UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————————

Form 10-Q

———————————

(Mark One)

☒ 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended Septemberquarterly period ended June 30, 2017  2020

(OR)or


[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Periodtransition period from ________ to________.
to________

Commission file number: 001-35824

———————————

Professional Diversity Network, Inc.

(Exact name of Registrant as Specified in Its Charter)

———————————

Delaware
80-0900177

(State or Other Jurisdiction of

Incorporation or Organization)

80-0900177

(I.R.S. Employer

Identification No.)

801 W. Adams Street, Suite 600

Chicago, Illinois

60607
(Address of Principal Executive Offices) (Zip(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)

(312) 614-0950

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each className of each exchange on which registered
Common Stock, $0.01 par value per shareThe Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [  ] No [X]

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 ☒[X] No ☐

[  ]

Indicate by check mark whether the registrant has submitted electronically 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)

.

Yes ☒[X] No ☐

[  ]

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“large accelerated filer,” “accelerated filer,”filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

(Check One):

Large accelerated filer ☐[  ]Accelerated filer ☐[  ]
Non-accelerated filer ☐[  ]Smaller reporting company ☒[X]
Emerging growth company [  ]
Emerging growth company ☒

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 ☐[  ] No ☒


[X]

There were 3,931,83812,819,843 shares outstanding of the registrant’s common stock as of November 6, 2017.

August 13, 2020.

 

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:

●our beliefs regarding our ability to capture and capitalize on market trends;
●our expectations on the future growth and financial health of the online diversity recruitment industry and the industry participants, and the drivers of such growth;
●our expectations regarding continued membership growth;
●our beliefs regarding the increased value derived from the synergies among our segments; 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.

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:

●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;
●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 intellectual property 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.

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 I, Item 1A, “Risk Factors” of our 2019 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.

2

PROFESSIONAL DIVERSITY NETWORK, INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 2017

2020

TABLE OF CONTENTS

PAGE
PART I
  
ITEM 1. FINANCIAL STATEMENTSPage4
PART I1
ITEM 1.FINANCIAL STATEMENTS1
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1723
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
2835
ITEM 4 CONTROLS AND PROCEDURES35
 ITEM 4.CONTROLS AND PROCEDURES28
PART II 29
 ITEM 1.LEGAL PROCEEDINGS29
ITEM 1 LEGAL PROCEEDINGSITEM 1A.RISK FACTORS2936
ITEM 1A RISK FACTORS37
ITEM 2.
2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
3037
ITEM 3.3 DEFAULTS UPON SENIOR SECURITIES3037
ITEM 4.4 MINE SAFETY DISCLOSUREDISCLOUSRES3037
ITEM 5.5 OTHER INFORMATION3037
ITEM 6 EXHIBITSITEM 6.37

EXHIBITS303

PART I
ITEM 1.FINANCIAL STATEMENTS
Professional 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        
Common stock, $0.01 par value; 45,000,000 shares authorized; 3,936,399 shares and 3,623,899
 shares issued as of September 30, 2017 and December 31, 2016, respectively; and 3,931,838 shares
and 3,619,338 shares outstanding as of September 30, 2017 and December 31, 2016, respectively
  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 

Item 1. FINANCIAL STATEMENTS

Professional Diversity Network, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

  June 30,  December 31, 
  2020  2019 
  (Unaudited)    
Current Assets:        
Cash and cash equivalents $858,875  $633,615 
Accounts receivable, net  453,112   720,750 
Incremental direct costs  16,876   33,258 
Prepaid expense and other current assets  365,640   240,763 
Current assets from discontinued operations  3,940   75,996 
Total current assets  1,698,443   1,704,382 
         
Property and equipment, net  8,546   21,188 
Capitalized technology, net  54,177   95,884 
Goodwill  339,451   339,451 
Intangible assets, net  414,281   452,385 
Right-of-use assets  14,326   93,251 
Merchant reserve  760,849   760,849 
Security deposits  15,033   15,033 
Long-term assets from discontinued operations  2,846,658   3,109,200 
Total assets $6,151,764  $6,591,623 
         
Current Liabilities:        
Accounts payable $856,976  $796,137 
Accrued expenses  1,633,789   654,169 
Deferred revenue  1,321,125   1,699,001 
Short-term loan  162,770   - 
Lease liability, current portion  16,016   105,083 
Current liabilities from discontinued operations  323,276   564,044 
Total current liabilities  4,313,952   3,818,434 
         
Long-term loan  488,308   - 
Deferred tax liability  202,833   221,254 
Total liabilities  5,005,093   4,039,688 
         
Commitments and contingencies        
         
Stockholders’ Equity        
Common stock, $0.01 par value; 45,000,000 shares authorized, 11,339,407 shares and 8,928,611 shares issued as of June 30, 2020 and December 31, 2019, and 11,338,359 and 8,927,563 shares outstanding as of June 30, 2020 and December 31, 2019  113,384   89,286 
Additional paid in capital  93,000,285   91,126,784 
Accumulated other comprehensive income  72,347   44,242 
Accumulated deficit  (92,002,228)  (88,671,260)
Treasury stock, at cost; 1,048 shares at June 30, 2020 and December 31, 2019  (37,117)  (37,117)
Total stockholders’ equity  1,146,671   2,551,935 
Total liabilities and stockholders’ equity $6,151,764  $6,591,623 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

Professional Diversity Network, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)4

  Three Months Ended September 30,  
Nine 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)
                 
Weighted average shares used in computing net
loss per common share:
                
Basic and diluted  3,932,886   1,809,676   3,912,282   1,809,676 

Professional Diversity Network, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
Revenues:                
Membership fees and related services $353,408  $633,914  $737,239  $1,428,453 
Recruitment services  572,233   651,046   1,138,920   1,125,306 
Products sales and other  1,899   1,143   3,330   3,955 
Consumer advertising and marketing solutions  24,290   38,059   54,638   73,775 
Total revenues  951,830   1,324,162   1,934,127   2,631,489 
                 
Costs and expenses:                
Cost of revenues  169,920   226,925   343,397   410,584 
Sales and marketing  459,106   469,377   984,075   1,165,144 
General and administrative  2,074,069   1,174,289   3,734,923   2,252,189 
Depreciation and amortization  47,848   217,334   99,849   434,517 
Total costs and expenses  2,750,943   2,087,925   5,162,244   4,262,434 
                 
Loss from continuing operations  (1,799,113)  (763,763)  (3,228,117)  (1,630,945)
                 
Other income (expense)                
Interest expense  -   (11,599)  -   (14,182)
Interest and other income  5,550   376,068   6,214   376,068 
Other income (expense), net  5,550   364,469   6,214   361,886 
                 
Loss before income tax benefit  (1,793,563)  (399,294)  (3,221,903)  (1,269,059)
Income tax benefit  (12,512)  (10,236)  (18,421)  (75,869)
Loss from continuing operations  (1,781,051)  (389,058)  (3,203,482)  (1,193,190)
Loss from discontinued operations  (57,821)  (382,176)  (127,486)  (737,413)
Net loss $(1,838,872) $(771,234) $(3,330,968) $(1,930,603)
                 
Other comprehensive loss:                
Net loss $(1,838,872) $(771,234) $(3,330,968) $(1,930,603)
Foreign currency translation adjustment  (11,768)  (9,349)  28,105   13,686 
Comprehensive loss: $(1,850,640) $(780,583) $(3,302,863) $(1,916,917)
                 
Basic and diluted loss per share:                
Continuing operations $(0.16) $(0.08) $(0.32) $(0.23)
Discontinued operations $(0.01) $(0.08) $(0.01) $(0.14)
Net loss $(0.17) $(0.16) $(0.33) $(0.37)
                 
Weighted average outstanding shares used in computing net loss per common share:                
Basic and diluted  10,933,614   5,074,480   9,951,759   5,117,098 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2

Professional Diversity Network, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)5

  
Nine Months Ended
September 30,
 
  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  
(1,067,652
)  (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 

Professional Diversity Network, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

  Six Months Ended June 30, 
  2020  2019 
Cash flows from operating activities:        
Loss from continuing operations $(3,203,482) $(1,193,190)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities - continuing operations:        
Depreciation and amortization  99,849   434,517 
Deferred tax benefit  (18,421)  (77,444)
Amortization of right-of-use asset  78,925   75,271 
Accretion of lease liability  2,217   5,872 
Stock-based compensation expense  397,599   98,689 
Litigation settlement reserve  708,422   - 
Write-off of accounts payable  -   (375,997)
Write-off of accounts payable        
Write-off of property and equipment  -   1,385 
Recovery of bad debt expense  -   (2,025)
Payment of lease obligations  (91,284)  (88,421)
Changes in operating assets and liabilities, net of effects of discontinued operations:  -   - 
Accounts receivable  267,638   386,898 
Prepaid expenses and other current assets  (124,877)  29,685 
Incremental direct costs  16,382   (20,345)
Accounts payable  60,839   (224,536)
Accrued expenses  271,198   (99,631)
Deferred revenue  (377,876)  (432,597)
Net cash used in operating activities - continuing operations  (1,912,871)  (1,481,869)
Net cash provided by operating actvities - discontinued operations  44,178   406,414 
Net cash used in operating activities  (1,868,693)  (1,075,455)
         
Cash flows from investing activities:        
Costs incurred to develop technology  (3,701)  (2,500)
Purchases of property and equipment  (3,695)  - 
Net cash used in investing activities - continuing operations  (7,396)  (2,500)
Net cash used in investing actvities - discontinued operations  -   - 
Net cash provided used in investing activities  (7,396)  (2,500)
         
Cash flows from financing activities:        
Proceeds from the sale of common stock  1,500,000   1,597,815 
Proceeds from short-term loan  651,078   - 
Proceeds from short-term loan - related party      400,000 
Repayment from short-term loan - related party      (200,000)
Repayment of note payable - related party  -   (292,882)
Proceeds from line of credit - related party  -   292,882 
Net cash provided by financing activities - continuing operations  2,151,078   1,797,815 
Net cash provided by (used in) financing actvities - discontinued operations  -   - 
Net cash provided by financing activities  2,151,078   1,797,815 
         
Effect of exchange rate fluctuations on cash and cash equivalents  (49,729)  13,686 
Net increase in cash and cash equivalents  225,260   733,546 
Cash, cash equivalents, beginning of period  633,615   105,670 
Cash and cash equivalents, end of period  858,875   839,216 
         
Supplemental disclosures of other cash flow information:        
Cash paid for income taxes $-  $8,594 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)6

Professional Diversity Network, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

                    Accumulated    
        Additional           Other  Total 
  Common Stock  Paid in  Accumulated  Treasury Stock  Comprehensive  Stockholders’ 
  Shares  Amount  Capital  Deficit  Shares  Amount  Income (Loss)  Equity 
Balance at January 1, 2020  8,928,611  $89,286  $91,126,784  $(88,671,260)  1,048.0  $(37,117) $44,242  $2,551,935 
                                 
Sale of common stock  2,251,737   22,518   1,477,482   -   -   -   -   1,500,000 
Issuance of vested restricted shares  158,011   1,580   (1,580)  -   -   -   -   - 
Share-based compensation  -   -   397,599   -   -   -   -   397,599 
Translation adjustments  -   -   -   -   -   -   28,105   28,105 
Net loss  -   -   -   (3,330,968)  -   -   -   (3,330,968)
Balance at June 30, 2020  11,338,359  $113,384  $93,000,285  $(92,002,228)  1,048  $(37,117) $72,347  $1,146,671 

  Common Stock  Additional
Paid in		  Accumulated  Treasury Stock  Comprehensive  Stockholders’ 
  Shares  Amount  Capital  Deficit  Shares  Amount  Income (Loss)  Equity 
Balance at January 1, 2019  4,856,213  $48,562  $83,728,903  $(84,826,796)  1,048  $(37,117) $(24,340) $(1,110,788)
                                 
Sale of common stock  737,031   7,370   1,590,445   -   -   -   -   1,597,815 
Conversion of note payable - related party  209,205   2,092   497,908                   500,000 
Issuance of common stock for settlement of acounts payable  30,640   306   98,664                   98,970 
Issuance of vested restricted shares  27,761   278   (278)                  - 
Share-based compensation  -   -   98,689   -   -   -   -   98,689 
Translation adjustments  -   -   -   -   -   -   13,686   13,686 
Net loss  -   -   -   (1,930,603)  -   -   -   (1,930,603)
Balance at June 30, 2019  5,860,850  $58,608  $86,014,331  $(86,757,399)  1,048  $(37,117) $(10,654) $(732,231)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

Professional Diversity Network, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation and Description of Business

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying condensed consolidated financial statements include all adjustments, which consist of normal recurring adjustments and transactions or events discretely impacting the interim periods, considered necessary by management to fairly state our results of operations, financial position and cash flows. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2019 Form 10-K.

