Professional Diversity Network, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited, compared with Q1 2015. The company operates the PDN professional networks, the National Association of Professional Women (NAPW), and Noble Voice career-consultation and lead-generation businesses.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior period |
|---|---|---|
| Revenue | $7.34 million | $10.70 million; down 31.4% |
| Operating loss | $1.90 million | $2.50 million |
| Net loss | $1.44 million; $0.10 per share | $1.54 million; $0.12 per share |
| Adjusted EBITDA (non-GAAP) | $(474,000) | $(1.41) million |
| Net cash used in operating activities | $445,000 | $465,000 |
| Cash and cash equivalents | $1.70 million | $2.07 million at Dec. 31, 2015 |
| Short-term investments | $250,000 | $500,000 at Dec. 31, 2015 |
| Working capital | $(7.94) million | $(6.74) million at Dec. 31, 2015 |
- Total costs and expenses fell 30.0% to $9.24 million. Cost of revenue was $885,000, equal to about 12.1% of revenue, versus about 16.0% a year earlier; corresponding gross margin was approximately 87.9% versus 84.0%.
- Cash decreased by $370,000 in the quarter. Investing activities provided $241,000, mainly from investment maturities; financing activities used $166,000, primarily reflecting the merchant reserve.
- At March 31, total assets were $39.23 million, total liabilities $17.97 million, and stockholders’ equity $21.26 million. Current liabilities were $13.07 million against current assets of $5.12 million; the filing attributes much of the working-capital deficit to deferred revenue from prepaid memberships and recruitment contracts.
- Current liabilities included a $445,000 promissory note. The new revolving facility had not closed and no borrowing under it was reported at quarter-end.
Material changes and business trends
- Revenue declined across the principal businesses: NAPW revenue fell 27.0% to $5.13 million; PDN Network revenue fell 24.3% to $696,000; and Noble Voice revenue fell 44.9% to $1.52 million.
- Management linked lower revenue to salesforce reductions, reduced marketing and data spending, facility closures, and contraction in markets served by Noble Voice. Sales and marketing expense fell 42.2%, and general and administrative expense fell 7.0%.
- Noble Voice reduced cost of sales to $446,000 from $1.09 million and reported segment gross margin of 70.6%, up from 60.3%. Its operating loss nevertheless increased, reflecting the sharp revenue decline.
- PDN recruitment-services bookings declined 21.5% to $698,000; NAPW membership-fee bookings declined 42.2% to $4.18 million. Registered PDN users increased 108.1% to approximately 8.1 million, while NAPW membership increased 11.1% to approximately 861,000, including paid and unpaid members.
- Consolidated net loss narrowed 6.7%, despite lower revenue. Reduced operating losses at NAPW and PDN were partly offset by a higher Noble Voice loss. The quarter included a $500,000 labor-class-action settlement accrual.
Outlook, financing, and risks
- Management said it was controlling costs, removing duplicative expenses, developing products, and seeking to grow salesforces in future periods. It expected available funds and operating cash flow to support operations for the next 12 months, while cautioning that plans may fail and additional funding could be needed.
- A March 30, 2016 credit facility with White Winston provides for up to the lesser of $5 million or 75% of eligible receivables, subject to required regulatory approvals. The company expected closing in May 2016 and anticipated an initial $2 million borrowing. The facility bears 8% interest, is secured by a first-priority lien on company assets, and includes a 3% annual fee on unused capacity beginning after the first year. Warrants for up to 3.75 million shares are contemplated upon closing; the lender may also obtain board-nomination rights if it owns more than 10% of the company. The filing states approvals had not yet been received as of its filing date.
- The facility includes a minimum adjusted current-ratio covenant of 1.4 to 1 beginning with the period ending December 31, 2016; deferred revenue is excluded from that calculation. Additional borrowing depends on eligible receivables and, in some cases, lender discretion.
- Several lawsuits were settled or agreed in principle for nominal amounts, subject to approvals. A California wage-and-hour class action settlement of $500,000 was agreed April 28, 2016, subject to court and agency approval, and recorded in accrued expenses at March 31. Other employment and regulatory matters remained pending; management said some claims were without merit or not expected to be material, but outcomes are uncertain.
- Management concluded disclosure controls and procedures were ineffective as of March 31, 2016. The company continued remediation of previously identified material weaknesses, including added segregation of duties and payroll and accounts-payable review procedures; remediation was not yet complete.
- Other stated risks include continuing operating losses, possible NASDAQ delisting, competition, privacy and regulatory compliance, attracting and retaining personnel, and the ability to generate eligible receivables or secure additional financing.
Most important facts for investors to verify
- Whether regulatory approvals were obtained and the credit facility closed, including actual borrowings, costs, warrant issuance, and covenant compliance.
- Whether cost reductions and new products can stabilize revenue and improve cash generation, particularly given lower bookings and declines across all three segments.
- Cash runway, the growing working-capital deficit, and the company’s ability to meet obligations without additional financing.
- Approval and payment of the $500,000 settlement and the outcomes or costs of remaining litigation and employment matters.
- Progress in remediating material weaknesses in internal controls and any subsequent change to management’s conclusion that disclosure controls were ineffective.