NATIONAL HOLDINGS CORPORATION 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 in Item 1 above. Any forward-looking statements contained in or incorporated into this Annual Report on Form 10-K 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. OVERVIEW We are engaged in independent brokerage and advisory services and asset management services, investment banking, equity research and institutional sales and trading, through our broker-dealer subsidiaries, NSC and WEC. We are committed to establishing a significant presence in the financial services industry by meeting the varying investment needs of our retail, corporate and institutional clients. Our wholly-owned subsidiary, NAM, is a federally-registered investment adviser that provides asset management advisory services to clients for a fee based upon a percentage of assets managed. We also provide tax preparation services through National Tax, which provides tax preparation services to individuals, predominantly in the middle and upper income tax brackets and accounting services to small and midsize companies. NSC and WEC are subject to regulation by, among others, theSEC andFINRA , and are members ofSIPC . In addition, NSC is licensed to conduct its brokerage activities in all 50 states, plus theDistrict of Columbia andPuerto Rico and theU.S. Virgin Islands . National Tax is also subject to regulation by, among others, theIRS . As ofSeptember 30, 2020 , we had approximately 1,010 associated personnel serving retail and institutional customers, trading and investment banking clients. In addition to our 30 Company offices located inNew York ,New Jersey ,Florida ,Texas ,Massachusetts andWashington , we had approximately 100 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. Proposal OnApril 30, 2020 ,B. Riley and the Company entered into a limited waiver of certain provisions of the standstill agreement withB. Riley and in connection therewith,B. Riley amended its Schedule 13D filing relating to the Company and sent the Board a letter containing a proposal regarding the Company. The Board formed a Special Committee of non-executive, independent directors to review theB. Riley proposal. COVID-19 Update and Action The COVID-19 outbreak continues to cause significant disruption in business activity and the financial markets both globally and inthe United States . As a result of the spread of COVID-19, economic uncertainties have arisen which have negatively impacted and are likely to continue to negatively impact our businesses, financial condition, results of operations, cash flows, strategies and prospects. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on our clients, employees, vendors and the markets in which we operate our businesses, all of which are uncertain at this time and cannot be predicted. The extent to which COVID-19 may impact our financial condition or results of operations cannot be reasonably estimated at this time. The Company's management put cost-savings plans into effect to mitigate the cash drain that potential, downward pressure on its business might cause. In particular, the Company's management made the very difficult decision to downsize its staff, significantly reduce compensation for many employees and implement moratoriums in variable spending categories. We continue to be cautious due to events that may be driven by the evolution of this pandemic that are unknown, are highly uncertain, and cannot be predicted as it relates to the Company's clients, employees, vendors, and the markets in which the Company operates its businesses. Paycheck Protection Program OnApril 10, 2020 , NSC entered into the NSC Note in the principal amount of$5,523,738 with the Lender, pursuant to which the Lender agreed to make the NSC Loan offered by the SBA pursuant to the CARES Act to qualified small businesses. OnApril 15, 2020 , WEC also entered into the WEC Note in the principal amount of$973,062 with the Lender, pursuant to which the Lender agreed to make the WEC Loan. The interest rate on each PPP Note is a fixed rate of 1% per annum. Interest is calculated by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. The applicable borrower is required to make monthly payments commencing on the first day of the first full calendar month following the end of the Deferral Period, and such payments shall continue to be due and payable on the first day of each calendar month thereafter until the Maturity Date, which isApril 13, 2022 in the case of the NSC Note andApril 16, 2022 in the case of the WEC Note. Monthly payment amounts are based on repayment of interest accrued during the Deferral Period, interest accruing until and including the Maturity Date, and full amortization of the outstanding principal balance. The PPP loans are recorded as debt. According to the terms of the PPP, all or a portion of loans under the PPP may be forgiven if certain conditions set forth in the CARES Act and the rules of the SBA are met. In addition, each PPP Note includes events of default, the occurrence and continuation of which would provide the Lender with the right to exercise remedies against NSC or WEC, as applicable, including the right to declare the entire unpaid principal balance under the applicable PPP Note and all accrued unpaid interest immediately due. There can be no assurance that the SBA will forgive all or any part of the PPP Loans, or that it will not assert that the conditions to obtaining such loans were met, in which case the PPP Loans could be subject to acceleration. 20