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 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.

for NAPW, Inc., a wholly-owned subsidiary of the Company and the operator of the National Association of Professional Women (the “NAPW Network” or “NAPW”). The PDN Network operates online professional networking communities with career resources specifically tailored to the needs of different diverse cultural groups including: Women, Hispanic-Americans, African-Americans, Asian-Americans, Disabled, Military Professionals, Lesbians, Gay, Bisexual and Transgender (LGBT), and Students and Graduates seeking to transition from education to career. The networks’ purposes, among others, are to assist its registered users in their efforts to connect with like-minded individuals, identify career opportunities within the network and connect with prospective employers. The Company’s technology platform is integral to the operation of its business. The NAPW Network is an exclusive women-onlynetworking organization for professional networking organization,women, whereby its members can develop their professional networks, further their education and skills, and promote their business and career accomplishments. NAPW provides its members with opportunities to network and develop valuable business relationships with other professionals through its website, as well as at events hosted at its local chapters across the country. Noble Voice monetizes its consumer transactions

In March 2020, our Board decided to suspend all China operations generated 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.


former CEO, Michael Wang. The Company began businessresults of China operations in Chinaare presented in the first quartercondensed consolidated statements of 2017, similaroperations and comprehensive loss as net loss from discontinued operations. On March 19, 2020, Jiangxi PDN Culture Media Co., Ltd. (“Jiangxi PDN”), a company established under the laws of the People’s Republic of China and a variable interest entity (VIE) controlled by Professional Diversity Network, Inc. (“PDN”), issued a Notice of Termination of the Agreement of Acquisition and Equity Transfer (the “Termination”). This Notice was exercised under Jiangxi PDN’s unilateral right and was delivered on March 19, 2020. Under the terms of the Termination, no additional due diligence shall be completed, any materials shall be returned to thosethe respective owners, and there shall be no breakup fee or penalty associated with this Termination. We expect no further involvement in the United States, focusing on providing tools, products and services which will assist in personal and professional development. The Company intends to cooperate with existing companies and organizations in China to efficiently and promptly deliver valuable products and services to its registered users. The Chinese operations focus on 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.

this matter.

2. Liquidity, Financial ConditionGoing Concern and Management’s Plans


At SeptemberJune 30, 2017,2020, the Company’s principal sources of liquidity were its cash and cash equivalents and the net proceeds from the closingssale of common stock during the CFL Transaction (as defined in Note 7).


six months ended June 30, 2020.

The Company had an accumulated deficit of approximately $65,123,000($92,002,228) at SeptemberJune 30, 2017.2020. During the ninethree and six months ended SeptemberJune 30, 2017,2020, the Company generated a net loss from continuing operations of approximately $17,665,000 (including a goodwill impairment charge of $9,920,000)($1,781,051) and ($3,203,482), and used cash in continuing operations of approximately $6,454,000, which includes $1,450,000 paid to LinkedIn as a litigation settlement, and the Company expects that it will continue to generate operating losses for the foreseeable future.six months of $1,912,871. At SeptemberJune 30, 2017,2020, the Company had a cash balance of approximately $2,822,000.$858,875. Total revenues were approximately $4,422,000$952,000 and $6,360,000$1,934,000 for the three and six months ended SeptemberJune 30, 2017 and 2016, respectively, and approximately $15,321,000 and $20,554,000 for the nine months ended September 30, 2017 and 2016, respectively.2020. The Company had a working capital deficiency from continuing operations of approximately ($1,475,000)2,616,000) and $1,000,000($2,114,000) at SeptemberJune 30, 20172020 and December 31, 2016, respectively.

4
2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)8

On November 7, 2016, the Company consummated the issuance and sale of 1,777,417 shares of the Company’s common stock to Cosmic Forward Limited, a Republic of Seychelles company wholly-owned by a group of Chinese investors (“CFL”), in a private placement, at a price of $9.60 per share (“Share Issuance”). In addition, on November 7, 2016, the Company completed the repurchase of 312,500 shares of its common stock at a price of $9.60 per share (“Tender Offer”). The Company received total gross proceeds of $17,063,000 from the Share Issuance, or $14,063,000 after giving effect to the payment for the 312,500 shares of common stock from the Tender Offer. The Company received approximately $9,000,000 in net proceeds from the Share Issuance, after repayment of all amounts outstanding under its Master Credit Facility and the payment of transaction-related expenses.

On January 18, 2017, the Company consummated the issuance and sale of 312,500 shares of the Company’s common stock to CFL at a price of $9.60 per share, for total gross proceeds of $3,000,000, or $2,821,000 after giving effect to the payment of transaction-related expenses.

Management believes that its available funds cash on hand and cash generatedflow from operations willmay not be sufficient to meet itsour working capital requirements at leastfor the next twelve months. In order to accomplish our business plan objectives, the Company will need to continue its cost reduction efforts, increase revenues, raising capital through November 2018.the issuance of common stock, or through a strategic merger or acquisition. However, there can be no assurances that theour business plans and actions proposed by management will be successful, that the Companywe will generate anticipated revenues, or that unforeseen circumstances will not require additional funding sources in the future or effectuateimpact plans to conserve liquidity. Future efforts to raise additional fundsimprove liquidity through the issuance of our common stock may not be successful, or if available, they may not be availablenegotiable on acceptable terms, ifterms.

On June 26, 2020, the Company entered into an agreement with an existing investor, Malven Group Limited, in connection with the purchase of 312,500 shares of common stock of the Company at all. 

a price of $3.20 per share for gross proceeds of $1,000,000. The closing date of the transaction was June 29, 2020 and the gross proceeds of $1,000,000 were received in July 2020.

On July 27, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with three institutional accredited investors. Pursuant to the Agreement, the Company offered and sold 1,481,484 shares of its common stock at a per share price of $1.35 for gross proceeds of approximately $2,000,000 pursuant to the Company’s Registration Statement on Form S-3 (Registration Statement No. 333-227249) (the “Transaction”). The Transaction closed on July 29, 2020 and the Company received net proceeds of $1,814,353, after deducting financial advisory, legal and escrow related fees.

3. Summary of Significant Accounting Policies

BasisPrinciples of Presentation–Consolidation - 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 presentationthe accounts of the financial position, operating resultsCompany, its wholly-owned subsidiaries, and cash flows for the periods presented.

The accompanying unaudited interim condensed consolidated financial statements should be reada variable interest entity. All significant intercompany balances and transactions have been eliminated in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on March 31, 2017 (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, 2016 and 2015. The financial information as of December 31, 2016 is derived from the audited financial statements presented in the Annual Report. The interim results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any future interim periods.

consolidation.

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; the assessment of goodwill for impairment, other intangible assets and long-lived assets for impairment; allowances for doubtful accounts, and assumptions related to the valuation allowances on deferred taxes, impact of applying the revised federal tax rates on deferred taxes, the valuation of stock-based compensation and the valuation of stock warrants.

5Cash Equivalents - The Company considers cash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less.

Accounts Receivable - Accounts receivable represent receivables generated from fees earned from customers and advertising revenue. The Company’s policy is to reserve for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was $41,007 and $20,007.

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)9

PrinciplesIncremental Direct Costs - Incremental direct costs incurred in connection with enrolling members in the NAPW Network consist of Consolidationsales commissions paid to the Company’s direct sales agents. Incremental direct costs associated with the PDN Network consists of commissions paid to third-party agencies. Commissions associated with the NAPW Network are deferred and amortized over the term of membership, which is a 12-month period and agency commissions associated with the PDN Network are deferred and amortized over the membership service period. Total incremental direct costs related to the NAPW and PDN Network during the three months ended June 30, 2020 and 2019 was $23,000 and $28,000. During the six months ended June 30, 2020 and 2019, total incremental direct costs related to the NAPW and PDN Network was $52,000 and $62,000.

PDN Network sales commission agency commission over service capitalized

–Property and Equipment - Property and equipment is stated at cost, including any cost to place the property into service, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which currently range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The accompanying unaudited condensed consolidatedcost of any assets sold or retired and related accumulated depreciation are removed from the accounts at the time of disposition, and any resulting profit or loss is reflected in income or expense for the period.

Capitalized Technology Costs - In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, the Company capitalizes certain external and internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally not exceeding three years.

Business Combinations - ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements include the accountsidentifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Accounting for acquisitions requires the Company to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company uses its wholly-owned subsidiaries. All significant intercompany balancesbest estimates and transactions have been eliminated in consolidation.

assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

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.

10

Prior to January 1, 2017, when

When conducting its annual goodwill impairment assessment, the Company initially performedperforms 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

Treasury Stock – Treasury stock is recorded at cost as a resultreduction 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 $9,920,305stockholders’ equity in the accompanying condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2017.


balance sheets.

Revenue Recognition– Revenue is recognized when all of the following conditions exist: (1) persuasive evidence of an arrangement exists, (2) services are performed, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.


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 month12-month membership period. At the time of enrollment, membership fees are recorded as deferred revenue and are recognized as revenue ratably over the 12 month12-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.

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.

6

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)

Lead Generation

Professional Diversity Network provides career opportunitiesDeferred Revenue – Deferred revenue includes customer deposits received prior to our registered users. As part of our employmentperforming 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 generationwhich are recognized inas revenue when revenue recognition criteria are met, and membership fees for annual memberships that are collected at the month whentime of enrollment and are recognized as revenue ratably over 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.
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 monthtwelve-month contract for services and as such the revenue for each contract is recognized ratably over its twelve monthtwelve-month term. Event revenue is recognized in the month that the event takes place and e-commerce sales are for one monthone-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:

●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

11
•          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 services

The Company's customers in recruitment services include Starbucks, PNC Bank, and US Dept. of Treasury, among others.

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. PartnerConsumer advertising and marketing solutions revenue is recognized as jobs are posted to their hosted sites.


The Company'sCompany’s partner organizations include NAACP and National Urban League,VetJobs, among others.

7Discontinued Operations

China Operations

On November 25, 2019, PDN China received a Seizure Decision Notice (the “Notice”) from the Yuexiu District Branch of the Police Department of Guangzhou City, the People’s Republic of China. The Notice stated that it is necessary to seize the assets of PDN China in connection with the criminal investigation of alleged illegal public fund raising by Gatewang Group (the “Gatewang Case”), a separate company organized under the laws of the People’s Republic of China (“Gatewang”), with which Mr. Maoji (Michael) Wang, the former Chairman and CEO of the Company (“Michael Wang”) is affiliated, who was subsequently held in custody by the local police department.

In response to such events, on December 12, 2019 the Company’s Board of Directors (the “Board”) established the Special Committee to investigate the situation, and ‎retained the international law firm of King & Wood Mallesons (“KWM”) to assist the Special Committee in connection with the Special Committee’s investigation of the Company’s operations in the People’s Republic of China and related events, ‎ in collaboration with the Company’s external auditor Ciro E. Adams CPA LLC. KWM conducted extensive research into public records in China, and interviewed the relevant divisions of the Public Security Bureau in China and any related witnesses in relation to the operations and specific transactions that had some relationship to the Gatewang entities. On April 16, 2020, based upon the information obtained, the investigation team concluded that it did not find any evidence that the Company or PDN China engaged in any criminal activity of illegal fund raising as alleged against Gatewang.

The Investigation also revealed that three entities and two ‎individuals (the “Payors”), who appeared to be related to Gatewang, collectively paid RMB 14.25 million to PDN China on behalf of ‎EGBT Foundation Ltd., a private placement investor that purchased ‎1,265,823 shares of the Company’s common stock (approximately 11.6%) in September 2019 (the “EGBT Transaction”)‎. To the knowledge of the Investigation team, the bank account holding the proceeds of ‎the EGBT Transaction is still frozen by the Chinese authorities. The seizure of PDN ‎China office by the local police was lifted on March 23, 2020. These funds, approximately $2.89 million dollars (USD) continue to be subject to the PRC government’s jurisdiction. If the source of funds is actually (or perceived to be) connected to Gatewang, the Chinese authorities may not unfreeze PDN China’s bank account. If and when the bank account is unfrozen, the Company will consider whether the EGBT Transaction needs to be unwound or further documented to be in full compliance with applicable law.

