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IPDN > SEC Filings for IPDN > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for PROFESSIONAL DIVERSITY NETWORK, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PROFESSIONAL DIVERSITY NETWORK, INC.


1-Apr-2013

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes to the consolidated financial statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto in Item 8, "Financial Statements and Supplementary Data," in Part II of this Annual Report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking statements. Please read "Special Note Regarding Forward-Looking Statements" for additional information regarding forward-looking statements used in this Annual Report.

Overview

We generate revenue through two sources - recruitment and advertising. Our principal customer in the recruitment sector has been Monster Worldwide. However, our agreement with Monster Worldwide expired on December 31, 2012, and was not renewed. On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn, which became effective on January 1, 2013. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. Our principal customer in the advertising sector is Apollo Group.

Our revenue has grown significantly since 2010. Total revenue for the year ended December 31, 2012 was $6.2 million, representing an increase of approximately 11% over total revenue for the year ended December 31, 2011, which was $5.6 million. 2011 total revenue was approximately 27% higher than total revenue for the year ended December 31, 2010, which was $4.4 million. Year over year net income during those periods decreased, however, to $2.4 million in 2012 from $2.7 million in 2011, which in turn was higher than net income in 2010 of $1.9 million.

We expect revenues and net income to be lower in 2013 than in prior periods, primarily as a result of the termination as of December 31, 2012 of our agreement with Monster Worldwide, pursuant to which we received fixed quarterly payments of $1 million and also as we incur expenses to implement our business strategies and to meet the requirements of being a publicly traded company. Our agreement with LinkedIn, which became effective as of January 1, 2013, provides us with fixed quarterly payments of $500,000 compared to $1 million from Monster Worldwide. Our agreement with LinkedIn has a term of three years, but may be terminated as early as June 30, 2013. Accordingly, we currently expect that our recruitment revenue in 2013, and possibly in future years, may be significantly lower than in prior years. Our agreement with LinkedIn allows us to earn commission revenue over and above the fixed quarterly payment of $500,000 if LinkedIn's revenue from its sale of our services exceeds $10 million in any calendar year as follows: we earn a 20% commission on annual sales over $10 million and less than $50 million and a 15% commission on annual sales over $50 million. LinkedIn will report to us information about its sales of our services on a quarterly basis within 60 days of the end of each quarter. The first quarter under our agreement with LinkedIn was completed on March 31, 2013, accordingly, we expect to have information about LinkedIn's sales of our services during that quarter by May 30, 2013.

Market Directly to Recruiters

We commenced development of an internal business plan to market diversity recruitment services to businesses directly prior to December 31, 2012 due to uncertainty of whether our agreement with Monster Worldwide would expire. Following the expiration of that agreement as of January 1, 2013, we began using certain existing employees and hired additional personnel to focus on these direct marketing activities.

We believe favorable market conditions will be necessary for us to succeed in our new relationship with LinkedIn and our direct marketing initiative. We will need lead time to develop the new sales group and it will require significant additional investments to successfully market and sell our recruiting services directly to employers and our ability to succeed is uncertain.

We have segmented the diversity recruitment market into three sectors:

Federal, state and local governments and companies and contractors who serve these governmental entities.

Small and medium sized businesses as defined by companies with less than 2,500 employees


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Large enterprises with greater than 2,500 employees.

Our sales team will approach these markets using a combination of telephone and email marketing as well as, in some cases, personal visits to companies and or their recruitment agencies. We also plan to attend major recruitment conferences where diversity recruitment recruiters are in attendance. Our sales team will not have the ability to sell to any of the 1,000 companies that are listed on the restricted account list pursuant to our agreement with LinkedIn. The companies in such restricted accounts list are of varying sizes, operate in diverse geographical locations and conduct business in different sectors. We believe LinkedIn designated these particular companies in its restricted account list because LinkedIn has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services. We are permitted, however, to market and sell our products to any company that is not on such restricted account list after our exclusive agreement with Monster Worldwide expired on December 31, 2012. Our agreement with Monster Worldwide requires us to maintain the diversity-based job postings that originated from Monster Worldwide prior to December 31, 2012. We are not restricted to sell those companies any additional products or services nor are we prevented from selling those companies directly upon the end of the fulfillment period.

We have invested in our direct sales infrastructure and expect to continue to do so in the future. We have budgeted approximately 15% of the net proceeds of the offering for sales and marketing expenses, including approximately 5% for additional payroll for additional employees in our direct sales team. These costs are primarily for sales personnel and to support the sales team with tools such as client relationship management systems, personal computers and travel expenses. The sales expenses are variable and can be adjusted to meet market conditions. However, there is a risk that we will not successfully sell our products and services directly to employers at a level that supports the cost of providing those services.

