National Securities Research

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1 National Securities Research Established 1947, Member FINRA/SIPC ` Saratoga Investment Corp. August 29, 2017 NEUTRAL (SAR, $21.26) Lower Middle Market Focused BDC with Ample Dry Powder to Drive Strong Portfolio Growth with Minimal Equity Issuance, Significant Non- Sponsor and Second Lien Composition Keep Us On the Sidelines For Now - Initiating With a NEUTRAL Rating And $23 Price Target. Christopher R. Testa ctesta@nationalsecurities.com Investment Conclusion. We are initiating coverage of Saratoga Investment Corp. (SAR) with a NEUTRAL rating and $23 price target. Saratoga is a lower middle market (LMM) focused company, making loans to companies with EBITDA between $2 - $50 million. The company commenced operations in March 2007 but was known as GSC Investment Corp. and was externally managed by GSCP, LP. In July 2010 the company recapitalized and Saratoga Investment Advisors became the new external manager of the company. SAR did not begin to pay regular cash dividends until fiscal 2Q15 and since then it has increased its quarterly dividend every quarter. The company recently had a couple non-accruals pop up totaling $20.1 million or 5.9% of the portfolio at amortized cost. We expect portfolio growth to offset the pressure on earnings that the non-accruals would otherwise cause. However, we note that we do model NAV to decrease the next fiscal quarter before stabilizing. Ample dry powder with increased first tier sponsor relationships should drive good volume for Saratoga, helping NII to overcome the anticipated earnings drag from non-accruals. Additionally, we expect the company to have to issue minimal equity on a flow basis through its ATM program given the reasonable regulatory leverage on the balance sheet. * Adjusted net investment income = net investment income + losses on debt extinguishment + interest on 2020 notes during call period + changes in accrued capital gains incentive fee expense/reversal Source: S&P Capital IQ, National Securities Corporation Estimates Please see pages for Important Disclosures 1

2 Saratoga s portfolio composition will likely mute the NAV multiple shares trade at. Despite being a generally good lender, especially since Saratoga took over external management in 2010, we note that the composition of the portfolio will likely weigh on the multiple that SAR trades at. Saratoga is a LMM lender and roughly half of the portfolio is non-sponsor, even if no further non-accruals were to spring up, we expect as the credit cycle continues to age that this should warrant more of a discounted valuation. Non-sponsor, LMM companies already have low recovery prospects should an investment go sour and SAR has a second lien portfolio that was 30.8% of the portfolio by amortized cost of 5/31/17. All-in effective yield and NIM (net investment margin) should be under pressure in fiscal 2018 before improving modestly in fiscal 2019, as we see it. We expect non-accruals and general broader market competition will likely weigh on all-in effective yields and thus NIM in fiscal 2018, before we expect non-accruals to be less of a drag as the portfolio grows and leads to improvement in yields and NIM in fiscal All-in effective yield and NIM were 11.98% and 8.40%, respectively, in fiscal 2017 and we project that they will be 10.94% and 7.62%, respectively, for fiscal For fiscal 2019 we model all-in effective yield and NIM to be 11.10% and 7.81%, respectively. SAR s portfolio should grow through fiscal 2018 and As of 5/31/17, SAR s portfolio at fair value was $329.7 million and we model this to increase to $357.3 million at the end of fiscal 2018 and $387.7 million at the end of fiscal The company finished 5/31/17 with regulatory D/E (excluding SBA debentures) of 0.78x and 1.83x including the SBA debt. We expect that the company will continue to issue equity through its ATM program on a flow basis and draw upon its revolver and some additional SBA debentures to generate the portfolio growth we model. Further dividend increases are likely although we do not expect step-ups each quarter. Saratoga has been increasing its quarterly dividend each quarter since fiscal 2Q15. We anticipate that the quarterly dividend will be increased Q/Q to $0.49/share in fiscal 4Q18 from our estimate of $0.48/share in fiscal 3Q18. We then expect the quarterly dividend to be increased to $0.51/share in fiscal 3Q19. We model the company to pay out 93% of adjusted NII in fiscal 2018 and 96% in fiscal 2019, from 99% in fiscal Currently, shares are at a 6% discount to NAV compared the average 5% discount in the BDC space. We think Saratoga should trade largely in-line with peers as it has a decent origination platform and asset quality with the potential to grow dividends. However, we note that the company s portfolio will likely be discounted, especially if and when the credit cycle shows more signs of turning, given the large second lien composition and non-sponsor investments. Additionally, the lack of private AUM takes away from the potential to co-invest, win deals courtesy of providing certainty of closing, and increases concentration risk. August 29,

