Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization
Overview
Siebert Financial Corp., a New York corporation, incorporated in 1934, is a holding company that conducts the following lines of business through its wholly-owned subsidiaries:
•
Retail brokerage business through Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and broker-dealer registered with the SEC
•
Investment advisory services through Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the SEC as a Registered Investment Adviser (“RIA”) under the Investment Advisers Act of 1940, as amended
•
Insurance services through Park Wilshire Companies, Inc. (“PWC”), a Texas corporation and licensed insurance agency
•
Robo-advisory technology development through Siebert Technologies, LLC (“STCH”), a Nevada limited liability company
•
Prime brokerage services through WPS Prime Services, LLC (“WPS”), a Delaware limited liability company and a broker-dealer registered with the SEC
•
StockCross Digital Solutions, Ltd. (“STXD”), an inactive subsidiary headquartered in Bermuda
For purposes of this Quarterly Report on Form 10-Q, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PWC, STCH, WPS, and STXD collectively, unless the context otherwise requires.
The Company is headquartered in New York, New York, with primary operations in New Jersey, Florida, and California. The Company has 15+ branch offices throughout the U.S. and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s 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 and has no other reportable segments. All of the Company's revenues for the three months ended March 31, 2021 and 2020 were derived from its operations in the U.S.
As of March 31, 2021, 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.
Acquisition of StockCross
On January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross Financial Services, Inc. (“StockCross”). Subsequently, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of the Company’s common stock. Effective January 1, 2020, StockCross was merged with and into MSCO, and as of January 1, 2020, all clearing and other services provided by StockCross were performed by MSCO.
Prior to and as of the date of the Company’s acquisition of StockCross, the Company and StockCross were entities under common control of Gloria E. Gebbia, the Company’s principal stockholder, and members of her immediate family (collectively, the “Gebbia Family”). The acquisition represented a change in reporting entity.
COVID-19
The challenges posed by the COVID-19 pandemic on the global economy increased significantly starting in the first quarter of 2020. COVID-19 has spread across the globe during 2020 and has impacted economic activity worldwide. In response to COVID-19, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.
The Company instituted a number of temporary closures of branch offices; however, as of the date of the filing of this Report, all of the Company’s branch offices have been re-opened while maintaining compliance with federal, state and local mandates and guidelines. The Company has taken numerous steps to ensure that its employees and customers are operating in a safe environment by implementing measures such as social distancing, sanitizing workstations, temperature checks, requiring masks, and alternating staff.
The financial impact on the Company from the COVID-19 pandemic has been varied as revenue streams related to interest rates have decreased while revenue streams from commissions and fees, principal transactions, and market making have largely benefited from the market volatility associated with the pandemic.
The Company is actively monitoring the impact of COVID-19 on its business, financial condition, liquidity, operations, employees, clients and business partners. Based on management’s assessment as of March 31, 2021, the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
Refer to Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report for additional detail on COVID-19 and its impact on the Company.
Basis of Presentation
The accompanying condensed consolidated financial statements (“financial statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s 2020 Form 10-K. The 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.
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in the Company’s 2020 Form 10-K.
Investments, Cost
Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, generally requires entities to measure equity investments (other than equity method investments, controlling financial interests that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. However, entities will be able to elect a measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient in ASC 820 to estimate fair value using the net asset value (NAV) per share.
Pursuant to ASU 2016-01, the Company has made an accounting policy election to measure equity securities without readily determinable fair value at cost, less any impairment, adjusted for any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Other than the updates described above and in Note 2 – New Accounting Standards in this Report, there have been no material changes to the Company’s significant accounting policies.
2. New Accounting Standards
Accounting Standards Adopted in Fiscal 2021
ASU 2020-01 - In January 2020, the FASB issued Accounting Standard Update (“ASU”) 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2020-01 on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.
ASU 2019-12 - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes”, as part of its initiative to reduce complexity in the accounting standards. The ASU eliminates certain exceptions from ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.
