Professional Diversity Network, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The company operates professional networking and recruitment businesses, the NAPW women’s network, Noble Voice lead-generation services, and newly launched China operations.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $5.63 million | $7.34 million; down 23.2% |
| Gross profit / gross margin | $4.93 million / approximately 87.6% | Approximately $6.46 million / 88.0% |
| Operating loss | $3.69 million | $1.90 million |
| Net loss | $3.10 million | $1.44 million |
| Net loss per share, basic and diluted | $0.80 | $0.80; weighted-average shares rose to 3.87 million from 1.81 million |
| Operating cash flow | $(3.36) million | $(0.44) million |
| Cash and working capital | $5.56 million cash; $1.43 million working capital at March 31 | $6.07 million cash and $1.00 million working capital at December 31, 2016 |
| Debt and liquidity | No debt balance is reported on the balance sheet; total liabilities were $10.95 million | Management expects available funds to cover working capital needs through May 2018 |
Cash declined by $0.51 million in the quarter. Financing provided $2.86 million, chiefly from the January stock issuance to CFL; operating cash use included a reported $1.45 million payment to LinkedIn related to litigation. Total assets were $39.96 million and stockholders’ equity was $29.01 million at quarter-end.
Material changes versus Q1 2016
- Membership fees and related services fell 44.1% to $2.82 million, primarily reflecting NAPW salesforce reductions and changes to marketing and lead-generation activity. NAPW segment revenue declined 44.2%.
- Lead-generation revenue rose 13.4% to $1.72 million; PDN Network revenue increased 4.2% to $0.72 million. China generated $0.32 million from education and training, with no comparable prior-year revenue.
- General and administrative expense increased 43.2% to $4.53 million, including higher stock compensation, China start-up costs, bad-debt expense and nonrecurring legal and compliance costs. Sales and marketing expense decreased 14.8% to $3.25 million.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $2.34 million versus a loss of $0.48 million.
- PDN registered users increased 17.3% to approximately 9.49 million; NAPW total membership increased 8.7% to approximately 936,000, including unpaid members.
Outlook, risks and notable items
- Management expects continuing operating losses for the foreseeable future and says available funds are expected to meet working-capital requirements through May 2018. Additional financing or further expense reductions may be needed; financing may not be available on acceptable terms.
- The company expects NAPW revenue to remain lower year over year for at least the rest of 2017, with anticipated increases in 2018 and 2019 from planned investment in product, marketing and salesforce development. These are expectations, not firm guidance.
- China operations are in an early launch stage. Management reported four events held in China during March and April 2017, with approximately 5,300 paid attendees cumulatively.
- CFL acquired 312,500 shares for $3.0 million gross proceeds in January and beneficially owned 54.64% of the company on a fully diluted basis. CFL can nominate five of nine directors; the filing highlights control, limited public float and potential future share-sale risks.
- Legal matters include an NLRB proceeding whose remedial order was affirmed by the Ninth Circuit, and an EEOC matter in which the agency made a preliminary discrimination finding; the complainant had not filed suit. A separate $500,000 wage-and-hour class settlement was funded in December 2016, with final administration expected to conclude in 2017.
- Management concluded disclosure controls and procedures were ineffective at quarter-end because of material weaknesses in internal control over financial reporting. Remediation efforts were ongoing; a full-time CFO was appointed March 7, 2017.
Important facts for investors to verify
- How quickly NAPW revenue and paid-member conversions can stabilize after salesforce and marketing reductions.
- Whether the cash runway estimate through May 2018 remains achievable given continuing losses and operating cash use.
- The nature and accounting treatment of the reported $1.45 million LinkedIn-related payment, and its relationship, if any, to the separately described $500,000 class settlement.
- China operations’ recurring economics, costs and ability to generate revenue beyond initial events.
- Progress in remediating material control weaknesses and the status and potential exposure of the NLRB and EEOC matters.
- Potential effects of CFL’s majority control, share-sale rights and concentrated ownership on governance and trading liquidity.