10-Q 1 nhld0630201810-q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarter Ended June 30, 2018
 
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
incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
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  ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one).
 
 
Large Accelerated Filer ☐ 
 
Accelerated Filer ☐
 
 
 
 
 
Non-Accelerated Filer ☒
 
Smaller Reporting Company ☐
 
(Do not check if a smaller reporting company)
 
 
 
 
Emerging Growth Company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES☐NO☒
 
As of July 31, 2018 there were 12,490,990 shares of the registrant's common stock outstanding. 




NATIONAL HOLDINGS CORPORATION
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2018
 
INDEX
  
PART I – FINANCIAL INFORMATION
 
 
 
 
 
Item 1 – Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
Condensed Consolidated Statements of Financial Condition as of June 30, 2018 (unaudited) and September 30, 2017
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three and Nine months ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine months ended June 30, 2018 (unaudited)
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine months ended June 30, 2018 and 2017 (unaudited)
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4 – Controls and Procedures
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
Item 1 – Legal Proceedings
 
 
 
 
 
Item 1A – Risk Factors
 
 
 
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3 – Defaults Upon Senior Securities
 
 
 
 
 
Item 4 – Mine Safety Disclosures
 
 
 
 
 
Item 5 – Other Information
 
 
 
 
 
Item 6 – Exhibits
 
 
 
 
 
Signatures
 
 
 
 
 
Exhibit Index

2



FORWARD-LOOKING STATEMENTS
  
The following information provides cautionary statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements we make in this report or in other documents that reference this report. All statements that express or involve discussions as to: expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, identified through the use of words or phrases such as we or our management believes, expects, anticipates or hopes and words or phrases such as will result, are expected to, will continue, is anticipated, estimated, projection and outlook, and words of similar import) are not statements of historical facts and may be forward-looking. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties including, but not limited to, economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in the documents filed by us with the Securities and Exchange Commission ("SEC"). Many of these factors are beyond our control. Actual results could differ materially from the forward-looking statements we make in this report or in other documents that reference this report. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report or other documents that reference this report will, in fact, occur.
 
These forward-looking statements involve estimates, assumptions and uncertainties, and, accordingly, actual results could differ materially from those expressed in the forward-looking statements. These uncertainties include, among others, the following: (i) the inability of our broker-dealer operations to operate profitably in the face of intense competition from larger full service and discount brokers; (ii) a general decrease in merger and acquisition activities and our potential inability to receive success fees as a result of transactions not being completed; (iii) increased competition from business development portals; (iv) technological changes; (v) our potential inability to implement our growth strategy through acquisitions or joint ventures; and (vi) our potential inability to secure additional debt or equity financing.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time and it is not possible for our management to predict all of such factors, nor can our management assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.  


3



PART I.        FINANCIAL INFORMATION
ITEM I.         CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
June 30,
2018
(Unaudited)
 
September 30,
2017
ASSETS
 
 
 
Cash
$
28,664,000

 
$
23,508,000

Restricted cash
1,352,000

 
1,381,000

Cash deposits with clearing organizations
336,000

 
1,041,000

Securities owned, at fair value
8,593,000

 
7,102,000

Receivables from broker-dealers and clearing organizations
3,181,000

 
2,850,000

Forgivable loans receivable
1,610,000

 
1,616,000

Other receivables, net
5,277,000

 
5,180,000

Prepaid expenses
1,374,000

 
2,490,000

Fixed assets, net
2,532,000

 
2,397,000

Intangible assets, net
4,997,000

 
4,843,000

Goodwill
5,217,000

 
5,217,000

Deferred tax asset, net
4,350,000

 
6,420,000

Other assets, principally refundable deposits
419,000

 
353,000

Total Assets
$
67,902,000

 
$
64,398,000

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities
 
 
 
Securities sold, but not yet purchased, at fair value
$
24,000

 
$
151,000

Accrued commissions and payroll payable
11,974,000

 
10,065,000

Accounts payable and accrued expenses
7,471,000

 
8,715,000

Deferred clearing and marketing credits
629,000

 
786,000

Warrants issued (Note 19)

 
5,597,000

  Other
77,000

 
181,000

Total Liabilities
20,175,000

 
25,495,000

 
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none outstanding

 

Common stock $0.02 par value, authorized 75,000,000 shares at June 30, 2018 and September 30, 2017; 12,490,990 and 12,437,916 shares issued and outstanding at June 30, 2018 and September 30, 2017, respectively
249,000

 
248,000

Additional paid-in-capital
85,273,000

 
66,955,000

Accumulated deficit
(37,795,000
)
 
(28,315,000
)
 
 
 
 
Total National Holdings Corporation Stockholders’ Equity
47,727,000

 
38,888,000

 
 
 
 
Non-Controlling interest

 
15,000

Total Stockholders’ Equity
47,727,000

 
38,903,000

 
 
 
 
Total Liabilities and Stockholders’ Equity
$
67,902,000

 
$
64,398,000

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

4



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
Three Month Period Ended
June 30,
 
Nine Month Period Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Commissions
$
28,397,000

 
$
24,881,000

 
$
85,422,000

 
$
73,380,000

Net dealer inventory gains (losses)
(1,263,000
)
 
1,767,000

 
2,402,000

 
7,735,000

Investment banking
18,733,000

 
12,645,000

 
47,812,000

 
37,253,000

Investment advisory
5,281,000

 
3,604,000

 
15,811,000

 
10,690,000

Interest and dividends
772,000

 
675,000

 
2,003,000

 
2,065,000

Transaction fees and clearing services
1,605,000

 
1,649,000

 
5,680,000

 
5,834,000

Tax preparation and accounting
2,445,000

 
2,527,000

 
6,835,000

 
6,527,000

Other
267,000

 
299,000

 
697,000

 
1,016,000

Total Revenues
56,237,000

 
48,047,000

 
166,662,000

 
144,500,000

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
Commissions, compensation and fees
48,555,000

 
39,963,000

 
141,462,000

 
118,983,000

Clearing fees
451,000

 
470,000

 
1,772,000

 
1,826,000

Communications
857,000

 
690,000

 
2,429,000

 
2,094,000

Occupancy
738,000

 
972,000

 
2,834,000

 
2,916,000

License and registration
861,000

 
391,000

 
2,028,000

 
1,223,000

Professional fees
1,077,000

 
1,083,000

 
3,047,000

 
3,336,000

Interest
25,000

 
5,000

 
30,000

 
13,000

Depreciation and amortization
387,000

 
288,000

 
1,145,000

 
871,000

Other administrative expenses
1,727,000

 
3,610,000

 
5,839,000

 
7,315,000

Total Operating Expenses
54,678,000

 
47,472,000

 
160,586,000

 
138,577,000

Income before Other (Expense) Income and Income Taxes
1,559,000

 
575,000

 
6,076,000

 
5,923,000

 
 
 
 
 
 
 
 
Other (Expense) Income
 
 
 
 
 
 
 
Gain on disposal of Gilman branches

 

 

 
130,000

Change in fair value of warrant liability (Note 19)

 
(642,000
)
 
(11,194,000
)
 
5,223,000

Other income (expense)
(146,000
)
 
