Professional Diversity Network, Inc. — Q3 2016 Form 10-Q
Business context and period. The unaudited quarter and nine months ended September 30, 2016 cover three businesses: the Professional Diversity Network (PDN), National Association of Professional Women (NAPW), and Noble Voice. Revenue is generated mainly from NAPW memberships, lead generation, and recruitment services. The filing was signed November 14, 2016. Comparative 2015 financial information was revised for an error involving deferred revenue acquired with NAPW; management said the error was not material to previously filed periods.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2016 | $6.36 million | $20.55 million |
| Revenue, 2015 revised | $9.22 million | $30.01 million |
| Net loss, 2016 | $1.27 million | $3.52 million |
| Net loss, 2015 revised | $31.81 million | $34.44 million |
| Operating cash flow, 2016 | Not separately provided for the quarter | $(2.49) million |
| Adjusted EBITDA, 2016 | $(0.34) million | $(1.33) million |
- Quarterly revenue declined 31.0% year over year; nine-month revenue declined 31.5%. Quarterly and nine-month net losses were substantially lower, primarily because the revised 2015 comparison includes a $26.74 million goodwill impairment charge.
- Gross profit was approximately $5.62 million for Q3 and $18.12 million for the nine months, implying gross margins of approximately 88.3% and 88.2%, respectively. These compare with approximately 84.1% and 84.5% on revised 2015 figures.
- Q3 revenue by segment: NAPW $3.80 million, PDN $1.00 million, and Noble Voice $1.55 million. NAPW revenue fell 36.5%, Noble Voice fell 33.4%, while PDN rose 11.3%. Nine-month revenue declines were 30.4% at NAPW, 42.8% at Noble Voice, and 6.4% at PDN.
- For the nine months, cost of revenue fell 47.6%, sales and marketing fell 40.1%, and general and administrative expense fell 18.7%, reflecting reduced spending, staffing and operating footprint. Lower revenue and a $500,000 litigation-settlement expense were offsets to the cost reductions.
- Cash and cash equivalents were $516,000 at September 30, down from $2.07 million at December 31, 2015. Operating cash use was $2.49 million; investing activities provided $694,000 and financing activities provided $239,000. The company reported a $10.60 million working-capital deficit and $46.87 million accumulated deficit.
- At September 30, the Master Credit Facility had $1.94 million principal outstanding ($828,000 net of unamortized issuance costs); the balance sheet also showed a $445,000 promissory note. The credit facility was repaid and terminated after quarter-end, and the promissory note was terminated in a November settlement.
Material developments, outlook and risks
- Financing and control: On November 7, 2016, the company issued 1,777,417 shares to Cosmic Forward Limited (CFL) at $9.60 per share and repurchased 312,500 shares in a tender offer. It reported approximately $9.0 million net proceeds after the tender purchase, debt repayment and transaction expenses. CFL acquired 51% ownership on a fully diluted basis and may nominate five of nine directors while its ownership remains above the specified threshold. A one-year lock-up applies, subject to exceptions; CFL also received registration rights.
- Outlook: Management expected revenue to continue declining during the remaining three months of 2016, with a slight increase in 2017, mainly from PDN and Noble Voice, and increases across all segments in 2018 and 2019. It expected operating losses to continue for the foreseeable future, while stating that available funds and operating cash flow should cover working capital needs for the next 12 months. Management cautioned that these plans and funding expectations are not assured.
- Liquidity dependence: The September-quarter cash position and working-capital deficit were weak. The post-quarter equity proceeds materially changed liquidity, but the filing cautions that proceeds may not be sufficient to implement productivity initiatives and that further funding might be needed.
- Accounting and controls: Management found no additional NAPW goodwill impairment necessary at September 30, 2016. However, disclosure controls were deemed ineffective because of material weaknesses in internal control over financial reporting; remediation efforts continued and rely substantially on manual review.
- Legal matters: A $500,000 wage-and-hour class-action settlement was accrued, subject to court and agency approval. LinkedIn sought payment of amounts it alleges are due under a marketing agreement; mediation was scheduled for December 2016 and the outcome was uncertain. The filing also describes NLRB and EEOC proceedings; management did not anticipate material financial impact from those matters.
- Other unusual items: The company recorded a $424,000 gain on cancellation of its Los Angeles office lease and a $401,000 non-cash expense from a warrant fair-value change. It effected a 1-for-8 reverse stock split on September 27, 2016; share and per-share information was retrospectively adjusted.
Most important facts for investors to verify
- Whether the CFL transaction proceeds and operating results support management’s stated 12-month liquidity expectation, and whether additional capital is required.
- Whether revenue declines stabilize as forecast, particularly at NAPW and Noble Voice, and whether planned salesforce investment improves bookings and revenue.
- How CFL’s controlling ownership, board nomination rights, registration rights and future share sales affect governance, public float and minority shareholders.
- The status and final cost of the $500,000 class-action settlement, LinkedIn litigation, and the EEOC and NLRB matters.
- Progress in remediating material weaknesses and any further effects of the revised 2015 deferred-revenue accounting.