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)12

The Company’s operations in China have been suspended since December 2019. On March 4, 2020 the Board decided to discontinue all of the Company’s operations in the People’s Republic of China, namely PDN (China) International Culture Development Co. Ltd.‎, a wholly owned subsidiary of ‎the Company, Jiangxi PDN Culture Media Co., Ltd. (“PDN Jiangxi”), a variable interest entity ‎‎controlled by of the Company‎, and the joint venture between PDN Jiangxi, Guangzhou ‎Zengcheng District Zhili Education ‎Training Center, and Guangzhou Angye Education ‎Consulting Co. Ltd.‎

All historical operating results for the Company’s China operations are included in a loss from discontinued operations, net of tax, in the accompanying statement of operations. For the three and six months ended June 30, 2020, loss from discontinued operations was approximately ($58,000) and ($127,000), compared to a loss from discontinued operations of ($382,000) and ($737,000) for the three and six months ended June 30, 2019.

Assets and liabilities of China operations are now included in current assets and long-term assets from discontinued operations, and current liabilities and long-term liabilities from discontinued operations. As of June 30, 2020, current assets from discontinued operations were approximately $4,000, compared to approximately $76,000 as of December 31, 2019, and long-term assets from discontinued operations were approximately $2,847,000 at June 30, 2020, compared to approximately $3,109,000 as of December 31, 2019. As of June 30, 2020, current liabilities from discontinued operations were approximately $323,000, compared to approximately $564,000 as of December 31, 2019.

Operating Results of Discontinued Operations

The following table represents the components of operating results from discontinued operations, as presented in the statements of operations and comprehensive loss for the three and six months ended June 30, 2020 and 2019:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
             
Revenues $-  $2,305  $-  $41,483 
                 
Cost of Sales  7,787   13,027   15,143   29,625 
Depreciation and amortization  1,676   4,207   1,676   8,446 
Sales and marketing  80,425   69,424   105,114   154,404 
General and administrative  (37,620)  300,251   -   583,299 
Non-operating (expense) income  (5,553)  9,811   (5,553)  4,261 
Loss from discontinued operations before income tax  (57,821)  (374,793)  (127,486)  (730,030)
Income tax expense  -   7,383   -   7,383 
Net loss from discontinued operations $(57,821) $(382,176) $(127,486) $(737,413)

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 SeptemberJune 30, 20172020 and 2016,2019, the Company incurred advertising and marketing expenses of approximately $658,000$179,691 and $657,000, respectively.$98,419. For the ninesix months ended SeptemberJune 30, 20172020 and 2016, the Company incurred2019, advertising and marketing expenses of approximately $2,246,000were $337,343 and $1,842,000, respectively.$235,347. These amounts are included in sales and marketing expenses in the accompanying condensed consolidated statements of comprehensive loss.operations.

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents and accounts receivable. The Company places its cash with high credit quality institutions. At Septembertimes, such amounts may be in excess of the FDIC insurance limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant credit risk on the account.

13

Income Taxes - The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement basis and tax basis of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.

ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC 740-20 and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 20172020. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

The Company may be subject to potential income tax examinations by federal or state authorities. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. Management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months. Tax years that remain open for assessment for federal and state tax purposes include the years ended December 31, 2016 therethrough 2019.

The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There were no prepaid advertising expensesamounts accrued for penalties or interest as of June 30, 2020.

Fair Value of Financial Assets and Liabilities - Financial instruments, including cash and cash equivalents, short-term investments and accounts payable, are carried at cost. Management believes that the recorded inamounts approximate fair value due to the accompanying condensed consolidated balance sheets.


short-term nature of these instruments.

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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 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 
Recently Issued

  As of June 30, 
  2020  2019 
       
Warrants to purchase common stock  125,000   153,907 
Stock options  66,126   319,126 
Unvested restricted stock  206,775   66,593 
Total dilutive securities  397,901   539,626 

Recent Accounting Pronouncements


In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (ASU 2019-02): Simplifying the Accounting Standards Update (“ASU”) No. 2014-09,”Revenue from Contracts with Customers,”for Income Taxes which was subsequently modifiedsimplifies the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in August 2015an interim period, and by clarifying and amending existing guidance in order to improve consistent application of and simplify GAAP for other areas of Topic 740. ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date.” As a result, the ASU No. 2014-092019-12 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). The Company will adopt the standard on January 1, 2018, using the full retrospective transition method, which may result in a cumulative-effect adjustment for deferred revenue to the opening balance sheet for 2018 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.

In February 2016, the FASB issued new lease accounting guidance ASU No. 2016-02, “Leases” (“ASU 2016-02”). Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessee‘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.
8
Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards 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 on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. ASU 2016-09 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, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have an impact on the Company’s financial position or results of operations.
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 31, 2018.2020. Early adoption is permitted.permitted, including adoption in an interim period. The Company is currently evaluating the adoption of this pronouncement guidance.

14

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modification and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the potential impact of adopting this guidance.


ASU on its condensed consolidated financial statements.

4. Capitalized Technology

Capitalized technology,Technology, net is as follows:

  
September 30,
2017
  
December 31,
2016
 
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 
Amortization expense of approximately $41,000 and $62,000 for

  June 30,  December 31, 
  2020  2019 
Capitalized cost:        
Balance, beginning of period $2,165,545  $2,163,044 
Additional capitalized cost  3,700   2,501 
Balance, end of period  2,169,245   2,165,545 
         
Accumulated amortization:        
Balance, beginning of period $2,104,740  $1,968,213 
Provision for amortization  10,328   101,448 
Balance, end of period  2,115,068   2,069,661 
Capitalized Technology, net  54,177   95,884 

For the three months ended SeptemberJune 30, 20172020 and 2016, respectively,2019, amortization expense was approximately $3,700 and $25,000, and was approximately $154,000$10,000 and $216,000$51,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively,2019. Amortization of capitalized technology is recorded in depreciation and amortization expense in the accompanying condensed consolidated statements of operations and comprehensive loss.

operations.

9

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)

5. Intangible Assets

Intangible assets, net iswas as follows:

    Gross       
  Useful Lives Carrying  Accumulated  Net Carrying 
June 30, 2020 (Years) Amount  Amortization  Amount 
Long-lived intangible assets:              
Sales Process 10 $2,130,956  $(1,807,075) $323,881 
Paid Member Relationships 5  803,472   (803,472)  - 
Member Lists 5  8,086,181   (8,086,181)  - 
Developed Technology 3  648,000   (648,000)  - 
Trade Name/Trademarks 4  440,000   (440,000)  - 
     12,108,609   (11,784,728)  323,881 
Indefinite-lived intangible assets:              
Trade name            90,400 
Intangible assets, net           $414,281 

15

September 30, 2017 
Useful Lives
(Years)
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net Carrying
Amount
 
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 
Useful Lives
(Years)
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net Carrying
Amount
 
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 

Future annual

    Gross       
  Useful Lives Carrying  Accumulated  Net Carrying 
December 31, 2019 (Years) Amount  Amortization  Amount 
Long-lived intangible assets:              
Sales Process 10 $2,130,956  $(1,768,971) $361,985 
Paid Member Relationships 5  803,472   (803,472)  - 
Member Lists 5  8,086,181   (8,086,181)  - 
Developed Technology 3  648,000   (648,000)  - 
Trade Name/Trademarks 4  440,000   (440,000)  - 
     12,108,609   (11,746,624)  361,985 
Indefinite-lived intangible assets:              
Trade name            90,400 
Intangible assets, net           $452,385 

As of June 30, 2020, estimated amortization expense in future fiscal years is summarized as follows:


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 
Amortization expense of $714,000 and $717,000 for

Year ended December 31,   
Remaining of 2020 $38,103 
2021  76,207 
2022  76,207 
2023  76,207 
2024 and thereafter  57,157 
  $323,881 

For the three months ended SeptemberJune 30, 20172020 and 2016, respectively,2019, amortization expense was approximately $19,000 and $2,148,000 and $2,151,000 for$183,000. For the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively,2019, amortization expenses was $38,000 and $366,000. Intangible amortization expense is recorded in depreciation and amortization expense in the accompanying statements of operations.

6. Revolving Credit Facility – Related Party

On November 16, 2018, the Company entered into a revolving credit facility agreement with GNet Tech Holdings Public Limited Company (GNet), “), under which we can draw up to GBP £1,500,000 (approximately $2,000,000). Interest is payable on any outstanding principal balance at a rate equal to the LIBOR rate plus 4%. Amounts drawn under this facility are payable at the end of one, three, or six months periods at the election of the Company. On January 14, 2019, the Company drew $293,000 under this facility and repaid it on June 7, 2019. On May 31, 2020, the revolving credit facility expired and the Company did not renew this credit facility.

7. Loan

The CARES Act was enacted on March 27, 2020. Among the provisions contained in the CARES Act was the creation of the Paycheck Protection Program (“PPP”) that provides for under the Small Business Administration (“SBA”) Section 7(a) loans for qualified small businesses. PPP loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves, rent, utilities and interest on certain other outstanding debt. The amount that will be forgiven will be calculated in part with reference to the Company’s full-time headcount during the eight-week period following the funding of the PPP loan. The Company applied for the PPP loan and on May 5, 2020, the Company received total proceeds of $651,077 from the SBA. In accordance with the loan forgiveness requirements under the CARES Act, the Company intends to use the proceeds from the PPP Loan primarily for payroll costs, rent and utilities.

The Company will be applying for loan forgiveness during the third quarter of 2020 and anticipates that 100% of the PPP Loan will be forgiven by the SBA. Until such time as the PPP Loan is fully or partially forgiven, the Company has recorded the receipts under the PPP Loan as a short-term and long-term loan in its condensed consolidated statements of operations and comprehensive loss.

10
balance sheets.

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)16

6.

8. Accrued Liabilities

As of June 30, 2020 and December 31, 2019, accrued liabilities consisted of the following:

  As of 
  June 30,  December 31, 
  2020  2019 
       
Litigation reserve $1,246,002  $348,000 
Accrued payroll  137,193   72,166 
Accrued legal fees  80,208   69,896 
Accrued Board of Director fees  57,378   50,364 
Accrued revenue sharing agreements  49,939   43,844 
Other  63,069   69,899 
Total accrued liabilities $1,633,789  $654,169 

9. Commitments and Contingencies

Lease Obligations– - The Company leases office space and equipment under various operating lease agreements, including an office for its corporate 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 $268,000

As of June 30, 2020, right of use assets were $14,326 and $258,000 for the three months ended September 30, 2017 and 2016, respectively, and approximately $811,000 and $808,000 for the nine months ended September 30, 2017 and 2016, respectively, is included in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss. Included in rent expense is sublease incomecurrent lease obligations were $16,016.

PDN China’s bank account with balance of approximately $96,000 and $90,000 for$2.89 million was frozen by Guangzhou Police due to 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.

Legal Proceedings

Gatewang Case. The Company has previously disclosed that itclassified this entire cash balance as a long-term asset 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 filedis classified 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.discontinued operations.

The amount of back pay and other potential liabilities ordered by NLRB is $146,000.Legal Proceedings


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.

In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of a claimto assert claims against the Company.  The letter allegesCompany in excess of $2 million based on White Winston’s contention that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay indelayed White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30, 2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No. 18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed with the court on Monday, March 25, 2019. This motion was not granted. We have since then substantially completed all of the discovery process and will begin expert witness disclosures. The Company denies liability for all claims and has entered into settlement negotiations.

17

NAPW is a defendant in a Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018, with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord has obtained a judgment against NAPW in the amount of $746,142.41. As a result of the judgement order, the Company recorded a $780,000 litigation settlement reserve in the second quarter of 2020, which reflected the judgement order in addition to imputed interest costs and legal fees. NAPW is currently negotiating a settlement with the Landlord.

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 on June 20, 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 such claim.

liability and intends to vigorously defend against these claims. The matter is in the final stages of discovery and we have completed depositions of relevant witnesses. During the first quarter of 2020, the Company recorded a $450,000 litigation settlement reserve in the event of an unfavorable outcome in this proceeding. The Company is engaged in settlement discussions.

We are also generally subject to legal proceedings and litigation arising in the ordinary course of business.

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.