5,000

 
90,000

 
10,000

Total Other (Expense) Income
(146,000
)
 
(637,000
)
 
(11,104,000
)
 
5,363,000

(Loss) Income before Income Taxes
1,413,000

 
(62,000
)
 
(5,028,000
)
 
11,286,000

 
 
 
 
 
 
 
 
Income tax expense (benefit)
601,000

 
(38,000
)
 
4,452,000

 
2,377,000

Net (Loss) Income
$
812,000

 
$
(24,000
)
 
$
(9,480,000
)
 
$
8,909,000

 
 
 
 
 
 
 
 
Net (loss) income per share - Basic
$
0.07

 
$

 
$
(0.76
)
 
$
0.72

Net (loss) income per share - Diluted
$
0.06

 
$

 
$
(0.76
)
 
$
0.72

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding - Basic
12,490,539

 
12,437,916

 
12,461,776

 
12,437,916

Weighted average number of shares outstanding - Diluted
13,899,374

 
12,437,916

 
12,461,776

 
12,459,834

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

5



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 
(Unaudited)
FOR THE NINE MONTHS ENDED JUNE 30, 2018
 
 
Common Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Deficit
 
Non-Controlling
Interest
 
Total Stockholders'
Equity
 
Shares
 
$
 
 
 
 
Balance, September 30, 2017
12,437,916

 
$
248,000

 
$
66,955,000

 
$
(28,315,000
)
 
$
15,000

 
$
38,903,000

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of shares of common stock for warrant exercises
1,489

 

 
5,000

 
 
 
 
 
5,000

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation for restricted stock units


 


 
1,605,000

 
 

 
 

 
1,605,000

 
 
 
 
 
 
 
 
 
 
 
 
Issuance of shares of common stock with respect to vested restricted stock units, net of 26,540 shares valued at $82,000 tendered for tax withholding
51,585

 
1,000

 
(83,000
)
 
 

 
 

 
(82,000
)
 
 
 
 
 
 
 
 
 
 
 
 
Warrant liability reclassification ( See Note 19)


 
 

 
16,791,000

 
 

 
 

 
16,791,000

 
 
 
 
 
 
 
 
 
 
 
 
Deconsolidation of subsidiary
 

 
 

 
 

 
 
 
(15,000
)
 
(15,000
)
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 
 

 
 

 
(9,480,000
)
 


 
(9,480,000
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018
12,490,990

 
$
249,000

 
$
85,273,000

 
$
(37,795,000
)
 
$

 
$
47,727,000

  

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

6



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For The Nine Month Period Ended June 30,
 
2018

2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(9,480,000
)
 
$
8,909,000

Adjustments to reconcile net (loss) income to net cash provided by operating activities
 
 
 
Change in fair value of warrant liability
11,194,000

 
(5,223,000
)
Depreciation and amortization
1,145,000

 
871,000

Amortization of forgivable loans to registered representatives
474,000

 
520,000

Stock-based compensation
1,605,000

 
312,000

Provision (recovery) for doubtful accounts
18,000

 
(274,000
)
Amortization of deferred clearing credit
(157,000
)
 
(157,000
)
Increase in fair value of contingent consideration payable
18,000

 
21,000

Deferred tax expense
2,070,000

 
392,000

Gain on disposal of Gilman branches

 
(130,000
)
Gain on deconsolidation of subsidiary
(15,000
)
 

Changes in assets and liabilities
 
 
 
Restricted cash
29,000

 
(1,026,000
)
Cash deposits with clearing organizations
705,000

 
(10,000
)
Securities owned, at fair value
(1,491,000
)
 
762,000

Receivables from broker-dealers and clearing organizations
(331,000
)
 
571,000

Forgivable loans receivable
(468,000
)
 
(77,000
)
Other receivables, net
(184,000
)
 
1,566,000

Prepaid expenses
1,116,000

 
755,000

Other assets, principally refundable deposits
(66,000
)
 
6,000

Accounts payable, accrued expenses and other liabilities
(574,000
)
 
(347,000
)
Securities sold, but not yet purchased, at fair value
(127,000
)
 
(298,000
)
Net cash provided by operating activities
5,481,000

 
7,143,000

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Acquisition of businesses
(187,000
)
 
(19,000
)
Acquisition of intangible assets
(45,000
)
 

Purchase of fixed assets
(85,000
)
 
(641,000
)
Collection on notes receivable
69,000

 
28,000

Net cash used in investing activities
(248,000
)
 
(632,000
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Repurchase of common stock for tax withholding
(82,000
)
 

Proceeds from warrant exercises
5,000

 

Net cash used in financing activities
(77,000
)
 

 
 
 
 
NET INCREASE IN CASH
5,156,000

 
6,511,000

 
 
 
 
CASH BALANCE
 
 
 
Beginning of the period
23,508,000

 
21,694,000

End of the period
$
28,664,000

 
$
28,205,000

 








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



7




NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)

 
For The Nine Month Period Ended June 30,
 
2018
 
2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
13,000

 
$
11,000

Income taxes
$
1,569,000

 
$
1,004,000

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES
 

 
 

Fixed assets (acquired but not paid)
$
537,000

 
$
665,000

Business acquired:
 
 
 
Identifiable intangible assets acquired
$
767,000

 
$
211,000

Contingent consideration payable
(580,000
)
 
(192,000
)
Cash paid
$
187,000

 
$
19,000

Sale of Gilman branches:
 
 
 
Notes receivable (included in other receivables)
$

 
$
638,000

Disposal of goodwill

 
(305,000
)
Disposal of intangible assets, net

 
(203,000
)
Gain on disposal of Gilman branches
$

 
$
130,000

Reclassification of warrant liability from debt to equity
$
16,791,000

 
$
































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

8



NATIONAL HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION
  
The accompanying condensed consolidated financial statements of the Company, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements as of June 30, 2018 and for the three and nine months ended June 30, 2018 and 2017 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, 2017 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, 2017 for additional disclosures and accounting policies.
 
Certain items in the condensed consolidated statement of operations for the fiscal 2017 period have been reclassified to conform to the presentation in the fiscal 2018 period. Such reclassifications did not have a material impact on the presentation of the overall financial statements.

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. Broker-dealer subsidiaries consist of National Securities Corporation (“National Securities” or “NSC”) and vFinance Investments, Inc. ("vFinance Investments") (collectively, the “Broker-Dealer Subsidiaries”). The Broker-Dealer Subsidiaries conduct a national securities brokerage business through their main offices in New York City, New York, Boca Raton, Florida, and Seattle, Washington. Broker-dealer subsidiaries are introducing brokers and clear all transactions through clearing organizations, on a fully disclosed basis. The Broker-Dealer Subsidiaries are registered with the Securities and Exchange Commission ("SEC") and are members of the Financial Industry Regulatory Authority ("FINRA") and the Securities Investor Protection Corporation.

The Company’s wholly-owned subsidiary, National Asset Management, Inc. ("NAM"), is a federally-registered investment adviser providing asset management advisory services to retail clients for a fee based upon a percentage of assets managed.

