Release Date Conference Call Time (Eastern) Contact Co. Guidance Consensus May 9 May 10 8:30am TBA NA $0.29

Transcription

1 April 19, 2018 Company Sponsored Research Morning Meeting Note Earnings Preview OTC Markets Group Inc. (OTCM) Equity Research Forecast 10% EPS Growth In 1Q:18, Aided By Lower Taxes; View OTCM As Well Positioned To Drive Steady Top- And Bottom-Line Growth; While Generating Strong Cash; Maintain $32 Target E 2019E OLD NEW OLD NEW OLD NEW Mar. $0.20 $0.26 $0.29 $0.30 June Sep Dec EPS $0.90 $1.06 $1.25 $1.33 P/E 21.8x 20.5x Note: NR = Not Rated. Risk Ratings: H = Highly risky; M = Moderately risky E include a respective $0.08, $0.09, $0.07 and $0.07 in stock-based compensation expense. Sum of quarterly EPS may not equal full-year total due to rounding and/or change in share count. NC=Not covered by Sidoti & Co., LLC. Year E 2019E Rev.(Mil.) $28.0 $30.8 $33.2 $33.6 $39.8 $49.9 $50.9 $54.7 $56.7 $59.3 * GAAP EPS* $0.28 $0.45 $0.51 $0.51 $0.69 $0.88 $0.90 $1.06 $1.25 $1.33 * Revenue is net of redistribution fees. Description: OTC Markets Group, Inc. ( operates three lines of business centered on 10,000 U.S. and global securities clients. The company offers a cost-effective solution to penetrate the U.S. securities market, while providing a host of services that connect brokers and dealers, organize markets, and ultimately monetize OTC s vast database of information. OTC s three lines of business are Link ATS (24% of revenue), Market Data (41%) and Corporate Services (35%). Headquarters are in New York, NY. Release Date Conference Call Time (Eastern) Contact Co. Guidance Consensus May 9 May 10 8:30am TBA NA $0.29 We forecast 1Q:18 EPS of $0.29, up 10% compared with $0.26 in 1Q:17. We estimate a 4% increase in revenue and lower tax rate offset higher operating costs. We estimate revenue gains of 6% in Corporate Services and 5% in Market Data, somewhat offset by a 4% decline in OTC Link trading-related revenue, with growth attributable to stronger market trends and new service offerings. In our view, OTCM is well positioned to deliver steady revenue and EPS growth, through a more efficient offering in the financial markets, coupled with positive backdrops on both the economic and regulatory fronts. We forecast EPS gains of 18% in 2018 and 6% in 2019, driven by new services, a likely strong IPO market, an increase in the number of companies using OTCM offerings and modest operating leverage. OTCM exited 4Q:17 with cash of $24 million ($2.05 per share) and no debt. We model FCF per share of $1.57 in 2018 and $1.59 in We note that in 2017 OTCM returned $15.4 million to shareholders in the form of dividends and share repurchase. Our $32 price target is based on 24x our 2019 EPS forecast of $1.33. NR Price Target: $32 Price: $27.25 Risk Rating: H Christopher McGinnis (212) (cmcginnis@sidoti.com) Key Statistics Analysts Covering 2 Market Cap (Mil) $310 Enterprise Value $ Week Range (US OTC) Year EPS CAGR 12% Avg. Daily Trading Volume 3,000 Shares Out (Mil) Float Shares (Mil) N/A Insider Ownership 47% Institutional Holdings 53% Annualized Dividend $0.56 Dividend Yield 2.1% FCF Per Share (2019E) $1.59 FCF Yield (2019E) 6% Net Cash Per Share (2019E) $4.16 Price to Book Value 22.6x Return on Equity (2019E) 41.7% Total Debt to Capital Interest Coverage Ratio Short Interest % Short Interest Days To Cover Nil N/A N/A% N/A Russell ,578 Russell 2000 Last 12 Months 12.8% OTCM Last 12 Months 26.7% We model 1Q:18 EPS of $0.29. We estimate revenue of $13.9 million, equating to growth of 4%, compared with $13.4 million in 1Q:17. On a segment basis, we forecast a 6% increase in Corporate Services revenue and 5% growth in Market Data, somewhat offset by a projected 4% decline in OTC Link revenue. We estimate revenue strength reflected a greater number of companies on the OTCQX and OTXQB markets, new product offerings and price increases. In our opinion, the decline in OTC Link trading-related revenue was Required disclosures appear in the Appendix Member FINRA & SIPC 1212 Avenue of the Americas 15 th Floor New York, NY Phone:

