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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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”) contain 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 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 Securities and Exchange Commission (the “SEC”) on March 31, 2015, as well as in our condensed consolidated financial statements, related notes and the other financial information appearing elsewhere in this Quarterly Report and our other filings with 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 the “Company,” “our,” “we” and “us” refer to Professional Diversity Network, Inc. and its consolidated subsidiaries. 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. In our discussion below, the Company occasionally refers to its number of “registered users,” which we measure in terms of consumers who use the properties operated by each division. Our definition is based upon criteria relevant to the operation of each division and therefore may be different for each division. For PDN (as defined below), a registered user is a consumer who has affirmatively visited one of our properties, opted into an affinity group and provided us with demographic or contact information enabling us to match them with employers and/or jobs. For NAPW (as defined below), a registered user is a consumer who has viewed our marketing material, opted in to membership, provided demographic information and engaged in an onboarding call with a membership coordinator. For Noble Voice (as defined below), a registered user is a jobseeker who has viewed our marketing material, completed a TCPA-compliant opt-in form and provided us with contact and other demographic information enabling us to contact them. Unless otherwise noted within the context of discussing a particular division, we typically disclose “registered users” in the aggregate, combining the users from all three divisions. 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 Quarterly 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
The Company
The Company is both the operator of the Professional Diversity Network (the “PDN Network,” “PDN” or the “Professional Diversity Network”) and a holding company for NAPW, Inc., a wholly-owned subsidiary of the Company and the operator of the National Association of Professional Women (the “NAPW Network” or “NAPW”), which is a for-profit membership organization for professional women and has offices in New York and Los Angeles; and Noble Voice LLC and Compliant Lead LLC (together, “Noble Voice”), each of which is a wholly-owned subsidiary of the Company and together provide career consultation services through their offices in Detroit and Darien, IL.
The NAPW Network
The NAPW Network is a for-profit membership organization for professional women that the Company believes is among the most prominent women-only professional networking organizations in the United States. As of June 30, 2015, the NAPW Network had over 700,000 paid and non-paid professional women members. We believe that we maintained high visibility for the NAPW Network in 2014 through its over 1.6 billion online ad impressions, 3.6 million direct mail impressions, hundreds of thousands of in-person impressions through its live networking activities and countless interactions via its online properties and social media accounts. Members of the NAPW Network, many of whom pay annual membership subscriptions fees to us, enjoy a wealth of resources dedicated to developing their professional networks, furthering their education and skills and promoting their businesses and career accomplishments. We provide NAPW Network members with opportunities to network and develop valuable business relationships with other professionals through NAPW’s website, as well as at events hosted at hundreds of local chapters across the United States. Through the NAPW Network website, members are able to create, manage and share their professional identity online, build and engage with their professional network and promote themselves and their businesses. In addition to online networking, NAPW Network members can participate in a number of local events held across the United States, including monthly chapter meetings, professional networking expos, charitable events and other events developed specifically to facilitate face-to-face networking with other professional women. NAPW has historically sponsored a National Networking Conference that provides participants the opportunity to network with other members, hear presentations from keynote speakers and participate in break-out sessions. In 2015, the Company is sponsoring a three-city National Networking Summit Series, having already held events in Chicago and Los Angeles, with a New York event to be held in the 4th Quarter, along with more than 20 other professional networking events nationwide, held in conjunction with PDN’s Career Networking Conferences.
NAPW Network members can also promote their career achievements and their businesses through placement on the NAPW Network website’s home page, in proprietary press releases drafted with the assistance of professional writers, in the online Member Marketplace and in monthly newsletter publications. In addition to networking and promotional opportunities, NAPW Network members are also provided with the ability to further develop their skills and expand their knowledge base through monthly newsletters, online and in-person seminars, webinars and certification courses. NAPW Network members are also provided exclusive discounts on third-party products and services through partnerships with valuable brands that include Morgan Stanley, Ritz Carlton, Inc. Magazine, McDonalds, Care.com, Lenovo personal computers and GEICO insurance.
Additionally, as a direct result of the acquisitions we made during 2014 and the subsequent integration of those acquired businesses, we are now able to offer NAPW members the ability to opt into our Telephone Consumer Protection Act-compliant process that matches and qualifies job-seeking NAPW members with interested employers.
As previously disclosed, on July 16, 2015, Matthew Proman, the founder of NAPW and formerly our Chief Operating Officer and Executive Vice President, separated from the Company. We have taken immediate steps to replace Mr. Proman with organizational and revenue competency by moving Chris Wesser, the Company’s Executive Vice President, General Counsel and Secretary, into a day-to-day operational oversight role. Mr. Wesser filled a similar role at NAPW before our merger in September 2014. Mr. Wesser is being assisted in this regard by consultation with Barry Feierstein, our Director and Chair of the Compensation Committee. Mr. Wesser has been a full time employee of NAPW for over five years and has considerable operational and institutional knowledge of the NAPW business. Mr. Feierstein, has been a director with Professional Diversity Network since our initial public offering, he is a Harvard MBA, a former McKinsey and Company business consultant and has had extensive experience managing business operations relating to lead acquisition and telesales revenue generation.
The PDN Network
The Company’s PDN Network consists of 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 Professionals; Military Professionals; Lesbian, Gay, Bisexual and Transgender (LGBT) Professionals; and Students and Graduates seeking to transition from education to career. The purpose of the PDN Network is to assist its registered users in their efforts to connect with like-minded individuals, identify career opportunities within the network and connect with prospective employers. Our technology platform is integral to the operation of this business. In so doing, our online platform provides employers a means to identify and acquire diverse talent and assist them with their efforts to comply with the regulations and requirements of the Equal Employment Opportunity-Office of Federal Contract Compliance Program (“OFCCP”).
As of June 30, 2015, the Company had approximately 5.7 million PDN Network registered users, which we define as job seekers who have opted into our network for purposes of using our services. This reflects an increase during the fiscal quarter ended June 30, 2015 of 35.1% compared to the 4.2 million PDN Network registered users as of March 31, 2015. This increase is primarily attributable to our acquisition of Noble Voice and the resulting increase in direct contact with job seekers. We expect that continued user growth of the PDN Network 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 in the United States.