The Company’s wholly-owned subsidiaries, National Insurance Corporation ("National Insurance") and Prime Financial Services ("Prime Financial"), provide fixed insurance products to their clients, including life insurance, disability insurance, long term care insurance and fixed annuities.

The Company’s wholly-owned subsidiary, Gilman Ciocia, Inc. ("Gilman"), provides tax preparation and accounting services to individuals and small to midsize companies.

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

On September 9, 2016, a subsidiary of Fortress Biotech, Inc. (“Fortress”), acquired a controlling interest in the Company. See Note 19.

On February 23, 2018, vFinance Investments merged into NSC in accordance to an agreement and plan of merger between the two companies. Assets and liabilities were transferred at carrying value. Operations conducted through vFinance are now conducted through NSC. In March 2018, vFinance filed for withdrawal from registration with FINRA and the SEC as a Broker-dealer and in May 2018, the withdrawals were completed.


9



NOTE 3. RECEIVABLES FROM BROKER-DEALERS AND CLEARING ORGANIZATIONS AND OTHER RECEIVABLES
 
At June 30, 2018 and September 30, 2017, the receivables of $3,181,000 and $2,850,000, respectively, from broker-dealers and clearing organizations represent net amounts due for fees and commissions associated with the Company’s retail brokerage business as well as asset based fee revenues associated with the Company’s Investment advisory business.

Other receivables at June 30, 2018 and September 30, 2017 consist of the following:
 
June 30,
September 30,
 
2018
2017
Trailing fees
$
1,027,000

$
1,156,000

Accounts receivable for tax and accounting services
609,000

698,000

Allowance for doubtful accounts - tax and accounting services
(277,000
)
(390,000
)
Advances to registered representatives
1,085,000

881,000

Allowance for doubtful accounts - advances to registered representatives
(285,000
)
(154,000
)
Investment banking receivable
1,523,000

1,086,000

Advisory fees
478,000

510,000

Notes receivable
609,000

676,000

Other
508,000

717,000

Total other receivables, net
$
5,277,000

$
5,180,000

 

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 loans receivable balance is comprised of unsecured non-interest-bearing and interest-bearing loans (weighted average interest rate of 4%). These loans have various schedules for repayment or forgiveness based on production or retention requirements being met and mature at various dates through 2023. Forgiveness of loans amounted to $474,000 and $520,000 for the nine months ended June 30, 2018 and 2017, 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 loans payable.

The Company provides an allowance for doubtful accounts on the loans based on historical collection experience and continually evaluates the receivables for collectability and possible write-offs where a loss is deemed probable. As of June 30, 2018 and September 30, 2017, no allowance for doubtful accounts was required.
 
Forgivable loan activity for the nine months ended June 30, 2018 is as follows:
Balance, September 30, 2017
$
1,616,000

Additions
468,000

Amortization
(474,000
)
Balance, June 30, 2018
$
1,610,000

 
There were no unamortized loans outstanding at June 30, 2018 and September 30, 2017 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.

10



The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3 - Unobservable inputs which reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

The following tables present the carrying values and estimated fair values at June 30, 2018 and September 30, 2017 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.

 
June 30, 2018
Assets
Carrying Value
Level 1
Level 2
Total Estimated Fair Value
Cash
$
28,664,000

$
28,664,000

$

$
28,664,000

Cash deposits with clearing organizations
336,000

336,000


336,000

Receivables from broker-dealers and clearing organizations
3,181,000


3,181,000

3,181,000

Forgivable loans receivable
1,610,000


1,610,000

1,610,000

Other Receivables, net
5,277,000


5,277,000

5,277,000

 
$
39,068,000

$
29,000,000

$
10,068,000

$
39,068,000

 
 
 
 
 
Liabilities
 
 
 
 
Accrued commissions and payroll payable
$
11,974,000

$

$
11,974,000

$
11,974,000

Accounts payable and accrued expenses (1)
6,703,000


6,703,000

6,703,000

 
$
18,677,000

$

$
18,677,000

$
18,677,000


(1)    Excludes contingent consideration liabilities of $768,000.

 
September 30, 2017
Assets
Carrying Value
Level 1
Level 2
Total Estimated Fair Value
Cash
$
23,508,000

$
23,508,000

$

$
23,508,000

Cash deposits with clearing organizations
1,041,000

1,041,000


1,041,000

Receivables from broker-dealers and clearing organizations
2,850,000


2,850,000

2,850,000

Forgivable loans receivable
1,616,000


1,616,000

1,616,000

Other Receivables, net
5,180,000


5,180,000

5,180,000

 
$
34,195,000

$
24,549,000

$
9,646,000

$
34,195,000

 
 
 
 
 
Liabilities
 
 
 
 
Accrued commissions and payroll payable
$
10,065,000

$

$
10,065,000

$
10,065,000

Accounts payable and accrued expenses (1)
8,404,000


8,404,000

8,404,000

 
$
18,469,000

$

$
18,469,000

$
18,469,000


(1)    Excludes contingent consideration liabilities of $311,000.


11



The following tables present the financial assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and September 30, 2017:

 
June 30, 2018
Assets
Carrying Value
Level 1
Level 2
Level 3
Total Estimated Fair Value
Securities owned:
 
 
 
 
 
Corporate stocks
$
101,000

$
101,000

$

$

$
101,000

Municipal bonds
530,000


530,000


530,000

Restricted stock
1,912,000


1,912,000


1,912,000

Warrants
6,050,000


6,050,000


6,050,000

 
$
8,593,000

$
101,000

$
8,492,000

$

$
8,593,000

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contingent consideration
$
768,000

$

$

$
768,000

$
768,000

Securities sold, but not yet purchased:
 
 
 
 
 
Corporate stocks
18,000

18,000



18,000

Corporate debt
6,000

6,000



6,000

 
$
792,000

$
24,000

$

$
768,000

$
792,000


 
September 30, 2017
Assets
Carrying Value
Level 1
Level 2
Level 3
Total Estimated Fair Value
Securities owned:
 
 
 
 
 
Corporate stocks
$
116,000

$
116,000

$

$

$
116,000

Municipal bonds
1,239,000

1,239,000



1,239,000

Restricted stock
82,000


82,000


82,000

Warrants
5,665,000


5,665,000


5,665,000

 
$
7,102,000

$
1,355,000

$
5,747,000

$

$
7,102,000

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contingent consideration
$
311,000

$

$

$
311,000

$
311,000

Warrants issued
5,597,000


5,597,000


5,597,000

Securities sold, but not yet purchased:
 
 
 
 
 
Municipal bonds
151,000

151,000



151,000

 
$
6,059,000

$
151,000

$
5,597,000

$
311,000

$
6,059,000


Certain positions in common stock and warrants were received as compensation for investment banking services. Restricted common stock and warrants may be freely traded only upon the effectiveness of a registration statement covering them or upon the satisfaction of the requirements of Rule 144, including the requisite holding period. The unrealized (loss)/gain for the change in fair value of such positions for the nine months ended June 30, 2018 and 2017 amounted to approximately $(2,813,000) and $64,000, respectively, which is included in net dealer inventory 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 current market values, the underlying securities market volatility, the terms of the warrants, exercise prices, and risk-free return rate. The market value of the underlying securities’ market value 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.