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United Advisors Acquisition OnFebruary 7, 2020 , the Company entered into a Stock Purchase Agreement (the "United Advisors Agreement" and the transactions contemplated thereunder, the "United Advisors Acquisition") withUnited Atlantic Capital, LLC , aNew Jersey limited liability company ("UAC"),Mark H. Penske ("MHP") andDarin Pope ("DP" and together with UAC and MHP, the "Selling Parties") to acquire all of the outstanding equity interests (collectively, the "Purchased Group Shares") ofFinancial Services International Corporation , aWashington corporation ("FSIC"),United Advisor Services, LLC , aNew Jersey limited liability company ("UAS"), andUnited Advisors, LLC , aNew Jersey limited liability company ("UA" and collectively with FSIC and UAS, the "Group Companies"). OnSeptember 11, 2020 , the Company completed the acquisition of all of the outstanding equity interests of the Group Companies. Under the terms of the United Advisors Agreement, at the closing of the United Advisors Acquisition, the Company acquired the Purchased Group Shares for a closing payment of$3.0 million paid in cash. Under the Purchase Agreement, the Selling Parties are entitled to additional consideration of up to approximately$4.5 million paid in twelve equal quarterly installment payments in cash (the "Additional Cash Purchase Price"), subject to certain adjustments.
UA is a
OnAugust 26, 2019 , the Company entered into a stock purchase agreement (as amended, the "Winslow Agreement" and the transactions contemplated thereunder, the "Winslow Acquisition") whereby the Company agreed to acquire all of the outstanding equity interests (the "PurchasedWinslow Shares ") ofWinslow Evans & Crocker, Inc. ("WEC"), Winslow,Evans & Crocker Insurance Agency, Inc. ("WIA"), andWinslow Financial, Inc. ("WF" and collectively with WEC and WIA, the "Winslow Targets"). The Company entered into an amendment to the Winslow Agreement onOctober 11, 2019 , to reflect certain clarifications to the terms of the Winslow Agreement as agreed to by the parties.
On
Under the terms of the Winslow Agreement, at the closing of the Winslow Acquisition, the Company acquired the PurchasedWinslow 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 throughSeptember 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 throughSeptember 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 aBoston -based, full-service investment firm established in 1991. WEC is an SEC Registered Investment Advisor and aFINRA registered broker-dealer. More than 50 financial professionals including Certified Financial Planners, Investment Advisor Representatives,Financial Consultants , brokers and other specialists are part of the Winslow team. Located in the heart of the financial district inBoston, MA , the Company believes that WEC is a strategic location for the Company to build out its banking platform. Growth Strategy We continue to evaluate opportunities to grow our businesses, including potential acquisitions or mergers with other securities, investment banking and investment advisory firms, and by adding to our base of independent registered representatives and institutional trading personnel organically. These acquisitions may involve payments of material amounts of cash, the incurrence of a significant amount of debt or the issuance of significant amounts of our equity securities, which may be dilutive to our existing stockholders and/or may increase our leverage. We cannot assure you that we will be able to consummate any such potential acquisitions at all or on terms acceptable to us or, if we do, that any acquired business will be profitable.
Key Indicators of Financial Performance for Management
Management periodically reviews and analyzes our financial performance across a number of measurable factors considered to be particularly useful in understanding and managing our business. Key metrics in this process include productivity and practice diversification of representatives, top line commission and advisory services revenues, gross margins, operating expenses, legal costs, taxes, EBITDA as adjusted and earnings per share.
Critical Accounting Policies and Estimates
Our most critical accounting policies relate to revenue recognition (including revenue from variable interest entities), income taxes, and goodwill. TheSEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods.
We believe our critical accounting policies are as follows:
Variable Interest Entities - We have entered into agreements to provide
investment banking and advisory services to numerous investment funds (the
"Funds") that are considered variable interest entities ("VIEs") under the
accounting guidance. These Funds are established primarily to make and manage
investments in equity or convertible debt securities of privately held companies
that we, as investment advisory to the Funds, believes possess innovative or
disruptive technologies and present opportunities for an initial public offering
("IPO") or another 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 another similar liquidity event and then to make distributions
to its investors when contractually permitted, estimated approximately six
months following such IPO or liquidity event.