We will not be able to generate any recruitment revenue unless and until we are able to market our diversity recruitment services to businesses directly, or alternatively, successfully develop our relationship with LinkedIn Corporation.

Revenue from our recruitment sector will be impacted positively and negatively by certain general macroeconomic conditions, such as the national unemployment rate. An increase in demand for employees should create market conditions favorable to recruitment companies like ourselves. Conversely, a weak employment environment should have a negative impact. We believe that our focus on diverse professionals mitigates this risk because of the social and political environment in the United States. We believe recent trends indicate an increased focus by companies on hiring diverse Americans for both compliance and business reasons. For example, as the Hispanic population grows and companies seek to conduct business with this population, we expect companies will hire aggressively within the Hispanic community, resulting in a robust demand for bilingual English/Spanish speakers and writers. Because of our specialization and focus in diversity recruitment, as opposed to general recruitment, we have not yet experienced negative pricing pressure associated with product commoditization (which is the act of making a product or service easy to obtain by making it as uniform, plentiful and affordable as possible).

On November 12, 2012, we entered into a diversity recruitment partnership agreement with LinkedIn, which became effective on January 1, 2013. Pursuant to our agreement, LinkedIn may resell to its customers diversity-based job postings and recruitment advertising on our websites. Our agreement with LinkedIn provides that LinkedIn will make fixed quarterly payments to us in the amount of $500,000 per quarter. This amount is half of the fixed quarterly payments we received from Monster Worldwide. Under the LinkedIn agreement, we will also earn commission for sales of our services in excess of certain thresholds. The fixed quarterly payments are payable regardless of sales volumes or any other performance metric. Although such fixed quarterly payments are significantly less than the fixed quarterly payments that we receive from Monster Worldwide, we believe that we have the potential to exceed our revenues from our previous agreement with Monster Worldwide because (i) we may earn additional commission payments with LinkedIn, if certain sales levels are achieved, and (ii) we may earn revenue by selling our services directly, as described above. Under our agreement with LinkedIn, we will receive (i) no commissions on the first $10 million of LinkedIn's revenue from the sale of our services during each calendar year, (ii) 20% commission on LinkedIn's revenue from the sale of our services during each calendar year that is in excess of $10 million and less than $50 million, and (iii) 15% commission on LinkedIn's revenue from the sale of our services during each calendar year that is in excess of $50 million. However, there can be no assurance that we will meet or exceed revenues earned through Monster Worldwide in prior periods. As an example solely to illustrate the stair-step structure of our commission schedule with LinkedIn, if LinkedIn sells $60 million of our services during any calendar year, we would receive $9.5 million in commission revenue for such year, in addition to our fixed payments, because we would earn no commission revenue for the first $10 million of LinkedIn sales of our services, $8 million in commission revenue for the next $40 million of LinkedIn sales of our services and $1.5 million in commission revenue for the remaining $10 million of LinkedIn sales of our services. We will not obtain information about commissions earned from LinkedIn, if any, until within 60 days following the end of any fiscal quarter. Because our agreement with LinkedIn became effective on January 1, 2013, we do not expect to have information about first quarter commissions, if any, until May 30, 2013.


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During the term of our agreement with LinkedIn, we may not permit any competitor of LinkedIn to resell our diversity-based recruitment services. Our agreement does not prohibit LinkedIn from selling its own or any third party's diversity recruitment services, However, during the term of our agreement with LinkedIn and for a period of one year thereafter, we may not sell our diversity-based recruitment services, directly or indirectly, to any of the 1,000 companies on LinkedIn's restricted account list. The companies in such restricted accounts list range are of varying sizes, operate in diverse geographical locations and conduct business in different sectors. We believe LinkedIn designated these particular companies in its restricted account list because LinkedIn has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services. We are permitted, however, to market and sell our products to any company that is not on such restricted account list after our exclusive agreement with Monster Worldwide expired on December 31, 2012.

The term of our agreement with LinkedIn is three years, subject to LinkedIn's right, in its sole and absolute discretion, to terminate our agreement on the six-month anniversary of the effective date, January 1, 2013, upon not less than 30 days' prior notice and during the fourth calendar quarter of the first and second years of the term of our agreement upon not less than 90 days' prior notice.

If not terminated sooner, the term of our agreement with LinkedIn will automatically renew for successive one-year terms unless either party delivers a notice of non-renewal with 90 days' prior notice. For additional information about our business arrangements with LinkedIn, please see the section entitled "Business - LinkedIn."

