National Securities Research

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1 National Securities Research Established 1947, Member FINRA/SIPC ` FS Investment Corporation November 3, 2015 NEUTRAL (FSIC, $9.82) Strong Origination Platform with Good Asset Quality but Limited Growth Prospects - Initiating With A NEUTRAL Rating And $11 Price Target. Christopher R. Testa ctesta@nationalsecurities.com Investment Conclusion. We are initiating coverage of FS Investment Corporation (FSIC) with a NEUTRAL rating and $11 price target. FSIC is the public BDC of the Franklin Square family, which includes three BDCs that are non-traded. FSIC has $4.0 billion of investments and the entire platform has $15.4 billion in assets under management (AUM). This is advantageous for FSIC as the company has SEC exemptive relief to co-invest among all four BDCs. FSIC is sub-advised by GSO, the credit platform of Blackstone (NYSE: BX-NR-$34.59). GSO, with $81 billion in AUM, is one of the largest alternative asset managers in the world. GSO has its own independent underwriting process usually done simultaneously with FSIC s own underwriting process. Under the GPO (Group Purchasing Organization), which all of FSIC s portfolio companies receiving direct originations are eligible to enroll in, Blackstone will assist the portfolio companies in bundling supply orders together and assist them in realizing cost savings. This further augments the pipeline for direct originations and is a differentiating factor from FSIC s peers. While the company is only 46.3% first lien by fair value, attachment point leverage is reasonable at 4.8x, which has risen from 4.0x as the company has continued to increase its direct originations relative to broadly syndicated loans. FSIC s nonaccruals have not breached 50 bps of fair value going back to 2012 although the company s large energy exposure (12% of portfolio fair value as of 6/30/15) is something that we think will test the ability of the portfolio to withstand significant stress. Our $11 price target implies an estimated 2016 P/NII (Price/NII) of 11.1x, dividend yield of 8.1%, and P/NAV (Price/NAV) of 1.09x compared to the BDC sector averages of 8.4x, 11.8%, and 0.84x, respectively. * Adjusted NII = NII + capital gains incentive fee + excise taxes + other one-time items Source: S&P Capital IQ, National Securities Corporation Estimates Please see pages for Important Disclosures 1

2 We anticipate FSIC will have modest portfolio growth in 2016 coinciding with an equity issuance. FSIC s portfolio has grown very slightly over the past several years. The company s portfolio at fair value at year end 2013 and 2014 was $4.14 billion and $4.18 billion, respectively. We expect the portfolio ill finish 2015 at $4.19 billion and 2016 at $4.72 billion. The growth in 2016 will require an additional equity issuance of $400 million (before fees) to deleverage the balance sheet and subsequently resume growth, in our opinion. We think it s feasible for the company to issue equity in 2016, as pricing becomes more attractive in the middle market, specifically second lien debt. The pipeline should be bolstered by increased awareness and participation in the GPO program as many businesses struggle with top line growth and the withdrawal of many participants in leveraged lending due to capital constraints. FSIC s portfolio is modestly leveraged and non-accruals have been minimal. Portfolio company attachment point leverage (weighted average net debt/ebitda) stood at 4.8x as of 6/30/15, up from 4.6x in 4Q14 and 4.0x in 4Q13. Despite the portfolio leverage trending up, this has occurred only as direct originations have as a percentage of total originations. With broadly syndicated loans becoming a much smaller piece of the portfolio, FSIC was comfortable taking on more attachment point leverage given the loans are a product of their underwriting and GSO s and thus they have much more control should problems arise in the portfolio company. This is likely the reason nonaccruals have yet to breach 50 bps of the portfolio at fair value despite it being less than half first lien. Currently one portfolio company, Samson Investment Co., is on nonaccrual with a cost of $13.4 million. We expect FSIC to make additional special dividends but do not think the regular distribution will be increased. FSIC has steadily increased dividends from the start of 2012 and has periodically made special dividends to supplement the regular ones. Total dividends for the years 2013 and 2014 were $0.83 and $1.08, respectively. We expect the dividend totals for 2015 and 2016 will be $0.99 each, with $0.22/share quarterly dividends supplemented by two fourth quarter $0.10/share special dividends. The adjusted NII payout ratios for 2013 and 2014 were 83% and 113%, respectively. For 2015 and 2016 we expect these payout ratios will be 92% and 100%, respectively. Currently, shares are at a 1% discount to NAV compared the average 15% discount in the BDC space and the P/NII is 10.1x for FSIC and 8.4x for the BDC sector. We think that FSIC deserves a premium to the BDC sector on a NAV and NII basis. The NAV premium is justified by sustained asset quality from consistent and sound underwriting, leverage multiples being reasonable, and the company s prudent capital management activities. While we don t expect NII/share growth through 2016, we expect only a slight decline in an otherwise very strong BDC. As we near what we believe is a critical inflection point in the credit cycle, solid operators with good underwriting and handles on credit who are positioned to stay afloat in the event of defaults picking up should be rewarded higher multiples. However, given the limited upside implied by our price target relative to the current price we are NEUTRAL on FSIC shares at this time. November 3,

