Professional Diversity Network, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited results; comparison is with the corresponding 2012 periods. The company operates online professional networks and career services for diverse communities.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $976,920 | $1,513,877 | $1,896,723 | $3,028,538 |
| Operating income (loss) | $(433,714) | $769,418 | $(680,689) | $1,517,254 |
| Net income (loss) | $(133,162) | $729,400 | $(614,978) | $1,435,481 |
| Operating cash flow | Not separately provided | Not separately provided | $867,426 | $1,574,022 |
- Q2 revenue declined 35.5%; first-half revenue fell 37.4%. Recruitment revenue was $556,111 in Q2 and $1,091,791 in the first half; consumer advertising and marketing revenue was $420,809 and $804,932, respectively.
- Q2 cost of services was $247,005, implying gross profit of approximately $729,915 and gross margin of 74.7% (versus approximately 87.0% in Q2 2012). First-half gross margin was approximately 74.4%, versus 86.8%.
- Q2 operating margin was approximately -44.4% and net margin -13.6%; first-half operating margin was approximately -35.9% and net margin -32.4%. The 2013 results include a noncash gain from a decrease in warrant liability fair value: $200,495 in Q2 and $311,303 for the first half.
- At June 30, cash and equivalents were $20.14 million; current assets were $21.01 million and current liabilities $1.04 million, leaving working capital of about $19.97 million. Current ratio was approximately 20.2. No notes payable remained outstanding; founder notes were converted to equity in connection with the IPO.
- First-half investing cash flow was $(391,236), including $200,000 for acquired technology and $164,875 for technology development. Financing cash flow was $18.80 million, primarily reflecting IPO proceeds, net of costs, and $200,000 in member distributions.
Material changes and business developments
- The Monster Worldwide alliance ended December 31, 2012. Its fixed quarterly payment had been $1 million; LinkedIn’s replacement agreement provides fixed quarterly payments of $500,000, contributing materially to lower recruitment revenue. LinkedIn may also pay commissions above specified annual sales thresholds, but the company reported none for Q1 and did not expect any for Q2.
- The company began selling directly to employers, subject to a LinkedIn restricted-account list of 1,000 companies. Direct recruitment sales were approximately $45,000 in Q2 and $69,000 in the first half. The company said its direct-sales effort had not yet produced a material revenue stream.
- Two customers—LinkedIn and Apollo Group—represented 91% of Q2 gross sales and 92% for the first half. Apollo alone represented 86% of accounts receivable at June 30.
- The University of Phoenix lead-generation insertion order with Apollo ended by mutual agreement on June 30, 2013. The separate fixed-fee Apollo agreement provides $116,667 per month.
- The March 2013 IPO sold 2.625 million shares at $8 per share. Shares outstanding increased to 6,318,227 by June 30, from 3,487,847 at year-end. The company reported approximately $18.1 million of net IPO proceeds in its narrative; the cash-flow statement reports $19.47 million of IPO proceeds and separately shows $479,356 of IPO costs paid. Verify the applicable presentation when reviewing cash proceeds.
- The company acquired Careerimp software technology for $200,000 and may owe an additional $200,000 if the former CEO remains employed through December 31, 2013.
Outlook, risks and controls
- Management expected available funds and operating cash flow to cover working-capital needs for the next 12 months. It anticipated that higher sales and marketing and product-development investment could continue to pressure profitability, with significant revenue benefits not expected before Q3 2013 at the earliest; success was not assured. No specific revenue or earnings guidance was provided.
- Management described LinkedIn as offering longer-term opportunities through commissions and direct selling, while acknowledging uncertainty over commission revenue and the time needed to build direct sales. It also cited seasonality in employer hiring and competition in a rapidly changing market.
- Customer concentration, the loss of Monster’s higher fixed payments, dependence on LinkedIn and Apollo, and the termination of Apollo lead-generation activity are material business risks. Management also noted increased public-company, sales and marketing, and platform investment costs.
- Disclosure controls and procedures were deemed ineffective as of June 30. The company disclosed a material weakness involving segregation of duties in accounting and financial reporting; remediation was underway, but completion and adequacy were not assured.
- The company authorized a share-repurchase program of up to $1 million over six months; no shares were repurchased in Q2. No legal proceedings were reported. Management stated it had no off-balance-sheet arrangements.
Investor verification priorities
- Assess whether direct employer sales and the LinkedIn partnership can replace the lost Monster revenue, and check subsequent-period commission disclosures.
- Monitor LinkedIn and Apollo concentration, Apollo receivables and the effect of the ended lead-generation arrangement.
- Reconcile IPO proceeds and offering costs across the notes, cash-flow statement and stated net proceeds; track cash burn and liquidity excluding IPO financing.
- Review the warrant liability’s valuation assumptions and the effect of fair-value changes on reported earnings; distinguish this noncash gain from operating performance.
- Check progress in remediating the disclosed material weakness and effectiveness of controls in subsequent filings.
- Verify the contingent Careerimp payment, use of IPO proceeds, and any share repurchases or further equity issuance.