10. CFL Transaction


On January 13, 2017,August 12, 2016, the Company entered into a stock purchase agreement (the “Purchase Agreement”), with Cosmic Forward Ltd. (“CFL”), pursuantCFL, a Republic of Seychelles company wholly-owned by a group of Chinese investors. Pursuant to which,the Purchase Agreement, the Company agreed to issue and sell to CFL (the “Second Share Issuance”“Share Issuance and Sale”), 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, 312,500a number of shares of the Company’s common stock. stock, par value $0.01 per share (the “Common Stock”), such that CFL will hold shares of Common Stock equal to approximately 51% of the outstanding shares of Common Stock, determined on a fully-diluted basis, after giving effect to the consummation of the transactions contemplated by the Purchase Agreement, including the Tender Offer described below (the “CFL Transaction”).

On January 18, 2017,November 7, 2016, the Company consummated the Second Share Issuance. AsIssuance and Sale of 1,777,417 shares of its common stock to CFL at a resultprice of $9.60 per share, pursuant to the terms of the completionPurchase Agreement, dated August 12, 2016. In addition, on November 7, 2016, the Company completed the purchase of the Second Share Issuance, as of January 18, 2017, CFL beneficially owned 54.64% of the Company’s outstanding312,500 shares of its common stock onat a fully diluted basis.

11
Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)
price of $9.60 per share, net to the seller in cash, pursuant to the Tender Offer. The Company received total gross proceeds of $3,000,000 from the Second Share Issuance, or approximately $2,821,000$9,000,000 in net proceeds from the Share Issuance and Sale, after the payment for the shares repurchased in the Tender Offer, the repayment of all amounts outstanding under the Master Credit Facility and the 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 SecondCFL Transaction, the Company entered into a Stockholders’ Agreement, dated November 7, 2016 (the “Stockholders’ Agreement”) with CFL and each of its shareholders: Maoji (Michael) Wang, Jingbo Song, Yong Xiong Zheng and Nan Kou (the “CFL Shareholders”). The Stockholders’ Agreement sets forth the agreement of the Company, CFL and the CFL Shareholders relating to board representation rights, transfer restrictions, standstill provisions, voting, registration rights and other matters following the closing of the Share Issuance and as contemplatedSale (see Note 13).

On November 15, 2019, CFL purchased additional 1,142,857 shares of the Company’s common stock for $1.75 per share for gross proceeds of $2,000,000 from an existing shareholder.

18

11. Stockholders’ Equity

Preferred Stock – The Company has no preferred stock issued. The Company’s amended and restated certificate of incorporation and amended and restated bylaws include provisions that allow the Company’s Board of Directors to issue, without further action by the Purchase Agreement,stockholders, up to 1,000,000 shares of undesignated preferred stock.

Common Stock – The Company has one class of common stock outstanding with a total number of shares authorized of 45,000,000. As of June 30, 2020, the Company had 11,338,359 shares of common stock outstanding.

On March 22, 2020, the Company entered into an amendment, dated asagreement with Malven Group Limited, a company established under the laws of January 18, 2017 (the “Amendment”), to the Stockholders’ AgreementBritish Virgin Islands, in connection with CFL and the CFL shareholders. The Amendment increased the cap on the amountpurchase 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 any1,939,237 shares of common stock from 51% of the then outstanding sharesCompany at a price of common stock, on a fully-diluted basis, to 54.64%$0.7735 per share for gross proceeds of $1,500,000. The closing of the then outstanding sharestransaction took place on March 30, 2020.

On June 26, 2020, the Company entered into a second agreement with Malven Group Limited, in connection with the purchase of common stock, on a fully-diluted basis. The Amendment also clarifies that the 312,500 shares of common stock purchasedof the Company at a price of $3.20 per share for gross proceeds of $1,000,000. The closing of the transaction took place on June 29, 2020, however, all the proceeds from this sale were not received until July 24, 2020. The resulting increase in Stockholders’ Equity from this stock sale is reflected when the proceeds were received. See Note 15. Subsequent Events.

12. 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 from 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 CFL300,000 shares, which the Company’s stockholders approved and ratified on November 8, 2018. The Company is now authorized to issue 915,000 shares under the amended 2013 Plan.

Stock Options

The fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. The valuation determined by the Black-Scholes pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The risk free rate is based on the U.S. Treasury rate for the expected life at the time of grant, volatility is based on the average long-term implied volatilities of peer companies, the expected life is based on the estimated average of the life of options using the simplified method, and forfeitures are estimated on the date of grant based on certain historical data. The Company utilizes the simplified method to determine the expected life of its options due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.

19

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2020 and 2019:

        Weighted Average    
     Weighted  Remaining    
     Average  Contractual  Aggregate 
  Number of  Exercise  Life  Intrinsic 
  Options  Price  (in Years)  Value 
Outstanding - January 1, 2020  295,793  $8.88   7.5  $- 
Granted  30,000   3.69   10.0     
Exercised  -   -   -     
Forfeited  (259,667)  9.21   -     
Outstanding - June 30, 2020  66,126  $5.24   8.8  $- 
                 
Exercisable at June 30, 2020  26,126  $8.18   7.5  $- 

     Weighted  Weighted Average    
     Average  Remaining Contractual  Aggregate 
  Number of  Exercise  Life  Intrinsic 
  Options  Price  (in Years)  Value 
Outstanding - January 1, 2019  499,439  $6.94  $9.0  $- 
Granted  30,000   2.23   -     
Exercised  -   -   -     
Forfeited  (210,313)  3.98   -     
Outstanding - June 30, 2019  319,126  $8.44   8.1  $8,400 
                 
Exercisable at June 30, 2019  252,459  $9.97   7.8  $2,800 

The fair value of stock options granted during the six months ended June 30, 2020 were estimated on the date of grant using the Black-Scholes option pricing model. The fair value of stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of share options were estimated using the following assumptions:

  Six Months Ended 
  June 30, 2020 
Expected dividend yield  - 
Risk-free interest rate  0.33%
Expected volatility  111.55%
Expected term (in years)  5.75 
Grant-date fair value of stock options awarded $3.03 

During the six months ended June 30, 2020, vested stock options of 259,667 with a weighted average exercise price of $9.21 were forfeited. Total unrecognized pre-tax stock-based compensation expense related to unvested stock options at June 30, 2020 was $102,297, which is expected to be recognized through the second quarter of 2023.

Warrants

As of June 30, 2020 and December 31, 2019, 125,000 warrants were outstanding and exercisable with an exercise price of $20.00 per share. The aggregate intrinsic value was $0 and the warrants are scheduled to expire on December 27, 2021.

20

Restricted Stock

As of June 30, 2020 and 2019, the following is a summary of restricted stock activity:

Number of
Shares
Outstanding - January 1, 202027,319
Granted306,775
Forfeited-
Vested(127,319)
Outstanding - June 30, 2020206,775

Number of
Shares
Outstanding - January 1, 201960,651
Granted47,568
Forfeited(13,865)
Vested(27,761)
Outstanding - June 30, 201966,593

During the six months ended June 30, 2020, 127,319 in restricted stock units vested. During the six months ended June 30, 2020, 306,775 restricted stock units were granted, of which 100,000 restricted stock units vested upon date of grant.

Additionally, the Company recorded non-cash pre-tax stock-based compensation expense of $374,397 and $72,570 for the six months ended June 30, 2020 and June 30, 2019, as a component of general and administrative expenses in the Second Share Issuance are subjectaccompanying statements of operations, pertaining to allrestricted stock.

Total unrecognized pre-tax stock-based compensation expense related to unvested restricted stock at June 30, 2020 was $757,603 and is expected to be recognized through the second quarter of 2022.

13. Income Taxes

The Company’s quarterly income tax provision is based upon an estimated annual income tax rate. The Company’s quarterly provision for income taxes also includes the restrictions containedtax impact of discrete items, if any, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the Stockholders’ Agreement, as amended. All other terms and conditions of the Stockholders’ Agreement remaininterim period in full force and effect and were ratified and affirmed by the parties in the Amendment.


8. Employment Agreements

Katherine 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 Taxes
The effective income tax rate forthey occur.

During the three months ended SeptemberJune 30, 20172020 and 2016 was 7.9%2019, the Company recorded a benefit for income tax from continuing operations of $12,512 and 32.9%, respectively, resulting$10,236. For the six months ended June 30, 2020 and 2019, the Company recorded a benefit for income tax of $18,421 and $75,869. The increase in a $213,000 and $624,000 income tax benefit respectively. during the current period was primarily due to an increase in discrete tax item associated with stock-based compensation expense in addition to a reduction in our valuation allowance

The effective income tax rate for the nine months ended Septembervaluation allowance at June 30, 2017 and 20162020 was 6.2% and 25.7%, respectively, resulting in a $1,160,000 and $1,218,000 income tax benefit, respectively.approximately $8,263,000. The differencenet change in the effective income tax rate forvaluation allowance during the three months ended SeptemberJune 30, 2017, 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 the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, is mainly attributable to the impairment charge recognized on NAPW’s goodwill and the change in the valuation allowance.2020 was an increase of approximately $562,000. 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 valuation allowance as of SeptemberJune 30, 2017 and December 31, 2016.2020.

21

The Company has not provided deferred income taxes

14. Segment Information

Beginning on the undistributed earnings of its foreign subsidiaries. The amount of such earnings was insignificant. These earnings have been permanently reinvested andMay 26, 2018, 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.

12
Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)

10. 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 by 390,000 shares, which the Company’s stockholders approved on June 26, 2017. The Company is now authorized to issue 615,000 shares under the amended 2013 Plan.

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2017:
  
Number of
Options
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life
(in Years)
  
Aggregate
Intrinsic
Value
 
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  $- 
The Company granted 210,000 and 30,000 stock options to Messrs. Wang and Xiao, respectively, in connection with their employment agreements. These options had an aggregate fair value of $1,060,800, using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate2.13%
Expected dividend yield0.00%
Expected volatility41.78%
Expected term5.5 years
The options are exercisable at an exercise price of $10.72 per share over a ten-year term and vest over two years, with one-third vested upon grant. The Company recorded $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 of general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive loss pertaining to stock options.

Total unrecognized compensation expense related to unvested stock options at September 30, 2017 amounts to approximately $501,000 and is expected to be recognized over a remaining weighted average period of 1.4 years.
Warrants

As of September 30, 2017, 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, 2017 and December 31, 2016 was 3.6 and 4.3 years, respectively, and the aggregate intrinsic value was 0.

The Company did not grant any warrants to purchase shares of common stock during the nine months ended September 30, 2017.

No compensation cost was recognized for the three and nine months ended September 30, 2017 and 2016 pertaining to warrants.
13
Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)

Restricted Stock and Restricted Stock Units

On June 26, 2017, the Company granted 15,544 restricted stock units (“RSUs”) to certain Board members. The RSUs vest 100% on June 28, 2018, 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 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 summary of the restricted stock award activity for the nine months ended September 30, 2017 is as follows:
Number of
Shares
Unvested Outstanding at December 31, 20162,778
Granted15,544
Forfeited-
Vested-
Unvested Outstanding at September 30, 201718,322
The 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. 
Total unrecognized compensation expense related to unvested restricted stock and unvested restricted stock units at September 30, 2017 amounts to approximately $108,000 and is expected to be recognized over a weighted average period of 0.6 year.
11. Segment Information

Beginning in January 2017, the Company operatesoperated in the following segments: (A) United States: (i) PDN Network and (ii) NAPW Network, and (iii) Noble Voice operations, and (B) China Operations.Operations, and (C) Corporate Overhead. The segments are categorized based on their business activities and organization. PriorOn March 4, 2020, the Company’s Board of Directors decided to January 2017,suspend all China operations. As of December 31, 2019, the Company operated solely in the United States in the following segments: (i) PDNNAPW Network, (ii) NAPWPDN Network and (iii) Corporate Overhead. Accordingly, all financial results for Noble Voice operations. and China Operations have been reclassified from the Company’s reportable segments to discontinued operations for all periods presented.

