Professional Diversity Network, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results include the PDN Network, NAPW Network and Noble Voice. NAPW and Noble Voice were acquired in 2014, so year-over-year comparisons are not directly comparable.
Financial performance
- Revenue: $10.70 million, up 764.6% from $1.24 million. NAPW contributed $7.02 million, Noble Voice $2.76 million and PDN $0.92 million.
- Costs and operating results: Costs and expenses were $13.21 million versus $1.79 million. Operating loss was $2.50 million versus $0.55 million. Cost of revenue was $1.71 million, implying an approximately 84% gross margin; the filing does not present gross margin as a reported measure.
- Net result: Net loss was $1.54 million, or $0.12 per diluted share, compared with a $0.26 million loss, or $0.04 per share. The 2015 loss included a $0.97 million income tax benefit.
- Cash flow: Operating cash use was $0.46 million, versus $0.35 million. Investing activities provided $2.79 million, mainly from maturities of short-term investments; financing activities used $0.31 million for an increase in merchant reserve. Cash increased $2.02 million to $3.53 million.
- Liquidity: Short-term investments were $2.28 million, for cash and investments totaling $5.81 million. Current liabilities exceeded current assets by approximately $7.83 million based on the balance sheet; MD&A reports a working-capital deficiency of $7.77 million.
- Debt and obligations: Notes payable were $1.36 million, related-party notes payable $0.44 million and capital lease obligations $0.02 million. The related-party note payment of $137,500 due May 15, 2015 was deferred to August 15 because NAPW did not meet specified performance criteria. Future minimum lease payments totaled $5.95 million.
- Balance sheet: Total assets were $72.70 million, including $45.18 million of goodwill and $14.20 million of net intangible assets. Total liabilities were $20.48 million; stockholders’ equity was $52.22 million.
Changes and business developments
- Revenue growth primarily reflects the addition of NAPW and Noble Voice to the consolidated results. NAPW membership fees and related services represented about 63% of revenue; lead generation represented about 26%.
- PDN revenue declined to $0.92 million from $1.24 million, with the filing attributing the decrease to the termination of agreements with LinkedIn and Apollo. Direct bookings rose 26.6% to $967,000, excluding bookings from those former customers.
- Sales and marketing expense increased to $6.62 million, including NAPW lead-generation advertising and sales-team costs. Management said it was controlling costs, eliminating duplicative expenses and integrating the acquired businesses.
- PDN registered users increased 16.9% during the quarter to approximately 4.08 million. NAPW reported more than 775,000 paid and non-paid members.
- In April, the company sold 1.67 million shares at $3.00 per share for $5.01 million gross proceeds. The filing gives different estimates of net proceeds—approximately $4.4 million in one section and $4.6 million in another. An additional 75,100-share overallotment was expected to close May 15.
Outlook, risks and unusual items
- Management projected positive operating cash flow by December 31, 2015 and said available funds and anticipated cash receipts should support operations for the next 12 months. It cautioned that execution, revenue generation and unforeseen funding needs could affect liquidity.
- Management viewed Hire AdvantEdge, launched in Q1, as a growth opportunity and reported that daily job-seeker matches had exceeded internal goals. These statements are forward-looking and not assurances of future results.
- NAPW litigation involving former employees reached a settlement in principle in April 2015; management expected the company’s contribution, largely within insurance limits, not to materially affect financial condition. A separate Noble Voice lawsuit remained pending, and the company intended to defend against the claims.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2015. Remediation work was ongoing, including added finance personnel, improved segregation of duties and engagement of an external reporting specialist.
- Results are exposed to recruitment-market conditions, membership acquisition and retention, customer demand, integration execution and the need for continued spending on sales, marketing and product development. Management noted historical seasonality in recruitment activity.
Investor verification points
- Reconcile the reported working-capital deficiency with the balance-sheet current-asset and current-liability totals.
- Confirm net proceeds from the April offering and the status and final proceeds of the overallotment.
- Track operating cash flow, cash needs and progress toward management’s year-end positive operating cash-flow target.
- Assess whether NAPW membership revenue and lead-generation growth can support the increased sales and marketing costs.
- Monitor the related-party note’s deferred payment, the NAPW settlement and the pending Noble Voice litigation.
- Review remediation of the disclosed ineffective controls and reconcile share-count disclosures, including the May 14 outstanding-share figure.