Professional Diversity Network - Refuting The Short Thesis

| About: Professional Diversity (IPDN)
This article is now exclusive for PRO subscribers.


Whenever a short seller omits key facts, as I believe The Street Sweeper's article did last week, it’s a red flag… indeed it’s my skull and crossbones.

Recent majority investors paid $20 million for 54.6% of the Company at $9.60 (IPDN closed at $9.87 on February 23, 2017).

Unlike most reverse splits that create low float stocks but have no cash and no future growth story, IPDN has cash, no debt, supportive majority investors and a growth plan.

Short sellers make money when a stock goes down. So when a short seller writes an article it usually tries to expose reasons why a stock should fall. It is important for long and short authors to present complete facts when writing about stocks.

I believe a fellow authors' short thesis article (now removed from Seeking Alpha) on Professional Diversity Network (NASDAQ:IPDN) did not give the complete, current, factual picture on IPDN. The market has appeared to agree as the stock closed green on the day of the article and is still higher to this day.

I seek to refute points of the recent article with facts and then present the long thesis for IPDN.

1) Warrants - The Full Facts

The short author posted this about the recently registered IPDN warrants:

Here are the facts:

White Winston, a private investment fund, was the former lender of IPDN and also a stockholder. The warrants wrote about were a result of the former loan facility.

The short author said the loan deal is now terminated. That sounds bad. Actually the correct description is the loan deal was paid off in full when the new investors put $20 million into the IPDN at $9.60 per share. Therefore, it was terminated because it was paid off and no longer needed.

On November 7, 2016, in connection with the closing of the CFL Transaction described below, the company (i) repaid in full amounts owed under the Master Credit Facility and (ii) terminated the Master Credit Facility and related agreements between the company and White Winston, including the Board Representation Agreement. All security interests created under the Master Credit Facility were released upon repayment of the amounts due under and the termination of the Master Credit Facility.

(Source: company SEC filing)

The short author said the shares were registered so White Winston can "sell off the lion's share of its stock... now." and "it's obvious White Winston wants to cash in the cheapo stock and get the heck out of Dodge while the gettin's good." These are total assumptions that the author of the short article knows the motive for registering these warrants and what White Winston will do with them now that they are registered.

Actually, the warrants had to be registered because they became exercisable as a result of the new investors putting $20 million into IPDN at $9.60 per share.

On August 10, 2016, the company entered into an Amendment to Master Credit Facility and Consent and Waiver Agreement (the "Amendment") with White Winston in connection with the CFL Transaction (see Note 8). Pursuant to the Amendment, White Winston consented to the CFL Transaction and waived its participation rights and board representation rights under the Board Representation Agreement in connection with the CFL Transaction. In consideration for the Amendment, the company agreed that the Pro Rata Warrant would be fully exercisable, notwithstanding the pro rata formula set forth in the warrant, and paid a fee of $15,000. In addition, White Winston granted the company an option to repurchase its outstanding, in-the-money warrants following consummation of the Tender Offer on the terms set forth in the Amendment.

(Source: company SEC filing)

Another important fact to note is that IPDN has the option to repurchase the White Winston in-the-money warrants now that the new investors have closed their deal for 54.6% of the company.

As far as knowing the motives of what White Winston will do with the registered shares, here is what they had to say about IPDN on June 30, 2016:

Item 4. Purpose of Transaction.

The Fund acquired the Warrants in the belief that the Shares were undervalued. The Reporting Persons have been in discussions with members of the Issuer's management and Board of Directors since November 2015 regarding a possible investment in the Issuer, ways to enhance shareholder value, and the possibility of representation for the Fund on the Issuer's Board of Directors.

(Source: company SEC filing)

So in contrast to what the short author stated, White Winston thought IPDN was undervalued and wanted to invest in them just last year.

The shares became effectively registered February 13, 2017. If White Winston sold any they would have to file a form stating they did. There have been no filing as of this date. Even if White Winston did sell some or all of their holdings, IPDN would still have one of the lowest public floats on the Nasdaq (more on this later).

In conclusion, the short author tried to lead us to believe they knew the reason and motive to the warrants registration, but the full picture of facts from the SEC filings gives us a different picture.

