Professional Diversity Network, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company operates the Professional Diversity Network (PDN) and National Association of Professional Women (NAPW), providing diversity-focused professional networking, membership and recruitment services. China operations were discontinued and are reported separately.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $951,830 | $1,324,162 | $1,934,127 | $2,631,489 |
| Continuing-operations loss | $1,781,051 | $389,058 | $3,203,482 | $1,193,190 |
| Net loss | $1,838,872 | $771,234 | $3,330,968 | $1,930,603 |
| Net loss per share | $0.17 | $0.16 | $0.33 | $0.37 |
| Operating cash flow, continuing operations | Not provided for the quarter | Not provided for the quarter | $(1,912,871) | $(1,481,869) |
Q2 gross profit was approximately $782,000, or 82.1% of revenue, versus $1.097 million, or 82.9%, a year earlier. For the first half, gross profit was approximately $1.591 million, or 82.3%, versus $2.221 million, or 84.4%.
Cash and cash equivalents were $858,875 at June 30, versus $633,615 at December 31, 2019. Working capital was in deficit by approximately $2.616 million, compared with a $2.114 million deficit at year-end. Total liabilities were $5.005 million; PPP loan balances were $162,770 current and $488,308 long-term. The related-party revolving credit facility expired May 31, 2020 and was not renewed. Accumulated deficit was $92.0 million.
Changes versus prior comparable periods
- Q2 revenue fell 28.1%; first-half revenue fell 26.5%. Membership fees and related services declined 44.2% in Q2 and 48.4% for the half, which management attributed mainly to delayed enrollments during COVID-19. Recruitment revenue decreased 12.1% in Q2 but increased 1.2% for the half.
- Q2 general and administrative expense rose 76.7% to $2.074 million; first-half expense increased 65.9% to $3.735 million. The filing cites litigation reserves, higher legal and accounting fees, and stock-based compensation. Lower amortization and sales and marketing costs partly offset the increases.
- First-half continuing-operations loss increased to $3.203 million from $1.193 million; continuing-operations cash use rose to $1.913 million from $1.482 million.
- China discontinued-operations loss improved to $57,821 for Q2 and $127,486 for the half, from $382,176 and $737,413, respectively, in 2019.
Liquidity, outlook and material matters
- Going concern: Management stated that cash and operating cash flow may not meet working-capital needs for the next twelve months. The filing says substantial doubt exists about the company’s ability to continue as a going concern. Management expects continued losses and identifies revenue growth, cost reductions and additional capital as necessary; success and financing availability are uncertain.
- Subsequent financing: A $1.0 million stock-sale payment agreed in June was received July 24. A July offering of 1,481,484 shares at $1.35 generated net proceeds of $1,814,353. The company reported total July proceeds of $2.814 million and said it had regained compliance with Nasdaq stockholders’ equity requirements, subject to continued monitoring. Shares outstanding were 11,338,359 at June 30 and 12,819,843 at August 13.
- COVID-19: Management reported weaker new and renewal memberships and event cancellations. Events shifted online, with positive Q2 enrollment and sponsorship results, but management expected continued customer uncertainty and revenue pressure for the remainder of 2020.
- China assets and investigation: Approximately $2.89 million held in a PDN China bank account remained frozen under PRC jurisdiction and was classified as a long-term asset of discontinued operations. The company said its investigation found no evidence that it or PDN China engaged in the alleged illegal fundraising, but the account’s release and the status of the related investment proceeds remain uncertain.
- Legal matters: The company recorded litigation reserves associated with a landlord judgment against NAPW and an employment-law case; it also faces White Winston litigation, which alleges damages and other relief. The filing describes ongoing settlement discussions in certain matters. The reserve amounts described in different parts of the filing do not fully reconcile: the statements report $708,422 of first-half litigation settlement reserve, while the legal disclosures describe $780,000 for the landlord judgment and $450,000 for the employment case.
- Controls: Management concluded disclosure controls and internal controls over financial reporting were not effective at June 30, citing material weaknesses in financial reporting analysis, staff expertise, documentation of non-routine transactions and controls over foreign subsidiaries. Remediation efforts were ongoing.
Important facts for investors to verify
- Whether July financing and subsequent operating cash flows sufficiently address the stated twelve-month liquidity needs and going-concern uncertainty.
- Progress in reducing losses and reversing membership and recruitment revenue declines, including the performance of online events.
- Availability and recoverability of the frozen $2.89 million China bank balance, and any consequences for the related investor transaction.
- Updated outcomes and cash exposure for the landlord judgment, employment-law case and White Winston litigation; clarify the litigation-reserve disclosures that do not reconcile clearly.
- Whether Nasdaq equity compliance is maintained and whether the disclosed material weaknesses are remediated.