Professional Diversity Network, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company operates the Professional Diversity Network (PDN) recruitment and career networks and the National Association of Professional Women (NAPW) membership network. China operations were discontinued and reported separately.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.306 million | $1.341 million | $3.240 million | $3.973 million |
| Loss from continuing operations | $0.912 million | $0.644 million | $4.116 million | $1.837 million |
| Net loss, including discontinued operations | $0.942 million | $0.777 million | $4.273 million | $2.708 million |
| Basic and diluted net loss per share | $0.07 | $0.11 | $0.39 | $0.47 |
| Adjusted EBITDA (non-GAAP) | $(0.006) million | $(0.607) million | $(2.027) million | $(1.705) million |
- Revenue mix and changes: Q3 recruitment services revenue rose 17.7% to $930,000, while membership revenue declined 38.2% to $319,000. For the nine months, recruitment revenue rose 8.0% to $2.069 million; membership revenue fell 45.7% to $1.056 million.
- Costs and margins: Q3 total costs and expenses were $2.226 million, down 1.1%; nine-month expenses were $7.388 million, up 13.4%, principally reflecting litigation reserves and higher share-based compensation. Gross margin, calculated as revenue less cost of revenue, was approximately 84% for both Q3 and the nine-month period; the filing does not present this margin as a reported metric.
- Cash flow: Nine-month operating cash use was $2.834 million overall, including $2.768 million from continuing operations. Investing cash use was $78,000; financing provided $4.928 million, including $4.277 million from stock sales and $651,000 from a PPP loan. Cash increased by $2.052 million to $2.685 million.
- Liquidity and debt: At September 30, cash was $2.685 million and working capital was negative approximately $752,000. Total liabilities were $5.866 million. PPP loan balances totaled approximately $651,000, divided between $163,000 current and $488,000 long-term; management expected to seek forgiveness, but it had not yet been granted.
- Equity: Common shares outstanding increased to 12.82 million from 8.93 million at December 31, 2019, following equity sales that generated approximately $4.277 million in gross proceeds during the nine months.
Material changes, outlook and risks
- Management reported a recovery in PDN during Q3, attributing recruitment growth to investments in e-commerce, technology and digital advertising, as well as increased client demand for diversity recruiting. It expected further recruitment growth and new client acquisitions in Q4 2020; in-person events had shifted online, with positive enrollment and sponsor feedback.
- NAPW continued to weaken: management cited lower new enrollment and retention amid COVID-19-related economic uncertainty. Website and digital advertising improvements were underway, with completion anticipated before year-end.
- The company stated that cash and operating cash flow might not meet working-capital needs for the next 12 months. Recurring losses, negative operating cash flow and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Management said it would need cost reductions, revenue growth and/or additional capital, but provided no assurance these efforts would succeed or be available on acceptable terms.
- China operations were suspended and discontinued. Approximately $2.9 million associated with the EGBT investment remained in a Chinese bank account frozen by authorities and was classified as a long-term asset of discontinued operations. The filing says its release and any need to unwind or further document the transaction remain uncertain.
- Litigation: The company recorded $1.475 million of litigation reserves during the nine months. A White Winston settlement agreed after quarter-end totaled $766,500, comprising $600,000 cash and $166,500 in shares; $250,000 was paid October 29, with the remaining $350,000 cash due by February 16, 2021. Other matters include a landlord judgment against NAPW of approximately $746,000, for which a $780,000 reserve was recorded, and a wage-and-hour case with a $450,000 reserve and settlement discussions underway.
- Controls: Management concluded disclosure controls were ineffective at quarter-end and identified material weaknesses involving financial reporting information, technical accounting expertise, documentation of non-routine transactions and controls over foreign subsidiaries. Remediation efforts included hiring an interim CFO and strengthening close and review procedures.
- Other forward-looking risks include the company’s history of losses and need for financing, competition, privacy regulation, technology and market changes, and retaining key personnel. No formal financial guidance was provided.
Key facts for investors to verify
- Whether operating performance and cash generation improve enough to address the stated going-concern uncertainty and working-capital deficit.
- Whether Q4 recruitment growth materialized and NAPW membership declines stabilized.
- Whether the approximately $2.9 million China-related frozen funds are recovered and what final accounting or legal treatment is required.
- Whether the PPP loan was forgiven and how the White Winston settlement and other legal matters were ultimately paid or resolved.
- Whether management remediated the disclosed material weaknesses and restored effective disclosure controls.
- The extent of future dilution and financing needs following the increase in shares outstanding during 2020.