Debt securities are valued based on recently executed transactions.



12



NOTE 6. FIXED ASSETS
 
Fixed assets as of June 30, 2018 and September 30, 2017 consist of the following: 
 
 
June 30,
2018
 
September 30,
2017
 
Estimated Useful
Lives
Equipment and software
$
2,290,000

 
$
1,742,000

 
5
Furniture and fixtures
421,000

 
382,000

 
5
Leasehold improvements
1,435,000

 
1,400,000

 
Lesser of useful
life or term of
lease
Capital leases (primarily composed of computer equipment)
739,000

 
739,000

 
5
 
4,885,000

 
4,263,000

 
 
Less accumulated depreciation and amortization
(2,353,000
)
 
(1,866,000
)
 
 
Fixed assets – net
$
2,532,000

 
$
2,397,000

 
 
 
Depreciation expense associated with fixed assets for the three months ended June 30, 2018 and 2017 was $158,000 and $91,000, respectively.

Depreciation expense associated with fixed assets for the nine months ended June 30, 2018 and 2017 was $487,000 and $278,000, respectively.


NOTE 7. BUSINESS COMBINATIONS AND CONTINGENT CONSIDERATION
 
Business Combination

In October, November 2017 and March 2018, Gilman acquired certain assets of five tax preparation and accounting businesses that were deemed to be business acquisitions. The consideration for the transactions consisted of cash payments at closing totaling $187,000 and contingent consideration payables in cash having a fair value of $580,000, for which liabilities (included in Accounts payable and accrued expenses) were 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. The liabilities were valued using an income-based approach using unobservable inputs (Level 3) and reflect the Company’s own assumptions. The liabilities will be revalued at each balance sheet date with changes therein recorded in earnings. The fair values of the acquired assets totaling $767,000 were allocated to customer relationships, which are being amortized over seven years. Results of operations of the acquired businesses are included in the accompanying condensed consolidated statements of operations from the respective dates of acquisition and were not material. In addition, based on materiality, pro forma results are not presented.

Contingent Consideration

Set below are changes in the carrying value of contingent consideration for the nine months ended June 30, 2018 related to acquisitions:

Fair value of contingent consideration at September 30, 2017
$
311,000

Fair value of contingent consideration in connection with above acquisitions
580,000

Payments
(141,000
)
Change in fair value
18,000

Fair value of contingent consideration at June 30, 2018
$
768,000









13



NOTE 8. INTANGIBLE ASSETS
 
Intangibles consisted of the following at June 30, 2018 and September 30, 2017

 
June 30, 2018
Intangible asset
Cost
 
Accumulated Amortization
 
Carrying Value
 
Estimated
Useful Life
(years)
Customer relationships
$
7,585,000

 
$
3,336,000

 
$
4,249,000

 
3-10
Software license
45,000

 
7,000

 
38,000

 
3
Gilman brand name
710,000

 

 
710,000

 
Indefinite
 
$
8,340,000

 
$
3,343,000

 
$
4,997,000

 
 

 
September 30, 2017
Intangible asset
Cost
 
Accumulated Amortization
 
Carrying Value
 
Estimated
Useful Life
(years)
Customer relationships
$
6,818,000

 
$
2,685,000

 
$
4,133,000

 
3-10
Gilman brand name
710,000

 

 
710,000

 
Indefinite
 
$
7,528,000

 
$
2,685,000

 
$
4,843,000

 
 

Amortization expense associated with intangible assets for the three months ended June 30, 2018 and 2017 was $229,000 and $197,000, respectively.

Amortization expense associated with intangible assets for the nine months ended June 30, 2018 and 2017 was $658,000 and $593,000, respectively.

The estimated future amortization expense of the finite lived intangible assets for the next five fiscal years and thereafter is as follows:   
Year ending
September 30,
 
Three months ending September 30, 2018
$
229,000

2019
914,000

2020
844,000

2021
833,000

2022
775,000

Thereafter
692,000

Total
$
4,287,000



















14



NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER LIABILITIES

Accounts payable and accrued expenses as of June 30, 2018 and September 30, 2017 consist of the following:
 
June 30,
2018
 
September 30,
2017
Legal
$
1,018,000

 
$
877,000

Audit
258,000

 
176,000

Telecommunications
207,000

 
205,000

Data services
547,000

 
464,000

Regulatory
372,000

 
540,000

Settlements
487,000

 
2,403,000

Contingent consideration payable
768,000

 
311,000

Deferred rent
679,000

 
497,000

Other
3,135,000

 
3,242,000

Total
$
7,471,000

 
$
8,715,000


Other primarily consists of $387,000 for investment banking deal expense accruals, $650,000 for soft dollar accruals and $177,000 for sales tax accrual at June 30, 2018. Other primarily consists of $187,000 for investment banking deal expense accruals, $552,000 for soft dollar accruals, $482,000 for recruiting fee payable and $141,000 for sales tax accrual at September 30, 2017.



NOTE 10. PER SHARE DATA
 
Basic net income (loss) per share of common stock attributable to the Company is computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is computed on the basis of such weighted average number of shares of common stock outstanding plus the dilutive effect of incremental shares of common stock potentially issuable under outstanding options, warrants and unvested restricted stock units utilizing the treasury stock method. A reconciliation of basic and diluted common shares used in the computation of per share data follows: 

 
Three Month Period Ended June 30,
 
Nine Month Period Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic weighted-average shares
12,490,539

 
12,437,916

 
12,461,776

 
12,437,916

Effect of dilutive securities:
 
 
 
 
 
 
 
Options

 

 

 
186

Unvested restricted stock units
272,818

 

 

 
21,732

Warrants
1,136,017

 

 

 

Diluted weighted-average shares
13,899,374

 
12,437,916

 
12,461,776

 
12,459,834


The following potential common share equivalents are not included in the above diluted computation because to do so would be anti-dilutive:  
 
Three Month Period Ended June 30,
 
Nine Month Period Ended June 30,
 
2018
 
2017
 
2018
 
2017
Options
612,000

 
1,206,000

 
616,000

 
1,207,333

Warrants

 
12,459,474

 
12,437,420

 
8,313,502

Restricted stock units

 
312,500

 
213,879

 

Total
612,000

 
13,977,974

 
13,267,299

 
9,520,835






15




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.


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 is effective for the Company beginning October 1, 2018, and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently evaluating the potential impact of this standard on its financial statements which, (1) for investment banking advisory arrangements may change the timing of revenue recognition depending on the number and nature of the performance obligations identified, (2) for underwriting expenses and costs of advisory services and related reimbursement revenue may need to be recognized on a gross basis, and (3) for costs to obtain and fulfill a contract may need to be capitalized, amortized and reviewed regularly for impairment. The Company will adopt Topic 606 in the first quarter of 2019 using the modified retrospective method which consists of applying and recognizing the cumulative effect of Topic 606 at the date of initial application and providing certain additional disclosures. The adoption of ASU 2014-09 is not expected to have a material impact on the Company's revenue.


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 to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for the Company beginning October 1, 2019 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all 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 March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 was effective for the Company beginning October 1, 2017 for both interim and annual reporting periods. The adoption did not have a significant impact on the Company’s financial statements. The Company had historically estimated the number of forfeitures as part of its share-based accounting and will continue to do so under the new guidance. No aspect of the guidance that requires retrospective adoption impacted the Company.



