Professional Diversity Network, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. The company operates online professional networking and recruitment communities serving diverse professionals and employers. It reported approximately 3.13 million registered users at quarter-end.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $1.238 million | $0.920 million |
| Operating loss | $0.552 million | $0.247 million |
| Net loss | $0.263 million | $0.482 million |
| Basic and diluted loss per share | $0.04 | $0.11 |
| Net cash from (used in) operations | $(0.347) million | $0.901 million |
- Revenue increased 34.6% year over year. Recruitment services rose 52.4% to $816,343; consumer advertising and marketing solutions grew 9.7% to $421,310.
- Costs and expenses rose 53.4% to $1.790 million, led by sales and marketing expense, up 74.7% to $796,444. Operating loss therefore more than doubled despite higher revenue.
- Net loss narrowed primarily with the absence of prior-year interest expense and a $179,267 income tax benefit, compared with $195,737 of tax expense in Q1 2013. The 2014 results also included $66,246 of interest and other income and a $43,809 noncash gain from the change in warrant fair value.
- Cash and cash equivalents were $10.829 million at March 31, 2014, down from $18.736 million at year-end; short-term investments were $7.500 million. Working capital was $18.122 million and total current liabilities were $1.519 million. No debt balance is reported at quarter-end; the company said prior shareholder debt had been retired through conversion to equity.
- Investing cash outflow was $7.560 million, primarily the purchase of short-term investments; financing cash flow was zero. The company reported no off-balance-sheet arrangements.
Material changes and business developments
- The LinkedIn reseller agreement terminated March 29, 2014. LinkedIn had provided fixed payments of $500,000 per quarter, and the company recognized $494,444 of LinkedIn revenue in Q1 2014. The company will receive no further fixed payments or potential commissions under the agreement.
- LinkedIn and Apollo together accounted for 68% of Q1 revenue: 40% from LinkedIn and 28% from Apollo. Apollo revenue was $350,000, and its agreement was renewed through February 28, 2015.
- Direct sales revenue from businesses, excluding LinkedIn and Apollo, was approximately $393,000, compared with $66,000 a year earlier. Direct bookings were $764,000, including $275,000 for events. The acquired Personnel Strategies events business contributed $100,183 of revenue.
- After LinkedIn restrictions ended, the company could sell directly to the previously restricted 1,000 accounts and planned to pursue those accounts and customers whose LinkedIn contracts expire over the next 12 months.
Outlook, risks, and unusual items
- Management said the LinkedIn termination would materially affect 2014 revenue and operating cash flow. It nevertheless expected available funds and operating cash flow to meet working-capital needs for the next 12 months.
- Management cited direct selling, access to former restricted accounts, OFCCP-related demand, and potential recruitment-industry acquisitions as parts of its response. These are plans, not quantified guidance; the filing gives no revenue or earnings forecast.
- Customer concentration remains a significant risk, particularly the loss of LinkedIn revenue and potential changes to Apollo’s agreement. Management also noted seasonal hiring patterns, with historically lower demand in the first half of the year.
- The company reported disclosure controls and procedures were not effective at March 31, 2014, citing material weaknesses involving segregation of duties and complex accounting. Remediation efforts were underway, but management said several quarters of successful operation might be needed before concluding the weakness was resolved.
- Other items include $50,000 accrued for contingent acquisition-related payments and a commitment for an additional $100,000 payment on each of September 20, 2014 and 2015, contingent on the former PSI chief executive’s continued employment. The company granted 187,000 options during the quarter; unrecognized compensation expense was $380,350.
Important facts for investors to verify
- How quickly direct sales can replace the lost LinkedIn payments, and whether former LinkedIn customers renew directly.
- Whether Apollo renews after February 2015 and how much revenue remains dependent on its contract.
- Cash burn and liquidity after the $7.5 million investment purchase; management’s 12-month liquidity expectation depends in part on future operating cash flow.
- Progress in correcting the material weakness in internal control and whether any subsequent filings report remediation.
- The treatment and timing of potential LinkedIn commissions for Q1 and contingent acquisition-related payments.