2 OTC MARKETS GROUP INC. driven by lower transactional volume and a reduction in the number of broker dealers due to industry consolidation. We forecast an operating margin of 31.1%, down 60 basis points compared with 1Q:17, as we estimate higher compensation and technology costs. We model net income of $3.327 million, up 10% compared with $3.022 million in 1Q:17, leading to EPS of $0.29, also up 10% year over year, aided by a lower tax rate. Exhibit 1: O TC M 1Q :18 Preview $ in th ousands except per sh are data 1Q :17A 1Q :18A YoY Change Revenue $13,376 $13, % Operating Income $4,238 $4, % Operating M argin 31.7% 31.1% Net Income $3,022 $3, % Profit M argin 22.6% 24.0% EPS $0.26 $ % Sources: Company reports and. estimates. OTCM is well positioned for solid growth through 2019, by our forecast. OTCM offers a more efficient option in the financial markets, with services that revolve around greater transparency, more organized markets and improved information at a cost effective subscription-based model. Expanded services and markets led to a 9% revenue CAGR in the last six years and an EPS CAGR of 16%. On the regulatory front, the OTCQX and OTCQB markets are now recognized for Blue Sky exemption status in 29 states. The exemption status will likely drive more smaller companies to use OTCM s services, which offer a simplified and cost efficient pathway to market. Lastly, Regulation A+ simplifies the process of seeking capital for companies looking to raise less than $50 million of proceeds through crowdfunding. While early in the adoption of this new path to market for smaller companies, there were several successful transactions; we expect the rate of adoption of Regulation A+ to increase over time. While we think Regulation A+ is still three to five years away from being a major revenue growth opportunity for OTCM, we see positive data points about adoption of this funding pathway. Given all this, we estimate revenue growth of about 4% in 2018 and 5% in 2019 and EPS growth of 18% in 2018 and 6% in 2019, driven by a lower tax rate and operating leverage. OTCM has a strong balance sheet and a shareholder friendly capital allocation plan, in our view. OTCM exited 4Q:17 with no debt and cash of $24 million ($2.05 per share). OTCM generated free cash flow per share of $1.32 in 2017; we model $1.57 in 2018 and $1.59 in 2019, leading to cash of $48 million ($4.16 per share) at the end of The company s capital spending is relatively modest at less than $1 million annually. Cash flow historically was returned to shareholders in the form of a quarterly dividend, special dividends and share repurchases. In 2017, the company returned a total of $15.4 million to shareholders, up from $14.8 million in The company repurchased 99,302 shares for an average price of $21.91 per share, while also spending $13.3 million in the form of the quarterly dividend of $0.14 per share and the third consecutive special dividend of $0.60 per share. We note that while it is likely there will be more special dividends, we model only quarterly dividends into our forecast. We maintain our $32 target on OTCM shares. This target is based on 24x our 2019 EPS forecast of $1.33. OTCM shares trade at about 22x and 21x our respective 2018 and 2019 EPS forecasts. In the past three years, OTCM shares ranged from 16x-28x forward EPS and averaged 21x. Peers in the corporate service-based industry trade at 18x-26x (average 21x) the consensus 2018 EPS forecast. Although OTCM s lack of liquidity validates the discount to the peers, we view the recurringrevenue model, profit profile, significant operating leverage, capital allocation and dividend payments as offsets. Meanwhile, as crowdfunding is relatively nascent in the capital markets world, we expect that as it matures, the door will open for additional companies to use OTC s services. Key Risks Trading liquidity 2

