Professional Diversity Network, Inc. (Form: 10-Q, Received: 11/14/2016 17:53:58)

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

7. Commitments and Contingencies

Lease Obligations – The Company leases office space, a corporate apartment, office furniture and equipment under various operating lease agreements.

The Company leases an office for its headquarters in Illinois, 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 $258,000 and $383,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $808,000 and $1,083,000 for the nine months ended September 30, 2016 and 2015, respectively, is included in general and administrative expense in the condensed consolidated statements of comprehensive loss. Included in rent expense is sublease income of approximately $93,000 and $90,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $279,000 and $255,000 for the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016, the Company recorded a gain on lease cancellation of approximately $424,000 related to the closing of its Los Angeles, CA office in general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive loss.

Legal Proceedings

The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to an action captioned LinkedIn Corp. v. NAPW, Inc. and Professional Diversity Network, Inc., No. 16-CV-299784 (Santa Clara Superior Ct.). The complaint was filed on September 12, 2016. LinkedIn Corp. (“LinkedIn”), the plaintiff, seeks payment of outstanding amounts it claims are owed under a marketing agreement between LinkedIn and NAPW. The Company has prepared but has not yet filed a counterclaim. LinkedIn has agreed to postpone the deadline for the Company to file a responsive pleading to January 5, 2017. The parties have also agreed to mediate their respective claims, with a mediation currently scheduled for December 20, 2016. The case is in its preliminary stages and it is uncertain whether or not its outcome is likely to have a material impact on the Company’s financial position.

The Company 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 alleging violations of various California Labor Code (wage & hour) sections. The plaintiffs seek unspecified damages. The complaint was filed in December 2015 and the Company has answered. On April 28, 2016, the parties entered into a mutual settlement agreement and release, on behalf of all putative class participants, in the amount of $500,000. Such amount is recorded in accrued expenses in the accompanying condensed consolidated balance sheet as of September 30, 2016. The parties’ agreement and its amount are subject to Court and state agency approval. The Company has been notified that the Court will hold a hearing to consider final approval on November 28, 2016. The Company anticipates that, if the global settlement is approved, it will have to fund the settlement in late Fourth Quarter of 2016 or early First Quarter of 2017.

The Company and its wholly-owned subsidiary, NAPW, Inc., are parties to an administrative action before the National Labor Relations Board captioned as In re Professional Diversity Network, Cases 31-CA-159810 and 31-CA-162904 (NLRB), alleging violations of the National Labor Relations Act, where employee was allegedly terminated for asserting “union organizing” rights. While the Company disputes that any rights were impacted, the NLRB has issued its preliminary order requiring the Company to take certain remedial actions in the form of posting notices and revising certain policies. The Company is currently working with the agency to comply with the NLRB order. The Company does not anticipate that its outcome will have a material impact on the Company’s financial position.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

The Company is a party to an administrative action before the Equal Employment Opportunity Commission captioned as Paul Sutcliffe v. Professional Diversity Network, Inc., No. 533-2016-00033 (EEOC), 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 issued a preliminary finding that the Company discriminated against the complainant. The Company is currently weighing its appellate options, but does not anticipate that this case will have a material impact on the Company’s financial position.

On November 4, 2016, the Company entered into a Confidential Settlement and Mutual Release of All Claims (the “Release”) with Matthew B. Proman (“Proman”), pursuant to which the Company agreed among other things that (i) it would pay Proman $300,000 at the closing of the Share Issuance, (ii) the Separation Agreement and Mutual Release of All Claims, dated July 16, 2015 between Proman and the Company (the “Separation Agreement”) would be terminated as of November 4, 2016, and (iii) the Seller Promissory Note in the principal amount of $445,000 dated September 24, 2014 in favor of Proman (the “Promissory Note”) would be terminated as of November 4, 2016. The Company also agreed that notwithstanding the termination of the Separation Agreement pursuant to the Release, Proman’s co-sale right would be preserved and he would continue to hold the options and warrants he held as of November 4, 2016. On November 7, 2016, the Company paid Proman $300,000 pursuant to the Release.

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.

8. CFL Transaction

On August 12, 2016, the Company entered into a stock purchase agreement (the “Purchase Agreement”), with Cosmic Forward Limited, a Republic of Seychelles company wholly-owned by a group of Chinese investors (“CFL”). Pursuant to the Purchase Agreement, the Company agreed to issue and sell to CFL (the “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, a number of shares of the Company’s common 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”).

Pursuant to a co-sale right, an existing shareholder of the Company would have the right to sell up to 205,925 shares of Common Stock to CFL as of the date of the Purchase Agreement (the “Co-Sale Right”), and such Co-Sale Right, to the extent exercised, would reduce the number of shares of Common Stock to be purchased by CFL directly from the Company. The Company also commenced a partial issuer tender offer to purchase up to 312,500 shares of Common Stock (the “Tender Offer”). The number of shares of Common Stock that CFL agreed to purchase was that amount that would allow it to hold 51% of the outstanding shares of Common Stock, determined on a fully-diluted basis, after giving effect to the number of shares of Common Stock (if any) the Company purchases in the Tender Offer, and any shares sold to CFL pursuant to the co-sale right (collectively, the “Common Shares”). The parties agreed that, if, immediately following the consummation of the Tender Offer and after giving effect to the purchase by the Company of all shares of Common Stock validly tendered and not withdrawn in the Tender Offer, the Common Shares amount to less than 51% of the then-outstanding shares of Common Stock, determined on a fully-diluted basis, then CFL shall have an option (the “Call Option”) to purchase, at a price per share equal to the Per Share Price, such additional number of shares of Common Stock (the “Call Option Shares”) as are necessary for the previously issued Common Shares plus the Call Option Shares to equal 51% of the then-outstanding shares of Common Stock determined on a fully-diluted basis, taking into account the issuance of the Call Option Shares.