16






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 is effective for the Company beginning October 1, 2018 for both interim and annual periods. Early adoption is permitted. The ASU should be applied retrospectively to all periods presented. The Company does not anticipate that the adoption of ASU 2016-15 will have a material impact on its financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash”. ASU 2016-18 reduces the diversity in the presentation of restricted cash and restricted cash equivalents in the statement. The statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The standard is effective for the Company beginning October 1, 2018 for both interim and annual periods. Early adoption is permitted. The ASU should be applied retrospectively to all periods presented. The Company expects that it will present restricted cash as a component of total cash and cash equivalents on the statement of cash flow upon adoption.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. 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 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 is effective for the Company beginning October 1, 2018 for both interim and annual periods. The Company is currently assessing the impact that the adoption of ASU 2017-01 will have on its financial statements.

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 is effective for the Company beginning October 1, 2018 for both interim and annual periods. Early adoption is permitted. The Company is currently assessing the impact that the adoption of ASU 2017-09 will have on its financial statements.

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the application of ASC 740 in the reporting period in which the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Company adopted SAB 118 in the first quarter of the fiscal year ending September 30, 2018. Additional information regarding the accounting for income taxes for the Tax Reform Act is contained in Note 17, Income Taxes.



17



NOTE 13. COMMITMENTS AND CONTINGENCIES
 
Leases
 
The Company leases office space in various states expiring at different dates through October 2026, and as of June 30, 2018, is committed under operating leases for future minimum lease payments as follows:  
Fiscal Year
Ending
Lease
Payments
 
Less,
Sublease
Income
 
Net
Three months ending September 30, 2018
$
883,000

 
$
90,000

 
$
793,000

2019
2,904,000

 
30,000

 
2,874,000

2020
2,754,000

 

 
2,754,000

2021
2,321,000

 

 
2,321,000

2022
1,527,000

 

 
1,527,000

Thereafter
4,609,000

 

 
4,609,000

 
$
14,998,000

 
$
120,000

 
$
14,878,000

 
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 June 30, 2018 and 2017 was $1,029,000 and $929,000, respectively. Rental expense under all operating leases, excluding sublease income, for the nine months ended June 30, 2018 and 2017 was $3,121,000 and $2,854,000, respectively. Sublease income under all operating subleases for the three months ended June 30, 2018 and 2017 was approximately $314,000 and $2,000, respectively. Sublease income under all operating subleases for the nine months ended June 30, 2018 and 2017 was approximately $404,000 and $77,000, respectively.

As of June 30, 2018, the Company and its subsidiaries had two outstanding letters of credit, which have been issued in the maximum amount of $1,352,000 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.

Liabilities for potential losses from complaints, legal actions, government investigations and proceedings are established where the Company 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 June 30, 2018 and September 30, 2017, the Company accrued approximately $487,000 and $2,403,000, 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 June 30, 2018 and 2017 were $(85,000) and $2,326,000, respectively, and during the nine months ended June 30, 2018 and 2017, the Company charged $576,000 and $3,322,000, respectively, to operations, which is included in other administrative expenses. The Company has included in "Professional fees" litigation and FINRA related expenses of $364,000 and $430,000 for the three months ended June 30, 2018 and 2017, respectively and $706,000 and $1,229,000 for the nine months ended June 30, 2018 and 2017, respectively.



18



NOTE 14. NET CAPITAL REQUIREMENTS
 
National Securities is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1) (the "Rule"), which, among other things, requires the maintenance of minimum net capital. At June 30, 2018, National Securities had net capital of $11,299,236 which was $10,299,236 in excess of its required net capital of $1,000,000. National Securities is exempt from the provisions of the SEC's 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 National Securities are restricted by the regulations of the SEC, and other regulatory agencies. These regulatory restrictions may limit the amounts that a subsidiary may dividend or advance to the Company. 
 
NOTE 15. STOCKHOLDERS' EQUITY

Stock Options
 
Information with respect to stock option activity during the nine months ended June 30, 2018 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, 2017
1,206,000

 
$
6.54

 
$
1.21

 
2.29
 
$

Expired
(594,000
)
 
$
6.85

 
$
0.83

 

 


Outstanding at June 30, 2018
612,000

 
$
6.23

 
$
1.59

 
3.52
 
$

Vested and exercisable at June 30, 2018
612,000

 
$
6.23

 
$
1.59

 
3.52
 
$

 
As of September 30, 2016, all compensation expense associated with the grants of stock options had been recognized.

Warrants

The following table summarizes information about warrant activity during the nine months ended June 30, 2018:
 
Warrants
 
Weighted
Average
Exercise Price Per
Share
 
Weighted Average Remaining Contractual Term
Outstanding at September 30, 2017
12,439,387

 
$
3.25

 
4.30
Exercised
(1,489
)
 
$
3.25

 
 
Forfeited or expired
(1,471
)
 
$
5.00

 
 
Outstanding and exercisable at June 30, 2018
12,436,427

 
$
3.25

 
3.56

















19



Restricted Stock Units

A summary of the Company's non-vested restricted stock units for the nine months ended June 30, 2018 is as follows:

 
Shares
 
Weighted
Average
Grant-
Date Fair
Value
Per Share
Non-vested restricted stock units at September 30, 2017
1,250,000

 
$
2.44

Granted
1,264,382

 
4.07

Vested
(78,125
)
 
2.71

Forfeited
(45,000
)
 
2.55

Non-vested restricted stock units at June 30, 2018
2,391,257

 
$
3.29


In February 2018, the Company granted 363,558 restricted stock units ("RSU") to the board of directors of the Company and 52,966 restricted stock units to employees of the Company. The fair value of the RSU awards issued in February 2018 of $1,966,000 was estimated on the grant date using the Company’s stock price as of the grant date. The RSU awards vest upon the passage of time. Compensation with respect to RSU awards is expensed on a straight-line basis over the vesting period.

In April 2018, the Company granted 847,858 RSUs to certain employees of the Company. RSUs vest based on service and certain performance and market conditions. RSUs 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. The fair value of the RSU awards issued in April 2018 was $3,184,000. Compensation with respect to RSU awards is expensed on a straight-line basis over the vesting period.

For the three and nine months ended June 30, 2018, the Company recognized compensation expense of $929,000 and $1,605,000, respectively, related to RSUs. For the three and nine months ended June 30, 2017, the Company recognized compensation expense of $129,000 and $312,000, respectively, related to RSUs. At June 30, 2018 and 2017, unrecognized compensation with respect to RSUs amounted to $5,881,000 and 1,150,000, respectively, assuming all performance-based compensation will vest.


NOTE 16.  SHARE REPURCHASE
 
In August 2015, the Company’s Board of Directors authorized the repurchase of up to $2 million of the Company’s common stock. Share repurchases, if any, will be made using a variety of methods, which may include open market purchases, privately negotiated transactions or block trades, or any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The Company's Board did not stipulate an expiration date for this repurchase and the purchase decisions are at the discretion of the Company's management. During the nine months ended June 30, 2018 and 2017, the Company did not repurchase any shares.


