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PROFESSIONAL DIVERSITY NETWORK, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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 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 March 27, 2014, 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"). As of June 30, 2014, the Company had approximately 3,170,000 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 523,000 registered users during the six months ended June 30, 2014, representing an increase of total registered users of 19.8% from December 31, 2013. 15 -------------------------------------------------------------------------------- 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 members and employers. 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, National Urban League, the National Association for the Advancement of Colored People, VetJobs, DisabledPersons.com, a leading 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. 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 first quarter of 2014, the Company launched its Diversity Jobs Report, which provides statistical data specific to the nation's employment situation for various workforce segments by a range of criteria such as education, industry sector and geography. The report also includes a new Diversity Jobs Index that sheds light on the monthly employment condition for women, veterans, disabled persons, Hispanics, African Americans, Asian Americans and members of the LGBT community. 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 recently modified diversity recruitment requirements of the OFCCP. The Company believes it is well positioned to provide recruiting and recordkeeping solutions to address these changes in an OFCCP-compliant manner. The Company's service delivery includes a screen shot capture of jobs posted to official State Job Boards, Employment Service Delivery Systems and other locations. Additionally the Company has significant diversity recruitment outreach via its own network of diverse sites and its numerous partner distribution sites. On July 11, 2014, the Company, NAPW Merger Sub Inc., a newly formed Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"), NAPW, Inc., a New York corporation ("NAPW"), and Matthew B. Proman, the sole shareholder of NAPW ("Proman"), entered into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger Agreement provides for, among other things, a business combination whereby NAPW will merge with and into Merger Sub, with Merger Sub as the surviving entity (the "Merger"). As a result of the Merger, the separate corporate existence of NAPW will cease and Merger Sub will continue as the surviving corporation, will be a wholly-owned subsidiary of the Company, and will be renamed "NAPW, Inc." At the effective time of the Merger, all shares of common stock of NAPW issued and outstanding immediately prior to the effective time of the Merger will be converted into and become the right to receive 5,110,975 shares of the Company's common stock, which will be issued to Proman as NAPW's sole shareholder. In addition, pursuant to separate subscription agreements, 959,096 shares will be issued to Star Jones, NAPW's President and National Spokeswoman, and 239,774 shares will be issued to Christopher Wesser, NAPW's General Counsel, as set forth in the Merger Agreement. Also, at the effective time of the Merger, the Company, as additional consideration, will pay to Proman, in cash, $3,450,000 and issue to Proman (i) a promissory note in the original principal amount of $550,000, (ii) an option to purchase 183,000 shares of the Company's common stock at a price of $3.45 per share, (iii) a warrant to purchase 50,000 shares of the Company's common stock at a price of $4.00 per share and (iv) a warrant to purchase 131,250 shares of the Company's common stock at a price of $10.00 per share (collectively, the "Option Consideration"). In consideration for its services as financial advisor to the Company, at the effective time of the Merger, the Company will also issue to Aegis Capital Corp. a warrant to purchase 50,000 shares of the Company's common stock with an exercise price of $4.00 per share. The issuance of the 6,309,845 shares as consideration for the Merger will dilute the ownership and voting interests of the Company's existing stockholders. Upon the issuance of such shares and the Option Consideration in connection with the Merger, the recipients will own 50% of the Company's issued and outstanding common stock and 50% of the Company's common stock on a fully-diluted basis. Therefore, the ownership and voting interests of the Company's existing stockholders will be proportionately reduced. The Company is required to continue to operate its business in the ordinary course pending the merger and not take certain specified actions prior to the completion of the proposed merger. As a result, the merger poses certain risks to the Company during the pendency of the transaction. Concurrently with the execution of the Merger Agreement, NAPW entered into a voting agreement (the "Voting Agreement") with certain stockholders of the Company who, in the aggregate, hold shares representing approximately 58.6% of the outstanding voting power of the Company. Pursuant to the Voting Agreement, the Company stockholders party thereto have agreed to vote the shares of Company common stock held by them in favor of the Merger and the other transactions contemplated by the Merger Agreement, and against, among other things, alternative business combination transactions. Such stockholders further agreed to certain restrictions on the disposition of such shares of common stock, subject to the terms and conditions contained therein. Pursuant to the terms of the Voting Agreement, the Voting Agreement will terminate upon the earlier of the consummation of the Merger or the termination of the Merger Agreement in accordance with its terms. 