UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~Form 10-Q

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)~~

~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

(Mark one)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019


~~For the Quarter Ended December 31, 2018~~		~~Commission File Number~~
¨		~~001-12629~~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, 25thFloor

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:



~~Delaware~~ Title of each class:	Trading Symbol(s)	~~36-4128138~~Name of each exchange on which registered:
~~(State or other~~ ~~jurisdiction of~~ ~~incorporation or~~ ~~organization)~~ Common Stock, $0.02 par value per share	NHLD	~~(I.R.S. Employer~~ ~~Identification No.)~~ The Nasdaq Capital Market

~~200 Vesey Street, 25th Floor, New York, NY 10281~~

~~(Address including zip code of principal executive offices)~~

~~Registrant’s telephone number, including area code:~~ ~~(212) 417-8000~~

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 ☒ý 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 ☒ý 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 (check one).~~Act.



	Large Accelerated Filer ☐		Accelerated Filer ☐

	Non-Accelerated Filer ☒ý		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☒~~NOý

As of January 31, ~~2019~~2020 there were ~~12,610,545~~13,278,835 shares of the registrant’s common stock outstanding.

NATIONAL HOLDINGS CORPORATION

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31, ~~2018~~2019

INDEX



PART I – FINANCIAL INFORMATION

	Item 1 – Condensed Financial Statements

		Condensed Consolidated Statements of Financial Condition as of December 31, ~~2018~~2019 (unaudited) and September 30, ~~2018~~2019	4

		Condensed Consolidated Statements of Operations for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 (unaudited)	5

		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2019 and 2018 (unaudited)	6

		Condensed Consolidated Statements of Cash Flows for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 (unaudited)	7

		Notes to Condensed Consolidated Financial Statements	9

	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		2730

	Item 3 – Quantitative and Qualitative Disclosures About Market Risk		3336

	Item 4 – Controls and Procedures		3437

PART II – OTHER INFORMATION

	Item 1 – Legal Proceedings		3538

	Item 1A – Risk Factors		3538

	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		3538

	Item 3 – Defaults Upon Senior Securities		3538

	Item 4 – Mine Safety Disclosures		3538

	Item 5 – Other Information		3539

	Item 6 – Exhibits		3640

	Signatures		3741

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; and (x) our continued ability to maintain and execute our business ~~strategy; and (xi) our potential inability to secure additional debt or equity financing.~~strategy.

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.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	December 31, 2018 (Unaudited)			September 30, 2018			December 31, 2019 (Unaudited)			September 30, 2019
ASSETS
Cash	$	30,813,000		$	27,920,000		$	21,820,000		$	30,443,000
Restricted cash	1,354,000			1,353,000			962,000			960,000
Cash deposits with clearing organizations	336,000			336,000			643,000			436,000
Securities owned, at fair value	7,208,000			7,786,000			10,912,000			12,481,000
Receivables from broker-dealers and clearing organizations	2,751,000			3,967,000			1,990,000			3,490,000
Forgivable loans receivable	1,531,000			1,567,000			2,911,000			1,834,000
Other receivables, net	5,595,000			4,265,000			7,881,000			5,672,000
Prepaid expenses	4,501,000			4,065,000			5,372,000			3,639,000
Fixed assets, net	2,652,000			2,671,000			5,026,000			5,067,000
Intangible assets, net	4,502,000			4,730,000			10,567,000			5,441,000
Goodwill	5,153,000			5,153,000			8,142,000			5,153,000
Deferred tax asset, net	4,105,000			4,192,000			3,305,000			4,560,000
Other assets, principally refundable deposits	767,000			444,000
Operating lease assets							15,231,000			—
Other assets							1,739,000			2,031,000
Total Assets	$	71,268,000		$	68,449,000		$	96,501,000		$	81,207,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities
Securities sold, but not yet purchased, at fair value							$	203,000		$	—
Accrued commissions and payroll payable	$	13,040,000		$	12,862,000		12,579,000			18,590,000
Accounts payable and accrued expenses	8,107,000			8,019,000			7,516,000			8,643,000
Deferred clearing and marketing credits	524,000			576,000			314,000			367,000
Contingent consideration							6,346,000			1,620,000
Operating lease liabilities							17,332,000			—
Other	620,000			57,000			1,343,000			388,000
Total Liabilities	22,291,000			21,514,000			45,633,000			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 December 31, 2018 and September 30, 2018; 12,610,545 shares issued and outstanding at December 31, 2018 and 12,541,890 shares issued and outstanding at September 30, 2018	252,000			250,000
Common stock $0.02 par value, authorized 75,000,000 shares at December 31, 2019 and September 30, 2019; 13,278,835 shares issued and outstanding at December 31, 2019 and 13,158,441 shares issued and outstanding at September 30, 2019							265,000			263,000
Additional paid-in-capital	87,729,000			86,510,000			91,120,000			90,354,000
Accumulated deficit	(39,004,000		)	(39,825,000		)	(42,372,000		)	(40,779,000		)
Total National Holdings Corporation Stockholders’ Equity							49,013,000			49,838,000
Non-controlling interest							1,855,000			1,761,000
Total Stockholders’ Equity	48,977,000			46,935,000			50,868,000			51,599,000

Total Liabilities and Stockholders’ Equity	$	71,268,000		$	68,449,000		$	96,501,000		$	81,207,000

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

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Month Period Ended December 31,						Three Month Period Ended December 31,
	2018			2017			2019			2018
Revenues
Commissions	$	21,012,000		$	25,618,000		$	23,167,000		$	21,012,000
Net dealer inventory (losses) gains	(503,000		)	905,000
Net dealer inventory gains (losses)							1,192,000			(503,000		)
Investment banking	27,071,000			14,547,000			15,227,000			27,071,000
Investment advisory	5,858,000			5,333,000			7,389,000			5,858,000
Interest and dividends	1,584,000			631,000			1,394,000			1,584,000
Transaction fees and clearing services	2,149,000			2,297,000			1,775,000			2,149,000
Tax preparation and accounting	774,000			523,000			931,000			774,000
Other	162,000			226,000			116,000			162,000
Total Revenues	58,107,000			50,080,000			51,191,000			58,107,000

Operating Expenses
Commissions, compensation and fees	49,410,000			43,561,000			45,299,000			49,410,000
Clearing fees	759,000			743,000			324,000			759,000
Communications	822,000			760,000			674,000			822,000
Occupancy	925,000			955,000			1,168,000			925,000
License and registration	579,000			637,000			1,024,000			579,000
Professional fees	1,985,000			1,393,000			2,194,000			1,985,000
Interest	8,000			2,000			14,000			8,000
Depreciation and amortization	398,000			379,000			530,000			398,000
Other administrative expenses	1,904,000			1,826,000			2,304,000			1,904,000
Total Operating Expenses	56,790,000			50,256,000			53,531,000			56,790,000
Income (Loss) before Other Income (Expense) and Income Taxes	1,317,000			(176,000		)	(2,340,000		)	1,317,000

Other Income (Expense)
Change in fair value of warrant liability	—			(5,597,000		)
Other income	6,000			6,000
Total Other Income (Expense)	6,000			(5,591,000		)
Other income (expense)							116,000			6,000
Total Other Income							116,000			6,000
Income (Loss) before Income Taxes	1,323,000			(5,767,000		)	(2,224,000		)	1,323,000

Income tax expense	367,000			2,273,000
Income tax expense (benefit)							(725,000		)	367,000
Net Income (Loss)	$	956,000		$	(8,040,000	)	(1,499,000		)	956,000

Net income (loss) per share - Basic	$	0.08		$	(0.65	)
Net income (loss) per share - Diluted	$	0.08		$	(0.65	)
Net income attributable to non-controlling interest							(94,000		)	—
Net income (loss) attributable to National Holdings Corporation common shareholders							$	(1,593,000	)	$	956,000

Net income (loss) per share attributable to National Holdings Corporation common shareholders - Basic							$	(0.12	)	$	0.08
Net income (loss) per share attributable to National Holdings Corporation common shareholders - Diluted							$	(0.12	)	$	0.08

Weighted average number of shares outstanding - Basic	12,545,286			12,437,916			13,169,025			12,545,286
Weighted average number of shares outstanding - Diluted	12,716,195			12,437,916			13,169,025			12,716,195

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

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

FOR THE THREE MONTHS ENDED DECEMBER 31, 2019 AND 2018

Common Stock Additional
Paid-in-
Capital Accumulated
Deficit 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 (Note 21) —
—
—
(135,000 ) (135,000 )

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



	Common Stock			Additional Paid-in- Capital			Accumulated Deficit			Non-controlling Interest		Total Stockholders’ Equity
	Shares	$		Additional Paid-in- Capital			Accumulated Deficit			Non-controlling Interest		Total Stockholders’ Equity
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



	Common Stock			Additional Paid-in- Capital			Accumulated Deficit			Non-controlling Interest		Total Stockholders’ Equity
	Shares	$		Additional Paid-in- Capital			Accumulated Deficit			Non-controlling Interest		Total Stockholders’ Equity
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

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

(Unaudited)


	For The Three Month Period Ended December 31,						For The Three Month Period Ended December 31,
	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	956,000		$	(8,040,000	)	$	(1,499,000	)	$	956,000
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Change in fair value of warrant liability	—			5,597,000
Depreciation and amortization	398,000			379,000			530,000			398,000
Amortization of forgivable loans	171,000			160,000			163,000			171,000
Stock-based compensation	1,322,000			258,000			907,000			1,322,000
Provision (recovery) for doubtful accounts	(136,000		)	20,000			171,000			(136,000		)
Amortization of deferred clearing and marketing credit	(52,000		)	(53,000		)	(53,000		)	(52,000		)
Increase in fair value of contingent consideration payable	6,000			4,000
Increase in fair value of contingent consideration							19,000			6,000
Deferred tax expense	87,000			2,318,000			59,000			87,000
Changes in assets and liabilities
Amortization of operating lease assets							700,000			—
Changes in assets and liabilities, net of business acquisitions
Securities owned, at fair value	578,000			(1,008,000		)	2,680,000			578,000
Receivables from broker-dealers and clearing organizations	1,216,000			(393,000		)	1,549,000			1,216,000
Forgivable loans receivable	(135,000		)	(78,000		)	(1,393,000		)	(135,000		)
Other receivables, net	(1,221,000		)	276,000			(1,223,000		)	(1,221,000		)
Prepaid expenses	(436,000		)	(423,000		)	(1,301,000		)	(436,000		)
Other assets	(15,000		)	18,000			(201,000		)	(15,000		)
Accounts payable, accrued expenses and other liabilities	393,000			2,062,000
Securities sold, but not yet purchased, at fair value	—			(151,000		)
Net cash provided by operating activities	3,132,000			946,000
Accrued commissions and payroll payable, accounts payable and accrued expenses and other liabilities							(7,434,000		)	393,000
Net cash provided (used in) by operating activities							(6,326,000		)	3,132,000

