Business context and reporting period
Professional Diversity Network, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company operates online professional networks serving diverse professionals and employers. On September 24, 2014, it acquired NAPW, a women-focused professional membership network; NAPW results are consolidated only from the acquisition date, so reported 2014 comparisons do not reflect a full period of NAPW operations.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.58 million | $0.98 million | $3.85 million | $2.88 million |
| Operating loss | $0.58 million | $0.46 million | $1.93 million | $1.14 million |
| Net loss | $0.94 million | $0.27 million | $1.69 million | $0.89 million |
| Operating cash flow | Not separately presented | $(3.91) million | $0.51 million |
- Year-over-year revenue rose 60.9% in Q3 and 33.7% for the nine-month period. The company reported Q3 gross margin of approximately 75% and nine-month gross margin of approximately 70%, calculated from revenue less cost of sales and services.
- Q3 and nine-month operating margins were approximately negative 37% and negative 50%, respectively. Net losses include significant acquisition-related costs and tax benefits.
- At September 30, cash and cash equivalents were $1.82 million and short-term investments were $9.24 million. Current assets were $14.24 million versus current liabilities of $17.90 million, resulting in a $3.66 million working-capital deficit.
- Total liabilities were $22.28 million, including a $434,582 related-party acquisition note and $17,093 of current capital-lease obligations. No material long-term borrowing balance is shown.
- Operating cash use was $3.91 million; investing cash use was $12.97 million, including purchases of short-term investments and acquisition cash consideration. Cash fell $16.91 million from year-end 2013.
Material changes and unusual items
- LinkedIn’s reseller agreement ended March 29, 2014. It had provided fixed payments of $500,000 per quarter; LinkedIn revenue was zero in Q3 2014 versus $500,000 in Q3 2013, and $494,444 for the first nine months of 2014 versus $1.5 million in 2013.
- Apollo Group terminated its agreement effective October 9, 2014. The contract paid $116,667 monthly; Apollo represented 27% of nine-month 2014 revenue. The loss of this revenue follows the LinkedIn termination.
- The NAPW acquisition consideration was approximately $40.1 million, principally 6.31 million shares, plus $3.56 million cash, a note, options and warrants. Preliminary purchase accounting recorded $44.62 million goodwill and approximately $14.38 million of identifiable intangible assets. Goodwill was not tax deductible.
- Q3 includes $968,839 of acquisition-related costs. The nine-month tax benefit of $1.13 million was primarily deferred and noncash. The company reported no goodwill or intangible-asset impairment at September 30.
- Unaudited pro forma results assuming NAPW had been acquired January 1, 2013 showed revenue of $7.57 million and net loss of $0.21 million for Q3 2014, and revenue of $22.32 million and net loss of $2.72 million for nine-month 2014. These illustrative figures are not the reported consolidated results.
Outlook, management commentary and risks
- Management said available funds and operating cash flow should meet working-capital needs for the next 12 months and expected the company to generate cash in 2015. This outlook should be weighed against cash burn, the working-capital deficit, and the loss of two significant customers.
- Management expects NAPW to contribute more revenue than PDN in future periods and plans to invest in member acquisition, retention, benefits and technology. It described a new networking platform as expected in December 2014, planned 18 NAPW events in 2015, and identified approximately $3.2 million in annual combined-company expenses for potential reduction.
- Direct-sales and event growth partially offset the lost LinkedIn revenue. Q3 direct bookings were $846,202, up 336% year over year; bookings are a management performance indicator, not recognized revenue or guaranteed future sales.
- Material risks include execution and integration of NAPW, membership renewal and acquisition, customer concentration, potential impairment of acquisition goodwill and intangibles, and possible dilution or market pressure when merger shares become eligible for resale. NAPW-related litigation is in early discovery; the company said it cannot estimate likelihood or potential exposure.
- Potential severance compensation was approximately $3.9 million, and future minimum lease payments totaled $6.58 million. The $445,000 related-party note is subject to performance-based payment deferrals; NAPW did not meet specified criteria for the September quarter, so the November 2014 installment was deferred.
- Management concluded disclosure controls and procedures were ineffective at quarter-end and identified a material weakness involving segregation of duties and complex accounting. Remediation efforts were underway, but management said several quarters of successful operation may be needed before concluding the weakness is remediated.
Most important facts for investors to verify
- Whether the company can replace the recurring LinkedIn and Apollo revenue with profitable direct sales, and the timing and durability of those sales.
- Whether NAPW membership growth, renewals, margins and integration deliver the projected contribution and expense savings.
- Liquidity and cash-flow forecasts against actual operating cash use, working-capital needs, acquisition-note payments and other commitments.
- Final NAPW purchase-price allocations, valuation assumptions and any subsequent impairment indicators.
- Progress in remediating the material weakness, and developments in the NAPW lawsuits and potential exposure.
- Timing and potential market impact of registration and resale of the 6.31 million merger shares, subject to contractual restrictions.