Company Quick10K Filing
National Holdings
Price2.64 EPS0
Shares13 P/E436
MCap35 P/FCF5
Net Debt-31 EBIT1
TEV3 TEV/EBIT7
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-13
10-Q 2020-03-31 Filed 2020-05-14
10-Q 2019-12-31 Filed 2020-02-13
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-Q 2018-12-31 Filed 2019-02-14
10-K 2018-09-30 Filed 2018-12-21
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-Q 2017-12-31 Filed 2018-02-14
10-K 2017-09-30 Filed 2017-12-22
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-Q 2016-12-31 Filed 2017-02-14
10-K 2016-09-30 Filed 2016-12-29
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-16
10-Q 2015-12-31 Filed 2016-02-16
10-K 2015-09-30 Filed 2015-12-28
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-Q 2014-12-31 Filed 2015-02-17
10-K 2014-09-30 Filed 2014-12-29
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-14
10-Q 2013-12-31 Filed 2014-02-14
10-K 2013-09-30 Filed 2013-12-27
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-14
10-Q 2012-12-31 Filed 2013-02-14
10-K 2012-09-30 Filed 2012-12-27
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-Q 2011-12-31 Filed 2012-02-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-Q 2010-12-31 Filed 2011-02-14
10-K 2010-09-30 Filed 2010-12-29
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-17
10-Q 2009-12-31 Filed 2010-02-16
8-K 2020-08-13 Earnings, Exhibits
8-K 2020-05-15
8-K 2020-04-30
8-K 2020-04-10
8-K 2020-04-02
8-K 2020-02-14
8-K 2019-12-31
8-K 2019-12-31
8-K 2019-10-11
8-K 2019-08-26
8-K 2019-08-15
8-K 2019-07-17
8-K 2019-05-16
8-K 2019-03-07
8-K 2019-02-15
8-K 2019-02-13
8-K 2018-12-28
8-K 2018-12-21
8-K 2018-11-14
8-K 2018-08-14
8-K 2018-07-20
8-K 2018-06-11
8-K 2018-05-31
8-K 2018-03-15
8-K 2018-02-14
8-K 2018-02-08

NHLD 10Q Quarterly Report

Part I. Financial Information
Note 1. Basis of Presentation
Note 2. Organization and Description of Business
Note 3. Receivables From Broker - Dealers and Clearing Organizations and Other Receivables
Note 4. Forgivable Loans Receivable
Note 5. Fair Value of Assets and Liabilities
Note 6. Fixed Assets
Note 7. Business Combination, Contingent Consideration and Disposal of Branch
Note 8. Intangible Assets
Note 9. Accounts Payable and Accrued Expenses
Note 10. per Share Data
Note 11. Off Balance Sheet Risk and Concentration of Credit Risk
Note 12. New Accounting Guidance
Note 13. Commitments and Contingencies
Note 14. Net Capital Requirements
Note 15. Stockholders' Equity
Note 16. Income Taxes
Note 17. Segment Information
Note 18. Acquisition of Controlling Interest in The Company
Note 19. Variable Interest Entities
Note 20. Revenues From Contracts and Significant Customers
Note 21. Leases
Note 22. Paycheck Protection Program
Note 23. Subsequent Event
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
EX-31.1 exhibit311nhld06302020.htm
EX-31.2 exhibit312nhld06302020.htm
EX-32.1 exhibit321nhld06302020.htm
EX-32.2 exhibit322nhld06302020.htm

National Holdings Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
8567493214-32012201420172020
Assets, Equity
655035205-102012201420172020
Rev, G Profit, Net Income
10.07.24.41.6-1.2-4.02012201420172020
Ops, Inv, Fin

10-Q 1 nhld0630202010-q.htm 10-Q Document


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, 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 Floor
New 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 class
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 NO
 
As of July 31, 2020 there were 13,584,593 shares of the registrant’s common stock outstanding. 




NATIONAL HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2020
 
INDEX
  
PART I – FINANCIAL INFORMATION
 
 
 
 
 
Item 1 – Condensed Financial Statements
 
 
 
 
 
 
 
Condensed Consolidated Statements of Financial Condition as of June 30, 2020 (unaudited) and September 30, 2019
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2020 and 2019 (unaudited)
 
 
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended June 30, 2020 and 2019 (unaudited)
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2020 and 2019 (unaudited)
 
 
 
 
 
 
Notes to Condensed Consolidated 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
 
 
 
 
 
Signatures

2



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; and (xii) the previously announced offer from B. Riley Financial regrading a potential transaction involving our shares of common stock.