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses	—			(124,000		)
Acquisition of businesses, net of cash received (Note 7)							(1,805,000		)	—
Purchase of fixed assets	(109,000		)	(36,000		)	(91,000		)	(109,000		)
Collection on notes receivable	27,000			25,000			18,000			27,000
Net cash used in investing activities	(82,000		)	(135,000		)	(1,878,000		)	(82,000		)

CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock for tax withholding	(101,000		)	—			(139,000		)	(101,000		)
Principal payments under capital lease obligations	(55,000		)	—
Principal payments under finance lease obligations							(58,000		)	(55,000		)
Principal payments under finance obligations							(108,000		)	—
Contingent consideration payments							(112,000		)	—
Net cash used in financing activities	(156,000		)	—			(417,000		)	(156,000		)

NET INCREASE IN CASH AND RESTRICTED CASH	2,894,000			811,000
NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH							(8,621,000		)	2,894,000

CASH AND RESTRICTED CASH BALANCE
Beginning of the period	29,273,000			24,889,000			31,403,000			29,273,000
End of the period	$	32,167,000		$	25,700,000		$	22,782,000		$	32,167,000

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)

For The Three Month Period Ended December 31,
2018 2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 8,000
$ 2,000
Income taxes $ 112,000
$ 13,000

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES

Fixed assets (acquired but not paid) $ 42,000
$ 9,000
Finance obligation (related asset included in other assets - see Note 9) $ 308,000
$ —
Business acquired:
Identifiable intangible asset acquired $ —
$ 529,000
Contingent consideration payable —
(405,000 )
Cash paid $ —
$ 124,000



	For The Three Month Period Ended December 31,
	2019			2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	14,000		$	8,000
Income taxes	$	88,000		$	112,000

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fixed assets (acquired but not paid)	$	30,000		$	42,000
Finance obligation	$	—		$	308,000
Businesses acquired (See Note 7)
Assets acquired including goodwill	$	9,108,000		$	—
Contingent consideration payable	(4,819,000		)	—
Additional consideration payable (net operating capital)	(873,000		)	—
Escrow deposit	(500,000		)	—
Cash received	(1,111,000		)	—
Cash paid, net of cash received	$	1,805,000		$	—

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

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, ~~2018~~2019

(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 December 31, ~~2018~~2019 and for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 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, ~~2018~~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, ~~2018~~2019 for additional disclosures and accounting policies.

Certain items in the condensed consolidated statement of operations for the fiscal ~~2018~~2019 period have been reclassified to conform to the presentation in the fiscal ~~2019~~2020 period. Such reclassifications did not have a material impact on the presentation of the overall financial statements.

Non-controlling Interest

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. During the three months ended December 31, 2019, Innovation X recognized $165,000 of unrealized gain from securities previously received from the investment fund and held at December 31, 2019 of which $94,000 was attributable to the 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, and Seattle, Washington.~~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"~~(“SEC”) and is a member of the Financial Industry Regulatory Authority ~~("FINRA"~~(“FINRA”) and the Securities Investor Protection Corporation (the “SIPC”).

Our wholly-owned subsidiary, National Asset Management, Inc., a Washington corporation ~~("NAM"~~(“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.

Our wholly-owned subsidiaries, National Insurance Corporation, a Washington corporation ("(“National ~~Insurance"~~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.

Our wholly-owned subsidiary, ~~Gilman Ciocia,~~National Tax and Financial Services, Inc. (“~~Gilman”~~National Tax”), provides tax preparation and accounting services to individuals and small to midsize companies. ~~In December 2018, Gilman changed its name to National Tax and Financial Services, Inc. (“National Tax”).~~

Our wholly-owned subsidiary, GC Capital Corporation ~~("GC"~~(“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”), 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 December 31, ~~2018~~2019 and September 30, ~~2018,~~2019, the receivables of ~~$2,751,000~~$1,990,000 and ~~$3,967,000,~~$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 December 31, ~~2018~~2019 and September 30, ~~2018~~2019 consist of the following:


	December 31,			September 30,			December 31,			September 30,
	2018						2019
Trailing fees	$	1,058,000		$	1,086,000		$	1,433,000		$	947,000
Accounts receivable for tax and accounting services	558,000			661,000			647,000			686,000
Allowance for doubtful accounts - tax and accounting services	(309,000		)	(286,000		)	(317,000		)	(282,000		)
Advances to registered representatives	674,000			393,000			1,447,000			1,383,000
Investment banking receivable	1,465,000			357,000			309,000			411,000
Advisory fees	455,000			559,000			709,000			483,000
Notes receivable	714,000			746,000			631,000			665,000
Other	980,000			749,000			3,022,000			1,379,000
Total other receivables, net	$	5,595,000		$	4,265,000		$	7,881,000		$	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 ~~2023.~~2029. Forgiveness of loans amounted to ~~$171,000~~$163,000 and ~~$160,000~~$171,000 for the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, 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 December 31, ~~2018~~2019 and September 30, ~~2018,~~2019, no allowance for doubtful accounts was required.

Forgivable loan activity for the three months ended December 31, ~~2018~~2019 is as follows:


Balance, September 30, 2018	$	1,567,000
Balance, September 30, 2019				$	1,834,000
Additions	135,000			1,393,000
Acquired through the Winslow acquisition (see Note 7)				91,000
Amortization	(171,000		)	(163,000		)
Balance, December 31, 2018	$	1,531,000
Reclassification to other receivables				(244,000		)
Balance, December 31, 2019				$	2,911,000

There were no unamortized loans outstanding at December 31, 2018 and September 30, 2018 attributable to registered representatives who ended their affiliation with the Broker-Dealer Subsidiaries prior to the fulfillment of their obligation.

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, ~~2018~~2019 and September 30, ~~2018~~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.


	December 31, 2018								December 31, 2019
Assets	Carrying Value		Level 1		Level 2		Total Estimated Fair Value		Carrying Value		Level 1		Level 2		Total Estimated Fair Value
Cash	$	30,813,000	$	30,813,000	$	—	$	30,813,000	$	21,820,000	$	21,820,000	$	—	$	21,820,000
Cash deposits with clearing organizations	336,000		336,000		—		336,000		643,000		643,000		—		643,000
Receivables from broker-dealers and clearing organizations	2,751,000		—		2,751,000		2,751,000		1,990,000		—		1,990,000		1,990,000
Forgivable loans receivable	1,531,000		—		1,531,000		1,531,000		2,911,000		—		2,911,000		2,911,000
Other Receivables, net	5,595,000		—		5,595,000		5,595,000
Other receivables, net									7,881,000		—		7,881,000		7,881,000
	$	41,026,000	$	31,149,000	$	9,877,000	$	41,026,000	$	35,245,000	$	22,463,000	$	12,782,000	$	35,245,000

Liabilities
Accrued commissions and payroll payable	$	13,040,000	$	—	$	13,040,000	$	13,040,000	$	12,579,000	$	—	$	12,579,000	$	12,579,000
Accounts payable and accrued expenses ~~(1)~~	7,402,000		—		7,402,000		7,402,000		7,516,000		—		7,516,000		7,516,000
	$	20,442,000	$	—	$	20,442,000	$	20,442,000	$	20,095,000	$	—	$	20,095,000	$	20,095,000

~~(1) Excludes contingent consideration liabilities of $705,000.~~

September 30, 2018
Assets Carrying Value Level 1 Level 2 Total Estimated Fair Value
Cash $ 27,920,000
$ 27,920,000
$ —
$ 27,920,000
Cash deposits with clearing organizations 336,000
336,000
—
336,000
Receivables from broker-dealers and clearing organizations 3,967,000
—
3,967,000
3,967,000
Forgivable loans receivable 1,567,000
—
1,567,000
1,567,000
Other Receivables, net 4,265,000
—
4,265,000
4,265,000
$ 38,055,000
$ 28,256,000
$ 9,799,000
$ 38,055,000

Liabilities
Accrued commissions and payroll payable $ 12,862,000
$ —
$ 12,862,000
$ 12,862,000
Accounts payable and accrued expenses (1) 7,275,000
—
7,275,000
7,275,000
$ 20,137,000
$ —
$ 20,137,000
$ 20,137,000

~~(1) Excludes contingent consideration liabilities of $744,000.~~



	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

The following tables present the financial assets and liabilities measured at fair value on a recurring basis at December 31, ~~2018~~2019 and September 30, ~~2018:~~2019:


	December 31, 2018										December 31, 2019
Assets	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value		Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Securities owned:
Corporate stocks	$	925,000	$	925,000	$	—	$	—	$	925,000	$	4,063,000	$	4,063,000	$	—	$	—	$	4,063,000
Municipal bonds	12,000		12,000		—		—		12,000		231,000		231,000		—		—		231,000
Restricted stock	784,000		—		784,000		—		784,000		731,000		—		731,000		—		731,000
Corporate bonds											103,000				103,000		—		103,000
Warrants	5,487,000		—		1,972,000		3,515,000		5,487,000		5,784,000		—		1,404,000		4,380,000		5,784,000
	$	7,208,000	$	937,000	$	2,756,000	$	3,515,000	$	7,208,000	$	10,912,000	$	4,294,000	$	2,238,000	$	4,380,000	$	10,912,000

Liabilities
Contingent consideration	$	705,000	$	—	$	—	$	705,000	$	705,000	$	6,346,000	$	—	$	—	$	6,346,000	$	6,346,000
Securities sold, but not yet purchased
U.S. treasury notes											203,000		203,000		—		—		203,000
	$	705,000	$	—	$	—	$	705,000	$	705,000	$	6,549,000	$	203,000	$	—	$	6,346,000	$	6,549,000