3 Table 1. OTC Markets Group Inc., Income Statement ($ in thousands, except where noted) OTC MARKETS GROUP INC Mar June Sep Dec 2017 Mar June Sep Dec 2018E Mar June Sep Dec 2019E OTC Link $10,573 $2,618 $2,497 $2,413 $2,546 $10,074 $2,513 $2,397 $2,316 $2,444 $9,671 $2,463 $2,349 $2,270 $2,395 $9,478 Market Data 21,054 5,450 5,522 5,505 5,445 21,922 5,723 5,798 5,780 5,717 23,018 6,066 6,146 6,127 6,060 24,399 Corporate Services 19,254 5,308 5,750 5,704 5,898 22,660 5,626 6,095 6,046 6,252 24,020 5,964 6,461 6,409 6,627 25,461 Total Revenue $50,881 $13,376 $13,769 $13,622 $13,889 $54,656 $13,862 $14,290 $14,143 $14,413 $56,709 $14,493 $14,956 $14,806 $15,083 $59,338 Redistribution fees 2, , , ,773 Net Revenue $48,564 $12,752 $13,143 $13,038 $13,243 $52,176 $13,197 $13,604 $13,478 $13,779 $54,059 $13,797 $14,238 $14,110 $14,419 $56,565 Compensation 19,589 5,566 5,243 5,250 5,421 21,480 5,684 5,473 5,459 5,592 22,208 5,942 5,698 5,700 5,777 23,117 IT Infrastructure 5,469 1,404 1,426 1,499 1,565 5,894 1,525 1,572 1,556 1,585 6,238 1,594 1,645 1,629 1,659 6,527 Professional fees 1, , , ,587 Marketing & Advertising ,010 Occupancy costs 1, , , ,780 D&A 1, , , ,780 General and administrative Total Operating Costs $31,637 $8,514 $8,319 $8,448 $8,592 $33,873 $8,886 $8,731 $8,655 $9,052 $35,324 $9,290 $9,048 $9,002 $9,351 $36,692 Operating Income $16,927 $4,238 $4,824 $4,590 $4,651 $18,303 $4,311 $4,873 $4,823 $4,728 $18,734 $4,507 $5,190 $5,108 $5,068 $19,873 Other incom (costs) Pretax Income $16,935 $4,252 $4,846 $4,595 $4,657 $18,350 $4,321 $4,883 $4,833 $4,738 $18,774 $4,517 $5,200 $5,118 $5,078 $19,913 Income Taxes (6,407) (1,230) (1,800) (1,200) (1,742) (6,100) (994) (1,123) (1,112) (1,090) (4,318) (1,039) (1,196) (1,177) (1,168) (4,580) Net Income $10,528 $3,022 $3,046 $3,395 $2,915 $12,250 $3,327 $3,760 $3,721 $3,648 $14,456 $3,478 $4,004 $3,941 $3,910 $15,333 Less restricted stock ($205) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Net Income To Common $10,323 $3,022 $3,046 $3,395 $2,915 $12,250 $3,327 $3,760 $3,721 $3,648 $14,456 $3,478 $4,004 $3,941 $3,910 $15,333 FD EPS $0.90 $0.26 $0.26 $0.29 $0.25 $1.06 $0.29 $0.33 $0.32 $0.32 $1.25 $0.30 $0.35 $0.34 $0.34 $1.33 FD Shares Outstanding 11,340 11,520 11,520 11,594 11,615 11,562 11,550 11,550 11,550 11,550 11,550 11,550 11,550 11,550 11,550 11,550 Dividend $0.56 $0.14 $0.14 $0.14 $0.14 $0.56 $0.14 $0.14 $0.14 $0.14 $0.56 $0.14 $0.14 $0.14 $0.14 $0.56 EBITDA $20,176 $5,198 $5,861 $5,342 $5,372 $21,773 $5,156 $5,718 $5,668 $5,573 $22,114 $5,364 $6,047 $5,965 $5,925 $23,301 Growth Analysis Revenue YOY Growth 1.9% 4.9% 8.9% 8.0% 7.9% 7.4% 3.6% 3.8% 3.8% 3.8% 3.8% 4.5% 4.7% 4.7% 4.6% 4.6% Adjusted Net Income YoY Growth 2.9% 34.2% 24.2% 16.0% 8.2% 18.7% 10.1% 23.4% 9.6% 25.1% 18.0% 4.5% 6.5% 5.9% 7.2% 6.1% Adjusted FD EPS YoY Growth 2.4% 33.3% 23.3% 14.3% 7.3% 17.7% 9.8% 23.1% 10.0% 25.8% 18.1% 4.5% 6.5% 5.9% 7.2% 6.1% Margin Analysis Operating Margin 34.9% 33.2% 36.7% 35.2% 35.1% 35.1% 32.7% 35.8% 35.8% 34.3% 34.7% 32.7% 36.4% 36.2% 35.1% 35.1% EBITDA Margin 41.5% 40.8% 44.6% 41.0% 40.6% 41.7% 39.1% 42.0% 42.1% 40.4% 40.9% 38.9% 42.5% 42.3% 41.1% 41.2% Adjusted Profit Margin 20.7% 22.6% 22.1% 24.9% 21.0% 22.4% 24.0% 26.3% 26.3% 25.3% 25.5% 24.0% 26.8% 26.6% 25.9% 25.8% Tax Rate 37.8% 28.9% 37.1% 26.1% 37.4% 33.2% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% Sources: Company reports, estimates 3

