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IPDN > SEC Filings for IPDN > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PROFESSIONAL DIVERSITY NETWORK, INC.

Form 10-Q for PROFESSIONAL DIVERSITY NETWORK, INC.


14-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Unaudited Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report. This section and other parts of this Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of Section 27A of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 concerning our future results of operations and financial position, business strategy and plans and our objectives for future operations. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Such risks and uncertainties include, among others, those discussed in "Item 1A
- Risk Factors" of our Annual Report on Form 10-K as filed with the SEC on April 1, 2013, as well as in our condensed financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report and our other filings with the Securities and Exchange Commission, or the SEC. These factors could cause actual results to differ materially from the results anticipated by these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. The forward-looking statements in this Quarterly Report speak only as of the date they were made. We do not intend, and undertake no obligation, to update any of our forward-looking statements to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless we specify otherwise, all references in this Quarterly Report to "Professional Diversity Network," "we," "our," "us" and the "Company" refer to Professional Diversity Network, LLC d/b/a iHispano.com prior to the consummation of our reorganization (from an Illinois limited liability company into a Delaware corporation) on March 5, 2013, and Professional Diversity Network, Inc. after our reorganization.

For purposes of this Quarterly Report, unless the context clearly dictates otherwise, all references to "professional(s)" means any person interested in the company's websites presumably for the purpose of career advancement or related benefits offered by the Company, whether or not such person is employed and regardless of the level of education or skills possessed by such person. The Company does not impose any selective or qualification criteria on membership and the term "professional(s)" as used in this Quarterly Report should be interpreted accordingly. In addition, the Company does not verify that any member of a particular Company website qualifies as a member of the ethnic, cultural or other group identified by that website. References to "user(s)" means any person who visits one or more of our websites and "our member(s)" means an individual user who has created a member profile on that website as of the date of measurement. If a member is inactive for 24 months then such person will be automatically de-registered from our database. The term "diverse" (or "diversity") is used throughout this Annual Report to include communities that are distinct based on a wide array of criteria which may change from time to time, including ethnic, national, cultural, racial, religious or gender classification.

Overview

Professional Diversity Network develops and operates online professional networking communities dedicated to serving diverse professionals in the United States and employers seeking to hire diverse talent. Our networking communities harness our relationship recruitment methodology to facilitate and empower professional networking within common affinities. We believe that those within a common affinity often are more aggressive in helping others within their affinity progress professionally. The Company operates these relationship recruitment affinity groups within the following sectors: Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, Lesbians, Gay, Bisexual and Transgender (LGBT), and Student and Graduates seeking to transition from education to career. Our online platform provides employers a means to identify and acquire diverse talent and assist them with their efforts to comply with the Equal Employment Opportunity-Office of Federal Contract Compliance Program ("OFCCP").

The Company currently has over 2.6 million registered users. We expect that our continued membership growth will enable us to further develop our menu of online professional diversity networking and career placement solutions. Additionally, the Company has established systems to distribute jobs in an OFCCP compliant manner to career agencies, including those of state and local governments.

The Company added over 122,000 registered users during the 3 months ended September 30, 2013, representing an increase of total registered users of 33% from September 30, 2012.


We currently provide registered users with access to our websites at no cost, a strategy which we believe will allow us to continue to grow our membership base and promote high levels of member engagement for the mutual benefit of registered users, employers and advertisers.

The Company continues to expand its partnership relationships with key strategic alliances that we believe are valuable to our core clients. The Company currently maintains relationships with the following key strategic allies: the National Black MBA Association, the National Association for the Advancement of Colored People; VetJobs; Veterans of Foreign Wars; DisabledPersons.com, a leading not-for-profit organization serving employment needs of people with disabilities; ALPFA, an organization dedicated to building Latino business leaders; Latino(a)s in Tech Innovation & Social Media; Illinois Hispanic Nursing Association;Women in Biology; Black Sales Journal; Ebony Magazine and numerous others. The Company considers its partner alliances to be a key value to its clients because it enables the Company to expand its job distribution and outreach efforts.

During the third quarter of 2013, the Company enhanced its Employer Recruitment Intelligent Compliance Assistance ("ERICA") product. The ERICA product was designed to align corporate compliance efforts with the diversity recruitment requirements of the OFCCP.

Revenue. The Company realized $979,289 in total revenue during the three month period ended September 30, 2013, compared to $1,707,932 in the same prior year period, representing a 42.7% decrease. The drop in total revenue is primarily attributable to the non-renewal of our agreement with Monster Worldwide, which terminated at the end of 2012. In January 2013, the Company began a distribution agreement with LinkedIn, which is one of the world's largest online sites for recruitment and professional development. The distribution agreement provides that LinkedIn will make fixed quarterly payments to us in the amount of $500,000 per quarter.

