SIEBERT FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Siebert Financial Corp., a New York corporation incorporated in 1934, is a holding company that conducts its retail brokerage business through its wholly-owned subsidiary, Muriel
Siebert & Co., Inc. (“MSCO”), a Delaware corporation and registered broker-dealer, its investment advisory business through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the U.S.
Securities and Exchange Commission (“SEC”) as a RIA under the Investment Advisers Act of 1940, as amended, and its insurance business through its wholly-owned subsidiary, Park Wilshire Companies, Inc. (“PWC”), a Texas corporation and licensed
insurance agency. Siebert conducts operations through its wholly-owned subsidiary, Siebert Technologies, LLC. (“STCH”), a Nevada limited liability company and developer of robo-advisory technology. In September 2019, the name of this subsidiary was
changed from KCA Technologies, LLC. to Siebert Technologies, LLC. Siebert also offers prime brokerage services through its fifth wholly-owned subsidiary, Weeden Prime Services, LLC (“Weeden Prime”), a Delaware limited liability company and a
broker-dealer registered with the SEC. For purposes of this Annual Report on Form 10-K, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PWC, STCH, and Weeden Prime collectively, unless the context
otherwise requires.
The Company is headquartered in New York, NY, with primary operations in New Jersey and California. The Company has 18 offices throughout the U.S. and clients around the world. The
Company’s SEC filings are available through the Company’s website at www.siebertnet.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock (“Common Stock”), par value $.01 per share, trades
on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates in the securities brokerage and asset management industry. All of the Company's revenues for the
years ended December 31, 2019 and 2018 were derived from its operations in the U.S.
As a result of its recent acquisitions, the Company re-evaluated its reportable segments and concluded that as of December 31, 2019, the Company is comprised of a single operating segment based on
the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of the Company from a consolidated perspective.
Acquisitions in 2019
Weeden Prime Services, LLC
As previously disclosed in a Current Report on Form 8-K filed on December 4, 2019, the Company completed the acquisition of 100% of the member interests in Weeden Prime. Effective
December 1, 2019, Weeden Prime became a wholly-owned subsidiary of the Company and the operating results for the 31-day period ending December 31, 2019 were included in the Company’s statement of income.
StockCross Financial Services, Inc.
As previously disclosed in a Current Report on Form 8-K filed on January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross
Financial Services, Inc. (“StockCross”), a clearing broker dealer. Subsequently, as previously disclosed in a Current Report on Form 8-K filed on January 7, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange
for 3,298,774 shares of Common Stock. Effective January 1, 2020, StockCross was merged with and into MSCO and as of January 1, 2020, all clearing services provided by StockCross are now performed by MSCO. See
“Note 20 – Subsequent Events” for additional detail on the transaction with StockCross.
Acquisitions in 2018
Siebert Technologies, LLC.
On August 21, 2018, the Company acquired all of the issued and outstanding membership interests of STCH from Kennedy Cabot Acquisition LLC, (“KCA”), one of the Company’s affiliates through common
ownership, for approximately $690,000. This transaction was accounted for as an asset acquisition. STCH is a technology company initially tasked with developing a Robo-Advisor platform for SNXT. The Robo-Advisor provides clients with an automated
wealth management solution intended to maximize portfolio returns based on the client’s specific risk tolerance.
Park Wilshire Companies, Inc.
In March 2018, the Company acquired all of the issued and outstanding shares of PWC, an insurance agency, from three related parties for approximately $110,000.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) as established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting of financial condition. The consolidated financial statements include the accounts of Siebert and its wholly-owned subsidiaries and upon
consolidation, all intercompany balances and transactions are eliminated. The U.S. dollar is the functional currency of the Company and numbers are rounded for presentation purposes.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company makes significant estimates that affect the reported amounts of assets, liabilities, revenue, and expenses. The estimates relate primarily to revenue and expenses in the normal course of
business as to which the Company receives no confirmations, invoices, or other documentation at the time the books are closed. The Company uses its best judgment, based on knowledge of these revenue transactions and expenses incurred, to estimate the
amount of such revenue and expenses. The Company is not aware of any material differences between the estimates used in closing the Company’s books for the last five years and the actual amounts of revenue and expenses incurred when the Company
subsequently receives the actual confirmations, invoices, or other documentation. Estimates are used in intangible asset valuations and useful lives, depreciation, income taxes, and the contingent liabilities related to legal and healthcare expenses.
The Company also estimates the valuation allowance for its deferred tax assets based on the more likely than not criteria. The Company believes that its estimates are reasonable.
Cash and Cash Equivalents
Cash and cash equivalents are all cash balances that are unrestricted. The Company has defined cash equivalents as highly liquid investments with original maturities of less than 90 days that are not
held for sale in the ordinary course of business. As of December 31, 2019 and 2018, the Company did not hold any cash equivalents.
Cash Segregated Under Federal Regulations
As of December 31, 2019, cash of $110,000 has been segregated in a special reserve bank account for the benefit of customers.
Non-Cash Investing and Financing Activities
The Company entered into a promissory note of $3 million with Gloria E. Gebbia to finance part of the acquisition of Weeden Prime. This was a non-cash item for the Company for the year ended December
31, 2019 as the $3 million was paid directly from Gloria E. Gebbia to Weeden Prime. See “Note 11 – Note Payable - Related Party” for additional detail.
Concentrations of Credit Risk
The Company is engaged in various trading and brokerage activities whose contra-parties include broker-dealers, banks and other financial institutions.
In the event contra-parties do not fulfill their obligations, the Company may sustain a loss if the market value of the instrument is different from the contract value of the transaction. The risk of
default primarily depends upon the credit worthiness of the contra-parties involved in the transactions. It is the Company’s policy to review, as necessary, the credit standing of each contra-party with which it conducts business. The Company has
experienced no material historical losses in relation to its contra-parties.
As of December 31, 2019, the Company maintains its cash balances at two financial institutions. These balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per
institution. The Company is subject to credit risk to the extent that the financial institution with which it conducts business is unable to fulfill its contractual obligations and deposits exceed FDIC limits.
Receivables from Clearing Broker Dealers
Retail customer transactions for the years ended December 31, 2019 and 2018, cleared, on a fully disclosed basis, through two clearing broker dealers, StockCross and NFS, the former of which is an
affiliate. The Company operates on a month to month basis with the clearing broker dealers and their fees are offset against the Company's revenues on a monthly basis. Receivables from clearing broker dealers include amounts receivable as well as
cash on deposit. As of the years ended December 31, 2019 and 2018, cash clearing deposits with StockCross and NFS were $75,000 and $50,000, respectively, which are included in the line item titled “Receivables from clearing broker dealers” on the
statements of financial condition.
Institutional customer transactions for the year ended December 31, 2019 cleared, on a fully disclosed basis, through two clearing broker dealers, The Goldman Sachs Group, Inc. (“Goldman Sachs”) and
Pershing LLC (“Pershing”). Amounts due to the clearing broker dealers are offset against amounts due from clearing broker dealers. Receivables from clearing broker dealers are subject to clearance agreements and include the net receivable from
monthly revenues as well as cash on deposit. As of the years ended December 31, 2019 and 2018, cash clearing deposits with Goldman Sachs and Pershing were approximately $2 million and $1.1 million, respectively, which are included in the line item
titled “Receivables from clearing broker dealers” on the statements of financial condition.