Pursuant to the terms of the Escrow Agreement, dated as of August 12, 2016 (the “Escrow Agreement”), by and among the Company, CFL and Wilmington Trust, N.A., as escrow agent (the “Escrow Agent”), CFL deposited approximately $1.7 million (the “Escrow Amount”) into an escrow account with the Escrow Agent as security for CFL’s potential termination fee obligations under the Purchase Agreement described below. The Escrow Amount was being held by the Escrow Agent in accordance with, and was released pursuant to the terms and subject to the conditions set forth in, the Escrow Agreement.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

The Purchase Agreement contained customary representations, warranties, covenants and agreements of the parties thereto, and completion of the Share Issuance and Sale was subject to the approval of the Company’s stockholders at a special meeting of stockholders. The Purchase Agreement also contained other customary closing conditions, including, among others, the execution of certain ancillary agreements and documentation; all receipt of all required consents and approvals necessary to consummate the Share Issuance and Sale; the absence of any injunction or proceeding by a government entity seeking to restrain or prohibit consummation of the CFL Transaction; the absence of any change or event that has had or would reasonably be expected to have a material adverse effect on the Company; and receipt of a clearance by the Committee on Foreign Investment in the United States.

The Purchase Agreement also contained customary indemnification and termination provisions.

Under the terms of the Purchase Agreement and as a condition to consummating the Share Issuance and Sale, at the closing of the Share Issuance and Sale, the Company, CFL and each of the shareholders of CFL (the “CFL Shareholders”) agreed to enter into a stockholders’ agreement (“Stockholders’ Agreement”). The Stockholders’ Agreement provides certain limitations on the ability of CFL and the CFL Shareholders to acquire additional securities from the Company, and provides for certain participation rights to CFL, to enable CFL to participate in future equity issuances by the Company, in order to maintain its then-current beneficial ownership interest in the Company, up to the CFL Shareholders’ then-current ownership percentage based on the number of shares of Common Stock then-outstanding, but no greater than 51.0% of the outstanding shares of Common Stock, determined on a fully-diluted basis, on a given date. The Stockholders’ Agreement also provides for certain “standstill” covenants prohibiting CFL or the CFL Shareholders or their respective affiliates from taking certain actions with respect to the Company or the Board of Directors. Under the Stockholders’ Agreement, CFL is entitled to nominate individuals reasonably acceptable to the Nominating and Governance Committee of the Board of Directors for election as directors of the Company, so long as CFL’s beneficial ownership level exceeds certain predefined percentage thresholds of the Company’s issued and outstanding Common Stock. The Stockholders’ Agreement provides that, upon the closing of the Share Issuance and Sale and for so long as CFL’s beneficial ownership level exceeds 49.5% of the Company’s issued and outstanding Common Stock, CFL is entitled to nominate five of nine directors on the Board of Directors. The Stockholders’ Agreement further provides certain restrictions on the transfer of the Common Shares issued and sold to CFL in the Share Issuance and Sale, including, among other restrictions, a lock-up during the one-year period following the closing of the Share Issuance and Sale. The Stockholders’ Agreement also provides certain demand, shelf and piggyback registration rights to CFL that require the Company to effect the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the resale of the Common Shares and other shares of Common Stock (including the Call Option Shares) acquired by CFL.

As described in Note 14, on November 7, 2016, the CFL Transaction closed.

9. Employment Agreement

On September 30, 2016, the Company entered into an employment agreement (the “Employment Agreement”) with Katherine Butkevich, the Company’s Chief Executive Officer. The Employment Agreement provides for an initial term of two years, and is subject to extension upon agreement of the Company and Ms. Butkevich unless either party provides advance written notice of its or her intention not to extend. Under the Employment Agreement, Ms. Butkevich will receive an annual base salary of $300,000, subject to increase, but not decrease, in the sole discretion of the Company’s Board of Directors (the “Board”) or the Compensation Committee of the Board (the “Compensation Committee”). Ms. Butkevich will be eligible to receive an annual incentive bonus, at a target amount of not less than her base salary, based upon the achievement of one or more performance goals, targets, measurements and other factors, established for such year by the Compensation Committee. Ms. Butkevich will also participate in all benefit plans and programs, subject to certain conditions and exceptions, as are generally provided by the Company to its other senior executive employees.

Under the terms of Employment Agreement, Ms. Butkevich is subject to non-solicitation, non-competition and non-interference restrictive covenants during her employment and for the 12-month period following her last day of employment with the Company. The Employment Agreement also contains customary confidentiality, work product and return of Company property covenants.

In addition, Ms. Butkevich is entitled to severance pay if she is terminated without “cause” or resigns for “good reason,” each as defined in the Employment Agreement. Upon such termination, provided that she executes a release and waiver agreement, Ms. Butkevich will be entitled to receive an amount equal to the sum of her base salary, any earned but unpaid bonus for the year prior to the year of termination, and the pro rata portion of any bonus earned for the year in which termination occurs, as well as continuation of applicable benefits for a period of 12 months following her termination.

In connection with the approval of the Employment Agreement, Ms. Butkevich also received a non-qualified stock option to purchase 57,500 shares of the Company’s common stock at an exercise price of $8.19 per share. The option will vest in accordance with the following schedule: (i) 1/3 of the shares underlying the option will vest immediately upon award, (ii) 1/3 of the shares underlying the option will vest on March 31, 2017, and (iii) 1/3 of the shares underlying the option will vest on March 31, 2018.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

10. Income Taxes

The effective income tax rate for the three months ended September 30, 2016 and 2015 was 32.9% and (10.3)%, respectively, resulting in a $624,000 income tax benefit and $2,976,000 income tax expense, respectively. The effective income tax rate for the nine months ended September 30, 2016 and 2015 was 25.7% and (4.6)%, respectively, resulting in a $1,218,000 income tax benefit and $1,509,000 income tax expense, respectively. During the three months ended September 30, 2016 and 2015, the Company recorded a valuation allowance of $458,000 and $4,106,000, respectively, and during the nine months ended September 30, 2016 and 2015, the Company recorded a valuation allowance of $832,000 and $4,106,000, respectively. 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 considered 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 determined that it is more likely than not that the Company will not realize the deferred income tax asset balances and therefore, initially recorded a valuation allowance as of September 30, 2015. Management has again evaluated the deferred tax asset for the nine months ended September 30, 2016 and has determined a full valuation allowance continues to be applicable.

