Professional Diversity Network, Inc. (IPDN) Flash Alert Rating: Strong Sell Price Target: $3.00 Date: March 20th, 2017 This research report reflects the opinions of Cliffside Research. We have based our opinions on facts and evidence collected and analyzed, all of which we set out in our research reports to support our opinions. This is not an offer to sell or a solicitation of an offer to buy any security. We strongly recommend that you do your own due diligence before buying or selling any security, and each investor must make any investment decision based on his/her judgment of the market and based upon all available information. At any time, you should presume that the principals of Cliffside Research and/or Cliffside Research clients and/or investors hold trading positions in the securities profiled on the site and therefore stands to realize significant gains in the event that the price of the stocks covered herein rises or declines in conjunction with our investment opinion. See our important full disclaimer titled “Terms of Service” at the bottom of this report.

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➢ On August 15th, 2016 a group of Chinese investors bought a majority stake in

IPDN for $20mil via a shell company called Cosmic Forward Limited (CFL). An investigation into CFL reveals all shareholders involved are executives of a Chinese company called GNet Group.

➢ GNet Group has been criticized by Southern Weekly, a respected Chinese newspaper, as a scam that dupes small, unsophisticated investors out of their savings. GNet investors have taken to the streets to protest the company and have formed Internet forums to expose what some claim is a Ponzi scheme.

➢ In 2015 GNet’s co-founder bought up shares of a shell company listed on

London’s AIM exchange called Gate Ventures. The stock was unexpectedly delisted 4 months later. Some have said that GNet used Gate Ventures to dupe GNet investors in China into believing the company had gone public.

➢ We believe that if investor and media allegations of GNet are true, IPDN

investors would have little hope for a turnaround. The $20mil paid to IPDN could result in lawsuits from GNet investors who lost money, and IPDN’s current Chinese management team could face legal consequences including arrest.

➢ An evaluation of IPDN’s assets and operations led us to conclude that IPDN is

worth at most $3.00 per share. This represents 75% downside to current valuation.

Professional Diversity Network, Inc. (IPDN)

We are initiating a “Flash Alert” on Professional Diversity Network, Inc. (IPDN) with a

STRONG SELL rating and a $3.00 target.

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The Curious Case of Professional Diversity Network, Inc. (IPDN) Summary Occasionally you come across a company that seems to defy reality. It’s unusual to find a stock that’s heading to the moon that operates an unprofitable business with steeply declining revenue. That in and of itself often leads to implosion. If that’s somehow combined with a Chinese management team and a stock promoter now you’ve really got something cooking. In recent years the investment landscape has been loaded with companies led by utterly fraudulent Chinese management teams that went to zero and some of our best shorts have been stocks “pumped” to the retail crowd by stock promoters. Throw in what we feel is a ridiculous valuation and perhaps the worst business model we’ve ever seen and now you’re in some rarefied air indeed. A company like that doesn’t come along very often. Finding a company like that is like finding a unicorn playing cards with a leprechaun and a mermaid. Yet somehow one company has been able to pull this off and that company is Professional Diversity Network, Inc. (IPDN). Since its public debut in 2013, IPDN has been known as an operator of professional networks focused on increasing diversity in the workplace. We like to think of IPDN as a highly unsuccessful miniature version of LinkedIn (without any of the name recognition) built specifically for minority groups. The company has served several groups including women, military veterans, the LGBT community and minorities in general. For the past two years the largest source of revenue for the company has been derived from the National Association of Professional Women (NAPW Network), a women-only professional networking organization acquired in 2014. The NAPW Network initially provided a temporary boost to revenue, but it appears the acquisition was a mistake. In 2015 the company was forced to take a $25.1mil goodwill impairment charge for NAPW and it managed to burn $6.2mil in operating cash flow on sales of $38.6mil. At the beginning of 2016 IPDN found itself in a precarious position as revenue from the NAPW Network began a steep decline. Left with only $2mil in cash and declining revenue, the future of the company was in jeopardy. Unfortunately for IPDN, things continued to get worse. In the 2nd quarter of 2016 revenue continued to nosedive with sales down by one-third. They had burned $2.2mil in cash in just two quarters and only had just over $1.3mil left on the balance sheet. By the third quarter the cash balance had dwindled to just over $500k. The company was facing bankruptcy before year-end. With its back against the wall, the company was forced to consider strategic alternatives. But who would want to inject capital into a dying business in a highly competitive environment dominated by industry giants?

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Enter Cosmic Forward Limited (CFL), a Seychelles private company wholly owned by a group of Chinese investors. In August of 2016 CFL paid $20.5mil for 51% of IPDN making the China based investors controlling shareholders of the company. They later increased their stake to 54.6% in early 2017. IPDN also completed a 1-for-8 reverse stock split in September 2016 to regain the $1.00 per share minimum bid requirement for Nasdaq listing. The reverse split drastically reduced the number of shares outstanding to only 3.9mil with a mere 400-600k shares in the public float. CFL paid a 126% premium for IPDN shares, or $9.60 per share post split so naturally the stock went higher under the assumption that the new investors must know what the company is “truly” worth. With the cash injection the company was able to pay off debt and was left with $12mil for its coffers. All of the sudden IPDN’s bleak future was looking a bit brighter. CFL’s shareholders had a plan too. They announced that IPDN would develop new US business lines and look to expand to China. The new owners gutted existing management and replaced the board. In effect, this was a reboot of IPDN. Now the company had a clean balance sheet, new management and new business “strategies.” Add in a stock promoter on a super low float stock and voila, the stock took off. Currently the stock is trading at about a 300% premium to its value prior to CFL’s initial investment.

