Professional Diversity Network, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. The company operates the PDN and NAPW professional networks and Noble Voice lead-generation business.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $6.85 million | $10.40 million | $14.19 million | $21.10 million |
| Operating loss | $0.94 million | $1.32 million | $2.84 million | $3.83 million |
| Net loss | $0.81 million | $0.78 million | $2.25 million | $2.32 million |
| Net loss per share | $0.06 | $0.06 | $0.16 | $0.17 |
| Operating cash flow | Not separately stated for the quarter | $(2.23) million | $(2.82) million |
- Revenue fell 34.1% in Q2 and 32.7% in the first half. First-half declines were concentrated in membership fees and related services (31.3%) and lead generation (46.8%); product sales and other revenue increased 64.0% from a low base.
- Derived gross margin was approximately 88.3% in Q2 and 88.1% in the first half, versus 85.8% and 84.9% in the comparable 2015 periods. Operating loss margin was approximately 13.7% in Q2 and 20.0% in the first half.
- Management’s non-GAAP Adjusted EBITDA was a loss of $0.51 million in Q2 versus $0.34 million, and a loss of $0.99 million in the first half versus $1.79 million.
- At June 30, cash and cash equivalents were $1.29 million, down from $2.07 million at December 31, 2015. Current assets were $4.09 million and current liabilities $11.67 million, a reported working-capital deficit of $7.58 million. Accumulated deficit was $43.14 million.
- The company reported $1.57 million of gross borrowings under its White Winston facility, with a $0.33 million carrying amount after unamortized debt issuance costs. It also had a $445,000 promissory note. The filing says cash was significantly lower by the report date but does not provide a clear updated amount.
Changes versus prior comparable periods
- Cost reductions lowered first-half total costs and expenses 31.7%, including a 40.1% reduction in sales and marketing and an 18.2% reduction in general and administrative expense. The six-month net loss improved only modestly; Q2 net loss increased about 3.6% despite lower revenue and expenses.
- NAPW revenue declined 29.3% in the first half, and Noble Voice revenue declined 46.8%. PDN Network revenue declined 15.6%. Noble Voice’s first-half net loss increased to $0.66 million from $0.29 million.
- Cash used in operations improved to $2.23 million from $2.82 million, but deferred revenue decreased by $2.38 million, using cash as memberships and other services were recognized.
Outlook, financing, and risks
- Management expects continued operating losses and revenue declines during the remainder of 2016; it anticipates a slight increase in 2017, mainly in PDN and Noble Voice, and increases across segments in 2018 and 2019. These are expectations, not quantified revenue guidance.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management’s ability to operate beyond September 2016 depended on cost controls, further lender advances, the proposed CFL transaction, or additional financing. The company warned that failure to obtain funding could require it to curtail operations.
- The White Winston facility is limited by eligible receivables, with discretionary advances possible at the lender’s option. The company had drawn approximately $435,000 above availability as of June 30. The facility bears 8% interest, is secured by a first-priority lien on company assets, and includes covenants, including a minimum adjusted current ratio beginning December 31, 2016.
- On August 12, 2016, after quarter-end, the company agreed to a proposed stock sale to Cosmic Forward Limited (CFL) intended to give CFL approximately 51% ownership. The agreement also provides for a tender offer of up to 2.5 million shares at $1.20 per share. Completion remained subject to stockholder approval and other conditions, including regulatory review. A failed transaction could leave the company needing other financing and could trigger termination payments in specified circumstances.
- Unusual items include a $500,000 accrued wage-and-hour class-action settlement, subject to court and agency approval, and a $424,000 gain on cancellation of the Los Angeles office lease. The company disclosed other employment and consumer-related proceedings; several were settled for confidential nominal amounts. It disputed a demand for repayment of the $445,000 note.
- Management concluded disclosure controls and procedures were not effective at June 30, 2016 because of previously identified material weaknesses in internal control over financial reporting. Remediation efforts were ongoing.
Key facts for investors to verify
- Updated cash balance, near-term cash needs, and whether the company secured additional advances or other financing.
- Status and final terms of the CFL transaction and tender offer, including stockholder approval, CFIUS review, closing conditions, and potential dilution or control changes.
- White Winston facility availability, any waiver or default status, compliance with covenants, and the treatment of its warrants.
- Revenue and bookings trends, particularly membership renewals and Noble Voice lead-generation demand, against management’s outlook.
- Approval and payment timing of the $500,000 settlement, the promissory-note dispute, and progress remediating control weaknesses.