Professional Diversity Network, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. PDN operates online diversity-focused professional networks and recruitment services (PDN Network) and a women’s professional networking organization (NAPW Network). China operations are reported as discontinued operations.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $1.485 million | $0.982 million; up 51.1% |
| Loss from continuing operations | $0.756 million | $1.422 million loss |
| Net loss | $0.771 million | $1.492 million loss |
| Basic and diluted loss per share | $0.06 | $0.17 |
| Operating cash flow | $0.769 million used by continuing operations; $0.734 million used in total | $0.574 million used by continuing operations; $0.558 million used in total |
| Cash and cash equivalents | $2.342 million at March 31 | $2.118 million at December 31, 2020 |
| Working capital | $0.684 million deficiency | $1.156 million deficiency at December 31, 2020 |
| Total liabilities | $5.074 million | $5.328 million at December 31, 2020 |
| Stockholders’ equity | $0.964 million | $3.346 million at December 31, 2020 |
Cost of revenue was $261,000, implying an approximately 82% gross margin. Loss from continuing operations was approximately 55% of revenue. The filing reports no interest expense or borrowing debt; lease liabilities totaled approximately $518,000, including current and non-current portions. Current deferred revenue was $2.115 million.
Changes and operating trends
- Recruitment services revenue rose 107% to $1.175 million. Management attributed the increase to improvements to its e-commerce platform, new sales collaborations, client acquisitions, and increased client diversity-recruitment initiatives. PDN Network revenue more than doubled to $1.220 million.
- Membership and related-services revenue fell 31% to $263,000. Management cited declining legacy-member retention and COVID-19-related pressure on discretionary spending and new enrollment. NAPW Network revenue was $264,000.
- Total costs and expenses fell 4% to $2.308 million. Lower general and administrative expense, including the absence of the $450,000 litigation reserve recorded in Q1 2020, was partly offset by higher sales and marketing costs.
- The Company raised $1.0 million in a February private placement by selling 500,000 shares at $2.00 per share. It also issued 150,000 shares valued at $166,500 as part of the White Winston settlement. Outstanding shares increased to 13,465,022 from 12,819,843 at year-end.
Outlook, risks, and unusual items
- Going concern: Management says available funds and operating cash flow may not meet working-capital needs for the 12 months after issuance of the statements. The filing states that substantial doubt exists about the Company’s ability to continue as a going concern. Management expects continued losses and says it may need cost reductions, higher revenue, additional equity or a strategic transaction; success and financing availability are uncertain.
- China cash seizure and listing: The Company disclosed that Chinese authorities seized approximately $2.9 million from a frozen PDN China bank account on April 22, 2021, after quarter-end, and says it reflected the reduction in the March 31 statements. The resulting reported equity of $964,228 is below Nasdaq’s stated $2.5 million continued-listing threshold. The Company is exploring ways to increase equity, including issuing shares, and is seeking return of the funds, but recovery is uncertain. Approximately $195,000 remained in the account and was also described as frozen.
- Litigation: NAPW has a landlord judgment of approximately $746,000, with settlement discussions ongoing. A separate wage-and-hour case was scheduled for trial in 2021; the Company disputes liability and had recorded a $450,000 reserve in 2020. The White Winston matter settled for $766,500, including cash and shares.
- Potential investment: The Company entered an agreement to acquire a significant equity stake in RemoteMore and paid a $60,000 deposit. The filing does not state that the transaction had closed.
- COVID-19: Management warns that ongoing or renewed restrictions could affect sales, profits, liquidity, and access to capital. No quantified financial guidance is provided.
- Controls: Management concluded disclosure controls were ineffective and reported unremediated material weaknesses involving revenue-sharing arrangements, receivable allowances, and foreign-subsidiary financial data. Remediation efforts include added accounting resources, updated procedures, closing checklists, staff training, and outside consultants.
Important facts for investors to verify
- Reconcile the cash balance: the balance sheet reports $2,342,343 at March 31, while the going-concern note states $2,324,343.
- Reconcile operating cash use: the cash-flow statement and MD&A report $769,098 used in continuing operations, while the going-concern note states $935,598.
- Confirm the accounting and timing for the approximately $2.9 million China-account seizure, its effect on reported equity, and the status of Nasdaq listing compliance and any remediation plan.
- Check the status and terms of the RemoteMore transaction, the $60,000 deposit, and the pending litigation matters.
- Confirm the filing’s inconsistent signature-date language: it refers to execution on May 20, 2020, while the signature block gives May 17, 2021.