UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form10-Q (Mark One) or Commission file number: 001-35824 Professional Diversity Network, Inc. (Exact name of Delaware (State or of 80-0900177 (I.R.S. Employer Identification No.) 801 W. Adams Street, Suite 600, Chicago, Illinois 60607 (Address of principal executive offices) (Zip Code) (312) 614-0950 (Registrant’s telephone number, including area code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Indicate by check mark whether the registrant has submitted electronically Yes Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large-accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has fled all documents and reports required to be filed by Sections 12, 13 or 15(d)of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ]Yes [ ]No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were PROFESSIONAL DIVERSITY NETWORK, INC. FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, TABLE OF CONTENTS Common stock, $0.01 par value; 45,000,000 shares authorized; 4,856,213 shares and 3,963,864 shares issued as of September 30, 2018 and December 31, 2017, respectively; and 4,855,165 sharesand 3,962,816 shares outstanding as of September 30, 2018 and December 31, 2017, respectively See Note 3 for Additional Variable Interest Entity Disclosures. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Nine Months Ended September 30, Weighted average shares used in computing net loss per common share: See Note 3 for Additional Variable Interest Entity Disclosures. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Nine Months Ended September 30, The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1. Description of Business Professional Diversity Network, Inc. is both the operator of the Professional Diversity Network (the “Company,” “we,” “our,” “us,” “PDN Network,” “PDN” or the “Professional Diversity Network”) and a holding company On May 25, 2018, the Company 2. Liquidity, Financial Condition and Management’s Plans At September 30, The Company had an accumulated deficit of approximately The Company is closely monitoring operating costs and capital requirements. Management of the Company On January 29, 2018, the Company On June 25, 2018, the Company sold 496,510 shares of common stock at a price of $2.89 per share for gross proceeds of $1,434,914. The purchaser is China EWI International Finance Group Co., Limited, a limited liability company based in the People’s Republic of China. On November 5, 2018, the Company On November 16, 2018, the Company entered into a revolving credit facility agreement (the “Revolving Credit Facility Agreement”) with GNet Tech, pursuant to which GNet Tech has agreed to provide the Company with working capital to support its business. The availability period of the Revolving Credit Facility (“RCF”) is the date of the Revolving Credit Facility Agreement until May 31, 2020. GNet Tech agreed to provide the Company with a RCF with a maximum of GBP £1,500,000 at interest of LIBOR rate plus 4% per Management believes that its available funds 3. Summary of Significant Accounting Policies Basis of Presentation– The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion, however, that the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, Use of Estimates– The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited interim condensed consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future intervening events. Accordingly, the actual results could differ significantly from estimates. Significant estimates underlying the financial statements include the fair value of acquired assets and liabilities associated with acquisitions; assessment of goodwill impairment, other intangible assets and long-lived assets for impairment; allowances for doubtful accounts and assumptions related to the valuation allowances on deferred taxes, the valuation of stock-based compensation and the valuation of stock warrants. Principles of Consolidation– The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its Variable Interest Entity – (VIE) Financial Information of VIE In November 2017, Jiangxi PDN Culture Media Co., Ltd became a consolidated VIE. Liabilities recognized as a result of consolidating this VIE do not represent additional claims on the Company’s general assets. VIE assets can be used to settle obligations of the primary beneficiary. The financial information of Jiangxi PDN Culture & Media Co., which was included in the accompanying condensed financial statements, is presented as follows: September 30, 2018 December 31, 2017 Goodwill and Intangible Assets - The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Goodwill is tested for impairment at the reporting unit level on an annual basis (December 31 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill impairment assessment, the Company initially Membership Fees and Related Services Membership fees are collected up-front and member benefits become available immediately; however those benefits must remain available over the 12 month membership period. At the time of enrollment, membership fees are recorded as deferred revenue and are recognized as revenue ratably over the 12 month membership period. Members who are enrolled in this plan may cancel their membership in the program at any time and receive a partial refund (amount remaining in deferred revenue) or due to consumer protection legislation, a full refund based on the policies of the member’s credit card company. Starting January 2, 2018, we also offer a monthly membership for which we collect fees on a monthly basis and we recognize revenue in the same month as we collect the monthly fees. Revenue from related membership services are derived from fees for development and set-up of a member’s personal on-line profile and/or press release announcements. Fees related to these services are recognized as revenue at the time the on-line profile is complete and press release is distributed. Deferred Revenue – Deferred revenue includes customer deposits received prior to performing services which are recognized as revenue when revenue recognition criteria are met, and membership fees for annual memberships that are collected at the time of enrollment and are recognized as revenue ratably over the 12 month membership period. Recruitment Services The Company’s recruitment services revenue is derived from the Company’s agreements through single and multiple job postings, recruitment media, talent recruitment communities, basic and premier corporate memberships, hiring campaign marketing and advertising, e-newsletter marketing and research and outreach services. Recruitment revenue includes revenue recognized from direct sales to customers for recruitment services and events, as well as revenue from the Company’s direct e-commerce sales. Direct sales to customers are most typically a twelve month contract for services and as such the revenue for each contract is recognized ratably over its twelve month term. Event revenue is recognized in the month that the event takes place and e-commerce sales are for one month job postings and the revenue from those sales are recognized in the month the sale is made. Our recruitment services mainly consist of the following products: Product Sales and Other Revenue Products offered to members relate to custom made plaques. Product sales are recognized as deferred revenue at the time the initial order is placed. Revenue is then recognized at the time these products are shipped. The Company’s shipping and handling costs are included in cost of sales in the accompanying consolidated statements of operations. Education and Training The Company works with its business partners to provide education and training seminars to business people in China. Revenues are recognized in the month when the seminar takes place. Consumer Advertising and Marketing Solutions The Company provides career opportunity services to its various partner organizations through advertising and job postings on their websites. The Company works with its partners to develop customized websites and job boards where the partners can generate advertising, job postings and career services to their members, students and alumni. Discontinued Operations On May 25, 2018, the Company sold Noble Voice to a long-time customer of the Company and exited the business segment previously conducted by Noble Voice. The All historical operating results for Noble Voice are included in a loss from discontinued operations, net of tax, in the accompanying consolidated statement of operations. During the three months ended September 30, 2018, loss from discontinued operations was $41,000, net of tax expense of $26,000, compared to a loss of $170,000, net of tax benefit of $12,000 during same period in the prior year. During the nine months ended September 30, 2018, loss from discontinued operations was $425,000, net of tax benefit of $25,000 compared to a loss of $509,000, net of tax benefit of $34,000 during same period in the prior year. Assets and liabilities that the Company retained, which were previously reported in the Noble Voice operating segment, are now included in current assets from discontinued operations, current liabilities from discontinued operations, and long-term liabilities from discontinued operations. As of September 30, 2018, the current assets from discontinued operations were $194,000, compared to $1,180,000 as of December 31, 2017. As of September 30, 2018, current liabilities from discontinued operations were $220,000 compared to $485,000 as of December 31, 2017. As of September 30, 2018, long-term liabilities from discontinued operations were $8,000. There were no long-term liabilities from discontinued operations as of December 31, 2017. Advertising and Marketing Expenses– Advertising and marketing expenses are expensed as incurred or the first time the advertising takes place. The production costs of advertising are expensed the first time the advertising takes place. For the three months ended September 30, Net Loss per Share– The Company computes basic net loss per share by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The computation of basic net loss per share for the three and nine months ended September 30, Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, In February 2016, the FASB issued new lease accounting guidance ASU No. 2016-02, “Leases” (“ASU 2016-02”) In In August 2016, the FASB issued ASU No. In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740)” (“ASU 2016-16”), which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption In January 2017, the FASB issued ASU In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Therefore, any carrying amount which exceeds the reporting unit’s fair value (up to the amount of goodwill recorded) will be recognized as an impairment loss. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance. In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. It is effective for annual periods beginning after December In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows for the reclassification of certain income tax effects related to the Tax Cuts and Jobs Act between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates to be included in “Income from continuing operations”, even in situations where the related items were originally recognized in “Other comprehensive loss” (rather than in “Loss from operations”). ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of ASU 2018-02 is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. The Company is evaluating the effect of this guidance. In June 2018, the FASB issued ASU 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. ASU 2018-07 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company does not expect that the ASU will have a material impact on our financial condition or results of operations. In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, regardless of whether they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently In October 2018, the FASB released ASU No. 2018-17, Consolidation (ASC 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which improves the consistency of the application of the variable interest entity (VIE) related party guidance for common control arrangements. The amendments require reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety (as currently required in GAAP) when determining whether a decision-making fee is a variable interest. ASU 2018-17 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The amendments should be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company does not expect that the ASU will have a material impact on our financial condition or results of operations. 4. Capitalized Technology Capitalized technology, net is as follows: December 31, 2017 Amortization expense 5. Intangible Assets Intangible assets, net is as follows: Useful Lives (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Useful Lives (Years) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Future annual estimated amortization expense is summarized as follows: Amortization 6. Commitments and Contingencies Lease Obligations– The Company leases office space and equipment under various operating lease agreements, including an office for its headquarters, as well as office spaces for its events business, sales and administrative offices under non-cancelable lease arrangements that provide for payments on a graduated basis with various expiration dates. Rent expense, amounting to approximately Legal Proceedings In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of NAPW is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord is suing NAPW for the balance of the rent due under the Lease Term – which term is less than one year remaining. The case is currently being litigated, and we are currently in the pleadings phase of the litigation. The Company is a party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (U.S. Dist. Ct., N.D. Ill.), a putative class action alleging violations of the Telephone Consumer Protection Act. A settlement has been reached and case has been dismissed by the court. The Company believes that its practices and procedures were compliant with the Telephone Consumer Protection Act and admitted no fault. NAPW and PDN are two of the named Respondents in a Superior Court of New Jersey Proceeding, and they are being sued by Shore Digital LLC. The Petitioner in this matter, Shore Digital LLC is alleging that both NAPW and PDN are in breach of contract, and the matter involves the payment of the entire value of the contract plus counsel feels, interests, and costs owing to the Petitioner. The case is on-going, and discussions are taking place to assess the company’s options to settle the matter without further litigation. The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc. and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed in June of 2018 and alleging violations of the Fair Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its subsidiary violated the applicable laws or that either entity has any liability and intends to vigorously defend against these claims. The matter is in the earliest stages of discovery. The potential financial impact on the Company is inherently uncertain at this point. The Company is a party to a proceeding captioned Jacqueline M. Jefferson v. Noble Voice, No. 440-2018-06979 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) on July 10, 2018 and alleging violations of Title VII and the Equal Pay Act of 1963, where an employee alleges she was terminated by the Company due to her age on May 25, 2018. Ms. Jefferson’s termination was as a result of the sale of the Noble Voice business on May 25, 2018. The Company and Jacqueline Jefferson are in the process of mediation. General Legal Matters From time to time, the Company is involved in legal matters arising in the ordinary course of business. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations. 7. The effective income tax rate for the three months ended September 30, 2018 and 2017 was 2.6% and The 8. Stock-Based Compensation Equity Incentive Plans – The Company’s 2013 Equity Compensation Plan (the “2013 Plan”) was adopted for the purpose of providing equity incentives to employees, officers, directors and consultants including options, restricted stock, restricted stock units, stock appreciation rights, other equity awards, annual incentive awards and dividend equivalents. The Company amended the 2013 Plan to increase the number of authorized shares of common stock under the Plan Stock Options The following table summarizes the Company’s stock option activity for the nine months ended September 30, Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value On April 19, 2018, the Company granted The April 19, 2018 options granted are exercisable at an exercise price of The Company recorded Total unrecognized compensation expense related to unvested stock options at September 30, Warrants As of September 30, The Company did not grant any warrants to purchase shares of common stock during the nine months ended September 30, No compensation cost was recognized for the three and nine months ended September 30, Restricted Stock and Restricted Stock Units During the first nine months of 2018, the Company granted 42,727 restricted stock units (“RSUs”) to certain Board members and 9,886 restricted stock to senior management. The RSUs vest one year after they were awarded, subject to continued service on the vesting date. The RSUs have no voting or dividend rights. The fair value of the common stock on the dates of grant were $2.82 and $3.07 per share, based upon the closing market price on the grant dates. The aggregate grant date fair value of the combined awards amounted to $154,000. A summary of the restricted stock award activity for the nine months ended September 30, 2018 is as follows: On June 26, 2017, the Company granted 15,544 The Company recorded non-cash compensation expenses of approximately $34,000 and $58,000 for the Total unrecognized compensation expense related to unvested restricted stock and unvested restricted stock units at September 30, 9. Segment Information Beginning PDN Network NAPW Network PDN Network NAPW Network PDN Network NAPW Network 10. Subsequent Events The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the condensed consolidated financial statements were issued for potential recognition or disclosure. On November 5, 2018, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with GNet Tech Holdings Public Limited Company (the “GNet Tech”), pursuant to which the Company issued to GNet Tech a $500,000 convertible promissory note with an interest rate of 6% per annum (the “Note”). The Note shall mature six months after the date of issuance (the “Maturity Date”). Pursuant to the Note Purchase Agreement and the Note, at any time on or after the Maturity Date, at the election of the note holder, the Note will convert into the Company’s common stock (the “Common Stock”) at a conversion price of the lower of (i) the closing price of the Common Stock on NASDAQ immediately preceding the date of issuance or the date of conversion, as applicable, or (ii) the average closing price of the Common Stock on NASDAQ for the five trading days immediately preceding the date of issuance or the date of conversion, as applicable (the “Minimum Price”). However, in no event shall the conversion price be less than the Minimum Price on the date of issuance. The issuance of the Note is exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. On November 16, 2018, the Company entered into a revolving credit facility agreement (the “Revolving Credit Facility Agreement”) with GNet Tech, pursuant to which GNet Tech has agreed to provide the Company with working capital to support its business. The availability period of the Revolving Credit Facility (“RCF”) is the date of the Revolving Credit Facility Agreement until May 31, 2020. GNet Tech agreed to provide the Company with a RCF with a maximum of GBP £1,500,000 at interest of LIBOR rate plus 4% per annum, payable at the end of one, three or six months (specified by the Company) after the loan is drawn. The Company Unless we specify otherwise, all references in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to Overview We are an operator of professional networks with a focus on diversity, employment, education and training. We use the term “diversity” (or “diverse”) to describe communities, or “affinities,” that are distinct based on a wide array of criteria, including ethnic, national, cultural, racial, religious or gender classification. We serve a variety of such communities, including Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, and Lesbian, Gay, Bisexual and Transgender (LGBT+). We On May 25, 2018, the Company sold Noble Voice to a long-time customer of the Company and exited the business segment. The Company retained all receivables and payables prior to the May 25, 2018 closing date and as a result of this divestiture, ceased operating losses on that division immediately upon the sale. Management believes that education lead generation business is not important to the Company’s long-term strategy and with the sale of the Noble Voice division, the Company is now able to focus on executing its long term plan for its PDN jobs recruitment division and NAPW. Our value proposition is simple: (i) we provide a robust online and in-person network for our women members to make professional and personal connections for our diverse audience of women: African Americans, Hispanics, Asians, Veterans, individuals with disabilities and members of the In January of 2017, the Company established PDN Hong Kong through its two wholly-owned subsidiaries there and in March of 2017 the Company established PDN China through its subsidiary there. We are currently executing our strategic plan to build in China entirely new networking, training and education businesses. We believe that coupling the Company’s expertise in networking and careers with our Chinese executives’ expertise in the China market will provide us with an opportunity for success with our overseas expansion. During the first two quarters of 2017, we held seven events as part of our education and training business line’s “Shared Economy” summit series, attracting over 7,800 paid attendees. Additionally, during the second quarter of 2017, we held a selective marketing event to introduce IAW, the PDN China women’s networking business. In the third quarter of 2017, Through the third quarter of We generate revenue from (i) paid membership subscriptions and related services, (ii) Three Months Ended September 30, Nine Months Ended September 30, Paid Membership Subscriptions and Related As part of In the third quarter of 2017, PDN China began to transact IAW annual memberships in China, ranging from RMB 20,000 to RMB 200,000 (approximately $3,000 to $30,000). In the fourth quarter of 2017, PDN China began to transact annual business club memberships in China, ranging from RMB 20,000 to RMB 100,000 (approximately $3,000 to $15,000). IAW memberships comprised approximately 100% of Recruitment Services. We provide recruitment services through PDN Network to medium and large employers seeking to diversify their employment ranks. Our recruitment services include recruitment advertising, job postings, semantic search technology and paid access to, and placement in, or advertising around our career and networking events. The majority of recruitment services revenue comes from job recruitment advertising. We also offer to businesses subject to the regulations and requirements of the Equal