The following tables present key financial information of the Company’s reportable segments as of June 30, 2020 and December 31, 2019 and for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016:


  Three Months Ended September 30, 2017 
  United States       
  
PDN
Network
  
NAPW
Network
  Noble Voice  
China
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 
2019:

  Three Months Ended June 30, 2020  Six Months Ended June 30, 2020 
  PDN  NAPW  Corporate     PDN  NAPW  Corporate    
  Network  Network  Overhead  Consolidated  Network  Network  Overhead  Consolidated 
Membership fees and related services $-  $353,408  $-  $353,408  $-  $737,239  $-  $737,239 
Recruitment services  572,233   -   -   572,233   1,138,920   -   -   1,138,920 
Products sales and other  -   1,899   -   1,899   -   3,330   -   3,330 
Consumer advertising and marketing solutions  24,290   -   -   24,290   54,638   -   -   54,638 
Total revenues  596,523   355,307   -   951,830   1,193,558   740,569   -   1,934,127 
Loss from continuing operations  (82,526)  (370,196)  (1,346,391)  (1,799,113)  (232,550)  (438,306)  (2,557,261)  (3,228,117)
Depreciation and amortization  11,835   36,013   -   47,848   26,510   73,339   -   99,849 
Income tax benefit  (121)  (2,201)  (10,190)  (12,512)  (1,072)  (2,608)  (14,741)  (18,421)
Net loss from continuing operations  (76,855)  (367,995)  (1,336,201)  (1,781,051)  (225,264)  (435,698)  (2,542,520)  (3,203,482)

  As of June 30, 2020 
Goodwill $339,451  $-  $-  $339,451 
Intangibles assets, net  90,400   323,881   -   414,281 
Assets from continuing operations  2,103,830   1,197,336   -   3,301,166 
                 

  Three Months Ended June 30, 2019  Six Months Ended June 30, 2019 
  PDN  NAPW  Corporate     PDN  NAPW  Corporate    
  Network  Network  Overhead  Consolidated  Network  Network  Overhead  Consolidated 
Membership fees and related services $-  $633,914  $-  $633,914  $-  $1,428,453  $-  $1,428,453 
Recruitment services  651,046   -   -   651,046   1,125,306   -   -   1,125,306 
Products sales and other  -   1,143   -   1,143   -   3,955   -   3,955 
Consumer advertising and marketing solutions  38,059   -   -   38,059   73,775   -   -   73,775 
Total revenues  689,105   635,057   -   1,324,162   1,199,081   1,432,408   -   2,631,489 
Loss from continuing operations  (19,545)  (44,245)  (699,973)  (763,763)  (191,021)  (151,976)  (1,287,948)  (1,630,945)
Depreciation and amortization  15,891   201,443   -   217,334   31,632   402,885   -   434,517 
Income tax benefit  24,110   (1,037)  (33,309)  (10,236)  10,975   (9,166)  (77,678)  (75,869)
Net loss from continuing operations  320,814   (43,208)  (666,664)  (389,058)  159,890   (142,810)  (1,210,270)  (1,193,190)

  As of December 31, 2019 
Goodwill $339,451  $-  $-  $339,451 
Intangibles assets, net  90,400   361,985   -   452,385 
Assets from continuing operations  2,151,734   1,254,693   -   3,406,427 

1415. Subsequent Events

On June 26, 2020, the Company entered into a second agreement with an institutional investor for the sale of 312,500 shares of common stock of the Company at a price of $3.20 per share for net proceeds of $1,000,000. The closing of this transaction took place on June 29, 2020, however, all the proceeds from this sale were not received until July 24, 2020. 

On July 27, 2020, the Company entered into a Securities Purchase Agreement with three institutional accredited investors. The Company sold 1,481,484 shares of its common stock at a per share price of $1.35 and received net proceeds of $1,814,353 on July 27, 2020.

Net proceeds from common stock sales received in July 2020:   
June 29, 2020, stock sale $1,000,000 
July 27, 2020, stock sale  1,814,353 
Total $2,814,353 

The resulting increase in Stockholders’ Equity from this stock sale is reflected in the financial statements when the proceeds are received.

With the receipt of the above net proceeds, the Company has regained compliance with NASDAQ listing requirements. NASDAQ will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement, and, if at the time of its next periodic report the Company does not evidence compliance, the Company may be subject to delisting.

Professional Diversity Network, Inc.
Condensed Consolidated Notes to Financial Statements (Unaudited)22

  Nine Months Ended September 30, 2017 
  United States       
  
PDN
Network
  
NAPW
Network
  Noble Voice  
China
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 
  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  
NAPW
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  
NAPW
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)

15ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Professional 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. 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. The Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

16

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless we specify otherwise, all references in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to the “Company,” “we,” “our,” and “us” refer to Professional Diversity Network, Inc. and its consolidated subsidiaries.  The following discussion and analysisBasis of our financial condition and results of operationsPresentation

This MD&A should be read in conjunction with ourthe accompanying condensed consolidated financial statements and the related notes thereto, and the audited consolidated financial statements and notes thereto included in Item 1, “Financial Statements,”our 2019 Form 10-K.

Forward-looking statements in Part Ithis MD&A are not guarantees of this Quarterly Report.  This discussion contains forward-looking statements, which are based on our assumptions about the future of our business.  Ourperformance and may involve risks and uncertainties that could cause actual results will likelyto differ materially from those contained inprojected. Refer to the forward-looking statements.  Please read “Special Note Regarding Forward-Looking“Forward-Looking Statements” section of this MD&A and Item 1A. Risk Factors of our 2019 Form 10-K for additional information regarding forward-looking statements used in this Quarterly Report.

a discussion of these risks and uncertainties.

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 currently operate in fourtwo business segments: (i) Professional Diversity Network (“(“PDN Network ”)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, and (ii) National Association of Professional Women (“(“NAPW Network ”)Network”), a women-only professional networking organization, (iii) Noble Voice operations (“ Noble Voiceorganization. ”), a career consultation and lead generation service, and (iv) China operations ( “China Operations” ), which focus on providing tools, products and services in China which will assist women, students and business professionals in personal and professional development.


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 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; and (iii) we help employers address their workforce diversity needs by connecting them with the right candidates;candidates.

Impact of COVID-19

During the second quarter of 2020, the outbreak of the novel coronavirus (COVID-19) continued to result in disruptions to our business and (iv)operations. In March 2020, we leveragebegan to experience reductions in new memberships and enrollment renewals due to COVID-19 as customers deferred our U.S. expertiseservices due to financial and China connections to deliver these values to China,economic concerns and this trend continued into the world’s fastest-growing market. 

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 careerssecond quarter. Additionally, revenues associated with our Chinese executives’ expertiseevents business were cancelled due to social distancing measures currently in place as well as travel restrictions. We have transitioned out events business to online events for the China market will provide us with an opportunity for success with our overseas expansion.  Duringremainder of the first two quarters of 2017,year and we held sevenhave seen positive results from the 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 in terms of 2017, we heldenrollment and sponsorship. We anticipate that there will continue to be a selective marketing event to introduce IAW,general business and customer financial uncertainty for the PDN China women’s networking business.
In the third quarter of 2017, IPDN China began to transact IAW memberships in China, ranging from RMB 20,000 to RMB200,000 (Approximately $3,000 to $30,000 annual memberships). 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, IPDN China finalized plans and secured commitments to hold its largest education and training eventremainder of the year. The eventyear, which may negatively impact new and existing customers and will be held on December 2, 2017continue to result in Beijing, China, “The International Capital Leadership Summit”. Mr. Bruce Aust, Vice Chairman of the Nasdaq Exchange will be featured at the event.
Through the third quarter of 2017, our PDN Network, NAPW Network, Noble Voicea reduction in expected revenues and China Operations businesses represented 14.1%, 49.3%, 30.7% and 5.9% of our revenues, respectively.  As of September 30, 2017, we had approximately 10.0 million registered usersan increase in our PDN Network; approximately 952,000 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. Weoperating costs. However, we believe that our existing cash balances will provide us the combination of our solutions allows usnecessary capital to approach recruiting and professional networking in a unique way and thus create enhanced value for our members and customers.
navigate the COVID-19 pandemic.

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Sources of Revenue

We generate revenue from (i) paid membership subscriptions and related services, (ii) lead 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.

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Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  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%

Paid Membership Subscriptions and Related 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% and 98.6%, respectively,

As part of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2017 and 2016, and 98.8% and 96.0%, respectively, for the nine months ended September 30, 2017 and 2016.


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 saleslaunch of data not usedIAW in the lead generation process.  Lead generation sales represented 100%United 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 thenew members registering, membership revenue attributableis received on a monthly rather than an annual basis. The new IAW is focused on delivering member benefits and providing value to the Noble Voice business segment for the three and nine months ended September 30, 2017 and 2016.

those who join as paid members.

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 ”)”) our OFCCP compliance product, which combines diversity recruitment advertising with job postings and compliance services.  Recruitment advertising revenue constituted approximately 91.4% and 95.0%, respectively, of revenue attributable to the PDN Network business segment for the three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2017 and 2016, recruitment advertising revenue constituted approximately 91.3% and 92.8%, respectively, of the revenue attributable to the PDN Network business segment.

Product Sales. We offer to new purchasers of our NAPW Network memberships the opportunity to purchase up to twoa commemorative wall plaquesplaque at the time of membership purchase. Product sales represented approximately 0.8% and 1.4%, respectively, of revenue attributableThey may purchase up to the NAPW Network business segment for the three months ended September 30, 2017 and 2016, and 1.2% and 4.0%, respectively, of revenue attributable to the NAPW Network business segment for the nine months ended September 30, 2017 and 2016.

two plaques at that time.

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 100% of the revenue attributable to China Operations for the three months ended September 30, 2017.  Because China Operations first began in March of 2017 there is no period-over-period comparison.


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 ability to post recruitment advertising and job openings. We generate revenue from fees charged for those postings.  Consumer advertising and marketing solutions represented approximately 8.6% and 5.0%, respectively, of the revenue attributable to the PDN Network business segment for the three months ended September 30, 2017 and 2106. For the nine months ended September 30, 2017 and 2016, consumer advertising and consumer marketing solutions revenue constituted approximately 8.7% and 7.2%, respectively, of the revenue attributable to the PDN Network business segment.

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Cost of Revenue

Cost of revenue primarily consists of 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. Costs of producing wall plaques, hosting member conferences and local chapter meetings are also included in the cost of revenue for NAPW Network.

Financial Overview

During the quarter and nine months ended September 30, 2017, we experienced losses as we continued our efforts to integrate new management and China Operations, reduce costs and streamline our business. For the three months ended September 30, 2017, we realized a net loss of approximately $2,489,000, a $1,216,000 increase from the comparable prior year period.  This increase in net loss 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 $788,000 in overall sales and marketing expenses. For the nine months ended September 30, 2017, we realized a net loss of approximately $17,666,000, a $14,147,000 increase from the comparable prior year period.  This increase in net loss is primarily related to goodwill impairment charge of $9,920,000, the decrease in membership fees and related services revenue, an increase in stock-based compensation, and an increase in legal expenses.

Recent Events
On 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.

Key Metrics
We believe that one of the key metrics in evaluating and measuring our performance is the number of registered users or members. We offer free memberships and in our NAPW segment we also offer a paid membership, one that provides a greater level of services and networking potential. The vast majority of our registered users are non-paid members. We define a registered user as an individual job seeker 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 her with employers and/or jobs (“PDN Network registered user”).  We believe that a higher number of registered users will result in increased sales of our products and services, as employers will 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 Network member”). 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 Members will result in increased conversions to Paid Members, which will further translate into increased revenues through membership subscriptions. 

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:
 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%
(1)
The number of registered users may be higher than the number of actual users due to various factors.  For more information, see “Risk Factors—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, 2016 (the “Annual Report”).
(2)Includes both Paid Members and Unpaid Members.
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Non-GAAP Financial Measure

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.

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The following table provides a reconciliation of Net Lossnet loss from continuing operations to Adjusted EBITDA for the three and six months ended June 30, 2020 and 2019, the most directly comparable GAAP measure reported in our consolidated financial statements:

  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 June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
  (in thousands)  (in thousands) 
Loss from Continuing Operations $(1,781) $(389) $(3,203) $(1,193)
Stock-based compensation  378   90   398   99 
Litigation settlement reserve  258   -   708   - 
Depreciation and amortization  48   217   100   435 
Interest expense  -   12   -   14 
Interest and other income  (6)  (376)  (6)  (376)
Income tax benefit  (13)  (10)  (18)  (76)
Adjusted EBITDA $(1,116) $(456) $(2,021) $(1,097)

Results of Operations

Revenues


Total Revenues

The following tables set forth our revenuesrevenue for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 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)%
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 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 June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Revenues:                
Membership fees and related services $354  $634  $(280)  -44.2%
Recruitment services  572   651   (79)  -12.1%
Products sales and other  2   1   1   100.0%
Consumer advertising and marketing solutions  24   38   (14)  -36.8%
Total revenues $952  $1,324  $(372)  -28.1%

Total revenues decreased $1,939,000,$372,000, or 30.5% for28.1%, from $1,324,000 during the three months ended SeptemberJune 30, 2017, compared2019, to $952,000 during the same prior year period, and $5,234,000, or 25.5%, for the ninethree months ended SeptemberJune 30, 2017, compared2020. The decrease was primarily attributable to the same prior year period, due primarily to decreasea $280,000 decline in new membership fees and products salesrelated services revenues in addition to a $79,000 decline in recruitment revenues during the three months ended June 30, 2020. Due to the COVID-19 pandemic, we continued to see a decline in our new membership fees as our customers have delayed new membership enrollment.