3 Company Description Saratoga Investment Corp. (SAR) is a Business Development Company with headquarters in New York, NY. The company originates both sponsor and non-sponsor loans across the capital stack. Although the majority of the portfolio is in first lien loans, the company had nearly 31% of the portfolio at amortized cost in second lien loans as of 5/31/17. The company is managed by Christian Oberbeck, CEO, Michael Grisius, CIO, and Henri Steenkamp, CFO. Mr. Oberbeck was a founder of Saratoga and managing director since 1995 and became chairman and CEO of SAR in Prior to Saratoga, Mr. Oberbeck was at Castle Harlan Young & Company as a managing director and was in corporate finance at Blyth, Eastman, Dillon, and Company. Mr. Grisius has been CIO of SAR since February of 2013 after joining the firm in Prior to SAR Mr. Grisisus worked at J.P. Morgan Chase and was a managing director at Allied Capital Corp. since 1992 where he had several roles including co-head of mezzanine finance. Mr. Steenkamp has been CFO of Saratoga for three years and before that he was CFO of MF Global since April of Exhibit 1. Investment Portfolio at Fair Value as of 5/31/17 Source: Company Reports SAR s portfolio had a fair value of $329.7 million as of 5/31/17 with 12.7% of the portfolio at fair value in business services, 11.0% in healthcare & pharmaceuticals, 7.2% in hightech, and 7.1% in chemicals and plastics. SAR had only 1.1% of the portfolio by fair value in oil and gas as of 5/31/17. SAR is externally managed by its investment advisor and pays both a base fee and incentive fee. The base fee is 1.75% of gross assets less cash in arrears. The incentive fee is paid only if SAR passes a designated hurdle rate of 7.50%. Essentially, SAR s NII less the incentive fee must post a return on prior period NAV greater than 7.50% before any fee is paid. If this return exceeds 9.376%, the investment advisor earns an even greater fee and will get 20% of the difference between the pre-incentive fee NII and the 7.5% return plus 20% of the difference between the pre-incentive NII and the 9.376% upper hurdle. The incentive fee hurdle compares favorably with peers although we note given the LMM, non-sponsor, and sizable second lien composition the hurdle rates are more in-line with peers on a risk-adjusted basis. Additionally, the 1.75% base fee is inline with peers of a similar size, although given Saratoga doesn t have private funds to co- August 29,

4 invest we think the likelihood of this being lowered in the future is lower to other similarly sized public peers with private funds on their respective platforms. WE ARE INITIATING COVERAGE WITH A NEUTRAL RATING AND $23 PRICE TARGET In order to arrive at our target price we utilize a variant thesis, expected value analysis of our base case plus a bull case and bear case. While the valuation is heavily weighted towards the base case (80%) we assign 10% weights to the upside and downside scenarios in order to capture the full spectrum of possibilities that the company may encounter over the next couple of years. We prefer to value SAR and BDCs in general on a NII basis as opposed to NAV basis because fair value marks that flow into equity under GAAP are difficult to forecast, especially with private investments, and do not necessarily reflect the true fundamentals of the company. Exhibit 2. Expected Value Analysis Source: National Securities Corporation Estimates The above table represents our assumptions which drive our valuation. For example, in our base case for fiscal 2019, we get a result of adjusted NII/share of $2.09 if investments end the year at $387.7 million and yield is 11.10%, the cost of funds is 4.91%, the economic return is 11.0%, cost/fv is 102.2%, and total distributions are $2.01/share. We do this for both years and for three scenarios. Based upon each scenario s performance it is assigned a multiple and discounted back at our calculation for the weighted average cost of capital (WACC) and then multiplied by the probability to arrive at our expected value. The sum of the expected values equals our price target. Our $23 price target implies an estimated fiscal 2019 P/ NII of 11.0x, dividend yield of 8.3%, and P/NAV of 1.05x compared to the BDC sector averages of 9.2x, 9.5%, and 0.95x, respectively. The economic return is calculated by taking year-end NAV minus the beginning of the year NAV/share and adding distributions divided by the beginning of the year NAV/share. August 29,