The Company evaluates receivables from clearing broker dealers and other receivables for collectability noting no amount was considered uncollectable as of the years ended December 31, 2019 and 2018.
No valuation allowance is recognized for these receivables as the Company does not have a history of losses from these receivables and does not anticipate losses in the future. The accounting policies for the revenue related to these receivables are
detailed further in the significant accounting policy for revenue recognition.
Furniture, Equipment and Leasehold Improvements, Net
Furniture, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally not exceeding four years. Leasehold improvements are amortized over the shorter of their estimated useful life or the remaining lease term unless the lease transfers ownership of the underlying asset to the
lessee, or the lessee is reasonably certain to exercise an option to purchase the underlying asset, in which case the lessee will amortize over the estimated useful life of the leasehold improvements.
Software, Net
The Company capitalizes certain costs for software, such as the Robo-Advisor, software license arrangements with a contract term of greater than 1 year, as well as other software, and amortizes the
assets over the estimated useful life of the software or contract term, generally not exceeding 3 years. The Company accounts for software license arrangements with a contract term of 1 year as prepaid assets and amortizes them over the contract
term. Other software costs such as routine maintenance and various data services to provide market information to customers are expensed as incurred.
The Company acquired the Robo-Advisor from STCH in August 2018. The Robo-Advisor has an estimated useful life of 3 years and the Company started to amortize it on January 1, 2019.
Equity Method Investments
Investments in which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method of accounting and are included in
the equity method investment in related party asset in the statement of financial condition. Under this method of accounting, the Company’s share of the net earnings or losses of the investee is presented before the income before provision
(benefit) for (from) income taxes on the statement of income.
The Company evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline
in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.
Intangible Assets, Net
Certain identifiable intangible assets the Company acquires such as customer relationships and trade names are amortized over their estimated useful lives on a straight-line basis. Amortization
expense associated with such intangible assets is included in the “Depreciation and amortization” expense on the statement of income.
The Company evaluates intangible assets for impairment on an annual basis or when events or changes indicate the carrying value may not be recoverable. The Company also evaluates the remaining useful
lives of intangible assets on an annual basis or when events or changes warrants the remaining period of amortization to be revised. The Company currently does not have any intangible assets with indefinite lives other than goodwill.
Goodwill
Goodwill is recognized as a result of business combinations and represents the excess of the purchase price over the fair value of net tangible assets and identifiable intangible assets. The Company
evaluates goodwill for impairment on an annual basis or when events or changes indicate the carrying value may not be recoverable. The Company has the option of performing a qualitative assessment of goodwill to determine whether it is more likely
than not that the fair value of its equity is less than the carrying value. If it is more likely than not that the fair value exceeds the carrying value, then no further testing is necessary; otherwise, the Company must perform a two-step
quantitative assessment of goodwill. The Company may elect to bypass the qualitative assessment and proceed directly to performing a two-step quantitative assessment.
For the year ended December 31, 2019, the Company concluded there have been no impairments to the carrying value of the Company's goodwill during the periods presented.
Revenue Recognition and Other Income
On January 1, 2018, the Company adopted the new revenue recognition standard ASC 606, Revenue from Contracts with Customers, on the modified
retrospective method (i.e., cumulative method). The Company has elected the modified retrospective method which did not result in a cumulative-effect adjustment at the date of adoption. The implementation of this new standard had no material impact
on the Company's consolidated financial statements for the years ended December 31, 2019 and 2018.
Revenue from contracts with customers includes commissions and fees, principal transactions, and advisory fees. The recognition and measurement of revenue is based on the assessment of individual
contract terms. Significant judgment is required to determine whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize
revenue based on the appropriate measure of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events. For
the years ended December 31, 2019 and 2018, there were no costs capitalized related to obtaining or fulfilling a contract with a customer, and thus the Company has no balances for contract assets or contract liabilities.
As of December 31, 2019, the acquisition of new entities did not impact the Company’s existing revenue streams as the acquired entities have
consistent application of the revenue recognition guidance.
Advertising Costs
Advertising costs are expensed as incurred and were $2,000 and $45,000 for the years ended December 31, 2019 and 2018, respectively.
Income Taxes
The results of operations are included in the consolidated federal and state income tax return of the Company as well as the consolidated or standalone state and local income tax returns of the
Company and/or its subsidiaries. The amount of current and deferred taxes payable or refundable is recognized as of the date of the consolidated financial statements, utilizing currently enacted tax laws and rates. Deferred tax expenses or benefits
are recognized in the consolidated financial statements for the changes in deferred tax liabilities or assets between years.
The Company records accruals for uncertain tax positions when the Company believes that it is not more likely than not that the tax position will be sustained on examination by the taxing authorities
based on the technical merits of the position. The Company adjusts these accruals when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The Company had no uncertain tax positions as of December 31,
2019 and 2018. Income taxes receivable as of December 31, 2019, and 2018, were $141,000 and $79,000, respectively, which are included in the line item titled “Prepaid expenses and other assets” on the statement of
financial condition.
The Company recognizes deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, the Company considers all
available positive and negative evidence, including future reversal of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. To the extent the Company determines that
realization of deferred tax assets is not more likely than not, the Company records a valuation allowance for the deferred tax assets. As a result, the amount of the deferred tax assets considered realizable could be reduced in the near term if
estimates of future taxable income are reduced. Such an occurrence could materially impact the Company’s consolidated financial statements.
Capital Stock
The authorized capital stock of the Company consists of a single class of common stock.
Per Share Data
Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average outstanding common shares during the year. Diluted earnings per share is calculated by dividing net
income by the number of shares outstanding under the basic calculation and adding, all dilutive securities, which consist of options. The Company has no dilutive securities as of December 31, 2019 and 2018.
Accounting for Acquisitions
ASC 805 is used for accounting in business acquisitions. ASC 805 requires that goodwill be recognized separately from assets acquired and liabilities assumed at their acquisition date fair values.
Goodwill, as of the date of acquisition, is determined as the excess of the consideration transferred net of the acquisition date fair values of assets acquired and liabilities assumed. Fair value estimates at acquisition date may be assessed
internally or externally using third parties. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated acquisition date fair values to assets and liabilities. These
fair value estimations are subjective and require careful consideration and sound judgment. Management reviews the third-party reports for fairness of the assigned values.
Recently Issued Accounting Pronouncements
ASU 2018-15 – In August 2018, the FASB issued ASU 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers to apply the same criteria for
capitalizing implementation costs incurred in a cloud computing arrangement that is hosted by the vendor as they would for an arrangement that has a software license. The standard is effective for interim and annual periods beginning after
December 15, 2019 and early adoption is permitted. The standard can be adopted prospectively or retrospectively. The Company is currently evaluating the expected impact of this new standard; however, the Company believes there will be no material
impact to its consolidated financial statements.
