UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30,December 31, 2020
or
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-12629
NATIONAL HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 36-4128138 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
200 Vesey Street, 25th
FloorNew York, NY 10281
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 417-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each | Trading Symbol(s) | Name of each exchange on which registered: |
Common Stock, $0.02 par value per share | NHLD | The Nasdaq Capital Market |
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
☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
☒ 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 filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☐ | ||
Non-Accelerated Filer | ☒ | Smaller Reporting 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
As of JulyJanuary 31, 20202021 there were 13,584,59313,765,304 shares of the registrant’s common stock outstanding.
FORM 10-Q QUARTERLY PERIOD ENDED INDEX PART I – FINANCIAL INFORMATION Item 1 – Condensed Financial Statements Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 3 – Quantitative and Qualitative Disclosures About Market Risk Item 4 – Controls and Procedures PART II – OTHER INFORMATION Item 1 – Legal Proceedings Item 1A – Risk Factors Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds Item 3 – Defaults Upon Senior Securities Item 4 – Mine Safety Disclosures Item 5 – Other Information Item 6 – Exhibits FORWARD-LOOKING STATEMENTS The following information provides cautionary statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements we make in this report or in other documents that reference this report. All statements that express or involve discussions as to: expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, identified through the use of words or phrases such as we or our management believes, expects, anticipates or hopes and words or phrases such as will result, are expected to, will continue, is anticipated, estimated, projection and outlook, and words of similar import) are not statements of historical facts and may be forward-looking. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties including, but not limited to, economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in the documents filed by us with the Securities and Exchange Commission (“SEC”). Many of these factors are beyond our control. Actual results could differ materially from the forward-looking statements we make in this report or in other documents that reference this report. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report or other documents that reference this report will, in fact, occur. These forward-looking statements involve estimates, assumptions and uncertainties, and, accordingly, actual results could differ materially from those expressed in the forward-looking statements. These uncertainties include, among others, the following: (i) general economic conditions; (ii) our ability to obtain future financing or funds when needed; (iii) our ability to maintain sufficient regulatory net capital; (iv) the ability of our broker-dealer operations to operate profitably in the face of intense competition from larger full service and discount brokers; (v) a general decrease in merger and acquisition activities and our potential inability to receive success fees as a result of transactions not being completed; (vi) increased competition from business development portals; (vii) technological changes; (viii) our potential inability to implement our growth strategy through acquisitions or joint ventures; (ix) acquisitions, business combinations, strategic partnerships, divestures, and other significant transactions may involve additional uncertainties; (x) our continued ability to maintain and execute our business strategy; (xi) the impact of the ongoing COVID-19 pandemic on our business operations; Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time and it is not possible for our management to predict all of such factors, nor can our management assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. ITEM I. FINANCIAL STATEMENTS NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2020 September 30, (Unaudited) 2020 ASSETS Cash Restricted cash Cash deposits with clearing organizations Securities owned, at fair value Receivables from broker-dealers and clearing organizations Forgivable loans receivable Other receivables, net Prepaid expenses Fixed assets, net Intangible assets, net Goodwill Deferred tax asset, net Right-of-use assets Other assets Total Assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Accrued commissions and payroll payable Accounts payable and accrued expenses Deferred clearing and marketing credits Contingent consideration Operating lease liabilities Other Total Liabilities Commitments and Contingencies (Note 13) Stockholders’ Equity Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding Common stock $0.02 par value, authorized 75,000,000 shares at December 31, 2020 and September 30, 2020; 13,765,304 shares issued and outstanding at December 31, 2020 and 13,639,622 shares issued and outstanding at September 30, 2020 Additional paid-in-capital Accumulated deficit Total National Holdings Corporation Stockholders’ Equity Total Liabilities and Stockholders’ Equity The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Month Period Ended December 31, 2020 2019 Revenues Commissions Net dealer inventory gains (losses) Investment banking Investment advisory Interest and dividends Transaction fees and clearing services Tax preparation and accounting Other Total Revenues Operating Expenses Commissions, compensation and fees Clearing fees Communications Occupancy License and registration Professional fees Interest Depreciation and amortization Other administrative expenses Total Operating Expenses Income (Loss) before Other Income (Expense) and Income Taxes Other Income (Expense) Other income (expense) Total Other Income Income (Loss) before Income Taxes Income tax expense (benefit) Net Income (Loss) Net income attributable to non-controlling interest Net income (loss) attributable to National Holdings Corporation common shareholders Net income (loss) per share attributable to National Holdings Corporation common shareholders - Basic Net income (loss) per share attributable to National Holdings Corporation common shareholders - Diluted Weighted average number of shares outstanding - Basic Weighted average number of shares outstanding - Diluted The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited) FOR THE Additional Total Common Stock Paid-in- Accumulated Non-controlling Stockholders’ Shares $ Amount Capital Deficit Interest Equity Balance, September 30, 2020 Stock-based compensation for restricted stock units Issuance of shares of common stock with respect to vested restricted stock units, net of 47,003 shares valued at $85,000 tendered for tax withholding Net income (loss) Balance, December 31, 2020 Additional Total Common Stock Paid-in- Accumulated Non-controlling Stockholders’ Shares $ Amount Capital Deficit Interest Equity Balance, Balance, October 1, 2018 Stock-based compensation for restricted stock units Issuance of shares of common stock with respect to vested restricted stock units, net of 52,291 shares valued at $139,000 tendered for tax withholding Net income (loss) Balance, December 31, 2019 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. CONDENSED CONSOLIDATED (Unaudited) 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation and amortization Amortization of forgivable loans Stock-based compensation Provision (recovery) for doubtful accounts Amortization of deferred clearing and marketing credit Change in fair value of contingent consideration Deferred tax expense Amortization of right-of-use assets Changes in assets and liabilities, net of business acquisitions Securities owned, at fair value Receivables from broker-dealers and clearing organizations Forgivable loans receivable Other receivables, net Prepaid expenses Other assets Accrued commissions and payroll payable, accounts payable and accrued expenses and other liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses, net of cash received Purchase of fixed assets Collection on notes receivable Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock for tax withholding Principal payments under finance lease obligations Principal payments under finance obligations Contingent consideration payments Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH CASH AND RESTRICTED CASH BALANCE Beginning of the period End of the period The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) 2020 2019 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest Income taxes, net of refunds SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Fixed assets (acquired but not paid) Businesses acquired (See Note 7) Assets acquired including goodwill Contingent consideration payable Additional consideration payable (net operating capital) Escrow deposit Cash received Cash paid, net of cash received The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements as of Certain items in the condensed consolidated statement of operations for the fiscal Non-controlling Interest The Company’s wholly-owned subsidiary, National Asset Management, Inc., a Washington corporation (“NAM”) has a majority voting interest in Innovation X Management, LLC (“Innovation X”), which together serve as the investment manager of an investment fund (See Note 19). Because NAM has the majority voting interest in Innovation X, the results of operations of Innovation X are included in the Company's consolidated financial statements, and the amount attributable to the other investor is recorded as a non-controlling interest. NOTE 2. National Holdings Corporation (“National” or the “Company”), a Delaware corporation organized in 1996, operates through its wholly-owned subsidiaries which principally provide financial services. Through its broker-dealer and investment advisory subsidiaries, the Company (1) offers full service retail brokerage and investment advisory services to individual, corporate and institutional clients, (2) provides investment banking, merger, acquisition and advisory services to micro, small and mid-cap high growth companies and (3) engages in trading securities, including making markets in micro and small-cap, NASDAQ and other The Company's broker-dealer The The The The The Company's wholly-owned subsidiary, Winslow, Evans & Crocker Insurance Agency, Inc., a Massachusetts corporation (“WIA”), provides fixed insurance products to its clients, and the Company's wholly-owned subsidiary, Winslow Financial, Inc., a Massachusetts corporation (“WF”) The Company's wholly-owned subsidiary, United Advisors, LLC, a New Jersey limited liability company (“UA”), is a New York-based advisor and wealth management firm. United Advisors Services, LLC, a New Jersey limited liability company (“UAS”), is an SEC Registered Investment Advisor, and Financial Services International Corporation, a Washington corporation (“FSIC”), was a FINRA registered broker-dealer. In October 2020, FSIC filed for NOTE 3. RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS AND OTHER RECEIVABLES At Other receivables at December 31, September 30, 2020 2020 Trailing fees Accounts receivable for tax and accounting services Allowance for doubtful accounts - tax and accounting services Advances to registered representatives Investment banking receivable Advisory fees Notes receivable Other Total other receivables, net NOTE 4. FORGIVABLE LOANS RECEIVABLE From time to time, the Company’s operating subsidiaries may make loans, evidenced by promissory notes, primarily to newly recruited independent financial advisors as an incentive for their affiliation. The notes receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (weighted average interest rate of 4%). These notes have various schedules for repayment or forgiveness based on production or retention requirements being met and mature at various dates through 2029. Forgiveness of loans amounted to The Company provides an allowance for doubtful accounts on the notes based on historical collection experience and continually evaluates the receivables for collectability and possible write-offs where a loss is deemed probable. As of Forgivable loan activity for the Balance, September 30, 2020 Additions Amortization Reclassification to other receivables Balance, December 31, 2020 NOTE 5. FAIR VALUE OF ASSETS AND LIABILITIES Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market or income approach are used to measure fair value. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 - Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company. Level 3 - Unobservable inputs which reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability. The following tables present the carrying values and estimated fair values at December 31, 2020 Total Estimated Assets Carrying Value Level 1 Level 2 Fair Value Cash Cash deposits with clearing organizations Receivables from broker-dealers and clearing organizations Forgivable loans receivable Other receivables, net Liabilities Accrued commissions and payroll payable Accounts payable and accrued expenses September 30, 2020 Total Estimated Assets Carrying Value Level 1 Level 2 Fair Value Cash Cash deposits with clearing organizations Receivables from broker-dealers and clearing organizations Forgivable loans receivable Other receivables, net Liabilities Accrued commissions and payroll payable Accounts payable and accrued expenses The following tables present the financial assets and liabilities measured at fair value on a recurring basis at December 31, 2020 Total Estimated Assets Carrying Value Level 1 Level 2 Level 3 Fair Value Securities owned: Corporate stocks Municipal bonds Restricted stock Corporate bonds Warrants Liabilities Contingent consideration September 30, 2020 Total Estimated Assets Carrying Value Level 1 Level 2 Level 3 Fair Value Securities owned: Corporate stocks Municipal bonds Restricted stock Warrants Liabilities Contingent consideration Changes in Level 3 assets measured at fair value on a recurring basis for the Beginning Balance as of September 30, 2020 Net realized Gain or (losses) Net Change in Unrealized Appreciation (Depreciation) Purchases Sales Transfer Into Level 3 (a) Transfer Out of Level 3 Ending Balance as of December 31, 2020 Assets Warrants See changes in Level 3 liabilities (contingent consideration) measured at fair value on a recurring basis for the The table below presents information on the valuation techniques, significant unobservable inputs and their ranges for the Fair Value Valuation Technique Input/Range Warrants Market Approach Discount for lack of marketability Volatility Certain positions in common stock and warrants were received as compensation for investment banking services. Restricted common stock and warrants may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of SEC Rule 144, including the requisite holding period. The unrealized Warrants are carried at fair value as determined by using the Black-Scholes option pricing model. This model takes into account the underlying securities’ current market values, the underlying securities’ market volatility, the terms of the warrants, exercise prices, and the risk-free return rate. A discount is applied for the warrants’ lack of marketability. The discount is based on the value of a protective put. Debt securities are valued based on recently executed transactions. NOTE 6. FIXED ASSETS Fixed assets as of December 31, September 30, Estimated Useful 2020 2020 Lives (years) Equipment and software Furniture and fixtures Leasehold improvements Lesser of useful life or term of lease Finance leases (primarily composed of computer equipment) Less accumulated depreciation and amortization Fixed assets, net Depreciation expense associated with fixed assets for the three months ended NOTE 7. BUSINESS COMBINATION AND CONTINGENT CONSIDERATION Tax & Accounting In The contingent consideration liability recognized in the above Contingent Consideration Set forth below are changes in the carrying value of the contingent consideration for the Fair value of contingent consideration at September 30, 2020 Fair value of contingent consideration in connection with the Tax & Accounting acquisition Payments Change in fair value Fair value of contingent consideration at December 31, 2020 NOTE 8. INTANGIBLE ASSETS Intangibles consisted of the following at December 31, 2020 Estimated Accumulated Carrying Useful Life Intangible asset Cost Amortization Value (years) Customer relationships Brand name Software license Total September 30, 2020 Estimated Accumulated Carrying Useful Life Intangible asset Cost Amortization Value (years) Customer relationships Software license Total Amortization expense associated with intangible assets for the three months ended The estimated future amortization expense of the finite lived intangible assets for the next five fiscal years and thereafter is as follows: Fiscal year ending September 30, Nine months ending September 30, 2021 2022 2023 2024 2025 Thereafter Total NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses as of December 31, September 30, 2020 2020 Legal Audit Telecommunications Data services Regulatory Settlements Other Total At NOTE 10. Basic net income (loss) per share of common stock attributable to the Company is computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is computed on the basis of such weighted average number of shares of common stock outstanding plus the dilutive effect of incremental shares of common stock potentially issuable under outstanding options, warrants and unvested restricted stock units utilizing the treasury stock method. A reconciliation of basic and diluted common shares used in the computation of per share data follows: 2020 2019 Basic weighted-average shares Effect of dilutive securities: Unvested restricted stock units Diluted weighted-average shares At NOTE 11. The Company is engaged in trading and providing a broad range of securities brokerage and investment services to a diverse group of retail and institutional clientele, as well as corporate finance and investment banking services to corporations and businesses. Counterparties to the Company’s business activities include broker-dealers and clearing organizations, banks and other financial institutions. The Company uses clearing brokers to process transactions and maintain customer accounts for the Company on a fee basis. The Company permits the clearing firms to extend credit to its clientele secured by cash and securities in the client’s account. The Company’s exposure to credit risk associated with the non-performance by its customers and counterparties in fulfilling their contractual obligations can be directly impacted by volatile or illiquid trading markets, which may impair the ability of customers and counterparties to satisfy their obligations to the Company. The Company has agreed to indemnify the clearing brokers for losses they incur while extending credit to the Company’s clients. It is the Company’s policy to review, as necessary, the credit standing of its customers and counterparties. Amounts due from customers that are considered uncollectible by the clearing broker are charged back to the Company by the clearing broker when such amounts become determinable. Upon notification of a charge back, such amounts, in total or in part, are then either (i) collected from the customers, (ii) charged to the broker initiating the transaction and/or (iii) charged to operations, based on the particular facts and circumstances. The Company maintains cash in bank deposits, which, at times, may exceed federally insured limits. The Company has not experienced and does not expect to experience losses on such accounts. A short sale involves the sale of a security that is not owned in the expectation of purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss. To the extent the Company invests in marketable securities, the Company is subject to various market risks related to the As a result of the spread of COVID-19, economic uncertainties have arisen which have negatively impacted and are likely to continue to negatively impact our businesses, financial condition, results of operations, cash flows, strategies and prospects. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our clients, employees, vendors and the markets in which we operate our businesses, all of which are uncertain at this time and cannot be predicted. The extent to which COVID-19 may impact our financial condition or results of operations cannot be reasonably estimated at this time. NOTE 12. In In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for the Fair Value Measurement," which removes or modifies certain current disclosures, and adds additional disclosures. The changes are meant to provide more relevant information regarding valuation techniques and inputs used to arrive at measures of fair value, uncertainty in the fair value measurements, and how changes in fair value measurements impact an entity's performance and cash flows. Certain disclosures in ASU 2018-13 will need to be applied on a retrospective basis and others on a prospective basis. The In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes". The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for the Company's fiscal year beginning October 1, 2021, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The NOTE 13.COMMITMENTS ANDCONTINGENCIES Litigation and Regulatory Matters The Company and its subsidiaries are defendants or respondents in various pending and threatened arbitrations, administrative proceedings and lawsuits seeking compensatory damages. Several cases have no stated alleged damages. Claim amounts are infrequently indicative of the actual amounts the Company will be liable for, if any. Further, the Company has a history of collecting amounts awarded in these types of matters from its registered representatives that are still affiliated, as well as from those that are no longer affiliated. Many of these claimants also seek, in addition to compensatory damages, punitive or treble damages, and all seek interest, costs and fees. These matters arise in the normal course of business. The Company intends to vigorously defend itself in these actions, and the ultimate outcome of these matters cannot be determined at this time. On July 3, 2019, a lawsuit was filed against National Securities Corporation, National Asset Management, Inc., the Company, the Company’s current board members and certain former board members, certain officers of the Company, John Does 1–10, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York, captioned The New York Department of Financial Services (the “Department”) is conducting an investigation of NSC’s compliance with the Department’s Cybersecurity Requirements for Financial Services Companies (the “Regulations”). The Regulations establish standards for the cybersecurity programs of entities the Department licenses or otherwise regulates, including NSC. NSC is cooperating with the Department’s investigation. Based on preliminary indications from the Department, the Company believes it is probable that the Department will assess a fine against NSC. However, in light of the uncertainties and variables involved, the Company is unable to estimate either the timing or the amount of the loss associated with this matter. There can be no assurance that this matter will not have a material adverse effect on NSC or the Company. Winslow, Evans & Crocker, Inc. (“WEC”) reached a settlement with the SEC over a mutual fund share class initiative. The settlement was reached in February 2021. The stock purchase agreement for the sale of WEC to the Company provides for the sellers to indemnify the Company for payments due related to this matter. Liabilities for potential losses from complaints, legal actions, government investigations and proceedings are established where management believes that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. In making these decisions, management bases its judgments on its knowledge of the situations, consultations with legal counsel and its historical experience in resolving similar matters. In many lawsuits, arbitrations and regulatory proceedings, it is not possible to determine whether a liability has been incurred or to estimate the amount of that liability until the matter is close to resolution. However, accruals are reviewed regularly and are adjusted to reflect management’s estimates of the impact of developments, rulings, advice of counsel and any other information pertinent to a particular matter. Because of the inherent difficulty in predicting the ultimate outcome of legal and regulatory actions, management cannot predict with certainty the eventual loss or range of loss related to such matters. In accordance with applicable accounting standards, the Company establishes an accrued liability for contingent litigation and regulatory matters when those matters present loss contingencies that are both probable and can be reasonably estimated. In such cases, there still may be an exposure to loss in excess of any amounts reasonably estimated and accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability, but continues to monitor, in conjunction with any outside counsel handling a matter, further developments that would make such loss contingency both probable and reasonably estimable. Once the Company establishes an accrued liability with respect to a loss contingency, the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established, and any appropriate adjustments are made each quarter. In making these decisions, management bases its judgments on its knowledge of the situations, consultations with legal counsel and its historical experience in resolving similar matters. In many lawsuits, arbitrations and regulatory proceedings, it is not possible to determine whether a liability has been incurred or to estimate the amount of that liability until the matter is close to resolution. Because of the broad differences in value ascribed to each case by each plaintiff and the Company, management cannot estimate the possible loss or range of loss, if any, in excess of any amounts reasonably estimated and accrued. As of December 31, 2020 and September 30, 2020 See the Other Commitments As of NOTE 14. NET CAPITAL REQUIREMENTS NSC is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which, among other things, requires the maintenance of minimum net capital. At WEC is also subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined under the Net Capital Rule, shall not exceed 15 to 1. At NOTE 15. STOCKHOLDERS' EQUITY Stock Options Information with respect to stock option activity during the Weighted Weighted Average Weighted Average Grant Average Exercise Date Fair Remaining Aggregate Price Per Value Contractual Intrinsic Options Share Per Share term (years) Value Outstanding at September 30, 2020 Forfeited Outstanding at December 31, 2020 Vested and exercisable at December 31, 2020 All compensation expense associated with the grants of stock options was recognized in prior years. Warrants The following table summarizes information about warrant activity during the Weighted Weighted Average Average Exercise Price Remaining Per Contractual Warrants Share Term Outstanding at September 30, 2020 Forfeited Outstanding and exercisable at December 31, 2020 Restricted Stock Units and Awards A summary of the Company's non-vested restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) for the Weighted Average Grant Date Shares Fair Value Non-vested restricted stock units and awards at September 30, 2020 Vested Non-vested restricted stock units and awards at December 31, 2020 One RSU or RSA gives the right to one share of the Company’s common stock. RSUs and RSAs that vest based on service and performance are measured based on the fair values of the underlying stock on the date of grant. The Company used a Lattice model to determine the fair value of the RSUs with a market condition. Compensation with respect to RSU and RSA awards is expensed on a straight-line basis over the vesting period. For the three NOTE 16. INCOME TAXES The Company files a consolidated federal income tax return and certain combined state and local income tax returns with its subsidiaries. Income taxes for the The effective tax rate for the At NOTE 17. SEGMENT INFORMATION The Company has two reportable segments. The brokerage and advisory services segment includes broker-dealer and investment advisory services, the sale of insurance products and licensed mortgage brokerage services provided by NSC, WEC, NAM, National Insurance, Prime Financial, The Corporate pre-tax income (loss) consists of certain items that have not been allocated to reportable segments. Segment information for the three Brokerage and Tax and Advisory Accounting Services Services Corporate Total Three Months Ended December 31, 2020 Revenues Pre-tax income (loss) (a) Assets (b) Depreciation and amortization Interest Capital expenditures 2019 Revenues Pre-tax income (loss) (a) Assets (b) Depreciation and amortization Interest Capital expenditures (a) Consists of professional fees, depreciation expense and other expenses not allocated to reportable segments by management. (b) Consists principally of deferred tax assets, cash, prepaid and fixed asset balances held at Corporate. NOTE 18. ACQUISITION OF CONTROLLING INTEREST IN THE COMPANY On November 14, 2018, B. Riley Financial, Inc. (“B. Riley”) and FBIO Acquisition, Inc. (“FBIO Acquisition”), a subsidiary of Fortress Biotech, Inc. (“Fortress”), entered into a stock purchase agreement whereby FBIO Acquisition agreed to sell FBIO Acquisition’s majority stake in the Company to a wholly-owned subsidiary of B. Riley B. Riley Proposal On April 30, 2020, B. Riley and the Company entered into a waiver of certain provisions of the NOTE 19. VARIABLE INTEREST ENTITIES The Company has entered into agreements to provide investment banking and advisory services to numerous investment funds (the “Funds”) that are considered variable interest entities (“VIEs”) under the accounting guidance. These Funds are established primarily to make and manage investments in equity or convertible debt securities of privately held companies that the Company, as investment advisor to the Funds, believes possess innovative or disruptive technologies and present opportunities for an initial public offering (“IPO”) or other similar liquidity event within approximately one to five years from the date of investment. The Funds intend to hold the investments until an IPO or other similar liquidity event and then to make distributions to its investors when contractually permitted, The Company earns fees from the Funds in the form of placement agent fees and carried interest. For placement agent fees, the Company receives a cash fee of generally 7% to 10% of the amount of raised capital for the Funds and the fee is recognized at the time the placement services occurred. The Company receives carried interest as a percentage allocation (8% to 15%) of the profits of the Funds as compensation for asset management services provided to the Funds and it is recognized at the time of distribution. Once fund investors have received distributions in an amount equal to one hundred percent (100%) of their total capital contributions, the Company as the manager of the Funds will be entitled to share in any profits of the Funds to the extent of the carried interest. As the fee arrangements under such agreements are arm's-length and contain customary terms and conditions and represent compensation that is considered fair value for the services provided, the fee arrangements are not considered variable interests and accordingly, the Company does not consolidate such VIEs. Placement agent fees attributable to such arrangements for the three months ended Unrecognized Carried Interest Based on the investment performance of the Funds as of December 31, 2020, unrecognized carried interest under a hypothetical distribution was $41,260,000 and the related compensation expense associated was $28,586,000. Carried interest is dependent on the market and will fluctuate until a distribution event occurs. NOTE 20. REVENUES FROM CONTRACTS AND SIGNIFICANT CUSTOMERS Performance Obligations The Company recognizes revenue from contracts with customers when, or as, the Company satisfies its performance obligations by transferring the promised goods or services to the customers. A good or service is transferred to a customer when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the Company determines the customer obtains control over the promised good or service. Transaction Price and Variable Consideration The amount of revenue recognized reflects the consideration (“transaction price”) the Company expects to be entitled to in exchange for the transfer of the goods or services to the customer services. In determining the transaction price, the Company considers multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, the Company considers the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of influence, such as market volatility or the judgment and actions of third parties. Contract Assets Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer, excluding unconditional rights to consideration that are presented as receivables. Contract Liabilities Contract liabilities represent the Company’s obligation to deliver products or provide data to customers in the future for which cash has already been received. The following provides detailed information on the recognition of the Company’s revenues from contracts with customers: Commissions and Transaction Fees and Clearing Services Investment Banking The Company’s revenues from advisory services primarily consist of fees generated in connection with mergers and acquisition and advisory transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully execute a specific transaction. Fees received prior to the completion of the transaction are deferred within other liabilities in the consolidated statements of financial condition. A significant portion of the fees the Company receives for advisory services are considered variable as they are contingent upon a future event and are excluded from the transaction price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to occur upon achievement of the specified milestone. Payment for advisory services is generally due promptly upon completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. The Company recognizes a receivable between the date of completion of the milestone and payment by the customer. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other investment banking advisory related costs are expensed as incurred. All investment banking advisory expenses are recognized within their respective expense category on the consolidated statements of operations and any expenses reimbursed by the clients are recognized as investment banking revenues. The Company controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis. Under accounting standards in effect for prior periods, the Company recorded expenses net of client reimbursements and/or netted against revenues. Investment Advisory/Asset Management Fees. The Company receives management and performance fees in connection with investment advisory services provided to various funds and accounts, which are satisfied over time as the customer receives the benefits of the services evenly throughout the term of the contract. Management and performance fees are considered variable as they are subject to fluctuation (e.g., changes in assets under management, market performance) and/or are contingent on a future event during the measurement period (e.g., meeting a specified benchmark) and are recognized only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. Management fees are generally based on month-end assets under management or an agreed upon notional amount and are included in the transaction price at the end of each month when the assets under management or notional amount is known. Performance fees are received when the return on assets under management for a specified performance period exceed certain benchmark returns, “high-water marks” or other performance targets. The performance period related to performance fees is annual, semiannual or at the recognition of a liquidation event. Accordingly, performance fee revenue will generally be recognized only at the end of the performance period to the extent that the benchmark return has been met. Tax Preparation and Accounting. Disaggregation of Revenue The following presents the Company’s revenues from contracts with customers disaggregated by major business activity and segment for the three Brokerage Tax and For the Three Months Ended and Advisory Accounting December 31, 2020 Services Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services Investment banking Investment advisory Tax preparation and accounting Sub-total revenue from contracts with customers Other revenue Total revenue Brokerage Tax and For the Three Months Ended and Advisory Accounting December 31, 2019 Services Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services Investment banking Investment advisory Tax preparation and accounting Sub-total revenue from contracts with customers Other revenue Total revenue Information on Remaining Performance Obligations and Revenue Recognized from Past Performance The Company does not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at Contract Balances The timing of the Company’s revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Contract Costs Incremental contract costs are expensed when incurred when the amortization period of the asset that would have been recognized is one year or less. Otherwise, incremental contract costs are recognized as an asset and amortized over time as services are provided to a customer. NOTE 21. The Company’s lease agreements primarily cover office space in various states expiring at various dates. The Company’s leases are predominantly operating leases, which are included in The Company’s lease population does not include any residual value guarantees, and therefore none were considered in the calculation of the lease balances. The Company has leases with variable payments, most commonly in the form of common area maintenance charges which are based on actual costs incurred. These variable payments were excluded from the right-of-use asset and lease liability balances since they are not fixed or in-substance fixed payments. The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for lease and non-lease components as a single lease component. For leases with terms greater than 12 months, right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its incremental borrowing rate. The Company's lease agreements generally do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, the Company estimates the Company’s incremental borrowing rate based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter in determining the present value of future payments. Lease expense for net present value of payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the condensed consolidated statements of financial condition. The Company recognizes lease expense for these leases on a straight-line basis over the term of the lease. The components of lease expense were as follows: For the Three Months Ended December 31, 2020 December 31, 2019 Operating lease cost: Finance lease cost: Amortization of finance lease assets Interest on finance lease liabilities Total finance lease cost The table below summarizes the Company’s scheduled future minimum lease payments under operating Fiscal Year Operating Ending September 30, Leases Nine months ending September 30, 2021 2022 2023 2024 2025 Thereafter Total minimum lease payments Less: Amounts representing interest not yet incurred Present value of lease obligations As of December 31, 2020, the Company has an additional operating lease, primarily for additional office space in Red Bank, New Jersey, that has not yet commenced. The following table presents the balances for operating and finance right-of-use assets and lease liabilities: Leases Classification December 31, 2020 September 30, 2020 Assets Operating lease assets Right-of-use assets Finance lease assets Fixed assets Total lease assets Liabilities Operating lease liabilities Operating lease liabilities Finance lease liabilities Other liabilities Total lease liabilities The table below presents additional information related to the For the Three Months Ended December 