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
discount 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. (“AdvisorNXT”), a New York corporation registered with the SEC as a Registered Investment Advisor under the Investment Advisers Act of 1940, as amended, its insurance business through its wholly-owned subsidiary, Park Wilshire
Companies, Inc. (“PWC”), a Texas corporation and licensed insurance agency, and KCA Technologies, LLC. (“KCAT”), a Nevada limited liability company and developer of robo-advisory technology. For purposes of this Form 10-K, the terms “Siebert,”
“Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, AdvisorNXT, PWC, and KCAT 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
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 are able to 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 years ended December 31, 2018 and 2017 were derived from its operations in the U.S.
Transactions completed during 2018
Acquisition of KCAT
On August 21, 2018, the Company acquired all of the issued and outstanding membership interests of KCAT 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. KCAT is a technology company initially tasked with developing a
sophisticated Robo-Advisor for AdvisorNXT, the Company’s RIA. The Robo-Advisor provides clients with an automated wealth management solution intended to maximize portfolio returns based on the client’s specific risk tolerance.
Acquisition of PWC
In March 2018, the Company acquired all of the issued and outstanding shares of PWC from three related parties for
approximately $110,000 (equal to the amount of cash held in PWC’s bank accounts at the time). The Board of Directors reviewed the transaction and concluded that, given the amount of the purchase price, the fact that the purchase price equaled the
cash on hand in PWC’s bank accounts, and that PWC had no liabilities, the acquisition was not material and did not require a third party valuation.
The sellers agreed to indemnify the Company from all liability attendant to the prior business activities of PWC. David
J. Gebbia agreed to continue as the unpaid CEO of PWC.
Transactions completed in prior to 2018
Acquisition of StockCross Retail Assets
The Company entered into an agreement to acquire most of the retail broker-dealer business of StockCross Financial
Services (“StockCross”), an affiliate of the Company, in exchange for 5,072,062 shares of the Company’s restricted Common Stock, subject to a two-year lock-up, valued at $19,984,000. Approximately $125,000 of legal and appraisal fees were
incurred in the consummation of the transaction. In addition, the Company acquired various rent obligations, transferred employees and customer lists.
As StockCross was determined to be an entity under common control, the assets and liabilities transferred to the Company
from StockCross were recorded at historical cost in accordance with ASC 805-50, Business Combinations - Related Issues. The difference between the consideration paid and historical cost of the net assets acquired was recorded as an equity
distribution by the Company. ASC 805-50 transactions between entities under common control stipulates a common control transaction as a transfer of net assets or an exchange of equity interests between entities under common control. Since the
assets acquired from StockCross had a book value of nil, the
fair market value of
assets acquired, approximately
$19,984,000, was reflected as nil for financial statement purposes as of the date of transfer as required by ASC 805-50.
Siebert 2018 Form 10-K 29
Additionally, as the transfer of net assets and related operations did not change the composition of MSCO as a reporting
entity, retrospective combination of the entities for all periods presented as if the combination has been in effect since the inception of common control is not required. Accordingly, the net assets transferred and related operations are
presented prospectively as of the effective date of November 30, 2017.
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.
Use of Estimates
The preparation of 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 at the date of the 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 relating to its deferred tax assets based on the more likely than not criteria. The Company
believes that its estimates are reasonable.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications
have no effect on previously reported net income.
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 the years ended December 31, 2018 and 2017, the Company did not hold any cash equivalents.
Receivables from Clearing and Other Brokers
Retail customer transactions are cleared, on a fully disclosed basis, through two clearing brokers, StockCross and NFS,
the former of which is an affiliate. The Company operates on a month to month basis with both clearing brokers and they offset their fees against the Company's revenues on a monthly basis. Receivables from clearing and other brokers include
amounts receivable as well as cash on deposit. As of the years ended December 31, 2018 and 2017, cash clearing deposits with StockCross and NFS were $75,000 and $50,000, respectively.
The Company evaluates receivables from clearing organizations and other brokers for collectability noting no amount was
considered uncollectable as of the years ended December 31, 2018 and 2017. No valuation allowance is recognized for receivables from clearing and other brokers as the Company does not have a history of losses from receivables from clearing and
other brokers and does not anticipate losses in the future.
Siebert 2018 Form 10-K 30
Furniture, Equipment and Leasehold Improvements
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 lives of the assets, generally not exceeding four years. Leasehold improvements are amortized over the shorter of the useful life or remaining lease term unless the lease
transfers ownership of the underlying asset to the lessee or lessee is reasonably certain to exercise an option to purchase the underlying asset, in which case the lessee will amortize over the useful life of the leasehold improvements.
Software
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.
Amortization of Intangible Assets
The Company has a finite-lived intangible asset in the Robo-Advisor acquired from KCAT. Intangible assets with finite
lives are amortized on a straight-line basis over their estimated useful lives. The Company acquired the Robo-Advisor from KCAT in August 2018. The Robo-Advisor has an estimated useful life of 3 years and the Company will start to amortize it in
2019.
Advertising Costs
Advertising costs are expensed as incurred and totaled $45,000 and $87,000 for the years ended December 31, 2018 and
2017, respectively.
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, 2018 and 2017.
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.
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.
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.
Siebert 2018 Form 10-K 31
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.
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.
The following table presents the major revenue categories and when each category is recognized:
|
|
Year Ended December 31,
|
|
|
|
Revenue Category
|
|
2018
|
|
|
2017
|
|
|
Timing of Recognition
|
Trading Execution and Clearing Services
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
9,504,000
|
|
|
$
|
4,801,000
|
|
|
Recorded on trade date
|
Principal transactions
|
|
$
|
9,020,000
|
|
|
$
|
1,639,000
|
|
|
Recorded on trade date
|
Advisory fees and additional income
|
|
$
|
584,000
|
|
|
$
|
70,000
|
|
|
Recorded as earned
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees
|
|
|
|
|
|
|
|
|
|
|
Margin interest
|
|
$
|
7,663,000
|
|
|
$
|
3,726,000
|
|
|
Recorded as earned
|
12b1 fees
|
|
|
3,265,000
|
|
|
|
2,874,000
|
|
|
Recorded as earned
|
Total Margin interest, marketing and distribution fees
|
|
$
|
10,928,000
|
|
|
$
|
6,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
30,036,000
|
|
|
$
|
13,110,000
|
|
|
|
The following table presents each revenue category and its related performance obligation:
Revenue Stream
|
Performance Obligation
|
Principal transactions, Commissions and fees, Advisory fees and additional income
|
Provide security trading services to customer and act as agent
|
Margin interest, marketing and distribution fees
|
n/a
|
Siebert 2018 Form 10-K 32
Disaggregation of Revenue
The following table presents a breakdown of the Company’s revenue between the amounts attributed to the legacy Siebert
customer base vs. the accounts acquired from the StockCross Retail Assets:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenue from Principal transactions:
|
|
|
|
|
|
|
Principal transactions – Legacy Siebert
|
|
$
|
1,894,000
|
|
|
$
|
490,000
|
|
Principal transactions – StockCross Retail Assets
|
|
|
7,126,000
|
|
|
|
1,149,000
|
|
Total Revenue from Principal transactions
|
|
$
|
9,020,000
|
|
|
$
|
1,639,000
|
|
|
|
|
|
|
|
|
|
|
Revenue from Commissions and fees:
|
|
|
|
|
|
|
|
|
Commissions and fees – Legacy Siebert
|
|
$
|
7,792,000
|
|
|
$
|
4,527,000
|
|
Commissions and fees – StockCross Retail Assets
|
|
|
1,712,000
|
|
|
|
274,000
|
|
Total Revenue from Commissions and fees
|
|
$
|
9,504,000
|
|
|
$
|
4,801,000
|
|
|
|
|
|
|
|
|
|
|
Revenue from Margin interest, marketing and distribution fees:
|
|
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees – Legacy Siebert
|
|
$
|
9,674,000
|
|
|
$
|
6,409,000
|
|
Margin interest, marketing and distribution fees – StockCross Retail Assets
|
|
|
1,254,000
|
|
|
|
191,000
|
|
Total Revenue from Margin interest, marketing and distribution fees
|
|
$
|
10,928,000
|
|
|
$
|
6,600,000
|
|
|
|
|
|
|
|
|
|
|
Additional Revenue:
|
|
|
|
|
|
|
|
|
Advisory fees – Legacy Siebert
|
|
|
478,000
|
|
|
|
51,000
|
|
Interest – Legacy Siebert
|
|
|
106,000
|
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
30,036,000
|
|
|
$
|
13,110,000
|
|
Income Taxes
The results of operations are included in the consolidated federal 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 financial statements, utilizing currently
enacted tax laws and rates. Deferred tax expenses or benefits are recognized in the 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 makes adjustments to 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, 2018 and 2017.
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 establishes a valuation allowance. 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 results of operations and financial condition.
Evaluation of Subsequent Events
The Company has evaluated events that have occurred subsequent to December 31, 2018 and through March 26, 2019, the date
of the filing of this report. As previously disclosed in a Current Report on Form 8-K on January 18, 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. The number of shares purchased by the Company was 922,875 at a
per share price of approximately $3.97.
There have been no additional 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 December 31, 2018.
Siebert 2018 Form 10-K 33
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.
Recently Issued Accounting Pronouncements
ASU 2016-02
– In
February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 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 (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet 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 income statement. The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company expects to adopt 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 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. The Company expects to recognize a material asset and a corresponding liability with
no material impact to operating results.
Recently Adopted Accounting Pronouncements
ASU 2014-09
– In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common
revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)." ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing." ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services. These ASUs are effective for
public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
The Company adopted this guidance starting the first quarter of 2018. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at
the date of initial application and not adjusting comparative information. The Company has adopted ASC 606 using the modified retrospective method (i.e., cumulative effect method).
Siebert 2018 Form 10-K 34
3. Receivables from and Payable to Brokers, Dealers, and Clearing Organizations
Amounts receivable from / payable to brokers, dealers and clearing organizations consisted of the following as of the
periods indicated:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Receivables from clearing and other brokers
|
|
|
|
|
|
|
NFS
|
|
$
|
1,664,000
|
|
|
$
|
1,396,000
|
|
StockCross
|
|
|
310,000
|
|
|
|
—
|
|
Other receivables
|
|
|
31,000
|
|
|
|
—
|
|
Citibank
|
|
|
25,000
|
|
|
|
—
|
|
Total Receivables from clearing and other brokers
|
|
$
|
2,030,000
|
|
|
$
|
1,396,000
|
|
|
|
|
|
|
|
|
|
|
Receivable from related party
|
|
|
|
|
|
|
|
|
StockCross
|
|
$
|
1,000,000
|
|
|
$
|
283,000
|
|
Total Receivable from related party
|
|
$
|
1,000,000
|
|
|
$
|
283,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to clearing brokers and related parties
|
|
|
|
|
|
|
|
|
NFS
|
|
$
|
58,000
|
|
|
$
|
—
|
|
StockCross
|
|
|
46,000
|
|
|
|
127,000
|
|
MSCO
|
|
|
29,000
|
|
|
|
—
|
|
Total Due to clearing brokers and related parties
|
|
$
|
133,000
|
|
|
$
|
127,000
|
|
4. Furniture, Equipment and Leasehold Improvements, Net
Furniture, equipment and leasehold improvements consisted of the following as of the periods indicated:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Leasehold improvements
|
|
$
|
545,000
|
|
|
$
|
267,000
|
|
Equipment
|
|
|
52,000
|
|
|
|
52,000
|
|
Total Furniture, equipment, and leasehold improvements
|
|
|
597,000
|
|
|
|
319,000
|
|
Less accumulated depreciation and amortization
|
|
|
(129,000
|
)
|
|
|
(56,000
|
)
|
Total Furniture, equipment, and leasehold improvements, net
|
|
$
|
468,000
|
|
|
$
|
263,000
|
|
5. Software, Net
Software consisted of the following as of the periods indicated:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Intangible asset – Robo-Advisor
|
|
$
|
763,000
|
|
|
$
|
—
|
|
Other purchased software
|
|
|
459,000
|
|
|
|
97,000
|
|
Total Software
|
|
|
1,222,000
|
|
|
|
97,000
|
|
Less accumulated amortization – Robo-Advisor
|
|
|
—
|
|
|
|
—
|
|
Less accumulated amortization – Other purchased software
|
|
|
(85,000
|
)
|
|
|
(13,000
|
)
|
Total Software, net
|
|
$
|
1,137,000
|
|
|
$
|
84,000
|
|
The Company generally recognizes software initially at cost and amortize 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 KCAT. The Company estimates future amortization related to all software assets of
$398,000, $398,000 and $341,000 in the years ending December 31, 2019, 2020, and 2021, respectively.
Siebert 2018 Form 10-K 35
6. Income Taxes
Income taxes consist of the following:
Current income tax (benefit) / expense, which represents the amount of federal tax and state and local tax currently
payable or receivable, including interest and penalties and amounts accrued for unrecognized tax benefits, if any, and;
Deferred income tax (benefit) / expense, which represents the net change in the deferred tax assets or liability balance
during the year, including any change in the valuation allowance.
|
|
Year Ending December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
948,000
|
|
|
$
|
51,000
|
|
State and local
|
|
|
26,000
|
|
|
|
102,000
|
|
Total Current
|
|
$
|
974,000
|
|
|
$
|
153,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,248,000
|
)
|
|
$
|
—
|
|
State and local
|
|
|
(2,328,000
|
)
|
|
|
—
|
|
Total Deferred
|
|
$
|
(5,576,000
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Income tax (benefit) / expense
|
|
$
|
(4,602,000
|
)
|
|
$
|
153,000
|
|
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
income taxes is as follows for the periods indicated:
|
|
Year Ending December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
Net effect of:
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
0.2
|
%
|
|
|
1.2
|
%
|
Depreciation
|
|
|
(0.9
|
%)
|
|
|
(4.5
|
%)
|
Tax amortization of intangible assets
|
|
|
(3.8
|
%)
|
|
|
(1.6
|
%)
|
Other temporary differences
|
|
|
(1.3
|
%)
|
|
|
(12.1
|
%)
|
Net operating loss
|
|
|
(2.6
|
%)
|
|
|
(13.2
|
%)
|
Increase due to state and local taxes, net of U.S.
federal income tax effects
|
|
|
0.6
|
%
|
|
|
2.8
|
%
|
Total Current effective income tax rate
|
|
|
13.2
|
%
|
|
|
6.6
|
%
|
Reversal of deferred tax assets valuation allowance
|
|
|
(75.8
|
%)
|
|
|
—
|
|
Total Effective income tax rate
|
|
|
(62.6
|
%)
|
|
|
6.6
|
%
|
Tax Cuts and Jobs Act
In regard to the effect of the Tax Cuts and Jobs Act, which lowered U.S. federal corporate income tax rates from 34% to
21%, the Company determined that the primary impact was a reduction in income tax expense in 2018 as well the projected income tax expense subsequent years. The statutory federal income tax rate in effect of 21% as of January 1, 2018 was utilized
to calculate the income tax provision and the deferred tax assets as of December 31, 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, 2018 were approximately $16.1
million and $27.1 million, respectively, which expire by 2036. 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.
Siebert 2018 Form 10-K 36
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, 2018, 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 financial statements as of December 31, 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;
|
•
|
Tax planning strategies; and
|
•
|
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 net operating loss, including the effect of reversing taxable temporary differences; and
|
•
|
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 net operating loss 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 this portion of the deferred tax assets.
Siebert 2018 Form 10-K 37
Below is a breakout of the deferred tax assets, net of valuation allowance as of the periods indicated. Prior period
amounts were adjusted to reflect the impact from the Tax Cuts and Jobs Act:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
5,811,000
|
|
|
$
|
6,596,000
|
|
|
|
$
|
5,811,000
|
|
|
$
|
6,596,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Furniture, equipment and leasehold improvements
|
|
$
|
(193,000
|
)
|
|
$
|
(79,000
|
)
|
Contribution carryover
|
|
|
—
|
|
|
|
126,000
|
|
Intangible assets
|
|
|
—
|
|
|
|
(25,000
|
)
|
Other reconciling items
|
|
|
(42,000
|
)
|
|
|
—
|
|
|
|
$
|
(235,000
|
)
|
|
$
|
22,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,576,000
|
|
|
$
|
6,618,000
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(6,618,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
5,576,000
|
|
|
$
|
—
|
|
7. 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 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 net capital rule 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, 2018, MSCO had net capital of
approximately $8.9 million, which was $8.7 million in excess of required net capital of $250,000. As of December 31, 2017, MSCO had net capital of approximately $4.4 million, which was $4.2 million in excess of required net capital of $250,000.
MSCO claims exemption from the reserve requirements under the 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.
Our cash and cash equivalents are unrestricted and are used to fund our working capital needs. The Company’s total
assets as of December 31, 2018 were approximately $18.2 million, of which $7.2 million, or approximately 40%, is highly liquid. The Company’s total assets as of December 31, 2017 were approximately $6.0 million, of which $3.8 million, or
approximately 62%, is highly liquid.
8. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
Retail customer transactions are cleared, on a fully disclosed basis, through two clearing brokers, one of which is an
affiliate. In the event that customers are unable to fulfill their contractual obligations, the clearing broker 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, 2018 have settled subsequent thereto with no
material adverse effect on the Company's 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.
9. Commitments, Contingencies and Other
Lease Commitments
The Company rents office space under operating leases expiring in 2019 through 2024. The leases call for base rent plus
escalations as well as property taxes and other operating expenses.
Siebert 2018 Form 10-K 38
Future annual minimum base rental payments under these operating leases are as follows as of December 31, 2018:
Year
|
|
Amount
|
|
2019
|
|
$
|
686,000
|
|
2020
|
|
|
651,000
|
|
2021
|
|
|
628,000
|
|
2022
|
|
|
489,000
|
|
2023 and thereafter
|
|
|
507,000
|
|
Total
|
|
$
|
2,961,000
|
|
Rent and related operating expenses amounted to $988,000 and $437,000 for the years ended December 31, 2018 and 2017,
respectively.
As part of the Company’s renovation of its office in Jersey City, as of December 31, 2018, the Company has a receivable
from the landlord of $171,000 for tenant improvements that will be reimbursed to the Company upon the completion of the renovation. In line with the guidance under ASC 840, the Company has a tenant improvement asset and corresponding lease
incentive liability recorded for this lease. The lease incentive liability will be amortized into income ratably over the life of the lease.
Legal and Regulatory Matters
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion
of the Company, all such matters are without merit, or involve amounts which would not have a significant effect on the financial statements of the Company.
General Contingencies
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion
of the Company’s management, all such matters are without merit, or involve amounts which would not have a significant effect on the financial statements of the Company.
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 totaling $935,000 and $546,000 for the years ended December 31,
2018 and 2017, respectively. The Company had an accrual of $50,000 and $28,000 as of the years ended December 31, 2018 and 2017, respectively, which represents the historical estimate of future claims to be recognized for claims incurred prior to
December 31, 2018 and 2017, respectively.
Siebert 2018 Form 10-K 39
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.
10. Employee Benefit Plans
The Company 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 in 2018
or 2017.
11. Related Party Disclosures
StockCross
StockCross and the Company are under common ownership and StockCross serves as one of the two clearing brokers for the
Company. StockCross has a clearing agreement with MSCO in which StockCross passes through all revenue and charges MSCO for related clearing expenses. Outside of the clearing agreement, MSCO has an expense sharing agreement with StockCross for its
Beverly Hills office. In addition, StockCross pays some of the vendors for miscellaneous expenses which it passes through to MSCO. Lastly, as of December 31, 2018, MSCO 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. As of December 31, 2017, MSCO had a receivable from StockCross totaling $283,000.
KCA
KCA is an affiliate of the Company and StockCross. To gain efficiencies and economies of scale with billing and
administrative functions, KCA serves as a paymaster for the Company and StockCross for compensation and benefits expenses, the entirety of which KCA passes through to the Company and StockCross proportionally. In addition, KCA has purchased the
naming rights for the Company for the Company to use.
PWC
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties totaled $28,000 for the
year ended December 31, 2018.
Scilent Networks LLC (Scilent Networks)
Scilent Networks is a technology wholesaler owned by a Siebert executive that buys technology and related services on
behalf of the Company at a reduced cost and then passes through the cost to the Company. Total expenses related to Scilent Networks totaled $133,000 and $112,000 for the years ended December 31, 2018 and 2017, respectively.
12. Summarized Quarterly Financial Data (unaudited)
|
|
2018
|
|
|
2017
|
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
Revenue
|
|
$
|
8,177,000
|
|
|
$
|
7,488,000
|
|
|
$
|
7,884,000
|
|
|
$
|
6,487,000
|
|
|
$
|
2,379,000
|
|
|
$
|
2,689,000
|
|
|
$
|
3,089,000
|
|
|
$
|
4,953,000
|
|
Net income (loss)
|
|
$
|
1,693,000
|
|
|
$
|
1,799,000
|
|
|
$
|
3,119,000
|
|
|
$
|
5,351,000
|
|
|
$
|
58,000
|
|
|
$
|
365,000
|
|
|
$
|
1,001,000
|
|
|
$
|
733,000
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
$
|
0.20
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|