Professional Diversity Network, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. The company operates diversity-focused professional networks, NAPW, career lead-generation services through Noble Voice, and newly launched China operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4.42 million | $6.36 million | $15.32 million | $20.55 million |
| Operating loss | $2.71 million | $1.28 million | $18.83 million | $4.12 million |
| Net loss | $2.49 million | $1.27 million | $17.66 million | $3.52 million |
| Net loss per share, basic and diluted | $0.63 | $0.70 | $4.52 | $1.94 |
| Cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $6.45 million | $2.49 million |
Revenue less cost of revenue implies gross margins of approximately 85% for Q3 2017 and 88% for Q3 2016, and 86% for the first nine months of 2017 versus 88% in 2016. These are calculated from reported revenue and cost of revenue.
At September 30, 2017, cash was $2.82 million, down from $6.07 million at December 31, 2016. Working capital was negative $1.48 million, compared with positive $1.00 million at year-end 2016. Total liabilities were $9.46 million; the balance sheet lists no borrowings. Total assets were $24.12 million, including $10.28 million of goodwill and $7.04 million of net intangible assets. Stockholders’ equity was $14.66 million.
Changes and operating drivers
- Q3 revenue fell 30.5% year over year; nine-month revenue fell 25.5%. NAPW was the largest source of the decline: its revenue decreased 41.5% in Q3 and 44.4% year to date, primarily amid salesforce reductions and changes to marketing and sales practices.
- PDN Network revenue declined 24.5% in Q3 and 12.4% year to date. Noble Voice revenue fell 11.8% in Q3 after losing a business partner late in Q2, though it rose 4.7% for the nine-month period.
- China operations generated $69,000 of Q3 revenue and $899,000 year to date, with $408,622 of nine-month operating loss. The company reported seven education and training events in the first half, attracting over 7,800 paid attendees.
- Q3 sales and marketing expense declined 25.7% to $2.28 million, while general and administrative expense increased 7.5% to $3.24 million. Nine-month general and administrative expense rose 26.8% to $11.32 million.
- The company recorded a $9.92 million goodwill impairment in the first half of 2017 after recurring NAPW operating losses. This was the principal unusual item behind the increase in nine-month net loss.
Liquidity, outlook, risks and contingencies
- Management expects available funds and cash generated from operations to meet working-capital needs through November 2018, but expects operating losses to continue. It cautions that additional financing or further cost reductions may be needed and that financing may not be available on acceptable terms.
- Operating cash use was $6.45 million in the first nine months, versus $2.49 million in the comparable 2016 period. Financing activities provided $3.50 million, including $3.00 million gross proceeds from the January 2017 share issuance to Cosmic Forward Limited (CFL).
- CFL beneficially owned 54.64% of the company on a fully diluted basis and could nominate five of nine directors. The filing identifies potential conflicts with other stockholders, limited public float, and possible share-price pressure from future CFL sales. The one-year CFL lock-up was nearing expiration after the reporting period.
- Management reported that disclosure controls and procedures were not effective at September 30, 2017 because of material weaknesses in internal controls. Remediation efforts were ongoing; management noted that manual controls may need to operate successfully for several quarters before the weaknesses can be considered remediated.
- The company accrued approximately $146,000 for potential back pay in an NLRB proceeding and disputed the amount and reinstatement obligation; a hearing was scheduled for January 2018. A separate EEOC complaint had not yet resulted in a lawsuit. White Winston Select Asset Funds threatened a claim alleging $2.24 million in damages; the company denied liability. The previously disclosed $500,000 wage-and-hour class settlement was concluded.
- Management planned to expand women’s networking from NAPW toward an international IAW platform and to develop China education, training, and membership businesses. It also anticipated a December 2017 Beijing event. These are plans, not guaranteed outcomes.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018 using the full retrospective method; it was still assessing the impact, including possible deferred-revenue adjustments and prior-period restatements.
Key facts for investors to verify
- Whether NAPW membership revenue and sales productivity stabilize after salesforce and marketing changes, and whether the impairment signals further asset risk.
- Cash burn, negative working capital, and the assumptions supporting management’s liquidity outlook through November 2018.
- China operations’ ability to convert announced events and memberships into recognized revenue and sustainable margins.
- Progress in remediating material weaknesses in internal controls and developments in the NLRB, EEOC, and threatened White Winston matters.
- CFL’s control, post-lock-up trading activity, and the effects of its majority ownership on governance and public-share liquidity.