Professional Diversity Network, Inc. — Q2 2018 Form 10-Q
Business context and period. The filing covers the three and six months ended June 30, 2018. PDN operates diversity-focused professional networks, including the PDN and NAPW networks, and China operations. On May 25, 2018, it sold certain Noble Voice assets and exited that business.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.119 million | $3.659 million | $4.432 million | $7.570 million |
| Loss from continuing operations | $1.841 million | $11.914 million | $3.665 million | $14.838 million |
| Net loss, including discontinued operations | $2.015 million | $12.075 million | $4.050 million | $15.177 million |
| Basic and diluted net loss per share | $0.46 | $3.07 | $0.94 | $8.39 |
| Cash used in continuing operating activities | Not presented quarterly | Not presented quarterly | $3.226 million | $4.254 million |
Gross margin was approximately 84.0% in Q2 and 85.9% for the first half, compared with 86.4% and 88.7% in the prior-year periods, respectively, calculated from reported revenue and cost of revenue. Adjusted EBITDA loss from continuing operations was $0.962 million for Q2 and $2.237 million for the first half; these are non-GAAP measures.
- At June 30, cash and cash equivalents were $2.667 million, total assets $16.557 million, and total liabilities $6.931 million. Working capital was negative $0.692 million.
- The filing reports no interest expense for the first half of 2018 and does not identify outstanding borrowings in the supplied financial statements.
- Cash fell $0.259 million during the first half. Financing provided $2.922 million, primarily from two common-stock sales; continuing investing activities used $0.061 million. The Noble Voice asset sale generated $0.200 million.
Material changes versus prior periods
- Revenue declined 42.1% in Q2 and 41.4% for the first half. Membership fees and related services fell 45.4% and 44.0%, respectively; education and training revenue fell approximately 98% in both periods.
- NAPW revenue declined 48.3% in Q2 and 46.9% for the first half, which management attributed mainly to reducing its salesforce from 48 representatives at Q2 2017 to 16 at Q2 2018, alongside changes to lead generation and marketing. PDN revenue rose 12.5% in Q2 and 3.6% for the first half. China revenue fell 85.1% and 82.7%, respectively, as the prior-year periods included paid events.
- Operating costs fell substantially, including lower sales and marketing and general and administrative expenses. The prior-year comparison also includes a $9.920 million goodwill impairment charge recorded in 2017; no such charge was recorded in 2018.
- PDN sold 876,805 shares in two 2018 transactions for total gross proceeds of approximately $2.922 million. Shares outstanding were 4,839,621 at June 30; 4,841,404 were reported outstanding as of August 6, 2018.
Outlook, risks and unusual items
- Management expects continued operating losses for the foreseeable future but believes available funds will meet working-capital needs through August 2019. It cautions that additional funding or further cost reductions may be needed and that future fundraising may not be available on acceptable terms.
- Management expects NAPW revenue to remain below prior-year levels for at least the rest of 2018, with anticipated increases in 2019 and 2020 tied to investment in product, marketing and salesforce development. This is an expectation, not quantified company-wide guidance.
- Management says Chinese foreign-exchange controls restrict moving funds from China to the U.S. The filing reports $2.732 million of cash in China, an amount that does not reconcile with reported total cash of $2.667 million.
- PDN reported that disclosure controls and procedures were ineffective as of June 30, 2018, citing material weaknesses including insufficient U.S. GAAP expertise, shortcomings in financial-reporting review and disclosure processes, and China service-revenue contract controls. Remediation efforts were underway.
- Disclosed legal matters include a shareholder-related damages suit seeking $1.708 million plus potential statutory multipliers and fees, a putative TCPA class action, employment claims, and landlord and contract disputes. The company disputes or is evaluating claims; management did not expect the Bayne matter to materially affect financial condition.
- Noble Voice was reported as discontinued operations, with a first-half loss of $0.385 million, net of tax, and a $0.064 million gain on the asset sale.
Important facts for investors to verify
- Reconcile the stated $2.732 million China cash balance with consolidated cash of $2.667 million and the VIE cash disclosure of $1.282 million.
- Confirm the first-half continuing operating cash-use figure: the financial statements and narrative report $3.226 million, while one MD&A table states $3.266 million.
- Assess the cash runway assumptions behind management’s August 2019 liquidity estimate, given persistent losses, negative working capital and restrictions on transferring China funds.
- Track NAPW member monetization and revenue trends, the performance of monthly memberships, and whether expected 2019–2020 recovery depends on renewed spending.
- Monitor internal-control remediation, litigation developments and any further equity financing or dilution.