NOTE 17. 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 and nine month period ended June 30, 2018 and 2017 is 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 and nine month period ended June 30, 2018 and 2017 differs from the federal statutory income tax rate principally due to non-deductible expenses, state and local income taxes and non-taxable changes in the fair value of warrant liability.



20



During the nine month period ended June 30, 2018, the Company estimated its annual effective rate to reflect a change in the federal statutory rate from 34% to 21%, resulting from legislation enacted on December 22, 2017. The rate change is administered effective at the beginning of the Company's fiscal year, using a blended rate for the annual period of 24.28%. Additionally, the Company recognized a tax expense of approximately $2,300,000 during the nine month period ended June 30, 2018 to adjust the Company's net deferred tax balance to reflect the new corporate tax rate. The accounting for the effects of the rate change on deferred tax balances is complete and no provisional amounts were recorded for this item.
 
At June 30, 2018, 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 18. 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 the Broker-Dealer Subsidiaries, NAM, National Insurance, Prime Financial and GC. The tax and accounting services segment includes tax preparation and accounting services provided by Gilman.
 
The Corporate pre-tax income (loss) consists of certain items that have not been allocated to reportable segments. 
 
Segment information for the three and nine months ended June 30, 2018 and 2017 is as follows: 
 
Brokerage and
Advisory
Services
 
Tax and
Accounting
Services
 
 
Corporate
 
Total
Three Months Ended June 30,
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
Revenues
$
53,792,000

 
$
2,445,000

 
$

 
$
56,237,000

Pre-tax income (loss)
1,912,000

 
441,000

 
(940,000
)
(a)
1,413,000

Assets
52,928,000

 
4,741,000

 
10,233,000

(b)
67,902,000

Depreciation and amortization
182,000

 
71,000

 
134,000

 
387,000

Interest
25,000

 

 

 
25,000

Capital expenditures
511,000

 

 
61,000

 
572,000

2017
 
 
 
 
 
 
 
Revenues
$
45,520,000

 
$
2,527,000

 
$

 
$
48,047,000

Pre-tax income
820,000

 
596,000

 
(1,478,000
)
(a)
(62,000
)
Assets
46,802,000

 
3,536,000

 
14,282,000

(b)
64,620,000

Depreciation and amortization
155,000

 
44,000

 
89,000

 
288,000

Interest
5,000

 

 

 
5,000

Capital expenditures
30,000

 
7,000

 
915,000

 
952,000

 

21



 
Brokerage and
Advisory
Services
 
Tax and
Accounting
Services
 
 
Corporate
 
Total
Nine Months Ended June 30,
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
Revenues
$
159,827,000

 
$
6,835,000

 
$

 
$
166,662,000

Pre-tax income (loss)
7,154,000

 
1,389,000

 
(13,571,000
)
(a)
(5,028,000
)
Assets
52,928,000

 
4,741,000

 
10,233,000

(b)
67,902,000

Depreciation and amortization
549,000

 
192,000

 
404,000

 
1,145,000

Interest
30,000

 

 

 
30,000

Capital expenditures
555,000

 
6,000

 
61,000

 
622,000

2017
 
 
 
 
 
 
 
Revenues
$
137,973,000

 
$
6,527,000

 
$

 
$
144,500,000

Pre-tax income
7,394,000

 
983,000

 
2,909,000

(c)
11,286,000

Assets
46,802,000

 
3,536,000

 
14,282,000

(b)
64,620,000

Depreciation and amortization
468,000

 
137,000

 
266,000

 
871,000

Interest
13,000

 

 

 
13,000

Capital expenditures
57,000

 
71,000

 
1,178,000

 
1,306,000


(a)
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.
(b)
Consists principally of deferred tax assets, cash, prepaid and fixed asset balances held at Corporate.
(c)
Consists of gain on the change in fair value of warrant liability offset in part by executive salaries and other expenses not allocated to reportable segments by management.

NOTE 19. ACQUISITION OF CONTROLLING INTEREST IN THE COMPANY AND WARRANT LIABILITY

On September 12, 2016, FBIO Acquisition, Inc. (“FBIO Acquisition”), a wholly-owned subsidiary of Fortress, completed a tender offer (the “Offer”) for all outstanding shares of the Company at a price of $3.25 per share, net to the seller in cash (less any required withholding taxes and without interest) (the “Offer Price”), pursuant to the terms of an Agreement and Plan of Merger dated as of April 27, 2016 (as amended, the “Merger Agreement”) among the Company, Fortress and FBIO Acquisition. The Offer expired on September 9, 2016, and a total of 7,037,482 shares were validly tendered and not withdrawn (including shares delivered through notices of guaranteed delivery), representing approximately 56.6% of the Company's issued and outstanding shares of common stock immediately following the completion of the Offer (in each case, without giving effect to the issuance or exercise of the Dividend Warrants). On September 12, 2016, FBIO Acquisition accepted for payment all shares that were validly tendered and not withdrawn prior to the expiration time of the Offer and delivered payment for such shares.

Dividend Warrants

In accordance with the Merger Agreement, since less than 80% of the Company's issued and outstanding shares of common stock were tendered, the Company remains a publicly-traded company and stockholders post-tender offer received from the Company a five year warrant per held share to purchase an additional share of the Company's common stock at $3.25 as a dividend to all holders of the Company's common stock.

As the Company did not have the ability to settle the warrants with unregistered shares and maintenance of an effective registration statement (which did not exist at September 30, 2016) was considered outside of the Company’s control, net cash settlement of the warrants was assumed. Accordingly, as the Company was obligated to issue the warrants at September 30, 2016, and subsequently issued the warrants in January 2017, the fair value of the 12,437,916 warrants was classified as a liability in the consolidated statement of financial condition at September 30, 2017. This liability was subject to re-measurement at each balance sheet date until the warrants were exercised or expired, and any change in fair value was recognized as “change in fair value of warrant liability” in the consolidated statements of operations. As the warrants were registered and the Company maintained an effective registration statement at June 30, 2018 and September 30, 2017, fair value of the warrants was based on the market price. The (loss)/gain for the change in fair value of the warrants for the three months ended June 30, 2018 and 2017 amounted to $0 and $(642,000), respectively. The (loss)/gain for the change in fair value of the warrants for the nine months ended June 30, 2018 and 2017 amounted to $(11,194,000) and $5,223,000, respectively.


22



Warrant Liability Reclassification

On March 15, 2018, the Company, Computershare Inc., a Delaware corporation (“Computershare”), and its wholly-owned subsidiary, Computershare Trust Company, N.A., a federally chartered trust company (and together with Computershare, the “Warrant Agent”) agreed to amend and restate the terms of the form of warrant agreement dated December 13, 2016 (the “Original Agreement”).

The Amended and Restated Warrant Agreement (the “Amended Agreement”) explicitly provides that the Company shall not be required to pay cash if it cannot issue registered shares of common stock upon exercise of a warrant.