2) Mistake in understanding how a reverse split works.

The short author described the IPDN reverse split like this:

Yes, it is true that when a 1-for-8 reverse split occurs that the share price will go higher by a multiple of 8 the effective day of the split. In this case IPDN closed at $0.72 and then opened at $5.60 after the 1-for-8 reverse split. The short author then stated "IPDN's lender could saddle up and begin selling its cheap stock for about eight times more than it could possibly expect before the split." This is true but what the short author failed to mention is that seller would also have 8 times LESS shares after the split. There is no difference in the amount of shares multiplied times the share price before or after a reverse split.

3) Customer complaints and declining revenue

The short author pointed out some selected customer complaints about the IPDN business. I don't refute these complaints. Good luck trying to find any business that does not have customer complaints. You won't be able to.

Revenue has been declining for the company and so has their losses declined drastically in the last quarter (more about that soon).

4) IPDN new majority owners invested $20 million for 54.6% of the company, not only $2 million

The short author made this statement about the new majority investors:

This is true. However, if I do not know the complete facts, I may read this and think that the majority owners, Cosmic Forwarded Limited, only put in $2.8 million for 54.6% of IPDN.

The complete facts are the Cosmic Forward Limited has invested $20 million at $9.60 per share for 54.6% of IPDN.

The first $17 million on November 7, 2016:

On November 7, 2016, Professional Diversity Network, Inc., a Delaware corporation ("PDN"), consummated the issuance and sale of 1,777,417 shares of PDN's common stock, par value $0.01 per share (the "Common Stock"), to Cosmic Forward Limited, a Republic of Seychelles company wholly-owned by a group of Chinese investors ("CFL"), at a price of $9.60 per share (giving effect to PDN's 1-for-8 reverse stock split effective on September 27, 2016), pursuant to the terms of its previously announced stock purchase agreement, dated August 12, 2016 (the "Purchase Agreement"), with CFL (the "Share Issuance"). IPDN received total gross proceeds of approximately $17.1 million from the Share Issuance.

(Source: company SEC filing)

Then, as recently as January 17, 2017, Cosmic Forward Limited bought another $3 million worth of IPDN at the same $9.60 per share to give them the 54.6% ownership.

I think a good question is would an investment group make a $20 million investment in IPDN at $9.60 per share in order to sit back and do nothing? Would they recently add to their position if the goal wasn't to grow and add value to their large investment at $9.60 per share? IPDN closed at $9.87 on February 23, 2017.

The short author then made this comment about Cosmic Forward Limited:

IPDN has been transparent about who Cosmic Forward Limited is, if you care to do a little research into SEC filings.

(Source: company SEC filing)

Maoji (Michael) Wang is the managing partner of Beijing Daqian Law Firm, and has held that position since November 2005. Mr. Wang has also served as a vice president at GNet Group Plc, an e-commerce company based in China, since April 2014, and as Chief Executive Officer of Tibet Weibai Investment Fund Management Co., Ltd. since March 2016, Guangzhou Gaixin Network Technology Development Co., Ltd. since May 2016 and Guangzhou Yougaojiu Marketing Management Co., Ltd. since June 2016. He has also worked as a supervisor at Guangzhou Wu Wei E-commerce Services Co., Ltd. since January 2015 and Yunnan Linkenuodi Education Information Consulting Co., Ltd. since November 2012.

Jingbo Song has served as Chairman of GNet Group Plc., an e-commerce company based in China, since March 2016. Before joining GNet Group Plc., Mr. Song was retired.

(Source: company SEC filing)

Cosmic Forward has also been transparent about growth plans:

Mr. Wang noted that the company has identified multiple areas of opportunity which, if realized, may position PDN for healthy growth into the future, including:

(1) Leveraging the company's relationship with CFL and its affiliates' technical expertise, Chinese contacts and resources, and the company's existing human and technology capital, to develop new U.S. business lines, potentially including a China-U.S. education brokerage and an e-commerce business;

(2) Developing a PDN wholly foreign-owned enterprise ("WFOE") in China and using both the company's existing expertise and related resources in the networking business and CFL's China expertise and contacts to expand the NAPW networking business and other potential educational and training businesses to China;

(3) Developing a PDN wholly-owned subsidiary or Special Purpose Vehicle ("SPV") in Hong Kong, and leveraging both PDN and its relationship with CFL to develop new businesses through the SPV in China, potentially including a broad-scale education platform;

(4) Identifying financing in the capital markets to help with the company expansion.