11. Stock-Based Compensation

Equity Incentive Plans – The Company adopted the 2013 Equity Compensation Plan under which the Company reserved 62,500 shares of common stock 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 subsequently amended the plan to increase the number of authorized shares of common stock under the plan to 225,000 shares, which the Company’s stockholders approved on June 3, 2015.

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2016:

	Number of Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value
Outstanding - December 31, 2015		19,653		$	30.00			8.0	$	-
Granted		57,500			8.19
Exercised		-			-
Forfeited/Canceled/Expired		(4,287	)		(31.81	)
Outstanding – September 30, 2016		72,866		$	12.69			9.5	$	-

Exercisable – September 30, 2016		30,264		$	16.29			9.2	$	-

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

A summary of the changes in the Company’s unvested stock options is as follows:

	Number of Options			Weighted Average Grant Date Fair Value
Unvested - December 31, 2015		13,571		$	13.76
Granted		57,500			4.01
Vested		(27,552	)		(7.07	)
Forfeited/Canceled/Expired		(917	)		(13.83	)
Unvested – September 30, 2016		42,602		$	4.93

As discussed in Note 9, the Company granted 57,500 stock options to Ms. Butkevich in connection with her Employment Agreement. These options had a fair value of $230,575, using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate		1.14	%
Expected dividend yield		0.00	%
Expected volatility		53.96	%
Expected term	5.5 years

The options are exercisable at an exercise price of $8.19 per share over a ten-year term and vest over three years. The Company recorded $77,000 as compensation expense during the three and nine months ended September 30, 2016 pertaining to this grant.

The Company recorded non-cash compensation expense of approximately $90,000 and $31,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $135,000 and $74,000 for the nine months ended September 30, 2016 and 2015, respectively, pertaining to stock options.

Total unrecognized compensation expense related to unvested stock options at September 30, 2016 amounts to approximately $182,000 and is expected to be recognized over a remaining weighted average period of 1.4 years.

Warrants

The following table summarizes the Company’s warrant activity for the nine months ended September 30, 2016:

	Number of Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value
Outstanding – December 31, 2015		45,314	$	66.72		3.5	$	-
Granted		468,750		6.80
Exercised		-		-
Forfeited/Canceled/Expired		-		-
Outstanding – September 30, 2016		514,064	$	12.09		4.7	$	2,127,813

Exercisable – September 30, 2016		389,064	$	9.54		4.5	$	2,127,813

As discussed in Note 6, on June 30, 2016, the Company granted warrants to purchase 468,750 shares of common stock. The fair value of the warrants issued of $783,458 has been recorded as a direct deduction from the carrying amount of Master Credit Facility.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

A summary of the changes in the Company’s unvested warrants is as follows:

	Number of Warrants			Weighted Average Grant Date Fair Value
Unvested – December 31, 2015		-		$	-
Granted		468,750			1.67
Vested		(468,750	)		(1.67	)
Forfeited/Canceled/Expired		-			-
Unvested – September 30, 2016		-		$	-

On November 7, 2016, warrants to purchase an aggregate of 343,750 shares of common stock were exercised for an aggregate exercise price of $687,500.

Restricted Stock

As of September 30, 2016 and December 31, 2015, there were 5,556 shares of unvested restricted stock outstanding.

The Company recorded non-cash compensation expense of approximately $28,000 and $83,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $83,000 and $277,000 for the nine months ended September 30, 2016 and 2015, respectively, pertaining to restricted stock.

Total unrecognized compensation expense related to unvested restricted stock at September 30, 2016 amounts to approximately $129,000 and is expected to be recognized over a weighted average period of 1.2 years.

12. Fair Value of Financial Instruments

Financial instruments, including cash and cash equivalents, short-term investments, accounts payable and accrued liabilities, are carried at historical cost. Management believes that the recorded amounts approximate fair value due to the short-term nature of these instruments.

The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Company uses three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of warrant liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Monte Carlo model to value Level 3 financial liabilities at inception and on subsequent valuation dates. This model is a discrete-time model that allows for sources of uncertainty and simulates the movements of the underlying asset and calculates the resulting derivative value for each trial. Such simulations are performed for a number of trials and the average value across all trials is determined in order to arrive at the concluded value of such derivative. The model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, and risk free rates, as well as volatility. A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in “change in fair value of warrant liability” in the Company’s condensed consolidated statements of operations and comprehensive loss.

As of September 30, 2016 and December 31, 2015, there were no transfers in or out of Level 3 from other levels in the fair value hierarchy.

The warrant liability was valued using the Monte Carlo model and the following assumptions:

	August 10,			June 30,
	2016			2016
Strike price	$	2.00		$	2.00
Market price	$	6.08		$	3.20
Expected life	5 years			5 years
Risk-free interest rate		1.07	%		1.01	%
Dividend yield		0.00	%		0.00	%
Volatility		100	%		100	%

The following table sets forth a summary of the changes in the fair value of the Level 3 financial liabilities that are measured at fair value on a recurring basis:

Balance – January 1, 2016	$	-
Initial value of derivative liability		380,000
Change in fair value of derivative liability		401,000
Reclassification of derivative liability to additional paid in capital		(781,000	)
Balance – September 30, 2016	$	-

As discussed in Note 6, on August 10, 2016, the Company entered into an Amendment with White Winston pursuant to which the Company agreed that the Pro Rata Warrant would be fully exercisable, notwithstanding the pro rata formula set forth in the warrant. Accordingly, as the derivative liability was eliminated on August 10, 2016, the Company reclassified $781,000 to additional paid in capital.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

13. Segment Information

The Company operates in three segments: (i) PDN Network, (2) NAPW Network and (3) Noble Voice operations, which are based on its business activities and organization. The following tables present key financial information of the Company’s reportable segments as of and for the three and nine months ended September 30, 2016 and 2015:

	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	)
Capital expenditures		-			-			-			-
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	)
Capital expenditures		-			-			-			-
Net loss		(1,083,270	)		(1,615,812	)		(819,959	)		(3,519,041	)