	September 30, 2018										September 30, 2019
Assets	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value		Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Securities owned:
Corporate stocks	$	1,084,000	$	1,084,000	$	—	$	—	$	1,084,000	$	6,282,000	$	6,282,000	$	—	$	—	$	6,282,000
Municipal bonds											20,000		20,000		—		—		20,000
Restricted stock	670,000		—		670,000		—		670,000		725,000		—		725,000		—		725,000
Warrants	6,032,000		—		2,753,000		3,279,000		6,032,000		5,454,000		—		1,529,000		3,925,000		5,454,000
	$	7,786,000	$	1,084,000	$	3,423,000	$	3,279,000	$	7,786,000	$	12,481,000	$	6,302,000	$	2,254,000	$	3,925,000	$	12,481,000

Liabilities
Contingent consideration	$	744,000	$	—	$	—	$	744,000	$	744,000	$	1,620,000	$	—	$	—	$	1,620,000	$	1,620,000
	$	744,000	$	—	$	—	$	744,000	$	744,000	$	1,620,000	$	—	$	—	$	1,620,000	$	1,620,000

Changes in Level 3 assets measured at fair value on a recurring basis for the three months ended December 31, ~~2018:~~2019:


	Beginning Balance as of September 30, 2018		Net realized Gain or (losses)		Net Change in Unrealized Appreciation (Depreciation)		Purchases		Sales		Transfer Into Level 3 (a)		Transfer Out of Level 3 (b)			Ending Balance as of December 31, 2018		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 December 31, 2019
Assets
Warrants	$	3,279,000	$	—	$	222,000	$	—	$	—	$	110,000	$	(96,000	)	$	3,515,000	$	3,925,000	$	—	$	383,000	$	—	$	—	$	72,000	$	—	$	4,380,000

(a) The Company received warrants as part of investment banking transactions.

~~(b) The underlying security became a publicly registered security and was transferred to level 2.~~

See changes in Level 3 liabilities (contingent consideration) measured at fair value on a recurring basis for the three months ended December 31, ~~2018~~2019 in Note 7.

The table below presents information on the valuation techniques, significant unobservable inputs and their ranges for our 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

Fair Value

Valuation Technique

Significant Unobservable Input(s)

Input/Range

Warrants

3,515,000

Market Approach

Discount for lack of marketability

Volatility

20% - 43%

56% - 119%

4,380,000

Market Approach

Discount for lack of marketability

Volatility

15% - 42%

41% - 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 (gain) loss for the change in fair value of such positions for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 amounted to approximately ~~$1,020,000~~$(143,000) and ~~$1,108,000,~~$1,020,000, respectively, which is included in net dealer inventory gains (losses) ~~gains.~~.

Warrants are carried at fair value as determined by using the Black-Scholes option pricing model. This model takes into account the underlying ~~securities~~securities’ current market values, the underlying ~~securities~~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 ~~market value of the underlying securities’ market value~~discount is ~~discounted~~ based on the value of a protective ~~put, which reduces the current market price used as an input into the Black-Scholes option pricing model.~~put.

Debt securities are valued based on recently executed transactions.

NOTE 6. FIXED ASSETS

Fixed assets as of December 31, ~~2018~~2019 and September 30, ~~2018~~2019 consist of the following:


	December 31, 2018			September 30, 2018			Estimated Useful Lives	December 31, 2019			September 30, 2019			Estimated Useful Lives
Equipment and software	$	1,792,000		$	2,299,000		3 - 7	$	1,911,000		$	1,835,000		3 - 7
Furniture and fixtures	439,000			439,000			5	795,000			761,000			5
Construction in process	151,000			271,000			N/A
Leasehold improvements	1,721,000			1,453,000			Lesser of useful life or term of lease	3,753,000			3,662,000			Lesser of useful life or term of lease
Capital leases (primarily composed of computer equipment)	1,249,000			739,000			3 - 7
Finance leases (primarily composed of computer equipment)								907,000			907,000			3 - 7
	5,352,000			5,201,000				7,366,000			7,165,000
Less accumulated depreciation and amortization	(2,700,000		)	(2,530,000		)		(2,340,000		)	(2,098,000		)
Fixed assets – net	$	2,652,000		$	2,671,000
Fixed assets, net								$	5,026,000		$	5,067,000

Depreciation expense associated with fixed assets for the three months ended December 31, 2019 and 2018 was $242,000 and ~~2017 was~~ $170,000, ~~and $169,000,~~ respectively.

NOTE 7. BUSINESS ~~COMBINATIONS~~COMBINATION AND CONTINGENT CONSIDERATION

~~Business Combination~~Tax & Accounting Acquisition

In ~~2018,~~December 2019, National Tax acquired certain assets of ~~five~~one tax preparation and accounting ~~businesses~~business that ~~were~~per accounting guidance was deemed to be a business ~~acquisitions.~~combination. The consideration for the ~~transactions~~transaction consisted of a cash ~~payments~~payment at closing totaling ~~$187,000~~$216,000, and contingent consideration ~~payables~~payable in cash having a fair value of ~~$580,000,~~$798,000, for which ~~liabilities~~a liability (included in ~~accounts payable and accrued expenses) were~~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 ~~closings.~~closing. The fair ~~values~~value of the acquired assets totaling ~~$767,000 were~~$1,014,000 was allocated to customer relationships, which ~~are~~is being amortized over seven years.

The contingent consideration ~~liabilities~~liability recognized in the above ~~acquisitions were~~acquisition 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 ~~businesses are~~business is included in the accompanying condensed consolidated statements of operations from the ~~dates~~date of acquisition and ~~were~~was not material. In addition, based on materiality, pro forma results are not presented.

Winslow Acquisition

On August 26, 2019, we 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 with over $2.5 billion in assets under management. 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 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. In addition, based on materiality, pro forma results are not presented.

The table below summarizes the Winslow assets acquired and liabilities assumed 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

Contingent Consideration

Set forth below are changes in the carrying value of the contingent consideration for the three months ended December 31, ~~2018~~2019 related to acquisitions:


Fair value of contingent consideration at September 30, 2018	$	744,000
Fair value of contingent consideration at September 30, 2019				$	1,620,000
Fair value of contingent consideration in connection with the Tax & Accounting acquisition				798,000
Fair value of contingent consideration in connection with the Winslow acquisition				4,021,000
Payments	(45,000		)	(112,000		)
Change in fair value	6,000			19,000
Fair value of contingent consideration at December 31, 2018	$	705,000
Fair value of contingent consideration at December 31, 2019				$	6,346,000

NOTE 8. INTANGIBLE ASSETS

Intangibles consisted of the following at December 31, ~~2018~~2019 and September 30, ~~2018:~~2019:


	December 31, 2018							December 31, 2019
Intangible asset	Cost		Accumulated Amortization		Carrying Value		Estimated Useful Life (years)	Cost		Accumulated Amortization		Carrying Value		Estimated Useful Life (years)
Customer relationships	$	7,511,000	$	3,749,000	$	3,762,000	3-10	$	14,440,000	$	4,898,000	$	9,542,000	3-12
Brand name	710,000		—		710,000		Indefinite	1,010,000		—		1,010,000		3-5
Software license	45,000		15,000		30,000		3	45,000		30,000		15,000		3
	$	8,266,000	$	3,764,000	$	4,502,000
Total								$	15,495,000	$	4,928,000	$	10,567,000


	September 30, 2018							September 30, 2019
Intangible asset	Cost		Accumulated Amortization		Carrying Value		Estimated Useful Life (years)	Cost		Accumulated Amortization		Carrying Value		Estimated Useful Life (years)
Customer relationships	$	7,511,000	$	3,525,000	$	3,986,000	3-10	$	9,326,000	$	4,614,000	$	4,712,000	3-10
Brand name	710,000		—		710,000		Indefinite	710,000		—		710,000		Indefinite
Software license	45,000		11,000		34,000		3	45,000		26,000		19,000		3
	$	8,266,000	$	3,536,000	$	4,730,000
Total								$	10,081,000	$	4,640,000	$	5,441,000

Amortization expense associated with intangible assets for the three months ended December 31, 2019 and 2018 was $288,000 and ~~2017 was~~ $228,000, ~~and $210,000,~~ 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,
Nine months ending September 30, 2019	$	686,000
2020	844,000
Nine months ending September 30, 2020			$	1,474,000
2021	833,000		1,875,000
2022	775,000		1,818,000
2023	521,000		1,327,000
2024			915,000
Thereafter	133,000		3,158,000
Total	$	3,792,000	$	10,567,000

NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, ~~2018~~2019 and September 30, ~~2018~~2019 consist of the following:


	December 31, 2018		September 30, 2018		December 31, 2019		September 30, 2019
Legal	$	548,000	$	448,000	$	321,000	$	900,000
Audit	319,000		411,000		177,000		239,000
Telecommunications	275,000		240,000		128,000		125,000
Data services	321,000		370,000		1,073,000		296,000
Regulatory	225,000		335,000		270,000		292,000
Settlements	1,095,000		825,000		1,515,000		1,817,000
Contingent consideration payable	705,000		744,000
Deferred rent	712,000		670,000		—		772,000
Other	3,907,000		3,976,000		4,032,000		4,202,000
Total	$	8,107,000	$	8,019,000	$	7,516,000	$	8,643,000

~~Other~~At December 31, 2019, other primarily consists of ~~$739,000~~$252,000 for ~~restitution payment accrual related to 12b-1 trailing fees, $1,001,000~~investment banking deal expense accruals, $1,331,000 for soft dollar accruals, ~~$201,000~~$486,000 for ~~sales~~finance obligation of the implementation costs of the general ledger system, $55,000 for tax return preparation fees and ~~use~~$329,000 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 ~~accrual and $308,000~~return preparation fees, $595,000 for ~~the financial~~finance obligation of the annual subscription fee and implementation costs of the new general ledger system, ~~at December 31, 2018. Other primarily consists of $739,000~~$380,000 for ~~restitution payment accrual related to 12b-1 trailing fees, $704,000~~fixed assets acquired but not paid, $396,000 for ~~soft dollar accruals, $187,000~~rent and $228,000 for ~~investment banking deal expense accruals and $189,000 for sales and use tax accrual at September 30, 2018.~~

In December 2018, the Company entered into an agreement for 12 months to finance the annual subscription fee of the new general ledger system in the amount of $308,000. The related asset is included within other assets in the condensed consolidated statements of financial condition.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 December 31,		Three Month Period Ended December 31,
	2018	2017	2019	2018
Basic weighted-average shares	12,545,286	12,437,916	13,169,025	12,545,286
Effect of dilutive securities:
Unvested restricted stock units	170,909	—	—	170,909
Diluted weighted-average shares	12,716,195	12,437,916	13,169,025	12,716,195

The following potential common share equivalents are not included in the above diluted computation because to do so would be ~~anti-dilutive as the instruments are out of the money:~~anti-dilutive:


	Three Month Period Ended December 31,		Three Month Period Ended December 31,
	2018	2017	2019	2018
Options	610,200	624,000	604,200	610,200
Warrants	12,436,427	12,437,916	5,398,907	12,436,427
Unvested restricted stock units	—	77,737	3,840,263	—
	13,046,627	13,139,653	9,843,370	13,046,627

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.