5) The real current state of IPDN financials

The short author used very selective financial information that frankly did not give the accurate picture.

Current financial facts

Actually, after the Cosmic Forward Limited investments, IPDN has approximately $12 million in cash and no debt.

On November 7, 2017, after the last 10-Q was filed and after the first investment of $17 million by Cosmic Forward Limited, the company disclosed their new cash position of $9 million after paying off all debt.

PDN received total gross proceeds of approximately $17.1 million from the Share Issuance, or $14.1 million after giving effect to the payment for 312,500 shares of Common Stock tendered and not withdrawn in the Tender Offer. PDN received approximately $9.0 million in net proceeds from the Share Issuance, after repayment of outstanding indebtedness and the payment of transaction-related expenses at the closing.

(Source: company SEC filing)

In January 2017, they received $2.8 million in net proceeds after the second Cosmic Forward Limited investment for a total of $11.8 million in cash. This is almost four times the amount of cash on hand that the short author told us IPDN has.

In the most recent quarter, IPDN reported sales down 31% but they also reported that adjusted EBITDA was down to a loss of $342k due to cost cutting measures. Even with reduced sales the run rate loss, (if you assumed it will not improve with continued cost cutting measures) would be $1.3 million ($342k multiplied by four quarters). With $12 million cash and no debt, this is hardly a situation where a company "needs to raise money" as the short author made it sound as if it was a certainty.

6) Public Float Analysis

There are 3.9 million shares outstanding and approximately 400-600 thousand shares outstanding in the public float per my calculations using SEC filings.

-Matthew Proman may have sold his shares to Cosmic Forward Limited but I cannot find any SEC filings stating that. As a result of this, the public float could be anywhere from 415-620 thousand (Less retail holders and funds that hold less than 5% ownership).

-Cosmic Forward is the new majority owners that just bought 54.6%.

-North Star is a fund that has owned IPDN since the days of their IPO.

-White Winston was written about in the warrants section.

-Ladurini has been a shareholder since the beginning of the company.

-Proman was the founder of NAPW and as stated may or may not still hold his shares.

-There have been no recent Form 4 filings for insider sales as of the writing of this article.

This is one of the lowest public floats on the Nasdaq that I see. This link lists the IPDN public float as 316 thousand.

If there has been selling in the stock, given the lack of SEC filings indicating otherwise, process of elimination would leave it to be retail sellers, funds that own less than 5% of IPDN, or short sellers.


Shorting low float stocks carries high risk as we have seen in big moves. I assumed to have been short squeezes in the last year in DryShips Inc. (Nasdaq:DRYS) ($5 to over $100), and most recently Gravity Co. Ltd (Nasdaq:GRVY) ($10 to $36). DRYS had an approximate float of 1 million and GRVY approximately 1.4 million at the time of their big moves.

Additionally, being long low float stocks carried risk as trading can be thin and volatile both ways.

7) Long thesis

  • Unlike most reverse splits that create low float stocks that have no cash and no future growth story, IPDN has approximately $12 million in cash, no debt and new majority investors that recently bought 54.6% ($20 million) of the company for $9.60 per share.
  • The new owners plan to grow the business with several parts to the growth strategy, including expanding the professional networking for women into China, e-commerce in the USA and developing other new businesses.
  • The new owners are successful in China as they are owners in GnetGroup O2O e-commerce (Forbes called O2O e-commerce a potential trillion dollar industry) and mentioned exploring e-commerce in the USA.
  • Would an Investment group make a large $20 million investment in IPDN at $9.60 per share in order to sit back and do nothing? Would they recently add to their position if the goal wasn't to grow the company and add value to their investment at $9.60 per share?

I released this article at 8:45 am EST Friday February 24, 2017 on my blog at and to my subscription newsletter service on at 8:45 am EST Friday February 24, 2017.

Disclosure: I am/we are long IPDN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.