Source: Bloomberg, Cliffside Research

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Source: Twitter

At these levels the highly volatile company has approximately a $45 to $50mil market cap. Although they now have some cash they’ll likely continue to burn it, especially if they plan to expand into new, unproven lines of business. It would appear IPDN’s current valuation is highly unjustified for a low float money losing operation with steeply declining revenue. Based on IPDN’s declining revenue and inability to turn a profit it’s clear that this is a highly risky place for an investor to park cash. Aside from a “pump” by a stock promoter, it’s hard to fathom why investors in IPDN would see so much potential in the company. Change In Control On August 15, 2016 CFL became the new majority shareholders of IPDN. CFL shareholders include Maoji (Michael) Wang, Jing Bo Song, Yong Xiong Zheng and Nan Nan Kou. When these shareholders took over IPDN they began gutting management and the board. CEO Katherine Butkevich was demoted and replaced by CFL shareholder Maoji (Michael) Wang who is also a member of the board. IPDN’s CFO David Mecklenburger quit effective December 31st, 2016 and has been replaced by Jiangping (Gary) Xiao. On October 26th of last year CFL removed former board members Katherine Butkevich, Stephen Pemberton and Andrea Saenz and replaced them with Xiaojing Huang, Xianfang Liu, Jingbo Song, Hao Zhang and new CEO Maoji (Michael) Wang. Jing

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Bo Song also was elected co-Chairman of IPDN. The board is now controlled by Chinese executives hand picked by CFL.

Source: IPDN 8K, slide 11

Source: IPDN 14F-1, pg. 4

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CFL’s investment in IPDN can essentially be considered a Chinese reverse merger. IPDN has minimal revenue and the revenue they do have is in steep decline. The company is unprofitable and had nearly depleted all its cash prior to CFL’s investment. When CFL made its initial investment in IPDN the company was in a desperate situation. According to IPDN’s SEC filings the company stated that they needed a “significant capital infusion” to continue as a “going concern.” The company also concluded that there were “no alternative financing opportunities” that would provide enough capital on acceptable terms.

This allowed CFL an opportunity to take over a Nasdaq listed company with a relatively small investment. Many have written about the dangers of Chinese reverse mergers, including us (see SORL). Now that CFL shareholders are in full control of IPDN they can begin implementing any business plan they choose. We believe the most important issue currently facing IPDN investors is determining who the members of CFL are and what their intentions may be. Who is Cosmic Forward Limited? All four members of CFL are also executives of a Chinese company known as GNet Group. GNet Group is supposedly involved in several lines of business including e-commerce, real estate, entertainment, the “internet of things” and others. We discovered that GNet’s reputation in China has come under severe criticism to say the least. Many consider the company to be a combination of a ponzi scheme wrapped in a pyramid scheme used to bilk unsophisticated investors out of their hard earned money. In other words, they believe it’s a total fraud. The importance of this cannot be overstated. All four owners of CFL who are also the majority owners of IPDN are GNet executives. Jingbo Song who is the Co-Chair of IPDN is also the Chairman of GNet. IPDN

“Our Board of Directors consulted with our management, financial advisors and legal counsel and considered a number of factors, including the following: The Company’s need for a significant capital infusion by the end of 2016 in order to continue as a going concern, in light of its limited current cash levels and current and projected monthly cash burn rates… …There were no alternative financing opportunities that would provide the Company with the significant amount of required capital on a timely basis and on acceptable terms, if at all, in light of general market and liquidity conditions…” ~IPDN 14A, 9/1/16, pg. 8

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director Yong Xiong Zheng is the CEO of GNet. In our opinion, the involvement of these four individuals with IPDN is not purely a coincidence.

Source: IPDN 13D, Item 7, Schedule A & Cliffside Research

Source: IPDN 13D, Item 7, Schedule A

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Several GNet investors and Chinese media outlets have reported that GNet is purely a scam, including an expose by a highly respected Chinese newspaper called Southern Weekly. Southern Weekly, also referred to as Southern Weekend, has the largest distribution of any newspaper on China’s mainland. In 2009 when President Barack Obama visited China, he turned down a CCTV interview and instead met with Southern Weekly. The New York Times has called Southern Weekly “China’s most influential liberal newspaper,” and The Guardian has said that, “the liberal newspaper is known for its pioneering investigations of social problems and official corruption.” We provide a full interpretation of the article in the appendix at the bottom of this report. According to the expose, GNet is soliciting investment from small, unsophisticated investors for the company’s 11 various projects, which they call “funds.” In the end it appears most are left with nothing more than a worthless piece of paper.