We currently provide registered PDN Network users with access to our websites at no cost, a strategy which we believe will allow us to continue to grow our user base and promote high levels of engagement for the mutual benefit of users and employers.
The Company continues to expand its 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 Urban League, the National Association for the Advancement of Colored People, VetJobs, DisabledPersons.com, a not-for-profit organization serving employment needs of people with disabilities, National Able Veterans Exchange, Leave No Veteran Behind, 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. New partnerships have been entered into with the National Association of African Americans in Human Resources, The Grio and the National Association of Women MBAs. 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.
Complimentary and Mutually Beneficial Combination of the NAPW Network and the PDN Network
The PDN Network provides NAPW Network members with direct access to employers seeking to hire professional women at a high level of connectivity and efficiency. The Merger has enabled the Company to launch its Hire AdvantEdge product, which matches members with jobs offered by our employment partners, qualifies those members for our partners’ jobs, secures an indication of interest from the member, and directly provides our partner with the member’s information or submits an application on behalf of the member to our partner’s recruitment system. The PDN Hire AdvantEdge service delivers enhanced membership value to those members seeking to reenter the workforce or to upgrade their professional employment condition, and our members deliver enhanced value to our partners who are seeking candidates of our members’ type. This benefit comes at no additional cost to members, reinforcing the membership value proposition. In addition to Hire AdvantEdge, Professional Diversity Network provides alternative values to members who are employed or are seeking employment, including, but not limited to, our patented resume optimizing service (Resunate), our semantic search job alerts and a new professional networking platform based upon PDN’s core networking technology.
NAPW is already leveraging the existing PDN events platform to host networking events in major markets around the nation. Because the PDN networking career events are already being conducted, we have added additional events for NAPW members at the same venues, one hour after the PDN event ends, at a substantially lower cost than hosting stand-alone NAPW events. Employers who sponsor the PDN career networking events will have the opportunity to participate in the NAPW event and meet with members to discuss employment opportunities in what we believe is an inviting and upscale networking environment. We believe that providing the opportunity for NAPW members to meet, outside of the monthly local chapter events and the three National Networking Summits, will add additional value to all NAPW members. That is, instead of attending one national event in New York, as was the case in 2014, in future years, NAPW Network members will be able to attend any or all of our PDN Network events. Non-members may also attend, subject to certain restrictions.
Collectively, these PDN products and services are being deployed to provide enhanced value to the NAPW membership experience, which we believe will be an important component in increasing both the number of new memberships and renewals of existing memberships, which leads to increased retention.
In a similar manner, NAPW provides PDN with an enhanced value proposition to our corporate recruitment business partners by providing a unique talent source of engaged and professional women. The same Hire AdvantEdge service that creates value for members by matching them with employers in a high touch manner provides employers with a very desirable candidate in an efficient, resourced and qualified manner. Furthermore, by adding NAPW events after PDN Career Networking Conferences, PDN will have opportunities to market upgrades to the exhibitors who recruit at the PDN events that will allow such exhibitors to participate in the NAPW membership networking event and meet members who may be potential employees for their companies. Exhibitors will be able to receive more exposure to more candidates because of the fact that the NAPW Networking Event will be held after PDN’s Career Networking Conference.
PDN Operations
We generate revenue from our PDN Network through numerous sources, all of which involve recruitment services designed to meet growing demand for diverse talent. We offer job postings, recruitment advertising, semantic search technology, career and networking events. We also license our recruitment technology platform. We currently have over 900 companies utilizing our products and services. Approximately 6% of our revenue is transacted online via ecommerce, and we believe we have the ability to increase this percentage efficiently. The majority of our sales are consummated via direct interaction with our diversity recruitment sales professionals. We generate revenue by contracting with medium to large employers seeking to diversify their employment ranks by advertising and promoting their job opportunities to our networks of diverse professionals and by assisting employers post their job opportunities in a method and manner compliant with the requirements of the OFCCP.
PDN - Marketing Directly to Recruiters
One of PDN’s core business strategies involves marketing our suite of products and services directly to recruiters. We market to both third-party and in-house corporate recruiters by assessing their diversity recruitment and talent acquisition needs and providing them real-time solutions that deliver diverse talent. We strongly believe that the industry has no single supplier that allows employers to access diverse candidates as efficiently as we are able to at our scale or quality, or with our unique understanding of the marketplace.
We believe that our approach is both unique and scalable. Our experience tells us that the diversity recruiting market is fragmented and difficult for diversity recruiting teams to penetrate because the market lacks a centralized point of approach. PDN solves that problem by developing strategic partnerships with leading organizations and providing a single point of access, which we deliver in an automated and culturally-relevant way that is meaningful to the job seeker.
While we are developing purely online marketing channels to bring recruiters to us, and courting strategic partners who can bring us new clients in bulk, we have found that the diversity recruiting market remains heavily dependent upon personal interaction. To that end, we currently employ professionals in sales, sales support and marketing who are all trained in selling our products and services. We believe in a team approach to nurturing the relationships we build, and, therefore, have three distinct groups of sales staff and support. The first includes our table-setters, who are responsible for setting up first meetings with prospect companies. The second includes our career sales professionals, who conduct the first meeting and mature the conversation to what we hope is a successful conclusion. The third includes our nurturing sales professionals who provide ongoing account management and are responsible for successful client renewals.
We have segregated the diversity recruitment market into three sectors:
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Federal, state and local governments and companies and contractors who serve these governmental entities;
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Small and medium sized businesses as defined by companies with less than 2,500 employees; and
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Large enterprises with greater than 2,500 employees.
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Our sales team is approaching 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. We have invested in our direct sales infrastructure and expect to continue to do so in the future. We plan to continue to invest in our sales and marketing team during the remainder of 2015, as they mature to a self-supporting group of professionals. 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.
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 PDN. Conversely, a weak employment environment may 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).