Accounting Standards Not Yet Adopted
ASU 2016-13 - In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial- Instruments”. The ASU changes the impairment model and requires financial assets measured at amortized cost basis, including finance receivables (loans), HTM debt securities, trade receivables, and off-balance sheet credit exposures not accounted for as insurance to be presented at the net amount expected to be collected. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequent ASUs, including 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, and 2020-02 were issued to clarify certain aspects of ASU 2016-13 and to provide transition reliefs. Adoption requires modified retrospective transition through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance. The Company plans to adopt ASU 2016-13 and all subsequent ASU guidance as of January 1, 2023 and is in the process of assessing its impact on the Company’s financial statements.
Management has evaluated other recently issued accounting standards and does not believe that any of these standards will have a significant impact on the Company’s financial statements and related disclosures as of March 31, 2021.
3. Acquisitions
StockCross
Overview of Acquisition
Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.
Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares and StockCross was merged with and into MSCO. The purchase price paid was approximately $29,750,000 or 3,298,774 shares of the Company’s common stock which was issued in connection with the acquisition. The acquisition of StockCross added incremental business lines, revenue streams, cost synergies and an experienced management team to MSCO.
Accounting for Acquisition
Prior to and as of the date of the acquisition, the Company and StockCross were entities under common control of the Gebbia Family. As such, the acquisition was accounted for as a transaction between entities under common control.
The acquisition represented a change in reporting entity. As such, upon the closing of the acquisition, the net assets of the Company were combined with those of StockCross at their historical carrying amounts and no goodwill was recorded as part of the transaction.
The Company acquired various assets and liabilities from StockCross which were recorded at their historical carrying amounts and summarized below:
|
|
|
Historical
Carrying Value
|
|
|
|
|
|
Assets acquired
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,588,000
|
|
Cash and securities segregated for regulatory purposes
|
|
|
224,814,000
|
|
Receivables from customers
|
|
|
86,331,000
|
|
Receivables from broker-dealers and clearing organizations
|
|
|
3,105,000
|
|
Other receivables
|
|
|
627,000
|
|
Prepaid expenses and other assets
|
|
|
346,000
|
|
Securities borrowed
|
|
|
193,529,000
|
|
Securities owned, at fair value
|
|
|
3,018,000
|
|
Furniture, equipment and leasehold improvements, net
|
|
|
19,000
|
|
Lease right-of-use assets
|
|
|
1,141,000
|
|
Deferred tax assets
|
|
|
407,000
|
|
Total Assets acquired
|
|
|
514,925,000
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
Payables to customers
|
|
|
308,091,000
|
|
Payables to non-customers
|
|
|
9,151,000
|
|
Drafts payable
|
|
|
2,834,000
|
|
Payables to broker-dealers and clearing organizations
|
|
|
1,406,000
|
|
Accounts payable and accrued liabilities
|
|
|
963,000
|
|
Securities loaned
|
|
|
170,443,000
|
|
Securities sold, not yet purchased, at fair value
|
|
|
28,000
|
|
Notes payable – related party
|
|
|
5,000,000
|
|
Lease liabilities
|
|
|
1,295,000
|
|
Total Liabilities assumed
|
|
|
499,211,000
|
|
|
|
|
|
|
Net Assets acquired
|
|
$
|
15,714,000
|
4. Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Amounts receivable from, payables to, and deposits with broker-dealers and clearing organizations consisted of the following as of the periods indicated:
|
|
|
As of
March 31, 2021
|
|
|
As of
December 31, 2020
|
|
|
Receivables from and deposits with broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
DTCC / OCC / NSCC
|
|
$
|
9,231,000
|
|
|
$
|
17,841,000
|
|
|
Goldman Sachs
|
|
|
2,972,000
|
|
|
|
2,430,000
|
|
|
Pershing Capital
|
|
|
1,512,000
|
|
|
|
1,266,000
|
|
|
NFS
|
|
|
1,044,000
|
|
|
|
1,061,000
|
|
|
Securities fail-to-deliver
|
|
|
508,000
|
|
|
|
379,000
|
|
|
Globalshares
|
|
|
29,000
|
|
|
|
46,000
|
|
|
Total Receivables from and deposits with broker-dealers and clearing organizations
|
|
$
|
15,296,000
|
|
|
$
|
23,023,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables to broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
|
|
Securities fail-to-receive
|
|
$
|
6,047,000
|
|
|
$
|
1,810,000
|
|
|
Total Payables to broker-dealers and clearing organizations
|
|
$
|
6,047,000
|
|
|
$
|
1,810,000
|
|
Under the DTCC shareholders’ agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of March 31, 2021 and December 31, 2020, MSCO had shares of DTCC common stock valued at approximately $1,026,000 and $937,000, respectively, which are included within the line item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.