5 SAR S PORTFOLIO IS 85% FLOATING RATE AND 56% FIRST LIEN SENIOR SECURED LOANS SAR s second lien portfolio composition at cost has remained relatively stable the past six quarters, averaging 31.0% per quarter. We model the portfolio to increase more into first lien as we expect non-accruals that have picked up the past couple quarters will likely induce management to move up the capital stack in conjunction with a continually aging credit cycle. Exhibit 3. Portfolio Mix Source: Company Reports, National Securities Corporation While we value BDCs on a NII basis, it is significant to note that fair value marks 1) impact GAAP NAV, which influences regulatory capital levels and 2) if truly reflective of portfolio performance, give an indication to potential losses the BDC may experience. SAR is focused on generating current income that will be distributed to shareholders although it still realizes gains and losses on investments and the unrealized gains and losses could still either increase or decrease equity. Thus, even if the investments that are marked down continue to pay contractual interest and principal as scheduled, negative fair value marks could hinder the company s ability to issue equity above NAV and cause D/E to increase. These scenarios are reflected in Exhibit 4 below. Exhibit 4. Impact of FV Marks on NAV, Leverage, and Returns With a 10% decline in the fair value of investments, D/E increases from 1.83x to 2.47 x which increases leverage significantly and the hit to NAV / share is $5.60. Negative fair August 29,

6 value marks could potentially cause the company to trade at a more discounted NAV multiple which could restrain the company s ability to issue equity on an accretive basis, which would hinder the ability of the company to complete accretive ATM equity issuance on a flow basis as we model it to do. SAR has traditionally had very sound asset quality, with non-accruals as a percentage of amortized cost averaging 0.6% per quarter since fiscal 1Q13. However, non-accruals as a percentage of amortized cost have recently picked up significantly, increasing to $9.3 million (from zero) or 3.1% of the portfolio at cost in fiscal 4Q17 to $20.1 million or 5.9% of the portfolio at amortized cost in fiscal 1Q18. While this is far from a disaster, we note that non-accruals across the BDC sector (particularly LMM-focused BDCs) have picked up momentum in the quarter-ended 6/30/17. Additionally, the lack of private AUM to coinvest with has led to two non-accrual loans comprising over 6% of the portfolio at cost, underscoring the concentration risk we remain wary of. Exhibit 5. Non-Accruals Chart Source: Company Reports, National Securities Corporation Non-accruals are comprised of two companies: TM Restaurant Group and My Alarm Center with a combined cost of $20.1 million and combined unrealized depreciation of $8.8 million. The total unrealized depreciation of these non-accruals represents 84% of the total $10.4 million net unrealized depreciation on the balance sheet. Exhibit 6. Non-Accruals Table Source: Company Reports, National Securities Corporation August 29,

7 The second lien book has been driving the vast majority of unrealized depreciation, with the jump in the most recent quarter mostly attributable to My Alarm Center. In fiscal 1Q17 second lien loans had $40,000 of unrealized depreciation which reached $2.9 million by the end of fiscal 2017 and then jumped to $8.6 million in fiscal 1Q18. Exhibit 7. Portfolio Metrics Source: Company Reports, National Securities Corporation We certainly understand and appreciate that LMM investments command premiums in terms of pricing and are less susceptible to the spread compression we are witnessing in the BSL (broadly syndicated loans), UMM, and core MM. However, the weighted average current yield has trended up in SAR since fiscal 1Q17 when it was 11.3% to 12.5% as of 1Q18. Now of course this can be a function of what is repaid or prepaid versus the other investments in the second lien book, but this has been a steady trend, not a single quarter anomaly. Additionally, to the extent there are prepayments, the prepayments are more likely to lower overall yield as the higher yielding loans are more likely to be prepaid first (although again the caveat is when call protection expires on a loan-by-loan basis). The issue is not only second lien loans, but also first lien loans where yields have remained stable over this same time period. August 29,