4 Table 2. OTC Markets Group Inc., Statement of Cash Flows ($ in thousands except where noted) OTC MARKETS GROUP INC Mar June Sep Dec 2017 Sep Dec Mar June 2018E Sep Dec Mar June 2019E Operating Activities Net Income $10,528 $3,022 $3,134 $3,488 $2,915 $12,559 $3,327 $3,760 $3,721 $3,648 $14,456 $3,478 $4,004 $3,941 $3,910 $15,333 Depreciation & amortization 1, , , ,612 Provision for bad debts Share based compensation 1, , , ,816 Excess tax benefit (602) 0 (592) 0 (497) (1,089) Deferred rent (42) 0 76 (29) (69) (22) Deferred income taxes (229) 0 (217) (108) Change in Operating Assets & Liabilities $12,917 $3,786 $3,443 $4,120 $3,508 $14,857 $4,172 $4,605 $4,566 $4,493 $17,836 $4,335 $4,861 $4,798 $4,767 $18,761 Net Change in Working Capital 2,823 2,128 (6,167) 286 5,379 1, (57) (57) 450 1,236 (69) (73) (73) Net Cash Provided by Operations $15,740 $5,914 ($2,724) $4,406 $8,887 $16,483 $5,074 $4,548 $4,509 $4,943 $19,073 $4,266 $4,788 $4,725 $5,559 $19,337 Investing Activities Capital expenditures (415) (150) (238) (280) (497) (1,165) (150) (238) (280) (300) (968) (150) (238) (280) (300) (968) Net Cash Provided by Investing Activities ($415) ($150) ($238) ($280) ($497) ($1,165) ($150) ($238) ($280) ($300) ($968) ($150) ($238) ($280) ($300) ($968) Financing Activities Dividends (13,059) (1,578) (1,620) (1,598) (8,466) (13,262) (1,598) (1,598) (1,598) (1,598) (6,392) (1,598) (1,598) (1,598) (1,598) (6,392) Proceeds from stock options (351) (37) Restricted stock Withholding taxes paid (198) (847) (847) Excess tax benefits Purchase of treasury stock (1,714) 0 (1,692) (483) (1) (2,176) Net Cash Provided by Financing ($14,216) ($1,578) ($3,663) ($2,118) ($8,828) ($16,187) ($1,598) ($1,598) ($1,598) ($1,598) ($6,392) ($1,598) ($1,598) ($1,598) ($1,598) ($6,392) Net Cash Increase (decrease) in cash $1,109 $4,186 ($6,625) $2,008 ($438) ($869) $3,326 $2,712 $2,631 $3,045 $11,713 $2,518 $2,952 $2,847 $3,661 $11,977 Beginning cash balance 24,135 25,244 29,430 22,805 24,813 25,244 24,375 27,701 30,412 33,043 24,375 36,088 38,606 41,557 44,404 36,088 Ending Cash Balance $25,244 $29,430 $22,805 $24,813 $24,375 $24,375 $27,701 $30,412 $33,043 $36,088 $36,088 $38,606 $41,557 $44,404 $48,065 $48,065 CFFO $15,740 $5,914 ($2,724) $4,406 $8,887 $16,483 $5,074 $4,548 $4,509 $4,943 $19,073 $4,266 $4,788 $4,725 $5,559 $19,337 CapEx (415) (150) (238) (280) (497) (1,165) (150) (238) (280) (300) (968) (150) (238) (280) (300) (968) Free Cash Flow $15,325 $5,764 ($2,962) $4,126 $8,390 $15,318 $4,924 $4,310 $4,229 $4,643 $18,105 $4,116 $4,550 $4,445 $5,259 $18,369 FCF / Share $1.35 $0.50 ($0.26) $0.36 $0.72 $1.32 $0.43 $0.37 $0.37 $0.40 $1.57 $0.36 $0.39 $0.38 $0.46 $1.59 Sources: Company reports, estimates 4

5 Table 3. OTC Markets Group Inc., Balance Sheet ($ in thousands except where noted) OTC MARKETS GROUP INC Mar June Sep 2017 Mar June Sep 2018E Mar June S ep 2019E ASSETS Current Assets Cash $25,034 $29,430 $22,805 $24,813 $23,683 $27,701 $30,412 $33,043 $36,088 $38,606 $41,557 $44,404 $48,065 Receivables 6,262 5,460 5,196 5,647 6,450 5,845 5,900 5,956 6,011 6,078 6,149 6,219 5,934 Prepaid income taxes ,331 1,554 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 1,013 Prepaid expenses 1, , , Deferred tax asset Total Current Assets $33,085 $36,154 $31,040 $32,309 $32,449 $35,331 $38,105 $40,798 $43,906 $46,499 $49,531 $52,457 $55,842 PP&E 2,279 2,075 1,876 1,967 2,018 1,777 1,624 1,513 1,422 1,422 1,422 1,422 1,422 Non-current deferred tax asset ,103 1, Goodwill Intangible assets Security deposits Total Assets $36,643 $39,508 $34,598 $36,058 $36,317 $38,958 $41,579 $44,161 $47,178 $49,771 $52,803 $55,729 $59,114 Liabilities Accounts payable Income tax payable Accrued expenses 4,761 4,761 2,950 4,165 4,858 4,858 4,858 4,858 4,858 4,858 4,858 4,858 4,858 Deferred revenue 14,664 14,664 12,263 10,116 15,531 15,531 15,531 15,531 15,531 15,531 15,531 15,531 15,531 Current Liabilities $20,036 $20,043 $15,633 $15,255 $21,175 $20,940 $20,946 $20,951 $20,956 $20,962 $20,969 $20,976 $20,982 Deferred rent Income tax reserve ,024 1,069 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 1,105 Total Liabilities $21,137 $21,202 $16,960 $16,598 $22,526 $22,291 $22,297 $22,302 $22,307 $22,313 $22,320 $22,327 $22,333 Shareholders' Equity Class A Class C Additional paid-in cap 12,988 13,198 13,853 14,267 14,150 14,150 14,150 14,150 14,150 14,150 14,150 