	At September 30, 2016
Goodwill	$	339,451	$	19,861,739	$	-	$	20,201,190
Intangible assets, net		90,400		9,482,806		327,333		9,900,539
Total assets		2,151,870		32,410,397		1,891,617		36,453,884

	Three Months Ended September 30, 2015 (Revised)
	PDN Network			NAPW Network			Noble Voice			Consolidated

Membership fees and related services	$	-		$	5,652,873		$	-		$	5,652,873
Lead generation		-			-			2,334,276			2,334,276
Recruitment services		830,250			-			-			830,250
Products sales and other		-			330,769			-			330,769
Consumer advertising and marketing solutions		73,011			-			-			73,011
Total revenues		903,261			5,983,642			2,334,276			9,221,179
Loss from operations		(491,126	)		(27,995,556	)		(339,150	)		(28,825,832	)
Depreciation and amortization		93,922			786,148			45,614			925,684
Income tax benefit		2,362,220			543,018			70,979			2,976,217
Capital expenditures		-			-			-			-
Net loss		(2,857,969	)		(28,538,574	)		(410,129	)		(31,806,672	)

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

	Nine Months Ended September 30, 2015 (Revised)
	PDN Network			NAPW Network			Noble Voice			Consolidated

Membership fees and related services	$	-		$	18,885,308		$	-		$	18,885,308
Lead generation		-			-			7,853,402			7,853,402
Recruitment services		2,432,951			-			-			2,432,951
Products sales and other		-			631,198			-			631,198
Consumer advertising and marketing solutions		209,097			-			-			209,097
Total revenues		2,642,048			19,516,506			7,853,402			30,011,956
Loss from operations		(1,727,721	)		(30,417,806	)		(818,410	)		(32,963,937	)
Depreciation and amortization		285,677			2,308,361			136,842			2,730,880
Income tax expense (benefit)		1,895,588			(271,103	)		(115,090	)		1,509,395
Capital expenditures		-			50,216			13,938			64,154
Net loss		(3,588,298	)		(30,146,703	)		(703,320	)		(34,438,321	)

	At December 31, 2015
Goodwill	$	339,451	$	19,861,739	$	-	$	20,201,190
Intangible assets, net		90,400		11,502,106		459,333		12,051,839
Total assets		4,167,229		34,985,831		2,274,756		41,427,816

14. 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.

Settlement with Matthew Proman

On November 4, 2016, the Company entered into the Release with Matthew Proman (see Note 7).

Exercise of Pro Rata and Fixed $2.00 Warrant

On November 4, 2016, White Winston exercised the Pro Rata Warrant and the Fixed $2.00 Warrant, such that the Company issued to White Winston an aggregate of 343,750 shares of the Company’s common stock for aggregate proceeds of $687,500. The Company used these proceeds to pay down a portion of the outstanding Master Credit Facility.

Payoff and Termination of Master Credit Facility

On November 7, 2016, in connection with the closing of the CFL Transaction described below, the Company (i) repaid in full amounts owed under the Master Credit Facility and (ii) terminated the Master Credit Facility and related agreements between the Company and White Winston, including the Board Representation Agreement. All security interest created under the Master Credit Facility were released upon repayment of the amounts due under and the termination of the Master Credit Facility.

Professional Diversity Network, Inc.

Condensed Consolidated Notes to Financial Statements (Unaudited)

CFL Share Issuance and Completion of the Tender Offer

On November 7, 2016, the Company consummated the issuance and sale of 1,777,417 shares of its common stock to CFL at a price of $9.60 per share, pursuant to the terms of the Purchase Agreement, dated August 12, 2016. In addition, on November 7, 2016, the Company completed the purchase of 312,500 shares of its common stock at a price of $9.60 per share, net to the seller in cash, pursuant to the Tender Offer. The Company received approximately $9,000,000 in net proceeds from the Share Issuance, 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.

At the closing of the CFL 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 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.

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 analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto in Item 1, “Financial Statements,” in Part I of this Quarterly Report. This discussion contains forward-looking statements, which are based on our assumptions about the future of our business. Our actual results will likely differ materially from those contained in the forward-looking statements. Please read “Special Note Regarding Forward-Looking Statements” for additional information regarding forward-looking statements used in this Quarterly Report.

Overview

We are a dynamic operator of professional networks with a focus on diversity. 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). Our value proposition is three-fold: (i) we provide a robust online and in-person network for our women members to make professional and personal connections (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. We operate in three business segments: (i) Professional Diversity Network (“ PDN Network ”), which includes online professional networking communities with career resources tailored to the needs of various diverse cultural groups and employers looking to hire members of such groups, (ii) National Association of Professional Women (“ NAPW Network ”), a women-only professional networking organization, and (iii) Noble Voice operations (“ Noble Voice ”), a career consultation and lead generation service. Through the third quarter of 2016, our PDN Network, NAPW Network and Noble Voice businesses represented 12.0%, 66.1% and 21.9% of our revenues, respectively. As of September 30, 2016, we had approximately 9.0 million registered users in our PDN Network; approximately 880,000 registered users, or members, in the NAPW Network; and over 580 companies utilizing our products and services in our combined PDN Network and Noble Voice operations. We believe that the combination of our solutions allows us to approach recruiting and professional networking in a unique way and thus create enhanced value for our members and customers.

Sources of Revenue

We generate revenue from (i) paid membership subscriptions and related services, (ii) lead generation, (iii) recruitment services, (iv) product sales and (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.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Percentage of revenue by product:
Membership fees and related services		58.9	%		61.3	%		63.5	%		62.9	%
Lead generation		24.4	%		25.3	%		21.8	%		26.2	%
Recruitment services		15.0	%		9.0	%		11.2	%		8.1	%
Products sales and other		0.8	%		3.6	%		2.6	%		2.1	%
Consumer advertising and consumer marketing solutions		0.8	%		0.8	%		0.9	%		0.7	%

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.com , as well as through in-person networking at nearly 200 local chapters nationwide, additional career and networking events such as the National Networking Summit Series and the PDN Network events, as well as ancillary (non-networking) benefits such as educational discounts, shopping, and other membership perks. Upgraded packages include (i) the VIP membership, which provides members with additional promotional and publicity tools as well as free access (including guest) to the National Networking Summits and free continuing education programs and (ii) the press release package, which provides members with the opportunity to work with professional writers to publish personalized press releases and thereby secure valuable online presence. Membership is renewable and fees are payable on an annual basis, with the first annual fee payable at the commencement of the membership. Membership subscriptions represented approximately 98.6% and 94.5%, respectively, of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2016 and 2015 and 96.0% and 96.8%, respectively, for the nine months ended September 30, 2016 and 2015.