8 Exhibit 8. Yield by Cost Source: Company Reports, National Securities Corporation Saratoga has very conservative investment structuring, with attachment points (WA net debt/ebitda) averaging a mere 3.9x since fiscal 1Q14. We respect the company s disciplined approach to structuring investments, especially at this junction in the credit cycle and what we feel is a frothy loan market. Nonetheless, with a significant amount of non-sponsor investments and LMM focus the lower attachment points give us less comfort than they otherwise would. It is not a stretch to think that a significant economic downturn could see LMM investments cycle 25% or so, where a 4.0x leveraged investment becomes 5.0x. This underscores why a pricing premium exists in this market segment. Exhibit 9. Attachment Point Leverage Source: Company Reports, National Securities Corporation August 29,

9 The internal investment rankings remain strong at Saratoga, with green representing investments performing credits, yellow being underperforming credits, and red being in default and/or having a risk of principal not being recovered in full. As of fiscal 1Q18, the company had 96.3% of its investments marked green, 2.8% marked yellow, and 0.9% marked red. This is a Q/Q improvement with yellow declining from 3.2% and red declining from 2.7%, as well as green increasing from 94.1%. However, we note that in fiscal 1Q17 and 2Q17 the portfolio was 100% green. Exhibit 10. Internal Rankings Source: Company Reports, National Securities Corporation We think that there is a good chance that asset quality and thus NAV/share stabilize subsequent to fiscal 2Q18 and as a result we expect double-digit economic returns in fiscal NAV/share finished fiscal 1Q18 at $21.69 and we project this will decline to $21.36 in fiscal 2Q18 before improving to $21.53 as of fiscal 4Q18 and $21.88 as of fiscal 4Q19. Economic return was 8.5% for fiscal 2017 and we model this to decrease to 6.7% for fiscal 2018 before improving to 11.0% for fiscal While double-digit economic returns are certainly strong, we continue to think that on a risk-adjusted basis given the portfolio composition that these are more along the lines of average. Exhibit 11. NAV/share & Economic Return August 29,

10 WE EXPECT RESPECTABLE PORTFOLIO GROWTH THROUGH FISCAL 2018 AND 2019 Saratoga has its ATM program in place along with an additional capacity of $15.3 million of SBA debentures (which we expect will be utilized in full by the end of fiscal 2018). We model the company to use $4.0 million of equity per quarter at 2% above trailing quarter NAV/share. We model a $21.4 million net increase on the revolver for fiscal 2018 and $13.5 million net increase on the revolver for fiscal All told, we model a net debt increase of $58.7 million and net equity issuance of $12.8 million for fiscal For fiscal 2019, we model a net debt increase of $13.5 million and net equity issuance of $15.2 million. As a result of our expected capital deployment we model the portfolio at fair value to finish fiscal 2018 at $357.3 million and fiscal 2019 at $ million, from $292.7 million in fiscal 4Q17. Exhibit 12. Investment Flow Exhibit 13. Capital Allocation Exhibit 14. Shares Outstanding August 29,