The Company's revenues are highly dependent on two customers: LinkedIn and Apollo Group. Apollo Group is the parent company of the University of Phoenix, the country's largest private university offering more than 100 degree programs as well as internet curriculum in most countries around the world. The loss of either major customer would materially and adversely affect the Company's business, operating results and financial condition. If LinkedIn or Apollo seeks to renegotiate its agreement on terms less favorable to the Company and the Company accepts such unfavorable terms, or if the Company seeks to negotiate better terms but is unable to do so, then the Company's business, operating results and financial condition would be materially and adversely affected. These two customers accounted for 87%, or approximately $850,000, of total gross sales with LinkedIn representing 51% and Apollo Group representing 36% of total gross sales for the three months ended September 30, 2013.

Pursuant to the agreement with Apollo Group entered into on October 1, 2012, the Company is paid a fixed monthly fee of $116,667 for services and technical solutions provided by the Company to the University of Phoenix and its students and alumni (Apollo Group is the University of Phoenix's parent company). The Company primarily provides recruitment solutions for the University of Phoenix student and alumni career services.

Recruitment Services. The majority of our revenue is generated from job recruitment advertising and in the fiscal year ended December 31, 2012 approximately two-thirds of our revenue was generated from recruitment advertising.

We entered into a diversity recruitment partnership agreement with LinkedIn on November 12, 2012, which became effective on January 1, 2013. Pursuant to the 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 which was $1,000,000 per quarter. The fixed quarterly payments are payable regardless of sales volumes or any other performance metric. The initial term of the agreement is for three years and will automatically renew for successive one year periods, unless terminated by either party, as permitted by the agreement. Under the LinkedIn agreement, we also may earn commissions for sales of our services in excess of certain thresholds as described in more detail in Note 13. We will not obtain information about commissions earned from LinkedIn, if any, until within 60 days following the end of any fiscal quarter. Accordingly, any commission earned from LinkedIn sales during any quarter will be reflected in our financial statements for the subsequent quarter, subject to the applicable revenue recognition criteria being met. We did not earn a commission from LinkedIn during the six months ended June 30, 2013 and do not expect to earn a commission for the three months ended September 30, 2013. While we are experiencing increased recruitment demand via our LinkedIn alliance, we are unable to forecast if there will be commission earned under this agreement for the remainder of 2013.

As of September 2013, the Company has developed a team of 26 sales and marketing professionals. Revenue derived from direct sales of recruitment services to businesses was approximately $85,000 and $154,000 during the three and nine months ended September 30, 2013, respectively. The Company tracks direct revenues booked for its services originating from the Company's direct sales force and via e-commerce by period. Direct revenues booked during the third quarter of 2013 were $170,000, compared to $67,000 in the second quarter of 2013, representing a quarterly increase of 154%.


Acquisitions. Part of our growth plan is to acquire companies that we believe will add to and/or expand our service offerings.

On June 14, 2013, we completed the purchase of the proprietary software technology related to developing career guidance tools for job seekers from Careerimp Inc. The terms of the purchase were an initial cash payment of $200,000 plus an additional payment of $200,000 to Careerimp's former CEO if he remains employed by PDN on December 31, 2013. The technology acquired by us from Careerimp is being used to enhance the functionality and appeal of our networks and provide our registered users with sophisticated technology to enhance their resumes and increase their potential to have a higher percentage of applications result in interviews.

The Company made an additional strategic acquisition in the third quarter of 2013 in order to expand its networking capabilities. The Company purchased the assets of Personnel Strategies Inc. ("PSI"), a producer of diversity focused career fairs, on September 20, 2013 for an aggregate purchase price of $200,000. We concurrently hired PSI's former CEO and committed to pay him an additional $100,000 on each of September 20, 2014 and 2015, contingent upon the former CEO's continued employment on each of those respective dates. Additionally, the former CEO may receive up to an additional $100,000 on September 20, 2014 and 2015 provided certain cash flow targets are met. PSI is a producer of approximately 25 to 30 career fairs annually in major market locations across the nation reaching approximately 500 employers and 20,000 diverse job seekers. The acquisition will enhance the Company's diversity recruitment offerings and help build brand awareness of Professional Diversity Network, Inc.

We currently have no other agreements or commitments with respect to acquisitions or investments in other companies. However, we continue to explore opportunities to acquire or consolidate some of the companies in our industry, which is highly fragmented.