31, 2020 December 31, 2019 Cash paid for amounts related to lease liabilities Operating cash flows from finance leases (interest) Operating cash flows from operating leases (lease payments reflected in the change in accounts payable, accrued expenses and other liabilities in the statement of cash flow) Financing cash flows from finance leases (principal payments) Operating lease assets obtained in exchange for lease liabilities Weighted Average Remaining Lease Term: Weighted Average Discount Rate: NOTE 22. PAYCHECK PROTECTION PROGRAM On April 10, 2020, NSC entered into a Promissory Note (the “NSC Note”) with Axos Bank as the lender (the “Lender”), pursuant to which the Lender agreed to make a loan to NSC under the Paycheck Protection Program (the “NSC Loan”) offered by the U.S. Small Business Administration (the “SBA”) pursuant to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to qualified small businesses (the “PPP”) in a principal amount of $5,523,738. On April 15, 2020, WEC also entered into a Promissory Note (the “WEC Note” and together with the NSC Note, the “PPP Notes”) with the Lender, pursuant to which the Lender agreed to make a loan to WEC under the PPP (the “WEC Loan” and together with the NSC Loan, the “PPP Loans”) in a principal amount of $973,062. The interest rate on each PPP Note is a fixed rate of 1% per annum. Interest is calculated by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. The applicable borrower is required to make monthly payments commencing on the first day of the first full calendar month following the end of a statutorily defined deferral period (the “Deferral Period”), and such payments shall continue to be due and payable on the first day of each calendar month thereafter until the date that is two (2) years following the funding date (the “Maturity Date”), or April 13, 2022 in the case of the NSC Note and April 16, 2022 in the case of the WEC Note. Monthly payment amounts are based on repayment of interest accrued during the Deferral Period, interest accruing until and including the Maturity Date, and full amortization of the outstanding principal balance. The PPP loans are recorded as debt. According to the terms of the PPP, all or a portion of loans under the PPP may be forgiven if certain conditions set forth in the CARES Act and the rules of the SBA are met. Each PPP Note includes events of default, the occurrence and continuation of which would provide the Lender with the right to exercise remedies against NSC or WEC, as applicable, including the right to declare the entire unpaid principal balance under the applicable PPP Note and all accrued unpaid interest immediately due. The Company has applied for forgiveness of the loans, but no assurance can be given that the Company will be granted forgiveness of the loans. During the three months ended December 31, 2020, investment banking revenues include approximately $620,000 of fees related to placement of securities for B. Riley Michael E. Singer, Executive Vice Chairman of the Board of the Company and Chief Strategy Officer, is the managing member and sole equity owner of Alternative Insight LLC (“Alternative Insight”). Alternative Insight is the general partner of Insight Wellness Fund, LLC (the “Wellness Fund”) and Insight Dharma, LLC (the “Dharma Fund” and, together with the Wellness Fund, the “Funds”). The Company performs certain solicitation and placement agent services on behalf of the Funds. During the three months ended December 31, 2020, the Funds collectively paid total placement fees to the Company of $232,000. On The board of directors of the Company (the “Board”) delegated to a special committee (the “Special Committee”) the responsibility and authority to review, evaluate, negotiate and recommend or not recommend to the Board a potential strategic transaction involving the Company. The Special Committee recommended to the Board the approval, execution, delivery and performance by the Company of the Merger Agreement. The Board, acting on the recommendation of the Special Committee, approved the execution, delivery and performance by the Company of the Merger Agreement, approved the acquisition of the Company by B. Riley on the terms and subject to the conditions set forth in the Merger Agreement and resolved to recommend that the stockholders of the Company (other than B. Riley and its subsidiaries) tender their shares of Common Stock to Merger Sub pursuant to the Offer. Under the Merger Agreement, Merger Sub is required to commence the Offer as promptly as reasonably practicable. The Offer commenced on January 27, 2021 and will initially expire at one minute following 11:59 P.M. (12:00 midnight), New York City time, on the twentieth (20th) business day following (and including the date of) the commencement of the Offer. The Offer may be extended subject to and in accordance with the terms set forth in the Merger Agreement. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (i) each share of Common Stock not tendered pursuant to the Offer (other than any shares of Common Stock (a) owned by the Company or any direct or indirect wholly-owned subsidiary of the Company immediately prior to the Effective Time, (b) owned by B. Riley, Merger Sub or any other direct or indirect wholly-owned subsidiary of B. Riley immediately prior to the Effective Time or (c) held by stockholders who have properly exercised and perfected their demands for appraisal of such shares of Common Stock in accordance with the DGCL and have neither withdrawn nor lost such rights prior to the Effective Time) will each be cancelled and converted into the right to receive the Offer Price, (ii) each outstanding time-based restricted stock unit, whether vested or unvested, with respect to shares of Common Stock (each, a “Company RSU”) and each outstanding performance-based restricted stock unit, whether vested or unvested, with respect to shares of Common Stock (each, a “Company PSU”) shall be converted into the right to receive an amount of cash equal to the full number of shares of Common Stock underlying such Company RSU or Company PSU multiplied by the Offer Price, and (iii) each outstanding stock option, whether vested or unvested, with respect to shares of Common Stock (each, a “Company Option”) shall be converted into the right to receive an amount of cash equal to the number of shares of Common Stock underlying such Company Option multiplied by the excess, if any, of the Offer Price over the Company Option’s exercise price. For the avoidance of doubt, any Company Option with an exercise price greater than or equal to the Offer Price shall be cancelled for no consideration. Concurrently with the execution of the Merger Agreement, B. Riley and the Company entered into an agreement (the “Termination Agreement”) pursuant to which (i) the Company waived the standstill obligations of B. Riley pursuant to the Standstill Agreement and (ii) the Standstill Agreement will terminate, effective upon the consummation of the Merger. Two lawsuits have been filed relating to the Offer and the Merger in federal courts by purported individual shareholders against the Company, certain of its directors and, The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. This Report may contain certain statements of a forward-looking nature relating to future events or future business performance. Any such statements that refer to our estimated or anticipated future results or other non-historical facts are forward-looking and reflect our current perspective of existing trends and information. These statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, risks and uncertainties detailed under the section titled "Risks Factors" of our Form 10-K for the year ended September 30, OVERVIEW We are engaged in independent brokerage and advisory services and asset management services, investment banking, equity research and institutional sales and trading, through our broker-dealer subsidiaries, NSC and WEC. We are committed to establishing a significant presence in the financial services industry by meeting the varying investment needs of our retail, corporate and institutional clients. Our wholly-owned subsidiary, NAM, is a federally-registered investment adviser that provides asset management advisory services to clients for a fee based upon a percentage of assets managed. We also provide tax preparation services through National Tax, which provides tax preparation services to individuals, predominantly in the middle and upper income tax brackets and accounting services to small and midsize companies. NSC and WEC are subject to regulation by, among others, the SEC, FINRA and is a member of the SIPC. In addition, NSC is licensed to conduct its brokerage activities in all 50 states, plus the District of Columbia and Puerto Rico and the U.S. Virgin Islands. National Tax is also subject to regulation by, among others, the Internal Revenue Service. As of December 31, Our registered representatives offer a broad range of investment products and services. These products and services allow us to generate both commissions (from transactions in securities and other investment products) and fee income (for providing investment advisory services, namely managing clients’ accounts). The investment products and services offered include but are not limited to stocks, bonds, mutual funds, annuities, insurance, and managed money accounts. Agreement and Plan of Merger On January 10, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with B. Riley, and B. Riley Principal Merger Corp. III, a Delaware corporation and wholly-owned subsidiary of B. Riley (“Merger Sub”). The Merger Agreement provides for the acquisition of the Company by B. Riley through a cash tender offer (the “Offer”) by Merger Sub for all of our outstanding shares of common stock (“Common Stock”), other than the shares of Common Stock owned by B. Riley and its subsidiaries, for $3.25 per share of Common Stock (the “Offer Price”) in cash, without interest, less any applicable withholding taxes. Following the consummation of the Offer, subject to the absence of injunctions or other legal restraints preventing the consummation of the Merger and the satisfaction or waiver the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of B. Riley (the “Merger”), pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law (the “DGCL”), without any additional stockholder approvals. The Merger will be effected as soon as practicable following the time of purchase by Merger Sub of shares of Common Stock validly tendered and not withdrawn in the Offer. B. Riley and its subsidiaries currently own approximately 45% of the issued and outstanding shares of our Common Stock. Our board of directors (the “Board”) delegated to a special committee (the “Special Committee”) the responsibility and authority to review, evaluate, negotiate and recommend or not recommend to the Board a potential strategic transaction involving the Company. The Special Committee recommended to the Board the approval, execution, delivery and performance by the Company of the Merger Agreement. The Board, acting on the recommendation of the Special Committee, approved the execution, delivery and performance by the Company of the Merger Agreement, approved the acquisition of the Company by B. Riley on the terms and subject to the conditions set forth in the Merger Agreement and resolved to recommend that our stockholders (other than B. Riley and its subsidiaries) tender their shares of Common Stock to Merger Sub pursuant to the Offer. Under the Merger Agreement, Merger Sub is required to commence the Offer as promptly as reasonably practicable. The Offer commenced on January 27, 2021 and will initially expire at one minute following 11:59 P.M. (12:00 midnight), New York City time, on the twentieth (20th) business day following (and including the date of) the commencement of the Offer. The Offer may be extended subject to and in accordance with the terms set forth in the Merger Agreement. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (i) each share of Common Stock not tendered pursuant to the Offer (other than any shares of Common Stock (a) owned by us or any of our direct or indirect wholly-owned subsidiary immediately prior to the Effective Time, (b) owned by B. Riley, Merger Sub or any other direct or indirect wholly-owned subsidiary of B. Riley immediately prior to the Effective Time or (c) held by stockholders who have properly exercised and perfected their demands for appraisal of such shares of Common Stock in accordance with the DGCL and have neither withdrawn nor lost such rights prior to the Effective Time) will each be cancelled and converted into the right to receive the Offer Price, (ii) each outstanding time-based restricted stock unit, whether vested or unvested, with respect to shares of Common Stock (each, a “Company RSU”) and each outstanding performance-based restricted stock unit, whether vested or unvested, with respect to shares of Common Stock (each, a “Company PSU”) shall be converted into the right to receive an amount of cash equal to the full number of shares of Common Stock underlying such Company RSU or Company PSU multiplied by the Offer Price, and (iii) each outstanding stock option, whether vested or unvested, with respect to shares of Common Stock (each, a “Company Option”) shall be converted into the right to receive an amount of cash equal to the number of shares of Common Stock underlying such Company Option multiplied by the excess, if any, of the Offer Price over the Company Option’s exercise price. For the avoidance of doubt, any Company Option with an exercise price greater than or equal to the Offer Price shall be cancelled for no consideration. Concurrently with the execution of the Merger Agreement, we entered into an agreement with B. Riley (the “Termination Agreement”) pursuant to which (i) we waived the standstill obligations of B. Riley pursuant to that certain Agreement, dated November 14, 2018, between the Company and B. Riley (the “Standstill Agreement”) and (ii) the Standstill Agreement will terminate effective upon the consummation of the Merger. COVID-19 Update The COVID-19 outbreak continues to cause significant disruption in business activity and the financial markets both globally and in the United States. As a result of the spread of COVID-19, economic uncertainties have arisen which have negatively impacted and are likely to continue to negatively impact our businesses, financial condition, results of operations, cash flows, strategies and prospects. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our clients, employees, vendors and the markets in which we operate our businesses, all of which are uncertain at this time and cannot be predicted. The extent to which COVID-19 may impact our financial condition or results of operations cannot be reasonably estimated at this time. The Company’s management put cost-savings plans into effect to mitigate the cash drain that potential, downward pressure on its business might cause. In particular, the Company’s management made the very difficult decision to downsize its staff, significantly reduce compensation for many employees and implement moratoriums in variable spending categories. We continue to be cautious due to events that may be driven by the evolution of this pandemic that are unknown, are highly uncertain, and cannot be predicted as it relates to the Company’s clients, employees, vendors, and the markets in which the Company operates its businesses. RESULTS OF OPERATIONS Three Months Ended Summary Our Revenues Total revenues increased Three Months Ended December 31, Increase (Decrease) 2020 2019 Amount Percent Commissions Net dealer inventory gains (losses) Investment banking Investment advisory Interest and dividends Transaction fees and clearing services Tax preparation and accounting Other Total Revenues Commissions increased Net dealer inventory gains (losses), increased Investment banking fees Investment advisory fees increased Interest and dividend income decreased Transaction fees and clearing services increased Tax preparation and accounting fees increased Other revenue decreased Operating Expenses Total operating expenses increased Three Months Ended December 31, Increase (Decrease) 2020 2019 Amount Percent Commissions, compensation and fees Clearing fees Communications Occupancy License and registration Professional fees Interest Depreciation and amortization Other administrative expenses Total Operating Expenses Commissions, compensation, and fees increased Clearing fees increased Communications expenses increased$310,000, or 46%, to $984,000 in the current quarter as compared to $674,000 recorded in the comparative period last year. This increase is primarily due to the incremental expense as a result of the Winslow Occupancy expenses increased License and registration expense decreased by $161,000, or Professional fees increased by Interest expense increased by Depreciation and amortization expenses increased Other administrative expenses NON-GAAP INFORMATION Management considers earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted, an important indicator in evaluating our business on a consistent basis across various periods. Due to the significance of non-recurring items, EBITDA, as adjusted, enables our Board and management to monitor and evaluate our business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not part of our core operations, such as interest expense and amortization expense associated with intangible assets, or items that do not involve a cash outlay, such as stock-related compensation. EBITDA, as adjusted should be considered in addition to, rather than as a substitute for pre-tax income (loss), net income (loss) and cash flows from operating activities. The following table presents a reconciliation of EBITDA, as adjusted, to net income (loss) attributable to common shareholders as reported in accordance with generally accepted accounting principles, or GAAP: Three Months Ended December 31, 2020 2019 Net income (loss) attributable to common shareholders, as reported Interest expense Income taxes Depreciation Amortization EBITDA Non-cash compensation expense Forgivable loan amortization Unrealized loss (gain) on the firm's warrant portfolio EBITDA, as adjusted EBITDA, adjusted for non-cash compensation expense, forgivable loan amortization, professional fees associated with the B. Riley proposal and unrealized loss (gain) on the firm’s warrant portfolio, Average balance during Ending balance at first three months of fiscal December 31, year ending September 30, 2020 2019 2021 2020 Cash Receivables from broker-dealers and clearing organizations Securities owned (excludes warrants) Accrued commissions and payroll payable, accounts payable and accrued expenses At NSC is subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital. At WEC is also subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined under the Net Capital Rule, shall not exceed 15 to 1. At We extend unsecured credit in the normal course of business to our brokers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific individual brokers from whom the receivables are due. The objective of liquidity management is to ensure that we have ready access to sufficient funds to meet commitments, fund deposit withdrawals and efficiently provide for the credit needs of customers. Our primary sources of liquidity include our cash flow from operations and the sale of our securities and other financing activities. We believe that we have sufficient funds from operations to fund our ongoing operating requirements for at least the next twelve months. However, we may need to raise funds to enhance our working capital and for strategic purposes. We do not have any material commitments for capital expenditures. We routinely purchase computer equipment and technology to maintain or enhance the productivity of our employees and such capital expenditures amounted to Certain of our subsidiaries have received loans from the Small Business Administration’s Payroll Protection Plan program, a significant part of the U.S. government’s pandemic stimulus. We anticipate that our use of proceeds from the PPP loans may result in loans being forgiven. See Note 22 of the notes to the condensed consolidated financial statements for additional information. Cash Flows - Operating Activities Net cash provided by (used in) operating activities was $1,422,000 and $(6,326,000) for the three months ended December 31, 2020 and 2019, respectively. During the three months ended December 31, 2020, net cash provided by operating activities was $ Changes in operating assets and liabilities consisting primarily of (i) a During the $ Changes in operating assets and liabilities consisting primarily of (i) a Cash Flow - Investing Activities Net cash used in investing activities was Cash Flow - Financing Activities Net cash OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. INFLATION We believe inflation has not had a material effect on our financial condition as of Not applicable. Evaluation of disclosure controls and procedures. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, are recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. Based on our evaluation of disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b) or 15d-15(b), our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were adequate and effective at the reasonable assurance level. Changes in internal controls. There were no changes in our internal control over financial reporting during the quarter ended The Company and its subsidiaries are defendants or respondents in the normal course of business in various pending and threatened arbitrations, administrative proceedings and lawsuits seeking compensatory damages. Several such cases have no stated alleged damages. Claim amounts are infrequently indicative of the actual amounts On July 3, 2019, a lawsuit was filed against National Securities Corporation, National Asset Management, Inc., the Company, the Company’s current board members and certain former board members, certain officers of the Company, John Does 1–10, and the Company as a nominal defendant, in the United States District Court for the Southern District of New York, captioned Two lawsuits have been filed relating to the Offer and the Merger in federal courts by purported individual shareholders against the Company, certain of its directors and, in one case, B. Riley and Merger Sub. The cases are, in the order by which they were filed: Raul v. National Holdings Corporation et al., 1:21-cv-01103 (S.D.N.Y. Feb. 8, 2021); and Johnson v. National Holdings Corporation et al., 1:21-cv-00176-UNA (D. Del. Feb. 9, 2021). The complaints generally allege that the Schedule 14D-9 misrepresented and/or omitted certain purportedly material information and assert violations of Sections 14(e), 14(d) and 20(a) of the Securities Exchange Act of 1934, rules thereunder or common law fraud and/or negligent misrepresentation or concealment. The alleged material misstatements and omissions relate to, among other topics, the Company’s forecasts, the financial analysis of the Company’s financial advisor, the interests of directors and officers in the Offer and the Merger and events giving rise to the Offer and the Merger. The plaintiffs in each of the foregoing actions seek, among other things, an injunction against the consummation of the Offer and the Merger or, in the alternative, rescission damages, as well as an award of costs and expenses (including attorneys’ and experts’ fees). The Company disputes the allegations made in both lawsuit complaints. The New York Department of Financial Services (the “Department”) is conducting an investigation of National Securities Corporation’s compliance with the Department’s Cybersecurity Requirements for Financial Services Companies (the “Regulations”). The Regulations establish standards for the cybersecurity programs of entities the Department licenses or otherwise regulates, including National Securities. National Securities is cooperating with the Department’s investigation. Based on preliminary indications from the Department, the Company believes it is probable that the Department will assess a fine against National Securities. However, in light of the uncertainties and variables involved, the Company is unable to estimate either the timing or the amount of the loss associated with this matter. There can be no assurance that this matter will not have a material adverse effect on National Securities or the Company. Winslow, Evans & Crocker, Inc. (“WEC”) reached a settlement with the SEC over a mutual fund share class initiative. The settlement was reached in February 2021. The stock purchase agreement for the sale of WEC to the Company provides for the sellers to indemnify the Company for payments due related to this matter. There The announcement and pendency of the transactions contemplated by the Merger Agreement may adversely affect our ● the impairment of our ability to attract, retain, and motivate our employees, including key personnel; ● the diversion of significant management time and resources towards the completion of the proposed transaction; ● difficulties maintaining relationships with clients, registered representatives, investment advisors, vendors and other business partners; ● delays or deferments of certain business decisions by our clients, registered representatives, investment advisors, vendors and other business partners; ● the inability to pursue alternative business opportunities or make appropriate changes to our business because the transaction agreement requires us to conduct our business in the ordinary course of business consistent with past practice and not engage in certain kinds of transactions prior to the completion of the proposed transaction; ● litigation relating to the proposed transaction and the costs related thereto; and ● the incurrence of significant costs, expenses, and fees for professional services and other transaction costs in connection with the proposed transaction. Failure to consummate the proposed transaction within the expected timeframe or at all could have a material adverse impact on our business, financial condition and results of operations. There can be no assurance that the proposed Merger will be consummated. The consummation of the proposed Merger is subject to the satisfaction or waiver of specified closing conditions, including the prior consummation of the Offer, which is conditioned upon (i) there being validly tendered and not validly withdrawn that number of shares of common stock representing at least a majority of our shares of common stock outstanding at the expiration time of the Offer (other than shares held by B. Riley, any subsidiary, director or executive officer of B. Riley, or certain executive officers of the Company) and (ii) other customary closing conditions. There can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all. The Merger Agreement also provides that the Merger Agreement may be terminated by us or B. Riley under certain circumstances, and in certain specified circumstances upon termination of the Merger Agreement we will be required to pay B. Riley a termination fee. If we are required to make this payment, doing so would materially adversely affect our business, financial condition and results of operations. A failed transaction may result in negative publicity and a negative impression of us among our clients, registered representatives, investment advisors or in the investment community or business community generally. Further, any disruptions to our business resulting from the announcement and pendency of the proposed Merger, including any adverse changes in our relationships with our clients, registered representatives, investment advisors, vendors and employees, could continue or accelerate in the event of a failed transaction. In addition, if the proposed Merger is not completed, and there are no other parties willing and able to acquire our Company at a price of $3.25 per share or higher, on terms acceptable to us, the share price of our common stock will likely decline to the extent that the current market price of our common stock reflects an assumption that the proposed Merger will be completed. Also, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the None. None. Not applicable. 31.1 31.2 32.1 32.2 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Labels Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL HOLDINGS CORPORATION February 16, 2021 By: /s/ Michael A. Mullen Michael A. Mullen Chief Executive Officer (Principal Executive Officer) February 16, 2021 By: /s/ Glenn C. Worman Glenn C. Worman Chief Financial Officer (Principal Financial Officer)JUNE 30,DECEMBER 31, 2020 and (xii) the previously announced cash tender offer fromby B. Riley Financial regrading a potential transaction involving ourto purchase certain shares of our common stock. $ 27,965,000 $ 27,327,000 962,000 962,000 686,000 686,000 4,652,000 4,739,000 5,198,000 3,367,000 4,608,000 4,269,000 10,593,000 12,394,000 6,565,000 4,258,000 4,210,000 4,382,000 12,532,000 12,276,000 11,673,000 11,673,000 3,358,000 4,795,000 13,868,000 14,721,000 1,727,000 1,388,000 $ 108,597,000 $ 107,237,000 17,993,000 15,445,000 9,374,000 9,656,000 105,000 157,000 10,702,000 10,401,000 15,864,000 16,719,000 PPP loans 6,538,000 6,523,000 1,549,000 1,701,000 62,125,000 60,602,000 — — 275,000 273,000 93,773,000 93,079,000 (47,576,000 ) (46,717,000 ) 46,472,000 46,635,000 $ 108,597,000 $ 107,237,000 June 30,
2020
(Unaudited) September 30,
2019ASSETS Cash $ 30,594,000 $ 30,443,000 Restricted cash 961,000 960,000 Cash deposits with clearing organizations 653,000 436,000 Securities owned, at fair value 7,891,000 12,481,000 Receivables from broker-dealers and clearing organizations 3,645,000 3,490,000 Forgivable loans receivable 4,244,000 1,834,000 Other receivables, net 11,056,000 5,672,000 Prepaid expenses 3,396,000 3,639,000 Fixed assets, net 4,523,000 5,067,000 Intangible assets, net 10,420,000 5,441,000 Goodwill 7,903,000 5,153,000 Deferred tax asset, net 4,776,000 4,560,000 Operating lease assets 14,637,000 — Other assets 1,475,000 2,031,000 Total Assets $ 106,174,000 $ 81,207,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Accrued commissions and payroll payable $ 17,746,000 $ 18,590,000 Accounts payable and accrued expenses 8,381,000 8,643,000 Deferred clearing and marketing credits 210,000 367,000 Contingent consideration 6,850,000 1,620,000 Operating lease liabilities 16,858,000 — PPP loans 6,509,000 — Other 1,870,000 388,000 Total Liabilities 58,424,000 29,608,000 Commitments and Contingencies (Note 13) Stockholders’ Equity Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding — — Common stock $0.02 par value, authorized 75,000,000 shares at June 30, 2020 and September 30, 2019; 13,584,593 shares issued and outstanding at June 30, 2020 and 13,158,441 shares issued and outstanding at September 30, 2019 271,000 263,000 Additional paid-in-capital 92,336,000 90,354,000 Accumulated deficit (44,857,000 ) (40,779,000 ) Total National Holdings Corporation Stockholders’ Equity 47,750,000 49,838,000 Non-controlling interest — 1,761,000 Total Stockholders’ Equity 47,750,000 51,599,000 Total Liabilities and Stockholders’ Equity $ 106,174,000 $ 81,207,000 $ 33,613,000 $ 23,167,000 1,330,000 1,192,000 15,242,000 15,227,000 12,730,000 7,389,000 885,000 1,394,000 2,509,000 1,775,000 1,412,000 931,000 111,000 116,000 67,832,000 51,191,000 56,735,000 44,121,000 2,564,000 1,502,000 984,000 674,000 1,302,000 1,168,000 863,000 1,024,000 3,145,000 2,194,000 20,000 14,000 846,000 530,000 2,669,000 2,304,000 69,128,000 53,531,000 (1,296,000 ) (2,340,000 ) 9,000 116,000 9,000 116,000 (1,287,000 ) (2,224,000 ) (428,000 ) (725,000 ) (859,000 ) (1,499,000 ) — (94,000 ) $ (859,000 ) $ (1,593,000 ) $ (0.06 ) $ (0.12 ) $ (0.06 ) $ (0.12 ) 13,639,622 13,169,025 13,639,622 13,169,025 (Unaudited) Three Month Period Ended
June 30, Nine Month Period Ended
June 30, 2020 2019 2020 2019 Revenues Commissions $ 30,821,000 $ 21,434,000 $ 85,141,000 $ 65,246,000 Net dealer inventory gains 1,421,000 167,000 1,393,000 933,000 Investment banking 14,730,000 15,824,000 37,515,000 52,692,000 Investment advisory 8,709,000 7,577,000 25,371,000 18,949,000 Interest and dividends 870,000 1,434,000 3,389,000 4,430,000 Transaction fees and clearing services 2,262,000 1,465,000 6,216,000 5,202,000 Tax preparation and accounting 2,807,000 2,675,000 8,046,000 7,572,000 Other 96,000 199,000 370,000 559,000 Total Revenues 61,716,000 50,775,000 167,441,000 155,583,000 Operating Expenses Commissions, compensation and fees 53,183,000 42,077,000 147,825,000 132,120,000 Clearing fees 611,000 492,000 1,689,000 1,781,000 Communications 814,000 720,000 2,587,000 2,239,000 Occupancy 1,349,000 966,000 3,742,000 2,872,000 License and registration 1,084,000 934,000 3,067,000 2,260,000 Professional fees 2,360,000 1,130,000 6,431,000 4,848,000 Interest 26,000 8,000 63,000 26,000 Depreciation and amortization 755,000 461,000 2,098,000 1,320,000 Other administrative expenses 2,174,000 2,773,000 6,133,000 9,484,000 Total Operating Expenses 62,356,000 49,561,000 173,635,000 156,950,000 Income (Loss) before Other Income (Expense) and Income Taxes (640,000 ) 1,214,000 (6,194,000 ) (1,367,000 ) Other Income (Expense) Gain on disposal of National Tax branch — — 297,000 — Other income (expense) 10,000 6,000 131,000 18,000 Total Other Income 10,000 6,000 428,000 18,000 Income (Loss) before Income Taxes (630,000 ) 1,220,000 (5,766,000 ) (1,349,000 ) Income tax expense (benefit) (235,000 ) 88,000 (1,412,000 ) (652,000 ) Net Income (Loss) (395,000 ) 1,132,000 (4,354,000 ) (697,000 ) Net (income) loss attributable to non-controlling interest (327,000 ) (899,000 ) 276,000 (899,000 ) Net income (loss) attributable to National Holdings Corporation common shareholders $ (722,000 ) $ 233,000 $ (4,078,000 ) $ (1,596,000 ) Net income (loss) per share attributable to National Holdings Corporation common shareholders - Basic $ (0.05 ) $ 0.02 $ (0.31 ) $ (0.13 ) Net income (loss) per share attributable to National Holdings Corporation common shareholders - Diluted $ (0.05 ) $ 0.02 $ (0.31 ) $ (0.13 ) Weighted average number of shares outstanding - Basic 13,516,869 12,931,660 13,349,669 12,751,712 Weighted average number of shares outstanding - Diluted 13,516,869 13,251,379 13,349,669 12,751,712 NINETHREE MONTHS ENDED JUNE 30,December 31, 2020 ANDand 2019 13,639,622 $ 273,000 $ 93,079,000 $ (46,717,000 ) $ — $ 46,635,000 — — 781,000 — — 781,000 125,682 2,000 (87,000 ) — — (85,000 ) — — — (859,000 ) — (859,000 ) 13,765,304 $ 275,000 $ 93,773,000 $ (47,576,000 ) $ — $ 46,472,000 13,158,441 $ 263,000 $ 90,354,000 $ (40,779,000 ) $ 1,761,000 $ 51,599,000 — — 907,000 — — 907,000 120,394 2,000 (141,000 ) — — (139,000 ) — — — (1,593,000 ) 94,000 (1,499,000 ) 13,278,835 $ 265,000 $ 91,120,000 $ (42,372,000 ) $ 1,855,000 $ 50,868,000 Common Stock Additional
Paid-in-
Capital Accumulated
Deficit Non-controlling
Interest Total Stockholders’
Equity Shares $ Balance, September 30, 2019 13,158,441 $ 263,000 $ 90,354,000 $ (40,779,000 ) $ 1,761,000 $ 51,599,000 Stock-based compensation for restricted stock units — — 907,000 — — 907,000 Issuance of shares of common stock with respect to vested restricted stock units, net of 52,291 shares valued at $139,000 tendered for tax withholding 120,394 2,000 (141,000 ) — — (139,000 ) Net income (loss) — — — (1,593,000 ) 94,000 (1,499,000 ) Balance, December 31, 2019 13,278,835 265,000 91,120,000 (42,372,000 ) 1,855,000 50,868,000 Stock-based compensation for restricted stock units — — 538,000 — — 538,000 Issuance of shares of common stock with respect to vested restricted stock units, net of 48,689 shares valued at $131,000 tendered for tax withholding 197,684 4,000 (135,000 ) — — (131,000 ) Net loss — — — (1,763,000 ) (697,000 ) (2,460,000 ) Balance, March 31, 2020 13,476,519 269,000 91,523,000 (44,135,000 ) 1,158,000 48,815,000 Stock-based compensation for restricted stock units — — 873,000 — — 873,000 Issuance of shares of common stock with respect to vested restricted stock units, net of 40,807 shares valued at $58,000 tendered for tax withholding 108,074 2,000 (60,000 ) — — (58,000 ) Distributions to non-controlling interest — — — — (1,485,000 ) (1,485,000 ) Net income (loss) — — — (722,000 ) 327,000 (395,000 ) Balance, June 30, 2020 13,584,593 $ 271,000 $ 92,336,000 $ (44,857,000 ) $ — $ 47,750,000 STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY, CONTINUEDCASH FLOWS For The Three Month Period Ended December 31, $ (859,000 ) $ (1,499,000 ) 846,000 530,000 241,000 163,000 781,000 907,000 150,000 171,000 (52,000 ) (53,000 ) (24,000 ) 19,000 (396,000 ) 59,000 951,000 700,000 87,000 2,680,000 (1,831,000 ) 1,549,000 (753,000 ) (1,393,000 ) 1,807,000 (1,223,000 ) (474,000 ) (1,301,000 ) (339,000 ) (201,000 ) 1,287,000 (7,434,000 ) 1,422,000 (6,326,000 ) (250,000 ) (1,805,000 ) (79,000 ) (91,000 ) 17,000 18,000 (312,000 ) (1,878,000 ) (85,000 ) (139,000 ) (51,000 ) (58,000 ) (60,000 ) (108,000 ) (276,000 ) (112,000 ) (472,000 ) (417,000 ) 638,000 (8,621,000 ) 28,289,000 31,403,000 $ 28,927,000 $ 22,782,000 (Unaudited)FOR THE NINE MONTHS ENDED JUNE 30, 2020 AND 2019 Common Stock Additional
Paid-in-
Capital Accumulated
Deficit Non-controlling
Interest Total Stockholders’
Equity Shares $ Balance, September 30, 2018 12,541,890 $ 250,000 $ 86,510,000 $ (39,825,000 ) $ — $ 46,935,000 Cumulative effect of adoption of ASC 606 (135,000 ) (135,000 ) Balance, Balance, October 1, 2018 12,541,890 250,000 86,510,000 (39,960,000 ) — 46,800,000 Stock-based compensation for restricted stock units — — 1,322,000 — — 1,322,000 Issuance of shares of common stock with respect to vested restricted stock units, net of 31,762 shares valued at $101,000 tendered for tax withholding 68,655 2,000 (103,000 ) — — (101,000 ) Net income — — — 956,000 — 956,000 Balance, December 31, 2018 12,610,545 252,000 87,729,000 (39,004,000 ) — 48,977,000 Issuance of shares of common stock for warrant exercises 38 — — — — — Stock-based compensation for restricted stock units — — 1,480,000 — — 1,480,000 Issuance of shares of common stock with respect to vested restricted stock units, net of 45,228 shares valued at $131,000 tendered for tax withholding 289,283 6,000 (137,000 ) — — (131,000 ) Net loss — — — (2,785,000 ) — (2,785,000 ) Balance, March 31, 2019 12,899,866 258,000 89,072,000 (41,789,000 ) $ — 47,541,000 Stock-based compensation for restricted stock units — — 720,000 — — 720,000 Issuance of shares of common stock with respect to vested restricted stock units and awards, net of 43,726 shares valued at $127,000 tendered for tax withholding 165,098 3,000 (130,000 ) — — (127,000 ) Net income — — — 233,000 899,000 1,132,000 Balance, June 30, 2019 13,064,964 $ 261,000 $ 89,662,000 $ (41,556,000 ) $ 899,000 $ 49,266,000 For The Three Month Period Ended December 31, $ 7,000 $ 14,000 $ (29,000 ) $ 88,000 $ — $ 30,000 $ 851,000 $ 9,108,000 (601,000 ) (4,819,000 ) — (873,000 ) — (500,000 ) — (1,111,000 ) $ 250,000 $ 1,805,000 (Unaudited) For The Nine Month Period Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (4,354,000 ) $ (697,000 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities Depreciation and amortization 2,098,000 1,320,000 Amortization of forgivable loans 649,000 500,000 Stock-based compensation 2,318,000 3,522,000 Provision (recovery) for doubtful accounts 253,000 (93,000 ) Amortization of deferred clearing and marketing credit (157,000 ) (157,000 ) Increase in fair value of contingent consideration 74,000 47,000 Deferred tax (benefit) expense (1,412,000 ) 26,000 Gain on disposal of National Tax branch (297,000 ) — Amortization of operating lease assets 2,366,000 — Changes in assets and liabilities, net of business acquisitions Cash deposits with clearing organizations (10,000 ) — Securities owned, at fair value 5,701,000 197,000 Receivables from broker-dealers and clearing organizations (106,000 ) 715,000 Forgivable loans receivable (3,238,000 ) (549,000 ) Other receivables, net (4,677,000 ) (1,857,000 ) Prepaid expenses 675,000 (724,000 ) Other assets 69,000 68,000 Accrued commissions and payroll payable, accounts payable and accrued expenses and other liabilities (1,343,000 ) (1,908,000 ) Securities sold, but not yet purchased, at fair value (203,000 ) 1,000 Net cash provided by (used in) operating activities (1,594,000 ) 411,000 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses, net of cash received (Note 7) (2,021,000 ) (387,000 ) Purchase of fixed assets (119,000 ) (1,686,000 ) Collection on notes receivable 59,000 86,000 Net cash used in investing activities (2,081,000 ) (1,987,000 ) CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of