ASU 2017-04 – In
January 2017, the FASB amended the guidance to simplify the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. The amended guidance requires the Company to perform its annual goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized at the amount by which the carrying amount exceeds the fair value of the reporting unit; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit. Income tax effects resulting from any tax-deductible goodwill should be considered when measuring the goodwill impairment loss, if applicable. The Company will still have the
option to perform a qualitative assessment to conclude whether it is more likely than not that the carrying amount of the Company exceeds its fair value. The guidance will be effective for interim and annual periods beginning January 1, 2020, and
must be applied prospectively. Early adoption is permitted. The Company is currently evaluating the expected impact of this new standard; however, the Company believes there will be
no material impact to its consolidated financial statements.
Recently Adopted Accounting Pronouncements
ASU 2016-02 – In February 2016, the FASB established ASC 842, Leases, by issuing ASU 2016-02, which requires lessees to recognize leases
on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires a lessee to recognize a lease right-of-use asset and lease liability on the statement of financial condition
for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income. The new standard is effective for
the Company on January 1, 2019, with early adoption permitted. The Company adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of
initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the consolidated financial statements as its date of initial application. The Company adopted the
new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods
before January 1, 2019. As of December 31, 2019, the Company recognized lease right-of-use assets of approximately $2.8 million and corresponding lease liabilities of approximately $3.1 million.
The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permits the Company not to
reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the hindsight practical expedient at transition.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify.
This means, for those leases that qualify, the Company will not recognize lease right-of-use assets or lease liabilities.
3. Acquisitions
Weeden Prime
Weeden Prime is a Delaware limited liability company originally organized as a corporation under the laws of the State of Florida in 2007. Weeden Prime is a registered broker-dealer with the SEC
and Commodity Futures Trading Commission ("CFTC"), and is a member of the Financial Industry Regulatory Authority, Inc. ("FINRA"), National Futures Association ("NFA"), and Securities Investor Protection Corporation ("SIPC"). Weeden Prime’s
operations consist primarily of trade execution and risk management services for customers and is an introducing broker for the transactions of institutional customers.
Overview of Acquisition
Prior to being acquired by the Company, Weeden Prime was comprised of two members, Weeden Investors L.P. (“WILP”), a Delaware limited partnership, and Weeden Securities Corporation (“WSC”), a
Delaware corporation, and was managed by a Board of Managers. Weeden Prime has maintained all of its registrations and licenses with the SEC, CFTC, FINRA, NFA, and SIPC as well as its agreements with some of its clearing broker dealers that were in
place before its acquisition by the Company.
Effective December 1, 2019, the Company purchased 100% of the member interests of Weeden Prime from WILP and WSC pursuant to an Equity Interests Purchase Agreement and Weeden Prime became a
wholly-owned subsidiary of the Company. The purchase price was approximately $7.1 million paid in cash, for which the Company borrowed $3 million in a promissory note payable to Gloria E. Gebbia. The operating results for the 31-day period ending
December 31, 2019 were included in the Company’s statement of income for the year ended December 31, 2019.
Weeden Prime will provide a new customer base of institutional clients and several strategic clearing relationships for the Company. In addition, there are cross-selling opportunities for the
institutional and retail clients, including partnering with institutional clients to generate new product offerings for the retail clients. Weeden Prime will bring economies of scale in terms of operational and administrative functions as well as a
skilled management team within the institutional space to the Company.
Accounting for Acquisition
The merger will be accounted for under the acquisition method of accounting for business combinations pursuant to ASC 805 - Business Combinations. ASC 805, requires, among other things, that the
assets acquired and liabilities assumed be recognized at their fair values as of the proposed acquisition date. ASC 820 - Fair Value Measurements, which establishes a framework for measuring fair values, defines fair value as ‘‘the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.’’
Allocation of Purchase Price
The Company was required to allocate the Weeden Prime purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of November 30,
2019. The excess of the purchase price over those fair values is recorded as goodwill. As of December 31, 2019, the Company completed its allocation of the Weeden Prime purchase price.
In determining the fair value of assets acquired and liabilities assumed, the Company primarily used discounted cash flow analyses and market approaches. Inputs to the discounted cash flow analyses
and other aspects of the allocation of purchase price require judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment include assumptions such as future revenue growth or attrition rates, projected
margins, discount rates used to present value future cash flows, the amount of synergies expected from the acquisition, and the economic useful life of assets.
In accordance with ASC 805, the Company was required to finalize the fair value of net assets of the business combination on the acquisition date. The excess of the fair value purchase price on the
date of acquisition was recorded as goodwill. Adjustments were made for tax considerations.
The following table summarizes the Company’s allocation of the purchase price as of the date of acquisition:
Purchase Price Allocation
|
|
Estimated
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
301,000
|
|
Cash segregated under federal regulations
|
|
|
152,000
|
|
Receivables from clearing broker dealers
|
|
|
4,616,000
|
|
Furniture, equipment and leasehold improvements, net
|
|
|
41,000
|
|
Software, net
|
|
|
51,000
|
|
Intangible assets, net
|
|
|
1,057,000
|
|
Lease right-of-use assets
|
|
|
214,000
|
|
Other assets
|
|
|
271,000
|
|
Total Assets acquired
|
|
|
6,703,000
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
1,353,000
|
|
Lease liabilities
|
|
|
214,000
|
|
Total Liabilities acquired
|
|
|
1,567,000
|
|
|
|
|
|
|
Net Assets acquired
|
|
|
5,136,000
|
|
Goodwill
|
|
|
1,989,000
|
|
Purchase price
|
|
$
|
7,125,000
|
|
The transaction resulted in $1,989,000 of goodwill which consisted of Weeden Prime providing a new customer base of institutional clients, several strategic clearing relationships, as well as
substantial cross-selling opportunities for the institutional and retail clients. The addition of Weeden Prime will bring economies of scale in terms of operational and administrative functions as well as a skilled management team within the
institutional space to Siebert. All of the goodwill is expected to be deductible for tax purposes.
Financial Results from Weeden Prime
The following table summarizes the revenue and net income from continuing operations of Weeden Prime included in the Company’s statement of income for the year ending December 31, 2019 since the date
of acquisition (for the 31-day period ending December 31, 2019):
Weeden Prime
|
|
|
|
Revenue
|
|
$
|
968,000
|
|
Net income from continuing operations
|
|
$
|
203,000
|
|
Pro Forma Statements
The following pro forma summary presents consolidated statements of income of the Company as if the acquisition of Weeden Prime had occurred on January 1, 2018, inclusive of pro forma adjustments (unaudited):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
39,746,000
|
|
|
$
|
42,987,000
|
|
Net income
|
|
$
|
2,485,000
|
|
|
$
|
11,102,000
|
|
These pro forma results include adjustments made for the consolidation of both entities. These pro forma results align Weeden Prime’s presentation to the Company’s accounting policy in relation to
reporting interest revenue net of interest expense and to recalculate Weeden Prime’s depreciation and amortization using the Company’s assumptions for estimated useful lives. These adjustments also take into consideration the amortization of the
intangible assets acquired in the transaction as well as the tax effect of pro forma adjustments using an estimated combined statutory rate of 28.0%.
Additionally, these pro forma results reflect the method of payment of the purchase price of approximately $7.1 million via cash and the promissory note, the acquisition of intangible assets and
goodwill, as well as the elimination of Weeden Prime’s equity upon consummation of the acquisition.