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  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Revenues:                
Membership fees and related services $737  $1,428  $(691)  -48.4%
Recruitment services  1,139   1,125   14   1.2%
Products sales and other  3   4   (1)  -25.0%
Consumer advertising and marketing solutions  55   74   (19)  -25.7%
Total revenues $1,934  $2,631  $(697)  -26.5%

Total revenues decreased $697,000, or 26.5%, from $2,631,000 during the management focuses on cost reduction efforts, includingsix months ended June 30, 2019, to $1,934,000 during the reductionsix months ended June 30, 2020. The decrease was primarily attributable to a $691,000 or 48.4% decline in the salesforce.

new membership fees and related services revenues and was primarily attributable to a delay or postponement of existing membership enrollments due to COVID-19.

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.

 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)%
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  Three Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $597  $689  $(92)  -13.4%
NAPW Network  355   635   (280)  -44.1%
Total revenues $952  $1,324  $(372)  -28.1%

During the three months ended SeptemberJune 30, 2017,2020, our NAPWPDN Network generated $2,223,000$597,000 in revenue from membership fees and related services and product sales,revenues compared to $3,801,000 for$689,000 in revenues during the same period in the prior year,three months ended June 30, 2019, a decrease of $1,578,000,$92,000 or 41.5%.  During the nine months ended September 30, 2017, our NAPW Network generated $7,556,000 in revenue from membership fees and related services and product sales and other, compared to $13,592,000 for the same period in the prior year, a decrease of $6,036,000, or 44.4%13.4%. The decrease in revenues was mainly attributableprimarily due to reductions ofa decrease in recruitment revenues generated in the NAPW sales staff while the Company 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.

current period.

During the three months ended SeptemberJune 30, 2017,2020, our PDNNAPW Network generated $759,000 in revenue,revenues were $355,000, compared to $1,005,000 for the same period in the prior year, a decreaserevenues of $246,000, or 24.5%. During the nine months ended September 30, 2017, our PDN Network generated $2,166,000 in revenue, compared to $2,472,000 for the same period in the prior year, a decrease of $306,000, or 12.4%. 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$635,000 during Q4 and beyond.

During the three months ended SeptemberJune 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,2019, a decrease of $184,000$280,000 or 11.8%44.1%. The decrease in revenues 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 increase in the first half of 2017primarily 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 $69,000effects of revenue. During the nine months ended September 30, 2017, China Operations generated $899,000 of revenue. During the third quarter of 2017,COVID-19 as new membership enrollment significantly declined as we developed 18 IAW members with total membership fees of $278,000, which we recognize ratably overbelieve that the membership period (ranging from 12services that we provide to 36 months).our customer has turned into a discretionary spending item and the services that we provide were postponed as a result.

  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $1,193  $1,199  $(6)  -0.5%
NAPW Network  741   1,432   (691)  -48.3%
Total revenues $1,934  $2,631  $(697)  -26.5%

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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.


 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)%
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During

  Three Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Cost and expenses:                
Cost of revenues $170  $227  $(57)  -25.1%
Sales and marketing  459   470   (11)  -2.3%
General and administrative  2,074   1,174   900   76.7%
Depreciation and amortization  48   217   (169)  -77.9%
Total cost and expenses: $2,751  $2,088  $663   31.8%

Total costs and expenses increased during the three months ended SeptemberJune 30, 2017, total2020 to $2,751,000 compared to $2,088,000 during the three months ended June 30, 2019. The increase was primarily the result of higher stock-based compensation expense of $280,000 primarily as a result of restricted stock unit awards granted during the second quarter of the current period, a litigation settlement reserve of $258,000, $450,000 in higher legal and accounting fees, partially offset by lower intangible amortization expense of $164,000. The litigation settlement reserve is reflected in our Corporate Overhead segment in general and administrative expenses.

  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Cost and expenses:                
Cost of revenues $343  $410  $(67)  -16.3%
Sales and marketing  984   1,165   (181)  -15.5%
General and administrative  3,735   2,252   1,483   65.9%
Depreciation and amortization  100   435   (335)  -77.0%
Total cost and expenses: $5,162  $4,262  $900   21.1%

Total costs and expenses were $7,133,000,increased during the six months ended June 30, 2020 to $5,162,000 compared to $7,640,000 for same period$4,262,000 during the six months ended June 30, 2019. The increase was primarily the result of litigation settlement reserves of $708,000, $649,000 in higher legal and accounting fees, higher stock-based compensation expense of $299,000, partially offset by a reduction of $476,000 in wages and benefits and lower intangible amortization expense of $328,000 in the prior year,current year.

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.

  Three Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $679  $709  $(30)  -4.2%
NAPW Network  726   679   47   6.9%
Corporate Overhead  1,346   700   646   92.3%
Total cost and expenses: $2,751  $2,088  $663   31.8%

Costs and expenses increased $47,000, or 6.9%, in our NAPW Network segment during the three months ended June 30, 2020 primarily as a result of a $258,000 legal settlement reserve, which was partially offset by lower intangible amortization expense of $164,000 and a $31,000 decrease in personnel costs.

Costs and expenses decreased $30,000, or4.2%, in our PDN Network segment during the three months ended June 30, 2020 primarily due to a $30,000 decrease in cost of $507,000 or 6.6%. The decrease is mainly attributablesales due to $788,000 or 25.7%lower revenues in the current period, a $78,000 decrease in sales and marketing personnel costs, partially offset by a $38,000 increase in general and administrative personnel costs.

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Corporate overhead expenses increased $646,000 during the three months ended June 30, 2020 primarily as a result of $485,000 in higher legal and accounting fees and a $280,000 increase in stock-based compensation expense.

  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $1,426  $1,390  $36   2.6%
NAPW Network  1,179   1,584   (405)  -25.6%
Corporate Overhead  2,557   1,288   1,269   98.5%
Total cost and expenses: $5,162  $4,262  $900   21.1%

Costs and expenses decreased $405,000, or 25.6%, in our NAPW Network segment during the six months ended June 30, 2020 primarily as a result of lower intangible amortization expense mostly due toof $328,000, a $200,000 decrease in personnel costs and a $37,000 reduction in costs of 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 expenseswhich was partially offset by an decreasea $258,000 legal settlement reserve recorded during the second quarter of $226,000 or 7.5%2020.

Costs and expenses increased $36,000 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 toPDN Network segment during 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%
During the ninesix months ended SeptemberJune 30, 2017, total2020 primarily due to higher rent expense of $25,000 and bad debt expense of $49,000, partially offset by lower costs andof revenues of $30,000.

Corporate overhead expenses were $34,150,000, compared to $24,674,000 forincreased $1,269,000 during the same period in the prior year, and increase of $9,476,000, or 38.4%. The increase issix months ended June 30, 2020 primarily as a result of goodwill impairment chargehigher legal and accounting fees of $9,920,000, an increase$681,000, a litigation settlement reserve of $2,395,000 or 26.8%$450,000 recorded in general and administrativethe first quarter of 2020 in addition to $299,000 in higher stock-based compensation expense, which was partially offset by a $200,000 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.


corporate personnel costs.

Operating Expenses

Cost of revenue:revenues: Cost of revenues during the three months ended SeptemberJune 30, 2017 were $658,000, compared to $745,000 for the same period in the prior year,2020 was $170,000, a decrease of $87,000,$57,000, or 11.7%25.1%, from $227,000 during the three months ended June 30, 2019 as a result of lower revenues of $372,000, or 28.1%, which resulted in a corresponding decrease in cost of revenues. Cost of revenues during the six months ended June 30, 2020 was $343,000, a decrease of $67,000, or 16.3%, from $410,000 during the six months ended June 30, 2019. The decrease in costs of revenues was primarily attributable to a $28,000 reduction in facility rent for our career events business and a $19,000 decrease in web hosting fees.

Sales and marketing expense: Sales and marketing expense during the three months ended June 30, 2020 was $459,000, a decrease of $11,000, from $470,000 during the three months ended June 30, 2019. The decrease is mainly attributable to a $78,000 decrease in sales and marketing spending in our PDN Network in the current period, offset by $68,000 in higher branding costs and marketing costs in our NAPW Network. Sales and marketing expense during the six months ended June 30, 2020 was $984,000, a decrease of $181,000, from $1,165,000 during the six months ended June 30, 2019. The decrease was mainly attributable to a decrease of $85,000$227,000 in the PDN segmentpersonnel costs and a decrease of $44,000$34,000 reduction in the Noble Voice segment due to decline in revenue,digital marketing spending, which was partially offset by an increase of $70,000 related to our China Operations that was launched$63,000 in March 2017. Cost of revenues during the nine months ended September 30, 2017 were $2,193,000, compared to $2,434,000 for the same periodhigher branding and marketing costs in the prior year, a decrease of $241,000, or 9.9%, mainly attributable to a decrease of $271,000 in the PDN segment as a result of improved efficiencies in spending,current period

General and a decrease of $221,000 in the Noble Voice segment as a result of improved efficiencies in lead data sourcingadministrative expense: General and spending, partially offset by an increase of $338,000 related to our China Operations that was launched in March 2017.


Sales and marketing expense: Sales and marketing expense administrative expenses during the three months ended SeptemberJune 30, 2017 were $2,276,000, compared to $3,064,000 for the same period in the prior year, a decrease2020 was $2,074,000, an increase of $788,000,$900,000, or 25.7%. Sales and marketing76.7%, from $1,174,000 during the nine months ended September 30, 2017 were $8,115,000, compared to $10,314,000 for the same period in the prior year, a decrease of $2,199,000, or 21.3%. The decreases for the three and nine months ended September 30, 2017 are 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 expense for the three months ended SeptemberJune 30, 20172019. The increase was $3,237,000, compared to $3,011,000 for the same perioda result of a litigation settlement reserve of $258,000 recorded in the prior year,second quarter of 2020, a $450,000 increase in legal and accounting fees and a $280,000 increase in stock-based compensation expense, partially offset by a reduction of $68,000 in personnel costs. General and administrative expenses during the six months ended June 30, 2020 was $3,735,000, an increase of 226,000$1,483,000, or 7.5%.65.9%, compared to $2,252,000 during the six months ended June 30, 2019. The increase was mainly attributable to a $268,000 general and administrative expense related to our China Operations that were launched in March 2017,result of litigation settlement reserves of $708,000, 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$649,000 increase in legal and accounting fees and $299,000 in higher stock-based compensation to independent board directors. Thisexpense, which was partially offset by a $106,000reduction of $177,000 in personnel costs.

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Depreciation and amortization expense: Depreciation and amortization expense during the three months ended June 30, 2020 was $48,000, compared to $217,000 during the three months ended June 30, 2019, a decrease of $169,000, or 77.9%. The decrease was primarily attributable to $164,000 in lower intangible amortization expense due to a $2,796,000 impairment charge recorded in the fourth quarter of 2018 in our NAPW segment. During the six months ended June 30, 2020 and 2019, depreciation and amortization expense was $100,000 and $435,000, respectively, a decrease of $335,000. The decrease was primarily attributable to $328,000 in lower intangible amortization expense.

Income Tax Expense (Benefit)

  Three Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Income tax benefit $(13) $(10) $(3)  30.0%

During the three months ended June 30, 2020 and 2019, we recorded a benefit for income tax of $13,000 and $10,000, respectively. The increase in income tax benefit during the current period was primarily due to an increase in a discrete tax item associated with stock-based compensation expense in addition to a reduction in our valuation allowance.

  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
Income tax benefit $(18) $(76) $58   -76.3%

During the six months ended June 30, 2020 and 2019, we recorded a benefit for income tax of $18,000 and $76,000, respectively. The decrease in credit card feesincome tax benefit during the current period was primarily due to lower sales and lower credit card rates, a $101,000 decrease in legal expenses, an $83,000 decrease in salariestax rates pursuant to the U.S. Tax Cuts 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 periodJobs Act that occurred in the prior year an increase of $2,395,000 or 26.8%. The increase was mainly attributablein addition to a $774,000 increase relatedlower reduction in our deferred tax liabilities in the current year.

