Dillistone Group has warned that full year results are likely to be significantly below market forecasts.
The group's update said that at the final results announcement for 2016 released in April, the board noted some softness in the UK recruitment market, following the BREXIT vote.
It continued: "As we have moved further into the year, we have seen some improvement in terms of the volume of new business wins and are pleased to have taken a number of clients from our direct competitors.
"However, a significant majority of our new clients have been new or young businesses with relatively few users purchasing on a subscription, as opposed to a licence model.
"While these subscriptions may be valuable in the long term, they have a much reduced impact on short term revenues and this has not allowed us to catch up on the slow start to the year."
The group also said it had been informally told that a contract with a major client was likely to expire later this year or early next.
It said: "This contract, which is with a client using a legacy product, is worth in the region of £600,000 per annum in contribution terms to the group.
"Despite this, we are pleased that recurring revenues in both divisions are at record levels providing good forward visibility and largely underpinning the Group's administrative cost base.
"This enables us to anticipate that revenue in the first six months of the year will be broadly in line with the first six months of the previous year.
"The group has announced its intention to develop an entirely new product.
"Development to date has been funded by internal resources while the Company explored the feasibility of the new product.
"The mew product addresses a market need which, in the view of the board, is global in nature and has the potential to be very significant for the group.
"We believe that our new product will be unique in scope, its commercial model, and its method of delivery."
It added: "Although the confidential nature of the product means that it has not been possible to discuss it widely with the potential market, those conversations that have taken place have been positive.
"These have led to the board receiving a non binding letter of intent from an organisation which is globally recognised in the market it serves and which plans in principal to adopt the product on release.
"While other conversations are not as far developed, the board is confident that similar agreements will be reached and, as such, the board has now approved the project and fundraising for completion and launch of the product is now being explored.
"We anticipate that development, marketing and other cash costs associated with the new product in the period to 31 December 2018 will be in the order of £2.4 million but excluding any revenue generated in this period.
"Approximately £0.7m of these costs will be capitalised. While significant investment in the new product has already been made, and will increase through the year, it is not anticipated that meaningful revenues will be generated prior to 2018 and the new product is not expected to be profitable before 2019.
"Thereafter we anticipate that it will be highly cash generative."
The group said its cost base increased in 2016, in particular to develop cloud based hosting services, and remained at the level required to continue with its product development programme and to pursue the new product project.
The group said it had a cash balance at 2 June 2017 of £1.3m.
It added: "Medium term prospects given the introduction of the General Data Protection Regulation in 2018 and the new product launch remain positive. Despite the increased investment in the new product, some of which will impact the P&L in the current half, the hroup expects to make a small operating profit before acquisition related items in the first half of the year.
"The board currently expects that the second half of the year will deliver better results than the first half in terms of general trading.
"However, the slow start to the year and the higher cost base mean that the results for the full year are expected to be significantly below market expectations.
"In view of the proposed fund raising, the board expects to reduce its dividend until the benefits of its investment in the new product flow through to the group's balance sheet."
Chief executive Jason Starr said: "We've seen improvement in the order book since the beginning of the year and are confident that this will improve further in H2.
"We are delighted by the early response to our new product and excited by its potential.
"The new product is essentially a start up being developed within the auspices of an established business.
"We believe that it has the potential to transform the nature of our business and to deliver significant shareholder value."
At 8:01am: (LON:DSG) Dillistone Group PLC share price was -5p at 79.5p