Employment Opportunity Office of Federal Contract Compliance Program (“OFCCP Product Sales. We offer to new purchasers of our NAPW Education and Training. In March of 2017 we began our China Operations by creating a Shared Economy summit series designed to provide education and training to Chinese business people. Our initial event was a paid event which generated revenue through paid event admission fees. Education and training represented approximately 0% and 100%, respectively, of the revenue attributable to China Operations for the three months ended September 30, Consumer Advertising and Consumer Marketing Solutions. We work with partner organizations to provide them with integrated job boards on their websites which offer their members or customers the opportunity to post recruitment advertising and job openings. We generate revenue from fees charged for those postings. Consumer advertising and marketing solutions represented approximately Cost of revenue primarily consists of Financial Overview During the Key Metrics We believe that one of the key metrics in evaluating and measuring our performance is the number of registered The following table sets forth the number of registered users on our PDN Network and total membership on our NAPW Network as of the periods presented: Adjusted EBITDA We believe Adjusted EBITDA provides a meaningful representation of our operating performance that provides useful information to investors regarding our financial condition and results of operations. Adjusted 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 Adjusted EBITDA to be an important measure of operating performance, Adjusted 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, Adjusted EBITDA, as we define it, may not be comparable to EBITDA, or similarly titled measures, as defined by other companies. The following table provides a reconciliation of Net Loss from continuing operations to Adjusted EBITDA, the most directly comparable GAAP measure reported in our consolidated financial statements: Results of Operations Revenues Total Revenues The following tables set forth our revenues for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. Total revenues decreased Revenues by Segment The following table sets forth each operating segment’s revenues for the periods presented. The period-to-period comparison is not necessarily indicative of future results. During the three months ended September 30, During the three months ended September 30, During the three months ended September 30, 2018, our China Operations generated $54,000 in revenue, compared to $69,000 for the same period in the prior year, a decrease of Costs and Expenses The following tables set forth our costs and expenses for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. During the three months ended September 30, During the nine months ended September 30, Operating Expenses Cost of revenue: Cost of revenues decreased during the Sales and marketing General and administrative expenses: General and administrative expenses for the three months ended September 30, 2018 were $1,786,000, compared to $2,712,000 for the same period in the prior year, a decrease of $926,000 or 34.1%. The decrease was mainly attributable to a $480,000 reduction in personnel costs primarily due to a large reduction in force in our NAPW segment in September 2017, a $314,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home model for certain employees at our NAPW segment in 2018, and a $115,000 decrease in compensation to our independent board directors. General and administrative expenses for the nine months ended September 30, 2018 were $6,602,000, compared to $9,564,000 for the same period in the prior year, a decrease of $3,362,000 or 35.2%. The decrease was mainly attributable to an $890,000 reduction in legal expenses, an $888,000 reduction in personnel costs, a $366,000 decrease in compensation to our independent board directors, a $352,000 reduction in rent expenses, and a $263,000 decrease in consulting fees. Litigation settlement: Litigation settlement for the three and nine months ended September 30, Goodwill impairment charge: As a result of the recurring operating losses incurred in NAPW since its acquisition in September 2014, the Company undertook a review of the carrying amount of its goodwill as of June 30, Depreciation and amortization Costs and Expenses by Segment The following table sets forth each operating segment’s costs and expenses for the periods presented. The period-to-period comparison is not necessarily indicative of future results. NAPW Network:During the three months ended September 30, 2018, total costs and expenses in our NAPW segment were $7,225,000, compared to $3,443,000 for the same period in the prior year, an increase of $3,782,000 or 109.8%. The increase was primarily due to a $5,251,000 goodwill impairment charge recorded on September 30, 2018. Excluding this non-recurring and non-cash expense, the total costs and expenses were $1,974,000 for the three months ended September 30, 2018, a decrease of $1,469,000 compared to the same period in the prior year. The decrease was a result of continued cost cutting efforts that began in the third quarter of 2017, mainly reduction in the work force that resulted in a $423,000 decrease in personnel costs, a $327,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home model for certain employees at our NAPW segment in 2018, a $276,000 reduction in lead generation spending, a $140,000 decrease in sales commission expense, and a $61,000 decrease in consulting and outside services costs. During the nine months ended September 30, 2018, total costs and expenses were $11,253,000, compared to $20,742,000 for the same period in the prior year, a decrease of $9,489,000 or 45.7%. The decrease was a result of a $4,669,000 decrease in goodwill impairment charge, a $1,835,000 reduction in personnel costs, a $962,000 savings in lead generation spending, a $462,000 reduction in sales commissions expenses, a $388,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home model for certain employees at our NAPW segment in 2018, a $258,000 decrease in consulting and outside services costs, and a $156,000 decrease in credit card fees. PDN Network: During the three months ended September 30, 2018, total costs and expenses in our PDN segment were flat compared to the same period in the prior year, totaling $712,000, and $719,000, respectively. During the nine months ended September 30, 2018, total costs and expenses were also flat compared to the same period in the prior year, totaling $2,222,000, and $2,233,000, respectively. China Operations: During the three months ended September 30, 2018, total costs and expenses in our China operations were $502,000, compared to $418,000 for the same period in the prior year, an increase of $85,000 or 20.4%. The primary reason for the increase was a $61,000 increase in marketing and advertising expenses. During the nine months ended September 30, 2018, total costs and expenses were $1,471,000, compared to $1,186,000 for the same period in the prior year, an increase of $286,000 or 24.1%. The increase was primarily driven by a $290,000 increase in personnel costs and a $102,000 increase in marketing and advertising costs, partially offset by lower cost of sales due to a reduction in revenue. Corporate Overhead: During the three months ended September 30, 2018, total costs and expenses incurred by our Corporate Overhead segment were $860,000, compared to $1,000,000 for the same period in the prior year, a decrease of $141,000 or 14.1%. As we continue our efforts to reduce corporate level expenses, during the third quarter of 2018, we reduced compensation to our independent board directors by $115,000, and corporate personnel cost by $104,000. During the nine months ended September 30, 2018, total costs and expenses were $2,850,000, compared to $4,748,000 during the same period in the prior year, a decrease of $1,897,000 or 40.0%. Such a large decrease is a result of a decrease in legal costs by $974,000, reduction in compensation to our independent board directors by $366,000, reduction of $200,000 in corporate personnel costs, a $94,000 reduction of stock-based compensation, an $89,000 decrease of audit and accounting fees, and an $85,000 reduction in corporate travel costs. The effective income tax rate for the three months ended September 30, 2018 and 2017 was 2.6% and Net Loss The following table sets forth each operating segment’s net loss from continuing operations for the periods presented. The period-to-period comparison is not necessarily indicative of future results. As the result of the factors discussed above, during the three and nine months ended September 30, NAPW Network. During the three and nine months ended September 30, 2018, our NAPW segment incurred a net loss of $5,894,000 and $6,952,000, respectively, compared to a net loss of $1,126,000 and $12,354,000 for the three and nine months ended September 30, 2017, respectively. The $4,768,000 increase in net loss for the three months ended September 30, 2018 was primarily driven by a $5,251,000 goodwill impairment charge recorded on September 30, 2018, and a $1,161,000 decrease in revenues from membership fees, related services and product sales period-over-period, partially offset by PDN Network. During the three China Operations.During the three months ended September 30, Corporate Overhead. During the three months ended September 30, 2018, our Corporate Overhead segment incurred same amount of net loss of $933,000, compared to the same period ended September 30, 2017. While the overall costs of expenses actually decreased by $141,000 period over period as we continued our efforts to reduce corporate level expenses, primarily compensation to our independent board directors (reduction in $115,000), and corporate personnel costs (reduction in $104,000), in the third quarter of 2018 we recorded an adjustment to income tax expenses of $73,000, due to a change in the projected full-year tax rate. During the nine months ended September 30, Liquidity and Capital Resources The following table summarizes our liquidity and capital resources as of September 30, Our principal sources of liquidity are our cash and cash equivalents, including the net proceeds from the We are closely monitoring operating costs and capital On On June 25, 2018, the Company sold 496,510 shares of We currently anticipate that our available funds We collect 18 Net Cash Used in Operating Activities For the nine months ended September 30, Net cash used in operating activities in continuing operations for the nine months ended September 30, 2017 was $6,388,000. We had a net loss of $17,156,000 during the nine months ended September 30, 2017, a deferred tax benefit of $1,099,000 which was offset by non-cash NAPW goodwill impairment charge of $9,920,000, depreciation and amortization of Net Cash (Used in) Provided by Investing Activities Net cash used in Net cash used in investing activities in continuing operations for the nine months ended September 30, 2017 was Net Cash Provided by Net cash provided by Net cash provided by financing activities in continuing operations during the nine months ended September 30, 2017 was $3,502,000, consisting of Net Cash Used in Discontinued Operations On May 25, 2018 we sold our Noble Voice operations. Net cash provided by Net cash used in operating activities in discontinued operations for the 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). Critical Accounting Policies and Estimates Pursuant to the provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”), 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 Recent Accounting Pronouncements See Note 3 to our unaudited condensed consolidated financial statements regarding recent accounting pronouncements. Special Note Regarding Forward-Looking Statements This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this Quarterly Report contains forward-looking statements regarding: These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: The foregoing list of important factors may not include all such factors. You should consult other disclosures made by the Company (such as in our other filings with the SEC or in company press releases) for additional factors, risks and uncertainties that may cause actual results to differ materially from those projected by the Company. Please refer to Part II, Item 1A, “Risk Factors” of this Quarterly Report and to Part I, Item 1A, “Risk Factors” of our Not applicable. Disclosure Controls and Procedures As of September 30, Changes in Internal Control over Financial Reporting During the third quarter of Our management had concluded that, as of September 30, 2018, we did not maintain effective controls over the preparation, review, presentation and disclosure of our financial statements. Specifically, we noted the following: 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 weaknesses. 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 weaknesses have been remediated. In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of NAPW is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord is suing NAPW for the balance of the rent due under the Lease Term – which term is less than one year remaining. The case is currently being litigated, and we are currently in the pleadings phase of the litigation. The Company is a party to a proceeding captioned Gerbie, et al. v. Professional Diversity Network, Inc. (U.S. Dist. Ct., N.D. Ill.), a putative class action alleging violations of the Telephone Consumer Protection Act. A settlement has been reached and case has been dismissed by the court. The Company believes that its practices and procedures were compliant with the Telephone Consumer Protection Act and admitted no fault. NAPW and PDN are two of the named Respondents in a Superior Court of New Jersey Proceeding, and they are being sued by Shore Digital LLC. The Petitioner in this matter, Shore Digital LLC is alleging that both NAPW and PDN are in breach of contract, and the matter involves the payment of the entire value of the contract plus counsel feels, interests, and costs owing to the Petitioner. The case is on-going, and discussions are taking place to assess the company’s options to settle the matter without further litigation. The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned Deborah Bayne, et al. vs. NAPW, Inc. and Professional Diversity Network, Inc., No. 18-cv-3591 (E.D.N.Y.), filed in June of 2018 and alleging violations of the Fair Labor Standards Act and certain provisions of the New York Labor Law. The Company disputes that it or its subsidiary violated the applicable laws or that either entity has any liability and intends to vigorously defend against these claims. The matter is in the earliest stages of discovery. The potential financial impact on the Company is inherently uncertain at this point. The Company is a party to a proceeding captioned Jacqueline M. Jefferson v. Noble Voice, No. 440-2018-06979 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) on July 10, 2018 and alleging violations of Title VII and the Equal Pay Act of 1963, where an employee alleges she was terminated by the Company due to her age on May 25, 2018. Ms. Jefferson’s termination was as a result of the sale of the Noble Voice business on May 25, 2018. The Company and Jacqueline Jefferson are in the process of mediation. Smaller reporting companies are not None. Not applicable. None. 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. Chief Financial Officer (On behalf of the Registrant and as principal financial officer and principal accounting officer)———————————Form 10-Q———————————☒ [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2018 15(d) of the Securities Exchange Act of 1934For the Quarterly Period Ended September 30, 2017 (OR)☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the Transition Period from ________ to________.[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to________. ———————————Registrantregistrant as Specifiedspecified in Itsits Charter)———————————Other Jurisdiction other jurisdictionIncorporationincorporation or Organization)801 W. Adams Street, Suite 600, Chicago, Illinois 60607(Address of Principal Executive Offices) (Zip Code)Telephone: (312) 614-0950(Registrant’s Telephone Number, Including Area Code)N/A(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)☒[X] No ☐and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)☒[X] No ☐Large accelerated filer ☐[ ] Accelerated filer ☐[ ]Non-accelerated filer ☐[ ] Smaller reporting company ☒[X]Emerging growth company [X] Emerging growth company ☒☐☐[ ] No ☒3,931,8384,856,948 shares outstanding of the registrant’s common stock outstanding as of November 6, 2017.2017 Page PART I 1 ITEM 1. FINANCIAL STATEMENTS 1 ITEM 2. AND AND RESULTS OF OPERATIONS17 ITEM 3. 2830 ITEM 4. CONTROLS AND PROCEDURES 2830PART II 2931 ITEM 1. LEGAL PROCEEDINGS 2931 ITEM 1A. RISK FACTORS 2931 ITEM 2. 3031 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 3031 ITEM 4. MINE SAFETY DISCLOSURE 3032 ITEM 5. OTHER INFORMATION 3032 ITEM 6. EXHIBITS 3032Professional Diversity Network, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2017 2016 (Unaudited) Current Assets: Cash and cash equivalents $ 2,821,729 $ 6,068,973 Accounts receivable, net 1,799,013 2,170,529 Incremental direct costs 241,235 423,023 Prepaid expenses and other current assets 490,581 957,140 Total current assets 5,352,558 9,619,665 Property and equipment, net 291,774 277,534 Capitalized technology, net 141,573 173,368 Goodwill 10,280,885 20,201,190 Intangible assets, net 7,035,139 9,183,439 Merchant reserve 780,849 1,426,927 Security deposits 239,059 220,754 Other assets - 35,000 Total assets $ 24,121,837 $ 41,137,877 Current Liabilities: Accounts payable $ 1,232,510 $ 2,172,332 Accrued expenses 1,172,435 962,172 Deferred revenue 4,422,715 5,485,599 Total current liabilities 6,827,660 8,620,103 Deferred tax liability 2,492,837 3,653,274 Deferred rent 60,959 55,718 Other liabilities 78,481 33,159 Total liabilities 9,459,937 12,362,254 Commitments and contingencies Stockholders' Equity
shares issued as of September 30, 2017 and December 31, 2016, respectively; and 3,931,838 shares 39,329 36,204 Additional paid in capital 79,783,969 76,234,772 Accumulated other comprehensive loss (1,435 ) - Accumulated deficit (65,122,846 ) (47,458,236 ) Treasury stock, at cost; 1,048 shares at September 30, 2017 and December 31, 2016 (37,117 ) (37,117 ) Total stockholders' equity 14,661,900 28,775,623 Total liabilities and stockholders' equity $ 24,121,837 $ 41,137,877 September 30, December 31, 2018 2017 (Unaudited) (Adjusted) Current Assets: Cash and cash equivalents (Amounts related to variable interest entity of $907,590 and $1,671,378 as of September 30, 2018 and December 31, 2017, respectively) $ 1,653,149 $ 2,926,088 Accounts receivable, net 527,565 905,723 Incremental direct costs 21,158 145,292 Prepaid expenses and other current assets 461,931 478,379 Current assets from discontinued operations 194,209 1,180,099 Total current assets 2,858,012 5,635,581 Property and equipment, net 96,553 221,184 Capitalized technology, net 187,258 153,381 Goodwill 339,451 5,590,150 Intangible assets, net 4,408,934 6,264,706 Merchant reserve 760,849 760,849 Security deposits 74,588 225,957 Long-term assets from discontinued operations - 137,114 Total assets $ 8,725,645 $ 18,988,922 Current Liabilities: Accounts payable $ 1,465,890 $ 1,120,444 Accrued expenses 785,682 1,166,214 Deferred revenue 2,440,998 4,004,015 Customer deposits 14,563 - Current liabilities from discontinued operations 219,693 484,524 Total current liabilities 4,926,826 6,775,197 Deferred tax liability 1,206,098 1,803,519 Deferred rent 45,800 56,082 Other liabilities - 52,321 Long-term liabilities from discontinued operations 7,762 - Total liabilities 6,186,486 8,687,119 Commitments and contingencies Stockholders' Equity 48,562 39,639 Additional paid in capital 83,566,225 80,016,218 Accumulated other comprehensive loss (13,383 ) 28,848 Accumulated deficit (81,025,128 ) (69,745,785 ) Treasury stock, at cost; 1,048 shares at September 30, 2018 and December 31, 2017 (37,117 ) (37,117 ) Total stockholders' equity 2,539,159 10,301,803 Total liabilities and stockholders' equity $ 8,725,645 $ 19,179,065 1Professional Diversity Network, Inc. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) Three Months Ended September 30, 2017 2016 2017 2016 Revenues: Membership fees and related services $ 2,204,909 $ 3,748,334 $ 7,465,202 $ 13,047,652 Lead generation 1,370,465 1,554,370 4,699,399 4,489,919 Recruitment services 694,454 954,887 1,977,101 2,295,556 Product sales and other 18,285 52,857 91,226 544,440 Education and training 68,890 - 898,584 - Consumer advertising and marketing solutions 65,188 49,719 189,217 176,771 Total revenues 4,422,191 6,360,167 15,320,729 20,554,338 Costs and expenses: Cost of revenues 658,297 745,159 2,193,224 2,433,550 Sales and marketing 2,275,585 3,064,454 8,114,908 10,314,145 General and administrative 3,236,848 3,010,862 11,322,513 8,928,493 Litigation settlement 155,216 - 155,216 500,000 Goodwill impairment charge - - 9,920,305 - Depreciation and amortization 806,898 819,894 2,443,511 2,498,136 Total costs and expenses 7,132,844 7,640,369 34,149,677 24,674,324 Loss from operations (2,710,653 ) (1,280,202 ) (18,828,948 ) (4,119,986 ) Other (expense) income Interest expense - (215,781 ) (12,399 ) (216,948 ) Interest and other income 4,117 150 9,218 801 Other finance income 5,318 - 7,082 - Other (expense) income, net 9,435 (215,631 ) 3,901 (216,147 ) Change in fair value of warrant liability - (401,000 ) - (401,000 ) Loss before income tax benefit (2,701,218 ) (1,896,833 ) (18,825,047 ) (4,737,133 ) Income tax benefit (213,133 ) (623,699 ) (1,160,437 ) (1,218,092 ) Net loss (2,488,085 ) (1,273,134 ) (17,664,610 ) (3,519,041 ) Other comprehensive loss: Foreign currency translation adjustment (3,056 ) - (1,435 ) - Comprehensive loss $ (2,491,141 ) $ (1,273,134 ) $ (17,666,045 ) $ (3,519,041 ) Net loss per common share, basic and diluted $ (0.63 ) $ (0.70 ) $ (4.52 ) $ (1.94 ) Basic and diluted 3,932,886 1,809,676 3,912,282 1,809,676 Three Months Ended September 30, 2018 2017 2018 2017 Revenues: Membership fees and related services $ 1,112,042 $ 2,204,909 $ 4,059,989 $ 7,465,202 Recruitment services 705,040 694,454 2,018,832 1,977,101 Product sales and other 3,180 18,285 13,197 91,226 Education and training - 68,890 16,048 898,584 Consumer advertising and marketing solutions 74,360 65,188 218,637 189,217 Total revenues 1,894,622 3,051,726 6,326,703 10,621,330 Costs and expenses: Cost of revenues 291,685 357,481 917,429 1,213,669 Sales and marketing 977,148 1,598,530 3,093,798 5,759,849 General and administrative 1,786,408 2,711,640 6,202,087 9,564,428 Litigation settlement 342,472 155,216 342,472 155,216 Goodwill impairment charge 5,250,699 - 5,250,699 9,920,305 Depreciation and amortization 650,103 757,144 1,989,125 2,294,012 Total costs and expenses 9,298,515 5,580,011 17,795,610 28,907,479 Loss from operations (7,403,893 ) (2,528,285 ) (11,468,907 ) (18,286,149 ) Other (expense) income Interest expense 29,549 - 29,549 (12,399 ) Interest and other income (4,368 ) 4,117 299 9,218 Other finance costs - 5,318 22,558 7,082 Other income, net 25,181 9,435 52,406 3,901 Loss before income tax benefit (7,378,712 ) (2,518,850 ) (11,416,501 ) (18,282,248 ) Income tax expense (benefit) (189,950 ) (201,123 ) (562,415 ) (1,126,220 ) Loss from continuing operations (7,188,762 ) (2,317,727 ) (10,854,086 ) (17,156,028 ) Loss from discontinued operations, net of tax, including gain on sale of $63,687 (40,735 ) (170,358 ) (425,258 ) (508,582 ) Net loss (7,229,497 ) (2,488,085 ) (11,279,344 ) (17,664,610 ) Other comprehensive loss: (7,229,497 ) (2,488,085 ) (11,279,344 ) (17,664,610 ) Foreign currency translation adjustment (28,480 ) (3,056 ) (42,231 ) (1,435 ) Comprehensive loss $ (7,257,977 ) $ (2,491,141 ) $ (11,321,575 ) $ (17,666,045 ) Basic and diluted loss per share: Continuing operations (1.48 ) (0.59 ) (2.42 ) (4.39 ) Discontinued operations (0.01 ) (0.04 ) (0.09 ) (0.13 ) Net loss $ (1.49 ) $ (0.63 ) $ (2.51 ) $ (4.52 ) Basic and diluted 4,856,044 3,932,886 4,485,358 3,912,282 2Professional Diversity Network, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2017 2016 Cash flows from operating activities: Net loss $ (17,664,610 ) $ (3,519,041 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,443,511 2,498,136 Deferred tax (1,160,437 ) (1,218,092 ) Gain on lease cancellation - (423,998 ) Goodwill impairment charge 9,920,305 - Stock-based compensation expense 731,322 217,547 Provision for bad debt 155,077 - Amortization of deferred financing costs - 156,594 Amortization of prepaid license fees - 112,500 Amortization of customer deposits - (112,500 ) Chang in fair value of warrant liability - 401,000 Changes in operating assets and liabilities: Accounts receivable 219,391 671,056 Prepaid expenses and other current assets 467,339 181,903 Incremental direct costs 181,788 476,300 Accounts payable (940,051 ) 893,210 Accrued expenses 209,458 681,779 Deferred revenue ) (3,560,351 ) Deferred rent 5,241 10,279 Other liabilities 45,322 45,098 Net cash used in operating activities (6,453,996 ) (2,488,580 ) Cash flows from investing activities: Proceeds from maturities of short-term investments - 500,000 Costs incurred to develop technology (122,597 ) - Purchases of property and equipment (154,295 ) - Security deposit (17,603 ) 194,411 Net cash (used in) provided by investing activities (294,495 ) 694,411 Cash flows from financing activities: Proceeds from the sale of common stock 3,000,000 - Payment of offering costs (144,000 ) - Proceeds from line of credit - 1,942,625 Payment of deferred issuance costs related to Master Credit Facility - (488,082 ) Payment of deferred offering costs related to CFL Transaction - (1,049,026 ) Merchant reserve 646,078 (166,078 ) Net cash provided by financing activities 3,502,078 239,439 Effect of exchange rate fluctuations on cash and cash equivalents (831 ) - Net decrease in cash and cash equivalents (3,247,244 ) (1,554,730 ) Cash and cash equivalents, beginning of period 6,068,973 2,070,693 Cash and cash equivalents, end of period $ 2,821,729 $ 515,963 Supplemental disclosures of other cash flow information: Cash paid for income taxes $ 1,702 $ 4,605 Cash paid for interest $ - $ 21,740 Issuance of warrants in connection with Master Credit Facility $ - $ 783,458 Reclassification of derivative liability to additional paid in capital $ - $ 781,000 2018 2017 Cash flows from operating activities: Loss from continuing operations $ (10,854,086 ) $ (17,156,028 ) Adjustments to reconcile net loss from continuing operations to net cash used in operating activities– continuing operations: Depreciation and amortization 1,989,125 2,294,012 Deferred tax expense (benefit) (374,536 ) (1,098,765 ) Goodwill impairment charge 5,250,699 9,920,305 Stock-based compensation expense 637,062 731,322 Provision for bad debt 20,000 28,544 Write-off of security deposit 149,292 - Write-off of property and equipment 51,804 - Changes in operating assets and liabilities, net of effects of discontinued operations: Accounts receivable 354,408 38,836 Prepaid expenses and other current assets 11,033 474,711 Incremental direct costs 124,134 181,788 Accounts payable 345,575 (971,728 ) Accrued expenses (332,578 ) 177,684 Deferred revenue (1,553,245 ) (1,062,884 ) Deferred rent (10,282 ) 8,591 Customer deposits (32 ) - Other liabilities (36,969 ) 45,322 Net cash used in operating activities– continuing operations (4,228,596 ) (6,388,290 ) Net cash provided by (used in) operating activities – discontinued operations 17,793 (91,173 ) Net cash used in operating activities (4,210,803 ) (6,479,463 ) Cash flows from investing activities: Costs incurred to develop technology (89,006 ) (122,597 ) Purchases of property and equipment (7,206 ) (156,704 ) Security deposit - (18,305 ) Net cash (used in) provided by investing activities– continuing operations (96,213 ) (297,606 ) Net cash provided by investing activities – discontinued operations 200,000 - Net cash provided by (used in) investing activities 103,787 (297,606 ) Cash flows from financing activities: Proceeds from the sales of common stock 2,921,868 3,000,000 Payment of offering costs - (144,000 ) Merchant reserve - 646,078 Net cash provided by financing activities 2,921,868 3,502,078 Effect of exchange rate fluctuations on cash and cash equivalents (87,791 ) (831 ) Net decrease in cash and cash equivalents (1,272,939 ) (3,275,822 ) Cash and cash equivalents, beginning of period 2,926,088 5,855,471 Cash and cash equivalents, end of period $ $1,653,149 $ $2,579,649 Supplemental disclosures of other cash flow information: Cash paid for income taxes $ 67,954 $ 1,702 3Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) for:·NAPW, Inc., a Delaware corporation and wholly-owned subsidiary of the Company and the operator of the National Association of Professional Women (the “NAPW Network” or “NAPW”);·Noble Voice LLC and Compliant Lead LLC (collectively, “Noble Voice”), both Delaware limited liability companies, each of which is a wholly-owned subsidiary of the Company and together provide career consultation services;·AETSI, Inc. (“AETSI”), a Delaware corporation and wholly-owned subsidiary of the Company, which was created to facilitate the Company’s prospective U.S.-China education partnerships, expected to begin later in 2017;·PDN HK International Education Ltd. and PDN HK International Education Information Co. Ltd. (collectively, “PDN Hong Kong”), both Hong Kong limited companies and wholly-owned subsidiaries which were created during the first quarter of 2017 to support the Company’s China expansion; and·PDN (China) International Culture Development Ltd. Co. (“PDN China”), a China wholly-owned foreign enterprise company and wholly-owned subsidiary created during the first quarter of 2017 to operate the China Operations described below.Noble Voice monetizes its consumer transactions by using proprietary technology to drive inexpensive online traffic to our offline call center and generating value-added leads for the Company’s strategic partners who provide continuing education and career services.beganestablished business operations in China in the first quarter of 2017,2017. Our business activities, similar to those in the United States, focusingwill be focused on providing tools, products and services in China, which will assist in personal and professional development. Theintendssold Noble Voice to cooperate with existing companiesa long-time customer of the Company and organizations in China to efficiently and promptly deliver valuable products and services to its registered users. The Chinese operations focus onexited the following areas:·Women’s Networking, which is the Chinese expansion of the NAPW segment, and is called “The International Association of Women” or “IAW,” the first marketing event for which was held near the end of the second quarter of 2017;·Secondary Education Services for Chinese Children, which will provide services to assist families in China identify, prepare for and attend secondary education schools in the United States and other countries, with U.S. operations managed by AETSI and China operations managed by PDN China; and·Education and Training for Accomplished Chinese Business People, through PDN China, which is providing education and training seminars in China, as reflected in the Company’s “China Operations / Education and Training” segment information below.2017,2018, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds from the closingssales of shares of common stock in the CFL Transaction (as defined in Note 7).$65,123,000$81,025,000 at September 30, 2017.2018. During the nine months ended September 30, 2017,2018, the Company generated a net loss from continuing operations of approximately $17,665,000 (including a goodwill impairment charge of $9,920,000),$10,854,000, used cash in continuing operations of approximately $6,454,000, which includes $1,450,000 paid to LinkedIn as a litigation settlement,$4,229,000, and the Company expects that it will continue to generate operating losses for the foreseeable future. At September 30, 2017,2018, the Company had a cash balance of approximately $2,822,000.$1,653,000. Total revenues were approximately $4,422,000$1,895,000 and $6,360,000$3,052,000 for the three months ended September 30, 20172018 and 2016,2017, respectively, and approximately $15,321,000$6,327,000 and $20,554,000$10,621,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively. The Company had working capital deficiency of approximately ($1,475,000)$2,069,000 and $1,000,000$1,140,000 at September 30, 20172018 and December 31, 2016,2017, respectively.4Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) On November 7, 2016,consummatedalso made efforts in 2017 and first three quarters of 2018 to contain and reduce cost, including implementing a new approval process over travel and other expenses, significantly reducing the issuancecash compensation for independent board directors, terminating non-performing employees and sale of 1,777,417 shares of the Company’s common stockeliminating certain positions, and replacing and negotiating with certain vendors. We also sold our Noble Voice business on May 25, 2018 to Cosmic Forward Limited, a Republic of Seychelles company wholly-owned by a group of Chinese investors (“CFL”),reduce operating losses and cash burns. If we are still not successful in a private placement, at a price of $9.60 per share (“Share Issuance”). In addition, on November 7, 2016,sufficiently reducing our costs, we may then need to dispose our other assets or discontinue business lines.completed the repurchase of 312,500sold 380,295 shares of its common stock at a price of $9.60$3.91 per share (“Tender Offer”). The Company received totalfor gross proceeds of $17,063,000 from$1,486,953. The per share purchase price reflected the Share Issuance, or $14,063,000 after giving effect toclosing price of the payment for the 312,500Company’s shares of common stock fromon January 24, 2018. The purchaser is Mr. Shengqi Cai, an individual and a resident of the Tender Offer.People’s Republic of China.received approximately $9,000,000 in net proceeds fromentered into a note purchase agreement (the “Note Purchase Agreement”) with GNet Tech Holdings Public Limited Company (the “GNet Tech”), a related party through one of the Share Issuance,Company’s shareholders, Cosmic Forward Limited (“CFL”), pursuant to which the Company issued to GNet Tech a $500,000 convertible promissory note with an interest rate of 6% per annum (the “Note”). The Note shall mature six months after repaymentthe date of all amounts outstanding under its Master Credit Facilityissuance (the “Maturity Date”). Pursuant to the Note Purchase Agreement and the paymentNote, at any time on or after the Maturity Date, at the election of transaction-related expenses.On January 18, 2017, the Company consummatednote holder, the issuance and sale of 312,500 shares ofNote will convert into the Company’s common stock to CFL(the “Common Stock”) at a conversion price of $9.60the lower of (i) the closing price of the Common Stock on NASDAQ immediately preceding the date of issuance or the date of conversion, as applicable, or (ii) the average closing price of the Common Stock on NASDAQ for the five trading days immediately preceding the date of issuance or the date of conversion, as applicable (the “Minimum Price”). However, in no event shall the conversion price be less than the Minimum Price on the date of issuance. The issuance of the Note is exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering.share, for total gross proceedsannum, payable at the end of $3,000,000,one, three or $2,821,000six months (specified by the Company) after giving effect to the payment of transaction-related expenses.and cash generated from operations will be sufficient to meet its working capital requirements at least through November 2018.2019. However, there can be no assurances that the plans and actions proposed by management will be successful, that the Company will generate anticipated revenues, or that unforeseen circumstances will not require additional funding sources in the future or effectuate plans to conserve liquidity. Future efforts to raise additional funds may not be successful or they may not be available on acceptable terms, if at all. 20162017 as filed with the SEC on March 31, 201730, 2018 (the “Annual Report”), which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis, for the years ended December 31, 20162017 and 2015.2016. The financial information as of December 31, 20162017 is derived from the audited financial statements presented in the Annual Report. The interim results for the three and nine months ended September 30, 20172018 are not necessarily indicative of the results to be expected for the year ending December 31, 20172018 or for any future interim periods.5Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) wholly-owned subsidiaries.VIE, Jiangxi PDN Culture & Media Co. All significant intercompany balances and transactions have been eliminated in consolidation. (in thousands) Cash and cash equivalents $ 908 1,671 Total assets $ 1,234 1,672 Total liabilities $ 18 257 Three Months Ended Nine months Ended September 30, September 30, 2018 2017 2018 2017 (in thousands) Total net revenue $ - $ - $ - $ - Net loss $ (23 ) $ - $ (132 ) $ - Prior to January 1, 2017, whenperformedperforms a qualitative evaluation of whether it is more likely than not that goodwill wasis impaired. If it wasis determined by a qualitative evaluation that it wasis more likely than not that goodwill wasis impaired, the Company then applied a two-step impairment test. The two-step impairment test first comparedcompares the fair value of the Company’s reporting unit to its carrying or book value. If the fair value of the reporting unit exceededexceeds its carrying value, goodwill wasis not impaired and the Company wasis not required to perform further testing. If the carrying value of the reporting unit exceeded its fair value, the Company determined the implied fair value of the reporting unit's goodwill and if the carrying value of the reporting unit's goodwill exceeded its implied fair value, then an impairment loss equal to the difference was recorded in the consolidated statements of operations.Effective January 1, 2017, the Company prospectively adopted the provisions of ASU 2017-04, ““Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the second step of the goodwill impairment test. Therefore, for goodwill impairment tests occurring after January 1, 2017, if the carrying value of a reporting unit exceeds its fair value, the Company will measure any goodwill impairment losses as the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.As a result of the recurring operating losses incurred in NAPW since its acquisition in September 2014, the Company undertook a review of the carrying amount of its goodwill as of June 30, 2017. The Company performed its review based on both qualitative and quantitative factors and determined that carrying value of NAPW’s goodwill exceeded its implied fair value. Accordingly, the Company recorded a goodwill impairment charge of $9,920,305 in the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2017.6Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) Lead GenerationProfessional Diversity Network provides career opportunities to our registered users. As part of our employment services we interact with over 27,500 job seekers via telephone on a weekly basis. Our Career Advisors suggest job opportunities for our registered users based on their location and profile. In certain circumstances our Career Advisers offer career support services to our registered users, including resume writing, education opportunities and economic consultations. In certain circumstances we receive compensation from various business partners resulting from our job seeker referrals. The Company derives lead generation revenues pursuant to arrangements with its business partners. Under these arrangements, the Company matches its business partners with potential candidates, pursuant to specific parameters defined in each arrangement. The Company invoices on a monthly basis based upon the number of leads provided. Revenues related to lead generation are recognized in the month when the leads are sent to its business partners.The Company's business partners include educational institutions such as Keypath Education, QuinStreet and Education Dynamics in Noble Voice's traditional, core business, as well as a broad array of corporations such as Avon Products, American Airlines, and Uber, among others.• On-line job postings to our diversity sites and to our broader network of websites including the National Association for the Advancement of Colored People and the National Urban League• OFCCP job promotion and recordation services• Diversity job fairs, both in person and virtual fairs• Diversity recruitment job advertising services• Cost per application, a service that employers can purchase whereby PDN sources qualified candidates and charges only for those applicants who meet the employers’ minimum qualifications• Diversity executive staffing servicesThe Company's customers in recruitment services include Starbucks, PNC Bank, and US Dept. of Treasury, among others.● On-line job postings to our diversity sites and to our broader network of websites including the National Association for the Advancement of Colored People, National Urban League and over 20 other partner organizations ● OFCCP job promotion and recordation services ● Diversity job fairs, both in person and virtual fairs ● Diversity recruitment job advertising services ● Cost per application, a service that employers can purchase whereby PDN sources qualified candidates and charges only for those applicants who meet the employers’ minimum qualifications ● Diversity executive staffing services PartnerConsumer advertising and marketing solutions revenue is recognized as jobs are posted to their hosted sites.Company's partner organizations include NAACPsales included all property, equipment, intangible assets, and National Urban League,VetJobs, among others.7Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) 20172018 and 2016,2017, the Company incurred advertising and marketing expenses of approximately $658,000$565,000 and $657,000,$658,000, respectively. For the nine months ended September 30, 20172018 and 2016,2017, the Company incurred advertising and marketing expenses of approximately $2,246,000$1,238,000 and $1,842,000,$2,246,000, respectively. These amounts are included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive loss. At September 30, 20172018 and December 31, 2016,2017, there were no prepaid advertising expenses recorded in the accompanying condensed consolidated balance sheets.20172018 and 20162017 excludes the potentially dilutive securities summarized in the table below because their inclusion would be anti-dilutive. As of September 30, 2017 2016 Warrants to purchase common stock 170,314 514,064 Stock options 284,897 72,886 Restricted stock units 15,544 - Unvested restricted stock 2,778 5,556 Total dilutive securities 473,533 592,506 As of September 30, 2018 2017 Warrants to purchase common stock 170,314 170,314 Stock options 499,439 284,897 Unvested Restricted stock units 42,727 15,544 Unvested restricted stock 9,886 2,778 Total dilutive securities 722,366 473,533 ”Revenue “Revenue from Contracts with Customers,” which was subsequently modified in August 2015 by ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date.” As a result, the ASU No. 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). TheSince the Company is an Emerging Growth Company “EGC”, it will adopt the standard on January 1, 2018,2019, using the fullmodified retrospective transition method, which may result in a cumulative-effect adjustment for deferred revenue to the opening balance sheet for 20182019 and the restatement of the financial statements for all prior periods presented. The Company continues to evaluate the impact of adoption of this standard on its consolidated financial statements and disclosures.., as amended by ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessee‘slessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.8Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) MarchJune 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (“ASU 2016-13”). ASU 2016-13 introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities and net investments in direct financing leases, amongst other financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for losses. ASU 2016-13 is effective for public business entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early application of the guidance permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments” (“ASU 2016-09”2016-15”). ASU 2016-09 was issued as part of, which eliminates the FASB’s simplification initiative and affects all entities that issue share-based payment awardsdiversity in practice related to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits oncertain cash receipts and payments in the statement of cash flows, an accounting policy election for forfeitures,by adding or clarifying guidance on eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the amount an employer can withhold to cover income taxeseffective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and still qualify for equity classificationseparately identifiable cash flows and application of the classification of those taxes paid on the statement of cash flows.predominance principle. ASU 2016-092016-15 is effective for annual and interim periods beginning after December 15, 2016. This guidance can be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company adopted the methodologies prescribed by ASU 2014-15 as of January 1, 2017. The adoption of ASU 2016-09 did not have a material effect on the Company’s financial position or results of operations.In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting “(“ASU 2017-09”). ASU 2017-09 provides clarity and reduces both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods beginning after December 15, 2017,2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. ASU 2016-15 provides for retrospective application for all periods presented. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.permitted. permitted using a modified retrospective transition approach. The Company is currently assessing the impact of the adoption of this guidance on its consolidated financial statements.2017-092017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within annual periods beginning after December 15, 2019. The Company does not expected toexpect that the ASU will have ana material impact on the Company’sour financial positioncondition or results of operations.31,15, 2018. Early adoption is permitted. The Company does not expect that the ASU will have a material impact on our financial condition or results of operations.evaluatingassessing the impact of adoptingthe adoption of this guidance.