11 WE EXPECT ADSJUTED NII ROAE TO REMAIN RELATIVELY STABLE AND NIM SHOULD DECLINE Y/Y FOR FISCAL 2018 BEFORE IMPROVING MODESTLY IN FISCAL 2019 As of fiscal 1Q18, total D/E was 1.83x and regulatory D/E was 0.78x. We expect the company to utilize its ATM issuance on a flow basis to decrease reliance upon drawing on the revolver which should serve to keep balance sheet leverage in check. For fiscal 2017, total D/E averaged 1.36x and the company generated adjusted NII ROAE (return on average equity) of 9.0%. We project the company s total D/E to average 1.81x for fiscal 2018 and 1.70x for fiscal 2019 with corresponding adjusted NII ROAE of 9.4% and 9.5%, respectively. We model adjusted NII ROAE to improve Y/Y for fiscal 2018 as the substantially increased average leverage we model should outweigh the NIM decline we estimate. We then expect adjusted NII ROAE to improve Y/Y by a modest 10 bps in fiscal 2019 despite much lower average leverage as we expect NIM to experience an improvement Y/Y and offset the lower average leverage that we model. Exhibit 15. Leverage & NII ROAE Saratoga has a good quality of earnings, with PIK income representing $0.04/share in fiscal 1Q18, down significantly from the high of $0.12/share in fiscal 4Q15. While PIK income has averaged 3.4% of revenue since fiscal 1Q14, we note that this has come down substantially in more recent years. Since fiscal 1Q16, PIK has only represented 2.5% of investment income and since fiscal 1Q17 has averaged 2.0% of revenue. Exhibit 16. PIK Source: Company Reports, National Securities Corporation August 29,

12 As a result of what we expect to be competitive pricing pressures persisting along with what we anticipate will be somewhat of a drag on overall portfolio yields from heightened non-accruals, we expect all-in effective yield and thus NIM to decline Y/Y for fiscal 2018 before we model improvement in fiscal For fiscal 2017, all-in effective yield and NIM were 11.98% and 8.40%, respectively. We model all-in effective yield to decrease to 10.94% in fiscal 2018 before we model a 16 bps Y/Y improvement in fiscal 2019 to 11.10%. Accordingly, we anticipate NIM will decrease to 7.62% for fiscal 2018 before increasing to 7.81% for fiscal Exhibit 17. NIM The effective cost of funds should remain relatively stable the next two fiscal years, as we see it. In fiscal 4Q17, Saratoga issued $74.5 million of 6.75% notes, using the proceeds to redeem its then $61.8 million of 7.50% notes outstanding. During the entirety of fiscal 2017 the company did not draw on its revolver and experienced a $1.5 million loss on debt extinguishment, as well as paying $269,895 of interest on the 7.50% notes during the call period. In total, the effective cost of funds (including these charges, amortization, and commitment fees) was 5.71% for the year. We expect the effective cost of funds to be 4.78% for fiscal 2018 and 4.91% for fiscal We model Saratoga to utilize all of its $150.0 million of SBA debentures in fiscal 4Q18 and expect the revolver to average 9.2% of funding in fiscal 2018 and 11.1% for fiscal Exhibit 18. Debt Mix & Cost of Funds August 29,

13 SAR s other income has averaged 4.9% of revenue per quarter since fiscal 1Q14. The other income component is generally fee income, which can be lumpy and is usually augmented when prepayment activity is heavy. Exhibit 19. Fee Income The correlation between fee income as a percentage of revenue and repayments/sales is only 0.49, which is obviously low. The issue is that prepayments are not broken out separately from repayments and sales, thus this is our best barometer by which to determine what level of fee income we should expect. Despite prepayments themselves not being broken out separately, we note that directionally other income has generally moved up and down with a more significant amount of repayments and sales. Most recently, in fiscal 1Q18, fee income represented 1.4% of revenue while repayments/sales were a mere $5.9 million. This is contrasted with fiscal 4Q17 where repayments and sales totaled $26.5 million and fee income represented 7.9% of revenue. The heaviest quarter of sales and repayment activity, fiscal 2Q17 with a volume of $50.3 million, had the highest revenue comprised of other income at 9.0%. Exhibit 20. Fees & Repayments August 29,