PDN - Recruitment Advertising
Diversity recruitment advertising enables recruiters to communicate their career opportunities to diverse candidates using Internet banner ads and email marketing. Our acquisition and integration of Noble Voice, with its expertise in these fields, has accelerated our success. In the past year we have provided diversity recruitment advertising services to numerous employers. We use sophisticated technology to deliver advertising targeted by geography and occupation. Our targeting is based upon data that we have accumulated relevant to our audiences’ job searches on our sites and vast profiles based upon those user experiences.
We believe that PDN stands apart from the industry in this arena because we are able to promote our clients’ brands in a manner that reflects each client’s commitment to diversity. In addition to delivering job seekers through our recruiter marketing, it is critical that we deliver to those job seekers jobs with employers they feel good about and who they feel understand them. Our recruitment advertising solutions provide job seekers with information that we believe allows them to look beyond a brand and deeper into an employer’s core values. Both we and our clients believe that this is critical to hiring success, and our recruitment advertising is expected to be a growing part of our business.
In addition to selling advertising packages and assisting our clients with their branding in this regard, we sell advertising packages which include access to develop “talent communities” within our affinities’ online properties, automated job feeds, access to our database for email marketing, banners within our network and affiliate networks, and re-targeting of directed advertisements.
PDN - Events
We generate revenue through our events division by selling employers access to and placement in or advertising around our diversity job fairs. In 2015 we will deliver over 20 Career Networking Conferences, including NAPW’s three-city National Networking Summit Series. The value of these events is multi-fold. We derive revenue from employers to whom we sell the events; we derive new members to both our PDN affinities and NAPW membership roll from participation in the events; we expect to derive increased retention among paying NAPW members; and we derive goodwill and positive publicity for our corporate brands as well as our overall message of diversity and inclusion, which further drives demand for our products and services.
NAPW - Membership Subscriptions
We believe that professionals attain success, in large part, based upon the value of their personal and professional networks. NAPW was built upon the premise that women have been historically disadvantaged in terms of building financially valuable networks, and that there exists a gap in the market for professional women to successfully network. Therefore, NAPW provides its members with online networking opportunities through its members-only site at www.napw.com, as well as through in-person networking at over 200 Local Chapters nationwide, additional career and networking events, and ancillary (non-networking) benefits such as educational discounts, shopping, and other membership perks. The information on NAPW’s website is not incorporated by reference in this Quarterly Report and you should not consider it as part of this Quarterly Report.
We currently employ 107 sales professionals, 93 of whom sell new membership subscriptions and 14 of whom sell upgraded membership packages and ancillary products (discussed below). We have decreased our number of sales professionals while fine-tuning our lead-generation and sales processes, and believe we can further reduce this number while maintaining a high level of revenue and increasing profitability. The new membership subscriptions include access to network online through the members-only website, at the Local Chapter meetings, discounted or free access to the National Networking Summits and Career Networking Conferences, and continuing education products, depending on the paid membership tier. New membership subscriptions are provided in five different paid tiers.
We also employ support teams to provide compliance, testing and customer service/support. Our compliance team is specifically focused on ensuring the integrity of the NAPW sales process. The team works closely with customer service and sales management to ensure that sales are conducted in an ethical manner and to identify sales representatives who would benefit from enhanced training. Our testing team consists of representatives who work with our Development and Executive teams to identify new lead-generation, sales and membership product opportunities, and to test those as well as new approaches to our current sales. Our customer service team, located in our New York, Los Angeles, Detroit and Darien, IL offices, work together to improve engagement with our members and to ensure a high degree of member satisfaction and retention.
NAPW - Upgraded Memberships and Ancillary Products.
Upgraded packages include the VIP membership, which provides members with additional promotional and publicity tools as well as free access (including guest) to the National Networking Summits and free continuing education programs; the press release package, which provides members with the opportunity to work with professional writers to publish personalized press releases and thereby secure valuable online presence; and the registry product, which allows members to create a durable, historical record chronicling their career achievements. We have 14 representatives in our New York and Los Angeles offices selling upgraded memberships and ancillary products. Our aforementioned compliance, testing and customer service teams also support our upgraded membership and ancillary product sales.
Noble Voice - Offline Career Consultations & Online Sales
Our Noble Voice division typically conducts over 37,000 career consultations per week. We monetize these consultations by using proprietary technology to drive inexpensive online traffic to our call centers and generating value-added leads for our strategic partners who provide continuing education and career services. Noble Voice maintains a sophisticated CRM and marketing controls, and is able to efficiently manage the number of consultations to match demand. We believe that we have a scalable platform that can continue to meet demand as it rises. We also generate revenue through Noble Voice’s online sales of recruiting advertising products.
Noble Voice - Technology Catalyst
We believe that the acquisition of Noble Voice was beneficial not only for its valuable business model and revenue stream, but also for its potential as a technology catalyst. As described, we have leveraged Noble Voice’s technology to-date to enable us to roll out our Hire AdvantEdge product, which is already working to supply our clients’ demand for job seekers in real time; to improve our methods of communication to prospects and leads for lead-generation; to deliver upgraded benefits not only to our NAPW members and members of the PDN affinities but to our clients through their client portal; to deliver the new NAPW website; to drive a significant increase in web traffic and time on site; and to greatly increase the rate of new user registrations on our online properties. We believe that we will continue to leverage Noble Voice resources going forward in a manner that continues to help us gain efficiencies.
Significantly, our Noble Voice technology resources have allowed us to roll out an upgraded Customer Relations Management database and interface (“CRM”) for use by NAPW across all aspects of its operations. Our new NAPW CRM was rolled out during the first quarter of 2015 and is already being used by all new membership sales professionals. The new CRM is already providing us with better business intelligence around the acquisition, distribution and management of NAPW leads as well as better operational control and management of NAPW call center operations.
Overview
The Company realized $10,399,000 and $21,101,000 in total revenues during the three and six months ended June 30, 2015, respectively, compared to $1,032,000 and $2,2670,000 in the same prior year period, representing an increase of 907% and 830%, respectively, attributable primarily to the acquisition of NAPW in September of 2014 and Noble Voice in November of 2014.