Lead Generation . We monetize our career consultations conducted by our Noble Voice division by generating and selling value-added leads to our strategic partners who provide continuing education and career services. We also generate revenue from sales of data not used in the lead generation process. Lead generation sales represented 100% of the revenue attributable to the Noble Voice business segment for the three and nine months ended September 30, 2016 and 2015.

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. For the three months ended September 30, 2016 and 2015, recruitment advertising revenue constituted approximately 95.0% and 91.9%, respectively, of the revenue attributable to the PDN Network business segment. For the nine months ended September 30, 2016 and 2015, recruitment services revenue constituted approximately 92.8% and 92.1%, 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 two commemorative wall plaques at the time of membership purchase. Product sales represented approximately 1.4% and 5.5%, respectively, of revenue attributable to the NAPW Network business segment for the three months ended September 30, 2016 and 2015 and 4.0% and 3.2%, respectively, of revenue attributable to the NAPW Network business segment for the nine months ended September 30, 2016 and 2015.

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 to post recruitment advertising and job openings. We generate revenue from fees charged for those postings. For the three months ended September 30, 2016 and 2015, consumer advertising and marketing represented approximately 5.0% and 8.1%, respectively, of the revenue attributable to the PDN Network business segment. For the nine months ended September 30, 2016 and 2015, consumer advertising and marketing represented approximately 7.2% and 7.9%, respectively, of the revenue attributable to the PDN Network business segment.

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, 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, 2016, we experienced losses as we continued our efforts to reduce costs and streamline our business. For the nine months ended September 30, 2016, we realized a net loss of approximately $3,519,000, a $30,919,000, or 89.8%, decrease from the comparable prior year period. This decrease in the net loss is primarily related to a charge taken for the impairment of goodwill at the NAPW Network taken on September 30, 2015 for $26,744,000. As discussed below, management determined that additional impairment charges are not appropriate for the nine months ended September 30, 2016. In addition, our net losses were further reduced by our efforts to reduce operating expenses, partially offset by the decline in revenue. Costs of revenue declined 47.6% during the nine months ended September 30, 2016 on a year-over-year basis due to significant reductions in expenditures and improved buying efficiencies of data used in generating leads for our Noble Voice division. Sales and marketing expenses in the nine months ended September 30, 2016 declined approximately 40%, from the comparable prior year period, primarily as a result of our efforts to reduce marketing costs related to lead generation at the NAPW Network, in an effort to optimize operating margins, combined with significant reductions of sales staff at both the NAPW Network and Noble Voice division on a year-over-year basis. General and administrative expenses in the nine months ended September 30, 2016 declined 18.7% reflecting the impact of our cost containment initiatives, combined with the reversal of sub-lease liability accrual recorded in the fourth quarter of 2015 related to the closing of the Company’s Los Angeles location.

On September 27, 2016, we effected a reverse stock split of our common stock, par value $0.01 per share (the “ Common Stock ”), at a ratio of 1-for-8 (the “ Reverse Split ”). As a result of the Reverse Split, every eight shares of the issued and outstanding Common Stock were automatically converted into one newly issued and outstanding share of Common Stock, without any change in the par value per share. Any fractional shares resulting from the Reverse Split were rounded up to the nearest whole share.

Recent Events

On November 7, 2016, we consummated the issuance and sale of 1,777,417 shares of Common Stock, to Cosmic Forward Limited, a Republic of Seychelles company wholly-owned by a group of Chinese investors (“ CFL ”), at a price of $9.60 per share (giving effect to the Reverse Split), pursuant to the terms of our previously announced stock purchase agreement, dated August 12, 2016 (the “ Purchase Agreement ”), with CFL (the “ Share Issuance ”). At the closing of the Share Issuance, and as contemplated by the Purchase Agreement, we entered into a Stockholders’ Agreement, dated November 7, 2016 (the “ Stockholders’ Agreement ”), with CFL and each of its shareholders. As previously disclosed, 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.

In addition, on November 7, 2016, we completed the purchase of 312,500 shares of Common Stock, at a price of $9.60 per share, net to the seller in cash, less any applicable withholding taxes and without interest, pursuant to our previously announced partial issuer tender offer as disclosed in the Company’s Offer to Purchase, dated September 28, 2016, as amended (the “ Tender Offer ”). As a result of the completion of the Share Issuance, the Tender Offer and the other transactions contemplated by the Purchase Agreement, as of November 7, 2016, CFL beneficially owned 51% of the Company’s outstanding shares of Common Stock, on a fully-diluted basis.

We received approximately $9.0 million in net proceeds from the Share Issuance, 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 at the closing.

On November 4, 2016, we entered into a Confidential Settlement and Mutual Release of All Claims (the “ Release ”) with Matthew B. Proman (“ Proman ”), pursuant to which we agreed among other things that (i) the we would pay to Proman $300,000 at the closing of the Share Issuance, (ii) the Separation Agreement and Mutual Release of All Claims, dated July 16, 2015 between Proman and PDN (the “Separation Agreement”) would be terminated as of November 4, 2016, and (iii) the Seller Promissory Note in the principal amount of $445,000 dated September 24, 2014 in favor of Proman (the “ Promissory Note ”) would be terminated as of November 4, 2016. We have also agreed that notwithstanding the termination of the Separation Agreement pursuant to the Release, Proman’s co-sale right would be preserved and he would continue to hold the options and warrants he held as of November 4, 2016. On November 7, 2016, we paid Proman $300,000 pursuant to the Release.