2017 Capitalized cost: Balance, beginning of period $ 1,888,791 $ 1,888,791 Additional capitalized cost 122,597 - Balance, end of period $ 2,011,388 $ 1,888,791 Accumulated amortization: Balance, beginning of period $ 1,715,423 $ 1,432,268 Provision for amortization 154,392 283,155 Balance, end of period $ 1,869,815 $ 1,715,423 Capitalized Technology, net $ 141,573 $ 173,368 September 30, 2018 Capitalized cost: Balance, beginning of period $ 2,043,122 $ 1,860,558 Additional capitalized cost 88,868 182,564 Balance, end of period $ 2,131,990 $ 2,043,122 Accumulated amortization: Balance, beginning of period $ 1,889,741 $ 1,698,954 Provision for amortization 54,991 190,787 Balance, end of period $ 1,944,732 $ 1,889,741 Capitalized Technology, net $ 187,258 $ 153,381 ofwere approximately $41,000$21,000 and $62,000$39,000 for the three months ended September 30, 20172018 and 2016,2017, respectively, and approximately $154,000$55,000 and $216,000$147,000 for the nine months ended September 30, 2018 and 2017, respectively, and 2016, respectively, isare recorded in depreciation and amortization expenseexpenses in the accompanying condensed consolidated statements of operations and comprehensive loss.9Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) September 30, 2017 Long-lived intangible assets: Sales Process 10 $ 3,970,000 $ (1,196,514 ) $ 2,773,486 Paid Member Relationships 5 890,000 (536,472 ) 353,528 Member Lists 5 8,957,000 (5,399,081 ) 3,557,919 Developed Technology 3 978,000 (959,666 ) 18,334 Trade Name/Trademarks 4 480,000 (359,861 ) 120,139 Customer Relationships 5 280,000 (158,667 ) 121,333 $ 15,555,000 $ (8,610,261 ) 6,944,739 Indefinite-lived intangible assets: Trade Name 90,400 Intangible assets, net $ 7,035,139 December 31, 2016 Long-lived intangible assets: Sales Process 10 $ 3,970,000 $ (898,764 ) $ 3,071,236 Paid Member Relationships 5 890,000 (402,972 ) 487,028 Member Lists 5 8,957,000 (4,055,531 ) 4,901,469 Developed Technology 3 978,000 (718,166 ) 259,834 Trade Name/Trademarks 4 480,000 (269,861 ) 210,139 Customer Relationships 5 280,000 (116,667 ) 163,333 $ 15,555,000 $ (6,461,961 ) 9,093,039 Indefinite-lived intangible assets: Trade Name 90,400 Intangible assets, net $ 9,183,439 September 30, 2018 Long-lived intangible assets: Sales Process 10 $ 3,970,000 $ (1,593,514 ) $ 2,376,486 Paid Member Relationships 5 890,000 (714,472 ) 175,528 Member Lists 5 8,957,000 (7,190,480 ) 1,766,520 Developed Technology 3 648,000 (648,000 ) - Trade Name/Trademarks 4 440,000 (440,000 ) - $ 14,905,000 $ (10,586,466 ) 4,318,534 Indefinite-lived intangible assets: Trade Name 90,400 Intangible assets, net $ 4,408,934 December 31, 2017 Long-lived intangible assets: Sales Process 10 $ 3,970,000 $ (1,295,764 ) $ 2,674,236 Paid Member Relationships 5 890,000 (580,972 ) 309,028 Member Lists 5 8,957,000 (5,846,931 ) 3,110,069 Developed Technology 3 648,000 (648,000 ) - Trade Name/Trademarks 4 440,000 (359,027 ) 80,973 $ 14,905,000 $ (8,730,694 ) 6,174,306 Indefinite-lived intangible assets: Trade Name 90,400 Intangible assets, net $ 6,264,706 Years ending December 31, 2017 (three months) $ 653,933 2018 2,563,872 2019 1,846,697 2020 397,000 2021 397,000 2022 397,000 Thereafter 689,237 $ 6,944,739 Years ending December 31, 2018 (three months) $ 591,600 2019 1,846,697 2020 397,000 2021 397,000 2022 397,000 Thereafter 689,237 $ 4,318,534 expenseexpenses of $714,000$618,000 and $717,000 for$670,000 were the three months ended September 30, 20172018 and 2016,2017, respectively, and $2,148,000$1,866,000 and $2,151,000$2,016,000 for the nine months ended September 30, 2018 and 2017, respectively, and 2016, respectively, isare recorded in depreciation and amortization expenseexpenses in the accompanying condensed consolidated statements of operations and comprehensive loss.10Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) $268,000$87,000 and $258,000$401,000 for the three months ended September 30, 20172018 and 2016,2017, respectively, and approximately $811,000$495,000 and $808,000$847,000 for the nine months ended September 30, 2018 and 2017, respectively, and 2016, respectively, isare included in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. Included in rent expense is sublease income of approximately $96,000 and $90,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $288,000 and $279,000 for the nine months ended September 30, 2017 and 2016, respectively.The Company has previously disclosed that it and its wholly-owned subsidiary, NAPW, Inc., are parties to litigation captioned Gauri Ramnath, et al. v. Professional Diversity Network, Inc., et al., No. BC604153 (Los Angeles Superior Ct.), a putative class action filed in January 2016 alleging violations of various California Labor Code (wage & hour) sections. During the first quarter of 2016, the Company executed a settlement agreement, subject to later Court approval, in which the Company agreed in principle to pay $500,000 for a global settlement of the class action. During the first quarter of 2016, the Company also recorded a litigation settlement expense in the amount of $500,000. On November 28, 2016, the Court approved the proposed settlement. In December of 2016 the Company paid the settlement amount in the Court’s fund and the third-party administrator began distributing payments to class members. On August 2, 2017, the Court notified the parties that the case is “reported as complete without the need for a further status conference.” This matter is therefore concluded and will not be further reported.The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned In re Professional Diversity Network, Cases 31-CA-159810 and 31-CA-162904, filed with the National Labor Relations Board (“NLRB”) in June 2015 and alleging violations of the National Labor Relations Act (“NLRA”) against the Company and its wholly-owned subsidiary, NAPW, Inc., where employee was allegedly terminated for asserting rights under Section 7 of the NLRA. While the Company disputes that any rights were impacted, the NLRB has issued its order requiring the Company to take certain remedial actions in the form of posting notices and revising certain policies, as well as to pay the claimant certain back pay and offer reinstatement. The Company has complied with the order in all respects except back pay and reinstatement. The Company disputes the amount of back pay owed to the claimant and disputes that reinstatement is appropriate under the circumstances and an evidentiary hearing on the issue of back pay is currently scheduled for January of 2018. The amount of back pay and other potential liabilities ordered by NLRB is $146,000.The Company is a party to a proceeding captioned Paul Sutcliffe v. Professional Diversity Network, Inc., No. 533-2016-00033 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) in April 2016 and alleging violations of Title VII and the Age Discrimination in Employment Act, where employee was allegedly terminated due to his race (Caucasian) and his age (over 40). The EEOC has not yet notified the Company that it has issued a right-to-sue letter, and the complainant has not yet filed a lawsuit.The Company is a party to a proceeding captioned Wei Aniton v. Professional Diversity Network, Inc., No. 440-2017-04717 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) on July 6, 2017 and alleging violations of Title VII and the Equal Pay Act of 1963, where employee alleges she was discriminated by the Company due to her race and her sex and was paid less than similarly situated white males. On September 20, 2017, the EEOC issued its Notice of Dismissal and Notice of Rights, effectively terminating this matter before the EEOC.a claimclaims against the Company. The letter alleges that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay in White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. The Company investigated White Winston’s claims and communicated to White Winston that the Company denies liability for any such claim. CFL TransactionOn January 13, 2017, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Cosmic Forward Ltd. (“CFL”), pursuant to which, the Company agreed to issue and sell to CFL (the “Second Share Issuance”), and CFL agreed to purchase, at a price of $9.60 per share (the “Per Share Price”), upon the terms and subject to the conditions set forth in the Purchase Agreement, 312,500 shares of the Company’s common stock. On January 18, 2017, the Company consummated the Second Share Issuance. As a result of the completion of the Second Share Issuance, as of January 18, 2017, CFL beneficially owned 54.64% of the Company’s outstanding shares of common stock, on a fully diluted basis.11Professional Diversity Network, Inc.Condensed Consolidated Notes to Financial Statements (Unaudited)The Company received total gross proceeds of $3,000,000 from the Second Share Issuance, or approximately $2,821,000 in net proceeds after payment of transaction-related expenses. The Company retained Aegis Capital Corp. (“Aegis”) as the exclusive placement agent in connection with the transaction. Aegis received a cash placement fee of $144,000 in connection with the transaction. The Company accounted for the fee paid to Aegis as a cost of the transaction resulting in a charge directly to stockholders’ equity.At the closing of the Second Share Issuance, and as contemplated by the Purchase Agreement, the Company entered into an amendment, dated as of January 18, 2017 (the “Amendment”), to the Stockholders’ Agreement with CFL and the CFL shareholders. The Amendment increased the cap on the amount of common stock that CFL, the CFL shareholders and their respective affiliates (collectively, the “CFL Group”) may, directly or indirectly acquire, agree to acquire or publicly propose or offer to acquire from the Company, or pursuant to a tender or exchange offer for any shares of common stock, from 51% of the then outstanding shares of common stock, on a fully-diluted basis, to 54.64% of the then outstanding shares of common stock, on a fully-diluted basis. The Amendment also clarifies that the 312,500 shares of common stock purchased by CFL in the Second Share Issuance are subject to all of the restrictions contained in the Stockholders’ Agreement, as amended. All other terms and conditions of the Stockholders’ Agreement remain in full force and effect and were ratified and affirmed by the parties in the Amendment.8. Employment AgreementsKatherine Butkevich, formerly Chief Executive Officer of the Company’s wholly-owned subsidiary, NAPW, Inc., was party to an employment contract with the Company dated September 30, 2016. As the Company previously reported in its August 30, 2017 Form 8-K, Ms. Butkevich notified the Company that she was resigning her employment effective September 18, 2017, thereby terminating the employment contract as of the resignation date.Chris Wesser, formerly the Company’s Executive Vice President, General Counsel and Corporate Secretary, was party to an employment contract with the Company dated September 24, 2014. Mr. Wesser’s employment contract expired on September 24, 2017. As the Company previously published via press release and reported in its September 29, 2017 Form 8-K, on September 26, 2017 Mr. Wesser and the Company entered into an Employment Separation and Consulting Agreement having a one-year term, under which Mr. Wesser will provide the Company with consulting services on an independent contractor basis.9. Income Taxes2016 was 7.9% and 32.9%8.0%, respectively, resulting in a $213,000$190,000, and $624,000$201,000 income tax benefit, respectively. The effective income tax rate for the nine months ended September 30, 2018 and 2017 was 4.9% and 2016 was 6.2% and 25.7%, respectively, resulting in a $1,160,000$562,000 and $1,218,000$1,126,000 income tax benefit, respectively. The difference in the effective income tax rate for the three and nine months ended September 30, 2017,2018, compared to the three months ended September 30, 2016, is mainly attributable to the change in the valuation allowance. The difference in the effective income tax rate for theand nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is mainly attributable to the decrease in tax rates pursuant to the U.S. Tax Cuts and Jobs Act, an impairment charge recognized on NAPW’s goodwill, and thea change in the valuation allowance. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of September 30, 20172018 and December 31, 2016.Company hasU.S. Tax Cuts and Jobs Act subjects a U.S. parent shareholder to current tax on its “global intangible low-taxed income” (GILTI). We are allowed under ASC 740 to elect an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred or (2) factoring such amounts into the Company’s measurement of its deferred taxes. Because of the complexity of these rules, and anticipated guidance from U.S. Treasury we will continue to evaluate the impact on the Company’s financial statements. Therefore, we have not providedrecorded any deferred incometaxes related to GILTI and have not made a policy decision regarding whether to record deferred taxes on the undistributed earnings of its foreign subsidiaries. The amount of such earnings was insignificant. These earnings have been permanently reinvested and the Company does not plan to initiate action that would precipitate the payment of income taxes thereon. It is not practicable to estimate the amount of additional tax that might be payable on the undistributed earnings of its foreign subsidiaries.12Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) 10.by 390,000from 225,000 shares to 615,000 shares, which the Company’s stockholders approved on June 26, 2017. The Company further amended the 2013 Plan to increase the number of authorized shares of common stock under the Plan by 300,000 shares, which the Company’s stockholders approved and ratified on November 8, 2018. The Company is now authorized to issue 615,000915,000 shares under the amended 2013 Plan.2017: Outstanding - December 31, 2016 69,950 $ 12.07 9.0 $ 156,975 Granted 240,000 10.72 Exercised - - Forfeited/Canceled/Expired (25,053 ) (13.93 ) Outstanding – September 30, 2017 284,897 $ 10.77 9.3 $ - Exercisable – September 30, 2017 124,897 $ 10.83 9.2 $ - The2018: Outstanding – January 1, 2018 246,564 $ 11.17 9.1 $ - Granted 253,000 2.82 Exercised - - Forfeited/Canceled/Expired (125 ) 27.6 Outstanding – September 30, 2018 499,439 $ 6.94 9.0 $ 7,500 Exercisable – September 30, 2018 251,272 $ 8.49 8.8 $ 2,500 210,00075,000, 75,000, 70,000 and 30,000 stock options to Messrs.Executive Chairman Jingbo Song, Non-executive Chairman James Kirsch, CEO Michael Wang and CFO Gary Xiao, respectively, in connection with their employment agreements. On September 7, 2018, the Company granted 3,000 stock options to an employee, in connection with his employment agreement. These options had an aggregate fair value of $1,060,800,$547,000, using the Black-Scholes option-pricing model with the following assumptions:Risk-free interest rate 2.132.77% to 2.82% Expected dividend yield 0.00 % Expected volatility 41.7897.4% to 98.8% Expected term 5.4 to 5.5 years $10.72$2.82 per share over a ten-year term and vest over two years, with one-third vested upon grant, while the September 7, 2018 options granted are exercisable at an exercise price of $3.07 per share over a ten-year term and vest over two years, with one-third vested upon grant.$88,000 and $560,000 as compensation expense during the three and nine months ended September 30, 2017, respectively, pertaining to these grants.Total non-cash compensation expense, for grants recorded by the Company amounted to approximately $88,000 and $90,000 for the three months ended September 30, 2017 and 2016, respectively, and $618,000 and $135,000 for the nine months ended September 30, 2017 and 2016, respectively, as a component ofwhich is included in general and administrative expenses in the accompanying condensed consolidated statementsstatement of operations, of approximately $137,000 and comprehensive loss pertaining$88,000 for the three months ended September 30, 2018 and 2017, respectively, and approximately $524,000 and $618,000 for the nine months ended September 30, 2018 and 2017, respectively, related to stock options.2017 amounts2018 amounted to approximately $501,000$435,000 and is expected to be recognized over a remaining weighted average period of 1.41.2 years.2017,2018, there were 170,314 warrants outstanding and exercisable, with a weighted average exercise price of $32.44 per share. The weighted average remaining contractual life of the warrants at September 30, 20172018 and December 31, 20162017 was 3.62.6 and 4.33.3 years, respectively, and the aggregate intrinsic value was 0.2017.20172018 and 20162017 pertaining to warrants.13Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) Number of
SharesUnvested Outstanding at December 31, 2017 15,544 Granted 52,613 Forfeited - Vested (15,544 ) Unvested Outstanding at September 30, 2018 52,613 restricted stock units (“RSUs”)RSUs to certain Board members. The RSUs vest 100%vested on June 28, 2018, subject to continued service on the vesting date.2018. The RSUs have no voting or dividend rights. The fair value of the common stock on the date of grant was $7.72 per share, based upon the closing market price on the grant date. The aggregate grant date fair value of the combined awards amounted to $120,000.A summaryrestricted stock award activitythree months ended September 30, 2018 and 2017, respectively, and approximately $113,000 and $113,000 for the nine months ended September 30, 2018 and 2017, is as follows:Number ofSharesUnvested Outstanding at December 31, 20162,778Granted15,544Forfeited-Vested-Unvested Outstanding at September 30, 201718,322The Company recorded non-cash compensation expense of approximately $58,000 and $28,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $113,000 and $83,000 for the nine months ended September 30, 2017 and 2016, respectively. 20172018 amounts to approximately $108,000$101,000 and is expected to be recognized over a weighted average period of 0.60.5 year.11.in January 2017,on May 26, 2018, the Company operates in the following segments: (A) United States: (i) PDN Network and (ii) NAPW Network, and (iii) Noble Voice operations, and (B) China Operations. The segments are categorized based on their business activities and organization. Prior to January 2017,May 26, 2018, the Company operated solely in the United States in the following segments: (A) United States: (i) PDN Network, (ii) NAPW Network, and (iii) Noble Voice operations.(B) China Operations. The following tables present key financial information of the Company’s reportable segments as of and for the three and nine months ended September 30, 20172018 and 2016: Three Months Ended September 30, 2018 United States China
