisition related costs in the accompanying consolidated statements of comprehensive loss during the year ended December 31, 2014.

 

Total revenues and loss from continuing operations since the date of the acquisition of NAPW, included in the consolidated statements of comprehensive loss for the year ended December 31, 2014, are $6,169,956 and $2,417,068, respectively.

 

Pro Forma Financial Information

 

The following unaudited consolidated pro forma information gives effect to the acquisitions of Noble Voice and NAPW as if these transactions had occurred on January 1, 2013. The following pro forma information is presented for illustration purposes only and is not necessarily indicative of the results that would have been attained had the acquisitions been completed on January 1, 2013, nor are they indicative of results that may occur in any future periods.

 

Year Ended December 31,

     

2014

   

2013

     

Revenues

$ 42,793,803     $ 29,396,415      

Net loss

$ (4,628,737 )   $ (5,837,145 )    
                     

Net loss per share:

                   

Basic and diluted

  $ (0.36 )   $ (0.46 )    
                     

Weighted average shares outstanding:

                   

Basic and diluted

    12,788,663       12,727,929