The Company notes that pro forma data may not be indicative of the results that would have been obtained had these events occurred at the
beginning of the periods presented, nor is it intended to be a projection of future results.
4. Receivables from and Payable to Clearing Broker Dealers and Related Parties
Amounts receivable from / payable to clearing brokers dealers, related parties and other organizations consisted of the following as of the periods indicated:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Receivable from clearing broker dealers
|
|
|
|
|
|
|
NFS
|
|
$
|
1,328,000
|
|
|
$
|
1,664,000
|
|
StockCross
|
|
|
883,000
|
|
|
|
310,000
|
|
Goldman Sachs
|
|
|
2,841,000
|
|
|
|
—
|
|
Pershing Capital
|
|
|
1,192,000
|
|
|
|
—
|
|
Other receivables
|
|
|
9,000
|
|
|
|
56,000
|
|
Total Receivable from clearing broker dealers
|
|
$
|
6,253,000
|
|
|
|
2,030,000
|
|
|
|
|
|
|
|
|
|
|
Receivable from related party
|
|
|
|
|
|
|
|
|
StockCross
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
Total Receivable from related party
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Due to clearing broker dealers and related parties
|
|
|
|
|
|
|
|
|
NFS
|
|
$
|
—
|
|
|
$
|
58,000
|
|
StockCross
|
|
|
7,000
|
|
|
|
46,000
|
|
MSCO
|
|
|
—
|
|
|
|
29,000
|
|
Total Due to clearing broker dealers and related parties
|
|
$
|
7,000
|
|
|
$
|
133,000
|
|
5. Furniture, Equipment and Leasehold Improvements, Net
Furniture, equipment and leasehold improvements consisted of the following as of the periods indicated:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Leasehold improvements
|
|
$
|
1,389,000
|
|
|
$
|
545,000
|
|
Equipment
|
|
|
170,000
|
|
|
|
52,000
|
|
Furniture and fixtures
|
|
|
134,000
|
|
|
|
—
|
|
Total Furniture, equipment, and leasehold improvements
|
|
|
1,693,000
|
|
|
|
597,000
|
|
Less accumulated depreciation and amortization
|
|
|
(562,000
|
)
|
|
|
(129,000
|
)
|
Total Furniture, equipment, and leasehold improvements, net
|
|
$
|
1,131,000
|
|
|
$
|
468,000
|
|
6. Software, Net
Software consisted of the following as of the periods indicated:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Robo-Advisor
|
|
$
|
763,000
|
|
|
$
|
763,000
|
|
Other Software
|
|
|
1,771,000
|
|
|
|
459,000
|
|
Total Software
|
|
|
2,534,000
|
|
|
|
1,222,000
|
|
Less accumulated amortization – Robo-Advisor
|
|
|
(254,000
|
)
|
|
|
—
|
|
Less accumulated amortization – Other software
|
|
|
(392,000
|
)
|
|
|
(85,000
|
)
|
Total Software, net
|
|
$
|
1,888,000
|
|
|
$
|
1,137,000
|
|
The Company generally recognizes software initially at cost and amortizes it over the estimated useful life of 3 years. In line with the Company’s policy, the basis for determining the amount
capitalized for the Robo-Advisor software was determined based on the price paid to acquire STCH. As of December 31, 2019, the Company estimates future amortization of software assets of $852,000, $747,000, $269,000, and $20,000 in the years ended
December 31, 2020, 2021, 2022, and 2023, respectively.
7. Equity Method Investments
In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. The Company purchased 922,875 shares of StockCross at a per share price of approximately $3.97, which was
representative of the fair value as of the transaction date. The Company’s ownership in StockCross is accounted for under the equity method of accounting.
In determining whether the investment in StockCross should be accounted for under the equity method of accounting, the Company considered the guidance under ASC 323, Investments – Equity Method and
Joint Ventures. Although the Company maintains approximately 15% ownership interest in StockCross, the Company evaluated the positive evidence related to criteria such as common representation on the board of directors, participation in policy-making
processes, material intra-entity transactions, interchange of managerial personnel and technological interdependency of the Company and StockCross. Based on these criteria, the Company determined that it was able to exercise significant influence of
StockCross, and therefore the equity method of accounting was used for this transaction.
Under the equity method, the Company recognizes its share of StockCross’ loss in the loss from equity method investment in related party line item on the statement of income. The Company has elected
to classify distributions received from equity method investees using the cumulative earnings approach. For the year ended December 31, 2019, the loss recognized from the Company’s investment in StockCross was $66,000. This investment is reported in
the equity method investment in related party asset in the statement of financial condition. In September 2019, StockCross made a $1.6 million cash distribution to its shareholders, of which the Company received $241,000, which reduced the carrying
amount of the investment in StockCross. As of December 31, 2019, the carrying amount of the investment in StockCross was approximately $3,360,000.
The Company evaluates its equity method investments for impairment when events or changes indicate the carrying value may not be recoverable. If the impairment is determined to be
other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment. As of December 31, 2019, the fair value of the investment in StockCross is not
estimated because there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and thus, no impairment was recorded.
Below is a table showing the summary from the consolidated statements of operations and the consolidated statements of financial condition for StockCross for the periods indicated (unaudited):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
14,823,000
|
|
|
$
|
13,340,000
|
|
Operating income / (loss)
|
|
$
|
(508,000
|
)
|
|
$
|
(929,000
|
)
|
Net income / (loss)
|
|
$
|
(420,000
|
)
|
|
$
|
(691,000
|
)
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
$
|
514,925,000
|
|
|
$
|
595,091,000
|
|
Liabilities
|
|
$
|
499,211,000
|
|
|
$
|
577,528,000
|
|
Stockholder’s Equity
|
|
$
|
15,714,000
|
|
|
$
|
17,563,000
|
|
8. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for
consideration. On January 1, 2019, the Company adopted ASU 2016-02, Leases (ASC 842) and all subsequent ASUs that modified ASC 842. For the Company, ASC 842 affected the accounting treatment for operating
lease agreements in which the Company is the lessee.
As of December 31, 2019, the Company rents office space under operating leases expiring in 2020 through 2024, and the Company has no financing leases. The leases call for base rent
plus escalations as well as other operating expenses. The following table represents the Company’s lease right-of-use assets and lease liabilities on the statement of financial condition. The Company elected not to include short-term leases (i.e.,
leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the statement of financial condition.
As of December 31, 2019, the Company does not believe that any of the renewal options under the existing leases are reasonably certain to be exercised; however, the Company will continue to assess
and monitor the lease renewal options on an ongoing basis.
|
|
As of
December
31, 2019
|
|
Assets
|
|
|
|
Lease right-of-use assets
|
|
$
|
2,810,000
|
|
Liabilities
|
|
|
|
|
Lease liabilities
|
|
$
|
3,114,000
|
|
The calculated amounts of the lease right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum
lease payments. The Company leases some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the statement of income rather than capitalizing them as lease
right-of-use assets. The Company determined a discount rate of 5.0% would approximate the Company’s cost to obtain financing given its size, growth, and risk profile.