5. Prepaid Service Contract
On April 21, 2020, the Company entered into a Master Services Agreement (“MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide the Company with the InvestCloud Platform, a new client and back end interface and related functionalities for the Company’s key operations. The Company agreed to pay InvestCloud as consideration therefore during the initial three-year term an annual license fee of $600,000 as well as an upfront professional service fee of $1.0 million for one-time configuration, installation and customization of the software. Following the initial three-year term, the MSA will automatically renew for additional one-year terms unless terminated by the Company upon 120 days’ notice.
In connection with the MSA, InvestCloud entered into a side letter agreement with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common stock (the “Shares”) at a per share price of $5.81 (the Company’s share price as of the close of May 12, 2020) for a total of $1.1 million for professional services, which approximates the cost of services to be provided, to integrate the InvestCloud Platform into the Company’s existing systems. The Shares were issued to InvestCloud on May 12, 2020 without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(a)(2) and or Regulation D thereunder.
The Company initially recorded a prepaid asset equal to the $2.1 million of the total professional services related to the development work to be performed by InvestCloud, which is within the line item “Prepaid service contract” on the statements of financial condition. The Company amortizes this asset over the 3-year term of the contract, a period during which the arrangement is noncancelable. The license fees related to the Company’s use of the InvestCloud Platform are prepaid three months in advance and are within the line item “Prepaid service contract” on the statements of financial condition. These prepaid license fees are amortized over the three-month term. The amortization for all the prepaid assets related to InvestCloud is within the line item “Technology and Communications” on the statements of income.
The Company recorded $94,000 and $0 in expense related to share-based payments to InvestCloud for professional services for the three months ended March 31, 2021, and 2020, respectively. The total cost related to InvestCloud was $327,000 and $0 for the three months ended March 31, 2021, and 2020, respectively.
6. Fair Value Measurements
Overview
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.
Equity securities: 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. Securities quoted in inactive markets or with observable inputs are categorized into level 2. If there are no observable inputs or quoted prices, securities are categorized as level 3 assets in the fair value hierarchy. Level 3 assets are not actively traded and subjective estimates based on managements’ assumptions are utilized for valuation.
Certificates of deposit: Certificates of deposit included in investments are valued at cost, which approximates fair value. When certificates of deposits are held directly with banking institutions and issued directly to the Company, these are categorized within prepaid expenses and other assets in level 2 of the fair value hierarchy. When certificates of deposits are available for trading, they are categorized within securities owned, at fair value 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.
Fair Value Hierarchy Tables
The following tables present the Company's fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of the periods presented.
|
|
|
As of March 31, 2021
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities*
|
|
$
|
2,015,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,015,000
|
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
91,000
|
|
|
|
—
|
|
|
|
91,000
|
|
|
Municipal securities
|
|
|
—
|
|
|
|
89,000
|
|
|
|
—
|
|
|
|
89,000
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
46,000
|
|
|
|
—
|
|
|
|
46,000
|
|
|
Unit investment trust
|
|
|
—
|
|
|
|
203,000
|
|
|
|
—
|
|
|
|
203,000
|
|
|
Equity securities
|
|
|
1,119,000
|
|
|
|
525,000
|
|
|
|
—
|
|
|
|
1,644,000
|
|
|
Total Securities owned, at fair value
|
|
$
|
3,134,000
|
|
|
$
|
954,000
|
|
|
$
|
—
|
|
|
$
|
4,088,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
|
|
As of December 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities*
|
|
$
|
2,029,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,029,000
|
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
91,000
|
|
|
|
—
|
|
|
|
91,000
|
|
|
Corporate bonds
|
|
|
—
|
|
|
|
24,000
|
|
|
|
—
|
|
|
|
24,000
|
|
|
Equity securities
|
|
|
345,000
|
|
|
|
134,000
|
|
|
|
—
|
|
|
|
479,000
|
|
|
Total Securities owned, at fair value
|
|
$
|
2,374,000
|
|
|
$
|
249,000
|
|
|
$
|
—
|
|
|
$
|
2,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
21,000
|
|
|
$
|
—
|
|
|
$
|
21,000
|
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
—
|
|
|
$
|
21,000
|
|
|
$
|
—
|
|
|
$
|
21,000
|
|
*As of March 31, 2021 and December 31, 2020, these U.S. government securities mature on 08/31/21
The following represents financial instruments in which the ending balances as of March 31, 2021 and December 31, 2020 are not carried at fair value on the statements of financial condition:
Receivables and other assets: Receivables from broker-dealers and clearing organizations, receivables from customers, other receivables, prepaid service contract, and prepaid expenses and other assets are recorded at amounts that approximate fair value and are classified as level 2 under the fair value hierarchy. The Company may hold cash equivalents related to rent deposits that are categorized as level 2 under the fair value hierarchy.