We earn fees from the Funds in the form of placement agent fees and carried
interest. For placement agent fees, we receive 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. We receive 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 distributions. Once fund investors have received distributions in an
amount equal to one hundred percent (100%) of their total capital contributions,
we 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, we
do not consolidate such VIEs.
Placement agent fees attributable to such arrangements were
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Carried interest is recognized and recorded at the time of distribution and all
contingencies are resolved. For the year ended September 30, 2020 , no carried
interest has been recorded. For the year ended September 30, 2019 , $15,872,000
of carried interest has been recorded. $5,403,000 of the carried interest is
related to the back-end compensation of the placement agent fees and is included
in investment banking in the consolidated statements of operations. The
remaining $10,469,000 is recorded as compensation for asset management services
and is included in investment advisory in the consolidated statements of
operations. For the year ended September 30, 2019 , an unrealized loss of
$2,389,000 was recorded due to the change in fair value of the shares received
for carried interest. The loss for the change in fair value is included in net
dealer inventory (losses) gains in the consolidated statements of operations.
Based on the investment performance of the Funds as of September 30, 2020 ,
unrecognized carried interest under a hypothetical distribution was $8,086,000
and the related compensation expense associated was $5,651,000 . Based on current
market values, at December 24, 2020 , unrecognized carried interest and related
compensation expense under a hypothetical distribution would increase to
$49,776,000 and $34,412,000 , respectively. Carried interest is dependent on the
market and will fluctuate until a distribution event occurs.
Revenue Recognition - Commission revenue represents commissions generated by our
registered representatives for their clients' purchases and sales of mutual
funds, variable annuities, general securities and other financial products, a
high percentage of which is paid to the registered representatives as
commissions for initiating the transactions.
Commission revenue is generated from front-end sales commissions that occur at
the point of sale, as well as trailing commissions. We recognize front-end sales
commission revenue and related clearing and other expenses on transactions
introduced to our clearing brokers on a trade date basis. We also recognize
front-end sales commissions and related expenses on transactions initiated
directly between the registered representatives and product sponsors upon
receipt of notification from sponsors of the commission earned. Commission
revenue also includes certain 12b-1 fees, and variable product trailing fees,
collectively considered as trailing fees, which are recurring in nature. These
trailing fees are earned by us based on a percentage of the current market value
of clients' investment holdings in trail eligible assets. Because trail
commission revenues are generally paid in arrears, management estimates
commission revenues earned during each period. These estimates are based on a
number of factors including investment holdings and the applicable commission
rate and the amount of trail commission revenue received in prior periods.
Estimates are subsequently adjusted to actual based on notification from the
sponsors of trail commissions earned.
Net dealer inventory gains, which are recorded on a trade-date basis, include
realized and unrealized net gains and losses resulting from our principal
trading activities including equity-linked warrants received from investment
banking activities.
We generally act as an agent in executing customer orders to buy or sell listed
and over-the-counter securities in which we do not make a market, and charge
commissions based on the services we provide to our customers. In executing
customer orders to buy or sell a security in which we make a market, we may sell
to, or purchase from, customers at a price that is substantially equal to the
current inter-dealer market price plus or minus a mark-up or mark-down. We may
also act as agent and execute a customer's purchase or sale order with another
broker-dealer market-maker at the best inter-dealer market price available and
charge a commission. Mark-ups, mark-downs and commissions are generally priced
competitively based on the services we provide to our customers. In each
instance the commission charges, mark-ups or mark-downs are in compliance with
guidelines established by FINRA .
Investment banking revenues consist of underwriting revenues, advisory revenues
and private placement fees. Underwriting revenues arise from securities
offerings in which we act as an underwriter and include management fees, selling
concessions and underwriting fees. Management estimates our share of the
transaction-related expenses incurred by the syndicate. On final settlement,
typically within 90 days from the trade date of the transaction, these amounts
are adjusted to reflect the actual transaction-related expenses.
Investment advisory fees are derived from account management and investment advisory services. These fees are determined based on a percentage of the customers assets under management, may be billed monthly or quarterly and are recognized when earned. Also included in advisory fees is carried interest. Carried interest is recognized and recorded at the time of distribution and all contingencies are resolved.