Advertising. We generate most of our advertising revenue from our exclusive advertising relationship with Apollo Group, for which we place advertising on our websites and to whose website we direct our members to help advance their education. Under our agreement with Apollo Group, we may not provide advertising services for any other institution of higher education, whether for-profit or non-profit, other than Apollo Group. Because we have an exclusivity arrangement with Apollo Group, our revenue growth in this market segment is dependent on the volume of students interested in, and the success of, Apollo Group's University of Phoenix and their use of our websites. Please see the section entitled "Business - Advertising Revenue - University of Phoenix" for further information about our business arrangement with Apollo Group.

The majority of our advertising revenue from Apollo Group is recognized based upon fixed fees with certain minimum monthly website visits or fixed fee for revenue sharing agreements in which payment is required at the time of posting. Unless we earn additional advertising revenue from clients outside of the higher education sector, our ability to generate additional advertising revenue is limited, unless we are able to negotiate more favorable terms with Apollo Group.

We believe that we have an opportunity for long-term growth with Apollo Group. In the short term, we are focused on maintaining our relationship with Apollo Group. If our relationship with Apollo Group is discontinued, we would suffer a loss in advertising revenue in the short-term. However, in the long-term, we feel that the for-profit education market sector is large enough and competitive enough to allow us to positively adjust to the potential loss of this client because we believe our target audience of diverse professionals is highly sought after. We believe we have significant opportunities to grow our advertising revenue from clients outside of the education sector.

Cost of Growth

In the fiscal year ended December 31, 2012, we began to increase our sales and marketing, as well as, product development expenses. Such expenses will not be capitalized under our financial statements, and we do not expect to see increased revenues resulting from these investments until the first quarter of 2013 at the earliest. Therefore, as we execute our strategy to increase advertising and recruitment revenue by hiring additional personnel, expanding our marketing efforts and building a sales team, our profitability has declined and may continue to decline in the short-term. We may increase our office space to accommodate additional personnel.

Results of Operations

The following tables set forth our results of operations for the periods presented (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results.


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Comparison of the Year Ended December 31, 2012 with the Year Ended December 31,

2011

                                                                                       December 31,
                                                               Year Ended                2011 to
                                                              December 31,                2012 %
                                                          2012           2011             change
                                                             (in thousands)
Revenue:
Recruitment services                                    $   4,000      $   4,000                  -
Consumer advertising and consumer marketing solutions       2,154          1,569                37.3

Total revenue                                               6,154          5,569                10.5

Operating expenses:
Cost of services                                              805            817                11.2
Sales and marketing                                         1,483          1,022                45.1
General and administrative                                  1,222            723                69.7
Depreciation and amortization                                 113            109                 4.0

Total operating expenses                                    3,623          2,671                39.7

Income from operations                                      2,531          2,898              (16.4)

Other income (expense):
Interest and other income                                      13             18              (25.3)
Interest expense                                             (172 )         (170 )               1.1

Other expense, net                                           (159 )         (152 )               4.1

Net income                                              $   2,372      $   2,746                17.5 %

Revenue

The following tables set forth our results of operations for the periods
presented as a percentage of revenue for those periods (certain items may not
foot due to rounding). The period to period comparison of financial results is
not necessarily indicative of future results.

                                                                  2012        2011
  Percentage of revenue by product:
  Recruitment revenue                                                65  %       72 %
  Consumer advertising and consumer marketing solutions revenue      35  %       28  %

Total revenue was $6,154,111, an increase of $584,769, or 10.5%, for the year ended December 31, 2012 compared to $5,569,342 for the year ended December 31, 2011. Revenue from our recruitment solutions remained flat as our base fixed fee pursuant to our contract with Monster did not change from 2011 to 2012 and we did not exceed the number of applications required to receive additional revenue from Monster. Revenue from our consumer advertising and consumer marketing solutions was $2,154,111, an increase of $584,769, or 37.3%, for the year ended December 31, 2012 compared to $1,569,342 for the year ended December 31, 2011. The period over period increase was a result of three amendments to our agreements with Apollo Group; the Apollo Education to Careers Agreement that commenced in the third quarter of 2011, which resulted in additional revenue of $269,333, an agreement entered into with Apollo Group to provide advertising and promotion services for its Education to Education Affinity Networking Portal Site, which resulted in additional revenue of $150,000 and an insertion order from Apollo Group which resulted in additional revenue of $346,321 based upon the number of persons we referred to the University of Phoenix who expressed an interest in obtaining information about attending the University of Phoenix. These increases were offset by a $172,391 decrease in advertising revenue and a $8,495 decrease in partner job posting revenue. The reasons for these decreases was that we allocated additional advertising inventory to the Monster Worldwide recruitment channel, which is covered by our flat fee arrangement with Monster Worldwide, and demand for media and partner services is slightly softer in 2012 than 2011.