3 Company Description FSI Investment Corporation (FSIC) is a Business Development Company with headquarters in Philadelphia, PA. FSIC invests in first lien, second lien, and subordinated debt. The company also has some equity and CLOs as well although these were 9.5% and 2.7% of the portfolio at fair value as of 2Q15, respectively. FSIC went public on April 16, The company is managed by Michael Forman, CEO and William Blake, CFO. Mr. Forman was a co-founder of Franklin Square in 2007 and prior to this was the founder and Chairman of FB Capital Partners. Prior to FB Capital, Mr. Forman was at Klehr, Harrison, Harvey, Branzburg, & Ellers, LP as an attorney and senior partner in the corporate and securities department. Mr. Blake has been CFO of FS Investment Corp. since February Prior to FSIC, Mr. Blake was a senior manager at Ernst & Young performing audits of RICs (registered investment companies), private investment partnerships, and broker dealers. Exhibit 1. Investment Portfolio at Fair Value as of 6/30/15 Source: Company Reports FSIC s portfolio had a fair value of $4.01 billion as of June 30, 2015 with 22% in capital goods, 13% in consumer services, and 12% in energy by fair value. The weighted average reported yield by amortized cost in 2Q15 was 10.1% excluding non-income producing securities as of 2Q15. In 2Q15 fee income was 17% of revenue but this was largely due to outsized prepayment fees. Since 1Q12 fee income has averaged 7% of total revenue on a quarterly basis. FSIC 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 in arrears. The incentive fee is paid only if FSIC passes a designated hurdle rate of 7.5%. Essentially, FSIC s NII less the incentive fee must post a return on prior period NAV greater than 7.5% before any fee is paid. If this return exceeds 9.375%, the investment advisor earns an even greater fee November 3,

4 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 9.375% upper hurdle. WE ARE INITIATING COVERAGE WITH A NEUTRAL RATING AND $11 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 FSIC 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 2016, we get a result of adjusted NII/share of $0.99 if investments end the year at $4.72 billion and yield is 11.32%, the cost of funds is 4.06%, the economic return is 11.4%, cost/fv is 99.6%, and total distributions are $0.99/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 $11 price target implies an estimated 2016 P/NII of 11.1x, dividend yield of 8.1%, and P/NAV of 1.09x compared to the BDC sector averages of 8.4x, 11.8%, and 0.84x, respectively. The economic return is calculated by taking year-end NAV minus the beginning of the year NAV and adding distributions divided by the beginning of the year NAV. November 3,

5 FSIC S PORTFOLIO IS 66% FLOATING RATE AND 46% FIRST LIEN SENIOR SECURED LOANS FSIC s portfolio composition has remained relatively stable over the past several years. First lien loans have averaged 51.5% of the portfolio at fair value while second lien loans have averaged 19.7% of the portfolio at fair value since 1Q12. Despite only about half of the portfolio on average being first lien, attachment point leverage for the portfolio as a whole (excluding equity and CLOs) was 4.8x. While this is beyond what is typically considered first lien (3.5x-4.0x) but for a portfolio with 46% first lien this demonstrates conservative attachment points on more subordinated positions. Exhibit 3: Portfolio Mix Exhibit 4: WA Debt/EBITDA 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. November 3,

6 FSIC 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 5 below. Exhibit 5: Impact of FV Marks on NAV, Leverage, and Returns Estimates With a 10% decline in the fair value of investments, D/E increases to 0.92x from 0.77x which increases leverage significantly and the hit to NAV / share is $1.66. Negative fair 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. FSIC s asset quality is strong with one small non-accrual investment as of 2Q15 and an average non-accrual rate (on a fair value basis) of 0.2% since 1Q12. In terms of internal investment rankings, with one being investments performing above expectations and five being investments where the company may not be repaid in full, the company has 0.8% of the portfolio ranked four and five as of 2Q15, down from 1.0% in the quarter prior. We believe these numbers speak to FSIC s underwriting strength. November 3,

