Professional Diversity Network, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2018. The company operates diversity-focused professional networks and recruiting services through PDN Network and NAPW, with developing China operations. It sold its Noble Voice business on May 25, 2018, and reports it as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.895 million | $3.052 million | $6.327 million | $10.621 million |
| Operating loss | $7.404 million | $2.528 million | $11.469 million | $18.286 million |
| Net loss | $7.229 million | $2.488 million | $11.279 million | $17.665 million |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $4.211 million | $6.479 million |
| Adjusted EBITDA (non-GAAP) | $(0.991) million | $(1.465) million | $(3.227) million | $(5.179) million |
- Revenue fell 37.9% in Q3 and 40.4% for the nine-month period. Membership revenue declined 49.6% and 45.6%, respectively; recruitment services increased modestly, while China education and training revenue fell sharply.
- Q3 operating expenses included a $5.251 million noncash goodwill impairment charge in NAPW. Excluding that charge, costs and expenses declined year over year; Q3 sales and marketing and general and administrative expense fell 38.9% and 34.1%, respectively.
- For nine months, the continuing-operations loss improved by $6.302 million year over year, primarily reflecting lower impairment, general and administrative, and sales and marketing expenses, partly offset by weaker revenue.
- At September 30, cash and cash equivalents were $1.653 million, including $908,000 held by the China VIE. Working capital deficiency was $2.069 million, versus $1.140 million at year-end 2017. Total liabilities were $6.186 million; the balance sheet shows no separate borrowings line.
- Cash from financing activities was $2.922 million for the nine months, principally from two stock sales totaling approximately $2.922 million gross. Shares outstanding were 4,855,165 at September 30 and 4,856,948 as of November 16, 2018.
Material changes, outlook and risks
- NAPW revenue declined 52.2% in Q3 and 48.5% for nine months. Management attributed the decline partly to reducing average NAPW sales representatives from 37 to 17 and changing lead-generation and marketing activities. PDN revenue grew modestly; China revenue fell 78.1% year over year for nine months, and the company held no major paid events in that period.
- The company reported an accumulated deficit of approximately $81.0 million and stated that continuing operating losses and cash use raise substantial doubt about its ability to continue as a going concern. Management expected available funds to meet working-capital requirements through November 2019, but cautioned that funding or further cost reductions may be needed and additional financing may not be available on acceptable terms.
- After quarter-end, the company issued a $500,000 convertible note to GNet Tech on November 5, 2018, bearing 6% interest and maturing in six months. On November 16, it entered a GNet Tech revolving facility with a maximum of £1.5 million at LIBOR plus 4%, available through May 31, 2020. These are subsequent events, not quarter-end cash or debt.
- Management cited Chinese foreign-exchange controls as a potential obstacle to transferring funds to the United States; approximately $1.332 million was held in China at September 30.
- Legal matters include claims involving White Winston, a landlord dispute, a contract dispute with Shore Digital, employment-law litigation, and an EEOC matter relating to the Noble Voice sale. The company disputes certain claims; potential financial impact is not clear for some matters. The TCPA class action was settled and dismissed.
- Management concluded disclosure controls were ineffective and identified material weaknesses, including insufficient qualified U.S. GAAP review capacity and an ineffective financial-reporting process. Remediation efforts were ongoing.
Important facts for investors to verify
- Whether the company can stabilize membership revenue and generate enough cash to meet obligations without additional financing.
- Availability, draw terms, related-party aspects, and potential dilution under the post-quarter convertible note and revolving facility.
- Whether NAPW impairment, ongoing membership declines, and China operating losses require further asset impairments or restructuring.
- Developments and potential exposure in the disclosed legal proceedings, particularly the White Winston and Shore Digital matters.
- Progress in remediating internal-control material weaknesses and the effect of adopting new revenue-recognition and lease-accounting standards.
- The comparative balance sheet reports December 31, 2017 total assets of $18.989 million but total liabilities and equity of $19.179 million; verify this apparent $190,143 discrepancy against the filed financial statements.