Securities borrowed and securities loaned: Securities borrowed and securities loaned are recorded at amounts which approximate fair value and are primarily classified as level 2 under the fair value hierarchy. The Company’s securities borrowed and securities loaned balances represent amounts of equity securities borrow and loan contracts and are marked-to-market daily in accordance with standard industry practices which approximate fair value.
Payables: Payables to customers, payables to non-customers, drafts payable, payables to broker-dealers and clearing organizations, accounts payable and accrued liabilities, interest payable, and taxes payable are recorded at amounts that approximate fair value due to their short-term nature and are classified as level 2 under the fair value hierarchy.
Notes payable – related party: The carrying amount of the notes payable – related party approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the notes payable – related party is classified as level 2.
Line of credit: The carrying amount of the line of credit with East West Bank approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the line of credit is classified as level 2.
Investments, cost: The carrying amount of the investment approximates fair value due to there being no identified events or changes in circumstances during the reporting period that could have a significant adverse effect on the original valuation of the investment. Under the fair value hierarchy, the investment is classified as level 3.
7. Leases
As of March 31, 2021, the Company rents office space under operating leases expiring in 2021 through 2026, 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 statements 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 statements of financial condition.
As of March 31, 2021, 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
March 31, 2021
|
|
|
As of
December 31, 2020
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets
|
|
$
|
3,225,000
|
|
|
$
|
|
2,290,000
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities
|
|
$
|
3,479,000
|
|
|
$
|
|
2,612,000
|
|
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 statements 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
|
|
As of
March 31, 2021
|
|
|
As of
December 31, 2020
|
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
3.5
|
|
|
|
2.2
|
|
|
Weighted average discount rate – operating leases
|
|
|
5.0
|
%
|
|
|
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 usually determined by the leased square footage in proportion to the overall office building.
|
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
Operating lease cost
|
|
$
|
489,000
|
|
|
$
|
571,000
|
|
|
Short-term lease cost
|
|
|
21,000
|
|
|
|
39,000
|
|
|
Variable lease cost
|
|
|
60,000
|
|
|
|
117,000
|
|
|
Sublease income
|
|
|
—
|
|
|
|
—
|
|
|
Total Rent and occupancy
|
|
$
|
570,000
|
|
|
$
|
727,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
556,000
|
|
|
$
|
614,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,388,000
|
|
|
$
|
1,915,000
|
|
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of March 31, 2021 were as follows:
|
Year
|
|
Amount
|
|
|
2021
|
|
$
|
1,057,000
|
|
|
2022
|
|
|
1,050,000
|
|
|
2023
|
|
|
847,000
|
|
|
2024
|
|
|
370,000
|
|
|
2025
|
|
|
325,000
|
|
|
Thereafter
|
|
|
139,000
|
|
|
Remaining balance of lease payments
|
|
|
3,788,000
|
|
|
Less: difference between undiscounted cash flows and discounted cash flows
|
|
|
309,000
|
|
|
Lease liabilities
|
|
$
|
3,479,000
|
|
As of March 31, 2021, the Company had two operating leases agreements for additional office space with terms of approximately 2 years. The total commitment of the leases is approximately $358,000, and the leases will commence on April 1, 2021.
Rent and occupancy expenses were $570,000 and $727,000 for the three months ended March 31, 2021 and 2020, respectively.