Discontinued Operations

In March 2020, our Board decided to oursuspend all China Operations that was launchedoperations generated by the former CEO, Michael Wang. The results of operations for China operations are presented in March 2017,the statements of operation and comprehensive loss as loss from discontinued operations. In May 2018, we sold Noble Voice to a $616,000 increase in legal fees, a $514,000 increase in stock based compensation, a gain on lease cancellationlong-time customer of $424,000 related to the closing of its Los Angeles, CA office recorded in prior year,Company and a $364,000 increase in compensation to independent board directors. This was partially offsetexited the business segment previously conducted by a $253,000 decrease in credit card fees due to lower sales volume,Noble Voice. For the three and a $92,000 decrease in professional fees.six months ended June 30, 2019, results from discontinued operations incudes costs and expenses associated with Noble Voice.

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Litigation settlement: Litigation settlement

The following table presents results from discontinued operations for the three and ninesix months ended September 30, 2017 represents primarily $146,000 expense that was accrued for the potential back-pay related to the “NLRB” legal proceeding (please refer to “Legal Proceedings” for details). Litigation settlement for the nine months ended 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.

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, 2017. 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 during the three2020 and nine months ended September 30, 2016.

2019:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
             
Revenues $-  $2  $-  $41 
                 
Cost of Sales  8   13   15   30 
Depreciation and amortization  2   4   2   8 
Sales and marketing  80   69   105   154 
General and administrative  (38)  300   -   583 
Non-operating (expense) income  (6)  10   (6)  4 
Loss from discontinued operations before income tax  (58)  (374)  (128)  (730)
Income tax expense  -   7   -   7 
Net loss from discontinued operations $(58) $(381) $(128) $(737)

Depreciation and amortization expense

: Depreciation and amortization expense for the three months ended September 30, 2017 was $807,000, compared to $820,000 for the same period in the prior year, a decrease of $13,000 or 1.6%. Depreciation and amortization expense for the nine months ended September 30, 2017 was $2,444,000, compared to $2,498,000 for the same period in the prior year, a decrease of $54,000 or 2.2%. The decrease for the three and nine months ended September 30, 2017 was mainly attributable to a reduction in amortization expense resulting from the amortization of the capitalized technology costs.

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Income Tax Benefit

 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)%

The effective income tax rate for the three months ended September 30, 2017 and 2016 was 7.9% and 32.9%, respectively, resulting in a $213,000 and $624,000 income tax benefit, respectively. The effective income tax rate for the nine months ended September 30, 2017 and 2016 was 6.2% and 25.7%, respectively, resulting in a $1,160,000 and $1,218,000 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 the nine months ended September 30, 2017, compared to the nine months ended September 30, 2017, is mainly attributable to the impairment charge recognized on NAPW’s goodwill and the 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 valuation allowance as of September 30, 2017 and December 31, 2016.
Net Loss
loss

The following table sets forth each operating segment’s net income or loss for the periods presented. The period-to-period comparison is not necessarily indicative of future results.

 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%

  Three Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $(77) $321  $(398)  -124.0%
NAPW Network  (368)  (43)  (325)  755.8%
Corporate Overhead  (1,336)  (667)  (669)  100.3%
Consolidated net loss from continuing operations $(1,781) $(389) $(1,392)  357.8%

  Six Months Ended June 30,  Change  Change 
  2020  2019  (Dollars)  (Percent) 
  (in thousands)       
PDN Network $(225) $160  $(385)  -240.6%
NAPW Network  (436)  (143)  (293)  204.9%
Corporate Overhead  (2,542)  (1,210)  (1,332)  110.1%
Consolidated net loss from continuing operations $(3,203) $(1,193) $(2,010)  168.5%

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As the result of the factors discussed above, during the three and nine months ended September 30, 2017 we incurred $2,489,000 and $17,666,000 respectively, of net losses, an increase (decrease) of 95.5% and 402.0% from net loss of $1,273,000 and $3,519,000 during the three and nine months ended September 30, 2016. The $1,216,000 increase in net loss 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 $788,000 in overall sales and marketing expenses. The $14,147,000 increase in net loss for the nine months ended September 30, 2017 was primarily driven by a decrease of $6,036,000 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 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.

During the three and nine months ended September 30, 2017, we incurred a net loss of $1,528,000 and $14,026,000, respectively, attributable to the NAPW Network segment, compared to net loss of $604,000 and $1,616,000 for the three and nine months ended September 30, 2016, respectively. The increase in net loss 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. The $12,410,000 increase in net loss for the nine months ended September 30, 2017 was primarily driven by a decrease of $6,036,000 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 by a decrease of $2,479,000 in sales and marketing expenses.


During the three months ended September 30, 2017, we incurred a net loss of $218,000, attributable to the PDN Network segment, compared to net loss of $513,000 for the three months ended September 30, 2016, a decrease of $295,000, or 57.5%. The decrease in net loss is 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 decrease in revenues. During the nine months ended September 30, 2017, we incurred a net loss of $1,865,000, compared to net loss of $1,083,000 for the nine months ended September 30, 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, we incurred a net loss of $419,000 and $1,358,000, respectively, attributable to the Noble Voice segment, compared to $156,000 and $820,000 for the three and nine months ended September 30, 2016, respectively. The increase in net loss was primarily attributable to by higher corporate overhead allocation.
Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of SeptemberJune 30, 20172020 and December 31, 2016, respectively,2019:

  June 30,  December 31, 
  2020  2019 
  (in thousands) 
Cash and cash equivalents $859  $634 
Working capital (deficiency) $(2,616) $(2,114)

As of June 30, 2020, we had cash and is intendedcash equivalents of $859,000 compared 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 
cash and cash equivalents of $634,000 at December 31, 2019. Our principal sources of liquidity are our cash and cash equivalents, including the net proceeds from the recent issuances of Common Stock to CFL.common stock. As of SeptemberJune 30, 2017 and2020, we had a working capital deficit of approximately $2,616,000, compared to a working capital deficit of approximately $2,114,000 as of December 31, 2016, we2019. We had working capital (deficiency)an accumulated deficit of approximately $(1,475,000) and $1,000,000.$92,002,000 at June 30, 2020. During the ninesix months ended SeptemberJune 30, 2017,2020, we generated a net loss of approximately $17,665,000 (including a non-cash impairment charge of $9,920,000), used cash infrom continuing operations of approximately $6,454,000, which includes $1,450,000 paid$3,203,000 and used cash from continuing operations of approximately $1,913,000.

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While we have aggressively implemented cost cutting initiatives and have continued our focus on improving our overall profitability though new sales and marking initiatives and through business collaborations, we have continued to LinkedIn related to litigation that was settled in 2016,generate negative cash flows from operations, and we expect that we will continue to generate operatingincur net losses for the foreseeable future.


We are closely monitoringThese conditions raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to further implement our business plan, raise capital, make strategic acquisitions and generate organic growth in revenues from our existing operating costs and capital requirements and have developedsegments. The condensed consolidated financial statements do not include any adjustments that might be necessary if we unable to continue as a going concern.

On March 22, 2020, we entered into an operating plan for 2017. We have had cost reductionsagreement with Malven Group Limited, a company established under the laws of the British Virgin Islands (“Malven”), in connection with the areaspurchase by Malven of staffing levels and operating budgets.

On November 7, 2016, we consummated the issuance and sale of 1,777,4171,939,237 shares of Common Stock to CFL,our common stock at a price of $9.60$0.7735 per share. Weshare for gross proceeds of $1,500,000. The closing of the transaction took place on March 31, 2020.

On June 26, 2020, we entered into a second agreement with Malven Group Limited, in connection with the purchase of 312,500 shares of common stock at a price of $3.20 per share for gross proceeds of $1,000,000. The closing of the transaction took place on June 29, 2020 and we received totalthe funds in July 2020.

On July 27, 2020, we entered into a Securities Purchase Agreement (the “Agreement”) with three institutional accredited investors. Pursuant to the Agreement, we offered and sold 1,481,484 shares of our common stock at a per share price of $1.35 for gross proceeds of approximately $17.1 million from the Share Issuance, or $14.1 million after giving effect$2,000,000 pursuant to the payment for 312,500 shares of Common Stock tenderedour Registration Statement on Form S-3 (Registration Statement No. 333-227249) (the “Transaction”). The Transaction closed on July 29, 2020 and not withdrawn in the Tender Offer. Wewe received approximately $9.0 million in net proceeds from the Share Issuance,of $1,814,353, after repayment of outstanding indebtednessdeducting financial advisory, legal and the payment of transaction-related expenses at the closing.

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On January 18, 2017, we sold 312,500 shares of Common Stock to CFL at a price of $9.60 per share, for total gross proceeds of $3,000,000, or $2,821,000 after giving effect to the payment of transaction-related expenses.

escrow related fees.

We currently anticipate that our available funds and cash generatedflow from operations will may not be sufficient to meet our working capital requirements through November of 2018.  Since the Company expects that it will continue to generate operating losses for the mid-term,twelve months subsequent to the Company mayissuance of our financial statements. In order to fund our operations, we will need to increase revenues or raise capital by the issuance of common stock. However, there can be no assurances that our business plans and actions will be successful, that we will generate anticipated revenues, or that unforeseen circumstances similar to COVID-19 will not require additional funding sources in the future or need to further decrease expenses in ordereffectuate 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.


We collect 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 monthtwelve-month period. Starting January 2, 2018, we also offer a monthly membership for IAW USA for which we collect a fee on a monthly basis. Our PDN Network also sells recruitment services to employers, generally on a one yearone-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, corporatefunds.

  Six Months Ended June 30, 
  2020  2019 
  (in thousands) 
Cash (used in) provided by continued operations        
Operating activities $(1,913) $(1,482)
Investing activities  (7)  (3)
Financing activities  2,151   1,798 
Effect of exchange rate fluctuations on cash and cash equivalents  (50)  14 
Cash provided by (used in) discontinued operations        
Operating activities  44   406 
Net increase in cash and cash equivalents $225  $733 

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Cash and municipal debtCash Equivalents

The Company considers cash and U.S. governmentcash equivalents to include all short-term, highly liquid investments that are readily convertible to known amounts of cash 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)

have original maturities of three months or less.

Net Cash Used in Operating Activities


For the nine months ended September 30, 2017, net

Net cash used in operating activities from continuing operations during the six months ended June 30, 2020 was $6,454,000.$1,913,000. We had a net loss from continuing operations of $17,665,000,$3,203,000 during the six months ended June 30, 2020, which included a deferred income tax benefitnon-cash litigation settlement reserve of $1,160,000, which was offset by non-cash NAPW goodwill impairment charge$708,000, stock-based compensation expenses of $9,920,000,$398,000 and depreciation and amortization expense of $2,444,000$100,000 and amortization of right-of-use assets of $79,000, which was partially offset by payments of lease obligations of $91,000. Changes in operating assets and liabilities provided $113,000 of cash during the six months ended June 30, 2020, consisting primarily of a $271,000 increase in accrued expenses and a $268,000 increase in account receivable, which was partially offset by a $378,000 reduction in deferred revenue and $125,000 reduction in prepaid expenses.

Net cash used in operating activities from continuing operations for the six months ended June 30, 2019 was $1,482,000. We had a net loss from continuing operations of $1,193,000 during the six months ended June 30, 2019, which included depreciation and amortization expense of $435,000, stock-based compensation expense of $731,000.$99,000 and amortization of right-of-use assets of $75,000, which was partially by a $376,000 write-off of accounts payable, payments of lease obligations of $88,000 and deferred tax benefits of $77,000. Changes in operating assets and liabilities used $879,000$360,000 of cash during the ninesix months ended SeptemberJune 30, 2017,2019, consisting primarily of a $433,000 decreases in deferred revenuerevenues and a $225,000 decrease in accounts payable, partially offset by a $387,000 increases in accrued expenses and decreases in accounts receivable and prepayments.

Net cash used in operating activities for the nine months ended September 30, 2016 was $2,489,000. We had a net loss 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.

receivable.

Net Cash (Used in) Provided byUsed in Investing Activities

Net cash used in investing activities forfrom continuing operations during the ninesix months ended SeptemberJune 30, 20172020 was $294,000, consisting$7,400, which consisted of $123,000 invested to developinvestments in developed technology $154,000and computer equipment purchases. During the six months ended June 30, 2019, net cash used in purchases of property and equipment, partially offset by $18,000 of returned security deposits.


Net cash provided by investing activities for the nine months ended September 30, 2016from continuing operations was $694,000, consisting$2,500 and consisted of $500,000 of proceeds from the maturities of short-term investments and $194,000 of returned security deposits.
investment in developed technology.