The Company is required to reassess its classification of each contract as of each reporting date. Reclassification of a contract classified as an asset or a liability is required if the contract begins to meet all the criteria for equity classification. If reclassification is required, the Company reclassifies the instrument as of the date of the event or change in circumstance that caused the reclassification at its then-current fair value. If a contract is reclassified from an asset or a liability to equity, gains and losses during the period the contract was classified as an asset or a liability are not reversed, and the adjustment to the contract’s current fair value is recognized in earnings before reclassification.

The Original Agreement required the issuance of registered shares upon exercise and since it did not expressly preclude an implied right to cash settlement, the agreement was accounted for as a derivative liability and the Company classified the derivative warrant liability on the consolidated statement of financial conditions as a liability.

Since the Amended Agreement expressly precludes cash settlement, the warrants meet the criteria for equity classification. Accordingly, the Company recorded the change in fair value of the warrants in earnings through March 15, 2018 before reclassification from liability to equity. The reclassification resulted in a credit to additional paid-in-capital of $16,791,000 during the nine months ended June 30, 2018.

NOTE 20. RELATED PARTY TRANSACTIONS

During the three months ended June 30, 2018 and 2017, Investment Banking revenues include approximately $0 and $3,679,000, respectively, of fees related to placement of securities for Fortress and subsidiaries of Fortress.

During the nine months ended June 30, 2018 and 2017, Investment Banking revenues include approximately $4,931,000 and $12,260,000, respectively, of fees related to placement of securities for Fortress and subsidiaries of Fortress.

As of June 30, 2018 and September 30, 2017, the value of warrants received from Fortress and subsidiaries of Fortress included in Securities Owned was $1,918,000 and $5,117,000, respectively.


NOTE 21. VARIABLE INTEREST ENTITIES

The Company has entered into agreements to provide investment banking and advisory services to numerous entities that are
variable interest entities ("VIEs") under the accounting guidance. 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 attributable to such arrangements for the three months ended June 30, 2018 and 2017 were $10,777,000 and $6,071,000, respectively. Fees attributable to such arrangements for the nine months ended June 30, 2018 and 2017 were $19,067,000 and $14,033,000, respectively.

23



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, 2017. Any forward-looking statements contained in or incorporated into 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 Subsidiaries, National Securities and vFinance Investments. 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 Gilman, which provides tax preparation services to individuals, predominantly in the middle and upper income tax brackets and accounting services to small and midsize companies.

Each of our Broker-Dealer Subsidiaries is subject to regulation by, among others, the SEC, FINRA and the Municipal Securities Rulemaking Board ("MSRB"), and are members of the Securities Investor Protection Corporation ("SIPC"). In addition, each of the Broker-Dealer Subsidiaries 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. Gilman is also subject to regulation by, among others, the Internal Revenue Service.

On February 23, 2018, vFinance Investments merged into National Securities in accordance to an agreement and plan of merger between the two companies. Assets and liabilities were transferred at carrying value. Operations conducted through vFinance Investments are now conducted through National Securities. In March 2018, vFinance Investments filed for withdrawal from registration with FINRA and the SEC as a Broker-dealer and in May 2018, the withdrawals were completed.

As of June 30, 2018, we had approximately 1,063 associated personnel serving retail and institutional customers, trading and investment banking clients. In addition to our 28 Company offices located in New York, New Jersey, Florida, Texas and Washington, we had approximately 103 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 June 30, 2018 Compared to Three Months Ended June 30, 2017
 
Summary
 
Our third quarter ended June 30, 2018 resulted in 17% increase in revenues and 15% increase in operating expenses. The increase in revenues is primarily related to higher revenues in investment banking, commissions and investment advisory. Net dealer inventory gains (losses) includes unrealized losses for the change in fair value of the warrants received from investment banking deals.
  




24



Revenues

Total revenues increased $8,190,000, or 17%, to $56,237,000, in the current quarter as compared to $48,047,000 recorded in the comparative period last year.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
Commissions
$
28,397,000

 
$
24,881,000

 
$
3,516,000

 
14
 %
Net dealer inventory gains (losses)
(1,263,000
)
 
1,767,000

 
(3,030,000
)
 
(171
)
Investment banking
18,733,000

 
12,645,000

 
6,088,000

 
48

Investment advisory
5,281,000

 
3,604,000

 
1,677,000

 
47

Interest and dividends
772,000

 
675,000

 
97,000

 
14

Transaction fees and clearing services
1,605,000

 
1,649,000

 
(44,000
)
 
(3
)
Tax preparation and accounting
2,445,000

 
2,527,000

 
(82,000
)
 
(3
)
Other
267,000

 
299,000

 
(32,000
)
 
(11
)
Total Revenues
$
56,237,000

 
$
48,047,000

 
$
8,190,000

 
17
 %

Commissions increased $3,516,000, or 14%, to $28,397,000 in the current quarter as compared to $24,881,000 recorded in the comparative period last year. The increase in retail commissions this quarter is due to recent hires and continuing strong equity markets;

Net dealer inventory gains (losses), decreased $3,030,000, or 171%, to $(1,263,000) in the current quarter as compared to $1,767,000 recorded in the comparative period last year. The decrease is primarily due to unrealized losses for the change in fair value of the warrants received from investment banking deals. In addition, we have reduced the number of trading silos within the Company to focus on servicing our retail and institutional clients. We expect this to result in improved margins within our trading business;

Investment banking fees increased $6,088,000, or 48%, to $18,733,000 in the current quarter as compared to $12,645,000 recorded in the comparative period last year. The increase is related to high investor demand for and quality execution of product offerings from a diverse group of issuer clients;
 
Investment advisory fees increased $1,677,000, or 47%, to $5,281,000 in the current quarter as compared to $3,604,000 recorded in the comparative period last year. The increase is related to the successful focus on growing assets within our asset management business and the continuing strength in the equity markets;
 
Interest and dividend income increased $97,000, or 14%, to $772,000 in the current quarter as compared to $675,000 recorded in the comparative period last year;
 
Transaction fees and clearing services decreased $44,000, or 3%, to $1,605,000 in the current quarter as compared to $1,649,000 recorded in the comparative period last year;
 
Tax preparation and accounting fees decreased $82,000, or 3%, to $2,445,000 in the current quarter as compared to $2,527,000 recorded in the comparative period last year. This decrease is due to a higher portion of tax return revenue recognized in the fiscal second quarter as well as reduced revenue due to the elimination of underperforming offices;
 
Other revenue decreased $32,000, or 11%, to $267,000 in the current quarter as compared to $299,000 recorded in the comparative period last year.
 










25




Operating Expenses
 
Total operating expenses increased $7,206,000, or 15%, to $54,678,000 in the current quarter as compared to $47,472,000 recorded in the comparative period last year.
 