Lease Term and Discount Rate
|
|
Weighted average remaining lease term – operating leases (in years)
|
3.0
|
Weighted average discount rate – operating leases
|
5.0%
|
The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate lease and non-lease components, and as such, the variable lease
cost primarily represents variable payments such as common area maintenance and utilities which are determined by the leased square footage in proportion to the overall office building.
|
|
Year Ended
December 31, 2019
|
|
Operating lease cost
|
|
$
|
905,000
|
|
Short-term lease cost
|
|
|
446,000
|
|
Variable lease cost
|
|
|
50,000
|
|
Sublease income
|
|
|
—
|
|
Total Rent and occupancy
|
|
$
|
1,401,000
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
928,000
|
|
|
|
|
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities
|
|
|
|
|
Operating leases
|
|
$
|
3,817,000
|
|
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of December 31, 2019 were as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
1,410,000
|
|
2021
|
|
|
878,000
|
|
2022
|
|
|
513,000
|
|
2023
|
|
|
493,000
|
|
2024
|
|
|
56,000
|
|
Thereafter
|
|
|
—
|
|
Remaining balance of lease payments
|
|
|
3,350,000
|
|
Difference between undiscounted cash
flows and discounted cash flows
|
|
|
236,000
|
|
Lease liabilities
|
|
$
|
3,114,000
|
|
Rent and occupancy expenses were $1,401,000 and $988,000 for the years ended December 31, 2019 and 2018, respectively.
9. Goodwill and Intangible Assets, Net
Goodwill
As of December 31, 2019, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of Weeden Prime, and there was no
goodwill as of December 31, 2018. See “Note 3 – Acquisitions” for more detail on the nature
of the goodwill acquired from Weeden Prime.
The Company will assess the goodwill recognized as a result of the Weeden Prime acquisition in a future period for potential impairment if there are any indicators that the fair value
recorded will be not be recovered.
Intangible Assets, Net
The Company recorded intangible assets which are subject to amortization over their estimated useful lives. As part of the acquisition of Weeden Prime, the Company acquired two intangible assets,
Weeden Prime’s customer relationships and Weeden Prime’s trade name. Weeden Prime is an introducing broker for the transactions of institutional customers and has maintained relationships with these customers. The Company expects to continue to
benefit from the customer relationships for a foreseeable future. Weeden Prime has a respected trade name in the financial services industry for providing quality services to clients. The Company will continue to operate Weeden Prime under this trade
name for a period of six months from the acquisition date. The intangible assets are deductible for tax purposes.
The following table summarizes information related to the intangible assets as of the dates indicated.
|
|
|
As of December 31, 2019
|
|
|
Date
Acquired
|
Original
Useful Life
(Years)
|
Remaining
Useful Life
(Years)
|
Gross
Amount
|
|
Accumulated
Amort
|
|
Net
Amount
|
|
Weeden Prime Customer Relationships
|
11/30/19
|
6.0 years
|
5.9 years
|
|
$
|
987,000
|
|
|
$
|
23,000
|
|
|
$
|
964,000
|
|
Weeden Prime Trade Name
|
11/30/19
|
0.5 years
|
0.4 years
|
|
|
70,000
|
|
|
|
12,000
|
|
|
|
58,000
|
|
Total Intangible assets
|
|
|
|
|
$
|
1,057,000
|
|
|
$
|
35,000
|
|
|
$
|
1,022,000
|
|
The amortization expense for the year ended December 31, 2019 was $35,000 and the weighted average amortization period as of December 31, 2019 was 5.6 years.
The Company expects its aggregate annual amortization expense for existing amortizable intangible assets for the below periods to be as follows:
|
|
Amount
|
|
2020
|
|
$
|
223,000
|
|
2021
|
|
|
165,000
|
|
2022
|
|
|
165,000
|
|
2023
|
|
|
165,000
|
|
2024
|
|
|
165,000
|
|
2025
|
|
|
139,000
|
|
Total future amortization expense
|
|
$
|
1,022,000
|
|
10. Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal
market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income, or cost approach, as specified by ASC 820, are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 - Quoted prices (unadjusted) in active markets for an identical asset or liability that the Company can assess at the measurement date.
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
The availability of observable inputs can vary from security to security and is affected by a variety of factors, such as the type of security, the liquidity of markets, and other
characteristics particular to the security. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. As such, the degree of
judgment exercised in determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy
within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not
readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
U.S. Government Securities: U.S. government securities are valued using quoted market prices and as such, valuation adjustments are not
applied. Accordingly, U.S. government securities are generally categorized in level 1 of the fair value hierarchy.
Municipal Securities: Municipal securities are valued using recently executed transactions, market price quotations (when observable), bond
spreads from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. Municipal securities are generally
categorized in level 2 of the fair value hierarchy.
Corporate Bonds and Convertible Preferred Stock: The fair value of corporate bonds and convertible preferred stock are determined using
recently executed transactions, market price quotations (when observable), bond spreads, or credit default swap spreads obtained from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and
derivative instruments. The spread data used is for the same maturity as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is used. When position-specific external price data is not
observable, fair value is determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond, or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds and
convertible preferred stocks are generally categorized in level 2 of the fair value hierarchy.
Exchange-Traded Equity Securities: Exchange-traded equity securities are valued based on quoted prices from the exchange. To the extent
these securities are actively traded, valuation adjustments are not applied, and they are categorized in level 1 of the fair value hierarchy; otherwise, they are categorized in level 2 or level 3 of the fair value hierarchy.
Certificates of Deposit: Certificates of deposit included in investments are valued at cost, which approximates fair value. These are
categorized within segregated investments in level 2 of the fair value hierarchy.
Unit Investment Trusts: Units of unit investment trusts are carried at redemption value, which represents fair value. Units of unit
investment trusts are categorized in level 1 of the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
Securities sold, not yet purchased, at fair value
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equity securities
|
|
$
|
88,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
88,000
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
88,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
88,000
|
|
11. Note Payable - Related Party
On December 2, 2019, the Company entered into an agreement with Gloria E. Gebbia, the Company’s principal shareholder, for a promissory note
of $3 million to finance part of the acquisition of Weeden Prime. The term of the promissory note was one year and interest accrues at 4% per year. The interest expense incurred for the year ended December 31, 2019 was $10,000. The total interest
will be payable upon maturity of the note on December 2, 2020, which is included in the line item “Interest Payable” on the statement of financial condition.
12. Revenue Recognition
The primary sources of revenue for the Company are as follows:
Margin Interest, Marketing and Distribution fees
Margin interest, marketing and distribution fees consists of two components: margin interest and 12b1 fees. Margin interest is the net interest charged to customers for holding financed margin
positions, and 12b1 fees are fees paid to the Company related to trailing payments from mutual funds as a result of prior sales of mutual funds to customers. Margin interest, marketing and distribution fees are recorded as earned.
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual
funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is
satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from
the customer.
Principal Transactions
Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the
securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that
is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from the customer.
Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to its revenue stream is satisfied over time; however, the advisory fees are variable as
they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.
Interest and Other Income
The Company earns interest from generated in clients’ accounts and on the Company’s bank balances and is recorded as earned. The Company earns miscellaneous income from various sources which is also
recorded as earned.