7 Exhibit 6: Investment Rankings and Non-Accruals as of 6/30/15 While FSIC has generally had unrealized gains on the portfolio in 2Q15 the company s overall portfolio had an unrealized loss of $3.0 million. While the unrealized loss is small, in 1Q15 the unrealized gain was $13.3 million and in 3Q14 unrealized gains were $88.6 million. Exhibit 7: Portfolio Metrics While the unrealized gains were also partially disposed of through two special dividends in the latter half of 2014, we think most of the change in the unrealized gains has clearly occurred from deterioration in the senior secured bonds in the portfolio. These bonds are purchased and generally bear higher risks than do loans which provide the originator with November 3,

8 the benefits of covenants, cash flow sweeps, and greater control should issues in the portfolio company arise. Exhibit 8: Senior Secured Bonds Driving Negative FV Marks As of 2Q15 senior secured bonds were 8.8% of the portfolio at fair value but unrealized losses were $47.3 million. By contrast, first lien loans were 46.3% of the portfolio with unrealized losses of $27.3 million. The disparity in size relative to outsized unrealized losses is likely due to energy exposure. As of 2Q15, energy was 30.4% of senior secured bonds while only 1.3% of first lien debt. Exhibit 9: Energy Investment Composition Energy is a core focus of FSIC. GSO has provided FSIC with 30 professionals dedicated solely to energy. While the current environment in oil & gas is highly distressed, we note that FSIC was not one of the BDCs that entered this space late simply to earn an incremental bps on its loans. Rather, FSIC, and even more so GSO, have been November 3,

9 energy investors for quite some time. This is likely why the company has only one nonaccrual in its energy portfolio even during this very challenging time for the energy sector. The company is bearish on the upstream space particularly and has stated that $45/barrel oil is not sustainable in the long-term for many energy companies. While FSIC may not be intentionally bringing down energy exposure, the company has stated that it is actively assessing its energy portfolio. Exhibit 10: Energy Investments November 3,

10 The overall energy portfolio has held up well considering the significant decline in commodity prices. Cost/FV is only 100.7% overall largely due to the 81.9% cost/fv of the equity investments in energy. Overall, unrealized losses are a mere $3.5 million on the total energy portfolio which is negligible for a portfolio with a cost of $508.5 million. FSIC has shifted its investment channel substantially over the past several years. Direct originations were only 31% of the portfolio in 1Q13 and by 1Q14 were 57% of the portfolio. As of 2Q15, direct originations were 77% of the portfolio. FSIC reduced exposure to broadly syndicated loans to 4% as of 2Q15, down from 12% in 2Q14 and 37% in 1Q13. The company exited broadly syndicated loans with optimal timing, in our view. The reduction of broadly syndicated loans has occurred at a time when over 60% of the issuance in 2013 and 2014 was covenant-lite. Assuming a weighted average life of 3 years, this would peg the current stock of broadly syndicated loans at over 80% covenant-lite. We have heard from certain market participants that this is the new normal and only bad credits require covenants a notion we reject as absurd. The reduction of broadly syndicated loans is likely what caused average EBITDA to fall significantly in the portfolio. Although FSIC is the largest BDC (including non-traded assets) and has exemptive relief to co-invest across all four BDCs, the direct investments will likely not be close to the size of broadly syndicated loans. Exhibit 11: Average EBITDA & Broadly Syndicated Exposure November 3,

11 While we would expect the increased direct originations to drive yields higher, this has not been the case for FSIC which has seen effective interest yields drop from 11.18% in 2013 to 10.93% in Backing out the acceleration of unamortized OID from the Cadillac Jack prepayment in 2Q15, effective interest yield was 10.91%. Exhibit 12: Channel Mix & Effective Interest Yield FSIC WILL NEED TO IMPROVE YIELDS IN ORDER TO GROW NII/SHARE NII/share at FSIC has been lackluster since 2013 when it was $1.00. In 2014, NII/share fell to $0.96 and we estimate it will finish 2015 at $1.08 although this increase is largely due to the outsized prepayment fees and accelerated amortization of OID in 2Q15. Balance sheet leverage has increased in 2014 relative to Average quarterly D/E was 0.68x in 2013 and rose to 0.74x in In 2Q15, D/E stood at 0.77x. The company has preferred to stay within the 0.70x 0.80x range in order to maintain its investment grade rating. Despite the increased leverage, adjusted NII ROAE fell to 9.6% in 2014 from 9.8% in The company has continued to increase direct originations and has generally kept first lien exposure similar over this time period. November 3,