The NAPW Network generated $6,819,000, or 66% of our total revenue, and $13,843,000, or 65% of our total revenue, for the three and six months ended June 30, 2015, respectively. We generate revenue from the NAPW Network through membership subscriptions, the sale of press releases and an annual registry publication. Members pay their annual fees at the commencement of their membership period and benefits become available immediately; however, the revenue is recognized ratably over the 12 month membership period. Membership subscriptions represented approximately 99% of NAPW’s revenue for the three months ended June 30, 2015.
Our primary strategy to increase revenues from the NAPW Network is to expand the NAPW Network’s base and create a robust database of information about its key demographic - professional women. We believe that we can do so through the deployment of capital into (i) the NAPW Network’s existing member acquisition model, (ii) testing new methods of member acquisition, (iii) key member retention initiatives, (iv) the refinement of existing, and development of additional, NAPW Network member benefits and (v) our information collection and technology infrastructure.
The PDN Network generated $820,000, or 8% of our total revenue, and $1,739,000, or 8% of our total revenue, for the three and six months ended June 30, 2015, respectively. The majority of revenue generated by the PDN Network comes from job recruitment advertising. For the three months ended June 30, 2015 and 2014, approximately 92% and 57%, respectively, of our aggregate revenue was generated from recruitment advertising. The sales and marketing team, launched in 2013 at Professional Diversity Network, is executing its sales plan to bring on numerous new direct relationships with employers who seek to recruit diverse talent. We have also experienced early adoption of our OFCCP compliance product services by a number of customers. By combining diversity recruitment advertising with job postings and compliance services, the Company is able to deliver a valuable, cost effective and comprehensive solution for businesses subject to OFCCP compliance.
We generate revenue from our PDN Network through numerous sources all of which involve recruitment services. We offer job postings, recruitment advertising, semantic search technology, career and networking events. We also license our recruitment technology platform. We currently have over 900 companies utilizing our products and services. For the three months ended June 30, 2015, approximately 8.2% of our PDN revenue was transacted online via ecommerce through our proprietary properties and those of our partners, compared to 8.7% for the three months ended June 30, 2014. The majority of our PDN Network direct sales are consummated via direct interaction with our diversity recruitment sales professionals.
The Company’s strategy for the PDN Network is to continue to diversify its customer base and thus its sources of revenue. Our sales and marketing team, launched in 2013, is experiencing meaningful growth in its ability to transact business. Revenue recognized from direct sales of all services and events to businesses was approximately $820,000 and $1,739,000 for the three and six months ended June 30, 2015, respectively, compared to $1,032,000 and $2,270,000 for the three and six months ended June 30, 2014, respectively, representing a decrease of $212,000, or 20.6%, and $531,000, or 23.4%, attributable to the cancellation of the agreement with each of LinkedIn, on March 3, 2014, and Apollo Education Group, on October 9, 2014, which former customers accounted for no revenues during the three and six months ended June 30, 2015 and $350,000 and $1,200,000 of revenues during the three and six months ended June 30, 2014, respectively.
While we recognize revenue in our financial statements ratably as earned over the lives of the respective contracts we enter into, internally we track gross bookings for services we originate through our direct sales force on a quarterly basis strictly as our performance measurement. Although direct bookings are non-binding and the revenue derived from such bookings are not recorded in earnings until all of the revenue recognition criteria are met, we consider direct bookings to be a key performance indicator of where we stand against our strategic plan. Direct bookings during the second quarter of 2015 for all services and events were $782,000 (including $254,000 of direct bookings from our events division), compared to $802,000 in the second quarter of 2014 (including $225,000 of direct events bookings but excluding LinkedIn and Apollo Education Group bookings), representing a decrease of 2.5% primarily the result of declining sales through our partner organizations.
We are managing several initiatives designed over the medium to long term to reduce expenses and integrate new technology that will help better manage operations, which, if successfully implemented, should have significant benefit to us. However, these events could have a near-term material adverse effect on business, and we anticipate it could take up to six months to fully integrate.
Reconciliation of Net Loss to EBITDA
We decreased our Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) deficit in the second quarter of 2015 by 1,114,000, or 71%, compared to the first quarter of 2015, corresponding to a decrease in net loss of $765,000, or 50%, compared to the first quarter of 2015. The following table reconciles our net loss to EBITDA, which is a non-GAAP financial measure:
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Three Months Ended
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June 30, 2015
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March 31,
2015
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(Amounts in thousands)
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Net loss
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$ |
(778 |
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$ |
(1,543 |
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Depreciation and amortization
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870 |
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935 |
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Change in fair value of warrant liability
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(71 |
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(20 |
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Interest expense
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29 |
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46 |
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Interest and other income
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(7 |
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(16 |
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Income tax benefit
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(497 |
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(970 |
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EBITDA
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$ |
(454 |
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$ |
(1,568 |
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Seasonality
Our quarterly operating results have historically been affected by the seasonality of employers’ businesses. Historically, demand for employment hiring is lower during the first quarter and second quarters of the year and increases during the third and fourth quarters. However, while NAPW sales have slight seasonal variations, generally sales have been slightly slower during summer months and during periods near holidays like Thanksgiving, Christmas and New Year’s Eve and New Year’s Day, the variations are far less significant than those of PDN’s recruitment business. Because NAPW generates the majority of revenue for the Company, the seasonality of the Company’s business has been less significant in recent quarters compared to quarters concluded prior to the Merger, and we expect that will be the case in future quarters.
Costs and Expenses
Total costs and expenses increased significantly in the three and six months ended June 30, 2015 to $11,723,000 and $24,929,000, respectively, compared to $1,825,000 and $3,614,000 for the three and six months ended June 30, 2014, respectively. This increase of 542% and 590% is primarily the result of the increased costs of operating the acquired businesses of the NAPW Network and Noble Voice.
Results of Operations
The following tables set forth our results of operations for the periods presented (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results.