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.

NOTE 12. NEW ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue From Contracts With Customers (Topic 606) which creates a single, principle-based model for revenue recognition and expands and improves disclosures about revenue. The new guidance was effective for the Company beginning October 1, 2018, and was adopted using a modified retrospective approach. The Company adopted the new revenue standard on October 1, 2018 and recognized a decrease of $135,000 to retained earnings as the cumulative effect of adoption of this accounting change. The impact of adoption is primarily related to the Company’s investment banking advisory fees that were recognized as of September 30, 2018 under the previously existing accounting guidance, which would have been deferred in prior periods under the new revenue standard. Accordingly, the new revenue standard will be applied prospectively in the Company’s financial statements from October 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. Further, the adoption of ASU 2014-09 did not have a material impact on the Company’s revenue.

The new revenue guidance does not apply to revenue associated with financial instruments, including the Company’s warrants and securities that are accounted for under other US GAAP, and as a result, did not have an impact on the elements of the statements of operations most closely associated with financial instruments. The new revenue standard primarily impacts the following of the Company’s revenue recognition and presentation accounting policies:

~~Investment Banking Revenues.~~ Advisory fees from mergers and acquisitions engagements are recognized at the point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction.

~~Investment Banking Advisory Expenses.~~ Historically, expenses associated with investment banking advisory assignments were deferred until reimbursed by the client, the related fee revenue is recognized or the engagement is otherwise concluded. Under the new revenue standard, expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized when all performance obligations are met. All other investment banking advisory related expenses are expensed as incurred.

~~Investment Banking Underwriting and Advisory Expenses.~~ Expenses have historically been recorded net of client reimbursements and/or netted against revenue. Under the new revenue standard, all investment banking expenses will be recognized within their respective expense category on the income statement and any expense reimbursements will be recognized as investment banking revenues (i.e., expenses are no longer recorded net of clients reimbursements and are not netted against revenue).

~~The new revenue standard requires enhanced disclosures, which are included in Note 21 to the Company's condensed consolidated financial statements for the three months ended December 31, 2018.~~

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 ~~lessees~~the lessee to recognize the right to use lease assets and lease liabilities that arise from leases, ~~on their balance sheets,~~ and ~~leaves lessor accounting largely unchanged.~~present them in its statement of financial condition. The ~~amendments in this ASU are effective~~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 ~~Company beginning~~provisions of Topic 842 on October 1, 2019, ~~and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a~~using the modified retrospective approach ~~for all~~and the option presented under ASU 2018-11 to transition only active leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently assessing the impact that the adoption of ASU 2016-02 will have on its financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments”. ASU 2016-15 reduces the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. The

~~standard was effective for the Company beginning October 1, 2018 for both interim and annual periods. The Company adopted ASU No. 2016-15~~ as of October 1, ~~2018.~~ 2019. All comparative periods prior to October 1, 2019 are not adjusted and continue to be reported in accordance with Topic 840.

The ~~adoption~~Company elected to utilize the package of ~~this update did not impact~~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 ~~and related disclosures.~~of operations on a straight-line basis over the lease term.

~~In November 2016,~~Adoption of the ~~FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash”. ASU 2016-18 reduces the diversity~~new standard resulted in the ~~presentation~~recording of ~~restricted cash~~right-of-use assets and ~~restricted cash equivalents in the statement. The statement requires that restricted cash~~corresponding lease liabilities of $14,720,000 and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The standard was effective for the Company beginning October 1, 2018 for both interim and annual periods. The Company adopted ASU No. 2016-18$16,309,000, respectively, as of October 1, ~~2018.~~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 ~~this update~~the new standard did not materially impact the ~~Company’s~~Company's consolidated ~~financial~~ statements of operations and ~~related disclosures.~~

~~In January 2017,~~had no impact on the ~~FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition~~Company's consolidated statements of ~~a Business”.~~cash flows. The ~~amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted~~Company's current lease arrangements expire through 2032. See Note 21 for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The standard was effective for the Company beginning October 1, 2018 for both interim and annual periods. The company adopted ASU 2017-01 as of October 1, 2018. Upon adoption of ASU 2017-01, there was no significant impact to the Company’s consolidated financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting”. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard was effective for the Company beginning October 1, 2018 for both interim and annual periods. The Company adopted ASU No. 2017-09 as of October 1, 2018. The adoption of this update did not impact the Company’s consolidated financial statements and related disclosures.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.

In ~~August 2018,~~December 2019, the FASB issued ASU ~~2018-15, “Customer’s~~2019-12, "Simplifying the Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”~~Income Taxes". The ~~guidance on~~amendments in ASU 2019-12 simplify the accounting for ~~implementation, setup, and other upfront costs (collectively referred~~income taxes by removing certain exceptions to ~~as implementation costs) applies to entities that are a customer~~the general principles in ~~a hosting arrangement that is a service contract.~~ASC Topic 740, Income Taxes. The amendments ~~align the requirements~~also improve consistent application of and simplify GAAP for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service elementother areas of ~~a hosting arrangement that is a service contract is not affected~~Topic 740 by ~~the guidance in this ASU. The standard is~~clarifying and amending existing guidance. ASU 2019-12 will be effective for the ~~Company~~Company's fiscal year beginning October 1, ~~2020, should~~2021, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either ~~retrospectively~~prospectively or ~~prospectively to all implementation costs incurred after the date of adoption, and early adoption is permitted.~~retrospectively. The company is currently assessing the impact that the adoption of ASU ~~2018-15~~2019-12 will have on its financial statements.

NOTE 13. COMMITMENTS AND CONTINGENCIES

~~Leases~~

The Company leases office space in various states expiring at various dates through October 2026, and as of December 31, 2018, is committed under operating leases for future minimum lease payments as shown in the table below.

In October 2018, the Company entered into an agreement to lease equipment under a capital lease for 24 months. The equipment under the lease are collateral for the lease obligation and are 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 capital lease obligation is included within other liabilities in the condensed consolidated statements of financial condition.

Fiscal Year
Ending September 30,
Operating Leases Capital Lease
Nine months ending September 30, 2019 $ 2,224,000
$ 184,000
2020 2,812,000
297,000
2021 2,381,000
—
2022 1,588,000
—
2023 1,450,000
—
Thereafter 3,239,000
—
Total minimum lease payments $ 13,694,000
$ 481,000
Less: Amounts representing interest not yet incurred 26,000
Present value of capital lease obligations $ 455,000

The total amount of rent payable under the leases is recognized on a straight line basis over the term of the leases. Rental expense under all operating leases, excluding sublease income, for the three months ended December 31, 2018 and 2017 was $951,000 and $1,040,000, respectively. Sublease income under all operating subleases for the three months ended December 31, 2018 and 2017 was approximately $51,000 and $133,000, respectively.

As of December 31, 2018, the Company and its subsidiaries had two outstanding letters of credit, which have been issued in the maximum amount of $1,354,000 as security for property leases, and which are collateralized by the restricted cash as reflected in the condensed consolidated statements of financial condition.

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 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.

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 the Company’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. At December 31, ~~2018~~2019 and September 30, ~~2018,~~2019, the Company accrued approximately ~~$1,095,000~~$1,515,000 and ~~$825,000,~~$1,817,000, respectively. 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 December 31, 2019 and 2018, were $388,000 and ~~2017 were~~ $523,000, ~~and $246,000, respectively, which is~~respectively. These amounts are included in other administrative ~~expenses.~~expenses in the condensed consolidated statements of operations. The Company has included in professional fees, litigation and arbitration related expenses of ~~$471,000~~$441,000 and ~~$351,000~~$471,000 for the three months ended December 31, 2019 and 2018, respectively.

Other Commitments

As of December 31, 2019, the Company and ~~2017, respectively.~~its subsidiaries had one outstanding letter of credit, which has been issued in the maximum amount of $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.

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 December 31, ~~2018,~~2019, NSC had net capital of ~~$12,492,000~~$2,939,406 which was ~~$11,492,000~~$1,939,406 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.

NOTE 15. STOCKHOLDERS' EQUITY

Stock Options

Information with respect to stock option activity during the three months ended December 31, ~~2018~~2019 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, 2018 612,000
$ 6.23
$ 1.59
3.27 $ —
Forfeited (1,800 ) $ 5.00
$ 2.30

$ —
Outstanding at December 31, 2018 610,200
$ 6.24
$ 1.59
3.01 $ —
Vested and exercisable at December 31, 2018 610,200
$ 6.24
$ 1.59
3.01 $ —



	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	—	$	—	$	—		$	—
Outstanding at December 31, 2019	604,200	$	6.19	$	1.58	2.03	$	—
Vested and exercisable at December 31, 2019	604,200	$	6.19	$	1.58	2.03	$	—

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 three months ended December 31, ~~2018:~~2019:

Warrants Weighted
Average
Exercise Price Per
Share Weighted Average Remaining Contractual Term
Outstanding at September 30, 2018 12,436,427
$ 3.25
3.30
Forfeited or expired —
$ —

Outstanding and exercisable at December 31, 2018 12,436,427
$ 3.25
3.05



	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 December 31, 2019	5,398,907	$	3.25	2.05

Restricted Stock Units and Awards

A summary of the Company's non-vested restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) for the three months ended December 31, ~~2018~~2019 is as follows:


	Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value
Non-vested restricted stock units at September 30, 2018	2,207,242		$	7,302,000
Non-vested restricted stock units and awards at September 30, 2019						3,318,640		$	10,006,000
Granted	1,447,292		4,289,000			702,000		1,839,000
Vested						(172,685	)	(561,000		)
Forfeited	(10,593	)	(50,000		)	(7,692	)	(23,000		)
Non-vested restricted stock units at December 31, 2018	3,643,941		$	11,541,000
Non-vested restricted stock units and awards at December 31, 2019						3,840,263		$	11,261,000

In ~~November 2018,~~December 2019, the Company granted ~~1,447,292 restricted stock units ("RSUs")~~702,000 RSUs to certain employees of the Company. RSUs vest based on ~~service and~~ certain performance ~~and market~~ conditions. The fair value of the RSU awards issued in ~~November 2018~~December 2019 was ~~$4,289,000.~~$1,839,000.