Interest is recorded on an accrual basis and dividends are recorded on the ex-dividend date.
Transfer fees and fees for clearing services are recorded on a trade date basis.
Tax preparation and accounting fees are recognized upon completion of the services.
See Note 20 of our consolidated financial statements for additional disclosures on revenue recognition from revenues from contracts.
Income Taxes - We account for income taxes in accordance with generally accepted accounting principles, also referred to asU.S. GAAP which require the recognition of tax benefits or expenses based on the estimated future tax effects of temporary differences between the financial statement and tax basis of its assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely than not to be realized. FASB ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements, requiring us to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. We recognize accrued interest and penalties related to income taxes as a component of income tax expense. As ofSeptember 30, 2020 and 2019, we had no unrecognized tax positions.Goodwill -Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired.Goodwill represents the excess of the purchase price over the fair value of its identifiable net assets acquired. We test goodwill for impairment at the reporting unit level. Fair value of a reporting unit is typically based upon estimated future cash flows discounted at a rate commensurate with the risk involved or market-based comparables. If the carrying amount of the reporting unit's net assets exceeds its fair value, then an impairment will be recognized. An impairment loss will be recognized in an amount equal to the excess of the carrying amount over its fair value. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Accounting guidance on the testing of goodwill for impairment allows entities testing goodwill for impairment, the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform such impairment test. Under Accounting Standards Update ('ASU') No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit's goodwill. Under the new standard, an entity recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for us beginningOctober 1, 2020 for both interim and annual periods. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afterJanuary 1, 2017 . We early adopted this standard for the annual tests performed afterJanuary 1, 2017 . 22 --------------------------------------------------------------------------------
Results of Operations
Fiscal Year 2020 Compared with Fiscal Year 2019
Our fiscal year 2020 resulted in an increase in revenues and an increase in operating expenses as compared to fiscal year 2019. Lower margin commission revenue replaced higher margin investment banking revenues, which we attribute to overall market dynamics and volatility associated with the COVID-19 pandemic, and which contributed to the increase in operating expenses. Fiscal 2019 results also included substantial carried interest revenue, which provided significantly higher levels of gross margin. Finally, increasingly low interest rates have impacted revenue generating capabilities of certain investment products. As a result, we reported loss before taxes of$(8,079,000) for fiscal year 2020 as compared to income before taxes of$2,160,000 for fiscal year 2019. Revenues Fiscal Year Increase (Decrease) 2020 2019 Amount Percent Commissions$ 116,898,000 $ 86,929,000 $ 29,969,000 34 % Net dealer inventory gains (losses) 1,076,000 (1,466,000 ) 2,542,000 173 % Investment banking 51,280,000 69,656,000 (18,376,000 ) (26 )% Investment advisory 35,676,000 34,400,000 1,276,000 4 % Interest and dividends 4,334,000 5,822,000 (1,488,000 ) (26 )% Transfer fees and clearing services 9,957,000 8,092,000 1,865,000 23 % Tax preparation and accounting 10,148,000 8,807,000 1,341,000 15 % Other 506,000 701,000 (195,000 ) (28 )% Total Revenues$ 229,875,000 $ 212,941,000 $ 16,934,000 8 % Total revenues increased$16,934,000 , or 8%, in fiscal year 2020 to$229,875,000 from$212,941,000 in fiscal year 2019. This increase in revenues is primarily due to revenues generated by commissions and net dealer inventory gains offset in part by the decrease in revenues from investment banking.
• Commissions increased by
to
fiscal 2019. This increase is mainly attributable to an increase in trading
commission revenue and
Acquisition. Customer trading volumes across the industry increased compared
to the prior year period, which we attribute to COVID-19 related market
volatility.
• Net dealer inventory gains (losses) increased by $2,542,000 , or 173%,
to
fiscal 2019. This increase is primarily due to higher security market values
resulting in higher gains. Unrealized losses for the Lyft securities and for
the firm's investment portfolio created the net loss in fiscal year 2019. In
addition,
• Investment banking decreased by
to $51,280,000 from $69,656,000 , during fiscal year 2020 when compared to
fiscal 2019. The 2019 fiscal year was particularly strong in both our
traditional investment banking business as well as our private shares
business. Our investment banking business recorded
interest in fiscal 2019. We attribute the weakness in this business in fiscal
2020 to COVID-19.
