Professional Diversity Network, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 20, 2020. PDN operates diversity-focused professional networks and recruitment services; NAPW is its professional women’s membership network. China operations are reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $982,297 | $1,307,327; down 24.9% |
| Continuing-operations loss | $1,422,431 | $804,132 loss |
| Discontinued-operations loss | $69,665 | $355,237 loss |
| Net loss / loss per share | $1,492,096 / $0.17 | $1,159,369 / $0.23 |
| Adjusted EBITDA (non-GAAP) | $906,000 loss | $642,000 loss |
| Cash used in operating activities | $558,305 total; $573,878 from continuing operations | $462,278 total; $827,723 from continuing operations |
Gross profit was approximately $809,000, or 82% of revenue, versus approximately $1.124 million, or 86%, a year earlier. General and administrative expense rose 54% to $1.661 million, including a $450,000 litigation settlement reserve and higher legal and accounting fees. Sales and marketing expense fell 25% to $525,000; depreciation and amortization fell 76% to $52,000.
At March 31, cash and cash equivalents were $1.555 million, versus $634,000 at year-end. Working capital from continuing operations remained deficient by approximately $1.741 million. The company reported no outstanding borrowings under its related-party credit facility; the facility was due to mature May 31, 2020. Current lease liabilities were $60,910. The quarter’s $1.5 million stock sale funded cash growth. Separately, approximately $2.988 million held in a China bank account remained frozen and was classified as a long-term asset from discontinued operations.
Material changes and business developments
- Membership and related-services revenue fell 51.6% to $384,000; recruitment revenue increased 19.6% to $567,000. PDN Network revenue rose 17.1% to $597,000, while NAPW revenue declined 51.7% to $385,000.
- Management attributed weaker NAPW revenue to reduced sales staffing, lower lead generation, and fewer enrollments and renewals. PDN’s increase was primarily from recruitment services.
- Registered users were approximately 10.826 million for PDN, up 1.2% year over year, and 948,000 for NAPW, down 0.4%. Paid NAPW members fell to 5,000 from 9,000.
- The company raised $1.5 million in a March private placement, issuing 1,939,237 shares to Malven Group Limited at $0.7735 per share.
Outlook, risks and unusual items
- Going concern: Management said available cash and operating cash flow may not meet working-capital needs for the 12 months after issuance of the financial statements. Recurring losses, operating cash outflows, and a $90.2 million accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern. Management cited cost reductions, revenue growth, and additional capital as necessary, but gave no assurance these efforts will succeed.
- COVID-19: The company reported reduced new memberships and renewals beginning in March, and possible delays or cancellations in event revenue. It said the pandemic’s overall financial impact was uncertain.
- China: The board decided to discontinue China operations. A China account holding approximately $2.988 million remained frozen after the local seizure was lifted; access and the possible need to unwind or further document an investor transaction remained uncertain. The company also noted restrictions on moving funds out of China.
- Litigation: A $450,000 reserve was recorded for the Bayne wage-and-hour case; the potential final impact remained uncertain. Other disclosed matters include the White Winston claim and a landlord dispute involving NAPW. The company denies liability in the disputed cases.
- PPP: After quarter-end, the company received $651,077 under the Paycheck Protection Program on May 5, 2020. It intended to use proceeds for eligible payroll, rent, and utilities and anticipated full forgiveness; forgiveness was not assured.
- Controls: Management concluded disclosure controls were ineffective and identified material weaknesses involving financial reporting, technical accounting expertise, transaction documentation, and foreign-subsidiary information. Remediation was underway.
- Other: Adjusted EBITDA is a non-GAAP measure. No formal revenue or earnings guidance was provided.
Most important facts for investors to verify
- Whether the company can fund operations through the next 12 months without further capital, and the terms and dilution risk of any future financing.
- Whether the frozen China cash can be recovered and how the company will resolve the EGBT transaction and related regulatory uncertainties.
- The eventual outcome and total exposure from the Bayne, White Winston, and landlord matters, including whether the $450,000 reserve is sufficient.
- Whether PPP loan forgiveness requirements were met and whether any unforgiven balance creates repayment obligations.
- Whether COVID-19 effects, declining paid NAPW membership, and control weaknesses improve or worsen in subsequent filings.