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 months ended December 31, ~~2018~~2019, the Company recognized compensation expense of $907,000 related to RSUs and ~~2017,~~RSAs. For the three months ended December 31, 2018, the Company recognized compensation expense of $1,322,000 ~~and $258,000, respectively,~~ related to ~~RSUs.~~RSUs and RSAs. At December 31, ~~2018,~~2019, unrecognized compensation with respect to RSUs and RSAs amounted to ~~$7,401,000,~~$6,128,000, assuming all performance-based compensation will vest.

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 three month period ended December 31, ~~2018~~2019 and ~~2017~~2018 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.

The effective tax rate for the three month period ended December 31, ~~2018 and 2017~~2019 differs from the federal statutory income tax rate principally due to non-deductible expenses, ~~and~~ state and local income ~~taxes.~~taxes and income allocated to the non-controlling interest for which no tax expense was provided.

At December 31, ~~2018,~~2019, 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.

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, NAM, National Insurance, Prime Financial, Winslow and GC. The tax and accounting services segment includes tax preparation and accounting services provided by National Tax.

The Corporate pre-tax income (loss) consists of certain items that have not been allocated to reportable segments.

Segment information for the three months ended December 31, ~~2018~~2019 and ~~2017~~2018 is as follows:


	Brokerage and Advisory Services		Tax and Accounting Services			Corporate				Total			Brokerage and Advisory Services		Tax and Accounting Services			Corporate				Total
Three Months Ended December 31,
2019
Revenues													$	50,259,000	$	931,000		$	1,000			$	51,191,000
Pre-tax income (loss)													473,000		(1,106,000		)	(1,591,000		)	(a)	(2,224,000		)
Assets													74,107,000		3,305,000			19,089,000			(b)	96,501,000
Depreciation and amortization													253,000		132,000			145,000				530,000
Interest													14,000		—			—				14,000
Capital expenditures													21,000		—			100,000				121,000
2018
Revenues	$	57,333,000	$	774,000		$	—			$	58,107,000		$	57,333,000	$	774,000		$	—			$	58,107,000
Pre-tax income (loss)	3,207,000		(503,000		)	(1,381,000		)	(a)	1,323,000			3,207,000		(503,000		)	(1,381,000		)	(a)	1,323,000
Assets	55,608,000		3,313,000			12,347,000			(b)	71,268,000			55,608,000		3,313,000			12,347,000			(b)	71,268,000
Depreciation and amortization	193,000		71,000			134,000				398,000			193,000		71,000			134,000				398,000
Interest	8,000		—			—				8,000			8,000		—			—				8,000
Capital expenditures	11,000		27,000			113,000				151,000			11,000		27,000			113,000				151,000
2017
Revenues	$	49,557,000	$	523,000		$	—			$	50,080,000
Pre-tax income (loss)	1,574,000		(992,000		)	(6,349,000		)	(c)	(5,767,000		)
Assets	50,390,000		2,589,000			11,510,000			(b)	64,489,000
Depreciation and amortization	186,000		58,000			135,000				379,000
Interest	2,000		—			—				2,000
Capital expenditures	39,000		6,000			—				45,000


(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.


~~(c)~~	~~Consists of loss on the change in fair value of warrant liability and executive salaries and other expenses not allocated to reportable segments by management.~~

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 to a wholly-owned subsidiary of B. Riley FBIO Acquisition’s majority stake in the Company (the “FBIO Sale”). Under the terms of the agreement, B. Riley ~~will~~agreed to purchase 7,037,482 shares of the Company's common stock from FBIO Acquisition, ~~representing~~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, with the remaining 4,027,428 shares to be purchased at the same $3.25 per-share price within 15 business days following FINRA approval, for an aggregate purchase price totaling approximately $22.9 million.share. After ~~the~~ approval from FINRA was received on February 4, 2019, B. Riley ~~completed the purchase of~~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, in connection with the FBIO Sale, the Company entered into an agreement with B. Riley (the “B. Riley Agreement”), pursuant to which B. Riley agreed to certain customary standstill provisions, effective as of the date of the B. Riley 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 interest 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 our 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 as follows: Upon the acquisition by a subsidiary of B. Riley of 3,010,054 shares of the Company’s common stock directly from FBIO Acquisition, B. Riley will be entitled to one board observer, who is expected to be Bryant Riley. In connection with the final closing of the FBIO Sale, B. Riley will be entitled to a second board 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.

~~NOTE 19. RELATED PARTY TRANSACTIONS~~

~~During~~Upon final closing of the ~~three months ended December 31, 2018 and 2017, investment banking revenues include approximately $0 and $1,298,000, respectively, of fees related~~FBIO Sale, the warrants held by FBIO Acquisition ceased to ~~placement of securities for Fortress and subsidiaries of Fortress.~~

be outstanding.

NOTE ~~20.~~19. VARIABLE INTEREST ENTITIES

The Company has entered into agreements to provide investment banking and advisory services to numerous ~~entities~~investment funds (the “Funds”) that are

considered variable interest entities ~~("VIEs"~~(“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, estimated approximately six months following such IPO or liquidity event.

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. ~~Fees~~

Placement agent fees attributable to such arrangements for the three months ended December 31, 2019 and 2018 were $8,409,000 and ~~2017 were~~ $18,979,000, respectively, and ~~$6,216,000, respectively.~~are included in investment banking in the condensed consolidated statements of operations.

NOTE ~~21.~~20. REVENUES FROM CONTRACTS AND SIGNIFICANT CUSTOMERS

On October 1, 2018, the Company adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of October 1, 2018. Results for reporting periods beginning after October 1, 2018 were presented under Topic 606, while prior periods amounts were not adjusted and reported under the accounting standards in effect for the prior periods. The adoption of Topic 606 did not have a material impact on the Company's consolidated results of operations and financial condition.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 ~~those promised~~the transfer of the goods or services ~~(i.e.,~~to the ~~“transaction price”).~~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, ~~we consider~~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 ~~Other~~Transaction Fees and Clearing Services. The Company earns commission and transaction fee and clearing services revenue based on the execution of transactions for clients ~~primarily~~ in ~~equity~~stocks, mutual funds, variable annuities and ~~equity-related products.~~other financial products and services as well as from trailing commissions. Trade execution and settlement, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission and transaction fee and clearing services revenues are recognized at a point in time on trade-date. Commission and transaction fee and clearing services revenues are generally paid on settlement date and the Company records a receivable between trade-date and payment on settlement date. For trailing commissions, the performance obligation is satisfied at the time of the execution of the transactions but the amount to be received for trailing commissions is uncertain, as it is dependent on the value of the investments at future points in time as well as the length of time the investor holds the investments, both of which are highly susceptible to variable factors outside the Company’s influence. The Company does not believe that it can overcome this constraint until the market value of the investment and the investor activities are known, which are usually monthly or quarterly. The Company’s consolidated statement of operations reflects trailing commissions for services performed and performance obligations satisfied in previous periods and are recognized in the period that the constraint is overcome.

Investment Banking. The Company provides clients with a full range of investment banking services. Investment banking services include underwriting and placement agent services in both ~~the~~ equity and debt, including private equity placements, initial public offerings, follow-on offerings and equity-linked convertible securities transactions and private debt. Underwriting and placement agent revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the investment banking offering at that point. Costs associated with investment banking transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded and are recorded on a gross basis as the Company is acting as a principal in the arrangement. Any expenses reimbursed by the Company’s clients are recognized as investment banking revenues. Where the Company is the lead underwriter, revenue and expenses will be first allocated to other members of a syndicate because the Company is acting as an agent for the syndicate. Accordingly, the Company records revenue on a net basis. When the Company is not the lead underwriter, the Company will recognize its share of revenue and expenses on a gross basis, because the Company is acting as the principal. Under accounting standards in effect for prior periods, the Company recognized all underwriting revenue on a net basis.

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 ~~condensed~~ 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 ~~condensed~~ 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 ~~and measured using a time elapsed measure of progress~~ 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. The Company charges fees in connection with tax preparation and accounting services. Revenues are recorded upon completion of the services.

Disaggregation of Revenue

The following presents the Company’s revenues from contracts with customers disaggregated by major business activity and segment for the three months ended December 31, 2019 and 2018:

For the Three Months Ended December 31, 2018 Brokerage and Advisory Services Tax and Accounting Services Corporate Total
Revenues from customer contracts:
Commissions $ 21,012,000
$ —
$ —
$ 21,012,000
Investment banking:
Underwriting 4,490,000
—
—
4,490,000
Private Placement 19,904,000
—
—
19,904,000
Advisory 133,000
—
—
133,000
Other 2,544,000
—
—
2,544,000
Investment advisory 5,858,000
—
—
5,858,000
Sub-total revenue from contracts with customers 53,941,000
—
—
53,941,000
Other revenue 3,392,000
774,000
—
4,166,000
Total revenue $ 57,333,000
$ 774,000
$ —
$ 58,107,000



For the Three Months Ended December 31, 2019	Brokerage and Advisory Services		Tax and Accounting Services		Corporate		Total
Revenues from customer contracts:
Commissions and transaction fees and clearing services	$	24,942,000	$	—	$	—	$	24,942,000
Investment banking	15,227,000		—		—		15,227,000
Investment advisory	7,389,000		—		—		7,389,000
Tax preparation and accounting	—		931,000		—		931,000
Sub-total revenue from contracts with customers	47,558,000		931,000		—		48,489,000
Other revenue	2,701,000		—		1,000		2,702,000
Total revenue	$	50,259,000	$	931,000	$	1,000	$	51,191,000



For the Three Months Ended December 31, 2018	Brokerage and Advisory Services		Tax and Accounting Services		Corporate		Total
Revenues from customer contracts:
Commissions and transaction fees and clearing services	$	23,161,000	$	—	$	—	$	23,161,000
Investment banking	27,071,000		—		—		27,071,000
Investment advisory	5,858,000		—		—		5,858,000
Tax preparation and accounting	—		774,000		—		774,000
Sub-total revenue from contracts with customers	56,090,000		774,000		—		56,864,000
Other revenue	1,243,000		—		—		1,243,000
Total revenue	$	57,333,000	$	774,000	$	—	$	58,107,000

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 December 31, ~~2018.~~

2019. 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 December 31, ~~2018.~~2019.

