Professional Diversity Network, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2015. The company operates the Professional Diversity Network (PDN), the National Association of Professional Women (NAPW), and Noble Voice, which provides career consultation and lead-generation services. Results include NAPW and Noble Voice for periods not included in the 2014 comparisons, so reported growth is substantially acquisition-driven.
Key financial results
- Revenue: Q3 revenue was $9.34 million, up 493% from $1.58 million; nine-month revenue was $30.44 million, up 692% from $3.85 million. Q3 segment revenue was NAPW $6.11 million, Noble Voice $2.33 million, and PDN $0.90 million.
- Profit and margins: Q3 net loss was $29.66 million ($2.05 per share), versus $0.94 million ($0.14 per share) in Q3 2014. Nine-month net loss was $31.98 million ($2.33 per share), versus $1.69 million ($0.26 per share). Cost of revenue implies gross margins of approximately 84% in both the quarter and nine-month period. Operating losses were $26.68 million and $30.50 million, respectively, heavily affected by impairment. Adjusted EBITDA, a non-GAAP measure, was a loss of $0.92 million for Q3 and $2.71 million for nine months.
- Cash flow: Nine-month operating cash use was $4.21 million, compared with $3.70 million in 2014. Investing activities provided $3.91 million, primarily from investment maturities; financing activities provided $2.66 million, including stock-offering proceeds. Cash increased $2.36 million to $3.88 million.
- Liquidity and debt: Cash and short-term investments totaled $4.63 million. Current assets were $9.52 million and current liabilities $14.74 million, resulting in a $5.22 million working-capital deficit. Current notes included $62,000 payable on the Noble Voice acquisition and a $445,000 promissory note to former NAPW executive Matthew Proman. The Proman note payment was deferred because NAPW did not meet specified performance criteria.
- Other metrics: Goodwill fell from $45.18 million at year-end 2014 to $20.60 million after the impairment charge. Deferred revenue was $8.56 million. The company had 14.43 million common shares outstanding at September 30, 2015.
Material changes versus prior periods
- Revenue rose sharply, principally because NAPW was acquired in September 2014 and Noble Voice in November 2014; 2014 comparisons include only limited or no contribution from those businesses.
- Q3 included a $24.72 million goodwill impairment charge related to NAPW, following recurring operating losses. This was the main driver of the substantially larger GAAP net loss and reduced reported goodwill.
- Membership and lead-generation revenue grew with the acquired businesses, while consumer advertising and marketing solutions revenue declined, partly following the end of the Apollo Group agreement. PDN recruitment revenue increased modestly.
- The company raised approximately $5.24 million gross through common-stock sales in April and May; net proceeds were approximately $4.6 million. Shares outstanding increased during the period.
Outlook, commentary, risks, and unusual items
- Management said it was reducing costs and integrating the businesses, and believed available funds and expected cash flows would support operations for the next 12 months. It cautioned that plans may not succeed and additional funding could be needed.
- Management reported monthly Adjusted EBITDA deficits narrowing from approximately $554,000 in July to $331,000 in August and $34,000 in September. It planned to close the Los Angeles call center and estimated annual savings of roughly $1.1 million to $1.2 million, while acknowledging a possible near-term revenue decline during transition. It expected to recover that revenue rate by the end of Q1 2016; this is management’s expectation, not a guarantee.
- Management cited NAPW’s new eChapter and CRM, the Hire AdvantEdge product, and a tested work-from-home sales model as initiatives intended to improve member engagement, sales productivity, and cost efficiency. It planned to test paid PDN memberships and expand recruitment products in 2016.
- A $3.94 million valuation allowance was recorded against deferred tax assets; the company also reported income tax expense despite its losses. The filing attributes this to its assessment of deferred-tax-asset realizability.
- NAPW employment-related litigation was settled without a material reported effect. Noble Voice faced a business dispute and a consumer Telephone Consumer Protection Act case; outcomes were uncertain, and the company said it would defend both. Five other employment-related claims were also disclosed.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2015. Remediation of previously identified internal-control weaknesses was ongoing; management said manual reviews remained important and that several quarters of successful operation might be needed before concluding remediation was complete.
Most important facts for investors to verify
- How much of revenue growth reflects sustainable performance versus acquisitions, and whether NAPW and Noble Voice can reach profitability.
- Whether the $24.72 million NAPW goodwill impairment adequately reflects the business outlook and whether further impairment is possible.
- Cash consumption, the working-capital deficit, deferred-revenue obligations, and whether management’s 12-month liquidity assessment holds.
- Progress and realized savings from the Los Angeles closure and work-from-home transition, including any revenue or retention effects.
- Resolution and potential financial exposure from the disclosed litigation, and progress remediating ineffective disclosure controls and internal-control weaknesses.