Seasonality

Our quarterly operating results are affected by the seasonality of employers' businesses. Historically, demand for employment hiring is lower during the first quarter and typically increases during the remainder of the year.

Costs and Expenses

During the nine months ended September 30, 2013, we continued to increase our expenditures on sales and marketing from $1,088,536 to $1,638,433, an increase of 51%. The change is primarily attributable to the growth and development of our direct Sales and Marketing team. These expenses are not capitalized within our financial statements. The Company has substantially increased staffing in sales and marketing in the first nine months of 2013, adding approximately 24 sales and marketing employees. The Company does not anticipate a continued increase of staff at the same pace for the balance of 2013. We believe that current staffing levels are sufficient to support successful operations for the foreseeable future. We may increase staff resulting from a unique personnel opportunity in sales and marketing or from the purchase of another company or when management believes that it is beneficial for the Company to do so.


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.

                                                 For the Three Months Ended
                                                        September 30,                 Change          Change
                                                  2013                2012           (Dollars)       (Percent)
                                                       (in thousands)

Revenues
Recruitment services                          $         602       $       1,000     $      (398 )         (39.8 %)
Consumer advertising and consumer marketing
solutions revenue                                       378                 708            (330 )         (46.6 %)
      Total revenues                                    979               1,708            (729 )         (42.7 %)

Costs and expenses:
Cost of services                                        235                 281             (45 )         (16.1 %)
Sales and marketing                                     607                 473             134            28.4 %
General and administrative                              530                 296             234            79.1 %
Depreciation and amortization                            66                  43              24            56.1 %
Gain on sale of property and equipment                    1                   0               1           100.0 %
Total costs and expenses                              1,439               1,091             347            31.8 %
(Loss) income from operations                          (459 )               617          (1,076 )        (174.5 %)

Other expense, net                                       (2 )               (39 )            37           (95.1 %)
Change in fair value of warrant liability                 4                   0               4           100.0 %
Income tax benefit                                     (185 )                 0            (185 )        (100.0 %)
Net (loss) income                             $        (271 )     $         578     $      (849 )        (147.0 %)




                                                 For the Nine Months Ended
                                                       September 30,                 Change          Change
                                                  2013                2012          (Dollars)       (Percent)
                                                       (in thousands)

Revenues
Recruitment services                          $       1,693       $      3,000     $    (1,307 )         (43.6 %)
Consumer advertising and consumer marketing
solutions revenue                                     1,183              1,736            (554 )         (31.9 %)
      Total revenues                                  2,876              4,736          (1,860 )         (39.3 %)

Costs and expenses:
Cost of services                                        722                679              42             6.2 %
Sales and marketing                                   1,638              1,089             550            50.5 %
General and administrative                            1,478                750             728            97.0 %
Depreciation and amortization                           182                 85              98           115.0 %
Gain on sale of property and equipment                   (4 )                0              (4 )        (100.0 %)
Total costs and expenses                              4,016              2,603           1,413            54.3 %
(Loss) income from operations                        (1,140 )            2,134          (3,274 )        (153.4 %)

Other expense, net                                     (143 )             (121 )           (22 )          18.2 %
Change in fair value of warrant liability               316                  0             316           100.0 %
Income tax benefit                                      (81 )                0             (81 )        (100.0 %)
Net (loss) income                             $        (886 )     $      2,013     $    (2,900 )        (144.0 %)


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.

                                                 For the Three Months Ended             For the Nine Months Ended
                                                        September 30,                         September 30,
                                                  2013                 2012             2013                 2012
Percentage of revenue by product:
Recruitment services                                   61%                  59%              59%                  63%
Consumer advertising and consumer marketing
solutions revenue                                      39%                  41%              41%                  37%

Total recruitment services revenue decreased 40% and 44% for the three and nine months ended September 30, 2013, compared to the same period in the prior year. Revenue from our recruitment solutions decreased $398,000 and $1,307,000 for the three and nine months ended September 30, 2013, respectively, as compared to the prior year, as the fixed fee we receive pursuant to our LinkedIn agreement is half of the fixed fee we received pursuant to our Monster agreement prior to its termination at the end of 2012.