• Investment advisory increased by $1,276,000 , or 4%,
to
fiscal 2019. The increase is primarily due to the incremental revenue as a
result of the Winslow Acquisition as well as an 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. The increase was offset by a decrease of
compensation for asset management services from the private shares funds
distributed. There was no carried interest revenue recorded during fiscal
2020.
• Interest and dividends decreased by $1,488,000 , or 26%,
to
2019. This decrease is attributable to the drop in the Federal funds rate, as
interest rates overall are near zero.
• Transfer fees and clearing services, increased by $1,865,000 , or 23%,
to
2019. This increase is primarily attributable to an increase in customer
trading volumes.
• Tax preparation and accounting fees increased by $1,341,000 , or 15%,
to
2019. This increase is attributable to revenue generated by new business
acquisitions.
• Other revenue decreased by
fiscal year 2020 when compared to fiscal 2019. This decrease is primarily due
to a decline of client participation in our fully paid stock lending program.
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Operating expenses
Fiscal Year Increase (Decrease)
2020 2019 Amount Percent
Commissions, compensation and fees
$ 20,485,000 12 % Clearing fees 8,474,000 4,808,000 3,666,000 76 % Communications 3,588,000 2,816,000 772,000 27 % Occupancy 5,053,000 4,301,000 752,000 17 % Licenses and registration 3,871,000 2,960,000 911,000 31 % Professional fees 9,320,000 7,306,000 2,014,000 28 % Interest 90,000 32,000 58,000 181 % Depreciation and amortization 2,854,000 1,832,000 1,022,000 56 % Other administrative expenses 9,203,000 11,333,000 (2,130,000 ) (19 )% Total Operating Expenses$ 238,391,000 $ 210,841,000 $ 27,550,000 13 %
In comparison with the 8% increase in total revenues, total operating
expenses increased 13%, or
• Commissions, compensation, and fees include expenses based on commission
revenue, net dealer inventory gains revenue, investment banking and investment
advisory revenues, as well as compensation to our non-broker employees. These
expenses increased by
2020 from
to higher commissions revenue and therefore higher variable compensation
expense. Commissions is our lowest margin business. In addition to the overall
revenue increase, as a result of the revenue redistribution from investment
banking to commissions revenue, our cost of sales commissions increased.
Additionally, $5,700,000 in incremental expense is due to the Winslow
Acquisition.
• Clearing fees increased by
2020 from
higher clearings fees as a result of the increase in trading volume and the
incremental expense as a result of the Winslow Acquisition.
• Communications expenses increased by
year 2020 from
to the incremental expense as a result of the Winslow Acquisition.
• Occupancy expenses increased by
2020 from
several small locations opened later in fiscal year 2019 as part of the
company's geographical expansion as well as the incremental expense as a
result of the Winslow Acquisition.
• Licenses and registration increased by
fiscal year 2020 from
attributable to licenses for software applications as we continue to invest in
and implement technology enhancement.
• Professional fees increased by
2020 from
to legal and consulting fees related to the
acquisition matters.
• Interest expense increased by
from
• Depreciation and amortization expense increased by
to
amortization expense for new customer list intangibles as a result of new
business acquisitions contributed to the majority of this increase.
• Other administrative expenses, which include but are not limited toadvertising, office supplies, dues and subscriptions, provisions for potential
arbitration settlements, insurance and director
compensation, decreased by
2020 from
prior year is primarily due to higher costs for arbitration settlements
recorded in the prior year period.
Net Income
We reported a net loss attributable to common shareholders in fiscal 2020
of $5,938,000 or $0.44 per common share on a fully diluted basis, as compared to
net loss attributable to common shareholders of $819,000 , or $0.06 per common
share on a fully diluted basis in fiscal year 2019.
24
--------------------------------------------------------------------------------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-based 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 fiscal years 2020 and 2019, EBITDA, as adjusted, was$5,672,000 and$12,395,000 , respectively.
The following table presents a reconciliation of net income (loss) attributable to common shareholders as reported in accordance with generally accepted accounting principles, or GAAP, to EBITDA, as adjusted.