The following table presents the major revenue categories and when each category is recognized:
|
|
Year Ended December 31,
|
|
|
|
Revenue Category
|
|
2019
|
|
|
2018
|
|
|
Timing of Recognition
|
|
|
|
|
|
|
|
|
|
Trading Execution and Clearing Services
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
8,302,000
|
|
|
$
|
9,504,000
|
|
|
Recorded on trade date
|
Principal transactions
|
|
|
8,061,000
|
|
|
|
9,020,000
|
|
|
Recorded on trade date
|
Advisory fees
|
|
|
801,000
|
|
|
|
478,000
|
|
|
Recorded as earned
|
Total Trading Execution and Clearing Services
|
|
|
17,164,000
|
|
|
|
19,002,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees
|
|
|
|
|
|
|
|
|
|
|
Margin interest
|
|
|
8,134,000
|
|
|
|
7,663,000
|
|
|
Recorded as earned
|
12b1 fees
|
|
|
2,987,000
|
|
|
|
3,265,000
|
|
|
Recorded as earned
|
Total Margin interest, marketing and distribution fees
|
|
|
11,121,000
|
|
|
|
10,928,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
308,000
|
|
|
|
106,000
|
|
|
Recorded as earned
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income
|
|
|
11,429,000
|
|
|
|
11,034,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
28,593,000
|
|
|
$
|
30,036,000
|
|
|
|
The following table presents each revenue category and its related performance obligation:
Revenue Stream
|
Performance Obligation
|
Commissions and fees, Principal transactions, Advisory fees
|
Provide security trading services to customer and act as agent
|
Margin interest, marketing and distribution fees, Interest and other income
|
n/a
|
Disaggregation of Revenue
The following table presents a breakdown of the Company’s revenue between the amounts attributed to the retail customer accounts that were
originally part of Siebert (“Legacy Siebert”) vs. the retail customer accounts the Company acquired from StockCross as part of the transaction that closed in December 2017 (“StockCross Retail
Assets”):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenue from Margin interest, marketing and distribution fees
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees – Legacy Siebert
|
|
$
|
9,723,000
|
|
|
$
|
9,674,000
|
|
Margin interest, marketing and distribution fees – StockCross Retail Assets
|
|
|
1,398,000
|
|
|
|
1,254,000
|
|
Total Revenue from Margin interest, marketing and distribution fees
|
|
$
|
11,121,000
|
|
|
$
|
10,928,000
|
|
|
|
|
|
|
|
|
|
|
Revenue from Principal transactions
|
|
|
|
|
|
|
|
|
Principal transactions – Legacy Siebert
|
|
$
|
2,154,000
|
|
|
$
|
1,894,000
|
|
Principal transactions – StockCross Retail Assets
|
|
|
5,907,000
|
|
|
|
7,126,000
|
|
Total Revenue from Principal transactions
|
|
$
|
8,061,000
|
|
|
$
|
9,020,000
|
|
|
|
|
|
|
|
|
|
|
Revenue from Commissions and fees
|
|
|
|
|
|
|
|
|
Commissions and fees – Legacy Siebert
|
|
$
|
7,037,000
|
|
|
$
|
7,792,000
|
|
Commissions and fees – StockCross Retail Assets
|
|
|
1,265,000
|
|
|
|
1,712,000
|
|
Total Revenue from Commissions and fees
|
|
$
|
8,302,000
|
|
|
$
|
9,504,000
|
|
|
|
|
|
|
|
|
|
|
Additional Revenue:
|
|
|
|
|
|
|
|
|
Advisory fees – Legacy Siebert
|
|
|
801,000
|
|
|
|
478,000
|
|
Interest – Legacy Siebert
|
|
|
308,000
|
|
|
|
106,000
|
|
Total Revenue
|
|
$
|
28,593,000
|
|
|
$
|
30,036,000
|
|
Soft Dollar Arrangement
As a result of the acquisition of Weeden Prime, the Company has soft dollar and commission sharing arrangements with customers that fall both within, and
outside of, the safe harbor provisions of Rule 28(e) of the Securities Exchange Act of 1934 ("Rule 28(e)"), as amended. These soft dollar arrangements were determined to be a separate performance obligation that should be allocated a portion of the
transaction price.
Under these arrangements, the Company charges additional dollars on customer trades and uses these fees to pay third parties for research, brokerage services, market data, and related expenses
(“research services”) on behalf of clients. The Company is an agent in this arrangement, as it does not control the research services before they are transferred to the customer. As such, the revenue from these agreements are recognized net of cost
in the statement of income on the line item titled “Commissions and fees.” For every other revenue transaction, the Company is the principal and there are no agents involved in providing the services; therefore, the revenue is recognized gross.
The Company paid client expenses approximately $48,000 for December 2019 and had an outstanding receivable and payable of approximately $31,000 and $158,000, respectively, as of December 31, 2019.
The receivable and payable are within the line items titled “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statement of financial condition.
As of December 31, 2019, no allowance for uncollectible commissions was necessary as management believes all commissions receivable and prepaid research services expenses will
be realized.
13. Referral Fees
Upon the acquisition of Weeden Prime, the Company has agreements with various third parties to share commissions and pay fees as defined in the respective agreements. These expenses totaled
approximately $86,000 for the year ended December 31, 2019, which are presented in the line item titled “Referral fees” in the statement of income.
14. Income Taxes
Provision (benefit) for (from) income taxes consists of the following:
Current income tax expense, which represents the amount of federal tax and state and local tax currently payable, including interest and penalties and amounts accrued for
unrecognized tax benefits, if any, and;
Deferred income tax expense (benefit), which represents the net change in the deferred tax assets balance during the year, including any change in the valuation allowance for the
deferred tax assets, if any. For the year ended December 31, 2019, there was no change in the valuation allowance for the deferred tax assets. For the year ended December 31, 2018, based on the more likely than not criteria, the Company reversed
100% of the valuation allowance on the deferred tax assets.
The following table presents the components of provision (benefit) for (from) income taxes for the periods indicated:
|
|
Year Ending December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current income tax expense
|
|
|
|
|
|
|
Federal
|
|
$
|
271,000
|
|
|
$
|
948,000
|
|
State and local
|
|
|
252,000
|
|
|
|
26,000
|
|
Total Current income tax expense
|
|
|
523,000
|
|
|
|
974,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
312,000
|
|
|
$
|
(3,248,000
|
)
|
State and local
|
|
|
283,000
|
|
|
|
(2,328,000
|
)
|
Total Deferred income tax expense (benefit)
|
|
|
595,000
|
|
|
|
(5,576,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Provision (benefit) for (from) income taxes
|
|
$
|
1,118,000
|
|
|
$
|
(4,602,000
|
)
|
Effective Income Tax Rate Reconciliation
A reconciliation of the U.S. federal statutory income tax rate to the effective tax rate applicable to income before provision for income taxes is as follows for the periods indicated:
|
|
Year Ending December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Net effect of
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Depreciation
|
|
|
—
|
|
|
|
(0.9
|
%)
|
Tax amortization of intangible assets
|
|
|
(1.2
|
%)
|
|
|
(3.8
|
%)
|
Other temporary differences
|
|
|
—
|
|
|
|
(1.3
|
%)
|
Net operating loss
|
|
|
—
|
|
|
|
(2.6
|
%)
|
Increase due to state and local taxes, net of
U.S. federal income tax effects
|
|
|
4.0
|
%
|
|
|
0.6
|
%
|
Lease liabilities
|
|
|
(0.3
|
%)
|
|
|
—
|
|
Total Current effective income tax rate
|
|
|
23.7
|
%
|
|
|
13.2
|
%
|
Reversal of deferred tax assets valuation allowance
|
|
|
—
|
|
|
|
(75.8
|
%)
|
Total Effective income tax rate
|
|
|
23.7
|
%
|
|
|
(62.6
|
%)
|
Tax Cuts and Jobs Act
The statutory federal income tax rate in effect of 21% per the Tax Cuts and Jobs Act as of January 1, 2018 was utilized to calculate the income tax provision for the years ended December 31, 2019 and
2018 as well as the deferred tax assets as of December 31, 2019 and 2018. As such, the change in federal income tax rates affected the valuation of the gross deferred tax assets.