8. Investments, Cost
OpenHand Holdings, Inc.
Pursuant to a stock purchase agreement dated as of January 31, 2021, the Company acquired an interest of 5% of OpenHand Holdings, Inc. ("OpenHand") common stock for consideration of a total of $2,231,000 consisting of $850,000 in cash and 329,654 restricted shares of the Company’s common stock valued at $1,381,000 or $4.19 per share. The value of the restricted stock was determined using the thirty-day trading average. The Company agreed to register the shares issued to OpenHand by filing a selling shareholder registration statement.
OpenHand is a subscription-based brokerage platform that will provide zero-commission trading for equity and option transactions and credit its members daily with rebates of revenues generated by the clients, less operational expenses. The Company will be the exclusive broker-dealer for all OpenHand account services and will benefit from their cloud-based technology which uses Amazon Web Services. Through this strategic, operational, regulatory, and technological partnership, OpenHand and the Company’s clients will benefit from numerous financial and operational efficiencies. The Company also received an option to purchase an additional 7.5% of OpenHand for approximately $4.5 million, based upon a $60 million valuation of OpenHand. This option expires 18 months after the launch of the OpenHand platform. No value was attributed to the option because it is not a derivative and there were no transaction costs associated with this option as of March 31, 2021.
As of March 31, 2021 and December 31, 2020, the carrying value of the Company’s investment in OpenHand was $2,231,000 and $0, respectively.
The investment does not have a readily determinable fair value since OpenHand is a private company and its shares are not publicly traded. The Company made an accounting policy election to measure this investment at cost less any impairment. As of March 31, 2021, there were no unrealized gains or losses on this investment. In addition, management concluded that there have been no impairments as there were no identified events or changes in circumstances during the reporting period that could have a significant adverse effect on the original valuation of the investment.
9. Goodwill and Intangible Assets, Net
Goodwill
As of March 31, 2021 and December 31, 2020, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of WPS.
Intangible Assets, Net
As a result of the Company’s acquisition of WPS, the Company acquired intangible assets consisting of WPS’s customer relationships and trade name, the fair values of which were $987,000 and $70,000, respectively, as of the acquisition date. Pursuant to the Company’s agreement with the original owners of WPS, the Company agreed to discontinue using the name of Weeden Prime Services, LLC and filed to change it to WPS Prime Services, LLC in May 2020. The Company amortizes its acquired intangible assets over their respective useful lives, and as of March 31, 2021, the WPS trade name has been fully amortized.
Impairment
As of March 31, 2021, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and other tangible and intangible assets.
10. Long-Term Debt
Line of Credit with East West Bank
Overview
On July 22, 2020, the Company entered into a Loan and Security Agreement with East West Bank. In accordance with the terms of this agreement, the Company has the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. The Company’s obligations under the agreement are secured by a lien on all of the
Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.
Term loans made pursuant to the agreement shall bear interest at the prime rate as reported by the Wall Street Journal, provided that the minimum interest rate on any term loan will not be less than 3.25%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.
This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of March 31, 2021 and the date of the filing of this Report, the Company was in compliance with all of its covenants related to this agreement.
In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually, and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994, and Gloria E. Gebbia, individually and as a co-trustee of the Trust.
As of March 31, 2021, the Company has drawn down a $5.0 million term loan under this agreement and has an outstanding balance of $4.4 million. The Company has an additional $5.0 million remaining to draw down from this line of credit.
Remaining Payments
Future annual minimum payments for the line of credit with East West Bank as of March 31, 2021 were as follows:
|
|
|
Amount
|
|
|
2021
|
|
$
|
749,000
|
|
|
2022
|
|
|
998,000
|
|
|
2023
|
|
|
998,000
|
|
|
2024
|
|
|
1,661,000
|
|
|
Total
|
|
$
|
4,406,000
|
|
The interest expense and cash paid related to this line of credit was both $37,000 for the three months ended March 31, 2021. The effective interest rate related to this line of credit was 3.25% for the three months ended March 31, 2021.
11. Notes Payable - Related Party
As of both March 31, 2021 and December 31, 2020, the Company had various notes payable to Gloria E. Gebbia, the Company’s principal stockholder, the details of which are presented below:
|
Description
|
|
Issuance Date
|
|
Face Amount
|
|
Unpaid Principal Amount
|
|
|
4.00% due May 31, 2021
|
|
December 1, 2020
|
|
$
|
2,200,000
|
|
$
|
2,200,000
|
|
|
4.00% due November 30, 2021*
|
|
November 30, 2020
|
|
|
3,000,000
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Notes payable – related party
|
|
|
|
$
|
5,200,000
|
|
$
|
5,200,000
|
|
*This note payable is subordinated to MSCO and is subordinated to the claims of general creditors, approved by FINRA, and are included in MSCO’s calculation of net capital and the capital requirements under FINRA and SEC regulations.
The Company’s interest expense for these notes for the three months ended March 31, 2021 and 2020 was $52,000 and $60,000, respectively. Cash paid for these notes for the three months ended March 31, 2021 and 2020 was both $30,000. The Company’s interest payable related to these notes was $22,000 and $0 as of March 31, 2021 and December 31, 2020, respectively.
12. Revenue Recognition
Overview of Revenue
The primary sources of revenue for the Company are as follows:
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.
Market Making
Market making revenue is generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. 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 counterparty. Securities owned are recorded at fair market value at the end of the reporting period.
Stock Borrow / Stock Loan
The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin and fully-paid securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company recognizes all self-clearing revenues net of operating expenses related to stock borrow / stock loan. Stock borrow / stock loan also includes any revenues generated from the Company’s fully paid lending programs on a self-clearing or introducing basis. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions.
The performance obligation is satisfied on the contract 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 counterparty.
For the three months ended March 31, 2021, stock borrow / stock loan revenue was $1,847,000 ($4,830,000 gross revenue less $2,983,000 expenses). For the three months ended March 31, 2020, stock borrow / stock loan revenue was $444,000 ($1,663,000 gross revenue minus $1,219,000 expenses).
Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to this 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, Marketing and Distribution fees
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances. Interest income also includes interest payouts from introducing relationships related to short interest, net of charges.
The Company also earns margin interest which is the net interest charged to customers for holding financed margin positions. Marketing and distribution fees consist of 12b-1 fees which are trailing payments from money market funds. Interest, marketing and distribution fees are recorded as earned.
For the periods presented, the Company combined revenue from interest income and revenue from margin interest, marketing and distribution fees as these revenue streams are similar in nature. These revenue streams were historically disaggregated; however, the Company has combined these revenue streams to most accurately present the statements of income.
Other Income
Other income represents fees generated from correspondent clearing fees, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.
Categorization of Revenue
The following table presents the Company’s major revenue categories and when each category is recognized:
|
|
|
Three Months Ended March 31,
|
|
|
|
Revenue Category
|
|
2021
|
|
|
2020
|
|
|
Timing of Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Trading Execution and Clearing Services
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
7,008,000
|
|
|
$
|
5,583,000
|
|
|
Recorded on trade date
|
|
Principal transactions
|
|
|
4,248,000
|
|
|
|
3,203,000
|
|
|
Recorded on trade date
|
|
Market making
|
|
|
1,614,000
|
|
|
|
470,000
|
|
|
Recorded on trade date
|
|
Stock borrow / stock loan
|
|
|
1,847,000
|
|
|
|
444,000
|
|
|
Recorded as earned
|
|
Advisory fees
|
|
|
356,000
|
|
|
|
262,000
|
|
|
Recorded as earned
|
|
Total Trading Execution and Clearing Services
|
|
|
15,073,000
|
|
|
|
9,962,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
Interest, marketing and distribution fees
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,154,000
|
|
|
|
1,331,000
|
|
|
Recorded as earned
|
|
Margin interest
|
|
|
2,152,000
|
|
|
|
2,506,000
|
|
|
Recorded as earned
|
|
12b-1 fees
|
|
|
153,000
|
|
|
|
788,000
|
|
|
Recorded as earned
|
|
Total Interest, marketing and distribution fees
|
|
|
3,459,000
|
|
|
|
4,625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
392,000
|
|
|
|
214,000
|
|
|
Recorded as earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
18,924,000
|
|
|
$
|
14,801,000
|
|
|
|
The following table presents each revenue category and its related performance obligation:
|
Revenue Stream
|
Performance Obligation
|
|
Commissions and fees, Principal transactions, Market making, Stock borrow / stock loan, Advisory fees
|
Provide financial services to customers and counterparties
|
|
Interest, marketing and distribution fees, Other income
|
n / a
|
Soft Dollar Arrangement
As a result of the acquisition of WPS, 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 these arrangements, 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 line item “Commissions and fees” on the statements of income.