Three Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
Commissions, compensation and fees
$
48,555,000

 
$
39,963,000

 
$
8,592,000

 
21
 %
Clearing fees
451,000

 
470,000

 
(19,000
)
 
(4
)
Communications
857,000

 
690,000

 
167,000

 
24

Occupancy
738,000

 
972,000

 
(234,000
)
 
(24
)
License and registration
861,000

 
391,000

 
470,000

 
120

Professional fees
1,077,000

 
1,083,000

 
(6,000
)
 
(1
)
Interest
25,000

 
5,000

 
20,000

 
400

Depreciation and amortization
387,000

 
288,000

 
99,000

 
34

Other administrative expenses
1,727,000

 
3,610,000

 
(1,883,000
)
 
(52
)
Total Operating Expenses
$
54,678,000

 
$
47,472,000

 
$
7,206,000

 
15
 %
 
Commissions, compensation, and fees increased $8,592,000, or 21%, to $48,555,000 in the current quarter as compared to $39,963,000 recorded in the comparative period last year. Commissions, compensation, and fees include expenses based on commission revenue earned, net dealer inventory gains and investment banking revenues, as well as compensation to our non-broker employees. The increases in investment banking and commissions revenue were primarily responsible for the increase in this expense category. In addition, new strategic hires in technology and enterprise risk management, increases in benefits expenses and increases in stock based compensation for stock grants also contributed to the increase;
 
Clearing fees decreased $19,000, or 4%, to $451,000 in the current quarter as compared to $470,000 recorded in the comparative period last year;
 
Communications expenses increased $167,000, or 24%, to $857,000 in the current quarter as compared to $690,000 recorded in the comparative period last year. This increase is attributable to costs related to a new customer relationship management system;

Occupancy expenses decreased $234,000, or 24%, to $738,000 in the current quarter as compared to $972,000 recorded in the comparative period last year. The decrease is primarily due to the sublease income recorded in the current quarter;
 
License and registration expense increased by $470,000, or 120%, to $861,000 in the current quarter as compared to $391,000 recorded in the comparative period last year. This increase is attributable to new licenses for software applications as the Company continues to invest in and implement technology enhancements;
 
Professional fees decreased by $6,000, or 1% to $1,077,000 in the current quarter as compared to $1,083,000 recorded in the comparative period last year;
 
Interest expense increased by $20,000, to $25,000 in the current quarter as compared to $5,000 recorded in the comparative period last year;
 
Depreciation and amortization expenses increased $99,000, or 34% to $387,000 in the current quarter as compared to $288,000 recorded in the comparative period last year. This increase is consistent with increases in leasehold improvements and amortization of development costs associated with a new system brought on-line in the fourth quarter of 2017;
 
Other administrative expenses decreased $1,883,000, or 52%, to $1,727,000 in the current quarter as compared to $3,610,000 recorded in the comparative period last year. This decrease is the result of a more normalized spending in the current quarter. The prior year period included higher provision for potential arbitration settlements and an increase in certain insurance costs.





26




Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
 
Summary
 
Our results for the nine months ended June 30, 2018 produced a 15% increase in revenues and 16% increase in operating expenses. Investment banking revenues increased significantly with continued successful capital raises in conjunction with favorable market conditions. These revenues coupled with a 16% increase in commissions accounted for the majority of the increase.

The majority of the increase in operating expenses is related to the commission expense generated by the overall increase in revenues. In addition, investments in technology and risk management have contributed to the operating expense growth.

Revenues

Total revenues increased $22,162,000, or 15%, to $166,662,000 in the nine months ended June 30, 2018 as compared to $144,500,000 recorded in the comparative period last year.
 
Nine Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
Commissions
$
85,422,000

 
$
73,380,000

 
$
12,042,000

 
16
 %
Net dealer inventory gains
2,402,000

 
7,735,000

 
(5,333,000
)
 
(69
)
Investment banking
47,812,000

 
37,253,000

 
10,559,000

 
28

Investment advisory
15,811,000

 
10,690,000

 
5,121,000

 
48

Interest and dividends
2,003,000

 
2,065,000

 
(62,000
)
 
(3
)
Transaction fees and clearing services
5,680,000

 
5,834,000

 
(154,000
)
 
(3
)
Tax preparation and accounting
6,835,000

 
6,527,000

 
308,000

 
5

Other
697,000

 
1,016,000

 
(319,000
)
 
(31
)
Total Revenues
$
166,662,000

 
$
144,500,000

 
$
22,162,000

 
15
 %
 
Commissions revenue increased $12,042,000, or 16%, to $85,422,000 in the nine months ended June 30, 2018 as compared to $73,380,000 recorded in the comparative period last year. Commissions increased primarily due to favorable markets, focus on a diversified product base and quality new hires during the current year;
 
Net dealer inventory gains decreased $5,333,000, or 69%, to $2,402,000 in the nine months ended June 30, 2018 as compared to $7,735,000 recorded in the comparative period last year. The decrease is primarily due to the unrealized losses for the change in fair value of the warrants received from investment banking deals. In addition, the Company has strategically decided to reduce the breadth of our trading model to focus on specifically servicing our retail and institutional clients;

Investment banking fees increased $10,559,000, or 28%, to $47,812,000 in the nine months ended June 30, 2018 as compared to $37,253,000 recorded in the comparative period last year. The increase is related to continuing high demand and quality execution of product offerings from a diverse group of issuers;
 
Investment advisory fees increased $5,121,000, or 48%, to $15,811,000 in the nine months ended June 30, 2018 as compared to $10,690,000 recorded in the comparative period last year. This increase is due to increasing levels of assets under management as we strategically invest in this business, and continuing strength in equity markets;
 
Interest and dividends decreased $62,000, or 3%, to $2,003,000 in the nine months ended June 30, 2018 as compared to $2,065,000 recorded in the comparative period last year. This decrease is primarily attributable to lower customer margin and free cash balances;
 
Transaction fees and clearing services decreased $154,000, or 3%, to $5,680,000 in the nine months ended June 30, 2018 as compared to $5,834,000 recorded in the comparative period last year;

Tax preparation and accounting fees increased $308,000, or 5%, to $6,835,000 in the nine months ended June 30, 2018 as compared to $6,527,000 recorded in the comparative period last year. This is a net increase attributable to revenue generated by new business acquisitions offset by the elimination of unprofitable offices;

27




Other revenue decreased $319,000, or 31%, to $697,000 in the nine months ended June 30, 2018 from $1,016,000 recorded in the comparative period last year. This decrease is due to the decline in client participation in our fully paid stock lending program.
 
Operating Expenses
 
Total operating expenses increased $22,009,000, or 16%, to $160,586,000 in the nine months ended June 30, 2018 as compared to $138,577,000 recorded in the comparative period last year. The increase in total operating expenses is primarily due to the increase in commissions, investment banking and investment advisory revenues, which has a direct effect on compensation, variable fees and clearing costs. The Company also continues to invest in infrastructure, notably technology, enterprise risk management and revenue development resources.
 
Nine Months Ended June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
Commissions, compensation and fees
$
141,462,000

 
$
118,983,000

 
$
22,479,000

 
19
 %
Clearing fees
1,772,000

 
1,826,000

 
(54,000
)
 
(3
)
Communications
2,429,000

 
2,094,000

 
335,000

 
16

Occupancy
2,834,000

 
2,916,000

 
(82,000
)
 
(3
)
License and registration
2,028,000

 
1,223,000

 
805,000

 
66

Professional fees
3,047,000

 
3,336,000

 
(289,000
)
 
(9
)
Interest
30,000

 
13,000

 
17,000

 
131

Depreciation and amortization
1,145,000

 
871,000

 
274,000

 
31

Other administrative expenses
5,839,000

 
7,315,000

 
(1,476,000
)