12 Exhibit 13: Changes in Yields FSIC s yield differential from exited investments versus funded investments has been decidedly negative. Since 2Q13, the average difference between yields on investments funded minus investments exited has been 87 bps and average change in effective interest yield has been 12 bps. While the changes in effective interest yield on average are small they are nonetheless declining which is a hindrance on the earnings power of FSIC. Exhibit 14: Changes in Yields November 3,

13 The funding side of the equation has been relatively negative for FSIC as well. The company is 98% fixed rate funded as of 2Q15, with floating rate revolvers making up the remaining 2%. The investment portfolio is 66% floating rate which makes any incremental increase in interest rates highly accretive for FSIC. While this would certainly be significant boost to NII/share, we do not believe rates are going to rise materially in the near-term future as economic growth remains tepid across the world and central banks seemingly do not have the political will to change policy. Exhibit 15: Interest Rate Sensitivity Source: Company Reports Exhibit 16: Funding Mix The all-in effective cost of funds has risen since In 2012, 2013, and 2014 the effective cost of funds was 2.67%, 2.88%, and 3.51%, respectively. We project the effective cost of funds for 2015 and 2016 will be 4.05% and 4.06%, respectively. As a result of the funding mix versus the portfolio mix and yield, NIM fell on an annual basis in 2014 to 9.52% from 10.33% in We anticipate NIM will finish 2015 at 10.01% and 2016 at 9.54%. November 3,

14 Exhibit 17: NIM With a BBB credit rating from S&P and low cost of funds, the only way to reduce the cost of funds is likely through optimizing the funding structure rather than through refinance. This appears unlikely unless the company redeems some of the fixed rate notes that it has outstanding. The direct originations enable FSIC to receive fee income, which, although usually lumpy, boosts overall yields on the portfolio. Fee income has risen as a percentage of total investment income with direct origination focus. Exhibit 18: Fee Income November 3,

15 The increasing fee income from direct originations should create a wider gap between effective interest yields and all-in effective yields (which take all income, including fees and dividends, into account). However, it is worth keeping in mind that prepayment fees are very difficult to predict and in the case of 2Q15, were outsized as sales and redemptions hit $747.2 million, up from the quarter prior amount of $237.4 million. FSIC CAN GROW ITS PORTFOLIO WITH A SECONDARY OFFERING IN 2016 We anticipate that FSIC can grow its portfolio to $4.19 billion at year end 2015 and then to $4.72 billion in 2016, up from $4.18 billion in However, the increase is contingent upon a secondary equity offering in 2Q15 of $400 million. With the stock currently at a 1% discount to NAV and trading in a tight range, it remains to be seen where it will trade when we model the secondary. The NAV multiple will be largely driven by asset quality, of which the energy exposure of FSIC will have a major influence. However, given the underwriting track record of Franklin Square we anticipate the stock will continue to trade around NAV. For 2015 and 2016 we estimate net debt issuance of ($61.0) million and $100.0 million, respectively. We estimate net equity issuance (including DRIP) of $17.5 million and $394.3 million in 2015 and 2016, respectively. Exhibit 19: Investment Flow Estimates Exhibit 20: Capital Allocation Estimates November 3,