The Company paid client expenses of approximately $227,000 and $218,000 for the three months ended March 31, 2021 and 2020, respectively. The Company had an outstanding receivable and payable of approximately $20,000 and $278,000, respectively, as of March 31, 2021.
The receivable and payable related to soft dollar arrangements are in the line items “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statements of financial condition.
As of March 31, 2021 and December 31, 2020, no allowance for uncollectible commissions was necessary as the Company believes all commissions receivable and prepaid research services expenses will be realized.
Other Items
For the three months ended March 31, 2021 and 2020, 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. The Company concludes that its revenue streams have the same underlying economic factors, and as such, no disaggregation of revenue is required.
13. Referral Fees
Upon the acquisition of WPS, the Company has agreements with various third parties to share commissions and pay fees as defined in the respective agreements. These expenses were approximately $407,000 and $111,000 for the three months ended March 31, 2021 and 2020, which are presented in the line item “Referral fees” on the statements of income.
14. Income Taxes
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of March 31, 2021, the Company has concluded that its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain federal net operating losses that are expected to expire unutilized and certain state net operating losses.
On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact the Company’s income tax provision.
For the three months ended March 31, 2021, the Company recorded an income tax provision of $735,000 on pre-tax book income of $3,010,000. The effective tax rate for the three months ended March 31, 2021 was 24%. The effective tax rate differs from the federal statutory rate of 21% primarily related to certain permanent tax differences and state and local taxes.
For the three months ended March 31, 2020, the Company recorded an income tax provision of $535,000 on pre-tax book income of $1,511,000. The effective tax rate for the three months ended March 31, 2020 was 35%. The effective tax rate differs from the statutory rate of 21% primarily related to an adjustment of certain deferred tax assets and state and local taxes.
15. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average of the number of outstanding common shares during the period. The Company had net income of $2,275,000 and $976,000 for the three months ended March 31, 2021 and 2020, respectively.
16. Capital Requirements
MSCO
Net Capital
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) of the Securities Exchange Act of 1934. Under the alternate method permitted by this rule, net capital, as defined, shall not be less than the lower of $1 million or 2% of aggregate debit items arising from customer transactions. As of March 31, 2021, MSCO’s net capital was $29.2 million, which was approximately $26.8 million in excess of its required net capital of $2.4 million, and its percentage of aggregate debit balances to net capital was 24.7%.
As of December 31, 2020, MSCO’s net capital was $27.5 million, which was approximately $25.2 million in excess of its required net capital of $2.3 million, and its percentage of aggregate debit balances to net capital was 24.3%.
Effective upon the Company’s acquisition of StockCross on January 1, 2020, the capital of MSCO and StockCross was combined.
Special Reserve Account
MSCO is subject to Customer Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of March 31, 2021, MSCO had cash deposits of $333.0 million in the special reserve accounts which was $9.3 million in excess of the deposit requirement of $323.7 million. After adjustments for deposit(s) and / or withdrawal(s) made on April 1, 2021, MSCO had $9.3 million in excess of the deposit requirement.
As of December 31, 2020, MSCO had cash deposits of $324.9 million in the special reserve accounts which was $5.0 million in excess of the deposit requirement of $319.9 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2021, MSCO had $1.0 million in excess of the deposit requirement.
Effective upon the Company’s acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined.
WPS
Net Capital
WPS, 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. WPS is also subject to the CFTC's minimum financial requirements which require that WPS 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 March 31, 2021, WPS’s net capital was approximately $3.3 million which was $3.1 million in excess of its minimum requirement of $250,000 under 15c3-1. As of December 31, 2020, WPS’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.
17. Financial Instruments with Off-Balance Sheet Risk
The Company enters into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and is, therefore, subject to varying degrees of market and credit risk.