16-------------------------------------------------------------------------------- Revenue. The Company realized $1,032,287 in total revenue during the three month period ended June 30, 2014, compared to $976,920 in the same prior year period, representing an increase of 5.7%, attributable primarily to an increase in revenue from direct sales, offset by a decrease in our LinkedIn revenue (see below). The sales and marketing team, launched last year 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. The technology that enabled the Company to effectively compete in OFCCP job distribution was enhanced by our June 14, 2013 purchase of proprietary software technology from CareerImp Inc., which related to the development of career guidance tools for job seekers. We generate revenue 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 500 companies utilizing our products and services, either directly or through our legacy LinkedIn reseller agreement. For the six months ended June 30, 2014, approximately 6% of our revenue was transacted online via ecommerce. The majority of our sales are consummated via direct interaction with our diversity recruitment sales professionals. The Company's revenues were historically 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 end of the Company's reseller relationship with LinkedIn during the first quarter of 2014, under which LinkedIn previously paid fixed quarterly payments of $500,000 to the Company, has materially and adversely affected the Company's business, operating results and financial condition. Additionally, if 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 53%, or approximately $1.2 million, of total gross revenues, with LinkedIn representing 22% and Apollo Group representing 31% of total gross revenues for the six months ended June 30, 2014. Pursuant to the agreement with Apollo Group renewed on February 14, 2014, 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. The Company primarily provides recruitment solutions for the University of Phoenix student and alumni career services. The Company's strategy is to continue to diversify its customer base and thus its sources of revenue. Our sales and marketing team, newly launched last year, is experiencing meaningful growth in its ability to transact business. As of June 30, 2014, the Company has developed a team of 26 sales and marketing professionals. Revenue recognized from direct sales of all services and events to businesses (exclusive of revenue from LinkedIn and Apollo) was approximately $682,000 and $1,075,000 for the three and six months ended June 30, 2014, respectively, compared to $92,000 and $158,000 for the three and six months ended June 30, 2013, respectively, representing an increase of 642% and 582%, respectively. While we recognize revenue ratably as earned over the life of the contracts we sell, the Company tracks gross revenues booked for its services originating from the Company's direct sales force on a quarterly basis. Direct revenues booked during the second quarter of 2014 for all services and events were $802,000 (including $225,000 of bookings from our events division), compared to $105,000 in the second quarter of 2013, representing an increase of 663%. Recruitment Services. The majority of our revenue is generated from job recruitment advertising. For the six months ended June 30, 2014, the three months ended June 30, 2014 and the fiscal year ended December 31, 2013, approximately 62%, 57% and 61% of our revenue was generated from recruitment advertising, respectively. 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 resold to its customers, diversity-based job postings and recruitment advertising on our websites. Our agreement with LinkedIn provided that LinkedIn made fixed quarterly payments to us in the amount of $500,000 per quarter and paid us commissions for sales of our services in excess of certain thresholds. We did not earn any commission from LinkedIn sales during the fiscal quarter ended March 31, 2014 or during the fiscal year ended December 31, 2013. The agreement with LinkedIn terminated on March 29, 2014 and as a result, LinkedIn is no longer a reseller of our products or services and we will not receive the fixed quarterly payments of $500,000 or have the potential to earn additional commission revenue from LinkedIn. As part of the termination agreement, we no longer have post termination restrictions on our ability to sell any employers our diversity recruitment services. Additionally, as part of our termination with LinkedIn, we will provide ongoing job postings and reporting for those employers to whom LinkedIn sold our diversity recruitment services. We are not restricted from entering into a direct recruitment relationship with those companies that are using our products and services via the LinkedIn reseller agreement. 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 second quarters of the year and increases during the third and fourth quarters. 