Net Operating Losses
The Company’s pre-tax federal and state and local NOLs for tax purposes as of December 31, 2019 were approximately $15.2 million and $23.6 million, respectively, which expire by 2036. The Company’s
pre-tax federal and state and local NOLs for tax purposes as of December 31, 2018 were approximately $16.1 million and $27.1 million, respectively. The federal NOL carryforwards have been reduced by the impact of annual limitations of approximately
$895,000 per year as described in the Internal Revenue Code Section 382 that arose as a result of an ownership change. Deferred tax assets are reported net of NOLs that have expired or are not expected to be utilized in the future.
Income Tax Examinations
The Company is subject to federal, state, and local tax examinations for a period typically between three and four years. The Company is currently under tax examination by the State of New York for
tax years 2012 through 2014. As of December 31, 2019, the State of New York has not proposed any adjustment to the Company’s tax position. Except for the examination described above, the Company is not under any other tax examinations.
Unrecognized Tax Benefits
The Company applied the “more-likely-than not” recognition threshold to all tax positions taken or expected to be taken in a tax return which resulted in no unrecognized tax benefits reflected in the
consolidated financial statements as of December 31, 2019 and 2018. The Company classifies interest and penalties that would accrue according to the provisions of relevant tax law as income taxes.
Deferred Tax Assets
The evaluation of the recoverability of the deferred tax assets and the need for a valuation allowance requires the Company to weigh all positive and negative evidence to reach a conclusion that it
is more likely than not that all or some portion of the deferred tax assets will be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more
positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.
The Company’s framework for assessing the recoverability of the deferred tax assets requires a determination of whether or not there is sufficient taxable income of appropriate character within the
carryback, carryforward period available under tax law. The Company considers of all available evidence, including:
•
|
Taxable income in carryback years if carryback is permitted
|
•
|
Future reversals of existing taxable temporary differences
|
•
|
Projected future taxable income exclusive of reversing temporary difference
|
In assessing projected future taxable income, the Company considers all evidence, including:
•
|
The nature, frequency, and amount of cumulative financial reporting income and losses in recent years
|
•
|
The sustainability of recent operating profitability of the Company
|
•
|
The predictability of future operating profitability of the character necessary to realize the net deferred tax assets
|
•
|
The carryforward period for the NOLs, including the effect of reversing taxable temporary differences
|
•
|
Prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax assets
|
In performing the assessment of the recoverability of the deferred tax assets under this framework, the Company also considers tax laws governing the utilization of the NOL in each applicable
jurisdiction.
For the year ended December 31, 2018, the Company achieved key financial milestones such as having three years of cumulative taxable income and generating four consecutive quarters of pre-tax
profitability generally greater than $1 million which led to a re-evaluation of the deferred tax assets. As of December 31, 2018, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not that
deferred taxes of $5,576,000 were realizable, and therefore, a valuation allowance was not necessary for the deferred tax assets.
As of December 31, 2019, the Company determined that sufficient positive evidence existed to conclude that it is more likely than not that its deferred tax assets were fully realizable, and
therefore, a valuation allowance was not necessary.
Below is a breakout of the deferred tax assets, net of valuation allowance as of the periods indicated.
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,322,000
|
|
|
$
|
5,811,000
|
|
Total Deferred tax assets
|
|
|
5,322,000
|
|
|
|
5,811,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Furniture, equipment and leasehold improvements
|
|
$
|
(430,000
|
)
|
|
$
|
(193,000
|
)
|
Lease liabilities
|
|
|
89,000
|
|
|
|
—
|
|
Contribution carryover
|
|
|
—
|
|
|
|
—
|
|
Intangible assets
|
|
|
—
|
|
|
|
—
|
|
Other reconciling items
|
|
|
—
|
|
|
|
(42,000
|
)
|
Total Deferred tax liabilities
|
|
|
(341,000
|
)
|
|
|
(235,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred tax assets
|
|
$
|
4,981,000
|
|
|
$
|
5,576,000
|
|
Weeden Prime
Prior to its acquisition by the Company effective December 1, 2019, Weeden Prime was a multi-member limited liability company, filed a U.S. Partnership return, and was not subject to Federal or state
taxes. The Internal Revenue Code ("IRC") provides that any income or loss, for either a single member or multi-member limited liability company, is passed through to the members for Federal and state income tax purposes. Weeden Prime was subject to
the New York City Unincorporated Business Tax ("UBT").
Effective upon the acquisition of Weeden Prime by the Company, Weeden Prime became aligned with the Company’s tax structure and was obligated to pay the Company for income taxes owed. The results of
Weeden Prime’s operations for the 31-day period ending December 31, 2019 are included in the consolidated federal income tax return of the Company and the state and local income tax return of the Company, as appropriate. Federal income taxes are
calculated as if the companies filed on a separate return basis, and the amount of current tax or benefit calculated is either remitted to or received from Company. The amount of current and deferred taxes payable or refundable is recognized as of
the date of the consolidated financial statements, utilizing currently enacted tax laws and rates.
During the 31-day period ending December 31, 2019, income before income taxes was $285,000 for Weeden Prime. As such, there was $82,000 of income tax expense, of which $57,000 was federal income tax
and $25,000 was state and local income tax. The income tax amount was recorded by the Company as an income tax expense and corresponding liability of income taxes payable within the statement of income and statement of financial condition,
respectively.
Prior to the acquisition of Weeden Prime by the Company, Weeden Prime had net operating loss carryforwards which expired starting in 2033, and had a full valuation allowance on its deferred tax
assets. As of December 31, 2019, due to the change of ownership, management determined that all prior NOLs will not be recovered by Weeden Prime after its acquisition by the Company.
15. Capital Requirements
MSCO is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. MSCO has elected to use the alternative method permitted by the Uniform Net
Capital Rule which requires that MSCO maintain minimum net capital, as defined, equal to the greater of $250,000, or 2% of aggregate debit balances arising from customer transactions, as defined. The Uniform Net Capital also provides that equity
capital may not be withdrawn, or cash dividends paid if resulting net capital would be less than 5% of aggregate debits. As of December 31, 2019, MSCO had net capital of approximately $4.4 million, which was $4.2 million in excess of required net
capital of $250,000. As of December 31, 2018, MSCO had net capital of approximately $8.9 million, which was $8.7 million in excess of required net capital of $250,000.