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. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.

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.

~~Practical Expedients~~

NOTE 21.LEASES

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 operating lease assets and operating lease liabilities on the Company’s condensed consolidated statements of financial condition. The Company’ current lease arrangement expire from 2020 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.

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.

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.

The components of lease expense were as follows:



	For the Three Months Ended December 31, 2019
Operating lease cost:	$	1,102,000

Finance lease cost:
Amortization of finance lease assets	$	19,000
Interest on finance lease liabilities	4,000
Total finance lease cost	$	23,000

The table below summarizes the Company’s scheduled future minimum lease payments under operating and finance leases, recorded on the condensed consolidated statements of financial condition as of December 31, 2019:



Fiscal Year Ending September 30,	Operating Leases		Finance Lease
Nine months ending September 30, 2020	$	3,230,000	$	235,000
2021	4,095,000		—
2022	2,487,000		—
2023	2,333,000		—
2024	2,138,000		—
Thereafter	7,471,000		—
Total minimum lease payments	21,754,000		$	235,000
Less: Amounts representing interest not yet incurred	4,422,000		6,000
Present value of lease obligations	$	17,332,000	$	229,000

As of December 31, 2019, the Company has an additional operating lease, primarily for additional office space in New Windsor, New York, 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, 2019

Assets
Operating lease assets	Operating lease assets	$	15,231,000
Finance lease assets	Fixed assets	509,000
Total lease assets		$	15,740,000

Liabilities
Operating lease liabilities	Operating lease liabilities	$	17,332,000
Finance lease liabilities	Other liabilities	229,000
Total lease liabilities		$	17,561,000

The table below presents additional information related to our leases as of December 31, 2019:



	For the Three Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	4,000
Operating cash flows from operating leases	$	709,000
Financing cash flows from finance leases	$	58,000

Weighted Average Remaining Lease Term:
Operating Leases	7.35 years

Weighted Average Discount Rate:
Operating Leases	5.50		%

NOTE 22. SUBSEQUENT EVENT

United Advisors Acquisition

On February 7, 2020, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with United Atlantic Capital, LLC, a New Jersey limited liability company (“UAC”), Mark H. Penske (“MHP”) and Darin Pope (“DP” and together with UAC and MHP, the “Selling Parties”) to acquire all of the outstanding equity interests (collectively, the “Purchased Shares”) of Financial Services International Corporation, a Washington corporation (“FSIC”), United Advisor Services, LLC, a New Jersey limited liability company (“UAS”), and United Advisors, LLC, a New Jersey limited liability company (“UA” and collectively with FSIC and UAS, the “Group Companies”). The transactions contemplated by the Purchase Agreement are collectively referred to as the “Transactions.”

UA is a New York-based, advisor and wealth management firm. US is an SEC Registered Investment Advisor and FSIC is a FINRA registered broker-dealer. More than 25 financial professionals are part of the United Advisors team.

At the closing of the Transactions (the “Closing”), the Company will acquire the Purchased Shares for an aggregate purchase price of approximately $3.0 million paid at Closing in cash, subject to certain adjustments, plus additional consideration of approximately $7.4 million paid in twelve equal quarterly installment payments in cash (the “Additional Cash Purchase Price”), subject to certain adjustments.

The Additional Cash Purchase Price shall be recalculated following the completion of six full calendar months following the Closing (the “First Six Months”) under the following circumstances: (i) if a registered representative of one of the Group Companies resigns voluntarily, or is fired for cause because of a regulatory issue that arose prior to the Closing while supervised by UAC or any of the Group Companies, the Aggregate Cash Purchase Price shall be reduced downward by a weighted percentage representing such registered representative’s contribution to the gross margin of the Group Companies at closing, and (ii) if certain retention payments are agreed to be made then the Aggregate Cash Purchase Price shall be reduced by the amount of such retention payment (the aggregate adjustment pursuant to the foregoing being referred to as the “Gross Margin Adjustment”). If any registered representative retires and his or her book of business is retained by the Company, then no adjustment to the Aggregate Cash Purchase Price shall be made. The Gross Margin Adjustment shall be deducted in equal installments from each of the remaining quarterly payments following the determination of the Gross Margin Adjustment.

The Company ~~has applied Topic 606’s practical expedient that permits~~is entitled to a prepayment discount in the event it pays the Additional Cash Purchase Price in advance of its due date, in the amount of (i) 15% for pre-payment prior to the ~~non-disclosure~~conclusion of the ~~value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less~~First Six Months and (ii) ~~contracts~~10% for ~~which~~pre-payment after the ~~Company recognizes revenue at~~conclusion of the ~~amount to which it has the right to invoice for services performed.~~first six months and until eighteen months from Closing.

The ~~Company also applied Topic 606’s practical expedient that allows incremental contract costs to be expensed when incurred when the amortization period~~Purchase Agreement contains customary representations, warranties and covenants of the ~~asset that would~~Selling Parties and the Company in connection with the Transactions. The obligations of the Company and the Selling Parties to consummate the Transactions are subject to the satisfaction or waiver of customary conditions, including certain regulatory approvals and consents. There is no financing condition to consummate the Transactions. The Purchase Agreement also provides for customary termination rights. Subject to certain exceptions, terms and limitations described in the Purchase Agreement, the Selling Parties and the Company have ~~been recognized is one year~~agreed to indemnify and hold each other harmless against any and all losses arising out of or ~~less.~~

with respect to any breach of any representations, warranty or covenant of the Selling Parties or the Company, as applicable, and in the case of indemnification by the Selling Parties, certain other specified matters.

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

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, ~~2018.~~2019. 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.

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 ~~Subsidiary,~~subsidiary, NSC. 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 is 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.

On December 31, 2019, the Company completed its previously announced 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 of the notes to the condensed consolidated financial statements for additional information.

As of December 31, ~~2018,~~2019, we had approximately ~~990~~950 associated personnel serving retail and institutional customers, trading and investment banking clients. In addition to our 2829 Company offices located in New York, New Jersey, Florida, Texas, Massachusetts and Washington, we had approximately ~~108~~104 other registered offices, owned and operated by independent owners who maintain all appropriate licenses and are responsible for all office overhead and expenses.

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.

RESULTS OF OPERATIONS

Three Months Ended December 31, ~~2018~~2019 Compared to Three Months Ended December 31, ~~2017~~2018

Summary

Our first quarter ended December 31, ~~2018~~2019 resulted in a ~~16% increase~~12% decrease in revenues and a ~~13% increase~~6% decrease in operating ~~expenses. The increase in revenues is~~expenses as compared to the comparative period last year. Investment banking declined from a particularly strong prior year quarter due to various factors, primarily two significant transactions related to ~~significantly higher revenues generated~~the Company's private shares business recorded in ~~investment banking, offset in part by~~ the ~~decrease in commissions. Investment banking continued to provide high demand deals that were sold across various industry segments.~~

comparative period last year.

Revenues

Total revenues ~~increased $8,027,000,~~decreased $6,916,000, or ~~16%~~12%, to ~~$58,107,000,~~$51,191,000, in the current quarter as compared to ~~$50,080,000~~$58,107,000 recorded in the comparative period last year.


	Three Months Ended December 31,					Increase (Decrease)					Three Months Ended December 31,					Increase (Decrease)
	2018			2017		Amount			Percent		2019		2018			Amount			Percent
Commissions	$	21,012,000		$	25,618,000	$	(4,606,000	)	(18	)%	$	23,167,000	$	21,012,000		$	2,155,000		10	%
Net dealer inventory (losses) gains	(503,000		)	905,000		(1,408,000		)	(156	)
Net dealer inventory gains (losses)											1,192,000		(503,000		)	1,695,000			337
Investment banking	27,071,000			14,547,000		12,524,000			86		15,227,000		27,071,000			(11,844,000		)	(44	)
Investment advisory	5,858,000			5,333,000		525,000			10		7,389,000		5,858,000			1,531,000			26
Interest and dividends	1,584,000			631,000		953,000			151		1,394,000		1,584,000			(190,000		)	(12	)
Transaction fees and clearing services	2,149,000			2,297,000		(148,000		)	(6	)	1,775,000		2,149,000			(374,000		)	(17	)
Tax preparation and accounting	774,000			523,000		251,000			48		931,000		774,000			157,000			20
Other	162,000			226,000		(64,000		)	(28	)	116,000		162,000			(46,000		)	(28	)
Total Revenues	$	58,107,000		$	50,080,000	$	8,027,000		16	%	$	51,191,000	$	58,107,000		$	(6,916,000	)	(12	)%

Commissions ~~decreased $4,606,000,~~increased $2,155,000, or ~~18%~~10%, to ~~$21,012,000~~$23,167,000 in the current quarter as compared to ~~$25,618,000~~$21,012,000 recorded in the comparatively ~~strong~~weak period last year. ~~Retail commissions decreased~~Commissions increased primarily due to ~~uncertain market conditions~~strong markets in the current quarter and an increase in the recruiting of new registered representatives, compared to the slower period a year ago which ~~resulted in lower trading volumes as many investors stayed on~~was impacted by interest rate concerns, volatile markets and the sidelines during the high market volatility periods. In addition, the firm’s strategy of bringing quality issuance and private share offerings to our client base did reallocate revenue generation to investment banking from commissions;impending government shutdown;

Net dealer inventory ~~(losses)~~ gains ~~decreased $1,408,000,~~(losses), increased $1,695,000, or ~~156%~~337%, to ~~$(503,000)~~$1,192,000 in the current quarter as compared to ~~$905,000 recorded in the comparative period last year. Unrealized losses for the change in fair value~~a loss of ~~the firm’s investment portfolio created the net loss in the current period. While comparative losses were also incurred in the first quarter of 2018, the~~