If true, clearly it is impossible for GNet to make these kinds of promises regarding return on investment and public listing. Not surprisingly, the article also states that in April of 2016 the “weekly dividend” became unsustainable. It appears that GNet also emphasizes investing in what many would consider innovative, “hot” categories like entertainment, fashion, technology and real estate. It is likely that these types of investments would appeal to young or unsophisticated investors. One investor was quoted in the article as saying that “young people understand the Internet better, and they must seize the opportunity.” Below is a copy of Southern Weekly with reference to the GNet scam on the cover.

According to the article, some GNet investors were told the following:

• Based on a 100k RMB investment, investors were guaranteed a 100% return on their money over two years.

• They would receive weekly cash dividend payments between 1000 to 1500 RMB, plus quarterly dividends.

• Investors can recommend friends and family to earn a 5-8% commission – the more investors that join, the higher the kickback.

• The big payoff will come when each “fund” goes public and all 11 of them are planning to go public.

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Source: http://tieba.baidu.com/p/4560443953

Southern Weekly describes GNet investment as a “pyramid scam.”

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The Southern Weekly expose was really just the beginning. We found several examples of investors claiming that GNet is a scam that has ripped them off. A quick search on Baidu.com shows how pervasive this is.

Source: Baidu.com, search “GNet Scam”

GNet investors are mad and they’re not going to take it anymore. They have taken to the streets to protest and are shaming the company with photos taken inside a GNet corporate lobby to help expose the company. In the photos below funds9999.com is supposedly where Chinese investors go to buy GNet products. Oddly, the website is not open to the general public.

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Source: http://tieba.baidu.com/p/4878528585?pid=100729336825&cid=0#100729336825

Source: http://tieba.baidu.com/p/4878528585?pid=100729336825&cid=0#100729336825 It appears these photos were taken in the lobby of a GNet office.

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Source: http://tieba.baidu.com/p/4878528585?pid=100729336825&cid=0#100729336825 We wish this shareholder luck in cashing in on a long awaited payday.

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Source: http://tieba.baidu.com/p/4906136596

GNet investors take to the streets.

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Source: http://tieba.baidu.com/p/4906136596

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Source: http://tieba.baidu.com/p/4560443953

Here a brief article claims that GNet is a “pyramid scheme” and that the company claims to have acquired 20% of BBC. In the text you can clearly see “BBC” and “20%.”

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Source: QQ (Tencent) Chat Group, Group ID: 438490339

In the appendix at the bottom of this report we provide examples of the communication in these types of groups shown above. They generally consist of small, independent investors who feel they have been scammed by GNet and are trying to get their money back. The Southern Weekly article explains that the Chinese Securities Commission has regulations in place for private investments. According to the article, investors cannot invest less than 1mil RMB and investor net assets need to be at least 3mil RMB or they need 3-year income above 500k RMB. GNet regularly accepts investments of 100k RMB from investors. According to the article, the company believes that if the investors pool their money together they can contribute under a single entity. The article concludes that GNet’s interpretation of the law is “flawed.” Selling the “IPO Dream” A large component of the alleged GNet sales pitch scam is the supposed intention to eventually take the projects public. GNet has actually been trying to go public in some

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form for several years but has been unsuccessful. For example, GNet’s has an e-commerce division called Gatewang. As you can see here, Gatewang had hopes of going public on the London Stock Exchange back in early 2013. Since going public is a large component of the pitch, it’s important that they can show some progress on that front. This led us to the saga of Gate Ventures, a company that has no connection to the business operations of Gatewang other than the word “gate.” On March 10th of 2015 Gate Ventures was listed on London’s alternative investment market (AIM) stock exchange. According to the Financial Times (FT), in March of 2015 Gate Ventures raised £3.24mil at £0.10 per share in a cash shell. At the time the company had no operations and the only plan they had announced was a £35k investment in the rights of a theatre production called “Being Woody Allen.” If you are unfamiliar with the AIM exchange, it is sub-market of the London Stock Exchange (LSE) reserved for smaller companies that are looking to raise capital. The listing requirements for AIM are quite low and regulatory oversight is provided by the issuer’s underwriter, or “nominated advisor” (NOMAD). This means that the NOMAD (investment bank) that brought the company public is also in charge of overseeing the company’s adherence to regulations. As you can imagine, several shady companies have made their way to the AIM exchange at one time or another and Gate Ventures appears to be one of those companies. The Gate Ventures prospectus revealed that the shareholder base consisted of ten individual shell companies with each holding 8.75% of Gate Ventures shares. All of the companies had been formed for the purpose of investing in Gate Ventures and aside from their Gate Ventures shares the companies had no other assets. No beneficial owners of the companies were listed. According to the FT article, eight of the ten companies were owned “by high net worth Chinese investors who had invested through specially constructed British Virgin Island shell companies.” Three days after Gate Ventures public listing, one of those companies called Black And White Investments Limited was bought by a Chinese investor named Jun Zhu. With the investment Jun Zhu became an owner of 8.75% of Gate Ventures. The FT article described Jun Zhu as “a businessman who runs a technology company called GNet, according to regulatory filings.” He is also a founder of GNet.

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Source: China National Enterprise Credit Information Publicity System: http://www.gsxt.gov.cn/index.html

As Gate Ventures stock began to surge, Jun Zhu bought another Gate Ventures shareholder called Black Elephant Ventures bringing his stake to 17% by the end of March. The Black Elephant Ventures purchase was particularly odd because Jun Zhu paid £1.45 per share for his second stake in the company. This equates to over a 1300% premium to Gate Ventures listing price of £0.10 at the beginning of that same month. Remember, Gate Ventures started out as purely a cash shell with roughly £3mil and some far-fetched plan to enter the entertainment business. Between March and June of 2015 Gate Ventures had an incredible run from £0.10 per share to £3.15 per share for a 3050% return in roughly 4 months. Then in June of 2015 Beaumont Cornish, the company’s NOMAD tasked with ensuring the company conformed to listing regulations, unexpectedly resigned. The stock was delisted from the AIM exchange and Gate Ventures investors were essentially trapped in the stock.

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Why would GNet executive Jun Zhu run up the shares of a low float shell with no business operations? It’s impossible to really know the intentions of Jun Zhu or GNet, but there is one obvious possibility. We speculate that it may be a desperate attempt to reinvigorate excitement among the GNet investor base that is becoming increasingly skeptical of the company’s legitimacy. It has been suggested that in lieu of actually going public, the company may be taking to some suspicious activity to provide the appearance that it is going public, or already is public. According to this blog post, Gatewang held an investor day in China on March 28th, 2015. This is the same month that Gate Ventures went public and GNet executive Jun Zhu had taken a large position in the company. The blog post says that GNet fraudulently claimed that its e-commerce division Gatewang had gone public under the ticker “GATE.” The blog says that Jun Zhu “waved aloft a piece of paper” that he called a “UK listing confirmation.” “GATE” is the same ticker that Gate Ventures used for their AIM listing. If true, it seems reasonable that GNet could have similar intentions for their investment in IPDN. IPDN is GNet’s Latest Public Offering? Amazingly, there have been blog posts in China claiming just that. At the 2016 GNet Macao Annual Celebration GNet was boasting that they had gone public in the US under the ticker IPDN. According to the snippet below, the CEO of IPDN Maoji (Michael) Wang wants GNet investors to remain mum on the new public listing. They warn that no one should post any information about the public listing on social media. No one should investigate either, because if the stock exchange finds out, it’s criminal!

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Source: http://bbs.tianya.cn/post-develop-2194525-1.shtml

The snippet above refers to “Mr. Zheng.” He is the CEO of GNet and one of the investors in CFL, which owns a majority stake in IPDN. Despite asking their “fans” not to discuss the public listing on social media, at least one fan went ahead and did so anyway…

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Source: http://tieba.baidu.com/p/4900763254?pid=101408408032&cid=0 - 101408408032

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Source: http://bbs.tianya.cn/post-free-5668968-1.shtml

This article exposes the GNet “scam” and sarcastically highlights that GNet claims they are “doing internet things” and “will go public.” It seems pretty clear that GNet wants to make sure its “fans and investors” are aware that they are taking steps to seek public listings for the company’s projects. What exactly this means for IPDN investors is unclear, but it’s probably not good to have your company taken over by a group of Chinese executives who, according to the media, are perhaps best known for their role in scamming investors. Implications for IPDN: CFL has stated that they intend to turn around IPDN by executing a strategic growth plan that includes expansion in the US and China. There has been some speculation that the company plans to become “the LinkedIn of China for women.” There’s only one

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problem with that. LinkedIn, now owned by Microsoft (MSFT), is the “LinkedIn of China.” IPDN’s attempt to compete in the US with LinkedIn has been an utter failure. Why would it be successful in China? IPDN is a nanocap with $12mil in cash and shrinking fast. MSFT is, of course, one of the largest technology companies in the world with $63bil in net cash. Good luck competing with that. In reality, it appears what the company is actually aiming to do is provide some Frankenstein like combination of services to Chinese women that includes education, training, networking, travel services, child services and a “helicopter pick-up service.” The company calls this division IAW. In SEC filings, the company recently submitted an investor presentation for this expansionary business model. It is hands down the most confusingly awkward business model we’ve ever reviewed. Below are some direct quotes taken from the presentation discussing the new China based initiatives to turn around IPDN’s failing operations.

IPDN Investor Presentation “Highlights” Regarding member benefits… “We select one lucky day each month and send you a bunch of flowers” “One time physical examination for free” “Children can experience English Online Training…” “Deliver speeches at our events for three times to promote your business” ~IPDN Presentation 3/14/17 pg. 15 Regarding online services… “IAW provides various Chinese and Western interest training courses within members’ needs, including painting, embroidery, management, jewelry appreciation, etc.” “Members can invite well-known American doctors to solve medical problems for members through IAW strong international network resources.” ~IPDN Presentation 3/14/17 pg. 17 Regarding their “advantage…” “Chances to meet, face-to-face, top celebrities in various industries – a can’t miss opportunity!” “To build a deep cooperation between Chinese and American top institutions that can bring you the splendid palace of academics.” ~IPDN Presentation 3/14/17 pg. 25 Regarding the education business model… To shape IPDN International Education as a platform gathering qualified high schools in the US and rich foreign services that can directly find suitable American high schools for students by connecting with national high schools, overseas study agencies, and personal agencies. And this platform can realize your online application and it can settle with all foreign service.” ~IPDN Presentation 3/14/17 pg. 40

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What!? Given IPDN’s current operational difficulties it appears they face a tall order, and $12mil isn’t going to take them very far.

Source: IPDN 8K, slide 14

The bottom line is, IPDN faces an uphill battle already, but what if the investor and media allegations made against GNet executives turn out to be true? Investors should consider the potential consequences.

What if the allegations are true?

1. If GNet is an empty shell, IPDN investors should have little hope in management’s ability to execute the plan to turn the business around.

2. Investors would have to question where GNet got the money to make the initial investment in IPDN in the first place.

3. Lastly, if the media reports are true, IPDN’s new CEO Maoji (Michael) Wang

and other CFL investors may face legal consequences, which could include arrest.

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To be clear, we are simply highlighting what others have already stated, including news media and blogs in China. We believe it is worth considering the potential consequences. We encourage investors to do their own independent due diligence on IPDN, and consult with a Chinese friend or colleague if necessary. Other Upstanding GNet Employees A co-founder and former executive of GNet named Li Zhaozeng left GNet to start a similar, competing company to GNet. He was later arrested for illegally raising money from investors. Again, given the extensive number of claims that GNet is a ponzi scheme, IPDN investors might consider that members of the Chinese group that now control the company could be at risk of suffering the same fate.

Source: http://www.dstoutiao.com/html/ds/ds12315/2015/0818/7863.html

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Source: http://bbs.tianya.cn/post-free-5668968-1.shtml

Also, GNet employee Bai Wucheng who was given an award as one of GNet’s top employees for 2015 was arrested for “pyramid scheming” in 2012.

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Source: http://tieba.baidu.com/p/4906136596 In Conclusion In 2016 IPDN Management found themselves in a desperate situation. Since its public debut in 2013 the company had never turned a profit and had accumulated a deficit of nearly $47mil with no sign of reaching profitability in sight. The revenue bump provided by the acquisition of the NAPW Network in 2015 was quickly eroding in 2016 as NAPW sales declined. There is nothing to suggest the company could have suddenly pulled out of this nosedive to somehow reach profitability. To believe so is to believe a farce. IPDN knew this. By their own admission, IPDN had few financing options and needed cash to remain a going concern. Companies in this position usually don’t survive for long. When GNet executives made their initial IPDN investment via the CFL shell in August of 2016, the company had a cash burn rate around $4mil per year with less than $1.3mil left on the balance sheet. The $20mil investment by CFL has allowed IPDN to put some cash back on the balance sheet and essentially extended the runway a bit. Unfortunately, the company’s desperation has led them to make a deal with an unscrupulous bunch. In China, GNet is well established as an investor scam according to various media sources. It is our opinion that CFL, the new majority shareholders of IPDN run by GNet executives, intends to somehow use the company to showcase their ability to bring various GNet projects public. We provided examples that appear to show this has already begun. This is consistent with what appears to have happened with Gate Ventures on the London AIM exchange. In that example, GNet executive Jun Zhu bought shares at a stratospheric premium to the cash assets of £3mil that were on Gate’s balance sheet at the time (the company had no other assets). Accounts of the incident claim that as Zhu was running up the stock, GNet was making false claims to investors that Gate Ventures

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was the public listing of Gatewang, their e-commerce portal. In reality Gate Ventures had no direct association with GNet or Gatewang and, if true, was used by GNet to dupe unsophisticated investors out of their money. Ultimately the stock was delisted after only 4 months on the AIM exchange and Gate Ventures investors were essentially left trapped in the shares. Similar to the Gate Ventures fiasco, CFL has unjustifiably paid a substantial premium for IPDN, a company with very few tangible assets. At the time of CFL’s acquisition of IPDN shares, IPDN had less than an $8mil market cap and tangible assets of only $6.6mil. The company was still losing money and likely would have run out of cash before year-end. It’s not hard to make a strong case that the company was worth nearly zero at this point, yet GNet executives paid an outrageous 126% premium for their shares. After accounting for dilution, this automatically brought the market cap to nearly $38mil. We struggle to determine how CFL could justify paying up for a company that was rapidly approaching bankruptcy. On the surface this appears to be a foolish investment on the part of CFL that has artificially inflated IDPN’s share value in our opinion. If the buyers were well established investors with a known history as savvy buyers of corporate assets than the price could be better justified. What we have with IPDN is a group of unknown China based investors with questionable motives. Therefore, the simple fact that they paid $9.60 for shares of IPDN does not mean the shares are actually worth that amount! In our view, IPDN’s valuation should not be based on what CFL paid for the shares but on what the assets of the company are actually worth. The assets of this money losing operation are worth a small fraction of what CFL paid for IPDN shares. CFL’s investment in IPDN was essentially a Chinese reverse merger into a pseudo shell. For the past several years investing in Chinese reverse mergers has been fraught with risk. In many cases these companies were eventually exposed as outright frauds and investors were left with nothing. While admittedly, it is impossible to know with certainty what CFL’s intentions are for IPDN, the established history of Chinese reverse mergers causes us to question them. Our concerns were only magnified when we found that CFL’s shareholders are all executives of GNet Group, a company seemingly well established in China as an investor scam. Valuation Currently the company has a market cap ranging between $45 to $50mil. It has a mere $12mil in cash and it’s burning fast. IPDN remains a money losing operation with steeply declining revenue. Although new management has plans to grow the business by expanding in the US and China, they have provided few details on exactly how they intend to do so successfully. What they’ve presented thus far is a disorganized hodgepodge of services they plan to roll out to Chinese women. How they plan to turn a profit on this model is a complete mystery. Any attempt to turn the business around