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Three Months Ended
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June 30,
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Change
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Change
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2015
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2014
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(Dollars)
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(Percent)
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(in thousands)
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Revenues
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Membership fees and related services
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$
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6,754
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$
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-
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|
|
$
|
6,754
|
|
|
|
100.0
|
%
|
|
Lead generation
|
|
|
2,760
|
|
|
|
-
|
|
|
|
2,760
|
|
|
|
100.0
|
%
|
|
Recruitment services
|
|
|
756
|
|
|
|
585
|
|
|
|
171
|
|
|
|
29.2
|
%
|
|
Products sales and other
|
|
|
65
|
|
|
|
-
|
|
|
|
65
|
|
|
|
100.0
|
%
|
|
Consumer advertising and marketing solutions
|
|
|
64
|
|
|
|
447
|
|
|
|
(383
|
)
|
|
|
(85.7
|
)%
|
|
Total revenues
|
|
|
10,399
|
|
|
|
1,032
|
|
|
|
9,367
|
|
|
|
907.7
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,472
|
|
|
|
396
|
|
|
|
1,076
|
|
|
|
271.7
|
%
|
|
Sales and marketing
|
|
|
5,479
|
|
|
|
763
|
|
|
|
4,716
|
|
|
|
618.1
|
%
|
|
General and administrative
|
|
|
3,902
|
|
|
|
572
|
|
|
|
3,330
|
|
|
|
582.2
|
%
|
|
Depreciation and amortization
|
|
|
870
|
|
|
|
94
|
|
|
|
776
|
|
|
|
825.5
|
%
|
|
Total costs and expenses
|
|
|
11,723
|
|
|
|
1,825
|
|
|
|
9,898
|
|
|
|
542.4
|
%
|
|
Loss from operations
|
|
|
(1,324
|
)
|
|
|
(792
|
)
|
|
|
(531
|
)
|
|
|
67
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
(23
|
)
|
|
|
(2,300.0
|
)%
|
|
Change in fair value of warrant liability
|
|
|
71
|
|
|
|
(30
|
)
|
|
|
101
|
|
|
|
(336.7
|
)%
|
|
Income tax benefit
|
|
|
(497
|
)
|
|
|
(333
|
)
|
|
|
(164
|
)
|
|
|
49.2
|
%
|
|
Net loss
|
|
$
|
(778
|
)
|
|
$
|
(488
|
)
|
|
$
|
(289
|
)
|
|
|
59.2
|
%
|
| |
|
Six Months Ended
|
|
|
|
|
|
|
|
| |
|
June 30,
|
|
|
Change
|
|
|
Change
|
|
| |
|
2015
|
|
|
2014
|
|
|
(Dollars)
|
|
|
(Percent)
|
|
| |
|
(in thousands)
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related services
|
|
$
|
13,543
|
|
|
$
|
-
|
|
|
$
|
13,543
|
|
|
|
100.0
|
%
|
|
Lead generation
|
|
|
5,519
|
|
|
|
-
|
|
|
|
5,519
|
|
|
|
100.0
|
%
|
|
Recruitment services
|
|
|
1,603
|
|
|
|
1,401
|
|
|
|
202
|
|
|
|
14.4
|
%
|
|
Products sales and other
|
|
|
300
|
|
|
|
-
|
|
|
|
300
|
|
|
|
100.0
|
%
|
|
Consumer advertising and marketing solutions
|
|
|
136
|
|
|
|
868
|
|
|
|
(732
|
)
|
|
|
(84.3
|
)%
|
|
Total revenues
|
|
|
21,101
|
|
|
|
2,270
|
|
|
|
18,832
|
|
|
|
829.6
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
3,183
|
|
|
|
762
|
|
|
|
2,421
|
|
|
|
317.7
|
%
|
|
Sales and marketing
|
|
|
12,095
|
|
|
|
1,560
|
|
|
|
10,535
|
|
|
|
675.3
|
%
|
|
General and administrative
|
|
|
7,846
|
|
|
|
1,108
|
|
|
|
6,738
|
|
|
|
608.1
|
%
|
|
Depreciation and amortization
|
|
|
1,805
|
|
|
|
185
|
|
|
|
1,620
|
|
|
|
875.7
|
%
|
|
Total costs and expenses
|
|
|
24,929
|
|
|
|
3,614
|
|
|
|
21,314
|
|
|
|
589.8
|
%
|
|
Loss from operations
|
|
|
(3,828
|
)
|
|
|
(1,344
|
)
|
|
|
(2,482
|
)
|
|
|
184.7
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(52
|
)
|
|
|
67
|
|
|
|
(119
|
)
|
|
|
(177.6
|
%)
|
|
Change in fair value of warrant liability
|
|
|
92
|
|
|
|
14
|
|
|
|
78
|
|
|
|
557.1
|
%
|
|
Income tax benefit
|
|
|
(1,467
|
)
|
|
|
(513
|
)
|
|
|
(954
|
)
|
|
|
186.0
|
%
|
|
Net loss
|
|
$
|
(2,321
|
)
|
|
$
|
(751
|
)
|
|
$
|
(1,569
|
)
|
|
|
208.9
|
%
|
Revenue
The following tables set forth our results of operations for the periods presented as a percentage of revenue for those periods. The period to period comparison of financial results is not necessarily indicative of future results.
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
June 30,
|
|
|
June 30,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Percentage of revenue by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership fees and related services
|
|
|
65 |
% |
|
|
- |
% |
|
|
64 |
% |
|
|
- |
% |
|
Lead generation
|
|
|
26 |
% |
|
|
- |
% |
|
|
26 |
% |
|
|
- |
% |
|
Recruitment services
|
|
|
7 |
% |
|
|
57 |
% |
|
|
8 |
% |
|
|
62 |
% |
|
Products sales and other
|
|
|
1 |
% |
|
|
- |
% |
|
|
1 |
% |
|
|
- |
% |
|
Consumer advertising and consumer marketing solutions
|
|
|
1 |
% |
|
|
43 |
% |
|
|
1 |
% |
|
|
38 |
% |
Membership fees and related services and products sales of $6,819,000 and $13,843,000, respectively for the three and six months ended June 30, 2015 are attributable to the NAPW Network, which was acquired in September 2014. The Company anticipates that in future periods, the revenue generated from the NAPW Network will continue to exceed revenue generated from the PDN Network, and will be material to the Company’s financial condition and results of operations. The Company began to significantly increase its energies and spending on sales opportunities and membership benefit services after the acquisition of NAPW in September 2014. We anticipate that these investments, which are a combination of improvements that leverage PDN’s technology and enhance membership services and support and our consistent, continuing investments in lead generation, will result in an increase in both membership sales in the near, mid and long term as well as an increase in renewals in the mid and long term.