On November 7, 2016, in connection with the closing of the Share Issuance, we (i) repaid in full all amounts owed under the Master Credit Facility among the Company, its wholly-owned subsidiaries NAPW, Inc., Noble Voice LLC and Compliant Lead LLC, and White Winston Select Asset Funds, LLC (“ White Winston ”), dated March 30, 2016 (the “ Master Credit Facility ”), and (ii) terminated the Master Credit Facility and related agreements between the Company and White Winston, including the Board Representation Agreement, dated as of June 30, 2016. All security interests created under the Master Credit Facility were released upon repayment of the amounts under and termination of the Master Credit Facility.

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 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 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”). 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 believe that a higher number of NAPW Network members will 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
	2016		2015		(Percent)
	(in thousands)
PDN Network Registered Users (1)		8,951		6,837		30.9	%
NAPW Network Total Membership (2)		880		831		5.9	%

(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, 2015, as amended on May 4, 2016 (the” 2015 Annual Report”).

(2)	Includes both paid and unpaid members.

We also track on a quarterly basis as our performance measurement gross bookings of services and products by NAPW Network and recruitment services and consumer advertising and marketing that we originate through PDN Network’s direct sales force and online products. Although direct bookings are non-binding and the revenue derived from such bookings is not recorded in earnings until all of the revenue recognition criteria are met, we consider direct bookings to be a key performance indicator of where we stand against our strategic plan.

The following table sets forth the booked revenues we originated as of the periods presented:

	Three Months Ended September 30,				Change
	2016		2015		(Percent)
	(in thousands)
NAPW Network bookings	$	2,904	$	5,224		(44.4	%)
PDN Network bookings	$	778	$	688		13.1	%

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.

The following table provides a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP measure reported in our consolidated financial statements:

(Amount in thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Net loss	$	(1,273	)	$	(31,807	)	$	(3,519	)	$	(34,438	)
Impairment expense		-			26,744			-			26,744
Stock-based compensation expense		118			114			218			351
Depreciation and amortization		820			926			2,498			2,731
Litigation settlement		-			-			500			-
Gain on lease cancellation		-			-			(424	)		-
Change in fair value of warrant liability		401			(2	)		401			(94	)
Interest expense		216			9			217			84
Interest and other income		-			(2	)		(1	)		(26	)
Income tax expense (benefit)		(624	)		2,976			(1,218	)		1,509
Adjusted EBITDA	$	(342	)	$	(1,042	)	$	(1,328	)	$	(3,139	)

Results of Operations

Revenues

Total Revenues

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

	Three Months Ended
	September 30,				Change			Change
	2016		2015		(Dollars)			(Percent)
	(in thousands)
Revenues
Membership fees and related services	$	3,748	$	5,653	$	(1,905	)		(33.7	%)
Lead generation		1,554		2,334		(780	)		(33.4	%)
Recruitment services		955		830		125			15.1	%
Products sales and other		53		331		(278	)		(84.0	%)
Consumer advertising and marketing solutions		50		73		(23	)		(31.5	%)
Total revenues	$	6,360	$	9,221	$	(2,861	)		(31.0	%)

	Nine Months Ended
	September 30,				Change			Change
	2016		2015		(Dollars)			(Percent)
	(in thousands)
Revenues
Membership fees and related services	$	13,048	$	18,885	$	(5,837	)		(30.9	%)
Lead generation		4,490		7,853		(3,363	)		(42.8	%)
Recruitment services		2,295		2,433		(138	)		(5.7	%)
Products sales and other		544		631		(87	)		(13.8	%)
Consumer advertising and marketing solutions		177		209		(32	)		(15.3	%)
Total revenues	$	20,554	$	30,011	$	(9,457	)		(31.5	%)

Total revenues decreased $2.9 million, or 31.0% for the three months ended September 30, 2016, compared to the same prior year period, and $9.5 million, or 31.5%, for the nine months ended September 30, 2016, compared to the same prior year period, due primarily to management focus on cost reduction efforts, including the reduction in the salesforce and decreased spending on digital advertising and data purchases that favorably impacted our margins. Management expects revenues to continue to decrease during the remaining three months of 2016, with an anticipated slight increase in 2017, mainly with the PDN Network and Noble Voice, and further increases in all segments in 2018 and 2019.

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
	2016		2015		(Dollars)			(Percent)
	(in thousands)
NAPW Network	$	3,801	$	5,984	$	(2,183	)		(36.5	%)
PDN Network		1,005		903		102			11.3	%
Noble Voice		1,554		2,334		(780	)		(33.4	%)
Total revenues	$	6,360	$	9,221	$	(2,861	)		(31.0	%)

	Nine Months Ended
	September 30,				Change			Change
	2016		2015		(Dollars)			(Percent)
	(in thousands)
NAPW Network	$	13,592	$	19,516	$	(5,924	)		(30.4	%)
PDN Network		2,472		2,642		(170	)		(6.4	%)
Noble Voice		4,490		7,853		(3,363	)		(42.8	%)
Total revenues	$	20,554	$	30,011	$	(9,457	)		(31.5	%)

Membership fees and related services and products sales of $3,801,000 for the three months and $13,592,000 for the nine months ended September 30, 2016, attributable to the NAPW Network, represent a reduction of $2,183,000 and $5,924,000, respectively, from the comparable periods in 2015, or 36.5% and 30.4% respectively. The decrease is primarily the result of reductions of the NAPW sales staff resulting from the closing of our Los Angeles, CA call center and reductions in workforce at our Garden City, NY call center. We do not anticipate further reductions and expect to increase the salesforce in future periods. We also expect NAPW to have decreased revenues for the remainder of 2016 and the year ended December 31, 2017, with anticipated increases in revenues in 2018 and 2019 as a result of increased investments in product salesforce development and will, therefore, be material to the Company’s financial condition and results of operations.