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will likely require substantial investment and in all likelihood won’t be initially profitable, if ever. We believe management’s poor reputation in China makes this an uphill battle, to say the least. We feel its fair to assume that IPDN will need to dip into the $12mil of new cash available on its balance sheet to return to growth. There is no guarantee it will ever be successful in this endeavor. Since the company is likely to remain unprofitable for the foreseeable future and will continue to burn cash, we cannot justify valuing the company above its cash value. Post the CFL transaction and post the 1-for-8 split the company has approximately 3.9mil shares outstanding for a cash valuation of $3.04 per share. Therefore we feel fully justified in setting a valuation target of $3.00 representing approximately 75% downside to IPDN shares. We believe our target is generous. Ultimately, if the company is unable to reach profitability and burns through its cash it is likely the company will be worth zero. FULL DISCLOSURE: Cliffside Research and our affiliates invest in the companies we cover. We spend great effort in our due diligence process. We make investments based on our conviction in our due diligence process. You should assume at the time of publication we hold a short position in securities of the company discussed in this report. Please see our full “Terms of Service” at the bottom of this report or at cliffsideresearch.com.

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Appendix: Item 1:

Full Translation of Southern Weekly Article You can find the full article here.

GNet Scam Using “IPO” Pretense to Make You Lose Everything

There are dozen of projects going public. After going public, the return won’t be as simple as a 2x return. On May 2016, Guangzhou Tianhe District, Pearl River New City, 31 floor of the “Guangzhou GNet Home”, “GNet fan” Ms. Huang swings a cellphone back

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and forth; the screen shows a list of 10 project “funds” along with the returns of each fund.

“GNet fan” is the official name of the GNet members. Founded in 2012, GNet markets that after a 100,000 RMB investment, investors can enjoy a “weekly dividend”, and a return of 200,000 RMB after two years. In April 2016, the high dividend of the “weekly dividend” became unsustainable. Afterwards, several “GNet prefix” funds emerged on the market for sale, and claimed that once the “fund project” becomes public, investors of the fund can convert their shares into “original common shares” 100,000 becomes 200,000 “Every fund has a project behind it, and they are doing very well operationally,” says Ms. Huang, who lives near the Guangzhou old train station, and was introduced to the GNet investment project by a friend. She explained to the Southern Weekly Reporter that if you were able to invest in GNet during the early period, you can enjoy the “weekly dividend.” But now the “weekly dividend” fund has been closed. You can still invest in other GNet funds in the short term for a high return, and have the optionality to convert those investments to “original common shares” once the project goes public. The so-called “weekly dividend” refers to where investors invest 100,000 RMB to GNet, and in two years or 104 weeks, those investors are entitled to a weekly dividend of 1000-1500 cash dividend, plus a quarterly dividend. A total of 200,000 RMB can be recovered. However, in the 200,000 RMB return, only 150,000 RMB is returned in cash, and 50,000 RMB as a form of points or “shopping vouchers” which can be spent on GNet’s E-commerce platform. “The earliest projects include the “GNet e-commerce platform” and the “GNet network”, which has already been listed. GNet Chairman secretary Liao Linyan tells the Southern Weekly Reporter. GNet e-commerce is an excellent e-commerce project. GNet network is a special O2O project, “weekly dividend” is primarily targeted towards these two projects. Liao Linyan also explains, if you can recommend another investor to become a member, you are able to enjoy a commission of 5%-8%. “This is not based upon how many people you introduce, but how much those people invest” she stresses. This means that the more members you bring, the greater the amount, and the more generous the commission.