common stock for tax withholding (328,000 ) (359,000 ) Principal payments under finance lease obligations (175,000 ) (166,000 ) Principal payments under finance obligations (222,000 ) (225,000 ) Proceeds from PPP related loans 6,497,000 — Contingent consideration payments (460,000 ) (457,000 ) Distributions to non-controlling interest (1,485,000 ) — Net cash provided by (used in) financing activities 3,827,000 (1,207,000 ) NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH 152,000 (2,783,000 ) CASH AND RESTRICTED CASH BALANCE Beginning of the period 31,403,000 29,273,000 End of the period $ 31,555,000 $ 26,490,000 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED(Unaudited) For The Nine Month Period Ended June 30, 2020 2019 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 43,000 $ 26,000 Income taxes, net of refunds $ 58,000 $ 162,000 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Fixed assets (acquired but not paid) $ 7,000 $ 40,000 Finance obligation $ — $ 958,000 Businesses acquired (See Note 7) Assets acquired including goodwill $ 10,121,000 $ 1,815,000 Contingent consideration payable (5,616,000 ) (1,428,000 ) Additional consideration payable (net operating capital) (873,000 ) — Escrow deposit (500,000 ) — Cash received (1,111,000 ) — Cash paid, net of cash received $ 2,021,000 $ 387,000 Sale of National Tax branch: Notes receivable (included in other receivables) $ 636,000 $ — Disposal of goodwill (239,000 ) — Disposal of intangible assets, net (100,000 ) — Gain on disposal of National Tax branch $ 297,000 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIESJUNE 30, 2020(Unaudited)June 30,December 31, 2020 and for the three and nine months ended June 30,December 31, 2020 and 2019 are unaudited. The results of operations for the interim periods are not necessarily indicative of the results of operations for the respective fiscal years. The consolidated statement of financial condition at September 30, 20192020 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statement presentation. The accompanying consolidated financial information should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 20192020 for additional disclosures and accounting policies.20192020 period have been reclassified to conform to the presentation in the fiscal 20202021 period. Such reclassifications did not have a material impact on the presentation of the overall financial statements.exchange listedexchange-listed stocks.subsidiary issubsidiaries are National Securities Corporation, a Washington corporation (“NSC”) and Winslow, Evans & Crocker, Inc (“WEC”). NSC conducts a national securities brokerage business through its main offices in New York City, New York and Boca Raton, Florida. NSC is an introducing broker and clears all transactions through clearing organizations, on a fully disclosed basis. WEC is a Boston-based, full-service investment firm established in 1991. NSC isand WEC are registered with the Securities and Exchange Commission (“SEC”) and is a memberare members of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (the “SIPC”).Company’sCompany's wholly-owned subsidiary, NAM, is a federally-registered investment adviser providing asset management advisory services to retail clients for a fee based upon a percentage of assets managed.Company’sCompany's wholly-owned subsidiaries, National Insurance Corporation, a Washington corporation (“National Insurance”) and Prime Financial Services, a Delaware corporation (“Prime Financial”), provide fixed insurance products to their clients, including life insurance, disability insurance, long term care insurance and fixed annuities.Company’sCompany's wholly-owned subsidiary, National Tax and Financial Services, Inc. (“National Tax”), provides tax preparation and accounting services to individuals and small to midsize companies.Company’sCompany's wholly-owned subsidiary, GC Capital Corporation (“GC”), provides licensed mortgage brokerage services in New York and Florida.On December 31, 2019, the Company completed its acquisition of all of the outstanding equity interests of Winslow Evans & Crocker, Inc., a Massachusetts corporation (“WEC”),. See Note 7, is an SEC Registered Investment Advisor.additional information.withdrawal from registration with FINRA and the SEC as a broker-dealer and in December 2020, the withdrawals were completed. In November 2020, UA and UAS were withdrawn from registration with the SEC as investment advisors. JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019,, the receivables of $3,645,000$5,198,000 and $3,490,000,$3,367,000, respectively, from broker-dealers and clearing organizations represent net amounts due for fees and commissions associated with the Company’s retail brokerage business as well as asset-basedasset based fee revenues associated with the Company’s investment advisory business.JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019 consist of the following: $ 1,566,000 $ 1,391,000 864,000 1,009,000 (497,000 ) (347,000 ) 1,651,000 1,834,000 1,183,000 2,383,000 291,000 771,000 1,218,000 1,229,000 4,317,000 4,124,000 $ 10,593,000 $ 12,394,000 June 30, September 30, 2020 2019 Trailing fees $ 1,713,000 $ 947,000 Accounts receivable for tax and accounting services 997,000 686,000 Allowance for doubtful accounts - tax and accounting services (399,000 ) (282,000 ) Advances to registered representatives 2,012,000 1,383,000 Investment banking receivable 1,630,000 411,000 Advisory fees 522,000 483,000 Notes receivable 1,235,000 665,000 Other 3,346,000 1,379,000 Total other receivables, net $ 11,056,000 $ 5,672,000 $649,000$241,000 and $500,000$163,000 for the ninethree months ended June 30,December 31, 2020 and 2019, respectively, and the related compensation was included in commissions, compensation and fees in the condensed consolidated statements of operations. In the event the advisor’s affiliation with the subsidiary terminates, the advisor is required to repay the unamortized balance of any notes payable.JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019,, no allowance for doubtful accounts was required.ninethree months ended June 30,December 31, 2020 is as follows: $ 4,269,000 753,000 (241,000 ) (173,000 ) $ 4,608,000 Balance, September 30, 2019 $ 1,834,000 Additions 3,238,000 Acquired through the Winslow acquisition (see Note 7) 91,000 Amortization (649,000 ) Reclassification to other receivables (270,000 ) Balance, June 30, 2020 $ 4,244,000 JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk. $ 27,965,000 $ 27,965,000 $ — $ 27,965,000 686,000 686,000 — 686,000 5,198,000 — 5,198,000 5,198,000 4,608,000 — 4,608,000 4,608,000 10,593,000 — 10,593,000 10,593,000 $ 49,050,000 $ 28,651,000 $ 20,399,000 $ 49,050,000 $ 17,993,000 $ — $ 17,993,000 $ 17,993,000 9,374,000 — 9,374,000 9,374,000 $ 27,367,000 $ — $ 27,367,000 $ 27,367,000 $ 27,327,000 $ 27,327,000 $ — $ 27,327,000 686,000 686,000 — 686,000 3,367,000 — 3,367,000 3,367,000 4,269,000 — 4,269,000 4,269,000 12,394,000 — 12,394,000 12,394,000 $ 48,043,000 $ 28,013,000 $ 20,030,000 $ 48,043,000 $ 15,445,000 $ — $ 15,445,000 $ 15,445,000 9,656,000 — 9,656,000 9,656,000 $ 25,101,000 $ — $ 25,101,000 $ 25,101,000 June 30, 2020 Assets Carrying Value Level 1 Level 2 Total Estimated Fair Value Cash $ 30,594,000 $ 30,594,000 $ — $ 30,594,000 Cash deposits with clearing organizations 653,000 653,000 — 653,000 Receivables from broker-dealers and clearing organizations 3,645,000 — 3,645,000 3,645,000 Forgivable loans receivable 4,244,000 — 4,244,000 4,244,000 Other receivables, net 11,056,000 — 11,056,000 11,056,000 $ 50,192,000 $ 31,247,000 $ 18,945,000 $ 50,192,000 Liabilities Accrued commissions and payroll payable $ 17,746,000 $ — $ 17,746,000 $ 17,746,000 Accounts payable and accrued expenses 8,381,000 — 8,381,000 8,381,000 $ 26,127,000 $ — $ 26,127,000 $ 26,127,000 September 30, 2019 Assets Carrying Value Level 1 Level 2 Total Estimated Fair Value Cash $ 30,443,000 $ 30,443,000 $ — $ 30,443,000 Cash deposits with clearing organizations 436,000 436,000 — 436,000 Receivables from broker-dealers and clearing organizations 3,490,000 — 3,490,000 3,490,000 Forgivable loans receivable 1,834,000 — 1,834,000 1,834,000 Other receivables, net 5,672,000 — 5,672,000 5,672,000 $ 41,875,000 $ 30,879,000 $ 10,996,000 $ 41,875,000 Liabilities Accrued commissions and payroll payable $ 18,590,000 $ — $ 18,590,000 $ 18,590,000 Accounts payable and accrued expenses 8,643,000 — 8,643,000 8,643,000 $ 27,233,000 $ — $ 27,233,000 $ 27,233,000 JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019:: $ 216,000 $ 216,000 $ — $ — $ 216,000 236,000 236,000 — — 236,000 696,000 — 696,000 — 696,000 323,000 323,000 — 323,000 3,181,000 — 2,140,000 1,041,000 3,181,000 $ 4,652,000 $ 452,000 $ 3,159,000 $ 1,041,000 $ 4,652,000 $ 10,702,000 $ — $ — $ 10,702,000 $ 10,702,000 $ 10,702,000 $ — $ — $ 10,702,000 $ 10,702,000 $ 137,000 $ 137,000 $ — $ — $ 137,000 332,000 332,000 — — 332,000 529,000 — 529,000 — 529,000 Corporate bonds 438,000 — 438,000 — 438,000 3,303,000 — 2,228,000 1,075,000 3,303,000 $ 4,739,000 $ 469,000 $ 3,195,000 $ 1,075,000 $ 4,739,000 $ 10,401,000 $ — $ — $ 10,401,000 $ 10,401,000 $ 10,401,000 $ — $ — $ 10,401,000 $ 10,401,000 June 30, 2020 Assets Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Securities owned: Corporate stocks $ 793,000 $ 793,000 $ — $ — $ 793,000 Municipal bonds 320,000 320,000 — — 320,000 Restricted stock 799,000 — 799,000 — 799,000 Corporate bonds 1,216,000 1,216,000 — 1,216,000 Warrants 4,763,000 — 801,000 3,962,000 4,763,000 $ 7,891,000 $ 1,113,000 $ 2,816,000 $ 3,962,000 $ 7,891,000 Liabilities Contingent consideration $ 6,850,000 $ — $ — $ 6,850,000 $ 6,850,000 $ 6,850,000 $ — $ — $ 6,850,000 $ 6,850,000 September 30, 2019 Assets Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Securities owned: Corporate stocks $ 6,282,000 $ 6,282,000 $ — $ — $ 6,282,000 Municipal bonds 20,000 20,000 — — 20,000 Restricted stock 725,000 — 725,000 — 725,000 Warrants 5,454,000 — 1,529,000 3,925,000 5,454,000 $ 12,481,000 $ 6,302,000 $ 2,254,000 $ 3,925,000 $ 12,481,000 Liabilities Contingent consideration $ 1,620,000 $ — $ — $ 1,620,000 $ 1,620,000 $ 1,620,000 $ — $ — $ 1,620,000 $ 1,620,000 ninethree months ended June 30, 2020:December 31, 2020: $ 1,075,000 $ — $ (34,000 ) $ — $ — $ — $ — $ 1,041,000 Beginning Balance as of September 30, 2019 Net realized Gain or (losses) Net Change in Unrealized Appreciation (Depreciation) Purchases Sales Transfer Into Level 3 (a) Transfer Out of Level 3 Ending Balance as of June 30, 2020 Assets Warrants $ 3,925,000 $ — $ (105,000 ) $ — $ — $ 142,000 $ — $ 3,962,000 (a) The Company received warrants as part of investment banking transactions.ninethree months ended June 30,December 31, 2020 in Note 7.Company’sCompany's financial assets measured at fair value on a recurring basis with a significant Level 3 balance.Financial Instruments Owned Significant Unobservable Input(s) $ 1,041,000 25% - 46% 65% - 123% Financial Instruments Owned Fair Value Valuation Technique Significant Unobservable Input(s) Input/Range Warrants $ 3,962,000 Market Approach (loss) gain(gain) loss for the change in fair value of such positions for the ninethree months ended June 30,December 31, 2020 and 2019 amounted to approximately $(989,000)$20,000 and $(1,065,000)$(143,000), respectively, which is included in net dealer inventory losses.JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019 consist of the following: $ 2,012,000 $ 1,989,000 3 - 7 911,000 892,000 5 Construction in Process 36,000 21,000 3,699,000 3,677,000 907,000 907,000 3 - 7 7,565,000 7,486,000 (3,355,000 ) (3,104,000 ) $ 4,210,000 $ 4,382,000 June 30,
2020 September 30,
2019 Equipment and software $ 1,973,000 $ 1,835,000 3 - 7 Furniture and fixtures 840,000 761,000 5 Leasehold improvements 3,651,000 3,662,000 Lesser of useful
life or term of
leaseFinance leases (primarily composed of computer equipment) 907,000 907,000 3 - 7 7,371,000 7,165,000 Less accumulated depreciation and amortization (2,848,000 ) (2,098,000 ) Fixed assets, net $ 4,523,000 $ 5,067,000 June 30,December 31, 2020 and 2019 was $255,000$251,000 and $168,000,$242,000, respectively.Depreciation expense associated with fixed assets for the nine months ended June 30, 2020 and 2019 was $750,000 and $509,000, respectively. AND DISPOSAL OF BRANCHAcquisitionsDecember 2019 and JanuaryOctober 2020, National Tax acquired certain assets of twoa tax preparation and accounting businessesbusiness that per accounting guidance werewas deemed to be a business combination. The consideration for the transactionstransaction consisted of a cash paymentspayment at closing totaling $432,000,$250,000, and a contingent consideration payable in cash having a fair value of $1,595,000,$601,000, for which a liability (included in contingent consideration) was recognized based on the estimated acquisition date fair value of the potential earn-outs. The earn-outs are based on revenue, as defined in the acquisition agreements,agreement, during various periods following the closing. The fair value of the acquired assets totaling $2,027,000$851,000 was allocated to customer relationships, which areis being amortized over seven years.acquisitionsacquisition was valued using an income-based approach using unobservable inputs (Level 3) and reflects the Company’s own assumptions. The liabilities will be revalued at each balance sheet date with changes therein recorded in earnings. Results of operations of the acquired business is included in the accompanying condensed consolidated statements of operations from the date of acquisition and was not material. In addition, based on materiality, pro forma results are not presented.Winslow AcquisitionOn August 26, 2019, the Company entered into a stock purchase agreement (as amended, the “Winslow Agreement” and the transactions contemplated thereunder, the “Winslow Acquisition”) whereby the Company agreed to acquire all of the outstanding equity interests (the “Purchased Shares”) of Winslow Evans & Crocker, Inc. (“WEC”), Winslow, Evans & Crocker Insurance Agency, Inc. (“WIA”), and Winslow Financial, Inc. (“WF” and collectively with WEC and WIA, the “Winslow Targets”). The Company entered into an amendment to the Winslow Agreement on October 11, 2019, to reflect certain clarifications to the terms of the Winslow Agreement as agreed to by the parties.On December 31, 2019, the Company completed the acquisition of all of the outstanding equity interests of the Winslow Targets.Under the terms of the Winslow Agreement, at the closing of the Winslow Acquisition, the Company acquired the Purchased Shares for an aggregate purchase price of approximately $3.2 million paid at closing in cash, subject to certain adjustments, plus additional consideration to be based on (i) the amount of net operating capital of WEC and WF as of the closing, payable in three annual installments and not to exceed $1.0 million in the aggregate, (ii) the aggregate pre-tax net income (loss) of the Winslow Targets through September 22, 2022, provided that such additional consideration shall not be less than $1.5 million and shall not exceed $3.0 million in the aggregate, and (iii) a portion of the synergies achieved through September 20, 2022. At the signing of the Winslow Agreement, the Company deposited $500,000 into escrow, which was applied to the amount payable at closing.WEC is a Boston-based, full-service investment firm established in 1991. WEC is an SEC Registered Investment Advisor and a FINRA registered broker-dealer. More than 50 financial professionals including Certified Financial Planners, Investment Advisor Representatives, Financial Consultants, brokers and other specialists are part of the Winslow team. Located in the heart of the financial district in Boston, MA, the Company believes that WEC is a strategic location for the Company to build out its banking platform.The acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of the Winslow Targets were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. A deferred tax liability has been recorded for the excess of financial statement basis over tax basis of the acquired assets and assumed liabilities with a corresponding increase to goodwill. The goodwill attributable to the acquisition has been recorded as a non-current asset and is not amortized, but issubject to an annual review for impairment. Goodwill, which is non-deductible for income tax purposes, is part of the brokerage and advisory services segment.The acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of assets acquired and liabilities assumed are considered preliminary and are based on the most recent information available. The Company believes that the information provides a reasonable basis for assigning the fair values of assets acquired and liabilities assumed. Thus, the provisional measurements of fair value set forth below are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.The table below summarizes the assets acquired and liabilities assumed in connection with the Winslow acquisition as of December 31, 2019. Estimated Fair Value Assets Cash $ 1,111,000 Cash deposits with clearing organizations 207,000 Securities owned at fair value 1,111,000 Receivables from broker dealers and clearing organizations 49,000 Forgivable loans receivable 91,000 Other receivables, net 113,000 Prepaid expenses 432,000 Fixed assets, net 80,000 Intangible assets, net 4,400,000 Operating lease assets 1,206,000 Other assets 12,000 Total assets acquired 8,812,000 Liabilities Securities sold, not yet purchased at fair value 203,000 Accrued commissions and payroll payable 390,000 Accounts payable and accrued expenses 188,000 Operating lease liabilities 1,514,000 Deferred tax liability 1,196,000 Other 216,000 Total liabilities assumed 3,707,000 Net identifiable assets acquired $ 5,105,000 Goodwill 2,989,000 Total Purchase price $ 8,094,000 The intangible assets as of the closing date of the acquisition included: Amount Customer relationships 4,100,000 Brand name 300,000 $ 4,400,000 Indications of fair value of the intangible assets acquired in connection with the acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized. The customer relationships are being amortized on an accelerated basis over an estimated useful life of twelve years and the brand name is being amortized on a straight-line basis over five years.Initial purchase price $ 3,200,000 Additional consideration payable (net operating capital) 873,000 Earnout (contingent consideration) 4,021,000 Total purchase price $ 8,094,000 Pro Forma Financial InformationThe following table presents the unaudited pro forma combined results of operations of the Company and Winslow for the three and nine months ended June 30, 2020 and 2019 as if the acquisition of Winslow had occurred on October 1, 2018. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the Company’s fiscal year 2019. Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 Net revenues $ 61,716,000 $ 53,462,000 $ 170,381,000 $ 163,548,000 Net Income (Loss) $ (395,000 ) $ 1,002,000 $ (4,282,000 ) $ (1,322,000 ) Net Income (Loss) attributable to common stockholders $ (722,000 ) $ 103,000 $ (4,006,000 ) $ (2,221,000 ) Net income (loss) per common share: Basic $ (0.05 ) $ 0.01 $ (0.30 ) $ (0.17 ) Diluted $ (0.05 ) $ 0.01 $ (0.30 ) $ (0.17 ) ninethree months ended June 30,December 31, 2020 related to acquisitions: $ 10,401,000 601,000 (276,000 ) (24,000 ) $ 10,702,000 Fair value of contingent consideration at September 30, 2019 $ 1,620,000 Fair value of contingent consideration in connection with 2020 Tax & Accounting acquisitions 1,595,000 Fair value of contingent consideration in connection with Winslow acquisition 4,021,000 Payments (460,000 ) Change in fair value 74,000 Fair value of contingent consideration at June 30, 2020 $ 6,850,000 Disposal of National Tax BranchIn January 2020, the Company sold one of its National Tax branches for a note in the aggregate principal amount of $636,000 which, after allocating a portion of goodwill and unamortized intangibles of $239,000 and $100,000, respectively, resulted in a gain on disposal of $297,000. Principal and interest on the note is payable monthly over 120 months with an interest rate of 3% per annum. Notes receivables are included in other receivables in the statement of financial condition.JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019: : $ 18,318,000 $ 6,489,000 $ 11,829,000 3-12 1,075,000 372,000 703,000 1-5 45,000 45,000 — 3 $ 19,438,000 $ 6,906,000 $ 12,532,000 $ 17,467,000 $ 5,988,000 $ 11,479,000 3-12 Brand name 1,075,000 282,000 793,000 1-5 45,000 41,000 4,000 3 $ 18,587,000 $ 6,311,000 $ 12,276,000 June 30, 2020 Intangible asset Cost Accumulated Amortization Carrying Value Estimated