Noble Voice, which was acquired on November 26, 2014, generated $2,760,000 and $5,519,000 of lead generation revenue for the three months and six months ended June 30, 2015, respectively. Noble Voice sales representatives are speaking directly to thousands of job seekers each day and assisting them with career and education goals and aspirations. In addition these candidates are being registered to the PDN networks system.
During the three and six months ended June 30, 2015 and 2014, we recognized $756,000 and $1,603,000, respectively, compared to $585,000 and $1,401,000, respectively of the same periods in the prior year, of revenues related to direct sales of our recruitment services. This increase in direct sales is primarily attributable to the continued successful execution by our sales and marketing team of its sales plan to bring on numerous new direct relationships with employers who seek to recruit diverse talent. We have also experienced early adoption of our OFCPP compliance product services by a number of customers. Additionally, direct sales of our recruitment services were positively impacted as a result of the termination of our previous agreement with LinkedIn, since we no longer have post termination restrictions on our ability to sell any employers our diversity recruitment services and we are not restricted from entering into direct recruitment relationships with those companies that are using our products and services via the LinkedIn reseller agreement.
Also contributing to the increase in recruitment services was $170,000 and $323,000 of revenues generated from our Events Division during the three and six months ended June 30, 2015, respectively, compared to revenue of $145,000 and $245,000, respectively, for the same prior year period.
Revenue from our consumer advertising and marketing solutions was $64,000 and $136,000, respectively, for the three and six months ended June 30, 2015, compared to $447,000 and $868,000, respectively, for the prior year period. The year over year decrease was primarily the result of the termination of our agreement with Apollo Group on October 9, 2014, which resulted in lost fixed monthly fees of $116,667. The Apollo Agreement would have otherwise expired by its terms on February 28, 2015. Revenue generated from agreements with our partner organizations amounted to $64,000 and $136,000, respectively, for the three and six months ended June 30, 2015, compared to $97,000 and $168,000, respectively, for the three and six months ended June 30, 2014. Partnership revenues declined as we shifted focus to our direct sales efforts and the integration of our recent acquisitions.
Operating Expenses
Cost of revenues: Cost of revenues during the three and six months ended June 30, 2015 were $1,472,000 and $3,183,000, respectively, an increase of $1,076,000 and $2,421,000, respectively, or 272% and 318%, from $396,000 and $762,000, respectively, for the three and six months ended June 30, 2014. The increase for the three and six months ended June 30, 2015 was due to (i) $186,000 and $378,000, respectively, of costs of products and membership services from NAPW and $907,000 and $2,001,000, respectively, from Noble Voice services that were incurred after the acquisition of each company, (ii) a $66,000 and $192,000, increase, respectively, in technology delivery services by PDN resulting from the growth of our OFCCP compliance product and expansion of our technology development, (iii) a decrease of $47,000 and $83,000, respectively, of direct costs incurred in connection with our Events Division, which had been acquired at the end of the third quarter of 2013 and (iv) a decrease of $26,000 and $57,000, respectively, of revenue sharing to our partner organizations due to the changes in certain partners.
Sales and marketing expense: Sales and marketing expense for the three and six months ended June 30, 2015 was $5,479,000 and $12,095,000, respectively, an increase of $4,716,000 and $10,535,000, respectively, or 618% and 675%, compared to $763,000 and $1,560,000, respectively, for the three and six months ended June 30, 2014. The increase for the three and six months ended June 30, 2015 primarily consisted of (i) $3,773,000 and $8,620,000, respectively, of sales and marketing expenses from NAPW, which included $1,770,000 and $3,703,000 of wages and benefits for the NAPW sales team and $2,003,000 and $4,917,000 of digital advertising and direct mail costs to generate leads, (ii) wages of $1,099,000 and $2,192,000, respectively, for the Noble Voice lead generation team and (iii) a decrease of $121,000 and $244,000, respectively, in sales and marketing salaries, commissions and benefits marketing costs for PDN which resulted from adjustments to the sales and marketing team. During the second quarter of 2015, we reduced our financial investment in the NAPW direct mail and digital marketing campaigns. It is our goal to continue to grow revenues in a cost efficient manner and leveraging the investment we are making in technology and people to drive that business. For the three months ended June 30, 2015, we realized a cost reduction of $910,000, compared to the three months ended March 31, 2015 for NAPW direct mail and digital marketing.
General and administrative expense: General and administrative expenses increased by $3,330,000 and $6,738,000, or 582% and 608%, to $3,902,000 and $7,846,000 for the three and six months ended June 30, 2015, respectively, compared to $572,000 and $1,108,000 for the three and six months ended June 30, 2014, respectively, primarily due to an increase of $2,694,000 and $5,435,000 of expenses from NAPW and $878,000 and $1,757,000 from Noble Voice, and was partially offset by a decrease from PDN of $217,000 and $526,000 due to allocation of shared expenses.
Depreciation and amortization expense: Depreciation and amortization expense for the three and six months ended June 30, 2015 was $870,000 and $1,805,000, respectively, compared to $94,000 and $185,000 for the three and six months ended June 30, 2014, an increase of $776,000 and $1,620,000, respectively, or 826% and 876%, which was primarily due to a $717,000 and $1,448,000 increase in amortization expense, resulting from the amortization of the intangible assets of $14,905,000 acquired from Old NAPW and $650,000 from Noble Voice and $182,000 of amortization related to the additions to capitalized software relating to web product platform development to support emerging technologies and to the acquired software technology from CareerImp Inc. in June 2013.
Other Income (Expenses)
Included in other expenses, net, for the three and six months ended June 30, 2015 is interest expense in the amount of $29,000 and $75,000, respectively. Interest expense during the three and six months ended June 30, 2015 is primarily the result of the note payable to Proman which had been issued in conjunction with the acquisition of Old NAPW. In addition, for the three and six months ended June 30, 2015, we recognized interest income of $7,000 and $23,000, respectively from interest earned on our short-term investments of cash in excess of our current needs for operating capital.