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"GNet fan" Zheng Caiyun joined earlier than Ms. Huang. She (Zheng Caiyun) tells the Southern Weekend reporter, two years to double income is very attractive, which led to her interest in GNet. On GNet’s Wechat and Weibo account, “internet of things” and innovation has been repeatedly emphasized. GNet announces: China is currently implementing the “internet of things” strategy, and GNet’s projects, taking advantage of its member’s financial wealth, will utilize “internet of things” concepts with big data and cloud computing to create a new e-commerce ecosystem, and will create a revolutionary business model. In addition to online publicity, GNet also held numerous conferences, events, and lectures to preach these ideas. "Young people understand the Internet better, and they must seize this opportunity," says Ms. Huang. In April 2016, GNet sponsored a train from Fuzhou to Beijing, titled the “GNet unit” Many celebrities also attended the annual meetings and conferences of GNet, including the famous “Song Jia” who starred in the movie “Yan Ting Sheng Sheng” Since 2014, "Zhuhai Hengqin New Area GNet Media Co., Ltd. Shanxi distributor” Wechat account claims: “Song Jia used the GNet points to purchase a Mercedes Benz ML400, and has formally acquired the car on September 2.” In the official response of GNet to the Southern Weekly, they denied that “Song Jia” is a spokesperson for GNet. However, data shows that the relationship between GNet and Song Jia is more intimate than expected. In the filings of Guangzhou Yuekai Television Media Co., Ltd, Song Jia is shown to be one of the shareholders. The company is controlled by GNet. The Parent Company that Doesn't Exist However, what makes Ms. Huang, Zheng Caiyun and others excited is GNet’s grand ambition to go public. In march 2015, at the “2014 GNet annual celebration” in Guangzhou International Performing Arts Center , CEO of GNet Zhu Jun announces: GNet has officially gone public in the UK. The company (GNet) was established only 3 years ago. On August 21, 2012, Zhuhai Hengqin New Area GNet Technology Development Co., Ltd (hereinafter referred to as "GNet Technology", Zhuhai Hengqin New Area GNet Media Co., Ltd. (hereinafter referred to as "GNet Netcom"), Zhuhai Hengqin GNet Network Investment Management Co., Ltd. (hereinafter referred to as "GNet Investment"), were incorporated at the same time in Zhuhai Hengqin New District Administration for Industry and Commerce. The legal representative is Zheng Yongxiong.

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Liao Linyuan explains: “GNet’s headquarter is in Guangzhou. The official address is in Yuexiu District Dongfeng Road Dongbao building”. However, the National Industry and Commerce Database shows that the registered address of GNet is in Zhuhai City. The Southern Weekly reporter learned from the Yuexiu District Administration of Industry and Commerce that the registered address of the Dongbao "GNet company" is Zhuhai Hengqin New Area GNet Technology Development Co., Ltd. Guangzhou Branch, and Zhuhai Hengqin New Area GNet Netcom Media Co., Ltd. Guangzhou Branch. In other words, the two Dongbao building GNet companies are actually two subsidiaries of the Guangzhou branch. GNet is officially registered in Zhuhai City District. Upon visiting the registered address, the Southern Weekly reporter finds out that the room number does not exist, and there is no GNet company in the building. “Some other person visited as well, there is no such company,” The build office staff tells the Southern Weekly reporter. In 2015, GNet Technology has been labeled under “suspicious operation” by the Zhuhai City Administration of Industry and Commerce. Regarding the “suspicious operation” problem, Chen Liwen explains that it was due to the “100,000 RMB for 200,000 RMB return”. It had been a problem before, and the Zhuhai City Administration of Industry and Commerce demanded some operational changes to GNet. “100,000 RMB for 200,000 RMB return” mostly targets the “GNet e-commerce” and the “GNet network”. GNet is building out an e-commerce infrastructure, and using the hottest O2O concepts. Chen Liwen also provides operational reports to GNet members in the Zhuhai district. Those report claims that most of GNet Network’s income comes from the GNet Terminals, which costs 100,00 RMB to the franchisees (storefronts). After following the GNet Guangzhou Wechat group, which disclosed the locations of these franchisees, the reporter travelled across Guangzhou Yuexiu, Haizhu, and Tianhe District, and investigated the operational status of 10 franchisees. These franchisees include a coffee shop on Tianque Road, a hotel on Longkou Road, and a BBQ shop on Kongding Market. Three franchisees were closed upon visit, and the GNet Terminals were collecting dust in a corner.

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A BBQ shop near Zhuying, an eyewear shop on Jiaoyang Road, a haircut shop on Huaishi Road, and a beauty shop on Wansheng Road have been meeting the required transaction amount for the GNet Terminal. A store manager for a communications equipment provider tells the Southern Weekly report that he has no idea how to use the Terminal or what the benefits are. “The reason it's placed so far away is because the Terminal blocks the entrance, and very few people use it. It is also inconvenient due to power connection issues,” says the beauty shop manager on Wansheng Road. Based on what the manager introduces, GNet Terminals are provided for free to the franchisees, and they never paid the 100,000 RMB franchisee fee. “Some business operations are good, and some business operations are bad” explains the GNet PR manager Zhang Yong, “you just happened to stumble across the bad operations.” Fund “Shell” Technique After describing the “100,000 RMB for 200,00 RMB return” Liao Linyuan introduces the current marketed “funds” of GNet. “You can invest in the angel round for 1 RMB, and dispose it at the A round for 1.50 RMB, that way you don’t need to wait for the project to go IPO,” Liao Linyuan explains. “Fund” investment starts at 100,000 minimum, and you can invest only for a few months for a 30-40% return, or perhaps even higher. The GNet “fund” will never make you lose money, you can be reassured. She explains, these “funds” operate on 3-4 rounds until they are sold out. Once a fund has been sold out, it will be “locked in” and investors will wait for the project to IPO. For emphasis, once “locked in”, these funds cannot be redeemed, until a successful IPO. Once the IPO does happen, investors are eligible for the ludicrous “original common shares” of the listed entity. From using the cellphone of Ms. Huang, the Southern Weekly reporter learned that only the confirmed investors are eligible to access the list of funds under the “GNet” platform. These funds include “GNet Property”, “GNet Pay”, “GNet Fresh”, “GNetBox”, “100 CommerceTravel”, “GNet Fashion”, “GNet Network”, “GNet Entertainment”, “GNet Union”, “Jingmao Property”, GNet Cloud.” A total of 11 “funds.” Liao Linyuan explains: behind every fund is an operational project. All these projects are in preparation for public listing. “All of these projects are performing very well, and therefore are eligible for IPO.”