Operations Corporate Overhead Consolidated Membership fees and related services $ - $ 1,058,443 $ 53,599 $ - $ 1,112,042 Recruitment services 705,040 - - - 705,040 Products sales and other - 3,180 - - 3,180 Consumer advertising and marketing solutions 74,360 - - - 74,360 Total revenues 779,400 1,061,623 53,599 - 1,894,622 (Loss) income from continuing operations 67,617 (6,163,059 ) (448,714 ) (859,737 ) (7,403,893 ) Depreciation and amortization 15,757 631,485 2,861 - 650,103 Income tax expense (benefit) 6,510 (269,371 ) - 72,913 (189,950 ) Net (loss) income from continuing operations 66,807 (5,893,686 ) (429,233 ) (932,650 ) (7,188,762 ) Capital expenditures - - (3,639 ) - (3,639 ) Three Months Ended September 30, 2017 United States Noble Voice
Operations Consolidated Membership fees and related services $ - $ 2,204,909 $ - $ - $ 2,204,909 Lead generation - - 1,370,465 - 1,370,465 Recruitment services 694,454 - - - 694,454 Products sales and other - 18,285 - - 18,285 Education and training - - - 68,890 68,890 Consumer advertising and marketing solutions 65,188 - - - 65,188 Total revenues 759,642 2,223,194 1,370,465 68,890 4,422,191 Loss from operations (249,017 ) (1,651,322 ) (448,310 ) (362,004 ) (2,710,653 ) Depreciation and amortization 13,213 740,489 49,754 3,442 806,898 Income tax expense (benefit) (17,311 ) (123,091 ) (29,688 ) (43,043 ) (213,133 ) Net loss (217,589 ) (1,528,231 ) (418,622 ) (323,643 ) (2,488,085 ) Capital expenditures 93,676 - (5,575 ) 12,356 100,457 14Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) Nine Months Ended September 30, 2017 United States Noble Voice
Operations Consolidated Membership fees and related services $ - $ 7,465,202 $ - $ - $ 7,465,202 Lead generation - - 4,699,399 - 4,699,399 Recruitment services 1,977,101 - - - 1,977,101 Products sales and other - 91,226 - - 91,226 Education and training - - - 898,584 898,584 Consumer advertising and marketing solutions 189,217 - - - 189,217 Total revenues 2,166,318 7,556,428 4,699,399 898,584 15,320,729 Loss from operations (2,001,870 ) (14,969,177 ) (1,449,279 ) (408,622 ) (18,828,948 ) Depreciation and amortization 67,099 2,220,806 149,499 6,107 2,443,511 Income tax expense (benefit) (125,444 ) (943,633 ) (91,360 ) - (1,160,437 ) Net loss (1,864,520 ) (14,025,544 ) (1,357,919 ) (416,627 ) (17,664,610 ) Capital expenditures 100,823 10,646 (5,234 ) 48,060 154,295 Nine Months Ended September 30, 2018 United States PDN Network NAPW Network China Operations Corporate Overhead Consolidated Membership fees and related services $ - $ 3,878,875 $ 181,114 $ - $ 4,059,989 Recruitment services 2,018,832 - - - 2,018,832 Products sales and other - 13,197 - - 13,197 Education and training - - 16,048 - 16,048 Consumer advertising and marketing solutions 218,637 - - - 218,637 Total revenues 2,237,469 3,892,072 197,162 - 6,326,703 Loss from continuing operations 15,858 (7,360,589 ) (1,273,897 ) (2,850,279 ) (11,468,907 ) Depreciation and amortization 49,722 1,926,366 13,037 - 1,989,125 Income tax expense (benefit) 1,832 (408,375 ) 2,265 (158,137 ) (562,415 ) Net loss from continuing operations 31,183 (6,952,214 ) (1,240,913 ) (2,692,142 ) (10,854,086 ) Capital expenditures - - (7,206 ) - (7,206 ) September 30, 2018 Goodwill $ 339,451 $ - $ - $ - $ 339,451 Intangible assets, net 90,400 4,318,534 - - 4,408,934 Assets from continuing operations 1,542,973 5,423,600 1,564,863 - 8,531,436 Three Months Ended September 30, 2017 United States China
Operations Corporate Overhead Consolidated Membership fees and related services $ - $ 2,204,909 $ - $ - $ 2,204,909 Recruitment services 694,454 - - - 694,454 Products sales and other - 18,285 - - 18,285 Education and training - - 68,890 - 68,890 Consumer advertising and marketing solutions 65,188 - - - 65,188 Total revenues 759,642 2,223,194 68,890 - 3,051,726 (Loss) income from continuing operations 40,429 (1,219,722 ) (348,630 ) (1,000,362 ) (2,528,285 ) Depreciation and amortization 13,213 740,489 3,442 - 757,144 Income tax expense (benefit) 3,283 (93,955 ) (43,043 ) (67,408 ) (201,123 ) Net (loss) income from continuing operations 51,263 (1,125,767 ) (310,269 ) (932,954 ) (2,317,727 ) Capital expenditures 93,676 - 12,356 - 106,032 Nine Months Ended September 30, 2017 United States China
Operations Corporate Overhead Consolidated Membership fees and related services $ - $ 7,465,202 $ - $ - $ 7,465,202 Recruitment services 1,977,101 - - - 1,977,101 Products sales and other - 91,226 - - 91,226 Education and training - - 898,584 - 898,584 Consumer advertising and marketing solutions 189,217 - - - 189,217 Total revenues 2,166,318 7,556,428 898,584 - 10,621,330 (Loss) income from continuing operations (66,187 ) (13,185,268 ) (286,957 ) (4,747,737 ) (18,286,149 ) Depreciation and amortization 67,099 2,220,806 6,107 - 2,294,012 Income tax expense (benefit) (3,422 ) (831,178 ) - (291,620 ) (1,126,220 ) Net (loss) income from continuing operations (50,859 ) (12,354,090 ) (294,962 ) (4,456,117 ) (17,156,028 ) Capital expenditures 100,823 10,646 48,060 - 159,529 September 30, 2017 Goodwill $ 339,451 $ 9,941,434 $ - $ - $ 10,280,885 Intangible assets, net 90,400 6,793,406 151,333 - 7,035,139 Total assets 1,814,350 18,425,123 1,624,568 2,257,796 24,121,837 Three Months Ended September 30, 2016 PDN Network
Network Noble Voice Consolidated Membership fees and related services $ - $ 3,748,334 $ - $ 3,748,334 Lead generation - - 1,554,370 1,554,370 Recruitment services 954,887 - - 954,887 Products sales and other - 52,857 - 52,857 Consumer advertising and marketing solutions 49,719 - - 49,719 Total revenues 1,004,606 3,801,191 1,554,370 6,360,167 Loss from operations (118,948 ) (894,361 ) (266,893 ) (1,280,202 ) Depreciation and amortization 33,471 738,473 47,950 819,894 Income tax expense (benefit) (222,808 ) (289,767 ) (111,124 ) (623,699 ) Net loss (512,771 ) (604,594 ) (155,769 ) (1,273,134 ) Nine Months Ended September 30, 2016 PDN Network
Network Noble Voice Consolidated Membership fees and related services $ - $ 13,047,652 $ - $ 13,047,652 Lead generation - - 4,489,919 4,489,919 Recruitment services 2,295,556 - - 2,295,556 Products sales and other - 544,440 - 544,440 Consumer advertising and marketing solutions 176,771 - - 176,771 Total revenues 2,472,327 13,592,092 4,489,919 20,554,338 Loss from operations (839,840 ) (2,173,251 ) (1,106,895 ) (4,119,986 ) Depreciation and amortization 130,121 2,207,703 160,312 2,498,136 Income benefit (373,717 ) (557,439 ) (286,936 ) (1,218,092 ) Net loss (1,083,270 ) (1,615,812 ) (819,959 ) (3,519,041 ) 15Professional Diversity Network, Inc. Condensed Consolidated Notes to Financial Statements (Unaudited) December 31, 2016 Goodwill $ 339,451 $ 19,861,739 $ - $ 20,201,190 Intangible assets, net 90,400 8,809,706 283,333 9,183,439 Total assets 7,643,471 31,457,958 2,036,448 41,137,877 12. December 31, 2017 Goodwill $ 339,451 $ 5,250,699 $ - $ - $ 5,590,150 Intangible assets, net 90,400 6,174,306 - - 6,264,706 Assets from continuing operations 1,726,061 12,889,367 3,056,281 - 17,671,709 did not identifyshall repay the loan on May 31, 2020, or any subsequent events that would have required adjustment or disclosureother date which may be agreed in writing between the consolidated financial statements.1616 ITEM 2. 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the “Company,“PDN,” “the Company,” “we,” “our,” and “us” refer to Professional Diversity Network, Inc. and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto in Item 1, “Financial Statements,” in Part I of this Quarterly Report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking statements. Please read “Special Note Regarding Forward-Looking Statements” for additional information regarding forward-looking statements used in this Quarterly Report.operateoperated in four business segments: (i) Professional Diversity Network (“PDN Network ”)”), which includes online professional networking communities with career resources tailored to the needs of various diverse cultural groups and employers looking to hire members of such groups, (ii) National Association of Professional Women (“NAPW Network ”)”), a women-only professional networking organization, (iii) Noble Voice operations (“Noble Voice ”),”) until May 25, 2018, a career consultation and lead generation service, and (iv) China operations ( “China“China Operations” ),), which focusfocuses on providing tools, products and services in China which will assist women, students and business professionals in personal and professional development.Gaygay community (with the ability to roll out to our other affinities); (ii) we assist our registered users, or members, in their efforts to connect with like-minded individuals and identify career opportunities within the network; (iii) we help employers address their workforce diversity needs by connecting them with the right candidates; and (iv) we leverage our U.S. expertise and China connections to deliver these values to China, one of the world’s fastest-growing market. IPDNPDN China began to transact IAW annual memberships in China, ranging from RMB 20,000 to RMB200,000 (ApproximatelyRMB 200,000 (approximately $3,000 to $30,000 annual memberships)$30,000). Additionally IAW China held its first IAW VIP China event at the Women’s Forum Global Meeting, in Paris, France. Also, in the third quarter, IPDNon December 2, 2017, PDN China finalized plans and secured commitments to holdheld its largest education and training event of the year. The event, will be held on December 2, 2017 in Beijing, China, “The International Capital Leadership Summit”., took place in Beijing, China. Among its many notable speakers was Mr. Bruce Aust, Vice Chairman of the Nasdaq Exchange, will bewho was featured at the event.2017,2018, our PDN Network, NAPW Network, Noble Voice and China Operations businesses represented 14.1%41.2%, 49.3%56.0%, 30.7% and 5.9%2.8% of our revenues, respectively. As of September 30, 2017,2018, we had approximately 10.010.7 million registered users in our PDN Network;Network and approximately 952,000954,000 registered users, or members, in the NAPW Network; and over 1,000 companies utilizing our products and services in our combined PDN Network and Noble Voice operations.Network. We believe that the combination of our solutions allows us to approach recruiting and professional networking in a unique way and thus create enhanced value for our members and customers.17lead generation, (iii) recruitment services, (iv)(iii) product sales, (v)(iv) education and training and (vi)(v) consumer advertising and consumer marketing solutions. The following table sets forth our revenues from each product as a percentage of total revenue for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. 2017 2016 2017 2016 Percentage of revenue by product: Membership fees and related services 49.9 % 58.9 % 48.7 % 63.5 % Lead generation 31.0 % 24.5 % 30.7 % 21.8 % Recruitment services 15.7 % 15.0 % 12.9 % 11.2 % Products sales and other 0.4 % 0.8 % 0.6 % 2.6 % Education and training 1.5 % 0.0 % 5.9 % 0.0 % Consumer advertising and consumer marketing solutions 1.5 % 0.8 % 1.2 % 0.9 % 2018 2017 2018 2017 Percentage of revenue by product: Membership fees and related services 58.7 % 72.3 % 64.1 % 70.3 % Recruitment services 37.2 % 22.7 % 31.9 % 18.6 % Products sales and other 0.2 % 0.6 % 0.2 % 0.8 % Education and training - % 2.3 % 0.3 % 8.5 % Consumer advertising and consumer marketing solutions 3.9 % 2.1 % 3.5 % 1.8 % Services.Services.Paid Membership Subscriptions and Related Services. We offer paid membership subscriptions through our NAPW Network, a women-only professional networking organization, operated by our wholly-owned subsidiary. Members gain access to networking opportunities through a members-only website at www.napw.comwww.iawomen.com and “virtual” eChapter events which occur in a webcast setting as well as through in-person networking at approximately 190100 local chapters nationwide, additional career and networking events such as the National Networking Summit Series, Power Networking Events and the PDN Network events. NAPW members also receive ancillary (non-networking) benefits such as educational discounts, shopping, and other membership perks. Upgraded packages include (i)The basic package is the VIP membership,Initiator level, which provides members with additional promotional and publicity toolsonline benefits only. Upgrades to an Innovator membership include the Initiator benefits as well as freemembership in local chapters, and access (including guest) to live in-person events. The most comprehensive level, the National Networking SummitsInfluencer, provides all the aforementioned benefits plus admission to exclusive “live” events and free continuing education programsexpanded opportunities for marketing and (ii)promotion, including the creation and distribution of a press release, package, which provides members with the opportunity to work withis prepared by professional writers to publish personalized press releases and thereby secure valuable online presence.sent over major newswires. Additionally, all memberships offer educational programs with discounts or at no cost, based on the membership level. NAPW Membership is renewable and fees are payable on an annual or monthly basis, with the first annual fee payable at the commencement of the membership. NAPW Membership subscriptions represented approximately 99.2%99.7% and 98.6%99.2%, respectively, of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2018 and 2017, and 2016,99.7% and 98.8% and 96.0%, respectively, for the nine months ended September 30, 20172018 and 2016.2017.Lead Generation. We monetize our career consultations conducted by our Noble Voice segment by generating and selling value-added leads to our strategic partners who provide continuing education and career services. We also generate revenue from salesdata not usedthe launch of IAW in the lead generation process. Lead generation sales representedUnited States, the Company began to offer a monthly membership option in January 2018, in addition to an annual membership option. While this has increased the number of new members registering, membership revenue is received on a monthly rather than an annual basis. The new IAW is focused on delivering member benefits and providing value to those who join as paid members. the revenue attributable to the Noble Voice business segmentChina Operations for the three months ended September 30, 2018, and 91.9% for the nine months ended September 30, 2017 and 2016. ”)”) our OFCCP compliance product, which combines diversity recruitment advertising with job postings and compliance services. Recruitment advertising revenue constituted approximately 91.4%90.5% and 95.0%91.4%, respectively, of revenue attributable to the PDN Network business segment for the three months ended September 30, 20172018 and 2016.2017. For the nine months ended September 30, 20172018 and 2016,2017, recruitment advertising revenue constituted approximately 91.3%90.2% and 92.8%91.3%, respectively, of the revenue attributable to the PDN Network business segment.Network memberships the opportunity to purchase up to twoa commemorative wall plaquesplaque at the time of membership purchase. They may purchase up to two plaques at that time. Product sales represented approximately 0.8%0.3% and 1.4%0.8%, respectively, of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2018 and 2017, and 2016,0.3% and 1.2% and 4.0%, respectively, of revenue attributable to the NAPW Network business segment for the nine months ended September 30, 20172018 and 2016.2017. Because2018 and 2017, and 8.1% and 100%, respectively, of revenue attributable to China Operations first began in March of 2017 there is no period-over-period comparison.8.6%9.5% and 5.0%8.6%, respectively, of the revenue attributable to the PDN Network business segment for the three months ended September 30, 20172018 and 2106.2017. For the nine months ended September 30, 20172018 and 2016,2017, consumer advertising and consumer marketing solutions revenue constituted approximately 8.7%9.8% and 7.2%8.7%, respectively, of the revenue attributable to the PDN Network business segment.18 data and related costs to generate leads for our Noble Voice customers, costs of producing job fair and other events, revenue sharing with partner organizations, costs of producing education and training events, and costs of web hosting and operating our websites for the PDN Network.Network, and costs of producing education and training events and serving IAW members for our China business. Costs of producing wall plaques, hosting member conferences and local chapter meetings are also included in the cost of revenue for NAPW Network.quarterthree and nine months ended September 30, 2017,2018, we experienced losses as we continued our efforts to integrate new management anddevelop China Operations, reduce costs and streamline our business. For the three months ended September 30, 2017,2018, we realized a net loss from continuing operations of approximately $2,489,000,$7,189,000, a $1,216,000$4,870,000 increase from the comparable prior year period. This increase in net loss was primarily driven bya result of a $5,251,000 goodwill impairment charge that was recorded during third quarter of 2018, and a decrease of $1,578,000$1,093,000 in NAPW segment revenues from membership fees, related services and product sales period-over-period, partially offset by a decrease of $788,000$926,000 in overall general and administrative expenses, and a decrease of $622,000 in overall sales and marketing expenses.costs. For the nine months ended September 30, 2017,2018, we realized a net loss from continuing operations of approximately $17,666,000,$10,854,000, a $14,147,000 increase$6,302,000 decrease from the comparable prior year period. This increasedecrease in net loss is primarily related to a result of a $4,669,000 decrease in goodwill impairment charge related to our NAPW segment, a decrease of $9,920,000, the$3,362,000 in overall general and administrative expenses, and a decrease of $2,666,000 in overall sales and marketing costs, partially offset by a decrease of $3,405,000 in revenues from membership fees, and related services revenue, an increasea decrease of $883,000 in stock-based compensation,revenues from education and an increase in legal expenses.Recent EventsOn January 13, 2017, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with Cosmic Forward Ltd. (“CFL”), pursuant to which, the Company agreed to issue and sell to CFL (the “Second Share Issuance”), and CFL agreed to purchase, at a price of $9.60 per share (the “Per Share Price”), upon the terms and subject to the conditions set forth in the Purchase Agreement, 312,500 shares of the Company’s common stock. On January 18, 2017, the Company consummated the Second Share Issuance. As a result of the completion of the Second Share Issuance, as of January 18, 2017, CFL beneficially owned 54.64% of the Company’s outstanding shares of common stock, on a fully diluted basis. The Company received total gross proceeds of $3,000,000 from the Second Share Issuance, or approximately $2,821,000 in net proceeds after payment of transaction-related expenses.users or members.users. We offer free memberships and in our NAPW segment we also offer a paid membership, one that provides a greater leveldefine the number of services and networking potential. The vast majority of our registered users are non-paid members. We define a registered user as an(i) the number of individual job seekerseekers who affirmatively visited one of PDN Network’s properties, opted into an affinity group and provided us with demographic or contact information enabling us to match him or herthem with employers and/or jobs (“PDN(PDN Network registered user”). We believe that a higherusers); and (ii) the number of registered users will result in increased sales of our products and services, as employers willconsumers who have access to a larger pool of professional talent. We define a member as a consumer who has viewed our marketing material, opted into membership in the NAPW Network, provided demographic information and engaged in an onboarding call with a membership coordinator (the “NAPW(NAPW Network member”)registered users). NAPW Network total membership is therefore comprised of members who paid for additional services (“Paid Members”) as well as members who opted into the NAPW Network and have not yet paid for additional services (“Unpaid Members”). The number of Unpaid Members at the NAPW Network segment is significantly higher than the number of Paid Members. We believe that a higher number of NAPW Network Unpaid Membersregistered users will result in increased conversionssales of our products and services, as customers will have access to Paid Members, whicha larger pool of professional talent. However, a higher number of registered users will furthernot immediately translate intoto increased revenuesrevenue, as there is a lag between the time we acquire a registered user through membership subscriptions. As of September 30, Change 2017 2016 (Percent) (in thousands) PDN Network Registered Users (1) 9,975 8,951 11.4 % NAPW Network Total Membership (2) 952 880 8.2 % As of September 30, Change 2018 2017 (Percent) (in thousands) PDN Network Registered Users (1) 10,659 9,975 6.9 % NAPW Network Total Membership (2) 954 952 0.2 % (1) Factors—TheFactors page #18 —The reported number of our registered users is higher than the number of actual individual users, and a substantial majority of our visits are generated by a minority of our users ” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162017 (the “Annual“2017 Annual Report”) as filed with the SEC on March 30, 2018).(2) Includes both Paid Members and Unpaid Members. 19 Three Months Ended Nine Months Ended September 30, September 30, 2017 2016 2017 2016 (in thousands) Net loss $ (2,488 ) $ (1,273 ) $ (17,665 ) $ (3,519 ) Stock-based compensation expense 146 118 731 218 Goodwill impairment charge - - 9,920 - Litigation Settlement 155 - 155 500 Gain on lease cancellation - - - (424 ) Depreciation and amortization 807 820 2,444 2,498 Change in fair value of Warrant Liability - 401 - 401 Interest Expense - 216 12 217 Interest and other income (4 ) - (9 ) (1 ) Income tax benefit (213 ) (624 ) (1,160 ) (1,218 ) Adjusted EBITDA $ (1,597 ) $ (342 ) $ (5,572 ) $ (1,328 ) Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 (in thousands) Loss from Continuing Operations $ (7,189 ) $ (2,318 ) $ (10,854 ) $ (17,156 ) Stock-based compensation expense 171 146 637 731 Goodwill impairment charge 5,251 - 5,251 9,920 Depreciation and amortization 650 757 1,989 2,294 Litigation settlement 342 155 342 155 Interest Expense (30 ) - (30 ) 12 Interest and other income 4 (4 ) - (9 ) Income tax expense (benefit) (190 ) (201 ) (562 ) (1,126 ) Adjusted EBITDA $ (991 ) $ (1,465 ) $ (3,227 ) $ (5,179 ) Three Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Revenues Membership fees and related services $ 2,205 $ 3,748 $ (1,543 ) (41.2 )% Lead generation 1,370 1,554 (184 ) (11.8 )% Recruitment services 694 955 (261 ) (27.3 )% Products sales and other 18 53 (35 ) (66.0 )% Education and training 69 - 69 100.0 % Consumer advertising and marketing solutions 65 50 15 30.0 % Total revenues $ 4,421 $ 6,360 $ (1,939 ) (30.5 )% 20 Nine Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Revenues Membership fees and related services $ 7,465 $ 13,048 $ (5,583 ) (42.8 )% Lead generation 4,699 4,490 209 4.7 % Recruitment services 1,977 2,295 (318 ) (13.9 )% Products sales and other 91 544 (453 ) (83.3 )% Education and training 899 - 899 100.0 % Consumer advertising and marketing solutions 189 177 12 6.8 % Total revenues $ 15,320 $ 20,554 $ (5,234 ) (25.5 )% Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Revenues Membership fees and related services $ 1,112 $ 2,205 $ (1,093 ) (49.6 )% Recruitment services 705 694 11 1.6 % Products sales and other 3 18 (15 ) (83.3 )% Education and training - 69 (69 ) (100.0 )% Consumer advertising and marketing solutions 74 65 9 13.8 % Total revenues $ 1,894 $ 3,051 $ (1,157 ) (37.9 )% Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Revenues Membership fees and related services $ 4,060 $ 7,465 $ (3,405 ) (45.6 )% Recruitment services 2,019 1,976 42 2.1 % Products sales and other 13 91 (78 ) (85.7 )% Education and training 16 899 (883 ) (98.2 )% Consumer advertising and marketing solutions 219 189 30 15.9 % Total revenues $ 6,327 $ 10,620 $ (4,294 ) (40.4 )% $1,939,000,$1,157,000, or 30.5%37.9% for the three months ended September 30, 2017,2018, compared to the same prior year period, and $5,234,000,$4,294,000, or 25.5%40.4%, for the nine months ended September 30, 2017,2018, compared to the same prior year period, due primarily to decrease in membership fees and products sales as the management focusesmanagement’s focus on cost reduction efforts, including the reduction in sales and operations workforce as a means to cost savings and rebranding the salesforce. Three Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) NAPW Network $ 2,223 $ 3,801 $ (1,578 ) (41.5 )% PDN Network 759 1,005 (246 ) (24.5 )% Noble Voice 1,370 1,554 (184 ) (11.8 )% China 69 - 69 100.0 % Total revenues $ 4,421 $ 6,360 $ (1,939 ) (30.5 )% Nine Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) NAPW Network $ 7,556 $ 13,592 $ (6,036 ) (44.4 )% PDN Network 2,166 2,472 (306 ) (12.4 )% Noble Voice 4,699 4,490 209 4.7 % China 899 - 899 100.0 % Total revenues $ 15,320 $ 20,554 $ (5,234 ) (25.5 )% 21 Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ 1,062 $ 2,223 $ (1,161 ) (52.2 )% PDN Network 779 759 20 2.6 % China 54 69 (15 ) (21.7 )% Total revenues $ 1,895 $ 3,051 $ (1,157 ) (37.9 )% Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ 3,892 $ 7,556 $ (3,664 ) (48.5 )% PDN Network 2,237 2,165 72 3.2 % China 197 899 (702 ) (78.1 )% Total revenues $ 6,326 $ 10,620 $ (4,294 ) (40.4 )% 2017,2018, our NAPW Network generated $2,223,000$1,062,000 in revenue from membership fees and related services and product sales, compared to $3,801,000$2,223,000 for the same period in the prior year, a decrease of $1,578,000,$1,161,000, or 41.5%52.2%. During the nine months ended September 30, 2017,2018, our NAPW Network generated $7,556,000$3,892,000 in revenue from membership fees and related services and product sales and other, compared to $13,592,000$7,556,000 for the same period in the prior year, a decrease of $6,036,000,$3,664,000, or 44.4%48.5%. The decrease was mainly attributable to reductions of thein NAPW sales staff whilefrom 37 sales representatives on average during the first nine months of 2017 to 17 sales representatives on average during the first nine months of 2018. As a part of rebranding the NAPW business, the Company also re-tooled its lead-generation and other marketing activities and replaced and re-trained sales staff on new sales practices we expect to lead to improved long-term productivity. During the third quarter, the Company formed a transition team and tasked the team on transitioning NAPW to long-term profitability. The core transition team’s objections are to increase the value for members, enhance membership sales productivity and to develop new methods of deriving revenue. To date the transition team has revamped membership outreach, new membership marketing and reducing indirect labor costs. In 2018 the Company will be investing in increasing women’s networking membership sales and expanding from NAPW (National Association of Professional Women), a national organization to IAW (International Association of Women), an international women’s networking organization. The Company believes that in a global market place, the IAW organization can offer all the value of today’s NAPW and add an international platform to enhance membership value.2017,2018, our PDN Network generated $759,000$779,000 in revenue, compared to $1,005,000$759,000 for the same period in the prior year, an increase of $20,000, or 2.6%. During the nine months ended September 30, 2018, our PDN Network generated $2,237,000 in revenue, compared to $2,165,000 for the same period in the prior year, an increase of $72,000, or 3.3%. The increase was a result of improved operational efficiencies and improvement in concerted efforts in sales growth, client retention, and customer satisfaction$246,000,$15,000 or 24.5%21.7%. During the nine months ended September 30, 2017,2018, our PDN NetworkChina Operations generated $2,166,000$197,000 in revenue, compared to $2,472,000$899,000 for the same period in the prior year, a decrease of $306,000,$702,000 or 12.4%78.1%. While Q1 2017 saw a modest uptick in sales and revenue generation over the prior year’s performance, Q2, and Q3 experienced a decline. The sales team experienced a reduction in staff with a corresponding drop in revenue generation. Additionally, sales strategy and operational changes implemented in Q2 are expected to result in an increase in revenue during Q4 and beyond.During the three months ended September 30, 2017, our Noble Voice business generated $1,370,000 of lead generation revenue, compared to $1,554,000 for the same period in the prior year, a decrease of $184,000 or 11.8%. The decrease was caused by an unexpected loss of a business partner at the end of Q2, which disrupted our business and resulted in a reduction in staff while the business re-strategized. During the nine months ended September 30, 2017, our Noble Voice business generated $4,699,000 of lead generation revenue, compared to $4,490,000 for the same period in the prior year, an increase of $209,000 or 4.7%. The increase was mainly attributable to sales increaseWe did not hold any major paid events in the first half of 2017 due to an improvement in the private education marketplace, coupled with strategic internal initiatives to increase volume and better lead quality.We started our operations in China in Q1 2017. During the three months ended September 30, 2017, China Operations generated $69,000 of revenue. During the nine months ended September 30, 2017, China Operations generated $899,000 of revenue. During the third quarter of 2017, we developed 18 IAW members with total membership fees of $278,000, which we recognize ratably over the membership period (ranging from 122018 as most our efforts were devoted to 36 months). Three Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Costs and expenses: Cost of revenue $ 658 $ 745 $ (87 ) (11.7 )% Sales and marketing 2,276 3,064 (788 ) (25.7 )% General and administrative 3,237 3,011 226 7.5 % Litigation settlement 155 - 155 100.0 % Depreciation and amortization 807 820 (13 ) (1.6 )% Total costs and expenses $ 7,133 $ 7,640 $ (507 ) (6.6 )% 22 Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Costs and expenses: Cost of revenue $ 292 $ 357 $ (65 ) (18.2 )% Sales and marketing 977 1,599 (622 ) (38.9 )% General and administrative 1,786 2,712 (926 ) (34.1 )% Litigation settlement 342 155 187 120.6 % Goodwill impairment charge 5,251 - 5,251 100.0 % Depreciation and amortization 650 757 (107 ) (14.1 )% Total costs and expenses $ 9,298 $ 5,580 $ (3,718 ) (66.6 )% 2017,2018, total costs and expenses were $7,133,000,$9,298,000, compared to $7,640,000$5,580,000 for same period in the prior year, an increase of $3,718,000 or 66.6%. We recorded a $5,251,000 goodwill impairment charge in our NAPW segment in September 2018. Excluding goodwill impairment charge, the total costs and expenses were $4,047,000, a decrease of $507,000$1,533,000 compared to the same period in the prior year, primarily due to $926,000 or 6.6%. The34.1% decrease is mainly attributable to $788,000in general and administrative expenses and a $622,000 or 25.7%38.9% decrease in sales and marketing expense mostly due to reduction in sales force, a decrease of $87,000 or 11.7% in cost of revenue, and a slight decrease of $13,000 or 1.6% in depreciation and amortization. The decrease in expenses was partially offset by an decrease of $226,000 or 7.5% in general and administrative expense, and $155,000 litigation settlement expenses in Q3 2017, of which $146,000 was accrued for the potential back pay related to the “NLRB” legal proceeding (please refer to “Legal Proceedings” for details). Nine Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Costs and expenses: Cost of revenue $ 2,193 $ 2,434 $ (241 ) (9.9 )% Sales and marketing 8,115 10,314 (2,199 ) (21.3 )% General and administrative 11,323 8,928 2,395 26.8 % Litigation settlement 155 500 (345 ) (69.0 )% Goodwill impairment charge 9,920 - 9,920 100.0 % Depreciation and amortization 2,444 2,498 (54 ) (2.2 )% Total costs and expenses $ 34,150 $ 24,674 $ 9,476 38.4 % Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Costs and expenses: Cost of revenue $ 917 $ 1,214 $ (297 ) (24.5 )% Sales and marketing 3,094 5,760 (2,666 ) (46.3 )% General and administrative 6,202 9,564 (3,362 ) (35.2 )% Litigation settlement 342 155 187 120.6 % Goodwill impairment charge 5,251 9,920 (4,669 ) (47.1 )% Depreciation and amortization 1,989 2,294 (305 ) (13.3 )% Total costs and expenses $ 17,795 $ 28,907 $ (11,112 ) (38.4 )% 2017,2018, total costs and expenses were $34,150,000,$17,795,000, compared to $24,674,000 for the same period in the prior year, and increase of $9,476,000, or 38.4%. The increase is primarily a result of goodwill impairment charge of $9,920,000, an increase of $2,395,000 or 26.8% in general and administrative expense, partially offset by a decrease of $2,199,000 or 21.3% in sales and marketing, a decrease of $345,000 litigation settlement, a decrease of $241,000 or 9.9% in cost of revenue and a decrease of $54,000 or 2.2% in depreciation and amortization.Cost of revenue: Cost of revenues during the three months ended September 30, 2017 were $658,000, compared to $745,000$28,907,000 for the same period in the prior year, a decrease of $87,000,$11,112,000, or 11.7%, mainly attributable to38.4%. The decrease is primarily a result of a $4,669,000 or 47.1% decrease of $85,000 in the PDN segment and a decrease of $44,000 in the Noble Voice segment due to decline in revenue, partially offset by an increase of $70,000goodwill impairment charge related to our China Operations that was launchedNAPW segment, a $3,362,000 or 35.2% decrease in March 2017.general and administrative expenses, and a $2,666,000 or 46.3% decrease in sales and marketing expenses.ninethree months ended September 30, 2017 were $2,193,000,2018 to $292,000, compared to $2,434,000$357,000 for the same period in the prior year, a decrease of $241,000,$65,000, or 9.9%, mainly attributable18.2%. During nine months ended September 30, 2018, cost of revenues was $917,000, compared to a decrease of $271,000$1,214,000 for the same period in the PDN segment asprior year, a resultreduction of improved efficiencies $297,000 or 24.5%. The decrease isin spending, and a decrease of $221,000 in the Noble Voice segment as a result of improved efficiencies in lead data sourcing and