Fiscal Year Ended
2020 2019
Net (loss) income attributable to common shareholders, as
reported $ (5,938,000 ) $ (819,000 )
Interest expense 90,000 32,000
Income taxes (1,865,000 ) 319,000
Depreciation and amortization 2,854,000 1,832,000
EBITDA (4,859,000 )
1,364,000
Non-cash compensation expense 3,108,000
4,282,000
Forgivable loan amortization 894,000
680,000
Unrealized (gain) loss on the firm's warrant portfolio 2,895,000
2,820,000
Real estate restructuring costs 116,000
315,000
Business acquisition related costs 355,000
168,000
Professional fees associated with the
-
Legal and arbitration costs associated with pre-fiscal 2017 lawsuits not covered by insurance
1,160,000 2,766,000
490,000 -
Gain on disposal of National Tax branches (297,000 ) -
Disposition/settlement of contingent consideration (540,000 ) -
Impairment of goodwill and intangible assets 1,125,000 -
EBITDA, as adjusted $ 5,672,000 $ 12,395,000
EBITDA, adjusted for non-cash compensation expense, forgivable loan
amortization, unrealized (gain) loss on the firm's warrant portfolio, real
estate restructuring costs, business acquisition related costs, professional
fees costs associated with the B. Riley proposal, legal and arbitration costs
associated with pre-fiscal 2017 lawsuits not covered by insurance, New York City
occupancy tax - fiscal 2007 through fiscal 2012, gain on disposal of National
Tax branches, disposition/settlement of contingent consideration and impairment
of goodwill and intangible assets is a key metric we use in evaluating our
business. EBITDA is considered a non-GAAP financial measure as defined by
Regulation G promulgated by the SEC .
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Liquidity and Capital Resources
Ending Balance Average Balance
September 30, during fiscal
2020 2019 2020 2019
Cash $ 27,327,000 $ 30,443,000 $ 25,806,200 $ 28,117,000
Receivables from broker-dealers and clearing
organizations 3,367,000 3,490,000 3,426,000 3,236,000
Securities owned (excludes warrants) 1,436,000 7,027,000 3,923,200 3,192,000
Accrued commissions and payroll payable, accounts payable and other accrued expenses 35,502,000 28,853,000 26,144,600 22,808,250
AtSeptember 30, 2020 and 2019, 30% and 50%, respectively, of our total assets consisted of cash, securities owned excluding warrants and receivables from broker-dealers and clearing organizations. 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. In addition, as a registered broker-dealer and member ofFINRA , NSC is subject to the Net Capital Rule, which is designed to measure the general financial integrity and liquidity of a broker-dealer and requires the maintenance of minimum net capital. Net capital is defined as the net worth of a broker-dealer subject to certain adjustments. In computing net capital, various adjustments are made to net worth that exclude assets not readily convertible into cash. Additionally, the regulations require that certain assets, such as a broker-dealer's position in securities, be valued in a conservative manner so as to avoid overstating of the broker-dealer's net capital. AtSeptember 30, 2020 , NSC had net capital of$3,812,891 which was$2,812,891 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. WEC is also subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined under the Net Capital Rule, shall not exceed 15 to 1. AtSeptember 30, 2020 , WEC had net capital of$467,947 which was$305,992 in excess of its required net capital of$161,955 . WEC's ratio of aggregate indebtedness to net capital was 5.2 to 1. WEC is exempt from the provisions of Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers. FSIC is also subject to the Net Capital Rule, which, among other things, requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined under theNet Capital Rule, shall not exceed 15 to 1. AtSeptember 30, 2020 , FSIC had net capital of$117,538 which was$112,538 in excess of its required net capital of$5,000 . FSIC's ratio of aggregate indebtedness to net capital was 0.2 to 1. FSIC is exempt from the provisions of Rule 15c3-3 since it is an introducing broker-dealer that clears all transactions on a fully disclosed basis and promptly transmits all customer funds and securities to clearing brokers. Advances, dividend payments and other equity withdrawals from NSC, WEC and FSIC are restricted by the regulations of theSEC and other regulatory agencies. These regulatory restrictions may limit the amounts that NSC, WEC and FSIC may dividend or advance to us. We extend unsecured credit in the normal course of business to our brokers. The determination of the appropriate amount of the reserve for uncollectible accounts is based upon a review of the amount of credit extended, the length of time each receivable has been outstanding, and the specific individual brokers from whom the receivables are due. The objective of liquidity management is to ensure that we have ready access to sufficient funds to meet commitments, fund deposit withdrawals and efficiently provide for the credit needs of customers. Our primary sources of liquidity include our cash flow from operations and the sale of our securities and other financing activities. We