Professional Diversity Network, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2019, compared with the three months ended March 31, 2018. PDN operates diversity-focused professional networks and recruitment services, the National Association of Professional Women (NAPW), and China operations. Noble Voice was sold in May 2018 and is reported as discontinued operations.
Financial performance and liquidity
- Revenue: $1.346 million, down 41.8% from $2.313 million. Membership fees and related services were $829,420 (down 48.6%); recruitment services were $474,260 (down 23.7%).
- Profit and margins: Operating loss was $1.202 million, versus $2.097 million. Continuing-operations loss was $1.145 million, versus $1.825 million; net loss including discontinued operations was $1.159 million, versus $2.034 million. Basic and diluted loss per share was $0.23, versus $0.48. Gross margin was approximately 86.1%, compared with 87.6%, calculated using reported cost of revenue.
- Costs: Total costs and expenses were $2.548 million, down 42.2%. General and administrative expense fell $992,000, sales and marketing fell $312,000, and depreciation and amortization fell $459,000. The amortization reduction largely reflects a $2.796 million NAPW intangible-asset impairment recorded in Q4 2018.
- Cash flow: Cash used in continuing operations was $1.079 million, compared with $1.568 million; total cash used in operating activities, including discontinued operations, was $1.038 million. Investing activities used $3,000. Financing provided $373,000, primarily from stock sales. Cash and cash equivalents ended the quarter at approximately $794,000, down from $1.442 million.
- Liquidity and debt: Working capital deficit was $4.301 million, compared with $3.384 million at year-end 2018. Stockholders’ deficit was $1.866 million. Related-party debt included a $207,118 note payable and $292,882 drawn under a related-party revolving credit facility. The facility permits borrowings of approximately $2 million at LIBOR plus 4%; approximately $1.707 million remained available as of May 15, 2019.
Material changes and management commentary
- Revenue declined across all reported segments: NAPW revenue fell 48.7% to $797,000, PDN Network fell 26.2% to $510,000, and China operations fell 43.5% to $39,000. Management attributed declines mainly to reduced sales staffing and reworked lead-generation and marketing; China held no major paid events during the quarter.
- NAPW paid members declined to approximately 9,000 from 22,000 a year earlier, while its total registered membership was approximately 952,000. PDN reported approximately 10.7 million registered users.
- Management expects operating losses to continue for the foreseeable future and said available funds and operating cash flow may not meet working-capital needs for the next 12 months. It cited capital raising or further use of the GNet facility as funding options, with no assurance of success. Management anticipated more robust PDN sales in the latter half of 2019; the filing provides no quantified revenue or earnings guidance.
- Management cited cost reductions, workforce changes, vendor negotiations, expense controls, and the Noble Voice sale as measures to reduce cash burn. It warned that further asset disposals or business-line discontinuations may be necessary if cost reductions are insufficient.
Risks, contingencies, and unusual items
- Going concern: The company reported substantial doubt about its ability to continue as a going concern, citing losses, operating cash use, accumulated deficit of approximately $85.986 million, and working-capital deficit. The financial statements contain no adjustments for a potential inability to continue.
- Nasdaq listing: On April 24, 2019, Nasdaq notified the company that it did not meet the $2.5 million stockholders’ equity requirement. The company had until June 8, 2019 to submit a compliance plan; a potential extension could run to October 21, 2019. The notice had no immediate effect on listing at the time disclosed.
- Legal matters: White Winston seeks $1.708 million plus fees, treble damages, and other amounts; the company denies liability and had a dismissal hearing scheduled for May 29, 2019. A separate wage-and-hour case was in final discovery, with potential financial impact described as uncertain. A former-premises rent dispute was in litigation. Other disclosed matters had been settled or dismissed.
- China and funding risks: Management stated that foreign-exchange controls may delay moving funds from China to the U.S.; approximately $761,000 of cash was in China. The filing also disclosed a letter of intent for the China VIE to acquire 51% of a tourism-development company, not a completed acquisition.
- Controls and leadership: Management concluded disclosure controls and internal control over financial reporting were ineffective and disclosed material weaknesses, including incomplete assessment of going-concern and impairment indicators and inadequate review of debt classification. The CFO and executive chairman resigned during the period or shortly before it; a new CFO, Adam He, began under an employment agreement in March.
Most important facts for investors to verify
- Whether the company obtained sufficient capital or drew additional related-party credit to fund operations, and its updated going-concern assessment.
- Whether Nasdaq accepted a compliance plan and whether the company regained or extended compliance with listing requirements.
- Whether revenue trends, particularly NAPW paid-member counts and PDN sales, improved after Q1 as management anticipated.
- Developments, potential exposure, and any recorded accruals for the White Winston, premises-rent, and wage-and-hour matters.
- Progress remediating material weaknesses, and the availability and transferability of cash held in China.