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Operating Expenses
Cost of services expense: Our cost of services expense for the year ended December 31, 2012 was $805,447, a decrease of $11,807, or 1.4%, as compared to $817,254 for the year ended December 31, 2011. The year over year decrease was primarily attributable to net decrease of $34,000 related to the maintenance and operation of our systems and websites consisting of computer programmer services expense decrease of $5,000 and web hosting expense increase of $47,000, both due to increased traffic and functionality for our websites, offset by a decrease in web development expense $76,000 as we brought more of those expenses in-house in 2012 and this amount is now included in salaries and wages. Offsetting the decrease in cost of services above was an increase in consulting expense related to our advertising and media services and our Apollo Group agreement which increased $71,000, and an increase in salaries and benefits of $59,000 resulting from hiring additional operations personnel in the fourth quarter of 2011 to support our revenue and traffic growth and the hiring of additional operations personnel in the second quarter of 2012. The increase in cost of services expense was offset by a $109,000 decrease in revenue sharing costs as we focused our advertising and recruitment efforts on our Monster and Apollo agreements and less on promoting partner advertising revenue.

Sales and marketing expense: Sales and marketing expense the year ended December 31, 2012 was $1,482,556, an increase of $460,717, or 45.1%, as compared to $1,021,839 for the year ended December 31, 2011. The year over year increase consisted of $91,000 in sales and marketing salaries and benefits which resulted from hiring additional staff in the fourth quarter of 2012 to support our 2013 direct sales capabilities, a $226,000 increase in online marketing expense to generate and support lead generation and additional website traffic, an $103,000 investment in customer database management tools, $30,000 to consultants and interns to assist with data mining to clean up our customer database and $11,000 to support our commitment to the University of Phoenix for student scholarships. .

General and administrative expense: Our general and administrative expense for the year ended December 31, 2012 were $1,222,158, an increase of $499,065, or 69.0%, as compared to $723,093 for the year ended December 31, 2011. The year over year increase in general and administrative expense was primarily due to an increase of approximately $275,000 in additional compensation payments paid to one of the members. The increase in additional compensation payments consists of $263,000 to compensate the member for additional income taxes resulting from money paid in 2010 for a condominium apartment in Miami, Florida which was primarily used by the company and an increase of $12,000 in expenses related to the condominium (please see "Agreements with Directors and Executive Officers" for further information regarding the additional compensation payments), an increase in audit and accounting fees of approximately $141,000, increases in personnel expenses of $83,000 related to the hiring of additional personnel to support our planned initial public offering and a $49,000 increase in bad debt expense as we determined the outstanding balance of certain advertising revenue invoices were uncollectible, offset by a decrease in public relations expense of $14,000 as we scaled back our press release efforts due to the IPO process and a decrease in CAM charges related to our office lease of $35,000.

Depreciation and amortization expense: The $4,351 increase in depreciation and amortization expense for the year ended December 31, 2012, as compared to the year ended December 31, 2011 was due to a $3,000 increase in amortization expense for additions to capitalized software related to updates and enhancements to our technology platforms and a $1,000 increase in depreciation expense related to computer equipment purchased in 2012.

Other Expenses and Income
Interest and other income: Interest and other income for the year ended December 31, 2012 decreased $4,444, or 25.3%, to $13,096, as compared to $17,540 for the year ended December 31, 2011. The year over year decrease was attributable to a decrease in interest and dividend income on our cash balances as we have liquidated our bond investments and currently hold only one exchange traded fund and the majority of our investments are in a money market account.

Interest expense: The increase in interest expense of $1,959, or 1.15%, to $172,411 for the year ended December 31, 2012, compared to $170,452 for the year ended December 31, 2011, was attributable to an increase in accretion on the note payable to one of the note holders as the note moves closer to maturity. Interest expense includes the amortization of a discount of $70,385 and $66,259 at December 31, 2012 and 2011, respectively, for the note pursuant to which we made a principal reduction payment. Payments on the notes were $176,000 and $192,000 for the years ended of December 31, 2012 and 2011, respectively.

Critical Accounting Policies and Estimates

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company," we may delay adoption of new or revised accounting standards applicable to public companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Upon issuance of new or revised accounting standards that apply to our financial statements, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting guidelines.


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Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

While our significant accounting policies are more fully described in Note 3 to our financial statements included at the end of this Annual Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Accounts Receivable

Our policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. We periodically reviews our accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and . . .

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