14 WE EXPECT SAR S DIVIDEND TO CONTINUE TO INCREASE Saratoga did not start paying a regular cash dividend until fiscal 2Q15 and since then has increased its distribution rate each quarter. We expect the quarterly dividend of $0.48/share in fiscal 2Q18 to be held there for another quarter before we model a further increase to $0.49/share in fiscal 4Q18. We then expect a penny increase per quarter through fiscal 2019 except in the final fiscal quarter we expect the dividend to remain flat. In total, we model Saratoga to pay out 93% of adjusted NII for fiscal 2018 and 96% of adjusted NII in fiscal Exhibit 21. Dividends & Coverage SARATOGA SHOULD BENEFIT IN THE EVENT OF RISING INTEREST RATES As of 5/31/17, SAR had 85% of its portfolio invested in floating rate debt while on the funding side of the equation 10.5% of debt (the revolving credit facility) was floating rate. While there are of course different LIBOR floors, the company estimates that a 100 bps increase in rates would increase interest income by $600,000 for the quarter. Exhibit 22. Select Data and Ratios August 29,

15 INVESTMENT POSITIVES: Likely Dividend Increases In fiscal 1Q18, Saratoga paid a $0.47/share dividend which we expect will increase by a penny next quarter and held there until it increased again by another penny in the last quarter of the fiscal year. Thereafter in fiscal 2019, we model the dividend to continue to step-up by a penny per quarter until it remains flat from fiscal 3Q19 into fiscal 4Q19. We accordingly model adjusted NII payout ratios of 93% for fiscal 2018 and 96% for fiscal Adequate Dry Powder for Respectable Portfolio Growth Saratoga has a $30.0 million ATM program we expect it to utilize opportunistically on a flow basis to keep balance sheet leverage in check. Additionally, the company has the capacity to issue an additional $15.3 million of SBA debentures, which we expect the company to do in fiscal 4Q18. We model the portfolio at fair value to finish fiscal 2018 at $357.3 million and fiscal 2019 at $387.7 million, from $329.7 million as of 5/31/17. INVESTMENT RISKS: Significant LMM & Non-Sponsor Presence SAR s portfolio is roughly half non-sponsor and largely focused on LMM companies. The non-sponsor investments typically have higher rates to compensate for increased risk, given these enterprises do not have a private equity sponsor to infuse capital into the company and/or make certain structural changes in the event of problems arising. Credit Quality Issues As of fiscal 1Q18, SAR s portfolio had $20.1 million of investments at amortized cost on non-accrual status, representing 5.9% of the portfolio. This is up significantly from $9.3 million or 3.1% of the portfolio Q/Q. While this is not massive, we note that there is significant concentration risk with nearly 6% of the portfolio at cost on non-accrual from two portfolio companies. The company does not have private funds to co-invest across and thus it is reliant upon growing scale in the public vehicle, which we think will take quite some time, in order to reduce the average investment exposure size. Thus, any future non-accruals are likely to be relatively sizable as a percentage of the total portfolio and, given the large second lien portfolio, LMM, and non-sponsor concentration, have lower recovery prospects. August 29,

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19 Note: Price/NII reflects consensus NII estimate provided by S&P Capital IQ * Price reflects closing price as of 8/28/17 Source: S&P Capital IQ August 29,

20 IMPORTANT DISCLOSURES: National Securities Corporation 200 Vesey Street, 25th Floor, New York, NY REG AC ANALYST CERTIFICATION The research analyst named on this report, Christopher Testa, certifies the following: (1) that all of the views expressed in this research report accurately reflect his personal views about any and all of the subject securities or issuers; and (2) that no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by him in this research report. IMPORTANT DISCLOSURES This publication does not constitute and should not be construed as an offer or the solicitation of any transaction to buy or sell any securities or any instruments or any derivatives of the securities mentioned herein, or to participate in any particular trading strategies. Although the information contained herein has been obtained from recognized services, and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. Opinions, estimates or projections expressed in this report may make assumptions regarding economic, industry, company and political considerations, and constitute current opinions, at the time of issuance, which are subject to change without notice. This report is being furnished for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Any recommendation(s) contained in this report is/are not intended to be, nor should it / they construed or inferred to be, investment advice, as such investments may not be suitable for all investors. When preparing this report, no consideration to one s investment objectives, risk tolerance and other individual factors was given; as such, as with all investments, purchase or sale of any securities mentioned herein may not be suitable for all investors. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decisions. Before committing funds to ANY investment, an investor should seek professional advice. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice, or to be used by anyone to provide tax advice. Investors are urged to consult an independent tax professional for advice concerning their particular circumstances. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, either expressed or implied, is made regarding future performance. National Securities Corporation (NSC) and its affiliated companies, shareholders, officers, directors and / or employees (including persons involved with the preparation or issuance of this report) may, from time to time, have long or short positions in, and buy or sell the securities or derivatives (including options) thereof, of the companies mentioned herein. One or more directors, officers, and / or employees of NSC and its affiliated companies, or independent contractors affiliated with NSC may be a director of the issuer of the securities mentioned herein. NSC and / or its affiliated companies may have managed or August 29,