During the three months ended September 30, 2016, our PDN Network generated $1,005,000 in revenue, compared to $903,000 for the same period in the prior year, an increase of $102,000, or 11.3%. The increase was mainly attributable to the PDN Recruits product that was added to our product line in December 2015 which targets a broader audience and shorter sales cycle that can generate recurring revenue on a monthly basis and resulted in approximately $92,000 in revenue for the quarter. During the nine months ended September 30, 2016, our PDN Network generated $2,472,000 in revenue compared to $2,642,000 generated in the prior year period, a decrease of $170,000 or 6.4%. For the three and nine months ended September 30, 2016, we had an increase of $102,000 and a decrease of $170,000 respectively due to the PDN Recruits revenue previously mentioned and strong activity in the third quarter of 2016 for the direct sales of our recruitment services. Included in this change was (i) a $37,000 increase and $182,000 period-over-period reduction in direct sales of our recruitment services, for the three and nine months ended September 30, 2016, respectively, which was primarily attributable to the downsizing of the PDN Network sales team and a strong renewals of contracts in the third quarter of 2016, (ii) a $5,000 and $171,000 period-over-period decline in the PDN Network Events Division revenue for the three and nine months ended September 30, 2016, respectively, as a result of a lower number of PDN Network events held in the first nine months of 2016 compared to the first nine months of 2015 due to scheduling and venue changes, and (iii) a $2,000 increase and $25,000 decrease in our e-commerce revenues for the three and nine months ended September 30, 2016, respectively, as a result of our focus on new products in 2016. Revenue from the PDN Network’s consumer advertising and marketing solutions declined $23,000 and $32,000, respectively, compared to the three and nine months ended September 30, 2015 due to changes in relationships with partner organizations.

Noble Voice generated $1,554,000 and $4,490,000 of lead generation revenue for the three months and nine months ended September 30, 2016, respectively, compared to $2,334,000 and $7,853,000, respectively, for the same periods in 2015, representing a decrease of 33.4% and 42.8%. The decrease in revenue was the result of continuing compression in the markets served by Noble Voice and the closure of our Detroit, MI call center in February 2016 and the related reduction in the salesforce. Our efforts are focused on capturing additional market share through increased sales to our existing customer base and internal efforts to add new customers. Our Detroit sales efforts were transitioned to a smaller workforce of independent contractors that work from their homes. We have capacity at our Darien, IL call center to significantly grow our sales team without incurring additional rental costs. We have also added Noble Voice sales representatives in our Chicago office, without adding additional floor space, in order to attract employees from a larger geographic territory.

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.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☒

			Page
PART I			1
	ITEM 1.	FINANCIAL STATEMENTS	1
	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
	ITEM 4.	CONTROLS AND PROCEDURES	37
PART II			38
	ITEM 1.	LEGAL PROCEEDINGS	38
	ITEM 1A.	RISK FACTORS	39
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	39
	ITEM 4.	MINE SAFETY DISCLOSURE	39
	ITEM 5.	OTHER INFORMATION	40
	ITEM 6.	EXHIBITS	40

	September 30,			December 31,
	2016			2015
	(Unaudited)			(Revised)
Current Assets:
Cash and cash equivalents	$	515,963		$	2,070,693
Accounts receivable, net		1,839,474			2,510,530
Short-term investments		-			500,000
Incremental direct costs		547,616			1,023,916
Prepaid license fee		-			112,500
Prepaid expenses and other current assets		229,689			411,592
Total current assets		3,132,742			6,629,231

Property and equipment, net		313,622			444,398
Capitalized technology, net		240,463			456,523
Goodwill		20,201,190			20,201,190
Intangible assets, net		9,900,539			12,051,839
Merchant reserve		1,426,927			1,260,849
Security deposits		189,375			383,786
Other assets		1,049,026			-
Total assets	$	36,453,884		$	41,427,816

Current Liabilities:
Accounts payable	$	5,359,151		$	4,465,941
Accrued expenses		1,519,491			837,712
Deferred revenue		6,406,542			9,966,893
Customer deposits		-			112,500
Promissory note		445,000			445,000
Total current liabilities		13,730,184			15,828,046

Deferred tax liability		3,724,816			4,942,908
Line of credit – Master Credit Facility, net of unamortized debt issuance costs		827,679			-
Deferred rent		55,434			45,155
Other liabilities		47,367			426,267
Total liabilities		18,385,480			21,242,376

Commitments and contingencies

Stockholders' Equity
Common stock, $0.01 par value; 45,000,000 shares authorized; 1,815,232 shares issued as of September 30, 2016 and December 31, 2015; and 1,808,628 shares outstanding as of September 30, 2016 and December 31, 2015		18,097			18,097
Additional paid in capital		64,956,199			63,554,194
Accumulated deficit		(46,868,775	)		(43,349,734	)
Treasury stock, at cost; 1,048 shares at September 30, 2016 and December 31, 2015		(37,117	)		(37,117	)
Total stockholders' equity		18,068,404			20,185,440

Total liabilities and stockholders' equity	$	36,453,884		$	41,427,816

	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:				(Revised)
Net loss	$	(3,519,041	)	$	(34,438,321	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,498,136			2,730,880
Deferred tax benefit		(1,218,092	)		1,509,395
Gain on lease cancellation		(423,998	)		-
Impairment expense		-			26,744,249
Stock-based compensation expense		217,547			350,667
Amortization of deferred financing costs		156,594			-
Amortization of prepaid license fees		112,500			168,750
Amortization of premium on short-term investments, net		-			76,878
Amortization of customer deposits		(112,500	)		(168,750	)
Change in fair value of warrant liability		401,000			(93,784	)
Accretion of debt discount		-			7,814
Loss on sale of property and equipment		-			32,649
Changes in operating assets and liabilities:
Accounts receivable		671,056			886,810
Prepaid expenses and other current assets		181,903			(682,541	)
Incremental direct costs		476,300			(184,420	)
Accounts payable		893,210			(1,630,793	)
Accrued expenses		681,779			1,510,273
Deferred revenue		(3,560,351	)		(1,089,802	)
Deferred rent		10,279			63,267
Other liabilities		45,098			-
Net cash used in operating activities		(2,488,580	)		(4,206,779	)

Cash flows from investing activities:
Proceeds from maturities of short-term investments		500,000			5,297,000
Purchases of short-term investments		-			(925,000	)
Costs incurred to develop technology		-			(393,385	)
Purchases of property and equipment		-			(53,596	)
Security deposit		194,411			(14,952	)
Net cash provided by investing activities		694,411			3,910,067

