Professional Diversity Network, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. The company operates online professional networking and recruitment communities serving diverse professionals and employers.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $979,289 | $1,707,932 | $2,876,012 | $4,736,470 |
| Gross profit and margin | $743,985; 76.0% | $1,427,432; 83.5% | $2,154,490; 74.9% | $4,057,237; 85.7% |
| Operating income (loss) | ($459,415) | $616,564 | ($1,140,104) | $2,133,817 |
| Net income (loss) | ($271,500) | $577,589 | ($886,478) | $2,013,070 |
| Basic and diluted EPS | ($0.04) | $0.17 | ($0.14) | $0.58 |
Q3 revenue fell 42.7%; nine-month revenue fell 39.3%. Recruitment revenue declined 39.8% in Q3 and 43.6% year to date. Consumer advertising and marketing revenue declined 46.6% and 31.9%, respectively. Higher sales and marketing, general and administrative, and amortization costs contributed to the swing from prior-year operating profit to losses.
Cash, debt and liquidity
- At September 30, 2013, cash and equivalents were $19.81 million, current assets $20.55 million, current liabilities $1.14 million, and working capital $19.40 million. Total assets were $22.20 million.
- Operating activities provided $507,828 in the first nine months, compared with $2.02 million in the prior-year period. Investing activities used $363,425; financing activities provided $18.80 million, primarily from the IPO. Cash increased by $18.94 million from year-end 2012.
- No notes payable remained at quarter-end: approximately $1.64 million of member debt was converted into equity. Current liabilities included a $99,609 warrant liability.
- Management said available funds and operating cash flow were expected to cover working capital needs for the next 12 months. The filing provides no quantified earnings or revenue guidance.
Material changes and management commentary
- The Monster Worldwide agreement ended December 31, 2012. LinkedIn’s replacement agreement provides fixed payments of $500,000 per quarter, half Monster’s former $1 million quarterly payment. The company reported no LinkedIn commission for the first half of 2013 and did not expect one for Q3; commissions for the remaining 2013 period were not forecastable.
- LinkedIn and Apollo together represented 87% of Q3 revenue (51% and 36%, respectively). Apollo accounted for 59% of accounts receivable at quarter-end. Management warned that losing either major customer, or accepting less favorable agreement terms, could materially harm results.
- The company reported more than 2.6 million registered users and added over 122,000 in Q3; registered users were up 33% from September 30, 2012. It had developed a 26-person sales and marketing team. Direct revenue booked rose to $170,000 in Q3 from $67,000 in Q2, although recognized direct-sales revenue was $85,000 for Q3.
- Investments included $200,000 for Careerimp software technology and a $200,000 asset purchase of Personnel Strategies, Inc. (PSI). PSI’s former CEO may receive employment- and cash-flow-contingent payments in 2014 and 2015. The company also recorded a $100,000 accrued contingent payment related to Careerimp integration.
- The $315,759 nine-month gain from the change in fair value of IPO warrants was non-cash. The company changed to C-corporation tax treatment after its March 2013 reorganization and recognized an $80,570 deferred tax benefit for the nine-month period.
- Disclosure controls and procedures were deemed ineffective at September 30. Management identified a material weakness involving segregation of duties and applying complex accounting requirements, and described remediation steps including additional finance personnel and outside reporting support. No assurance was given that remediation would be timely or adequate.
Risks, contingencies and other items
Management cited the effect of the Monster non-renewal on revenue and operating cash flow, customer concentration, competition, and the need to invest in direct sales and the recruiting platform. The company also described seasonality, with hiring demand historically lower in Q1 and generally increasing later in the year. The filing reports no legal proceedings and no off-balance-sheet arrangements. A board-authorized share repurchase program of up to $1 million had made no purchases through September 30, 2013.
Key facts for investors to verify
- Whether LinkedIn and Apollo revenue dependence has declined, and whether LinkedIn commissions or direct sales have become meaningful.
- Whether recruitment revenue, gross margin, and operating performance stabilize after the loss of Monster’s higher fixed payments.
- Cash use and working-capital trends, including the cash impact of acquisitions, technology spending, and contingent payments.
- Progress in remediating the disclosed material weakness and improving disclosure controls.
- Final purchase-price accounting for PSI and the valuation and potential dilution associated with the underwriter warrants.