21 co-managed a public offering of, or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this report within the last three (3) years, or may, from time to time, perform investment banking or other services for, or solicit investment banking business from any company mentioned in this report. This research may be distributed by affiliated entities of National Securities Corporation (NSC). Affiliated entities of NSC may include, but are not limited to, vfinance Investments, Inc., National Asset Management and other subsidiaries of our parent company, National Holdings Corporation. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce if any, may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Furthermore, NSC may follow emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. This report does not take into account the particular investment objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable in light of his/her particular circumstances and, if necessary, seek professional advice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Additional information relative to securities, other financial products, or issuers discussed in this report is available upon request. Neither this entire report, nor any part thereof, may be reproduced, copied or duplicated in any form or by any means without the prior written consent of National Securities Corporation. All rights reserved. NSC is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corporation (SIPC). For disclosures inquiries, please call us at and ask for your NSC representative, or write us at National Securities Corporation, Christopher Testa or Glenn Williams - Research Department, 200 Vesey Street, 25th Floor, New York, NY 10281, or visit our website at Estimates Disclosures Legend Relevant Disclosures: 1 National Securities (NSC) is a market-maker in the securities of the subject company 2 In the past twelve (12) month period, NSC and / or its affiliates have received compensation for investment banking for services from the subject company 3 In the past twelve (12) month period, NSC and / or its affiliates have received compensation from the subject company for services other than those related to investment banking 4 In the past twelve (12) month period, NSC was a manager or a co-manager of a public offering of one or more of the securities of the issuer 5 In the past twelve (12) month period, NSC was a member of the selling group of a public offering of the security (ies) of the issuer August 29,

22 6 One or more directors, officers, and / or employees of NSC and / or its affiliated companies is / are a director (s) of the issuer of the security which is the subject of this report 7 NSC and / or its affiliates expects to receive or intends to seek compensation for investment banking services from the subject company at some point during the next three (3) months 8 A Estimates analyst or a member of his / her household has a financial interest in the securities of the subject company as follows: a) long common stock; b) short common stock; c) long calls; d) short calls; e) long puts; f) short puts; g) long rights; h) short rights; i) long warrants; j) short warrants; k) long futures; l) short futures; m) long preferred stock; n) short preferred stock 9 As of the end of the month immediately preceding the date of publication of this report or the end of the prior month if the publication is within ten (10) days following the end of the month, NSC and / or its affiliates beneficially owned one percent (1%) or more of any class of common equity securities of the subject company. 10 Please see below for other relevant disclosures Shares of this security may be sold to residents of all 50 states, Puerto Rico, Guam, the US Virgin Islands and the District of Columbia. *Investment banking services provided in the previous 12 months MEANING OF RATINGS: BUY: the stock is likely to generate a total return of at least 10% over the next 12 months and should outperform relative to the industry. NEUTRAL: the stock is likely to perform in-line with the industry over the next 12 months. SELL: the stock is likely to underperform (from a total return perspective) relative to the industry over the next 12 months. NR: Not Rated SP: Suspended August 29,

23 Charts - SAR Source: S&P Capital IQ. August 29,