spending, partially offset by an increase of $338,000 related to our China Operations that was launched in March 2017.expenseexpenses: Sales and marketing expense expenses during the three months ended September 30, 20172018 were $2,276,000,$977,000, compared to $3,064,000$1,599,000 for the same period in the prior year, a decrease of $788,000,$622,000, or 25.7%38.9%. The decrease was mostly attributable to a $239,000 decrease in personnel cost due to sales force reduction in our NAPW segment, a $154,000 reduction in sales commission expenses, and a $153,000 reduction in lead spending in our NAPW segment. Sales and marketing duringexpenses for the nine months ended September 30, 20172018 were $8,115,000,$3,094,000, compared to $10,314,000$5,760,000 for the same period in the prior year, a decrease of $2,199,000,$2,666,000, or 21.3%46.3%. The decreasesdecrease was primarily due to a $962,000 reduction in lead spending in our NAPW segment, an $869,000 decrease in personnel costs due to sales force reduction in our NAPW segment, and a $461,000 reduction in sales commission expenses.2017 are2018 represents primarily due to reduction in the NAPW segment sales force from 64 sales representatives as of September 30, 2016 to 51 as of September 30, 2017. General and administrative expense: General and administrative expensepotential settlement accrued for the three months ended September 30, 2017 was $3,237,000, compared to $3,011,000 for the same period in the prior year, an increase of 226,000 or 7.5%. The increase was mainly attributable to a $268,000 general and administrative expense related to our China Operations that were launched in March 2017, a $183,000 rent liability accrual related to the unused space at our Garden City office related to NAPW segment, a $183,000 severance accrual for reduction in force in NAPW segment, and a $115,000 increase in compensation to independent board directors. This was partially offset by a $106,000 decrease in credit card fees due to lower sales and lower credit card rates, a $101,000 decrease in legal expenses, an $83,000 decrease in salaries and benefits, an $83,000 decrease in corporate insurance expenses, and a $52,000 decrease in consulting fees. General and administrative expense for the nine months ended September 30, 2017 was $11,323,000, compared to $8,928,000 for the same period in the prior year, an increase of $2,395,000 or 26.8%. The increase was mainly attributable to a $774,000 increase related to our China Operations that was launched in March 2017, a $616,000 increase in legal fees, a $514,000 increase in stock based compensation, a gain on lease cancellation of $424,000 related to the closing of its Los Angeles, CA office recorded in prior year, and a $364,000 increase in compensation to independent board directors. This was partially offset by a $253,000 decrease in credit card fees due to lower sales volume, and a $92,000 decrease in professional fees.Litigation settlement:various cases. Litigation settlement for the three and nine months ended September 30, 2017 represents primarily $146,000 expensein expenses that waswere accrued for the potential back-pay related to the “NLRB” legal proceeding (please refer to “Legal Proceedings” for details)details in the previous 10-Q). LitigationSince then, the Company settled its “NLRB” litigation and paid full settlement for the nine months endedamount of $139,000 as of September 30, 2016 represents the expense related to a $500,000 settlement of a class action lawsuit that was recorded during the first quarter of 2016.2018.2017.2017, and as of September 30, 2018. Accordingly, the Company recorded a goodwill impairment charge of $9,920,000 for the nine months ended September 30, 2017. No goodwill impairment charge was recorded during2017, and $5,251,000 for the three and nine months ended September 30, 2016.expenseexpenses: Depreciation and amortization expense expenses for the three months ended September 30, 2017 was $807,000,2018 were $650,000, compared to $820,000$757,000 for the same period in the prior year, a decrease of $13,000$107,000 or 1.6%14.1%. Depreciation and amortization expenseexpenses for the nine months ended September 30, 2017 was $2,444,000,2018 were $1,989,000, compared to $2,498,000$2,294,000 for the same period in the prior year, a decrease of $54,000$305,000 or 2.2%13.3%. The decrease for the three and nine months ended September 30, 20172018 was mainly attributable to a reduction in amortization expenseexpenses resulting from the amortization of the capitalized technologyintangible assets as listed in Note 5 on page 10 of this quarterly report. Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ 7,225 $ 3,443 $ 3,782 109.8 % PDN Network 712 719 (7 ) (1.0 )% China 502 418 85 20.4 % Corporate Overhead 860 1,000 (141 ) (14.1 )% Total costs and expenses $ 9,299 $ 5,580 $ 3,719 66.6 % Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ 11,253 $ 20,742 $ (9,489 ) (45.7 )% PDN Network 2,222 2,233 (11 ) (0.5 )% China 1,471 1,186 286 24.1 % Corporate Overhead 2,850 4,748 (1,897 ) (40.0 )% Total costs and expenses $ 17,796 $ 28,907 $ (11,111 ) (38.4 )% 24 23Benefit Three Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Total $ (213 ) $ (624 ) $ 411 (65.9 )% Nine Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) Total $ (1,160 ) $ (1,218 ) $ 58 (4.8 )% Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Total $ (190 ) $ (201 ) $ 11 (5.5 )% Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) Total $ (562 ) $ (1,126 ) $ 564 (50.1 )% 2016 was 7.9% and 32.9%8.0%, respectively, resulting in a $213,000$190,000, and $624,000$201,000 income tax benefit, respectively. The effective income tax rate for the nine months ended September 30, 2018 and 2017 was 4.9% and 2016 was 6.2% and 25.7%, respectively, resulting in a $1,160,000$562,000 and $1,218,000$1,126,000 income tax benefit, respectively. The difference in the effective income tax rate for the three months ended September 30, 2017, compared to the three months ended September 30, 2017, is mainly attributable to the change in the valuation allowance. The difference in the effective income tax rate for theand nine months ended September 30, 2017,2018, compared to the three and nine months ended September 30, 2017, is mainly attributable to the decrease in tax rates pursuant to the U.S. Tax Cuts and Jobs Act, an impairment charge recognized on NAPW’s goodwill, and the change in the valuation allowance. In assessingallowance and the realizability of deferredforeign tax assets, management considers whether it is more likely than not that some portion or all ofrate differential due to the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.Company’s China Operations. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a valuation allowance as of September 30, 20172018 and December 31, 2016. Three Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) NAPW Network $ $(1,528 ) $ (604 ) $ (924 ) 153.0 % PDN Network (218 ) (513 ) 295 (57.5 )% Noble Voice (419 ) (156 ) (263 ) 168.6 % China (324 ) - (324 ) 100.0 % Consolidated Net Loss $ (2,489 ) $ (1,273 ) $ (1,216 ) 95.5 % Nine Months Ended September 30, Change Change 2017 2016 (Dollars) (Percent) (in thousands) NAPW Network $ (14,026 ) $ (1,616 ) $ (12,410 ) 767.9 % PDN Network (1,865 ) (1,083 ) (782 ) 72.2 % Noble Voice (1,358 ) (820 ) (538 ) 65.6 % China (417 ) - (417 ) 100.0 % Consolidated Net Loss $ (17,666 ) $ (3,519 ) $ (14,147 ) 402.0 % 24 Three Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ (5,894 ) $ (1,126 ) $ (4,768 ) 423.5 % PDN Network 67 51 16 31.2 % China (429 ) (310 ) (119 ) 38.4 % Corporate Overhead (933 ) (933 ) - 0.0 % Consolidated Net Loss from continuing operations $ (7,189 ) $ (2,318 ) $ (4,871 ) 210.2 % Nine Months Ended September 30, Change Change 2018 2017 (Dollars) (Percent) (in thousands) NAPW Network $ (6,952 ) $ (12,354 ) $ 5,402 (43.7 )% PDN Network 31 (51 ) 82 (161.2 )% China (1,241 ) (295 ) (946 ) 320.7 % Corporate Overhead (2,692 ) (4,456 ) 1,764 (39.6 )% Consolidated Net Loss from continuing operations $ (10,854 ) $ (17,156 ) $ 6,302 (36.7 )% 20172018 we incurred $2,489,000a net loss from continuing operations of $7,189,000 and $17,666,000$10,854,000 respectively, of net losses, an increase (decrease) of 95.5%210.2% and 402.0%a decrease of 36.7% from net loss from continuing operations of $1,273,000$2,318,000 and $3,519,000$17,156,000 during the three and nine months ended September 30, 2016. 2017, respectively. The $1,216,000$4,871,000 increase in net loss for the three months ended September 30, 20172018 was primarily driven by a $5,251,000 goodwill impairment charge for our NAPW segment that we recorded on September 30, 2018, and a $1,161,000 decrease in revenues from membership fees, related services at our NAPW segment, partially offset by our continuous cost cutting efforts, primarily a decrease of $1,578,000$926,000 in general and administrative expenses and a decrease of $622,000 in sales and marketing expenses. The $6,302,000 decrease in net loss for the nine months ended September 30, 2018 was primarily a result of a $4,669,000 decrease in goodwill impairment charge related to our NAPW segment, a $3,362,000 decrease in general and administrative expenses, and a $2,666,000 decrease in sales and marketing expenses, partially offset by a $4,294,000 decrease in overall revenue period-over-period, mainly a $3,664,000 reduction in NAPW segment revenues from membership fees, related services and product sales, and a $702,000 reduction in China Operations revenues from events and IAW memberships.acontinuing decrease of $788,000 in overall spending, mainly a $423,000 decrease in personnel costs due to sales force reduction, a $327,000 reduction in rent expenses because we centralized our US operations in Chicago and marketing expenses.executed a work-from-home model for certain employees at our NAPW segment in 2018, and a $276,000 reduction in lead generation spending. The $14,147,000 increase$5,402,000 decrease in net loss for the nine months ended September 30, 20172018 was primarily driven by a $4,669,000 decrease of $6,036,000 in goodwill impairment charge related to our NAPW segment, and overall cost cutting efforts, mainly a $1,835,000 reduction in personnel costs, a $962,000 savings in lead generation spending, a $462,000 reduction in sales commissions expenses, a $388,000 reduction in rent expenses because we centralized our US operations in Chicago and executed a work-from-home model for certain employees at our NAPW segment in 2018, partially offset by a $3,664,000 decrease in revenues from membership fees, related services and product sales period-over-period, along with NAPW segment goodwill impairment charge of $9,920,000, and an increase of $2,395,000 in overall general and administrative expenses, partially offset by a decrease of $2,199,000 in overall sales and marketing expenses.period-over-period. and nine months ended September 30, 2017, we incurred2018, our PDN segment generated a net lossincome of $1,528,000 and $14,026,000, respectively, attributable to the NAPW Network segment,$67,000, compared to a net lossincome of $604,000 and $1,616,000 for the three and nine months ended September 30, 2016, respectively. The increase in net loss$51,000 for the three months ended September 30, 2017 was primarily driven by a decrease of $1,578,000 in NAPW segment revenues from membership fees, related services and product sales period-over-period, partially offset by a decrease of $734,000 in sales and marketing expenses.2017. The $12,410,000 increase in net income of $16,000 was mainly a result of a $20,000 increase in revenue, while the overall costs and expenses decreased period-to-period by $7,000. During the nine months ended September 30, 2018, we generated a net income of $31,000, compared to a net loss of $51,000 for the nine months ended September 30, 20172017. The increase in net income of $82,000 was primarily driven byattributable to a decrease of $6,036,000$71,000 increase in NAPW segment revenues from membership fees, related services and product sales period-over-period, along with NAPW segment goodwill impairment charge of $9,920,000, and partially offset byrevenue, a $40,000 decrease of $2,479,000 in sales and marketing expenses, and a $17,000 decrease in depreciation and amortization expenses.2017, we2018, our China Operations incurred a net loss of $218,000, attributable$429,000, compared to the PDN Network segment, compared toa net loss of $513,000$310,000 for the three months ended September 30, 2016, a decrease of $295,000, or 57.5%.comparable period in the prior year. The decreaseincrease in net loss isof $119,000 was mainly a result of $216,000 interest expense, and a loss of $401,000 as a result of change in fair value of warrant liability, both recorded during three months ended September 30, 2016, partially offset by a $246,000$15,000 decrease in revenues.revenue, while overall expenses were higher by $85,000, mainly due to a $61,000 increase in marketing and advertising expenses. During the nine months ended September 30, 2017,2018, we incurred a net loss of $1,865,000,$1,241,000, compared to a net loss of $1,083,000$295,000 for the prior year period. The increase in net loss of $946,000 was primarily driven by a $701,000 decrease in revenue, while overall expenses grew by $286,000, mainly due to a $290,000 increase in personnel costs and a $102,000 increase in marketing and advertising costs, partially offset by lower cost of sales due to a reduction in revenue.2016, an increase of $782,000, or 72.2%. The increase in net loss was primarily attributable to $616,000 increase in non recurring legal expense, $513,000 increase in stock based compensation, along with a $306,000 decrease in revenues, partially offset by a $216,000 interest expense, and $401,000 change in fair value of warrant liability, both recorded during three months ended September 30, 2016.During the three and nine months ended September 30, 2017,2018, we incurred a net loss of $419,000 and $1,358,000, respectively, attributable to the Noble Voice segment,$2,692,000, compared to $156,000 and $820,000a net loss of $4,456,000 for the three and nine months ended September 30, 2016, respectively.prior year’s corresponding period. The increasedecrease in net loss of $1,764,000 was primarily attributabledriven by a reduction in legal costs by $974,000, reduction of compensation to our independent board directors by higher$366,000, reduction in $200,000 in corporate overhead allocation.personnel costs, $94,000 reduction in stock-based compensation, an $89,000 decrease of audit and accounting fees, and an $85,000 reduction in corporate travel costs.20172018 and December 31, 2016,2017, respectively, and is intended to supplement the more detailed discussion that follows: September 30, December 31, 2017 2016 (in thousands) Cash and cash equivalents $ 2,822 $ 6,069 Working capital (deficiency) $ (1,475 ) $ 1,000 September 30, 2018 December 31,2017 (in thousands) Cash and cash equivalents $ 1,653 $ 2,926 Working (deficiency) capital $ (2,069 ) $ (1,140 ) recent issuances of Common Stockcommon stock to CFL.CFL and other investors. As of September 30, 20172018 and December 31, 2016,2017, we had working capital (deficiency)deficiency of approximately $(1,475,000)$2,069,000 and $1,000,000.$1,140,000. During the nine months ended September 30, 2017,2018, we generated a net loss from continuing operations of approximately $17,665,000$10,854,000 (including a non-cash$5,251,000 goodwill impairment charge recorded during third quarter of $9,920,000)2018), used cash in continuing operations of approximately $6,454,000, which includes $1,450,000 paid to LinkedIn related to litigation that was settled in 2016,$4,229,000, and we expect that we will continue to generate operating losses for the foreseeable future.requirements and have developed an operating plan for 2017.requirements. We havealso had cost reductions in the areas of staffing levels and operating budgets.November 7, 2016, we consummatedJanuary 29, 2018, the issuance and sale of 1,777,417Company sold 380,295 shares of Common Stock to CFL,common stock at a price of $9.60$3.91 per share. We received totalshare for gross proceeds of approximately $17.1 million from$1,486,953. The per share purchase price reflected the Share Issuance, or $14.1 million after giving effect toclosing price of the payment for 312,500Company’s common stock on January 24, 2018. The purchaser is Mr. Shengqi Cai, an individual and a resident of the People’s Republic of China.Common Stock tendered and not withdrawn in the Tender Offer. We received approximately $9.0 million in net proceeds from the Share Issuance, after repayment of outstanding indebtedness and the payment of transaction-related expenses at the closing.25On January 18, 2017, we sold 312,500 shares of Common Stock to CFLcommon stock at a price of $9.60$2.89 per share for total gross proceeds of $3,000,000, or $2,821,000 after giving effect to$1,434,914. The purchaser is China EWI International Finance Group Co., Limited, a limited liability company based in the paymentPeople’s Republic of transaction-related expenses. and cash generated from operations will be sufficient to meet our working capital requirements through November of 2018.2019. Since the Company expects that it will continue to generate operating losses for the mid-term, the Company may require additional funding sources or need to further decrease expenses in order to conserve liquidity. Future efforts to raise additional funds may not be successful or they may not be available on acceptable terms, if at all. NAPW Network membership fees generally at the commencement of the membership term or at renewal periods thereafter. The memberships we sell are for one year and we defer recognition of the revenue from membership sales and renewals and recognize it ratably over the twelve month period. Starting January 2, 2018, we also offer a monthly membership for IAW in the USA for which we collect a fee on a monthly basis. Our PDN Network also sells recruitment services to employers, generally on a one year contract basis. This revenue is also deferred and recognized over the life of the contract. Our payment terms for PDN Network and Noble Voice 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. Nine Months Ended September 30, 2017 2016 (in thousands) Cash provided by (used in): Operating activities $ (6,454 ) $ (2,489 ) Investing activities (294 ) 694 Financing activities 3,502 239 Effect of exchange rate fluctuations on cash and cash equivalents (1 ) - Net decrease in cash and cash equivalents $ (3,247 ) $ (1,556 ) Nine Months Ended September 30, 2018 2017 (in thousands) Cash provided by (used in) continuing operations Operating activities $ (4,229 ) $ (6,388 ) Investing activities (96 ) (298 ) Financing activities 2,922 3,502 Effect of exchange rate fluctuations on cash and cash equivalents (88 ) (1 ) Cash provided by (used in) discontinued operations: Operating activities (91 ) Investing activities 200 - Net decrease in cash and cash equivalents $ (1,273 ) $ (3,276 ) 2017,2018, net cash used in operating activities in continuing operations was $6,454,000.