believe that we have sufficient funds from operations to fund our ongoing operating requirements for at least the next twelve months. However, we may need to raise funds to enhance our working capital and for strategic purposes. We do not have any material commitments for capital expenditures. We purchase computer equipment and technology to maintain or enhance the productivity of our employees and such capital expenditures have amounted to$241,000 and$3,124,000 during fiscal years 2020 and 2019, respectively. Certain of our subsidiaries have received loans from theSmall Business Administration's Payroll Protection Plan program, a significant part of theU.S. government's pandemic stimulus. We anticipate that our use of proceeds from the PPP loans may result in loans being forgiven. See Note 22 of the notes to the consolidated financial statements for additional information. 26 --------------------------------------------------------------------------------
Cash Flow - Operating Activities
Net cash provided by (used in) operating activities was
During the year ended
•
consisting primarily of (i)
(ii)
deferred tax benefit and (iv)
assets; and
• Changes in operating assets and liabilities consisting primarily of (i) a
liabilities, (ii) a
offset by (i) a
decrease in prepaid expenses.
During the year ended
•
consisting primarily of (i)
(ii)
of amortization of forgivable loans; and
• Changes in operating assets and liabilities consisting primarily of (i) a
receivables, and (iii) a
These items were partially offset by (i) a
payable, accrued expenses and other liabilities, and (ii) a
in receivables from broker dealers and clearing organizations.
Cash Flow - Investing Activities
Net cash used in investing activities was
Cash Flow - Financing Activities
Net cash provided by (used in) financing activities was$3,444,000 and$(2,529,000) for the years endedSeptember 30, 2020 and 2019, respectively. Net cash used in financing activities for the year endedSeptember 30, 2020 , was primarily attributable to (i)$6,497,000 in proceeds from PPP related loans, (ii)$1,485,000 distributions to non-controlling interest, (iii)$730,000 of contingent consideration payments, and (iv)$373,000 for repurchase of common stock for tax withholding. Net cash used in financing activities for the year endedSeptember 30, 2019 , was primarily attributable to (i)$899,000 distributions to non-controlling interest, (ii)$617,000 of contingent consideration payments, and (iii)$425,000 for repurchase of common stock for tax withholding. Inflation
We believe that the effect of inflation on our assets, consisting of cash, securities, office equipment, leasehold improvements and computers has not been significant.
Off-Balance Sheet Arrangements
We do not have any off-balance-sheet arrangements (as defined in Regulation S-K
303(a)(4)(ii)) that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
27--------------------------------------------------------------------------------
New Accounting Guidance InFebruary 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 to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The recognition of these lease assets and lease liabilities represents a change from previousU.S. 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 previousU.S. GAAP requirements. The Company adopted the provisions of Topic 842 onOctober 1, 2019 , using the modified retrospective approach and the option presented under ASU 2018-11 to transition only active leases as ofOctober 1, 2019 . All comparative periods prior toOctober 1, 2019 are not adjusted and continue to be reported in accordance with Topic 840. The Company elected to utilize the package of practical expedients permitted within the new standard, which among other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off the Company's consolidated statements of financial condition which resulted in recognizing those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Adoption of the new standard resulted in the recording of right-of-use assets and corresponding lease liabilities of$14,720,000 and$16,309,000 , respectively, as ofOctober 1, 2019 . The difference between the right-of-use assets and the lease liabilities was recorded to eliminate existing deferred rent balances and remaining balances of lease incentives recorded under Topic 840. The adoption of the new standard did not materially impact the Company's consolidated statements of operations and had no impact on the Company's consolidated statements of cash flows. The Company's current lease arrangements expire through 2032. See Note 22 for further information. InAugust 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 beginningOctober 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. InDecember 2019 , the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes". The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for the Company's fiscal year beginningOctober 1, 2021 , with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The company is currently assessing the impact that the adoption of ASU 2019-12 will have on its financial statements.
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