In the normal course of business, the Company's customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose the Company to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. On a daily basis, the Company controls this risk by monitoring the market value of securities pledged and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, the Company establishes credit limits for such activities and continuously monitors compliance.
18. 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.
On April 26, 2021, FINRA proposed that StockCross enter into a settlement agreement with FINRA for alleged failures to comply with supervisory requirements relating to certain equity and options and stock lending transactions. These activities occurred prior to Siebert’s acquisition of StockCross, and FINRA proposed a fine of $300,000 in relation to the matter. On January 22, 2021, the California Department of Financial Protection and Innovation proposed that StockCross enter into a consent order related to StockCross and one of its registered representatives for activities that occurred prior to Siebert’s acquisition of StockCross. The California proposed order seeks an aggregate amount of approximately $900,000 in relation to this matter.
The Company has actively worked with legal counsel to evaluate the merit of each matter. Based on the facts of the above matters as well as historical resolutions, the Company does not believe that the above matters will have a material impact on the Company’s results of operation or its financial position.
As of March 31, 2021, all other legal matters are without merit or involve amounts which would not have a material impact on the Company’s results of operations or its financial position.
Overnight Financing
The Company has an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank as of March 31, 2021. As of March 31, 2021, the Company had no outstanding loan balance with BMO Harris Bank and there are no commitment fees or other restrictions on line of credit. As of December 31, 2020, MSCO had an additional $15 million line of credit with Texas Capital Bank, which MSCO did not renew. The removal of this line of credit did not impact MSCO’s ability to meet its liquidity requirements. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.
The interest expense and the cash paid related to the utilization of this credit line was both $14,000 and $16,000 for the three months ended March 31, 2021 and 2020, respectively. There were no fees associated with the utilization of this credit lines for the three months ended March 31, 2021 and 2020, respectively.
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 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 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 financial statements.
As part of this plan, the Company recognized expenses of $291,000 and $210,000 for the three months ended March 31, 2021 and 2020, respectively.
The Company had an accrual of $88,000 as of March 31, 2021, which represents the historical estimate of future claims to be recognized for claims incurred during the period.
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.
19. Related Party Disclosures
StockCross
Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares and StockCross was merged with and into MSCO. The purchase price paid was approximately $29,750,000 or 3,298,774 shares of the Company’s common stock which was issued in connection with the acquisition. Upon the closing of the transaction on January 1, 2020, all receivables and payables between the Company and StockCross were eliminated upon consolidation.
Kennedy Cabot Acquisition, LLC
Kennedy Cabot Acquisition, LLC (“KCA”) is an affiliate of the Company 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 for payroll and related functions, the entirety of which KCA passes through to the subsidiaries of the Company proportionally. In addition, KCA has purchased the naming rights of the Company for the Company to use.
KCA sponsors a 401(k) profit sharing plan which covers substantially all of the Company’s employees. Employee contributions to the plan are at the discretion of eligible employees. There were no contributions by the Company or KCA to the plan for the three months ended March 31, 2021 and 2020. In January 2020, MSCO sold approximately $288,000 worth of a private equity security to KCA at cost.
For the three months ended March 31, 2021 and 2020, KCA has earned no profit for providing these services as KCA passes through any revenue or expenses to the Company’s subsidiaries.
Park Wilshire Companies, Inc.
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties was $49,000 and $37,000 for the three months ended March 31, 2021 and 2020, respectively.
Gloria E. Gebbia and John J. Gebbia
The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. Refer to Note 11 – Notes Payable - Related Party for additional detail.
In addition, the Company’s obligations under its agreement with East West Bank are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually, and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994, and Gloria E. Gebbia, individually and as a co-trustee of the Trust. Refer to Note 10 – Long-Term Debt for additional detail.
Gloria E. Gebbia has extended loans to certain Company employees for the purchase of the Company’s shares. These transactions have not materially impacted the Company’s financial statements.
Gebbia Sullivan County Land Trust
The Company operates on a month-to-month lease agreement for its branch office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a member of the Gebbia Family. For both the three months ended March 31, 2021 and 2020, rent expense was $15,000 for this branch office.
20. Subsequent Events
The Company has evaluated events that have occurred subsequent to March 31, 2021 and through May 17, 2021, the date of the filing of this Report.
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 financial statements as of March 31, 2021.