Useful Life
(years)Customer relationships $ 15,176,000 $ 5,566,000 $ 9,610,000 3-12 Brand name 1,010,000 208,000 802,000 3-5 Software license 45,000 37,000 8,000 3 Total $ 16,231,000 $ 5,811,000 $ 10,420,000 September 30, 2019 Intangible asset Cost Accumulated Amortization Carrying Value Estimated
Useful Life
(years)Customer relationships $ 9,326,000 $ 4,614,000 $ 4,712,000 3-10 Brand name 710,000 — 710,000 Indefinite Software license 45,000 26,000 19,000 3 Total $ 10,081,000 $ 4,640,000 $ 5,441,000 June 30,December 31, 2020 and 2019 was $500,000$595,000 and $293,000,$288,000, respectively.Amortization expense associated with intangible assets for the nine months ended June 30, 2020 and 2019 was $1,348,000 and $811,000, respectively. $ 1,773,000 2,245,000 1,767,000 1,363,000 1,252,000 4,132,000 $ 12,532,000 Fiscal year ending
September 30, Three months ending September 30, 2020 $ 684,000 2021 2,019,000 2022 1,785,000 2023 1,387,000 2024 1,055,000 Thereafter 3,490,000 Total $ 10,420,000 JuneDecember 31, 2020 and September 30, 2020 and September 30, 2019 consist of the following: $ 1,446,000 $ 1,068,000 348,000 318,000 60,000 74,000 494,000 467,000 2,358,000 2,176,000 1,132,000 920,000 3,536,000 4,633,000 $ 9,374,000 $ 9,656,000 June 30,
2020 September 30,
2019Legal $ 1,120,000 $ 900,000 Audit 178,000 239,000 Telecommunications 120,000 125,000 Data services 435,000 296,000 Regulatory 1,152,000 292,000 Settlements 885,000 1,817,000 Deferred rent — 772,000 Other 4,491,000 4,202,000 Total $ 8,381,000 $ 8,643,000 June 30,December 31, 2020, other primarily consists of $151,000$105,000 for investment banking deal expense accruals, $1,226,000$1,447,000 for soft dollar accruals, $371,000$252,000 for finance obligation of the implementation costs of the general ledger system $105,000and $157,000 for tax return preparation fees and $49,000 for rent.fees. At September 30, 2019,2020, other primarily consists of $319,000$151,000 for investment banking deal expense accruals, $1,188,000$1,291,000 for soft dollar accruals, $119,000$130,000 for tax return preparation fees, $595,000$312,000 for finance obligation of the annual subscription fee and implementation costs of the new general ledger system $380,000and $493,000 for fixed assets acquired but not paid, $396,000 forcommercial rent and $228,000 for clearing fees.tax. Three Month Period Ended December 31, 13,639,622 13,169,025 — — 13,639,622 13,169,025 Three Month Period Ended June 30, Nine Month Period Ended June 30, 2020 2019 2020 2019 Basic weighted-average shares 13,516,869 12,931,660 13,349,669 12,751,712 Effect of dilutive securities: Unvested restricted stock units — 319,719 — — Diluted weighted-average shares 13,516,869 13,251,379 13,349,669 12,751,712 June 30,December 31, 2020 and 2019, options, warrants and unvested restricted stock units totaling 9,631,3098,993,737 and 9,383,1869,843,370 shares, respectively, were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive.FebruaryJune 2016, the FASB issued ASU 2016-02, Leases2016-13, Measurement of Credit Losses on Financial Instruments (Topic 842)326), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires the lessee to recognize the rightentities to use lease assets and lease liabilities that arise from leases, and present them in its statementa forward-looking approach based on current expected credit losses ("CECL") to estimate credit losses on certain types of financial condition. Theinstruments, including trade receivables. This may result in the earlier recognition of these lease assetsallowances for losses. ASU 2016-13 is effective for the Company beginning October 1, 2023, and lease liabilities represents a change from previous US GAAP requirements, which did not require lease assets and lease liabilities to be recognized for most leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee, have not significantly changed from previous US GAAP requirements.early adoption is permitted. The Company adoptedis currently assessing the provisions of Topic 842 on October 1, 2019, using the modified retrospective approach and the option presented under ASU 2018-11 to transition only active leases as of October 1, 2019. All comparative periods prior to October 1, 2019 are not adjusted and continue to be reported in accordance with Topic 840.The Company elected to utilize the package of practical expedients permitted within the new standard, which among other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Company’s consolidated statements of financial condition which resulted in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term.Adoption of the new standard resulted in the recording of right-of-use assets and corresponding lease liabilities of $14,720,000 and $16,309,000, respectively, as of October 1, 2019. The difference between the right-of-use assets and the lease liabilities was recorded to eliminate existing deferred rent balances and remaining balances of lease incentives recorded under Topic 840. Theimpact that adoption of the new standard did not materially impact the Company's consolidated statements of operations and had no impactASU 2016-13 will have on the Company's consolidated statements of cash flows. The Company's current lease arrangements expire through 2032. See Note 21 for further information.standard is effective for the Company beginningadopted ASU No. 2018-13 as of October 1, 2020 for both interim and annual periods. Early adoption is permitted.2020. The company is currently assessing the impact that the adoption of ASU 2018-13 will have on its financial statements.companyCompany is currently assessing the impact that the adoption of ASU 2019-12 will have on its financial statements.Company’s board of directors (the “Board”)Board acted in accordance with its fiduciary duties to prevent and uncover alleged legal and regulatory misconduct and wrongdoing on the part of a National officer. As part of its claims brought directly by the plaintiff, the complaint generally alleges that certain individual and corporate defendants wrongfully terminated the employment of the plaintiff in violation of the Dodd-Frank Act and applicable common law, or conspired to do so. The complaint further alleges that certain corporate defendants violated the Equal Pay Act with regards to the plaintiff’s compensation. The complaint seeks monetary damages in favor of the Company, an order directing the Company’s board members to take actions to enhance the Company’s governance, compensatory and punitive damages in favor of the plaintiff, and attorneys’ fees and costs. On February 2, 2020, the plaintiff filed an amended complaint presenting additional causes of action. The Company has notified its insurer of the lawsuit and believes it has valid defenses to the asserted claims of the complaint. On March 18, 2020, the defendants filed a motion to dismiss the amended complaint. The plaintiff filed an opposition to the defendants’ motion to dismiss on April 15, 2020, and the defendants filed a reply in further support of the motion to dismiss on May 6, 2020.At June and September 30, 2019,, the Company accrued approximately $885,000$1,132,000 and $1,817,000,$920,000, respectively in liabilities for contingent litigation and regulatory matters. These amounts are included in accounts payable and accrued expenses in the condensed consolidated statements of financial condition. Amounts charged to operations for settlements and potential losses during the three months ended June 30,December 31, 2020 and 2019, were $9,000$407,000 and $715,000, respectively, and during the nine months ended June 30, 2020 and 2019, were $283,000 and $3,198,000,$388,000, respectively. These amounts are included in other administrative expenses in the condensed consolidated statements of operations. The Company has included in professional fees, litigation and arbitration related expenses of $607,000$1,432,000 and $401,000$441,000 for the three months ended June 30,December 31, 2020 and 2019 respectively, and $1,513,000 and $1,329,000 for, respectively.nine months ended June 30, 2020 and 2019, respectively.June 30,December 31, 2020, the Company and its subsidiaries had one outstanding letter of credit, which has been issued in the maximum amount of $961,000$962,000 as security for a property lease, and which is collateralized by the restricted cash as reflected in the condensed consolidated statements of financial condition.June 30,December 31, 2020, NSC had net capital of $8,103,137$3,875,125 which was $7,103,137$2,875,125 in excess of its required minimum net capital of $1,000,000. NSC is exempt from the provisions of Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers.June 30,December 31, 2020, WEC had net capital of $1,163,064$777,629 which was $1,046,476$618,479 in excess of its required minimum net capital of $116,588.$159,150. WEC's ratio of aggregate indebtedness to net capital was 1.53.1 to 1. WEC is exempt from the provisions of Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers.a subsidiaryNSC and WEC may dividend or advance to the Company.ninethree months ended June 30,December 31, 2020 follows: 269,200 $ 5.22 $ 2.19 $ 2.83 $ — — $ — $ — $ — 269,200 $ 5.22 $ 2.19 $ 2.57 $ — 269,200 $ 5.22 $ 2.19 $ 2.57 $ — Options Weighted
Average
Exercise
Price Per
Share Weighted
Average
Grant
Date Fair
Value
Per Share Weighted
Average
Remaining
Contractual
term (years) Aggregate
Intrinsic
ValueOutstanding at September 30, 2019 604,200 $ 6.19 $ 1.58 2.29 $ — Forfeited (3,500 ) $ 5.00 $ 2.30 $ — Outstanding at June 30, 2020 600,700 $ 6.20 $ 1.57 1.53 $ — Vested and exercisable at June 30, 2020 600,700 $ 6.20 $ 1.57 1.53 $ — ninethree months ended June 30, 2020:December 31, 2020: 5,398,907 $ 3.25 1.30 — $ — 5,398,907 $ 3.25 1.05 Warrants Weighted
Average
Exercise Price Per
Share Weighted Average Remaining Contractual Term Outstanding at September 30, 2019 5,398,907 $ 3.25 2.30 Forfeited — $ — Outstanding and exercisable at June 30, 2020 5,398,907 $ 3.25 1.55 ninethree months ended June 30,December 31, 2020 is as follows: 3,498,315 $ 9,695,000 (172,685 ) (561,000 ) 3,325,630 $ 9,134,000 Shares Weighted
Average
Grant Date
Fair ValueNon-vested restricted stock units and awards at September 30, 2019 3,318,640 $ 10,006,000 Granted 904,616 2,188,000 Vested (579,695 ) (2,116,000 ) Forfeited (11,859 ) (38,000 ) Non-vested restricted stock units and awards at June 30, 2020 3,631,702 $ 10,040,000 In December 2019, the Company granted 702,000 RSUs to certain employees of the Company. RSUs vest based on certain performance conditions. The fair value of the RSU awards issued in December 2019 was $1,839,000.In January 2020, the Company granted 39,216 RSUs to an employee of the Company. RSUs vest based on certain service conditions. The fair value of the RSU awards issued in January 2020 was $99,000.In April 2020, the Company granted 163,400 RSUs to certain directors of the Company. RSUs vest based on certain service conditions. The fair value of the RSU awards issued in April 2020 was $250,000. and nine months ended June 30,December 31, 2020, the Company recognized compensation expense of $873,000 and $2,318,000, respectively,$781,000 related to RSUs and RSAs. For the three and nine months ended June 30,December 31, 2019, the Company recognized compensation expense of $720,000 and $3,522,000, respectively,$907,000 related to RSUs and RSAs. At June 30,December 31, 2020, unrecognized compensation with respect to RSUs and RSAs amounted to $4,999,000,$3,324,000, which will be recognized over a weighted average period of 2.5 years, assuming all performance-based compensation will vest.three and nine three-month period ended June 30,December 31, 2020 and 2019 are based on the estimated annual effective tax rate. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.three and nine three-month period ended June 30,December 31, 2020 differs from the federal statutory income tax rate principally due to non-deductible expenses and state and local income taxes and income (loss) allocated to the non-controlling interest for which no tax expense (benefit) was provided.June 30,December 31, 2020, the Company's net deferred tax asset is principally comprised of net operating loss carryforwards. Management believes that is more likely than not that its deferred tax assets will be realized and, accordingly, has not provided a valuation allowance against such amount.WinslowGC, WIA, WF, UA, UAS and GC.FSIC. The tax and accounting services segment includes tax preparation and accounting services provided by National Tax. and nine months ended June 30,December 31, 2020 and 2019 is as follows: $ 66,419,000 $ 1,412,000 $ 1,000 $ 67,832,000 1,363,000 (1,019,000 ) (1,631,000 ) (1,287,000 ) 85,169,000 7,596,000 15,832,000 108,597,000 442,000 232,000 172,000 846,000 20,000 — — 20,000 54,000 25,000 — 79,000 $ 50,259,000 $ 931,000 $ 1,000 $ 51,191,000 473,000 (1,106,000 ) (1,591,000 ) (2,224,000 ) 74,107,000 3,305,000 19,089,000 96,501,000 253,000 132,000 145,000 530,000 14,000 — — 14,000 21,000 — 100,000 121,000 Brokerage and
Advisory
Services Tax and
Accounting
Services Corporate Total Three Months Ended June 30, 2020 Revenues $ 58,909,000 $ 2,807,000 $ — $ 61,716,000 Pre-tax income (loss) 1,272,000 (39,000 ) (1,863,000 ) (a) (630,000 ) Assets 76,081,000 9,867,000 20,226,000 (b) 106,174,000 Depreciation and amortization 389,000 193,000 173,000 755,000 Interest 26,000 — — 26,000 Capital expenditures (reimbursements) — 15,000 — 15,000 2019 Revenues $ 48,100,000 $ 2,675,000 $ — $ 50,775,000 Pre-tax income (loss) 1,610,000 430,000 (820,000 ) (a) 1,220,000 Assets 50,470,000 5,344,000 14,662,000 (b) 70,476,000 Depreciation and amortization 207,000 137,000 117,000 461,000 Interest 8,000 — — 8,000 Capital expenditures 461,000 6,000 909,000 1,376,000 Brokerage and
Advisory
Services Tax and
Accounting
Services Corporate Total Nine Months Ended June 30, 2020 Revenues $ 159,393,000 $ 8,046,000 $ 2,000 $ 167,441,000 Pre-tax income (loss) (1,164,000 ) 281,000 (4,883,000 ) (a) (5,766,000 ) Assets 76,081,000 9,867,000 20,226,000 (b) 106,174,000 Depreciation and amortization 1,064,000 519,000 515,000 2,098,000 Interest 63,000 — — 63,000 Capital expenditures (reimbursements) (73,000 ) 62,000 137,000 126,000 2019 Revenues $ 148,011,000 $ 7,572,000 $ — $ 155,583,000 Pre-tax income (loss) 1,359,000 1,503,000 (4,211,000 ) (a) (1,349,000 ) Assets 50,470,000 5,344,000 14,662,000 (b) 70,476,000 Depreciation and amortization 605,000 341,000 374,000 1,320,000 Interest 26,000 — — 26,000 Capital expenditures 633,000 77,000 1,666,000 2,376,000 FBIO Acquisition’s majority stake in the Company (the “FBIO Sale”). Under the terms of the agreement, B. Riley agreed to purchase 7,037,482 shares of the Company's common stock from FBIO Acquisition, which represented approximately 56.1% of the Company's outstanding common stock and Fortress’s entire economic interest in the Company. An aggregate of 3,010,054 shares were purchased immediately at $3.25 per share. After approval from FINRA was received on February 4, 2019, B. Riley purchased an additional 3,149,496 shares of the Company's common stock on February 11, 2019 and assigned its right to purchase the remaining 877,932 shares to third parties.Further, inIn connection with the FBIO Sale, the Company entered into an agreement with B. Riley (the “B. Riley“Standstill Agreement”), pursuant to which B. Riley agreed to certain customary standstill provisions, effective as of the date of the B. RileyStandstill Agreement through December 31, 2021 (the “Standstill Period”), prohibiting B. Riley and any of its affiliates or associates, directly or indirectly, from among other things: (i) acquiring, agreeing to acquire or otherwise seeking to acquire any beneficial interest2021. See the additional update in the Company’s share capital or any of its material assets other than (x) the FBIO Sale and (y) pursuant to B. Riley’s pro rata participation rights described in the B. Riley Agreement; (ii) making a take-over bid, tender offer or exchange offer for all or any part of the Company’s share capital; (iii) announcing, or taking any action which would require the announcement of, any proposals by B. Riley for any business combination or any other similar transaction involving the securities of the Company or its material assets or businesses; (iv) soliciting proxies with respect to any securities of the Company or otherwise influencing any shareholders of the Company for any action or transaction; (v) requesting that the Board expand or reduce the number of directors or the number of Board designees nominated by otherwise designated by B. Riley; (vi) take any other action that would constitute a “business combination” for purposes of Section 203 of the Delaware General Corporation Law (including any successor statute thereto) (“Section 203”) (other than any transactions covered by Section 203(c)(3)(v) of the Delaware General Corporation Law that are in the ordinary course of the Company’s business operations); (vii) make any public announcement with respect to any of the foregoing, except as, and solely to the extent, legally required or compelled (and provided that the reason for any such required announcement is not the result of any action taken by B. Riley) or (viii) contest the validity of the standstill terms of the B. Riley Agreement or initiate or participate in any judicial proceeding to amend, waive, terminate or seek a release of the restrictions of such standstill terms.Pursuant to the B. Riley Agreement, the Company granted to B. Riley the right to appoint B. Riley representatives to attend meetings of the Board and any committee thereof in a non-voting observer capacity. If B. Riley’s beneficial ownership of the Company’s common stock is reduced to below 24%, its rights to designate board observers will be reduced to one board observer, and if B. Riley’s beneficial ownership of the Company’s common stock is reduced to below 5%, its rights to designate board observers will cease.The B. Riley Agreement further permits B. Riley to participate pro rata in any bona fide common stock equity offering by the Company (including the offering of any securities convertible into common stock) if the offering price of the Company’s common stock in such offering is equal to or less than $3.25 per share, as adjusted for stock splits, stock dividends, stock combinations and similar events, subject to certain exceptions. This participation right will end upon the earlier of (x) the end of the Standstill Period and (y) a change in control of the Company, as defined in the B. Riley Agreement.The Agreement also contains non-solicitation terms that prohibit either the Company or B. Riley, or any of their respective affiliates, associates and related parties, from hiring any executive officer or member of senior management of the other party during the Standstill Period, subject to certain exceptions.In connection with the Agreement, the Board waived the applicability of Section 203 of the Delaware General Corporation Law to B. Riley in connection with the FBIO Sale.Upon final closing of the FBIO Sale, the warrants held by FBIO Acquisition ceased to be outstanding.B. RileyStandstill Agreement and in connection therewith, B. Riley amended its Schedule 13D filing relating to the Company and sent the Board a letter containing a proposal regarding the Company. The Company’sCompany's Board formed a Special Committee of non-executive, independent directors to review the B. Riley proposal. The Company does not anticipate having any further comment unless and until a definitive agreement is reached.See the additional update in Note 24.which is estimated to be approximately six months following such IPO or liquidity event.June 30,December 31, 2020 and 2019 were $6,685,000$5,174,000 and $6,395,000,$8,409,000, respectively, and are included in investment banking in the condensed consolidated statements of operations.Placement agent fees attributable to such arrangements for the nine months ended June 30, 2020 and 2019 were $17,028,000 and $31,484,000, respectively, and are included in investment banking in the condensed consolidated statements of operations. and nine months ended June 30,December 31, 2020 and 2019:2019: $ 36,122,000 $ — $ — $ 36,122,000 15,242,000 — — 15,242,000 12,730,000 — — 12,730,000 — 1,412,000 — 1,412,000 64,094,000 1,412,000 — 65,506,000 2,325,000 — 1,000 2,326,000 $ 66,419,000 $ 1,412,000 $ 1,000 $ 67,832,000 $ 24,942,000 $ — $ — $ 24,942,000 15,227,000 — — 15,227,000 7,389,000 — — 7,389,000 — 931,000 — 931,000 47,558,000 931,000 — 48,489,000 2,701,000 — 1,000 2,702,000 $ 50,259,000 $ 931,000 $ 1,000 $ 51,191,000 For the Three Months Ended
June 30, 2020Brokerage and Advisory Services Tax and Accounting Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services $ 33,083,000 $ — $ — $ 33,083,000 Investment banking 14,730,000 — — 14,730,000 Investment advisory 8,709,000 — — 8,709,000 Tax preparation and accounting — 2,807,000 — 2,807,000 Sub-total revenue from contracts with customers 56,522,000 2,807,000 — 59,329,000 Other revenue 2,387,000 — — 2,387,000 Total revenue $ 58,909,000 $ 2,807,000 $ — $ 61,716,000 For the Nine Months Ended
June 30, 2020Brokerage and Advisory Services Tax and Accounting Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services $ 91,357,000 $ — $ — $ 91,357,000 Investment banking 37,515,000 — — 37,515,000 Investment advisory 25,371,000 — — 25,371,000 Tax preparation and accounting — 8,046,000 — 8,046,000 Sub-total revenue from contracts with customers 154,243,000 8,046,000 — 162,289,000 Other revenue 5,150,000 — 2,000 5,152,000 Total revenue $ 159,393,000 $ 8,046,000 $ 2,000 $ 167,441,000 For the Three Months Ended
June 30, 2019Brokerage and Advisory Services Tax and Accounting Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services $ 22,899,000 $ — $ — $ 22,899,000 Investment banking 15,824,000 — — 15,824,000 Investment advisory 7,577,000 — — 7,577,000 Tax preparation and accounting — 2,675,000 — 2,675,000 Sub-total revenue from contracts with customers 46,300,000 2,675,000 — 48,975,000 Other revenue 1,800,000 — — 1,800,000 Total revenue $ 48,100,000 $ 2,675,000 $ — $ 50,775,000 For the Nine Months Ended
June 30, 2019Brokerage and Advisory Services Tax and Accounting Services Corporate Total Revenues from customer contracts: Commissions and transaction fees and clearing services $ 70,448,000 $ — $ — $ 70,448,000 Investment banking 52,692,000 — — 52,692,000 Investment advisory 18,949,000 — — 18,949,000 Tax preparation and accounting — 7,572,000 — 7,572,000 Sub-total revenue from contracts with customers 142,089,000 7,572,000 — 149,661,000 Other revenue 5,922,000 — — 5,922,000 Total revenue $ 148,011,000 $ 7,572,000 $ — $ 155,583,000 June 30, 2020.December 31, 2020. Investment banking advisory fees that are contingent upon completion of a specific milestone are also excluded as the fees are considered variable and not included in the transaction price at June 30, 2020.operating leaseright-of-use assets and operating lease liabilities on the Company’s condensed consolidated statements of financial condition. The Company’Company’s current lease arrangementarrangements expire from 20202021 through 2032, some of which include options to extend or terminate the lease. However, the Company in general is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not considered in the lease term or the right-of-use asset and lease liability balances.In October 2018, the Company entered into an agreement to lease equipment under a finance lease for 24 months. The equipment under the lease is collateral for the lease obligation and is included within fixed assets in the condensed consolidated statements of financial condition. The leased equipment is amortized on a straight line basis over 7 years. The interest rate related to the lease obligation is 5.6 percent and the maturity date is September 2020. The finance lease obligation is included within other liabilities in the condensed consolidated statements of financial condition. $ 1,412,000 $ 1,102,000 $ 19,000 $ 19,000 — 4,000 $ 19,000 $ 23,000 Sublease income: $ 138,000 $ — Three Month Period Ended June 30, 2020 Nine Month Period Ended June 30, 2020 Operating lease cost: $ 1,425,000 $ 3,859,000 Finance lease cost: Amortization of finance lease assets $ 19,000 $ 58,000 Interest on finance lease liabilities 2,000 9,000 Total finance lease cost $ 21,000 $ 67,000 Sublease income: $ 119,000 $ 227,000 and finance leases, recorded on the condensed consolidated statements of financial condition as of June 30, 2020:December 31, 2020: $ 3,255,000 2,763,000 2,588,000 2,400,000 2,258,000 6,071,000 19,335,000 3,471,000 $ 15,864,000 Operating Leases Finance Lease Three months ending September 30, 2020 $ 1,098,000 $ 112,000 2021 4,240,000 — 2022 2,615,000 — 2023 2,456,000 — 2024 2,264,000 — Thereafter 8,280,000 — Total minimum lease payments 20,953,000 $ 112,000 Less: Amounts representing interest not yet incurred 4,095,000 1,000 Present value of lease obligations $ 16,858,000 $ 111,000 $ 13,868,000 $ 14,721,000 317,000 336,000 $ 14,185,000 $ 15,057,000 $ 15,864,000 $ 16,719,000 — 51,000 $ 15,864,000 $ 16,770,000 Leases Classification June 30, 2020 Assets Operating lease assets Operating lease assets $ 14,637,000 Finance lease assets Fixed assets 355,000 Total lease assets $ 14,992,000 Liabilities Operating lease liabilities Operating lease liabilities $ 16,858,000 Finance lease liabilities Other liabilities 111,000 Total lease liabilities $ 16,969,000 Company’sCompany's leases as of June 30, 2020:December 31, 2020: $ — $ 4,000 $ 1,197,000 $ 709,000 $ 51,000 $ 58,000 $ 98,000 $ — Operating Leases (in years) 7.22 7.35 Operating Leases 5.50 % 5.50 % Nine Month Period Ended June 30, 2020 Supplemental cash flow information and non-cash activity: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 9,000 Operating cash flows from operating leases $ 2,820,000 Financing cash flows from finance leases $ 175,000 Operating lease assets obtained in exchange for lease liabilities $ 1,018,000 Weighted Average Remaining Lease Term: Operating Leases 7.46 years Weighted Average Discount Rate: Operating Leases 5.50 % The proceeds of each PPP Loan are to be used to pay for payroll costs, continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; rent; utilities; and interest on certain other outstanding debt; however, 60% of the proceeds of each PPP Loan must be used for payroll purposes.SUBSEQUENT EVENTProposaland subsidiaries of B. Riley.July 24, 2020,January 10, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with B. Riley, amendedand B. Riley Principal Merger Corp. III, a Delaware corporation and wholly-owned subsidiary of B. Riley (“Merger Sub”). The Merger Agreement provides for the acquisition of the Company by B. Riley through a cash tender offer (the “Offer”) by Merger Sub for all of the Company’s outstanding shares of common stock (“Common Stock”), other than the shares of Common Stock owned by B. Riley and its Schedule 13D filingsubsidiaries, for $3.25 per share of Common Stock (the “Offer Price”) in cash, without interest, less any applicable withholding taxes. Following the consummation of the Offer, subject to the absence of injunctions or other legal restraints preventing the consummation of the Merger and the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of B. Riley (the “Merger”), pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law (the “DGCL”), without any additional stockholder approvals. The Merger will be effected as soon as practicable following the time of purchase by Merger Sub of shares of Common Stock validly tendered and not withdrawn in the Offer. B. Riley and its subsidiaries currently own approximately 45% of the issued and outstanding shares of the Company's Common Stock.sent the Board a letter containing a revised proposal regarding the Company. The Company’s Special Committee is currently reviewing thein one case, B. Riley revised proposal.and Merger Sub. The cases are, in the order by which they were filed: Raul v. National Holdings Corporation et al., 1:21-cv-01103 (S.D.N.Y. Feb. 8, 2021); and Johnson v. National Holdings Corporation et al., 1:21-cv-00176-UNA (D. Del. Feb. 9, 2021). The complaints generally allege that the Schedule 14D-9 misrepresented and/or omitted certain purportedly material information and assert violations of Sections 14(e), 14(d) and 20(a) of the Securities Exchange Act of 1934, rules thereunder or common law fraud and/or negligent misrepresentation or concealment. The alleged material misstatements and omissions relate to, among other topics, the Company’s forecasts, the financial analysis of the Company’s financial advisor, the interests of directors and officers in the Offer and the Merger and events giving rise to the Offer and the Merger. The plaintiffs in each of the foregoing actions seek, among other things, an injunction against the consummation of the Offer and the Merger or, in the alternative, rescission damages, as well as an award of costs and expenses (including attorneys’ and experts’ fees). The Company does not anticipate having any further comment unless and until a definitive agreement is reached.disputes the allegations made in both lawsuit complaints.2019.2020. Any forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date of this Report. We undertake no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.On 2019, we completed our previously announced acquisition of all of the outstanding equity interests of Winslow Evans & Crocker, Inc.2020, a Massachusetts corporation (“WEC”), Winslow, Evans & Crocker Insurance Agency, Inc., a Massachusetts corporation (“WIA”), and Winslow Financial, Inc., a Massachusetts corporation (“WF”). See Note 7 of the notes to the condensed consolidated financial statements for additional information.As of June 30, 2020, we had approximately 940997 associated personnel serving retail and institutional customers, trading and investment banking clients. In addition to our 3230 Company offices located in New York, New Jersey, Florida, Texas, Massachusetts and Washington, we had approximately 98107 other registered offices, owned and operated by independent owners who maintain all appropriate licenses and are responsible for all office overhead and expenses.B. Riley Proposal UpdateOn July 24, 2020, B. Riley amended its Schedule 13D filing relating to the Company and sent the Board a letter containing a revised proposal regarding the Company. The Company’s Special Committee is currently reviewing the B. Riley revised proposal. The Company does not anticipate having any further comment unless and until a definitive agreement is reached.June 30,December 31, 2020 Compared to Three Months Ended June 30,December 31, 2019thirdfirst quarter ended June 30,December 31, 2020 resulted in a 22%33% increase in revenues and a 26%29% increase in operating expenses as compared to the comparative period last year. The COVID-19 outbreak has had a negative impact on ourLower margin commission and investment advisory revenue growth outpaced higher margin investment banking revenues, which we attribute to overall market dynamics and private shares businesses, our higher margin businesses,volatility associated with the COVID-19 pandemic, and which contributed to the overall increase in operating expenses. Additionally, the current quarter ended June 30, 2020. $10,941,000,$16,641,000, or 22%33%, to $61,716,000,$67,832,000, in the current quarter as compared to $50,775,000$51,191,000 recorded in the comparative period last year. Three Months Ended
June 30, Increase (Decrease) 2020 2019 Amount Percent Commissions $ 30,821,000 $ 21,434,000 $ 9,387,000 44 % Net dealer inventory gains 1,421,000 167,000 1,254,000 751 Investment banking 14,730,000 15,824,000 (1,094,000 ) (7 ) Investment advisory 8,709,000 7,577,000 1,132,000 15 Interest and dividends 870,000 1,434,000 (564,000 ) (39 ) Transaction fees and clearing services 2,262,000 1,465,000 797,000 54 Tax preparation and accounting 2,807,000 2,675,000 132,000 5 Other 96,000 199,000 (103,000 ) (52 ) Total Revenues $ 61,716,000 $ 50,775,000 $ 10,941,000 22 % $ 33,613,000 $ 23,167,000 $ 10,446,000 45 % 1,330,000 1,192,000 138,000 12 % 15,242,000 15,227,000 15,000 0 % 12,730,000 7,389,000 5,341,000 72 % 885,000 1,394,000 (509,000 ) (37 )% 2,509,000 1,775,000 734,000 41 % 1,412,000 931,000 481,000 52 % 111,000 116,000 (5,000 ) (4 )% $ 67,832,000 $ 51,191,000 $ 16,641,000 33 % $9,387,000,$10,446,000, or 44%45%, to $30,821,000$33,613,000 in the current quarter as compared to $21,434,000$23,167,000 recorded in the comparativecomparatively period last year. This wasincrease is mainly attributable to an increase in trading commission revenue and $1.2 million$1,191,000 in incremental revenue due to the Winslow acquisition.and United Advisors acquisitions. Customer trading volumes across the industry (according to Bloomberg) increased 78% for the three months ended June 30, 2020 compared to the prior year period, which we attribute to COVID-19 related market volatility. $1,254,000,$138,000, or 751%12%, to $1,421,000$1,330,000 in the current quarter as compared to $167,000$1,192,000 recorded in the comparative period last year. The increase is primarily due to higher security market values during the current quarter thus resulting in higher gains. In addition, $0.3 million in incremental revenue is due to the Winslow acquisition.decreased $1,094,000,increased$15,000, or 7%0%, to $14,730,000$15,242,000 in the current quarter as compared to $15,824,000$15,227,000 recorded in the comparative period last year. The prior year quarter was particularly strong in both our traditional investment banking business as well as our private shares business. $1,132,000,$5,341,000, or 15%72%, to $8,709,000$12,730,000 in the current quarter as compared to $7,577,000$7,389,000 recorded in the comparative period last year. TheThis increase is primarily due to the incremental revenue as a result of the Winslow acquisition. $564,000,$509,000, or 39%37%, to $870,000$885,000 in the current quarter as compared to $1,434,000$1,394,000 recorded in the comparative period last year. This wasdecrease is attributable to the drop in the Federal funds rate, as interest rates overall are near zero. $797,000,$734,000, or 54%41%, to $2,262,000$2,509,000 in the current quarter as compared to $1,465,000$1,775,000 recorded in the comparative period last year. This wasincrease is primarily attributable to an increase in customer trading volumes as noted above. $132,000,$481,000, or 5%52%, to $2,807,000$1,412,000 in the current quarter as compared to $2,675,000$931,000 recorded in the comparative period last year. The current periodThis increase is attributable to revenue generated by new business acquisitions. $103,000,$5,000, or 52%4%, to $96,000$111,000 in the current quarter as compared to $199,000$116,000 recorded in the comparative period last year. This decrease is primarily due to a decline of client participation in our fully paid stock lending program. Client participation in this program varies quarter to quarter. $12,795,000,$15,597,000, or 26%,29% to $62,356,000$69,128,000 in the current quarter as compared to $49,561,000$53,531,000 recorded in the comparative period last year. Operating expenses have increased due to higher commissions expense associated with the increase in commissions revenue, and higher legal and professional fee expenses associated with the B. Riley proposal. Three Months Ended
June 30, Increase (Decrease) 2020 2019 Amount Percent Commissions, compensation and fees $ 53,183,000 $ 42,077,000 $ 11,106,000 26 % Clearing fees 611,000 492,000 119,000 24 Communications 814,000 720,000 94,000 13 Occupancy 1,349,000 966,000 383,000 40 License and registration 1,084,000 934,000 150,000 16 Professional fees 2,360,000 1,130,000 1,230,000 109 Interest 26,000 8,000 18,000 225 Depreciation and amortization 755,000 461,000 294,000 64 Other administrative expenses 2,174,000 2,773,000 (599,000 ) (22 ) Total Operating Expenses $ 62,356,000 $ 49,561,000 $ 12,795,000 26 % $ 56,735,000 $ 44,121,000 $ 12,614,000 29 % 2,564,000 1,502,000 1,062,000 71 % 984,000 674,000 310,000 46 % 1,302,000 1,168,000 134,000 11 % 863,000 1,024,000 (161,000 ) (16 )% 3,145,000 2,194,000 951,000 43 % 20,000 14,000 6,000 43 % 846,000 530,000 316,000 60 % 2,669,000 2,304,000 365,000 16 % $ 69,128,000 $ 53,531,000 $ 15,597,000 29 % $11,106,000,$12,614,000, or 26%29%, to $53,183,000$56,735,000 in the current quarter as compared to $42,077,000$44,121,000 recorded in the comparative period last year. Commissions, compensation, and fees include expenses based on commission revenue earned, investment banking and investment advisory revenues, as well as compensation to our non-broker employees. TheThis increase is dueprimarily related to higher commissions revenue and therefore higher variable compensation expense. Commissions is our lowest margin business. In addition, $1.9 millionAdditionally, $3,764,000 in incremental expense is due to the Winslow acquisition. Cost-savings actions taken by us during the fiscal third quarter contributed to a reduction in our salary and benefits expenses. $119,000,$1,062,000, or 24%71%, to $611,000$2,564,000 in the current quarter as compared to $492,000$1,502,000 recorded in the comparative period last year. TheThis increase is primarily due to higher clearing fees as a result of the increase in trading volume and the incremental expense as a result of the Winslow and United Advisors acquisitions.acquisition.Communicationsand United Advisors acquisitions. $94,000,$134,000, or 13%11%, to $814,000$1,302,000 in the current quarter as compared to $720,000$1,168,000 recorded in the comparative period last year. TheThis increase is primarily due to the incremental expense as a result of the Winslow acquisition.Occupancy expenses increased $383,000,and United Advisors acquisitions offset in part by the sublease income recorded in the current quarter.40%16%, to $1,349,000$863,000 in the current quarter as compared to $966,000 recorded in the comparative period last year. The increase is primarily due to the incremental expense as a result of the Winslow acquisition.License and registration expense increased by $150,000, or 16%, to $1,084,000 in the current quarter as compared to $934,000$1,024,000 recorded in the comparative period last year. This increasedecrease is attributableprimarily due to new licenses for software applications as we continue to invest in and implement technology enhancements.$1,230,000,$951,000, or 109%43% to $2,360,000$3,145,000 in the current quarter as compared to $1,130,000$2,194,000 recorded in the comparative period last year. This increase is primarily duerelated to legal and consulting fees related to the B. Riley proposal and business acquisition matters.$18,000$6,000, to $26,000$20,000 in the current quarter as compared to $8,000$14,000 recorded in the comparative period last year. $294,000,$316,000, or 64%60% to $755,000$846,000 in the current quarter as compared to $461,000$530,000 recorded in the comparative period last year due to higher amortization expense for new customer list intangibles as a result of new business acquisitions.decreased $599,000,increased$365,000, or 22%16%, to $2,174,000$2,669,000 in the current quarter as compared to $2,773,000 recorded in the comparative period last year. This decrease as compared to the prior year quarter, is primarily due to higher costs for arbitration settlements recorded in the prior year quarter.Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019SummaryOur nine months ended June 30, 2020 resulted in an 8% increase in revenues and 11% increase in operating expenses as compared to the comparative period last year. Lower margin commission revenue replaced higher margin investment banking revenues, contributing to the higher increase in operating expenses.RevenuesTotal revenues increased $11,858,000, or 8%, to $167,441,000 in the nine months ended June 30, 2020 as compared to $155,583,000 recorded in the comparative period last year. Nine Months Ended
June 30, Increase (Decrease) 2020 2019 Amount Percent Commissions $ 85,141,000 $ 65,246,000 $ 19,895,000 30 % Net dealer inventory gains 1,393,000 933,000 460,000 49 Investment banking 37,515,000 52,692,000 (15,177,000 ) (29 ) Investment advisory 25,371,000 18,949,000 6,422,000 34 Interest and dividends 3,389,000 4,430,000 (1,041,000 ) (23 ) Transaction fees and clearing services 6,216,000 5,202,000 1,014,000 19 Tax preparation and accounting 8,046,000 7,572,000 474,000 6 Other 370,000 559,000 (189,000 ) (34 ) Total Revenues $ 167,441,000 $ 155,583,000 $ 11,858,000 8 % Commissions increased $19,895,000, or 30%, to $85,141,000 in the nine months ended June 30, 2020 as compared to $65,246,000 recorded in the comparative period last year. Retail commissions increased due to COVID-19 related higher customer trading volumes in the current quarter and $2.3 million in incremental revenue due to the Winslow acquisition, compared to the slower period a year ago which was impacted by interest rate concerns, volatile markets and the impending government shutdown.Net dealer inventory gains increased $460,000, or 49%, to $1,393,000 in the nine months ended June 30, 2020 as compared to $933,000 recorded in the comparative period last year. The increase is primarily due to the incremental revenue as a result of the Winslow acquisition.Investment banking fees decreased $15,177,000, or 29%, to $37,515,000 in the nine months ended June 30, 2020 as compared to $52,692,000 recorded in the comparative period last year. The prior year was particularly strong in both our traditional investment banking business as well as our private shares business. Additionally due to the COVID-19 outbreak, investment banking and private share deals have been delayed, deferred and, in certain cases canceled.Investment advisory fees increased $6,422,000, or 34%, to $25,371,000 in the nine months ended June 30, 2020 as compared to $18,949,000 recorded in the comparative period last year. A net increase in assets under management, due to increased registered representative recruiting, market valuation levels, and the continuing reallocation of some client assets to our investment advisory business contributed to the increase. In addition, $2.6 million in incremental revenue is due to the Winslow acquisition.Interest and dividends decreased $1,041,000, or 23%, to $3,389,000 in the nine months ended June 30, 2020 as compared to $4,430,000 recorded in the comparative period last year. This decrease is primarily attributable to the drop in the Federal funds rate as interest rates trend towards zero.Transaction fees and clearing services increased $1,014,000, or 19%, to $6,216,000 in the nine months ended June 30, 2020 as compared to $5,202,000 recorded in the comparative period last year. This increase is primarily attributable to an increase in customer trading volumes.Tax preparation and accounting fees increased $474,000, or 6%, to $8,046,000 in the nine months ended June 30, 2020 as compared to $7,572,000 recorded in the comparative period last year. The current period increase is attributable to revenue generated by new business acquisitions.Other revenue decreased $189,000, or 34%, to $370,000 in the nine months ended June 30, 2020 from $559,000 recorded in the comparative period last year. This decrease is primarily due to a decline of client participation in our fully paid stock lending program. Client participation in this program varies quarter to quarter.Operating ExpensesTotal operating expenses increased $16,685,000, or 11%, to $173,635,000 in the nine months ended June 30, 2020 as compared to $156,950,000 recorded in the comparative period last year. Nine Months Ended
June 30, Increase (Decrease) 2020 2019 Amount Percent Commissions, compensation and fees $ 147,825,000 $ 132,120,000 $ 15,705,000 12 % Clearing fees 1,689,000 1,781,000 (92,000 ) (5 ) Communications 2,587,000 2,239,000 348,000 16 Occupancy 3,742,000 2,872,000 870,000 30 License and registration 3,067,000 2,260,000 807,000 36 Professional fees 6,431,000 4,848,000 1,583,000 33 Interest 63,000 26,000 37,000 142 Depreciation and amortization 2,098,000 1,320,000 778,000 59 Other administrative expenses 6,133,000 9,484,000 (3,351,000 ) (35 ) Total Operating Expenses $ 173,635,000 $ 156,950,000 $ 16,685,000 11 % Commissions, compensation, and fees increased $15,705,000, or 12%, to $147,825,000 in the nine months ended June 30, 2020 as compared to$132,120,000 recorded in the comparative period last year. Commissions, compensation, and fees include expenses based on commission revenue, net dealer inventory gains, investment banking and investment advisory, as well as compensation to our non-broker employees. The increase is primarily related to higher commissions revenue and therefore higher variable compensation expense. Commissions is our lowest margin business. In addition, $3.9 million in incremental expense is due to the Winslow acquisition.Clearing fees decreased $92,000, or 5%, to $1,689,000 in the nine months ended June 30, 2020, as compared to $1,781,000 recorded in the comparative period last year. This decrease is primarily due to higher charge backs to registered representatives for clearing fees offset in part by the incremental expense as a result of the Winslow acquisition.Communications expenses increased $348,000, or 16%, to $2,587,000 in the nine months ended June 30, 2020, as compared to $2,239,000 recorded in the comparative period last year. The increase is primarily due to the incremental expense as a result of the Winslow acquisition.Occupancy expenses increased $870,000, or 30%, to $3,742,000 in the nine months ended June 30, 2020, as compared to $2,872,000 recorded in the comparative period last year. The increase is primarily due to several small locations opened later in fiscal year 2019 as part of the company's geographical expansion as well as the incremental expense as a result of the Winslow acquisition.License and registration fees increased $807,000, or 36%, to $3,067,000 in the nine months ended June 30, 2020, as compared to $2,260,000 recorded in the comparative period last year. This increase is attributable to licenses for software applications as we continue to invest in and implement technology enhancement.Professional fees increased $1,583,000, or 33%, to $6,431,000 in the nine months ended June 30, 2020, as compared to $4,848,0002,304,000 recorded in the comparative period last year. This increase is primarily due to legal and consulting fees related to the B. Riley proposal and business acquisitions matters.higher insurance costs.Interest expense increased $37,000 to $63,000 in the nine months ended June 30, 2020, as compared to $26,000 recorded in the comparative period last year.Depreciation and amortization expenses increased $778,000, or 59%, to $2,098,000 in the nine months ended June 30, 2020, as compared to $1,320,000 recorded in the comparative period last year. Higher amortization expense for new customer list intangibles as a result of new business acquisitions contributed to the majority of the increase.Other administrative expenses decreased $3,351,000, or 35%, to $6,133,000 in the nine months ended June 30, 2020, as compared to $9,484,000 recorded in the comparative period last year. This decrease as compared to the prior year period, is primarily due to higher costs for arbitration settlements recorded in the prior year period.For the three months ended June 30, 2020 and 2019, EBITDA, as adjusted, was $2,219,000 and $2,020,000, respectively. The increase of $199,000, or 10%, resulted primarily from higher revenue generation in the current period.For the nine months ended June 30, 2020 and 2019, EBITDA, as adjusted, was $1,763,000 and $4,185,000, respectively. The decrease of $2,422,000, or 58%, resulted primarily from lower profitability in the current period. Three Months Ended
June 30, Nine Months Ended
June 30, 2020 2019 2020 2019 Net income (loss) attributable to common shareholders, as reported $ (722,000 ) $ 233,000 $ (4,078,000 ) $ (1,596,000 ) Interest expense 26,000 8,000 63,000 26,000 Income taxes (235,000 ) 88,000 (1,412,000 ) (652,000 ) Depreciation 255,000 168,000 750,000 509,000 Amortization 500,000 293,000 1,348,000 811,000 EBITDA (176,000 ) 790,000 (3,329,000 ) (902,000 ) Non-cash compensation expense 873,000 720,000 2,318,000 3,522,000 Forgivable loan amortization 262,000 167,000 649,000 500,000 Unrealized loss (gain) on the firm's warrant portfolio 18,000 343,000 989,000 1,065,000 Real estate restructuring costs 91,000 — 98,000 — Professional fee costs associated with the B. Riley proposal 548,000 — 548,000 — Legal and arbitration costs associated with pre-fiscal 2017 lawsuits not covered by insurance 113,000 — 297,000 — New York City occupancy tax - fiscal 2007 through fiscal 2012 490,000 — 490,000 — Gain on disposal of National Tax branch — — (297,000 ) — EBITDA, as adjusted $ 2,219,000 $ 2,020,000 $ 1,763,000 $ 4,185,000 $ (859,000 ) $ (1,593,000 ) 20,000 14,000 (428,000 ) (725,000 ) 251,000 242,000 595,000 288,000 (421,000 ) (1,774,000 ) 781,000 907,000 241,000 163,000 Professional fees associated with the B. Riley proposal 653,000 — 20,000 (143,000 ) $ 1,274,000 $ (847,000 ) real estate restructuring costs, professional fee costs associated with the B. Riley proposal, legal and arbitration costs associated with pre-fiscal 2017 lawsuits not covered by insurance, New York City occupancy tax - fiscal 2007 through fiscal 2012 and gain on disposal of National Tax branch, is a key metric we use in evaluating our business. EBITDA and EBITDA, as adjusted, are considered non-GAAP financial measure as defined by Regulation G, promulgated by the SEC. Ending balance at
June 30, Average balance during the
first nine months of fiscal year ending September 30, 2020 2019 2020 2019 Cash $ 30,594,000 $ 25,331,000 $ 25,426,000 $ 27,487,000 Receivables from broker-dealers and clearing organizations 3,645,000 3,252,000 3,441,000 3,356,000 Securities owned (excludes warrants) 3,128,000 2,115,000 4,545,000 1,874,000 Accrued commissions and payroll payable, accounts payable and accrued expenses 26,127,000 20,082,000 23,401,000 20,816,000 $ 27,965,000 $ 21,820,000 $ 27,646,000 $ 26,132,000 5,198,000 1,990,000 4,283,000 2,740,000 1,471,000 5,128,000 1,454,000 3,441,000 27,367,000 20,095,000 26,234,000 23,664,000 June 30,December 31, 2020 and 2019 respectively, 35%32% and 44%30% of our total assets consisted of cash, securities owned and receivables from clearing brokers and other broker-dealers. The level of cash used in each asset class is subject to fluctuation based on market volatility, revenue production and trading activity in the marketplace.June 30,December 31, 2020, NSC had net capital of $8,103,137$3,875,125 which was $7,103,137$2,875,125 in excess of its required minimum net capital of $1,000,000. NSC is exempt from the provisions of the Customer Protection Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers.June 30,December 31, 2020, WEC had net capital of $1,163,064$777,629 which was $1,046,476$618,479 in excess of its required minimum net capital of $116,588.$159,150. WEC's ratio of aggregate indebtedness to net capital was 1.53.1 to 1. WEC is exempt from the provisions of Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers.and nine months of fiscal 20202021 and 2019,2020, NSC and WEC were in compliance with the rules governing dividend payments and other equity withdrawals.$126,000$79,000 and $2,376,000$121,000 during the first ninethree months of fiscal 2021 and 2020, and 2019, respectively.$(1,594,000) and $411,000 for the nine months ended June 30, 2020 and 2019, respectively.During the nine months ended June 30, 2020, net cash used in operating activities was primarily attributable to:(4,354,000)(859,000) of net loss, which included $5,892,000$2,497,000 in non-cash items, consisting primarily of (i) $2,318,000$781,000 of stock-based compensation expense, (ii) $2,098,000$846,000 of depreciation and amortization expense, and (iii) $2,366,000$951,000 of amortization of operating lease assets. These items were partially offset by $1,412,000 of deferred tax benefit;right-of-use assets; and$4,677,000$1,831,000 increase in other receivables from broker-dealers and clearing organizations (ii) a $1,343,000 decrease in accounts payable, accrued expense and other liabilities and (iii) a $3,238,000$753,000 increase in forgivable loans receivable.receivable, and (iii) a $474,000 increase in prepaid expenses. These items were partially offset by (i) a $5,701,000 decrease$1,287,000 increase in securities ownedaccounts payable, accrued expenses and other liabilities, and (ii) a $675,000$1,807,000 decrease in prepaid expenses.other receivables.ninethree months ended June 30,December 31, 2019, net cash provided by operating activities was primarily attributable to:(697,000)(1,499,000) of net loss, which included $5,165,000$2,496,000 in non-cash items, consisting primarily of (i) $3,522,000$907,000 of stock-based compensation expense, (ii) $1,320,000$530,000 of depreciation and amortization expense, and (iii) $500,000$700,000 of amortization of forgivable loans;operating lease assets; and$724,000 increase$7,434,000 decrease in prepaidaccounts payable, accrued expenses and other liabilities, (ii) a $1,857,000$1,223,000 increase in other receivables, (iii) a $549,000$1,393,000 increase in forgivable loans receivable, and (iv) a $1,908,000 decrease$1,301,000 increase in accounts payable.prepaid expenses. These items were partially offset by (i) a $715,000$2,680,000 decrease in securities owned and (ii) a $1,549,000 decrease in receivables from broker dealers and clearing organizations and (ii) a $197,000 decrease in securities owned.organizations.$2,081,000$312,000 and $1,987,000$1,878,000 for the ninethree months ended June 30,December 31, 2020 and 2019, respectively. Net cash used in investing activities during the ninethree months ended June 30,December 31, 2020 and 2019 was primarily attributable to the acquisition of businesses and during the nine months ended June 30, 2019, was primarily attributable to the acquisition of businesses and the purchase of fixed assets.provided by (used in)used in financing activities was $3,827,000$472,000 and $(1,207,000)$417,000 for the ninethree months ended June 30,December 31, 2020 and 2019, respectively. Net cash provided by (used in)used in financing activities for the ninethree months ended June 30,December 31, 2020, was primarily attributable to (i) $(328,000)$85,000 for the repurchase of common stock for tax withholding, (ii) $(460,000)$276,000 of contingent considerations payments, and (iii) $(222,000)$60,000 for principal payments under finance obligations, (iv) $(1,485,000) of distributions to non-controlling interest and (v) $6,497,000 of proceeds from PPP related loans.obligations. Net cash used in financing activities for the ninethree months ended June 30,December 31, 2019, was primarily attributable to the(i) $139,000 for repurchase of common stock for tax withholding, (ii) $112,000 of contingent considerations payments, and (iii) $108,000 for principal payments under finance obligations and contingent consideration payments.JuneDecember 31, 2020, and September 30, 2020 and September 30, 2019,, or on our results of operations and cash flows for the ninethree months ended June 30,December 31, 2020 and 2019.Market RiskOur primary market risk arises from the fact that we engage in proprietary trading and make dealer markets in equity securities. Accordingly, we may maintain certain amounts of inventories in order to facilitate customer order flow. We may incur losses as a result of price movements in these inventories due to changes in interest rates, foreign exchange rates, equity prices and other political factors. We are not subject to direct market risk due to changes in foreign exchange rates. However, we are subject to market risk as a result of changes in interest rates and equity prices, which are affected by global economic conditions. We manage our exposure to market risk by limiting our net long or short positions. Trading and inventory accounts are monitored daily by management and we have instituted position limits. Our ability to manage market risk associated with our carried interest in our private shares program may be limited by contractual lock-ups, which prevent us from protecting against market decline in those shares.Credit risk represents the amount of accounting loss we could incur if counterparties to our proprietary transactions fail to perform and the value of any collateral proves inadequate. Although credit risk relating to various financing activities is reduced by the industry practice of obtaining and maintaining collateral, we maintain more stringent requirements to further reduce our exposure. We monitor our exposure to counterparty risk on a daily basis by using credit exposure information and monitoring collateral values. Our clearing firms, in conjunction with our risk department, review margin requirements for large or concentrated accounts and set higher requirements or require a reduction of either the level of margin debt or investment in high-risk securities or, in some cases, requiring the transfer of the account to another broker-dealer.We monitor our market and credit risks daily through internal control procedures designed to identify and evaluate the various risks to which we are exposed. There can be no assurance, however, that our risk management procedures and internal controls will prevent losses from occurring as a result of such risks.The following table shows the fair values of our securities owned as of June 30, 2020. We performed an entity-wide analysis of our financial instruments and assessed the related market risk. Based on this analysis, we do not expect that the market risk associated with our financial instruments at June 30, 2020 will have a material adverse effect on our consolidated financial position or results of operations. Securities
ownedCorporate stocks $ 793,000 Municipal bonds 320,000 Restricted stock 799,000 Corporate bonds 1,216,000 Warrants 4,763,000 Total $ 7,891,000 Operational RiskOperational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes. We operate in a dynamic market and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions and damage to our reputation. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees operate within established corporate policies and limits.Risk ManagementWe have established various committees to oversee the management of risks associated with our business. Our Audit Committee was established for the primary purpose of overseeing (i) the integrity of our unaudited and audited condensed consolidated financial statements, (ii) our compliance with legal and regulatory requirements that may impact our unaudited condensed consolidated financial statements or financial operations, (iii) the independent auditor’s qualifications and independence and (iv) the performance of our independent auditor and internal audit function.In addition, we have written policies and procedures that govern the conduct of business by our employees and our relationship with our clients. Our client policies address the extension of credit for client accounts, data and physical security, compliance with industry regulation and codes of ethics to govern employee conduct among other matters.June 30,December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.the Companywe will be liable for, if any. Further, the Company has a history of collecting amounts awarded in these types of matters from its registered representatives that are still affiliated, as well as from those that are no longer affiliated. Many of these claimants also seek, in addition to compensatory damages, punitive or treble damages, and all seek interest, costs and fees. These matters arise in the normal course of business. The Company intends to vigorously defend itself in these actions, and the ultimate outcome of these matters cannot be determined at this time.have beenare no material changes from the risk factors discussedpreviously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 20192020, other than the following:Quarterly Reportsbusiness, financial condition and results of operations.Form 10-Qour clients, registered representatives, investment advisors, employees and other parties may have an adverse effect on our business, financial condition and results of operation regardless of whether the proposed transactions are completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the proposed transactions:quarterly periods ended December 31, 2019proposed Merger, for which we will have received little or no benefit if the proposed Merger is not completed. Many of these fees and March 31, 2020.None.31.1August 13, 2020By: August 13, 2020 45