Change in Fair Value of Warrant Liability
The change in the fair value of the warrant liability is related to the common stock purchase warrants issued to underwriters in the Company’s IPO on March 4, 2013. We recorded a non-cash gain of $71,000 and $92,000 during the three and six months ended June 30, 2015, respectively, related to changes in the fair value of our warrant liability liabilities. The change in the fair value of our warrant liability was primarily the result of changes in our stock price.
Income Tax (Benefit) Expense
The effective income tax rate for the three and six months ended June 30, 2015 was 38.7%, resulting in income tax benefits of $497,000 and $1,467,000, respectively. The effective income tax rate for the three and six months ended June 30, 2014 was 40.6%, resulting in income tax benefits of $333,000 and $513,000.
Non-GAAP Financial Measures
We make reference to “EBITDA,” a measure of financial performance not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”). Management has included EBITDA because it believes that investors may find it useful to review our financial results as adjusted to exclude items as determined by management. Reconciliations of this non-GAAP financial measure to the most directly comparable GAAP financial measure, net loss, to the extent available without unreasonable effort, are set forth above.
Management believes EBITDA provides a meaningful representation of our operating performance that provides useful information to investors regarding our financial condition and results of operations. EBITDA is commonly used by financial analysts and others to measure operating performance. Furthermore, management believes that this non-GAAP financial measure may provide investors with additional meaningful comparisons between current results and results of prior periods as they are expected to be reflective of our core ongoing business. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Further, EBITDA, as we define it, may not be comparable to EBITDA, or similarly titled measures, as defined by other companies.
Critical Accounting Policies and Estimates
On April 5, 2012, the Jumpstart Our Business Startups Act (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 consolidated 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 consolidated 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.
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated 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 consolidated financial statements requires us to exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and disclosure of commitments and contingencies at the date of the consolidated financial statements.
We base our estimates on our historical experience, knowledge of our business and industry, current and expected economic conditions, the attributes of our products, the regulatory environment, and in certain cases, the results of outside appraisals. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary. 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.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
There have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 31, 2015, which we believe 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.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of June 30, 2015 and 2014, respectively, and is intended to supplement the more detailed discussion that follows:
| |
|
June 30,
|
|
| |
|
2015
|
|
|
2014
|
|
| |
|
(in thousands)
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,329
|
|
|
$
|
5,609
|
|
|
Short-term investments
|
|
|
1,096
|
|
|
|
11,876
|
|
|
Working capital (deficiency)
|
|
|
(3,843
|
)
|
|
|
17,344
|
|
Our principal sources of liquidity are our cash and cash equivalents, short-term investments and the net proceeds from our initial public offering and other recent public offerings. Our payment terms for PDN customers range from 30 to 60 days. We consider the difference between the payment terms and payment receipts a result of transit time for invoice and payment processing and to date have not experienced any liquidity issues as a result of the payments extending past the specified terms. We collect NAPW membership fees generally at the commencement of their membership term or at renewal periods thereafter. Cash and cash equivalents and short term investments consist primarily of cash on deposit with banks and investments in money market funds, corporate and municipal debt and U.S. government and U.S. government agency securities.
Under our business agreement with Apollo Group, Apollo Group made fixed monthly payments to us in the amount of $116,667 for the following services we provided to Apollo Group: (1) access to the hosted service for University of Phoenix students and alumni; (2) reports on a daily, weekly or as otherwise requested basis by Apollo Group; and (3) supporting services, including technical support for the hosted service, or as requested by Apollo Group. The agreement with Apollo terminated on October 9, 2014 and, as a result, the Company no longer receives fixed monthly payments of $116,667.
The Merger with NAPW resulted in a reduction in the amount of cash and short-term investments of the Company. The consideration for the Merger consisted of $3,555,000 paid by the Company in cash to the former sole shareholder of Old NAPW, fees of approximately $474,000 paid by the Company to the Company’s financial advisor, Aegis Capital Corp. and fees of approximately $349,000 paid by the Company to its legal and accounting advisors.
On March 31, 2014 the Company filed its amended Registration Statement on Form S-3 (the “Shelf”), which was declared effective by the SEC on April 2, 2015, registering for issuance shares of our common stock, preferred stock, depositary shares, rights, warrants, units and debt securities up to an aggregate amount of $100,000,000, and 6,309,845 shares of our common stock for resale by certain selling stockholders, in one or more future offerings. This Shelf presented an economical way to position the Company to take advantage of strategic opportunities that may arise, all while helping to create a more liquid market for the Company’s common stock.
Following the Company’s 2014 acquisitions, which have enabled it to report the revenue growth depicted in its financial statements for the quarters ended March 31, 2015 and June 30, 2015, it became prudent to raise additional working capital to replenish amounts spent on the acquisitions and subsequent integration.
To that end, in April of 2015, the Company held its first offering under the Shelf and sold an aggregate of 1,670,000 shares of its common stock at $3.00 per share for gross proceeds of $5,010,000. After the payment of underwriting commissions and discounts, the net proceeds of the offering amounted to approximately $4,400,000. In May of 2015, the underwriters elected to exercise their option to purchase an additional 75,100 shares of the Company’s common stock, also at $3.00 per share, for gross proceeds of $225,300, or approximately $210,000 after the payment of underwriting commissions and discounts. These offerings enabled the Company to replenish its current assets, maintain the ability to pursue new opportunities, and enjoy a more liquid market for its common stock. The Company believes it has more than adequate cash reserves to execute its business plan and drive the Company to profitability.
We intend to continue to make investments to support our business growth and may require additional funds to increase our sales and marketing efforts and product development and acquire complementary businesses and technologies. We may need to engage in equity or debt financings to secure additional funds. Future efforts to raise additional funds may not be successful or they may not be available on acceptable terms, if at all.