14,150 14,150 Retained earnings 6,385 8,975 9,343 11,233 5,682 8,557 11,173 13,750 16,762 19,349 22,374 25,294 28,672 Treasury shares (3,984) (3,984) (5,676) (6,159) (6,160) (6,160) (6,160) (6,160) (6,160) (6,160) (6,160) (6,160) (6,160) Total Stockholders' Equity $15,506 $18,306 $17,638 $19,460 $13,791 $16,666 $19,282 $21,859 $24,871 $27,458 $30,483 $33,403 $36,781 Total Liabilities & Stockholders' Equity $36,643 $39,508 $34,598 $36,058 $36,317 $38,958 $41,579 $44,161 $47,178 $49,771 $52,803 $55,729 $59,114 Key Metrics ROA 28.7% 7.9% 8.2% 9.6% 33.7% 8.8% 9.3% 8.7% 30.6% 7.2% 7.8% 7.3% 25.9% ROE 67.9% 17.9% 16.9% 18.3% 88.8% 21.8% 20.9% 18.1% 58.1% 13.3% 13.8% 12.3% 41.7% ROIC 65.4% 18.6% 16.5% 16.8% 80.1% 21.3% 17.8% 16.2% 59.9% 15.1% 12.8% 11.9% 44.9% Cash per share $2.21 $2.55 $1.98 $2.14 $2.05 $2.40 $2.63 $2.86 $3.12 $3.34 $3.60 $3.84 $4.16 Sources: Company reports, estimates 5

6 Appendix Required Disclosures Required Disclosures OTC Markets Group Inc. (OTCM-$27.25) NR Price Target: $32 Risk Rating: H Rating and Price Target History Table Action Date Px Rating PT Risk Rating Initiation 9/1/16 17 NR 21 H PT 12/23/ PT 8/10/ PT 9/29/ PT 3/7/ Key Risks Trading liquidity Valuation: We maintain our $32 target on OTCM shares. This target is based on 24x our 2019 EPS forecast of $1.33. OTCM shares trade at about 22x and 21x our respective 2018 and 2019 EPS forecasts. In the past three years, OTCM shares ranged from 16x-28x forward EPS and averaged 21x. Peers in the corporate service-based industry trade at 18x-26x (average 21x) the consensus 2018 EPS forecast. Although OTCM s lack of liquidity validates the discount to the peers, we view the recurringrevenue model, profit profile, significant operating leverage, capital allocation and dividend payments as offsets. Meanwhile, as crowdfunding is relatively nascent in the capital markets world, we expect that as it matures, the door will open for additional companies to use OTC s services. Sidoti & Company. is a licensed broker/dealer, and publishes research reports about some of the securities it follows. All research published by is based on public information, or on information from the company discussed in the report that that company is required to promptly make public. This report was prepared for market professionals and institutional investor customers. Market professionals and institutional investors should consider this report as only one factor in making their investment decisions. This report is for information purposes only and is not intended as an offer to sell or a solicitation to buy securities. This research report is not a substitute for the exercise of your independent judgment. Information contained herein is based on sources we believe to be reliable but we do not guarantee their accuracy. The stock rating on this report reflects the analyst s recommendation based on a 12-month period. It should be presumed that the analyst who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication. Sidoti does NOT own securities of the issuers described herein, and Sidoti does not make a market in any securities. Sidoti does not engage in, or receive compensation from, any investment banking or corporate finance-related activities with the company discussed in the report. Sidoti s contracts with issuers protect Sidoti s full editorial control of all research, timing of release of reports, and release from liability for negative reports. To ensure further independence, the company discussed in the report has agreed to a minimum coverage term of one Initiation Report and three Update Reports, which that company cannot unilaterally terminate earlier. takes steps to ensure analyst independence including setting fees in advance and utilizing analysts who must abide by the CFA Institute Code of Ethics and Standards of Professional Conduct. Each Sidoti & Company, LLC analyst has full discretion on the rating and revenue target based