Professional Diversity Network, Inc. — FY2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it does not provide standalone fourth-quarter results. PDN operates diversity-focused professional networks and recruitment services, a women’s membership network (NAPW), and networking, education and training businesses in China. It sold Noble Voice on May 25, 2018 and reported that business as discontinued operations.
Key financial metrics
Amounts below are in millions of dollars except per-share data, percentages and user counts.
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Revenue | $8.453 | $16.080 | Down 47.4% |
| Operating loss | $(16.154) | $(23.268) | Loss narrowed |
| Loss from continuing operations | $(14.572) | $(21.577) | Loss narrowed 32.5% |
| Net loss, including discontinued operations | $(15.081) | $(22.288) | Includes $0.509 loss from discontinued operations in 2018 |
| Basic and diluted net loss per share | $(3.29) | $(5.68) | |
| Adjusted EBITDA (non-GAAP) | $(4.324) | $(4.586) | Still negative; company-defined measure |
| Cash used in continuing operating activities | $(5.057) | $(6.436) | Cash burn continued |
| Cash and cash equivalents at year-end | $1.442 | $2.926 | |
| Working capital | $(3.384) | $(1.140) | Deficit widened |
| Total liabilities / stockholders’ equity | $6.349 / $(1.111) | $8.687 / $10.302 | Equity turned negative |
Cost of revenue was $1.613 million, giving gross profit of approximately $6.840 million (about 80.9% of revenue), compared with gross profit of approximately $13.387 million (about 83.3%) in 2017. Total costs and expenses declined 37.5% to $24.606 million. The filing reports $8.047 million of impairment charges in 2018: $5.251 million for goodwill and $2.796 million for intangible assets. Interest expense was $4,637.
Revenue by segment was $4.786 million for NAPW, $2.835 million for PDN Network and approximately $0.832 million for China Operations. NAPW represented 59.3% of revenue, PDN 33.5% and China 7.2%. At year-end, the company reported approximately 10.695 million PDN registered users and 954,000 NAPW members; paid NAPW members fell to 12,633 from 25,436.
Material changes versus 2017
- Revenue fell $7.628 million. NAPW revenue declined 49.5% to $4.786 million, primarily amid sales-force and workforce reductions and a rebranding effort. China revenue declined 78.0% to $0.832 million, mainly because 2017 included a major event that generated $2.875 million. PDN revenue was essentially flat at $2.835 million.
- Management reduced sales and marketing expense by 45.4% and general and administrative expense by 31.0%. These reductions, along with lower impairment charges, helped narrow the operating and continuing-operations losses despite sharply lower revenue.
- Cash used in continuing operations improved by about $1.379 million, but remained substantial. Financing included $2.922 million of common-stock proceeds and a $0.500 million related-party note.
- Goodwill declined to $0.339 million from $5.590 million after impairment; net intangible assets declined to $1.021 million from $6.265 million after impairment and amortization.
Outlook, risks and unusual items
- Going concern and liquidity: Management and the independent auditor disclosed substantial doubt about the company’s ability to continue as a going concern. Management said available funds and operating cash flow might not meet working-capital needs through the following 12 months and that additional capital, credit facilities or other financing would be needed. Future financing is not assured. The company also cited restrictions and approval requirements affecting transfers of funds from China to the U.S.
- Financing and dilution: A $0.500 million convertible note from related party GNet Tech bore 6% interest and matured six months after its November 5, 2018 issuance; it could convert at the holder’s election under specified pricing terms. A related-party revolving facility allows borrowings up to approximately $2.0 million, bears interest at LIBOR plus 4%, and matures May 31, 2020. It was undrawn at year-end; approximately $1.707 million remained available on April 12, 2019, when $0.293 million had been drawn. The company also raised $0.480 million in a 2019 private placement through April 2.
- Management plans: For 2019, management said it planned to continue improving U.S. operating efficiency and growing China operations. No quantified revenue, earnings or cash-flow guidance was provided. Management warned that further asset sales or discontinued business lines might be necessary if cost reductions and funding prove insufficient.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness involving use of operating information in financial reporting and estimates, and review of debt agreements and classification. Remediation efforts were underway but had not fully resolved the weakness.
- Legal matters: White Winston refiled a lawsuit alleging damages, including a claim for $1.708 million plus fees, treble damages and other amounts; PDN denied liability and moved to dismiss. Other disclosed matters include employment, contract and lease litigation; potential financial effects were uncertain in at least one matter. The Telephone Consumer Protection Act class action was settled and dismissed without admission of fault.
- Other risks: The filing highlights intense competition, membership renewal and engagement risks, data privacy and cybersecurity exposure, China regulatory and currency-transfer risks, dependence on key personnel, and potential dilution or constrained financing associated with major-stockholder rights. CFL beneficially owned approximately 47.27% of common stock as of April 12, 2019.
Important facts for investors to verify
- Whether the company can secure adequate financing and improve cash generation, given the going-concern disclosure, $1.442 million year-end cash balance and $3.384 million working-capital deficit.
- Whether revenue trends, paid NAPW membership and renewal performance stabilize after the substantial 2018 revenue decline and workforce reductions.
- The status and terms of the GNet Tech convertible note and revolving facility, including subsequent drawdowns and any conversion or repayment.
- Progress in remediating the material weakness in financial reporting controls and whether future filings classify debt and disclose estimates reliably.
- Developments in the White Winston and other litigation, and any resulting liabilities, settlements or cash requirements.