$4,229,000. We had a net loss of $17,665,000, a$10,854,000, deferred income tax benefit of $1,160,000,$375,000 which was offset by non-cash NAPW goodwill impairment charge of $5,251,000, depreciation and amortization of $1,989,000, stock-based compensation expense of $637,000, and a write off of security deposit of $149,000. Changes in operating assets and liabilities used $1,098,000 of cash during the nine months ended September 30, 2018, consisting primarily of decreases in deferred revenue and accrued expenses, partially offset by increases in accounts receivable and accounts payable.$2,444,000$2,294,000, and stock-based compensation expense of $731,000. Changes in operating assets and liabilities used $879,000$1,108,000 of cash during the nine months ended September 30, 2017, consisting primarily of decreases in accounts payable and deferred revenue, and accounts payable, partially offset by increases in prepayments, and accrued expenses and decreases in accounts receivable and prepayments.expenses.operatinginvesting activities in continuing operations for the nine months ended September 30, 20162018 was $2,489,000. We had a net loss$96,000, mainly consisting of $3,519,000 during the nine months ended September 30, 2016, a deferred tax benefit of $1,218,000 and a gain on lease cancellation of $424,000, which were partially offset by non-cash depreciation and amortization of $2,498,000, an increase in the fair value of warrant liabilities of $401,000, stock-based compensation expense of $218,000 and deferred financing cost amortization of $157,000. Changes in operating assets and liabilities used $601,000 of cash during the nine months ended September 30, 2016, consisting primarily of decreases in deferred revenue and increased prepaid expenses partially offset by increases in accrued expenses.Net Cash (Used in) Provided by Investing Activities$294,000,$298,000, consisting of $157,000 invested in property and equipment, and $123,000 invested to develop technology, $154,000 in purchases of property and equipment, partially offsetnew technology.$18,000 of returned security deposits.investingfinancing activities forin continuing operations during the nine months ended September 30, 20162018 was $694,000,$2,922,000, consisting of $500,000 of$1,487,000 in gross proceeds from the maturitiesJanuary 29, 2018 issuance and sale of short-term investments380,295 shares of common stock at a price of $3.91 per share to Mr. Shengqi Cai, an individual and $194,000a resident of returned security deposits.26Net Cash Provided by Financing Activities the $3,000,000 in gross proceeds from the January 18, 2017 issuance, $646,000 refund of merchant reserve, partially offset by thea $144,000 payment of offering costs to third-party professionals.financingoperating activities duringin discontinued operations for the nine months ended September 30, 20162018 was $239,000,$18,000. Net cash provided by investing activities for the same period was $200,000, consisting of $1,943,000$200,000 in gross proceeds from the sale of proceeds drawn on our Master Credit Facility, partially offset by $488,000 of costs related to securing that facility, payment of $1,049,000 of costs related toNoble Voice operations.CFL Transaction and $166,000 due to the increase in the merchant reserve for NAPW Network.20162017 Annual Report, which we believe are the most critical to our business and the understanding of our results of operations and affect the more significant judgments and estimates that we use in the preparation of our financial statements.·●our beliefs regarding our ability to create enhanced value for our members and customers; ·●our beliefs regarding the relation between the number of members or registered users and our revenues; ·●our expectations regarding future changes in our salesforce; ·●our expectations regarding the changes in revenues in 2017, 2018, 2019 and 2019;2020;·●our expectations regarding future increases in sales and marketing costs and general and administrative expenses; and ·●our beliefs regarding our liquidity requirements, the availability of cash and capital resources to fund our business in the future and intended use of liquidity. 27·●our ability to raise funds in the future to support operations failure to realize synergies and other financial benefits from mergers and acquisitions within expected time frames, including increases in expected costs or difficulties related to integration of merger and acquisition partners; ·●inability to identify and successfully negotiate and complete additional combinations with potential merger or acquisition partners or to successfully integrate such businesses; ·●our history of operating losses; ·●we may not be able to reverse the significant decline in our revenues; ·●our limited operating history in a new and unproven market; ·●increasing competition in the market for online professional networks; ·●our ability to comply with increasing governmental regulation and other legal obligations related to privacy; ·●our ability to adapt to changing technologies and social trends and preferences; ·●our ability to attract and retain a sales and marketing team, management and other key personnel and the ability of that team to execute on the Company’s business strategies and plans; ·●our ability to obtain and maintain protection for our intellectual property; ·●any future litigation regarding our business, including intellectual property claims; ·●general and economic business conditions; and ·●legal and regulatory developments. 20162017 Annual Report for additional information regarding factors that could affect our results of operations, financial condition and cash flow. You should consider these factors, risks and uncertainties when evaluating any forward-looking statements and you should not place undue reliance on any forward-looking statement. Forward-looking statements represent our views as of the date of this Quarterly Report, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date of this Quarterly Report.2017,2018, 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 is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act”). We recognize that there are material weaknesses related to our internal controls. Therefore, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, as of the end of the period covered by this Quarterly Report. This includes 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. Furthermore, to provide reasonable assurance that information required to be disclosed 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.2017,2018, 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 year ended December 31, 2016. We2017. Specifically, we continued making necessary changesimplementing policies to more fully segregate incompatible duties within our accounting and implementing new policies tofinancial reporting functions and enhance the overall internal control structure, including requiring pre-approvala more rigorous and transparent expense approval process, and segregating check signing ability for travelfinance personnel; we continued to implement more effective financial reporting process that included monthly and quarterly closing check-lists and monthly review of the financial reports by the Company’s Finance Department. We also continued to implement certain purchasesmeasures to help remediate material weaknesses in our China operations that we identified near the end of the fourth quarter of 2017, primarily improving standard processes and ensuring employees are cross trained for certain key tasks.controls over revenue recognition of service income. There have been no other changes in our internal control over financial reporting during the third quarter of 20172018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.28● The Company lacks sufficient qualified personnel with the relative U.S. GAAP knowledge to review conclusions reached regarding the accounting for complex transactions and related analyses to record amounts resulting from such transactions in our financial records. ● We did not maintain an effective financial reporting process to prepare financial statements in accordance with U.S. GAAP. Specifically, our process lacked timely and complete financial statement reviews and procedures to ensure all required disclosures were made in our financial statements. The Company has previously disclosed that it and its wholly-owned subsidiary, NAPW, Inc., are parties to litigation captioned Gauri Ramnath, et al. v. Professional Diversity Network, Inc., et al., No. BC604153 (Los Angeles Superior Ct.), a putative class action filed in January 2016 alleging violations of various California Labor Code (wage & hour) sections. During the first quarter of 2016, the Company executed a settlement agreement, subject to later Court approval, in which the Company agreed in principle to pay $500,000 for a global settlement of the class action. During the first quarter of 2016, the Company also recorded a litigation settlement expense in the amount of $500,000. On November 28, 2016, the Court approved the proposed settlement. In December of 2016 the Company paid the settlement amount in the Court’s fund and the third-party administrator began distributing payments to class members. On August 2, 2017, the Court notified the parties that the case is “reported as complete without the need for a further status conference.” This matter is therefore concluded and will not be further reported.The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to a proceeding captioned In re Professional Diversity Network, Cases 31-CA-159810 and 31-CA-162904, filed with the National Labor Relations Board (“NLRB”) in June 2015 and alleging violations of the National Labor Relations Act (“NLRA”) against the Company and its wholly-owned subsidiary, NAPW, Inc., where employee was allegedly terminated for asserting rights under Section 7 of the NLRA. While the Company disputes that any rights were impacted, the NLRB has issued its order requiring the Company to take certain remedial actions in the form of posting notices and revising certain policies, as well as to pay the claimant certain back pay and offer reinstatement. The Company has complied with the order in all respects except back pay and reinstatement. The Company disputes the amount of back pay owed to the claimant and disputes that reinstatement is appropriate under the circumstances and an evidentiary hearing on the issue of back pay is currently scheduled for January of 2018. The amount of back pay and other potential liabilities ordered by NLRB is $146,000.The Company is a party to a proceeding captioned Paul Sutcliffe v. Professional Diversity Network, Inc., No. 533-2016-00033 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) in April 2016 and alleging violations of Title VII and the Age Discrimination in Employment Act, where employee was allegedly terminated due to his race (Caucasian) and his age (over 40). The EEOC has not yet notified the Company that it has issued a right-to-sue letter, and the complainant has not yet filed a lawsuit.The Company is a party to a proceeding captioned Wei Aniton v. Professional Diversity Network, Inc., No. 440-2017-04717 (EEOC), filed with the Equal Employment Opportunity Commission (“EEOC”) on July 6, 2017 and alleging violations of Title VII and the Equal Pay Act of 1963, where employee alleges she was discriminated by the Company due to her race and her sex and was paid less than similarly situated white males. On September 20, 2017, the EEOC issued its Notice of Dismissal and Notice of Rights, effectively terminating this matter before the EEOC.a claimclaims against the Company. The letter alleges that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay in White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. The Company investigated White Winston’s claims and communicated to White Winston that the Company denies liability for any such claim.ITEM 1A. RISK FACTORS The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our 2016 Annual Report.The proceeds from the January 2017 Share Issuance may not be sufficient to implement our productivity improvement initiatives.We received net proceeds of approximately $2,856,000 from the January 18, 2017 Share Issuance, partially offset by approximately $144,000 in third-party professional fees. We expect to use the net proceeds for general corporate and working capital purposes including to implement the productivity improvement initiatives that we have identified as key to our ability to deliver profitable growth over the long term. We cannot be certain that the proceeds from the Share Issuance will be sufficient to implement all or any of the initiatives or that these initiatives will improve our short and long-term business performance or prospects. In the event that we cannot implement these initiatives or that these initiativessuccessful, we could again face liquidity and going concern issues, which could result in your losing your entire investment inrequired to provide the Company.29The Company is controlledinformation required by CFL, and CFL’s interests may differ from the interests of our other stockholders.CFL beneficially owns 54.64% of our outstanding shares of Common Stock on a fully diluted basis. Five out of nine members of our Board of Directors are nominated by CFL. CFL may not exercise its rights as our controlling stockholder in a manner consistent with the interests of our other stockholders. By virtue of its ownership of a majority of our Common Stock and the power to designate the majority of our Board of Directors, CFL is in a position to influence the Company’s actions for its own benefit.Public sales of a substantial number of shares of our Common Stock by CFL could cause our stock price to fall.CFL beneficially owns 54.64% of our outstanding shares of Common Stock on a fully diluted basis. Pursuant to the Stockholders’ Agreement, dated November 7, 2016, by and among the Company, CFL and CFL shareholders, CFL, CFL shareholders and their respective affiliates (collectively, the “ CFL Group ”) are subject to a one-year lock-up with respect to all shares of Common Stock owned by members of the CFL Group, subject to certain exceptions. However, after the one-year period, it may generally sell its shares in the public markets, subject to applicable securities laws. Furthermore, we have granted CFL and the CFL shareholders certain registration rights that provide them the ability to register for resale, from time to time and in accordance with the terms of the registration rights agreement, all shares of Common Stock owned by members of the CFL Group, subject to certain exceptions. Sales of a substantial number of shares of our Common Stock in the public market or the perception that these sales might occur, could depress the market price of our Common Stock and could have a material adverse effect on the trading price of our Common Stock.Because we have a majority stockholder, our public float is more limited which could impact your ability to sell your shares and could result in increased volatility in our stock price.CFL beneficially owns 54.64% of the outstanding shares of our Common Stock. As a result, the trading volume of our Common Stock could be more limited than if our shares were more-widely held. In addition, because we are a relatively small company, the range of investors willing to invest in our shares may be relatively limited. As a result of these factors, it may be more difficult for you to sell your shares of Common Stock at a time and price that you deem appropriate, and could increase the volatility of our stock price.We did not sell any equity securities in transactions that were not registered under the Securities Act of 1933 during the three months ended September 30, 2017.31.1 31.2 32.1 101. INS XBRL Instance Document 101. SCH XBRL Taxonomy Extension Schema Document 101. CAL XBRL Taxonomy Extension Calculation Linkbase Document 101. DEF XBRL Taxonomy Extension Definition Linkbase Document 101. LAB XBRL Taxonomy Extension Labels Linkbase Document 101. PRE XBRL Taxonomy Extension Presentation Linkbase Document SIGNATURES PROFESSIONAL DIVERSITY NETWORK, INC. Date: November 13, 2017 19, 2018By: /s/ Jiangping (Gary) Xiao Name: Jiangping (Gary) Xiao Title: 3131.1 31.2 32.1 101. INS XBRL Instance Document 101. SCH XBRL Taxonomy Extension Schema Document 101. CAL XBRL Taxonomy Extension Calculation Linkbase Document 101. DEF XBRL Taxonomy Extension Definition Linkbase Document 101. LAB XBRL Taxonomy Extension Labels Linkbase Document 101. PRE XBRL Taxonomy Extension Presentation Linkbase Document 32