on his or her own due diligence. Analysts are paid in part based on overall profitability of. Such profitability is derived from a variety of sources and includes payments received from issuers of securities covered by for services described below. No part of analyst compensation was, or will be, directly or indirectly, related to the specific recommendations or views expressed in any report or article. All issuers to be considered for research obtain the approval of a stock selection committee comprised of the Director of Research, the Chief Compliance Officer, and an independent outside person for screening applicants. Sidoti Company Sponsored Research Rating System The Company Sponsored Research rating 6

7 APPENDIX CONTINUED system consists of Moderately Risky (M) and Highly Risky (H) ratings. Moderately Risky suggests companies, that while still subject to relatively high price volatility, are characterized by more stable and predictable cash flow, a more established operating history, and an operating environment that is somewhat less competitive with a potential for loss of principal. Highly Risky suggests high risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal. As of 04/19/18, Company Sponsored Research Cap Research provides research on 13 companies, of which 8 (61%) are rated Moderately Risky and 5 (38%) are rated Highly Risky. Earnings targets and opinions concerning the composition of market sectors included in this report reflect analyst judgments as of this date and are subject to change without notice. A risk to our earnings targets is that the analyst s estimates or forecasts may not be met. This report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed in the Risk Factors section in the issuer s SEC filings available in electronic format through SEC Edgar filings at Every company in the Microcap sector bears certain inherent risks and will not provide any company subject to those risks with a rating below moderate because stock in the Microcap segment of the market have many risks that are not as prevalent in Large-Cap, Blue Chips, or even Small-Cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats and very low trading volume which can lead to large spreads and high volatility in stock price. In addition, Microcaps tend to have significant company specific risks that contribute to lower valuations. Investors need to be aware of the higher probability of financial default and higher degree of financial distress inherent in the Microcap segment of the market. Sidoti & Company policy is to update research reports as and when the Research Analyst and Research Management deem appropriate, based on developments with the issuer, the sector, or the market that may have a material impact on the research views or opinions stated therein. In addition, certain Research publications are intended to be updated on a regular periodic basis (weekly/monthly/quarterly/annual) and will ordinarily be updated with that frequency, unless the Research Analyst and Research Management determine that a different publication schedule is appropriate based on current conditions. Sidoti & Company Research does not provide individually tailored investment advice. Sidoti & Company Research has been prepared without regard to the circumstances and objectives of those who receive it. Sidoti & Company recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in Sidoti & Company Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Sidoti & Company Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Sidoti & Company Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data. Investors should consider Sidoti & Company Research as only a single factor in making their investment decision. For valuation methodology and risks associated with any recommendation, rating or price target referenced in this research report, please contact the Client Support Team as follows: US/Canada Alternatively