~~Company, during the prior year, strategically decided to reduce the breadth of our trading model to focus on specifically servicing our retail and institutional clients;~~

~~Investment banking fees increased $12,524,000, or 86%, to a record $27,071,000 in the current quarter as compared to $14,547,000~~$(503,000) recorded in the comparative period last year. The increase ~~was~~is primarily due to an unrealized gain recorded in the ~~result of successful, diverse, quality offerings across market segments, and to two significant private share offerings executed during~~current quarter on several positions, versus unrealized losses recorded in the ~~quarter;~~comparative period last year;

Investment ~~advisory~~banking fees ~~increased $525,000,~~decreased $11,844,000, or ~~10%~~44%, to ~~$5,858,000~~$15,227,000 in the current quarter as compared to ~~$5,333,000~~$27,071,000 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;

Investment advisory fees increased $1,531,000, or 26%, to $7,389,000 in the current quarter as compared to $5,858,000 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;

Interest and dividend income ~~increased $953,000,~~decreased $190,000, or ~~151%~~12%, to ~~$1,584,000~~$1,394,000 in the current quarter as compared to ~~$631,000 recorded in the comparative period last year. The increase is primarily attributable to a new FDIC Sweep interest program that started in late 2018;~~

~~Transaction fees and clearing services decreased $148,000, or 6%, to $2,149,000 in the current quarter as compared to $2,297,000~~$1,584,000 recorded in the comparative period last year;

~~Tax preparation~~Transaction fees and ~~accounting fees increased $251,000,~~clearing services decreased $374,000, or ~~48%~~17%, to ~~$774,000~~$1,775,000 in the current quarter as compared to ~~$523,000~~$2,149,000 recorded in the comparative period last year. This ~~increase~~decrease is ~~attributable~~primarily due to ~~higher collections associated with extensions filed~~fewer retail transactions being processed during the current period;

Tax preparation and accounting fees increased $157,000, or 20%, to $931,000 in the current quarter as compared to $774,000 recorded in the ~~prior period;~~comparative period last year. While traditionally our fiscal first quarter is the slowest period for this business, the current period increase is attributable to revenue generated by new business acquisitions, which has resulted in an increase in our client base;

Other revenue decreased ~~$64,000,~~$46,000, or 28%, to ~~$162,000~~$116,000 in the current quarter as compared to ~~$226,000~~$162,000 recorded in the comparative period last year. This decrease is due to a decline of client participation in our fully paid stock lending program. Client participation in this program varies quarter to quarter.

Operating Expenses

Total operating expenses ~~increased $6,534,000,~~decreased $3,259,000, or ~~13%~~6%, to ~~$56,790,000~~$53,531,000 in the current quarter as compared to ~~$50,256,000~~$56,790,000 recorded in the comparative period last year.


	Three Months Ended December 31,				Increase (Decrease)					Three Months Ended December 31,				Increase (Decrease)
	2018		2017		Amount			Percent		2019		2018		Amount			Percent
Commissions, compensation and fees	$	49,410,000	$	43,561,000	$	5,849,000		13	%	$	45,299,000	$	49,410,000	$	(4,111,000	)	(8	)%
Clearing fees	759,000		743,000		16,000			2		324,000		759,000		(435,000		)	(57	)
Communications	822,000		760,000		62,000			8		674,000		822,000		(148,000		)	(18	)
Occupancy	925,000		955,000		(30,000		)	(3	)	1,168,000		925,000		243,000			26
License and registration	579,000		637,000		(58,000		)	(9	)	1,024,000		579,000		445,000			77
Professional fees	1,985,000		1,393,000		592,000			42		2,194,000		1,985,000		209,000			11
Interest	8,000		2,000		6,000			300		14,000		8,000		6,000			75
Depreciation and amortization	398,000		379,000		19,000			5		530,000		398,000		132,000			33
Other administrative expenses	1,904,000		1,826,000		78,000			4		2,304,000		1,904,000		400,000			21
Total Operating Expenses	$	56,790,000	$	50,256,000	$	6,534,000		13	%	$	53,531,000	$	56,790,000	$	(3,259,000	)	(6	)%

Commissions, compensation, and fees ~~increased $5,849,000,~~decreased $4,111,000, or ~~13%~~8%, to ~~$49,410,000~~$45,299,000 in the current quarter as compared to ~~$43,561,000~~$49,410,000 recorded in the comparative period last year. Commissions, compensation, and fees ~~includes~~include expenses based on commission revenue earned, ~~net dealer inventory gains~~investment banking and investment ~~banking~~advisory revenues, as well as compensation to our non-broker employees. The decrease is primarily related to lower revenues and therefore lower variable compensation expense. Our variable expense ratio did increase approximately 1% quarter versus quarter due to the reduction in investment banking revenue was primarily responsible for the increase in this expense category. Strategic new hires, increases in benefits expenses and increases in stock based compensation for stock grants also contributed to the increase;revenues, which is our highest margin business;

Clearing fees ~~increased $16,000,~~decreased $435,000, or 2%57%, to ~~$759,000~~$324,000 in the current quarter as compared to ~~$743,000~~$759,000 recorded in the comparative period last ~~year;~~year. The decrease is primarily due to higher charge backs to registered representatives for clearing fees;

Communications expenses ~~increased $62,000,~~decreased $148,000, or 8%18%, to ~~$822,000~~$674,000 in the current quarter as compared to ~~$760,000~~$822,000 recorded in the comparative period last year. The decrease is primarily due to cost saving measures implemented during the past year;

Occupancy expenses ~~decreased $30,000,~~increased $243,000, or 3%26%, to ~~$925,000~~$1,168,000 in the current quarter as compared to ~~$955,000~~$925,000 recorded in the comparative period last ~~year;~~year. The increase is primarily due to the sublease income recorded during the comparative period last year, and increases due to several small locations opened later in fiscal 2019 as part of the company’s geographical expansion;

License and registration expense ~~decreased~~increased by ~~$58,000,~~$445,000, or 9%77%, to ~~$579,000~~$1,024,000 in the current quarter as compared to ~~$637,000 recorded in the comparative period last year;~~

~~Professional fees increased by $592,000, or 42% to $1,985,000 in the current quarter as compared to $1,393,000~~$579,000 recorded in the comparative period last year. This increase is ~~primarily related~~attributable to ~~professional~~new licenses for software applications as the Company continues to invest in and implement technology enhancements;

Professional fees ~~associated with~~increased by $209,000, or 11% to $2,194,000 in the ~~B. Riley transaction;~~current quarter as compared to $1,985,000 recorded in the comparative period last year;

Interest expense increased by $6,000, to ~~$8,000~~$14,000 in the current quarter as compared to ~~$2,000~~$8,000 recorded in the comparative period last year;

Depreciation and amortization expenses increased ~~$19,000,~~$132,000, or 5%33% to ~~$398,000~~$530,000 in the current quarter as compared to ~~$379,000~~$398,000 recorded in the comparative period last ~~year;~~year due to higher amortization expense for new customer list intangibles as a result of new business acquisitions;

Other administrative expenses increased ~~$78,000,~~$400,000, or 4%21%, to ~~$1,904,000~~$2,304,000 in the current quarter as compared to ~~$1,826,000~~$1,904,000 recorded in the comparative period last year.

This increase is primarily due to higher provisions for potential arbitration settlements.

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.

For the three months ended December 31, ~~2018~~2019 and ~~2017,~~2018, EBITDA, as adjusted, was ~~$4,242,000~~$(847,000) and ~~$1,737,000,~~$4,242,000, respectively. The ~~increase~~decrease of ~~$2,505,000,~~$5,089,000, or ~~144%~~120%, resulted primarily from ~~profit generated by~~lower revenue generation in the ~~increase in investment banking and investment advisory revenue.~~current quarter.

The following table presents a reconciliation of EBITDA, as adjusted, to net income (loss) as reported in accordance with generally accepted accounting principles, or GAAP:


	Three Months Ended December 31,					Three Months Ended December 31,
	2018		2017			2019			2018
Net income (loss), as reported	$	956,000	$	(8,040,000	)
Net income (loss) attributable to common shareholders, as reported						$	(1,593,000	)	$	956,000
Interest expense	8,000		2,000			14,000			8,000
Income taxes	367,000		2,273,000			(725,000		)	367,000
Depreciation	170,000		169,000			242,000			170,000
Amortization	228,000		210,000			288,000			228,000
EBITDA	1,729,000		(5,386,000		)	(1,774,000		)	1,729,000
Non-cash compensation expense	1,322,000		258,000			907,000			1,322,000
Change in fair value of warrant liability	—		5,597,000
Forgivable loan amortization	171,000		160,000			163,000			171,000
Unrealized loss on the firm's warrant portfolio	1,020,000		1,108,000
Unrealized loss (gain) on the firm's warrant portfolio						(143,000		)	1,020,000
EBITDA, as adjusted	$	4,242,000	$	1,737,000		$	(847,000	)	$	4,242,000

EBITDA, adjusted for non-cash compensation expense, ~~change in fair value of warrant liability,~~ forgivable loan amortization and unrealized loss (gain) on the firm’s warrant portfolio, is a key metric we use in evaluating our business. EBITDA isand EBITDA, as adjusted, are considered a non-GAAP financial measure as defined by Regulation G, promulgated by the SEC.

Liquidity and Capital Resources


	Ending Balance at December 31,				Average Balance during first three months of fiscal year ending September 30,				Ending balance at December 31,				Average balance during first three months of fiscal year ending September 30,
	2018		2017		2019		2018		2019		2018		2020		2019
Cash	$	30,813,000	$	24,318,000	$	29,367,000	$	23,913,000	$	21,820,000	$	30,813,000	$	26,132,000	$	29,367,000
Receivables from broker-dealers and clearing organizations	2,751,000		3,243,000		3,359,000		3,047,000		1,990,000		2,751,000		2,740,000		3,359,000
Securities owned (excludes warrants)	1,721,000		3,592,000		1,738,000		2,515,000		5,128,000		1,721,000		3,441,000		1,738,000

Accrued commissions and payroll payable, accounts payable and accrued expenses	21,147,000		19,489,000		21,014,000		19,135,000		20,095,000		21,147,000		23,664,000		21,014,000

~~We maintain a relatively high level of liquidity on our balance sheet.~~ At December 31, 2019 and 2018 respectively, 30% and ~~2017 respectively,~~ 50% ~~and 48%~~ 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.

