Professional Diversity Network, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019. PDN operates U.S. professional networking and recruitment businesses, including the PDN Network and NAPW Network, and education and training businesses in China. The company reported approximately 10.8 million PDN registered users and 950,000 NAPW members; paid NAPW membership was 7,000, down from 15,000 a year earlier.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.348 million | $1.895 million | $4.021 million | $6.327 million |
| Operating loss | $1.109 million | $7.404 million | $3.427 million | $11.469 million |
| Loss from continuing operations | $839,000 | $7.189 million | $2.726 million | $10.854 million |
| Net loss | $777,000 | $7.229 million | $2.708 million | $11.279 million |
| Adjusted EBITDA, non-GAAP | $(798,000) | $(991,000) | $(2.573) million | $(3.227) million |
Revenue and margins. Revenue fell 28.8% in Q3 and 36.4% for the nine-month period. Membership fees and related services declined 53.6% in Q3 and 51.9% year to date; recruitment services rose 12.1% in Q3 but fell 5.1% year to date. Management attributed reduced revenue primarily to a smaller sales and operations workforce during restructuring and rebranding. Gross margin, calculated as revenue less cost of revenue, was approximately 79.9% in Q3 2019 versus 84.6% in Q3 2018, and 82.6% for the 2019 nine-month period versus 85.5% in 2018.
Costs and unusual comparisons. Operating costs declined substantially, including lower sales and marketing and general and administrative expenses. The much smaller reported losses versus 2018 principally reflect the absence of the prior-year $5.251 million goodwill impairment charge and lower amortization after a $2.796 million intangible-asset impairment recorded in Q4 2018. Prior-year Q3 also included a $342,000 litigation settlement charge. These comparisons do not indicate that the company has returned to profitability.
Cash flow and liquidity. At September 30, cash and cash equivalents were $4.862 million, versus $1.442 million at December 31, 2018; approximately $3.304 million was held in China, where currency controls may delay or restrict transfers to the U.S. Working capital was $149,000, compared with a $3.384 million deficit at year-end 2018. Continuing-operations operating cash use was $3.424 million for the first nine months, while financing provided $6.895 million, primarily from common-stock sales. Investing cash use was approximately $1,000. Management stated that operating losses are expected to continue and that available funds and operating cash flow may not cover working-capital needs for the next 12 months; the filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern.
Debt and balance sheet. Total liabilities were $5.739 million and stockholders’ equity was $3.558 million at September 30. Current assets of $5.805 million compared with current liabilities of $5.656 million. A China short-term loan of approximately $280,000 was due by July 2020. The $500,000 related-party convertible note was converted into 209,205 shares in June and is no longer outstanding. No amount was drawn on the related-party revolving credit facility at quarter-end; approximately $2 million was available as of November 18, 2019, with maturity on May 31, 2020. Common shares issued increased to 8.921 million at quarter-end from 4.856 million at December 31, 2018, reflecting stock sales and other issuances.
Material changes, outlook, and risks
- PDN Network produced Q3 revenue of $825,000, up 5.8%; NAPW revenue was $517,000, down 51.3%; China operations generated $7,000, down 87.7%. Management said no major paid China events were held in the first nine months as resources focused on future development.
- PDN issued 915,864 shares valued at approximately $1.374 million as consideration for a 51% interest in two Chinese education businesses. The filing also reports a $1.154 million “stocks to be issued” liability at quarter-end. Investors should review the acquisition accounting, share issuance terms, and remaining obligations.
- Management described ongoing cost reductions, a changed NAPW membership-acquisition strategy, and investment in Chinese education, including a newly established after-school education subsidiary. It stated that PDN Network expected a “very strong Q4”; the filing provides no quantified revenue or earnings guidance.
- Additional financing, use of the GNet facility, or strategic transactions may be needed. Management cautioned that financing may not be available on acceptable terms and that cost reductions or business plans may not succeed; asset sales or discontinuing business lines may be considered if cost reductions prove insufficient.
- Material risks include PRC restrictions on foreign exchange transfers and the company’s contractual VIE structure in China; continuing losses and revenue declines; and litigation. White Winston seeks damages and the company denies liability; a landlord case against NAPW had summary judgment for the plaintiff with damages still to be calculated; and a wage-and-hour case remained in discovery with uncertain financial impact. A separate staffing suit was settled and dismissed.
- Management concluded disclosure controls were ineffective and identified material weaknesses in financial reporting, including going-concern and impairment assessments, debt classification, acquisition accounting, transaction documentation, and completeness and timeliness of foreign-subsidiary data. Remediation efforts were ongoing.
- After quarter-end, President Star Jones announced she would leave the role effective December 31, 2019 and not seek reelection to the board. On November 15, CFO Adam He was appointed interim CEO and a director, without additional compensation.
Important facts for investors to verify
- Cash availability and the pace of operating cash burn, particularly the amount held in China and the practical ability to transfer funds.
- Whether the company can obtain sufficient financing or generate cash flow to address the disclosed going-concern uncertainty.
- Underlying causes of NAPW’s paid-member decline and whether its revised membership strategy can stabilize revenue.
- Terms, accounting, performance, and funding needs of the Chinese education acquisitions and related stock consideration.
- Progress in remediating internal-control weaknesses and the status and potential exposure of outstanding litigation.
- Whether the stated Q4 outlook translated into results; the filing provides no quantified forward guidance.