Revenue from our consumer advertising and consumer marketing solutions was $378,000 and $1,183,000 for the three and nine months ended September 30, 2013, respectively, compared to $708,000 and $1,736,000 for the three and nine months ended September 30, 2012, respectively. The period over period decrease was primarily the result of changes in our agreements with Apollo Group and a decrease in media revenue as we changed our product offerings. The revenue from our Apollo Education to Careers Agreement, which consists of a fixed monthly fee of $116,667, remained the same. However, the advertising and promotion campaign for Apollo Group's Education to Education Affinity Networking Portal Site ended in June 2012 and such termination resulted in a decrease in revenue of $150,000 for the nine months ended September 30, 2013. Additionally, we mutually ended our insertion order agreement with the Apollo Group for lead generation for the University of Phoenix in June 2013 and such termination resulted in a decrease in revenue of $249,000 and $274,000 for the three and nine months ended September 30, 2013, respectively. Our media revenue for the three and nine months ended September 30, 2013 was $0, compared to $73,000 and $117,000 for the three and nine months ended September 30, 2012, respectively, as our 2013 efforts focused on growing our recruitment solutions products.

Operating Expenses

Cost of services expense: The decrease in cost of services for the three months ended September 30, 2013 was primarily attributable to a $41,000 decrease in our revenue sharing expense associated with our Monster contract, partner services revenue and media products, as well as a decrease in consulting expenses of $13,000 due to the decrease in our advertising and media services resulting from the change in our product offerings.

The increase in cost of services expense for the nine months ended September 30, 2013 was mainly a result of a $150,000 increase in salaries and benefits for the nine months ended September 30, 2013 resulting from hiring additional operations personnel in the third quarter of 2012 to support our expected revenue and traffic growth in 2013. The increase was offset by a $71,000 decrease in our revenue sharing expense associated with our Monster contract, partner services revenue and media products for the nine months ended September 30, 2013. Additionally, consulting expenses decreased by $23,000 for the nine months ended September 30, 2013 as a result of the decrease in our advertising and media services due to the change in our product offerings. Lower maintenance and operation expenses related to our systems and websites, which resulted in a decrease of $17,000 for the nine months ended September 30, 2013, also contributed to the fluctuation in our costs and expenses.

Sales and marketing expense: Sales and marketing expense for the three months ended September 30, 2013 was $607,000, an increase of $134,000, or 28%, compared to $473,000 for the three months ended September 30, 2012. Sales and marketing expense for the nine months ended September 30, 2013 was $1,638,000, an increase of $550,000, or 51%, compared to $1,089,000 for the nine months ended September 30, 2012. The increase primarily consisted of an increase of $221,000 and $455,000 for the three and nine months ended September 30, 2013, respectively, in sales and marketing salaries, commissions and benefits and a $27,000 and $63,000 increase in travel, meals and entertainment expense for the three and nine months ended September 30, 2013, respectively, which resulted from hiring additional staff to support our 2013 direct sales capabilities. Additionally, consulting expense increased $36,000 and $100,000 for the three and nine months ended September 30, 2013, respectively, and marketing expense increased $71,000 and $214,000 for the three and nine months ended September 30, 2013, respectively, both related to customer database management tools. The increases were partially offset by a $224,000 and $286,000 decrease in online marketing expense during the three and nine months ended September 30, 2013, respectively as a result of the 2013 initiative to market and sell directly to potential customers.


General and administrative expense: The increase in general and administrative expenses for the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, was primarily due to increases in personnel expenses of $50,000 and $179,000 for the three and nine months ended September 30, 2013, respectively, related to the hiring of additional personnel to support our initial public offering, as well as a payment during the first quarter of 2013 to our former CFO of approximately $89,000 for services provided. We incurred additional costs of approximately $181,000 and $470,000 for the three and nine months ended September 30, 2013 related to being a public company, including costs associated with audit, legal, directors and officers insurance, investor relations and filing fees and registration. In connection with the acquisition of the software technology from Careerimp in June 2013, we committed to pay Careerimp an additional $200,000 contingent upon the former CEO's continued employment with PDN through December 31, 2013. We recorded $100,000 of this contingent liability during the three and nine months ended September 30, 2013. We also experienced an increase of $8,000 and $76,000 for the three and nine months ended September 30, 2013, respectively, in occupancy, technology and communication costs as we moved our corporate headquarters to a larger space and hired additional employees. The increase was offset by a $28,000 decrease in travel, meals and entertainment expense for the three and nine months ended September 30, 2013 and a $49,000 decrease in bad debt expense for the three and nine months ended September 30, 2013.

Depreciation and amortization expense: The increase in depreciation and amortization expense for the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012, was primarily due to a $14,000 and $85,000 increase in amortization expense for the three and nine months ended September 30, 2013, respectively, related to the approximately $320,000 in additions to capitalized software in the third and fourth quarters of 2012 for updating the technology stack of our web product platform to support emerging technologies. We switched over to the platform, dubbed "V2," at the end of 2012, though the development continued through the first quarter of 2013.

Other Expenses

Included in other expenses, net, for the three months ended September 30, 2013 . . .

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