NSC is subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital. At December 31, ~~2018,~~2019, NSC had net capital of ~~$12,492,000~~$2,939,406 which was ~~$11,492,000~~$1,939,406 in excess of its required minimum net capital of $1,000,000. NSC is exempt from the provisions of the Customer Protection Rule 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 are restricted by the regulations of the SEC, and other regulatory agencies. These regulatory restrictions may limit the amounts that NSC may dividend or advance to ~~the~~ us. During the first three months of fiscal ~~2019~~2020 and 2018, NSC was in compliance with the rules governing dividend payments and other equity withdrawals.

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 ~~through~~for at least ~~2019.~~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 ~~$151,000~~$121,000 and ~~$45,000~~$151,000 during the first three months of fiscal ~~2019~~2020 and ~~2018,~~2019, respectively.

Cash Flows ~~for the Three Months Ended December 31, 2018 and 2017~~

Three months ended
December 31,
2018 2017
Cash flows from operating activities
Net income (loss) $ 956,000
$ (8,040,000 )
Non-cash adjustments
Change in fair value of warrant liability —
5,597,000
Depreciation and amortization 398,000
379,000
Stock based compensation 1,322,000
258,000
Deferred tax expense 87,000
2,318,000
Other (11,000 ) 131,000
Changes in assets and liabilities
Receivables from clearing organizations, broker-dealers, forgivable loans and other (140,000 ) (195,000 )
Accounts payable and accrued expenses and other liabilities 393,000
2,062,000
Prepaid expenses (436,000 ) (423,000 )
Other 563,000
(1,141,000 )
Net cash provided by operating activities 3,132,000
946,000

Cash flows from investing and financing activities
Acquisition of businesses —
(124,000 )
Purchase of fixed assets (109,000 ) (36,000 )
Collection on notes receivable 27,000
25,000
Repurchase of shares of common stock (101,000 ) —
Principal payments under capital lease obligations (55,000 ) —
Net cash used in investing and financing activities (238,000 ) (135,000 )
Net increase in cash and restricted cash $ 2,894,000
$ 811,000
- Operating Activities

Net cash (used in) provided by operating activities was $(6,326,000) and $3,132,000 for the three months ended December 31, 2019 and 2018, respectively.

During the three months ended December 31, 2019, net cash provided by operating activities ~~increased $2,186,000~~was primarily attributable to:

$(1,499,000) of net loss, which included $2,496,000 in non-cash items, consisting primarily of (i) $907,000 of stock-based compensation expense, (ii) $530,000 of depreciation and amortization expense, and (iii) $700,000 of amortization of operating lease assets; and

Changes in operating assets and liabilities consisting primarily of (i) a $7,434,000 decrease in accounts payable, accrued expenses and other liabilities, (ii) a $1,223,000 increase in other receivables, (iii) a $1,393,000 increase in forgivable loans receivable, and (iv) a $1,301,000 increase in prepaid expenses. These items were partially offset by (i) a $2,680,000 decrease in securities owned and (ii) a $1,549,000 decrease in receivables from broker dealers and clearing organizations.

During the three months ended December 31, 2018, net cash provided by operating activities was primarily attributable to:

$956,000 of net income, which included $1,796,000 in non-cash items, consisting primarily of (i) $1,322,000 of stock-based compensation expense, (ii) $398,000 of depreciation and amortization expense, and (iii) $171,000 of amortization of forgivable loans; and

Changes in operating assets and liabilities consisting primarily of (i) a $436,000 increase in prepaid expenses, (ii) a $1,221,000 increase in other receivables and (iii) a $135,000 increase in forgivable loans receivable. These items were partially offset by (i) a $1,216,000 decrease in receivable from broker-dealers, clearing organizations, (ii) a $393,000 increase in accounts payable, accrued expenses and other liabilities, and (iii) a $578,000 decrease in securities owned.

Cash Flow - Investing Activities

Net cash used in investing activities was $1,878,000 and $82,000 for the three months ended December 31, 2019 and 2018, respectively. Net cash used in investing activities during the three months ended December 31, 2019 was primarily attributable to the acquisition of businesses and during the three months ended December 31, 2018, was primarily attributable to the acquisition of fixed assets.

Cash Flow - Financing Activities

Net cash used in financing activities was $417,000 and $156,000 for the three months ended December 31, 2019 and 2018, respectively. Net cash used in financing activities for the three months ended December 31, 2019, was primarily attributable to (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. Net cash used in financing activities for the three months ended December 31, 2018, ~~compared to the three months ended December 31, 2017. The increase in net cash provided by operating activities~~ was primarily ~~due~~attributable to ~~higher operating revenues collected~~repurchase of common stock for ~~the three months ended December 31, 2018.~~tax withholding.

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 December 31, 2019, and September 30, 2019, or on our results of operations and cash flows for the three months ended December 31, 2019 and 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Our 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 ~~sets~~set higher requirements or ~~requires~~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 December 31, ~~2018:~~ 2019. 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 December 31, 2019 will have a material adverse effect on our consolidated financial position or results of operations.


	Securities owned		Securities owned		Securities sold, but not yet purchased
Corporate stocks	$	925,000	$	4,063,000	$	—
Municipal bonds	12,000		231,000		—
Restricted stock	784,000		731,000		—
Corporate bonds			103,000		—
Warrants	5,487,000		5,784,000		—
U.S. treasury notes			—		203,000
Total	$	7,208,000	$	10,912,000	$	203,000

Operational Risk

Operational 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 Management

We have established various committees ofto oversee the ~~Board~~management of ~~Directors to manage the~~ 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.

ITEM 4. CONTROLS AND PROCEDURES

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 December 31, ~~2018,~~2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We and our 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 we will be liable for, if any. Further, we have a history of collecting amounts awarded in these types of matters from our 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.~~ We intend to vigorously defend our company in these actions, and the ultimate outcome of these matters cannot be determined at this time.

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. As of December 31, ~~2018~~2019 and September 30, ~~2018,~~2019, the Company accrued approximately ~~$1,095,000~~$1,515,000 and ~~$825,000,~~$1,817,000, respectively. These amounts are included in accounts payable and other accrued expenses in the statements of financial condition. Awards ultimately paid, if any, may be covered by our errors and omissions insurance policy. While we will vigorously defend our company in these matters, and will assert insurance coverage and indemnification to the maximum extent possible, there can be no assurance that such matters will not have a material adverse impact on our financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

There are no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018.~~2019.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~On February 7, 2020, National Holdings Corporation (the “Company”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with United Atlantic Capital, LLC, a New Jersey limited liability company (“UAC”), Mark H. Penske (“MHP”) and Darin Pope (“DP” and together with UAC and MHP, the “Selling Parties”) to acquire all of the outstanding equity interests (collectively, the “Purchased Shares”) of Financial Services International Corporation, a Washington corporation (“FSIC”), United Advisor Services, LLC, a New Jersey limited liability company (“UAS”), and United Advisors, LLC, a New Jersey limited liability company (“UA” and collectively with FSIC and UAS, the “Group Companies”). The transactions contemplated by the Purchase Agreement are collectively referred to as the “Transactions.”

The Company is entitled to a prepayment discount in the event it pays the Additional Cash Purchase Price in advance of its due date, in the amount of (i) 15% for pre-payment prior to the conclusion of the First Six Months and (ii) 10% for pre-payment after the conclusion of the first six months and until eighteen months from Closing.

The Purchase Agreement contains customary representations, warranties and covenants of the Selling Parties and the Company in connection with the Transactions. The obligations of the Company and the Selling Parties to consummate the Transactions are subject to the satisfaction or waiver of customary conditions, including certain regulatory approvals and consents. There is no financing condition to consummate the Transactions. The Purchase Agreement also provides for customary termination rights. Subject to certain exceptions, terms and limitations described in the Purchase Agreement, the Selling Parties and the Company have agreed to indemnify and hold each other harmless against any and all losses arising out of or with respect to any breach of any representations, warranty or covenant of the Selling Parties or the Company, as applicable, and in the case of indemnification by the Selling Parties, certain other specified matters.

The foregoing descriptions of the Purchase Agreement and the Transactions do not purport to be complete and are qualified in their entirety by reference to the Purchase Agreement, a copy of which is filed with this Quarterly Report on Form 10-Q as Exhibit 10.1.

The Purchase Agreement contains representations and warranties that the Selling Parties and the Company made to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the Purchase Agreement between the Selling Parties and the Company and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Purchase Agreement. In addition, such representations and warranties: (i) may not be accurate or complete as of any specified date; (ii) are modified and qualified in important part by the underlying disclosure schedules; (iii) may be subject to a contractual standard of materiality different from those generally applicable to investors; or (iv) may have been used for the purpose of allocating risk among the parties to the Purchase Agreement, rather than establishing matters as facts. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. For the foregoing reasons, the representations and warranties should not be relied upon as statements of factual information.

ITEM 6. EXHIBITS



10.1	Stock Purchase Agreement, dated as of February 7, 2020, by and among United Atlantic Capital, LLC, Mark H. Penske, Darin Pope and National Holdings Corporation.
31.1	Principal Executive Officer’s Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Principal Financial Officer’s Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Principal Executive Officer’s Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Principal Financial Officer’s Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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

SIGNATURES

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 ~~14, 2019~~13, 2020	By:	/s/ Michael A. Mullen
		Michael A. Mullen
		Chief Executive Officer
		(Principal Executive Officer)

February ~~14, 2019~~13, 2020	By:	/s/ Glenn C. Worman
		Glenn C. Worman
		Chief Financial Officer
		(Principal Financial Officer)

3741



Fiscal Year Ending September 30,	Operating Leases		Capital Lease
Nine months ending September 30, 2019	$	2,224,000	$	184,000
2020	2,812,000		297,000
2021	2,381,000		—
2022	1,588,000		—
2023	1,450,000		—
Thereafter	3,239,000		—
Total minimum lease payments	$	13,694,000	$	481,000
Less: Amounts representing interest not yet incurred			26,000
Present value of capital lease obligations			$	455,000