you may contact your investment representative or Sidoti & Company Research at 1212 Avenue of the Americas, (Attention: Director of Research), New York, NY USA. Compensation. received a flat fee of $40,000, renewable annually from the company discussed in this report for the creation and dissemination of an Initiation Report and three Update Reports, including this report. The purpose of the fee is to subsidize the high costs of research and monitoring. Sidoti holds a conference twice a year and charges a fee of $5,000 per conference for presenting companies. Sidoti does not currently have a current investment banking services relationship with the company discussed in this report, or contemporaneously with any other companies discussed in other (Sidoti) Company Sponsored Research reports. Sidoti has not received investment banking income from the company discussed in the report in the past 12 months, and does not expect to receive investment banking income from the company discussed in the report in the next 12 months. Of securities rated in other Sidoti Company Sponsored Research reports, Sidoti has received investment banking income from 0 companies (0%) in the past 12 months. Investment banking services, as defined under FINRA Rule 2241, include, among other things, acting as an underwriter in, or as a member of the selling group in, a securities underwriting. Sidoti s role in any issuer s investment banking transaction can be viewed in that issuer s filings at 7

8 APPENDIX CONTINUED Sidoti has non-research employees who will seek compensation for brokerage commission revenue in connection with market trading the securities of this company. has received compensation for non-investment banking services on the Small-Cap Universe, and expects to receive additional compensation for non-investment banking services on the Small- Cap Universe, paid by issuers of securities covered by analysts. These non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, investment research, investment management, non-deal road shows, and attendance fees for conferences sponsored or co-sponsored by. This company has paid a fee to to present at the September 2017 Sidoti Fall Conference. Sidoti Analysts. The research analyst certifies that this report accurately reflects his/her personal views about the subject securities and issuers and that none of the research analyst's compensation was, is or will be, directly or indirectly, related to the analyst's specific recommendations or views contained in this research report. Sidoti policy does not allow an analyst or a member of their household (i) to own, trade, or have any beneficial interest in any securities of any company that analyst covers, or (ii) serve as an officer or director of a covered company. Sidoti employees, including research analysts, receive compensation that is based in part upon the overall performance of the firm, including revenues generated by Sidoti s investment banking and brokerage activities, but compensation is not directly related to investment banking or brokerage revenues. Sidoti maintains and enforces written policies and procedures reasonably designed to prevent any controlling persons, officers (or persons performing similar functions), or employees of Sidoti from influencing the activities of research analysts and the content of research reports prepared by the research analyst. Sidoti research analysts seek to have management of their covered companies meet with investors during non-deal road shows. Analysts compensation may be related to their success in scheduling non-deal road shows. This approach could be viewed as presenting potential conflicts of interest. Reprints of reports are prohibited without permission. Additional information is available upon request. For any further questions, please contact the Chief Compliance Officer at Sidoti. Source Key Statistics data is sourced from FactSet Research Systems 8