We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our working capital requirements for the next twelve months.
| |
|
Six Months Ended
|
|
| |
|
June 30,
|
|
| |
|
2015
|
|
|
2014
|
|
| |
|
(in thousands)
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2,816
|
)
|
|
$
|
(1,116
|
)
|
|
Investing activities
|
|
|
3,732
|
|
|
|
(11,986
|
)
|
|
Financing activities
|
|
|
2,895
|
|
|
|
(26
|
)
|
|
Net increase (decrease) in cash and cash equivalents
|
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$
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3,810
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$
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(13,127
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)
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Cash and Cash Equivalents
The Company considers cash and cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.
Net Cash (Used in) Provided by Operating Activities
Net cash used in operating activities for the six months ended June 30, 2015 was $2,816,000. We had a net loss of $2,321,000 during the six months ended June 30, 2015, which was offset by non-cash depreciation and amortization of $1,805,000, stock-based compensation expense of $236,000, a deferred tax benefit of $1,467,000, the amortization of debt discount related to the Proman note of $5,000, the amortization of premiums paid on short-term investments of $71,000 and a decrease in the fair value of warrant liabilities of $92,000. Changes in working capital used $1,054,000 of cash during the six months ended June 30, 2015.
Net cash used in operating activities for the six months ended June 30, 2014 was $1,116,000. We had a net loss of $751,000 during the six months ended June 30, 2014, which was offset by non-cash depreciation and amortization of $185,000, stock-based compensation expense of $26,000, a deferred tax benefit of $513,000 and a decrease in the fair value of a warrant liability of $14,000. Changes in working capital used $49,000 of cash during the six months ended June 30, 2014.
Net Cash Used in Investing Activities
Net cash provided by investing activities for the six months ended June 30, 2015 was $3,731,000, consisting of $4,957,000 of proceeds from the sale and maturities of short-term investments, offset by $925,000 from the purchase of short-term investments, $231,000 invested in developed technology, $64,000 in purchases of property and equipment and $5,000 of new security deposits.
Net cash used in investing activities for the six months ended June 30, 2014 was $11,985,000, consisting of $14,976,000 from the purchase of short-term investments, $98,000 invested in developed technology, $12,000 in purchases of property and equipment, offset by $3,100,000 of proceeds from the sale and maturities of short-term investments.
Net Cash Provided by Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2015 was $2,895, consisting of $5,010,000 of proceeds from the sale of common stock and $225,300 of proceeds from the sale of over-allotment common stock to our underwriters, offset by $653,000 of costs related to the common stock offerings, $1,272,000 for the repayment of a note payable, $400,000 of increase in a merchant reserve and $15,000 for the payment of capital lease obligations.
The Company used $26,000 to repurchase common stock during the six months ended June 30, 2014.
Off-Balance Sheet Arrangements
Since inception, we have not engaged in any off-balance sheet activities as defined in Regulation S-K Item 303(a)(4).
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s condensed financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of June 30, 2015, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
However, during the second quarter of 2015, we continued to undertake certain initiatives to improve and remediate material weaknesses related to our internal control over financial reporting that were identified for the fiscal year ended December 31, 2014. Specifically, the Company continued implementing new policies to more fully segregate incompatible duties and enhance the overall internal control structure. Additional procedures were written supporting which functions employees with access to the general ledger system can access, which will provide additional internal control enhancements. As a result of the 2014 acquisitions of NAPW and Noble Voice, we continue to reallocate roles and responsibilities in order to improve our segregation of duties.
We anticipate that the actions described above and resulting improvements in controls will strengthen the Company’s internal control over financial reporting and will, over time, address the related material weakness. However, because many of the controls in the Company’s system of internal controls rely extensively on manual review and approval, the successful operation of these controls may be required for several quarters prior to management being able to conclude that the material weakness has been remediated.
PART II
ITEM 1. LEGAL PROCEEDINGS
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 31, 2015, NAPW, Inc., the Company’s wholly-owned subsidiary and successor by merger to Old NAPW, is a defendant in the related cases of Costantino v. NAPW, Inc., No. 0000074/2013 (Sup. Ct., Nassau Co.), filed on January 3, 2013 in the County Court for Nassau County, New York, and DeLisi, et al. v. NAPW, Inc., No. 2:13-CV-05322 (E.D.N.Y.), filed on September 25, 2013 in federal court for the Eastern District of New York. These cases involved allegations of same-sex sexual harassment against a female manager by five female employees. The cases were settled in full on June 2, 2015, subject to confidentiality agreements. Under the terms of the settlement, the parties have agreed to have the case dismissed pending releases from all parties as well as from interested third-parties who provided benefits to the plaintiffs. It is anticipated that all releases will be executed and the matter dismissed during the third quarter of 2015. The Company believes that these settlements will not have a material effect on its financial condition.
Noble Voice LLC, a wholly-owned subsidiary of the Company acquired in connection with the Global Outreach acquisition, is party to litigation captioned as Expand, Inc. v. Noble Voice LLC et al., CASE NO.: 2014-CA-9366 A (Orange County, FL Circuit Court) pursuant to which Expand, Inc., d/b/a SoftRock, Inc. (“SoftRock”) filed a complaint against Noble Voice LLC and certain other defendants (the “Noble Voice Defendants”) on or about September 10, 2014 alleging the existence of a purported conspiracy by Noble Voice and the other defendants to breach the individual Noble Voice Defendants’ Non-Compete Agreements and separate Confidentiality Agreements, misappropriation of trade secrets by some but not all Noble Voice Defendants, tortious interference and seeking injunctive relief. During the Second Quarter the parties met to discuss settlement of claims against the corporate defendants. The outcome of this lawsuit is uncertain, however, we believe that the claims asserted are without merit and we intend to aggressively defend against the claims.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Please see the exhibit index following the signature page of this Quarterly Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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PROFESSIONAL DIVERSITY NETWORK, INC.
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Date:
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August 12, 2015
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By:
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/s/ David Mecklenburger
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Name: David Mecklenburger
Title: Chief Financial Officer
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(On behalf of the Registrant and as principal financial officer and principal
accounting officer)
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EXHIBIT INDEX
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Exhibit
Number
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Description of Exhibit
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3.1
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Amended and Restated Certificate of Incorporation of the Company, as amended (incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2014)
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3.2
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Amended and Restated Bylaws of the Company, as amended (incorporated herein by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2014)
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31.1
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Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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33