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Chen Liwen responds: all of these projects are under GNet, and are represented by independent legal counsels. Private Equities, after investment in GNet projects, want to attract outside capital. Therefore they use the GNet blueprint to market for outside money. “The marketing is done by the fund, and if there are any problems, the fund will be held responsible”. Chen Liwen explains: GNet only has a contractual relationship with the fund company. GNet does not issue the fund. “We don’t sell the fund, the fund is sold by fund management companies, and has no relationship to GNet” However, if everything is done by the fund management company and not GNet, why is all the marketing material, promotions, and transactions done at the GNet headquarter? Chen Liwen responds, because this is authorized by GNet, but some locations are not authorized. He is not sure about the authorization status across China. Chen Liwen also provided a list of GNet contracts. He reassures the Southern Weekly Reporter that the funds are private equity funds. However, on July 1, 2014, The Securities Commission issued a “Private Investment Fund Supervision and Management of the Interim Measures” regulation, which stated that solicitation can only be done for qualified individuals. Qualified investors shall make investments not less than 1 million RMB, and net asset must not be below 3 million RMB or 3 year income not below 500,000 RMB. Chen Liwen interpretation of the private equity is flawed. He believes that if all the retail investors pooled money together, they can contribute under a single entity. Zhang Yong explains: the “100,000 RMB for 200,000 RMB return” does exist. Under the regulation of the Zhuhai Administration of Industry and Commerce, it has been removed. Regarding to what happens to investors who invested less than 2 years, he is not certain. “Some are cashed out, but most are converted, if cashed out it would not be for 200,000 RMB”. Zhang Yong states that most of the “100,000 RMB for 200,000 RMB return” investors are converted into the GNet project “fund”, but he is unclear of the exact operation.

Selling the “IPO Dream”

Found under the 11 “fund” projects, the reporter tried investigating “GNet Entertainment”. All the reporter could find was an Android game called “Shen Tou Li Li”

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disclosed under a GNet Wechat account. However, the game was not able to be downloaded on the Android. Liao Linyuan explains: GNet Property has some land in Guangzhou Keyun Road, and Haikou City, which will be used to sell real estate development, and is preparing for IPO. “I’ve never seen the land, but our management has. Mr. Zheng (Zheng YongXiong) only sleeps 3 to 4 hours per day, helping us make money”. After warning from the Southern Weekly Reporter, Ms. Huang says that she does not need to go to Kexun Road for due diligence, and that she trusts the company. “We already have projects that IPOed, the rest of the projects will soon IPO as well”, Liao Linyuan says. Chen Liwen corrects Liao Linyuan, GNet property has two pieces of land, but it is not at Keyun Road. “It’s all marketing, anyone can say what they want, but my vision is in the future.” Zhang Yong says, “At the 2014 Annual GNet Celebration”, they have announced a successful IPO, and showed members the public listing on the London AIM Board. Material discloses that it is a company called Gate Ventures. Investor material shows they believe Gate Venture will be the IPO for GNet E-commerce. But in July 24, 2015, Forbes China issued an article titled “The shell company and its mysterious stock increases.” The report discloses that as Gate Venture only became public in March 2015, and is just an empty shell valued at £3 million. After the listing, Zhu Jun acquired 8.74% of the company, and later acquired 17%. In March 2015, Zhu Jun acquired Gate Ventures, and became a shareholder in GNet Network For this, Chen Liwen explains, GNet wanted to use a complicated capital maneuver to use the London company as a shell. However, the Forbes article also mentions that Gate Ventures has already withdrawn from the AIM. Chen Liwen explains, even though Gate Ventures withdrew from AIM, you can still find it on BRITDAQ. BRITDAQ is part of the capital market, so this stock is not a scam, but a listed company. Chen Liwen says. However according to Sohu “Qianwang” report, The London Stock Exchange officially explains that Gate Venture BRITDAQ is not a public exchange, and has nothing to do with the London Stock Exchange anymore.

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Item 2:

Supporting Material Related to GNet

Source: http://tieba.baidu.com/p/4991543831

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Source: http://tieba.baidu.com/p/4991543831

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Source: QQ (Tencent) Chat Group, Group ID: 438490339

Source: QQ (Tencent) Chat Group, Group ID: 438490339

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Source: http://tieba.baidu.com/p/4688571864

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