Cash flows from financing activities:
Proceeds from the sale of common stock		-			5,235,300
Repayment of note payable		-			(1,294,753	)
Payment of offering costs		-			(670,877	)
Proceeds from line of credit		1,942,625			-
Payment of debt issuance costs related to Master Credit Facility		(488,082	)		-
Payment of deferred offering costs related to CFL Transaction		(1,049,026	)		-
Merchant reserve		(166,078	)		(400,000	)
Shares repurchased on vesting of restricted stock		-			(195,976	)
Payments of capital leases		-			(15,232	)
Net cash provided by financing activities		239,439			2,658,462

Net (decrease) increase in cash and cash equivalents		(1,554,730	)		2,361,750
Cash and cash equivalents, beginning of period		2,070,693			1,519,467
Cash and cash equivalents, end of period	$	515,963		$	3,881,217

Supplemental disclosures of other cash flow information:
Cash paid for income taxes	$	4,605		$	4,631
Cash paid for interest	$	21,740		$	-



Non-cash investing and financing activities:
Issuance of warrants in connection with Master Credit Facility	$	783,458		$	-
Reclassification of derivative liability to additional paid in capital	$	781,000		$	-
Working capital adjustment to note payable	$	-		$	32,281
Increase in goodwill resulting from NAPW legal settlement	$	-		$	133,693

	December 31, 2015
	As previously
	reported			Adjustment			As revised
Deferred revenue	$	7,507,176		$	2,459,717		$	9,966,893
Total current liabilities		13,368,329			2,459,717			15,828,046
Total liabilities		18,782,659			2,459,717			21,242,376
Accumulated deficit		(40,890,017	)		(2,459,717	)		(43,349,734	)
Stockholders’ equity	$	22,645,157		$	(2,459,717	)	$	20,185,440

Delaware (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 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)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
				(Revised)						(Revised)
Revenues
Membership fees and related services	$	3,748,334		$	5,652,873		$	13,047,652		$	18,885,308
Lead generation		1,554,370			2,334,276			4,489,919			7,853,402
Recruitment services		954,887			830,250			2,295,556			2,432,951
Product sales and other		52,857			330,769			544,440			631,198
Consumer advertising and marketing solutions		49,719			73,011			176,771			209,097
Total revenues		6,360,167			9,221,179			20,554,338			30,011,956

Costs and expenses:
Cost of revenues		745,159			1,464,214			2,433,550			4,647,520
Sales and marketing		3,064,454			5,132,077			10,314,145			17,226,640
General and administrative		3,010,862			3,748,138			9,428,493			11,593,955
Impairment expense		-			26,744,249			-			26,744,249
Depreciation and amortization		819,894			925,684			2,498,136			2,730,880
Loss on sale of property and equipment		-			32,649			-			32,649
Total costs and expenses		7,640,369			38,047,011			24,674,324			62,975,893

Loss from operations		(1,280,202	)		(28,825,832	)		(4,119,986	)		(32,963,937	)

Other (expense) income
Interest expense		(215,781	)		(9,229	)		(216,948	)		(84,339	)
Interest and other income		150			2,382			801			25,566
Other income (expense), net		(215,631	)		(6,847	)		(216,147	)		(58,773	)

Change in fair value of warrant liability		(401,000	)		2,224			(401,000	)		93,784

Loss before income tax benefit		(1,896,833	)		(28,830,455	)		(4,737,133	)		(32,928,926	)
Income tax expense (benefit)		(623,699	)		2,976,217			(1,218,092	)		1,509,395
Net loss	$	(1,273,134	)	$	(31,806,672	)	$	(3,519,041	)	$	(34,438,321	)

Net loss per common share, basic and diluted	$	(0.70	)	$	(17.59	)	$	(1.94	)	$	(20.05	)

Weighted average shares used in computing net loss per common share:
Basic and diluted		1,809,676			1,808,099			1,809,676			1,717,816

	Three Months Ended
	September 30, 2015
	As previously
	reported			Adjustment			As revised
Revenues	$	9,343,312		$	(122,133	)	$	9,221,179
Impairment expense		24,717,157			2,027,092			26,744,249
Loss from operations		(26,676,607	)		(2,149,225	)		(28,825,832	)
Net loss	$	(29,657,447	)	$	(2,149,225	)	$	(31,806,672	)
Net loss per share:
Basic and Diluted (as adjusted for the Reverse Stock Split)	$	(16.40	)	$	(1.19	)	$	(17.59	)

	2016		2015
Warrants to purchase common stock		514,064		45,314
Stock options		72,886		19,732
Unvested restricted stock		5,556		25,002
		592,506		90,048

	September 30, 2016		December 31, 2015
Capitalized cost:
Balance, beginning of period	$	1,888,791	$	1,469,432
Additional capitalized cost		-		419,359
Balance, end of period	$	1,888,791	$	1,888,791


Accumulated amortization:
Balance, beginning of period	$	1,432,268	$	943,362
Provision for amortization		216,060		488,906
Balance, end of period	$	1,648,328	$	1,432,268
Capitalized Technology, net	$	240,463	$	456,523

September 30, 2016	Useful Lives (Years)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Long-lived intangible assets:
Sales Process		10	$	3,970,000	$	(799,514	)	$	3,170,486
Paid Member Relationships		5		890,000		(358,472	)		531,528
Member Lists		5		8,957,000		(3,607,681	)		5,349,319
Developed Technology		3		978,000		(636,666	)		341,334
Trade Name/Trademarks		4		480,000		(239,861	)		240,139
Customer Relationships		5		280,000		(102,667	)		177,333
				15,555,000		(5,744,861	)		9,810,139
Indefinite-lived intangible assets:
Trade Name									90,400

Intangible assets, net								$	9,900,539

Years ending December 31,
2016 (three months)	$	717,100
2017		2,802,233
2018		2,563,872
2019		1,846,697
2020		397,000
2021		397,000
Thereafter		1,086,237
	$	9,810,139

Total Master Credit Facility	$	1,942,625
Less: Unamortized debt issuance costs		(1,114,946	)
Total Master Credit Facility, net of unamortized debt issuance costs		827,679
Less: Current portion of Master Credit Facility		-
Long-term portion	$	827,679