17 --------------------------------------------------------------------------------Costs and Expenses We maintained a relatively consistent level of expenditures on sales and marketing during the three months ended June 30, 2014 of approximately $763,000, compared to approximately $796,000 for the three months ended March 31, 2014. This is primarily attributable to our investment in building a sales and marketing group that can deliver long-term success. During the three months ended June 30, 2014, the Company terminated the employment of certain members of the sales team and replaced them with sales executives experienced in online recruitment. The Company believes that it will benefit from these new team members in the coming months and years. In connection with the termination of the LinkedIn agreement effective March 29, 2014, the Company now has the freedom to sell those 1,000 accounts formerly restricted by the LinkedIn agreement. The Company maintains a business relationship with LinkedIn with respect to certain LinkedIn clients that utilize the Company's OFCCP compliance services. We believe there are more than 10,000 companies that are potential business partners of Professional Diversity Network. We also believe that our year over year growth of over 663% for the second quarter of 2014 via our direct sales model, while not necessarily indicative of future results, does indicate that our investment in our new sales and marketing team is beginning to have a positive impact on the Company. Building a new team takes time and resources and we believe that our investment in this team now will enable us to diversify our client base, increase our revenue and create value for our shareholders. We feel that the size of the current team is sufficient to grow our direct sales revenues significantly, without further substantial investments in sales personnel. Results of Operations The following tables set forth our results of operations for the periods presented (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months Ended June 30, Change Change 2014 2013 (Dollars) (Percent) (in thousands) Revenues Recruitment services $ 585 $ 556 $ 29 5.2 % Consumer advertising and consumer marketing solutions revenue 447 421 26 6.3 % Total revenues 1,032 977 55 5.7 % Costs and expenses: Cost of services 396 247 149 60.2 % Sales and marketing 763 576 187 32.5 % General and administrative 572 527 45 8.5 % Depreciation and amortization 94 61 33 54.6 % Gain on sale of property and equipment 0 0 0 0.0 % Total costs and expenses 1,825 1,411 414 29.3 % Loss from operations (792 ) (434 ) (359 ) 82.7 % Other income, net 1 9 (8 ) (88.9 %) Change in fair value of warrant liability (30 ) 200 (231 ) (115.1 %) Income tax benefit (333 ) (91 ) (242 ) 266.6 % Net loss $ (488 ) $ (133 ) $ (355 ) 266.6 % 18-------------------------------------------------------------------------------- Six Months Ended June 30, Change Change 2014 2013 (Dollars) (Percent) (in thousands) Revenues Recruitment services $ 1,401 $ 1,092 $ 310 28.4 % Consumer advertising and consumer marketing solutions revenue 868 805 64 7.9 % Total revenues 2,270 1,897 373 19.7 % Costs and expenses: Cost of services 762 486 276 56.8 % Sales and marketing 1,560 1,032 528 51.1 % General and administrative 1,108 948 160 16.8 % Depreciation and amortization 185 116 69 59.1 % Gain on sale of property and equipment 0 (5 ) 5 (100.0 %) Total costs and expenses 3,614 2,577 1,037 40.2 % Loss from operations (1,344 ) (681 ) (663 ) 97.5 % Other income (expense), net 67 (141 ) 208 (147.8 %) Change in fair value of warrant liability 14 311 (298 ) (95.7 %) Income tax (benefit) expense (513 ) 105 (617 ) (589.1 %) Net loss $ (751 ) $ (615 ) $ (136 ) 22.1 % 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, 2014 2013 2014 2013 Percentage of revenue by product: Recruitment services 57 % 57 % 62 % 58 % Consumer advertising and consumer marketing solutions revenue 43 % 43 % 38 % 42 % Total recruitment services revenue increased 5.2% and 28.4%% for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Revenue from our recruitment solutions includes $0 and $500,000 for the three months ended June 30, 2014 and 2013, respectively, and $494,000 and $1,000,000 for the six months ended June 30, 2014 and 2013, respectively, pursuant to our LinkedIn agreement, which expired on March 29, 2014. In September 2013, we purchased the assets of Personnel Strategies, Inc. ("PSI"). PSI had been operating diversity focused job fairs throughout the United States for over 20 years and is now being operated as the events division of the Company. Revenues for the three and six months ended June 30, 2014 includes $145,000 and $245,000, respectively, of revenues generated from our events division. Additionally, during the three months ended June 30, 2014 and 2013, we recognized $350,000 and $45,000, respectively, of revenues related to direct sales of our recruitment services. During the six months ended June 30, 2014 and 2013, we recognized $530,000 and $69,000, respectively, of revenues related to direct sales of our recruitment services. The increase in direct sales is primarily attributable to the 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 OFCCP compliance product services by a number of customers. Additionally, direct sales of our recruitment services were positively impacted as a result of our termination 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 a direct recruitment relationship with those companies that are using our products and services via the LinkedIn reseller agreement. Revenue from our consumer advertising and consumer marketing solutions was $447,000 and $868,000 for the three and six months ended June 30, 2014, respectively, compared to $421,000 and $805,000 for the three and six months ended June 30, 2013. The year over year increase was primarily the result of an increase in partner sales, which