26

Net Cash Provided by Financing Activities

Net cash provided by financing activities from continuing operations during the ninesix months ended SeptemberJune 30, 20172020 was $3,502,000, consisting of the $3,000,000 in gross$2,151,000, which reflected proceeds from the January 18, 2017 issuance, $646,000 refundsale of merchant reserve, partially offset bycommon stock of $1,500,000 and $651,000 in proceeds received with respect to the $144,000 paymentPaycheck Protection Program loan. On March 22, 2020, we entered into an agreement with Malven Group Limited, a company established under the laws of offering costs to third-party professionals.the British Virgin Islands, in connection with the purchase of 1,939,237 shares of our common stock at a price of $0.7735 per share for gross proceeds of $1,500,000. The closing of the transaction took place on March 30, 2020.

32

On June 26, 2020, we entered into a second agreement with Malven Group Limited, in connection with the purchase of 312,500 shares of common stock at a price of $3.20 per share for gross proceeds of $1,000,000. The closing of the transaction took place on June 29, 2020 and gross proceeds of $1,000,000 were received in July 2020.

Net cash provided by financing activities from continuing operations during the ninesix months ended SeptemberJune 30, 20162019 was $239,000,$1,798,000, consisting of $1,943,000$1,100,000 in gross proceeds from the sale of 500,000 shares of common stock to one purchaser at a purchase price $2.20 per share, $498,000 in gross proceeds drawn onfrom the sale of 237,031 shares of common stock ranging from $1.146 to $3.96 and $400,000 in gross proceeds from a short-term loan from GNet Tech Holdings, a related party through one of our Master Credit Facility,shareholders, Cosmic Forward Limited, partially offset by $488,000a $200,000 repayment of costs related to securing that facility, payment of $1,049,000 of costs related to the CFL Transaction and $166,000 due to the increase in the merchant reserve for NAPW Network.

short-term loan from GNet Tech Holdings

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 condensed 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

While our significant accounting policies and estimates as compared to the critical accounting policies and estimatesare more fully described in the 2016 Annual Report, whichNote 3 to our condensed consolidated financial statements included in this Form 10-Q, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our business and the understanding of ourreported financial results of operations and affect the more significant judgments and estimates that we use in the preparation of our financial statements.

Special Note Regarding Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A

Accounts Receivable

Our policy is to reserve for uncollectible accounts based on our best estimate of the Securities Actamount of 1933, as amended,probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance for doubtful accounts is necessary based on an analysis of past due accounts and Section 21Eother factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

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.

33

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 performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then compares the fair value of the Securities Exchange ActCompany’s reporting unit to its carrying or book value. If the fair value of 1934,the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of a reporting unit exceeds its fair value, the Company will measure any goodwill impairment losses as amended.  Thesethe 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.

Capitalized Technology Costs

We account for capitalized technology costs in accordance with ASC 350-40, Internal-Use Software (“ASC 350-40”). In accordance with ASC 350-40, we capitalize certain external and internal computer software costs incurred during the application development stage. The application development stage generally includes software design and configuration, coding, testing and installation activities. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software costs are amortized over the estimated useful lives of the software assets on a straight-line basis, generally not exceeding three years.

Business Combinations

ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements for how the acquirer : a) recognizes and measures in its financial statements concern expectations, beliefs, projections, plansthe identifiable assets acquired, the liabilities assumed, 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:

·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 and 2019;
·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
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 couldany non-controlling interest in the future affect our actual resultsacquiree; b) recognizes and could cause actual resultsmeasures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to differ significantlydisclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Accounting for acquisitions requires the Company to recognize, separately from those expressed in any forward-looking statement.  The most important factors that could prevent us from achieving our goals, and causegoodwill, the assumptions underlying forward-looking statementsassets acquired 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:
·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.
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 2016 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 viewsliabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of this Quarterly Report,consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of comprehensive loss.

Revenue Recognition

Our principal sources of revenue are recruitment revenue, consumer marketing and consumer advertising revenue, membership subscription fees, and product sales. Recruitment revenue includes revenue recognized from direct sales to customers for recruitment services and events, as well as revenue from our direct ecommerce sales. Revenues from recruitment services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed or determinable and collectability is probable. Our recruitment revenue is derived from 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.

Consumer marketing and consumer advertising revenue is recognized either based upon a fixed fee for revenue sharing agreements in which payment is required at the time of posting, or billed based upon the number of impressions (the number of times an advertisement is displayed) recorded on the websites as specified in the customer agreement.

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Revenue generated from NAPW Network membership subscriptions is recognized ratably over the 12-month membership period, although members pay their annual fees at the commencement of the membership period. Starting January 2, 2018, we also offer a monthly membership for which we collect fees on a monthly basis and we undertake no obligationrecognize revenue in the same month as the fees are collected. 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 update any forward-looking statementthese services are recognized as revenue at the time the on-line profile is complete and press release is distributed.

Recent Accounting Pronouncements

See Note 3 to reflect the impactour financial statements.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of circumstances or events that arise after the date of this Quarterly Report.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controlsdisclosure controls and Procedures
procedures

As of SeptemberJune 30, 2017,2020, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Interim 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“Exchange Act”). We recognize that there are material weaknesses related to our internal controls. Therefore, our Chief Executive Officer and Interim 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.

Changes in Internal Controlinternal control over Financial Reporting

financial reporting

During the third quarterfirst six months of 2017,2020, 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.  We2019. Specifically, we continued making necessary changesto implement more effective financial reporting process and implementing new policies to enhance the overall internal control structure, including requiring pre-approval for travelprocedures that included monthly and certain purchasesquarterly closing check-lists and ensuring employees are cross trained for certain key tasks.monthly review of the financial reports by the Company’s Finance Department. We also continued improving GAAP training of internal staff and to utilize third-party consultants to assist in the review and preparation of complex accounting transaction and financial statement reports. There have been no other changes in our internal control over financial reporting during the third quarterfirst six months of 20172020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our management has concluded that, as of June 30, 2020, we did not maintain effective controls over the preparation, review, presentation and disclosure of our financial statements. Specifically, we noted the following:

●Relevant operating information is not adequately used to develop accounting and financial information and serve as a basis for reliable financial reporting. This same operating information is also used as the basis for accounting estimates. Specifically, financial and nonfinancial indicators of going concern and impairment of assets were not completely assessed by management.
●Employees lack full technical competence and training necessary for the nature and complexity of the entity’s activities. Specifically, Company personnel could not perform purchase accounting or fair value measurements with Company’s acquisitions.

35

●Supporting analysis is not prepared for each non-routine event or transaction that requires management’s judgement and/or estimate. Specifically, no analysis is prepared to document compliance with relevant GAAP and entity’s accounting policies.
● Accounting procedures relevant to foreign subsidiaries are not sufficiently formal that management can determine whether the control objective is met, documentation supporting the procedures is in place, and personnel routinely know the procedures that need to be performed. Specifically, data from foreign subsidiaries underlying financial statements is not captured completely, accurately, and timely, in accordance with the entity’s policy and procedures.

28Limitations on effectiveness of controls and procedures

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.

PART II

ITEM 1.LEGAL PROCEEDINGS
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.ITEM 1 – LEGAL PROCEEDINGS


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.

In a letter dated October 12, 2017, White Winston Select Asset Funds (“White Winston”) threatened assertion of a claimto assert claims against the Company.  The letter allegesCompany in excess of $2 million based on White Winston’s contention that White Winston suffered $2,241,958 in damages as a result of the Company’s alleged conduct that caused a delay indelayed White Winston’s ability to sell shares in the Company during a period when the Company’s stock price was generally falling. On April 30, 2018, White Winston filed a lawsuit, entitled White Winston Select Asset Funds, LLC v. Professional Diversity Network, Inc., No. 18-cv-10844, (the “Federal Action”) in the United States District Court for the District of Massachusetts, asserting federal jurisdiction based on diversity of citizenship. The four-count complaint in the Federal Action alleged that White Winston is entitled to recover compensatory damages of $1,708,233, plus attorneys’ fees, treble damages and other amounts. White Winston served the complaint on July 12, 2018, and the Company moved to dismiss the entire action for failure to state a claim. On October 15, 2018, prior to addressing the motion to dismiss, the Court issued an order noting that White Winston (which is a limited liability company) had failed to allege the citizenship of its members and ordered White Winston to show cause that complete diversity exists between the parties and that the Court had jurisdiction. On October 23, 2018, White Winston dismissed the Federal Action without prejudice. On December 18, 2018, White Winston filed a complaint in Massachusetts Superior Court in Suffolk County in Boston alleging the same claims and rights to relief as in the Federal Action. The Company has moved to once again to dismiss the complaint in its entirety for failure to state a claim. The entire motion package, comprised of the Company’s motion to dismiss and accompanying memorandum, White Winston’s opposition, and the Company’s reply brief, were filed with the court on Monday, March 25, 2019. This motion was not granted. We have since then substantially completed all of the discovery process and will begin expert witness disclosures. The Company denies liability for any such claim.

ITEM 1A.RISK FACTORS
The information presented below updates,all claims and should be readhas entered into settlement negotiations.

NAPW is a defendant in conjunctiona Nassau County (NY) Supreme Court case, whereby TL Franklin Avenue Plaza LLC has sued NAPW Case index No. LT-000421/2018, with respect to NAPW’s former Garden City NY Premises. NAPW had surrendered the Premises to the Landlord, and the Landlord has obtained a judgment against NAPW in the amount of $746,142.41. As a result of the judgement order, the Company recorded a $780,000 litigation settlement reserve in the second quarter of 2020, which reflected the judgement order in addition to imputed interest costs and legal fees. NAPW is currently negotiating a settlement with the risk factorsLandlord.

The Company and information disclosedits 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 on June 20, 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 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 proceedsfinal stages 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 corporatediscovery and working capital purposes including to implement the productivity improvement initiatives that we have identified as key to our ability to deliver profitable growth overcompleted depositions of relevant witnesses. During the long term.  We cannot be certain thatfirst quarter of 2020, 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. InCompany recorded a $450,000 litigation settlement reserve in the event that we cannot implement these initiatives or that these initiatives are not successful, we could again face liquidity and going concern issues, which could resultof an unfavorable outcome in your losing your entire investment in the Company.
29
this proceeding. The Company is controlled 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 Directorsengaged in settlement discussions.

We 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 ”) arealso generally 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 shareslegal proceedings and litigation arising 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, fromordinary course of business.

36

General Legal Matters

From time to time, andthe Company is involved 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 Stocklegal matters arising in the public marketordinary 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 the perception that these sales might occur, could depress the market price of our Common Stock and couldbe, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.

ITEM 1A – RISK FACTORS

Smaller reporting companies are not required to provide the trading price of our Common Stock.

Because we haveinformation required by this item.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 31, 2020 the Company closed 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%private placement with Malven Group Limited, a company established under the laws of the outstandingBritish Virgin Islands, in connection with the purchase of 1,939,237 shares of our Common Stock.  Ascommon stock at a result,price of $0.7735 per share for gross proceeds of $1,500,000. The Company’s Form 8-K filed on March 27, 2020 is incorporated herein by reference.

On June 26, 2020, the trading volumeCompany entered into a second agreement with Malven Group Limited, in connection with the sale 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 your312,500 shares of Common Stockcommon stock of the Company at a timeprice of $3.20 per share for gross proceeds of $1,000,000. The closing of the transaction took place on June 29, 2020 and price that you deem appropriate, and could increase the volatilitysale proceeds of our stock price.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not sell any equity securities$1,000,000 were received in transactions that were not registered under the Securities Act of 1933 during the three months ended September 30, 2017.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
July 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURE

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5.OTHER INFORMATION
None.
ITEM 6.EXHIBITS

ITEM 5. OTHER INFORMATION

Please refer to Note 15 in the condensed consolidated financial statements.

ITEM 6. EXHIBITS

31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1
Certification of Chief Executive Officer andpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
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

37

30SIGNATURES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

authorized, on May 20, 2020.

 PROFESSIONAL DIVERSITY NETWORK, INC.
   
Date: NovemberAugust 13, 2017           2020By:/s/ Xin (Adam) He
 /s/ Jiangping (Gary) XiaoName:Xin (Adam) He
Title:Chief Executive Officer
  Name:
Date: August 13, 2020Jiangping (Gary) XiaoBy:/s/ Charles O’Brien
 Name:Charles O’Brien
 Title:
Interim Chief Financial Officer

(On behalf of the Registrant and as principal financial
officer and principal accounting officer)
38

31

EXHIBIT INDEX

31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1
Certification of Chief Executive Officer andpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
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

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