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.  


3



PART I.        FINANCIAL INFORMATION
ITEM I.         FINANCIAL STATEMENTS

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
June 30,
2020
(Unaudited)
 
September 30,
2019
ASSETS
 
 
 
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

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

4



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(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

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

5



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY 
(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, 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


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



















6



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY, CONTINUED
(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


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

7



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(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

 

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






8






NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
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.

9



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(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 June 30, 2020 and for the three and nine months ended June 30, 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, 2019 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, 2019 for additional disclosures and accounting policies.
 
Certain items in the condensed consolidated statement of operations for the fiscal 2019 period have been reclassified to conform to the presentation in the fiscal 2020 period. Such reclassifications did not have a material impact on the presentation of the overall financial statements.

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. ORGANIZATION AND DESCRIPTION OF BUSINESS
 
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 exchange listed stocks.

The Company's broker-dealer subsidiary is National Securities Corporation, a Washington corporation (“NSC”). 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. NSC is registered with the Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (the “SIPC”).

The Company’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.

The Company’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.

The Company’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.

The Company’s wholly-owned subsidiary, GC Capital Corporation (“GC”), provides licensed mortgage brokerage services in New York and Florida.


10



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”), Winslow, Evans & Crocker Insurance Agency, Inc., a Massachusetts corporation (“WIA”), and Winslow Financial, Inc., a Massachusetts corporation (“WF”). See Note 7 for additional information.

NOTE 3. RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS AND OTHER RECEIVABLES
 
At June 30, 2020 and September 30, 2019, the receivables of $3,645,000 and $3,490,000, 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-based fee revenues associated with the Company’s investment advisory business.

Other receivables at June 30, 2020 and September 30, 2019 consist of the following:
 
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

 
 
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 $649,000 and $500,000 for the nine months ended June 30, 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.

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 June 30, 2020 and September 30, 2019, no allowance for doubtful accounts was required.
 
Forgivable loan activity for the nine months ended June 30, 2020 is as follows:
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

 









11



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 June 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.

 
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





12



 
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


The following tables present the financial assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and September 30, 2019:

 
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







13




Changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended June 30, 2020:

 
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.

See changes in Level 3 liabilities (contingent consideration) measured at fair value on a recurring basis for the nine months ended June 30, 2020 in Note 7.

The table below presents information on the valuation techniques, significant unobservable inputs and their ranges for the Company’s financial assets measured at fair value on a recurring basis with a significant Level 3 balance.

Financial Instruments Owned
Fair Value
Valuation Technique
Significant Unobservable Input(s)
Input/Range
Warrants
$
3,962,000

Market Approach
Discount for lack of marketability

Volatility

26% - 43%

66% - 115%

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 Rule 144, including the requisite holding period. The unrealized (loss) gain for the change in fair value of such positions for the nine months ended June 30, 2020 and 2019 amounted to approximately $(989,000) and $(1,065,000), respectively, which is included in net dealer inventory losses.

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 June 30, 2020 and September 30, 2019 consist of the following: 
 
 
June 30,
2020
 
September 30,
2019
 
Estimated Useful
Lives
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
lease
Finance 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

 
 
 

14




Depreciation expense associated with fixed assets for the three months ended June 30, 2020 and 2019 was $255,000 and $168,000, respectively.

Depreciation expense associated with fixed assets for the nine months ended June 30, 2020 and 2019 was $750,000 and $509,000, respectively.


NOTE 7. BUSINESS COMBINATION, CONTINGENT CONSIDERATION AND DISPOSAL OF BRANCH
 
Tax & Accounting Acquisitions

In December 2019 and January 2020, National Tax acquired certain assets of two tax preparation and accounting businesses that per accounting guidance were deemed to be a business combination. The consideration for the transactions consisted of cash payments at closing totaling $432,000, and contingent consideration payable in cash having a fair value of $1,595,000, 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, during various periods following the closing. The fair value of the acquired assets totaling $2,027,000 was allocated to customer relationships, which are being amortized over seven years.

The contingent consideration liability recognized in the above acquisitions 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 Acquisition

On 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 is

15



subject 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.


16



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 Information

The 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
)

Contingent Consideration

Set forth below are changes in the carrying value of the contingent consideration for the nine months ended June 30, 2020 related to acquisitions:

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 Branch

In 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.














