Professional Diversity Network, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 14, 2017. The company operates diversity-focused professional networks, NAPW, career-consultation and lead-generation services, and newly launched China operations.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $5.26 million | $6.85 million | $10.90 million | $14.19 million |
| Operating loss | $12.43 million | $0.94 million | $16.12 million | $2.84 million |
| Net loss | $12.07 million | $0.81 million | $15.18 million | $2.25 million |
| Net loss per share, basic and diluted | $3.07 | $0.45 | $3.89 | $1.24 |
| Adjusted EBITDA (non-GAAP) | $(1.63) million | $(0.51) million | $(3.98) million | $(0.99) million |
Revenue fell 23.2% in both Q2 and the first half year over year. Gross profit, calculated as revenue less cost of revenue, was approximately $4.43 million in Q2 (84.2% gross margin) and $9.36 million in the first half (85.9%); corresponding 2016 margins were approximately 88.3% and 88.1%. The reported losses include a $9.92 million non-cash goodwill impairment charge related to NAPW. Income tax benefits were $345,000 in Q2 and $947,000 in the first half.
Revenue trends and operating changes
- NAPW revenue decreased 47.0% to $2.47 million in Q2 and 45.5% to $5.33 million in the first half. Management attributed the decline principally to salesforce reductions and changes to sales and marketing practices.
- Noble Voice lead-generation revenue increased 13.3% to $1.60 million in Q2 and 13.4% to $3.33 million in the first half, reflecting an improved private-education marketplace and efforts to increase lead volume and quality.
- PDN Network revenue declined 11.5% to $682,000 in Q2 and 4.1% to $1.41 million in the first half. China Operations, which began in 2017, generated $505,000 in Q2 and $830,000 in the first half through education and training events.
- Sales and marketing expense declined 24.6% in Q2 and 19.5% in the first half, largely reflecting lower NAPW sales staffing. General and administrative expense rose 29.2% in Q2 and 36.6% in the first half, driven by legal fees, China expansion costs, stock compensation, rent and director compensation.
Cash, liquidity and capital
- Cash and cash equivalents were $4.95 million at June 30, 2017, down from $6.07 million at December 31, 2016. Working capital declined to approximately $327,000 from $1.00 million.
- Operating activities used $4.51 million in the first half, versus $2.23 million in the prior-year period. Investing activities used $117,000; financing activities provided $3.50 million, including $3.00 million of gross proceeds from the January stock issuance and a $646,000 merchant-reserve refund. Ending cash decreased by $1.12 million.
- No borrowings are reported on the June 30 balance sheet; the company said it repaid amounts outstanding under its Master Credit Facility in 2016. Total liabilities were $10.52 million.
- In January, the company issued 312,500 shares to Cosmic Forward Limited (CFL) for $3.00 million gross proceeds, approximately $2.82 million net. CFL held 54.64% of common shares on a fully diluted basis and could nominate five of nine directors.
- Management believed available funds would meet working-capital requirements through August 2018, but cautioned that operating losses are expected to continue and additional funding or further expense reductions may be needed.
Outlook, risks and unusual items
- Management expected NAPW revenue to remain below the prior year for at least the rest of 2017, with potential increases in 2018 and 2019 tied to investment in products, marketing and salesforce development. Management said Q2 PDN sales and operational changes were expected to support a Q3 revenue increase. These are expectations, not formal financial guidance.
- The company reported a $9.92 million NAPW goodwill impairment after recurring operating losses. Goodwill declined to $10.28 million from $20.20 million at year-end 2016.
- Cash used in operations includes $1.45 million paid to LinkedIn in connection with litigation settled in 2016. A separate $500,000 class-action settlement expense was recorded in 2016; the court reported that matter complete in August 2017, with formal dismissal expected.
- An NLRB order requiring remedial actions was affirmed by the Ninth Circuit; the company was working with the NLRB, which was expected to levy a make-whole remedy. The company did not expect a material negative financial impact. Two EEOC matters were disclosed, including a July 2017 complaint; the filing does not quantify potential exposure.
- Nasdaq notified the company of an Audit Committee composition deficiency covering February 13 through June 2, 2017. The company regained compliance after appointing two independent directors, and Nasdaq closed the matter.
- Management concluded disclosure controls and procedures were not effective at June 30 because material weaknesses in internal control remained. Remediation efforts included purchase and vendor controls, approval authorities, monthly close procedures and accounting-department changes; management said several quarters of successful operation may be needed before concluding remediation is complete.
- Other stated risks include ongoing operating losses, declining revenue, uncertain fundraising prospects, China expansion and execution risks, competition, legal and regulatory exposure, and CFL’s control and potential future share sales.
Important facts for investors to verify
- Whether NAPW revenue and salesforce restructuring stabilize, and whether management’s projected recovery in 2018–2019 materializes.
- Cash burn, working-capital needs and the assumptions supporting management’s liquidity runway through August 2018.
- The impact of the NAPW impairment and continuing segment losses on future asset values and profitability.
- Progress on material-weakness remediation and any subsequent assessment of internal-control effectiveness.
- Developments and potential costs in the NLRB and EEOC matters, and the status of the class-action dismissal.
- CFL’s controlling ownership, governance influence, and the effect of any future registered or public share sales.