amounted to $97,000 and $168,000 for the three and six months ended June 30, 2014, compared to $36,000 and $66,000 for the three and six months ended June 30, 2013, resulting from the addition of new partners. The revenue from our Apollo Education to Careers Agreement, which consists of a fixed monthly fee of $116,667, remained the same. 19 --------------------------------------------------------------------------------Operating Expenses Cost of services expense: Cost of services expense increased $149,000 and $276,000 during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013. The increase in cost of services for the three and six months ended June 30, 2014 was mainly due to $120,000 and $217,000, respectively, of direct costs incurred in connection with our events division and a $24,000 and $46,000 increase in revenue sharing expenses during the three and six months ended June 30, 2014, respectively. Sales and marketing expense: Sales and marketing expense for the three months ended June 30, 2014 was $763,000, an increase of $187,000, or 32%, compared to $576,000 for the three months ended June 30, 2013. Sales and marketing expense for the six months ended June 30, 2014 was $1,560,000, an increase of $528,000, or 51%, compared to $1,032,000 for the six months ended June 30, 2013. The increase primarily consisted of an increase of $236,000 and $570,000 for the three and six months ended June 30, 2014, respectively, in sales and marketing salaries, commissions and benefits, offset by a decrease in marketing and advertising expense of $47,000 and $64,000 for the three and six months ended June 30, 2014, respectively. General and administrative expense: General and administrative expenses increased $45,000 and $160,000 during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013, primarily due to (1) an increase in certain public company expenses, such as directors and officers insurance, investor relations, filing fees, franchise tax fees and registration fees, of $25,000 and $141,000 for the three and six months ended June 30, 2014, respectively, (2) stock based compensation expense of $26,000 incurred in connection with the granting of stock options to certain members of management and employees and (3) an increase of $86,000 and $26,000 in personnel expenses for the three and six months ended June 30, 2014, respectively, mainly due to the hiring of additional staff. Additionally, in connection with the acquisition of PSI, we committed to pay the former chief executive officer an additional $100,000 on each of September 20, 2014 and 2015 contingent upon his continued employment with us on each of those respective dates. We recorded an expense of $25,000 and $50,000 related to these contingent liabilities during the three and six months ended June 30, 2014, respectively. The increase was offset by a decrease in professional fees of $133,000 and $85,000 for the three and six months ended June 30, 2014, respectively. Depreciation and amortization expense: Depreciation and amortization expense increased $33,000 and $69,000 during the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013. The increase was primarily due to a $33,000 and $66,000 increase in amortization expense for the three and six months ended June 30, 2014, respectively, due to the additions to capitalized software relating to web product platform to support emerging technologies and to the acquired software technology from CareerImp Inc. in June 2013. Other Income (Expenses) Other income for the three and six months ended June 30, 2014 mainly consists of interest earned on our short-term investments. Other expense for the six months ended June 30, 2013 is primarily attributable to the retirement of debt previously owed to certain shareholders of the Company that was exchanged for shares of our common stock upon our reorganization on March 4, 2013. 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 (loss)/gain of ($30,000) and $14,000, during the three and six months ended June 30, 2014, respectively, and non-cash gains of $200,000 and $311,000 during the three and six months ended June 30, 2013, 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 As a result of the Company's completion of its IPO, the Company's results of operations are taxed as a C Corporation. Prior to the IPO, the Company's operations were taxed as a limited liability company, whereby the Company elected to be taxed as a partnership and the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes was recorded for periods prior to March 4, 2013. This change in tax status to a taxable entity resulted in the recognition of deferred tax assets and liabilities based on the expected tax consequences of temporary differences between the book and tax basis of the Company's assets and liabilities at the date of the IPO. This resulted in a net deferred tax (benefit) expense of ($513,000) and $105,000 being recognized and included in the tax provision for the six months ended June 30, 2014 and 2013, respectively. The tax (benefit) expense was determined using an effective tax rate of 40.6% for the six months ended June 30, 2014 and for the period from March 4, 2013 (the date on which the tax status changed to a C Corporation) to June 30, 2013. 20 --------------------------------------------------------------------------------Critical Accounting Policies and Estimates On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company," we may delay adoption of new or revised accounting standards applicable to public companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Upon issuance of new or revised accounting standards that apply to our financial statements, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting guidelines. Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates. 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, 2013 filed with the SEC on March 27, 2014, 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, 2014 and 2013, respectively, and is intended to supplement the more detailed discussion that follows: June 30, 2014 2013 (in thousands) Cash and cash equivalents $ 5,609 $ 20,140 Short-term investments 11,876 246 Working capital 17,344 19,965 Our principal sources of liquidity are our cash and cash equivalents, short-term investments and the net proceeds from our initial public offering. Our payment terms for our 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. 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. In March 2013, we received an approximately $18.1 million cash infusion in connection with the completion of our IPO. Under our business agreement with LinkedIn, LinkedIn made fixed quarterly payments to us in the amount of $500,000 per quarter and paid us commissions for sales of our services in excess of certain thresholds. The agreement with LinkedIn terminated on March 29, 2014 and, as a result, LinkedIn is no longer a reseller of the Company's products or services and the Company will not receive the fixed quarterly payments of $500,000 or have the potential to earn additional commission revenue from LinkedIn. Accordingly, the termination of our agreement with LinkedIn has had a material impact on revenue and operating cash flow in the near term. However, we will be permitted, as of March 30, 2014, to market and sell our products to any company, including those 1,000 companies on LinkedIn's restricted account list because as part of our termination arrangement with LinkedIn, the restricted account list will no longer apply. The Company has implemented a plan to actively engage with the 1,000 companies that were formerly restricted from us by agreement with LinkedIn. In addition we will also be marketing to customers that had purchased our products through contracts with LinkedIn with the intent of renewing those contracts directly as they expire over the coming 12 months. We feel that our existing salesforce has the capacity to service the additional potential customers we will target as a result of the termination of the LinkedIn agreement. 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. 21-------------------------------------------------------------------------------- Six Months Ended June 30, 2014 2013 (in thousands) Cash provided by (used in): Operating activities $ (1,116 ) $ 867 Investing activities (11,985 ) (391 ) Financing activities (26 ) 18,795 Net (decrease) increase in cash and cash equivalents $ (13,127 ) $ 19,271 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 Provided by (Used in) Operating Activities 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. The cash flow provided by operating activities during the six months ended June 30, 2013 was primarily attributable to changes in our assets and liabilities, mainly consisting of a decrease in accounts receivable of $1,542,000. The decrease in accounts receivable was due to the collection of outstanding receivables. We had a net loss of $615,000 during the six months ended June 30, 2013, which included non-cash interest and accretion added to our notes payable of $155,000, non-cash depreciation and amortization of $116,000, a non-cash deferred tax expense of $105,000 and a decrease in the fair value of a warrant liability of $311,000. Net Cash Used in Investing Activities 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 used in investing activities for the six months ended June 30, 2013 was $391,000, primarily consisting of $200,000 paid for the acquisition of technology, $165,000 invested in developed technology and $33,000 in purchases of property and equipment. Net Cash Provided by Financing Activities The Company used $26,000 to repurchase common stock during the six months ended June 30, 2014. Net cash provided by financing activities was $18,795,000 for the six months ended June 30, 2013. The cash provided by financing activities consisted of $19,475,000 in net proceeds from our initial public offering less $479,000 in initial public offering costs paid by the Company, offset by $200,000 in distributions to members of the Company prior to our reorganization. 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 In July 2013, the FASB ASU, No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company adopted ASU 2013-11 effective January 1, 2014 and the adoption did not have an impact on the condensed financial statements but may have an impact in future periods. 22-------------------------------------------------------------------------------- In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (ASU 201-09). ASU 201-09 provides guidance for revenue recognition and affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry-specific guidance. The core principle of ASU 2014-09 is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for fiscal years beginning after December 15, 2016 and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company's condensed financial statements and disclosures. In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation" (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period ("ASU 2014-12"). ASU 2014-12 affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-12 will have on the Company's consolidated financial statements and disclosures. |