17



NOTE 8. INTANGIBLE ASSETS
 
Intangibles consisted of the following at June 30, 2020 and September 30, 2019

 
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

 
 

Amortization expense associated with intangible assets for the three months ended June 30, 2020 and 2019 was $500,000 and $293,000, 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.

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,
 
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


















18



NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of June 30, 2020 and September 30, 2019 consist of the following:
 
June 30,
2020
 
September 30,
2019
Legal
$
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


At June 30, 2020, other primarily consists of $151,000 for investment banking deal expense accruals, $1,226,000 for soft dollar accruals, $371,000 for finance obligation of the implementation costs of the general ledger system, $105,000 for tax return preparation fees and $49,000 for rent. At September 30, 2019, other primarily consists of $319,000 for investment banking deal expense accruals, $1,188,000 for soft dollar accruals, $119,000 for tax return preparation fees, $595,000 for finance obligation of the annual subscription fee and implementation costs of the new general ledger system, $380,000 for fixed assets acquired but not paid, $396,000 for rent and $228,000 for clearing fees.


NOTE 10. PER SHARE DATA
 
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: 

 
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


At June 30, 2020 and 2019, options, warrants and unvested restricted stock units totaling 9,631,309 and 9,383,186 shares, respectively, were excluded from the computation of diluted net income (loss) per share as their effect would have been anti-dilutive.


NOTE 11. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
 
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.

19




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
portfolio.

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. NEW ACCOUNTING GUIDANCE

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires the lessee to recognize the right to use lease assets and lease liabilities that arise from leases, and present them in its statement of financial condition. The recognition of these lease assets 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. The Company adopted 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. The adoption of the new standard did not materially impact the Company's consolidated statements of operations and had no impact on the Company's consolidated statements of cash flows. The Company's current lease arrangements expire through 2032. See Note 21 for further information.

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 standard is effective for the Company beginning October 1, 2020 for both interim and annual periods. Early adoption is permitted. The company is currently assessing the impact that the adoption of ASU 2018-13 will have on its financial statements.


20



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 company is currently assessing the impact that the adoption of ASU 2019-12 will have on its financial statements.

NOTE 13. COMMITMENTS AND CONTINGENCIES
 
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 Kay Johnson v. National Securities Corporation, et al., Case No. 1:19-cv-06197-LTS. The complaint presents three purported derivative causes of action on behalf of the Company, and five causes of action by the plaintiff directly. As part of the derivative claims, the complaint generally alleges that certain of the individual defendants failed to establish and maintain adequate internal controls to ensure that the Company’s board of directors (the “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.

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.


21



At June 30, 2020 and September 30, 2019, the Company accrued approximately $885,000 and $1,817,000, 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, 2020 and 2019 were $9,000 and $715,000, respectively, and during the nine months ended June 30, 2020 and 2019, were $283,000 and $3,198,000, 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 and $401,000 for the three months ended June 30, 2020 and 2019, respectively, and $1,513,000 and $1,329,000 for the nine months ended June 30, 2020 and 2019, respectively.


Other Commitments

As of June 30, 2020, the Company and its subsidiaries had one outstanding letter of credit, which has been issued in the maximum amount of $961,000 as security for a property lease, and which is collateralized by the restricted cash as reflected in the condensed consolidated statements of financial condition.


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 June 30, 2020, NSC had net capital of $8,103,137 which was $7,103,137 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.

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 June 30, 2020, WEC had net capital of $1,163,064 which was $1,046,476 in excess of its required net capital of $116,588. WEC's ratio of aggregate indebtedness to net capital was 1.5 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.

Advances, dividend payments and other equity withdrawals from NSC and WEC are restricted by the regulations of the SEC, and other regulatory agencies. These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company. 
 

NOTE 15. STOCKHOLDERS' EQUITY

Stock Options
 
Information with respect to stock option activity during the nine months ended June 30, 2020 follows:
 
Options
 
Weighted
Average
Exercise
Price Per
Share
 
Weighted
Average
Grant
Date Fair
Value
Per Share
 
Weighted
Average
Remaining
Contractual
term (years)
 
Aggregate
Intrinsic
Value
Outstanding 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
 
$

 
All compensation expense associated with the grants of stock options was recognized in prior years.





22



Warrants

The following table summarizes information about warrant activity during the nine months ended June 30, 2020: