Professional Diversity Network, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. PDN operates professional networks focused on diversity recruiting and careers, the NAPW women’s professional network, and RemoteMore, a software-developer recruiting and services business. China operations are discontinued.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $1.955 million | $2.053 million |
| Cost of revenue | $1.074 million | $0.862 million |
| Gross profit and margin | $0.881 million; 45.0% | $1.191 million; 58.1% |
| Loss from continuing operations, net of tax | $1.109 million | $0.890 million |
| Net loss attributable to PDN | $1.069 million | $0.703 million |
| Basic and diluted net loss per share | $0.11 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $(0.909) million | $(0.292) million |
| Cash used in continuing operating activities | $0.394 million | $0.287 million |
Revenue declined 4.8%. Recruitment services fell 17.3% to $1.103 million; membership revenue fell 34.2% to $129,000; and consumer advertising and marketing revenue fell 46.8% to $25,000. Contracted software development increased 46.3% to $698,000. Management attributed weaker PDN recruiting revenue partly to softer client hiring and cited $83,000 of Expo Experts event revenue with no prior-year comparison.
Cash and cash equivalents were $964,306 at March 31, down from $1.237 million at year-end. Investing activities used $548,000, principally for the Expo Experts acquisition and an additional RemoteMore interest; financing provided $700,000 from a common-stock sale. Cash declined $272,000 during the quarter. The company reported a continuing-operations working capital deficit of approximately $1.068 million, versus $187,000 at December 31, 2022. Total liabilities were $4.702 million; reported lease liabilities totaled approximately $426,000. The filing does not report conventional borrowings.
Assets were $6.826 million and total stockholders’ equity was $2.124 million at quarter-end. Deferred revenue was $2.191 million. Shares outstanding were 10,269,530 at March 31, 2023; the company reported 10,269,530 shares outstanding as of May 15.
Material changes and unusual items
- PDN Network revenue declined 18.3% to $1.128 million and its segment reported a $349,000 loss, compared with $266,000 of income a year earlier. NAPW revenue declined 34.2% to $129,000. RemoteMore revenue rose 46.3% to $698,000; its segment loss narrowed to $102,000 from $381,000.
- Cost of revenue rose 24.6%, while total costs and expenses increased 3.8% to $3.082 million. Gross margin contracted to 45.0% from 58.1%. Lower depreciation and amortization partly reflected prior-year RemoteMore amortization ending, offset by amortization of acquired Expo Experts assets.
- In January, PDN acquired Expo Experts’ assets and operations for $600,000: $400,000 cash and $200,000 in restricted common shares. The acquisition added event revenue and approximately $541,000 of intangible assets and $126,000 of goodwill.
- PDN exercised an option to acquire an additional 20% of RemoteMore for $116,667, taking its ownership to 65.62% at quarter-end. In May 2023, it acquired a further 7% for approximately $235,000, increasing ownership to 72.62%.
- In March, PDN sold 333,181 shares for $700,000 gross proceeds, approximately $2.10 per share. The filing also reports a reverse stock split at a 2-for-1 ratio effective in January 2023.
Outlook, risks and contingencies
Management states that recurring losses, negative operating cash flow, an accumulated deficit of $99.5 million, and the working capital deficit raise substantial doubt about the company’s ability to continue as a going concern. Management believes available cash and operating cash flow may meet working capital needs through December 31, 2023, but says executing its business plan will require continued cost reductions, revenue growth, and capital raising, potentially through common-stock issuance or a strategic transaction. It cautions that financing may not be available on acceptable terms and that expected results are not assured. No specific revenue or earnings guidance is provided.
- Management described continued cost-control measures, including staff reductions, vendor negotiations, and technology intended to reduce manual work. It said asset sales or discontinuing business lines may be considered if cost reductions are insufficient.
- The company and NAPW are defending a putative employment-law case alleging violations of federal and New York labor laws. Plaintiffs seek monetary damages and equitable relief. The company disputes liability; a $450,000 reserve was recorded in 2020, and mediation did not produce a settlement.
- Approximately $195,000 of PDN China cash remained frozen at March 31, 2023, and was classified as a long-term discontinued-operations asset. The company also continues to seek return of approximately $2.9 million seized in 2021; recovery is uncertain. Discontinued China operations recorded a $12,000 quarterly loss.
- Other stated risks include the company’s history of losses and need for future funding, hiring-market weakness, competition, privacy regulation, technology and social changes, key-personnel retention, acquisition integration and realization of synergies, and legal or regulatory developments.
- Management concluded disclosure controls and procedures were effective as of March 31, 2023; it reported no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Cash runway and ability to obtain additional financing, given the going-concern warning and working capital deficit.
- Whether revenue weakness in recruitment and membership services persists, and whether software-development growth and Expo Experts events improve margins.
- Acquisition economics, integration costs, and the performance of Expo Experts and RemoteMore as PDN increases its ownership.
- Status and potential financial effect of the employment litigation and the frozen or seized China assets.
- Share count, potential dilution from future equity financing, and stockholder approval of the proposed 2023 equity compensation plan.