16 For purposes of calculating shares issued, we use the prior quarter NII/share estimate discounted by 10% and apply a 9% required ROE to the annualized discounted NII/share. Changes in share count, including our estimates, are shown below in Exhibit 21. Exhibit 21: Share Count Changes Estimates We expect the pipeline at FSIC to remain robust even in a challenging middle market environment. We think that capital constraints at the vast majority of FSIC s peers should keep competition lighter than in the past enabling FSIC to gain some market share. The weakness in high yield and second lien markets will also provide a company like FSIC, with the knowledge and wherewithal to invest up and down the capital stack, to find more opportunities in the space. Also, as the economy continues to be lackluster (to put it lightly) more companies will likely find the GPO program more attractive to save on costs while simultaneously raising capital. Additionally, GSO s ability to find opportunity in the energy sector will be very helpful in a distressed market where many lenders who are not as savvy in the space will likely be tepid to make new originations in it. The GPO program should not be dismissed as something miniscule. The ability to market a cost savings program under the credit platform of one of the world s top alternative asset managers while also getting financing is a very attractive scenario for many companies. As of September 1, 2015 the GPO program had fifteen different Franklin Square portfolio companies (10 being current) having at least one cost saving program in place. There are also another fifteen projects underway. The GPO enrolled companies, have, on average, saved 18.7% on addressed spend and have increased EBITDA by 4.7%. THERE WILL LIKELY BE ENOUGH SPILLOVER INCOME FOR SPECIAL DIVIDENDS AGAIN ALTHOUGH RAISING THE ORDINARY DIVIDEND WILL BE CONTINGENT ON NII GROWTH In 2012, 2013, and 2014 total distributions per share were $0.69, $0.83, and $1.08, respectively. For these same years adjusted NII payout ratios were 91%, 83%, and 113%, respectively. We estimate $0.99/share in total distributions for both 2015 and 2016 with NII payout ratios of 92% and 100%, respectively. We model the regular quarterly dividend of $0.2275/share to remain constant with supplemental $0.10/share special dividends in both 4Q15 and 4Q16. While the adjusted NII may be largely covering the dividend on a cash basis the picture becomes significantly different. November 3,

17 FSIC has a significant amount of OID accretion and PIK income that makes the earnings of the company have a decent degree of non-cash components to it. Since 1Q12, OID accretion has averaged 7.2% of revenue per quarter while PIK has averaged 2.4% and total non-cash items have averaged 9.6% of revenue. Even taking out the outsized OID acceleration in 2Q15 from large prepayments, the averages are 6.7%, 2.3%, and 9.0%, respectively. We believe this is very significant and should not be overlooked. Exhibit 22: Non-Cash Items As % of Revenue Exhibit 23: Non-Cash Items, NII, and Dividends Per Share November 3,

18 Cash payout ratios for 2012, 2013, and 2014 were 105%, 104%, and 137%, respectively. Keep in mind that this compares to adjusted NII payout ratios of 91%, 83%, and 113%, respectively for the same years. The difference between the two is significant and shown in Exhibit 24 below. Exhibit 24: Non-Cash Items, NII, and Dividends Per Share Exhibit 25: Select Data & Ratios November 3,

19 INVESTMENT POSITIVES: Strong Direct Origination Platform and Sourcing Capabilities FSIC s sub-advisory agreement with GSO is beneficial for sourcing and screening potential investments. The GPO, which enables directly originated FSIC portfolio companies to bundle supply orders together for cost savings, is another means of inducing companies to accept FSIC s financing and increases the likelihood of return business from said companies. Sound Asset Quality FSIC has strong asset quality with one small non-accrual investment as of 2Q15 and an average non-accrual to fair value rate of 0.2% since 1Q12. Positioned Very Favorably Should Rates Rise The company s funding is 98% fixed rate with 665 of the investment portfolio floating. Thus, any increase in rates will boost NII for FSIC which is different than the rate profile of most BDCs, which expect to incur decreasing NII until rates increase past the LIBOR floors of bps. INVESTMENT RISKS: Increased Competition and Pricing Pressure The large size of FSIC is beneficial for volume and co-investing alongside the nontraded funds of Franklin Square but also means the company will be less likely to avoid the pricing pressure that is less prevalent in the lower middle market. With increases in leverage and direct origination exposure not generating much incremental NII/share, increasing effective yields is crucial for FSIC to boost NII/share. Energy & Capital Goods Exposure As of 2Q15 FSIC had 12% of its portfolio in energy with one energy company (albeit a very small one) placed on non-accrual status. Capital goods were 22% of the portfolio as of 6/30/15. While energy is on everyone s mind, capital goods is a highly cyclical industry and in our view the global economy is very weak. With companies like Caterpillar (NYSE: CAT-NR-$74.75) experiencing 34 consecutive months of declining global revenue and emerging market growth prospects becoming quite bleak, we tend to think there is trouble brewing in the capital goods industry. November 3,

20 November 3,

21 November 3,

22 November 3,

23 Note: Price/NII reflects consensus NII estimate provided by S&P CapitalIQ * Price reflects closing price as of 11/3/15 Source: S&P CapitalIQ November 3,

24 IMPORTANT DISCLOSURES: National Securities Corporation 410 Park Avenue, 14th 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 Estimates 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 Estimates 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 November 3,

25 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, Attn. Al Scerbo - Supervision Department, 410 Park Avenue, 14th Floor, New York, NY 10022, 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 November 3,

26 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 November 3,

27 Charts - FSIC Source: S&P Capital IQ November 3,