MSCO claims exemption from the reserve requirements under SEC’s Rule 15c 3-3 pursuant to paragraph (k)(2)(ii) as it clears its customer transactions through one unaffiliated and one affiliated
clearing firm on a fully disclosed basis.
Weeden Prime, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to
net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn, or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. Weeden Prime is also subject to the CFTC's minimum financial
requirements which require that the Company maintain net capital, as defined, equal to the greater of its requirements under Regulation 1.17 under the Commodity Exchange Act or Rule 15c3-1. As of December 31, 2019, the Company's net capital was
approximately $3.9 million which was $3.7 million in excess of its minimum requirement of $250,000 under 15c3-1.
The Company’s cash and cash equivalents are unrestricted and are used to fund working capital needs. The Company’s total assets as of December 31, 2019 were approximately $28.5 million, of which $3.1
million, or approximately 11%, was highly liquid. The Company’s total assets as of December 31, 2018 were approximately $18.2 million, of which $7.2 million, or approximately 40%, was highly liquid.
16. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
Customer transactions are cleared through a variety of clearing broker dealers on a fully disclosed basis, one of which is an affiliate. In the event that customers are unable to fulfill their
contractual obligations, the clearing broker dealer may charge the Company for any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy customers' obligations. The Company regularly monitors the
activity in its customer accounts for compliance with its margin requirements. Securities transactions entered into as of December 31, 2019 have settled subsequent thereto with no material adverse effect on the Company's consolidated financial
statements.
Credit risk represents the potential loss that would occur if counterparties fail to perform pursuant to the terms of their obligations. The Company is subject to credit risk to the extent a
custodian or broker with whom it conducts business is unable to fulfill contractual obligations. There were no material losses for unsettled customer transactions for the years ended December
31, 2019 and 2018 and the Company does not have a history of losses from receivables from clearing broker dealers and does not anticipate losses in the future.
17. Commitments, Contingencies and Other
Legal and Regulatory Matters
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. As of December 31, 2019, in the opinion of the Company, all such matters are without merit, or
involve amounts which would not have a significant effect on the consolidated financial statements of the Company.
General Contingencies
In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing
services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material
payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the
breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse
application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under
these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for
these indemnifications.
The Company is self-insured with respect to employee health claims. The Company maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately
$50,000 per employee. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs, and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent
estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the
estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the consolidated financial statements.
As part of this plan, the Company recognized expenses totaling $867,000 and $935,000 for the years ended December 31, 2019 and 2018, respectively. The Company had an accrual of $47,000 as of December
31, 2019, which represents the historical estimate of future claims to be recognized for claims incurred prior to December 31, 2019.
The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities
in excess of recorded reserves or in excess of its insurance limits.
18. Employee Benefit Plans
The Company through its affiliate, KCA, sponsors a defined-contribution retirement plan under Section 401(k) of the Internal Revenue Code that covers substantially all employees. Participant
contributions to the plan are voluntary and are subject to certain limitations. The Company may also make discretionary contributions to the plan. No contributions were made by the Company during the years ended December 31, 2019 and 2018.
19. Related Party Disclosures
StockCross and the Company are under common ownership and StockCross, prior to January 1,2020, served as one of the clearing broker dealers for the Company. The StockCross clearing
agreement with the Company provided that StockCross passed through all revenue and charged the Company for related clearing expenses. Outside of the clearing agreement, the Company had an expense sharing agreement with StockCross for its Beverly
Hills and Jersey City offices, and StockCross paid some vendors for miscellaneous expenses which it passed through to the Company.
As of December 31, 2019, the Company had receivables from StockCross totaling approximately $2.0 million, consisting of financing for inventory positions, the net
monthly clearing fees StockCross owes the Company, and a clearing deposit. As of December 31, 2019, the Company had a payable to StockCross totaling $7,000. As of December 31, 2018, the Company had receivables from StockCross totaling
approximately $1.3 million consisting of financing for inventory positions, the net monthly clearing fees StockCross owes MSCO, and a clearing deposit.
In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. Effective January 1, 2020, the Company acquired the remaining 85% of StockCross in
exchange for 3,298,774 shares of the Company’s Common Stock and StockCross was merged with and into MSCO. For the year ended December 31, 2019, the loss recognized from the Company’s 15% investment in StockCross was $66,000.
Kennedy Cabot Acquisition, LLC
KCA is an affiliate of the Company and StockCross and is under common ownership with the Company. To gain efficiencies and economies of scale with billing and
administrative functions, KCA serves as a paymaster for the Company and StockCross for payroll and related functions, the entirety of which KCA passes through to the Company and StockCross proportionally. In August 2018, the Company
acquired all of the issued and outstanding membership interests of SNXT from KCA for approximately $690,000. In addition, KCA has purchased the naming rights of the Company for the Company to use.
Park Wilshire Companies, Inc.
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties was $69,000 and $28,000 for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company had a receivable from PWC totaling approximately $11,000. In March 2018, the Company acquired all of the issued and outstanding shares
of PWC from three related parties for approximately $110,000.
On December 2, 2019, the Company entered into an agreement with Gloria E. Gebbia, the Company’s principal shareholder, for a promissory note
of $3 million to finance part of the acquisition of Weeden Prime. The term of the promissory note was one year and interest accrues at 4% per year. The interest expense incurred for the year ended December 31, 2019 was $10,000. The total interest
will be payable upon maturity of the note on December 2, 2020, which is included in the line item “Interest Payable” on the statement of financial condition. See “Note 11 – Note Payable - Related Party” for additional detail.
20. Subsequent Events
The Company has evaluated events that have occurred subsequent to December 31, 2019 and through March 27, 2020, the date of the filing of this report.
As previously disclosed in a Current Report on Form 8-K, filed on January 7, 2020, the Company entered into an Agreement and Plan of Merger by and between the Company, MSCO, StockCross and Michael J.
Colombino, on behalf of himself and as representative of the other StockCross shareholders, pursuant to which the Company acquired, from the StockCross shareholders, all of the shares of StockCross owned by the shareholders in exchange for a total
of 3,298,774 shares of the Company’s restricted Common Stock and StockCross was merged with and into MSCO (the “Merger”). The Merger was effective on January 1, 2020. Prior to the Merger, the Company owned 15% of the issued and outstanding common
stock of StockCross, and the Company and StockCross were affiliated entities through common ownership. As of January 1, 2020, all clearing services provided by StockCross are now performed by MSCO.
On January 27, 2020, the Company filed an Information Statement Pursuant to Section 14(c) of the Exchange Act to inform shareholders that holders of 71.4% of the Company’s outstanding Common Stock,
acting by written consent, approved an amendment to the Company’s Restated Certificate of Incorporation, as amended (the “Amendment”) to increase the total shares of Common Stock the Company is authorized to issue to 100,000,0000 shares. The
Amendment was filed with the New York Department of State on February 21, 2020.
Other than the events described above, there have been no material subsequent events that occurred during such period that would require disclosure in this report or would be required to be
recognized in the consolidated financial statements as of December 31, 2019.