**Shares outstanding as of December 31, 2019 represents the combined total of the Company’s shares outstanding and the shares issued for the Company’s
acquisition of StockCross. See “Note 1 – Organization and Basis of Presentation” for additional detail.
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.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
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 its retail brokerage business through its wholly-owned subsidiary, Muriel Siebert & Co.,
Inc. (“MSCO”), a Delaware corporation and registered broker-dealer, its investment advisory business through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the U.S. Securities and Exchange
Commission (“SEC”) as a Registered Investment Adviser under the Investment Advisers Act of 1940, as amended, and its insurance business through its wholly-owned subsidiary, Park Wilshire Companies, Inc. (“PWC”), a Texas corporation and licensed
insurance agency. Siebert conducts operations through its wholly-owned subsidiary, Siebert Technologies, LLC. (“STCH”), a Nevada limited liability company and developer of robo-advisory
technology. Siebert offers prime brokerage services through its fifth wholly-owned subsidiary, Weeden Prime Services, LLC (“WP”), a Delaware limited liability company and a broker-dealer registered with the SEC. As of the beginning of May 2020, the Company filed for the name of Weeden Prime Services, LLC to be changed to WPS Prime Services, LLC, pursuant to the terms of an agreement the
Company had with the previous owners of WP. The Company also owns 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, WP, and STXD collectively, unless the context otherwise requires.
The Company is headquartered in New York, NY, with primary operations in New Jersey and California. The Company has 18 offices throughout the U.S. and clients around the world. The Company’s SEC
filings are available through the Company’s website at www.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, 2020
and 2019 were derived from its operations in the U.S.
As a result of its acquisitions of StockCross Financial Services, Inc. (“StockCross”) in January 2020 and WP in December 2019, the Company re-evaluated its
reportable segments and concluded that as of March 31, 2020, 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
As previously disclosed in a Current Report on Form 8-K filed on January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross. Subsequently, as
previously disclosed in a Current Report on Form 8-K filed on January 7, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of 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 are performed by MSCO.
Change in Reporting Entity
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 and as such, the companies have been presented on a combined basis for all periods presented in the
unaudited condensed consolidated financial statements (“financial statements”). See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.
The challenges posed by the COVID-19 pandemic on the global economy increased significantly as the first quarter of 2020 progressed. COVID-19 has spread across the globe during 2020 and is impacting
economic activity worldwide. In response to COVID-19, national and local governments around the world have 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. Based on management’s assessment as of March 31, 2020, 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. See “Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional detail on COVID-19 and its impact on the Company.
Basis of Presentation
The 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 the Company’s management, the accompanying 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 Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 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 2019 Form 10-K. The following changes to the Company’s significant accounting policies as of March 31, 2020 are primarily due to the acquisition of StockCross. Other than the updates indicated below and in “Note 2 – New Accounting Standards,” there have been no significant changes to the Company’s significant accounting policies.
Cash and Securities Segregated For Regulatory Purposes
MSCO is subject to Customer Account Rule 15c3-3 of the SEC which requires segregation of funds in a special reserve account for the exclusive benefit of customers. Effective upon the Company’s
acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined. See “Note 13 – Capital Requirements” for additional detail.
Receivables From and Payables To Customers
Accounts receivable from and payable to customers include amounts due and owed on cash and margin transactions. Securities owned by customers are held as collateral for receivables. Receivables
from customers are reported at their outstanding principal balance, adjusted for any allowance for doubtful accounts. An allowance is established when collectability is not reasonably assured. When the receivable from a brokerage client is
considered to be impaired, the amount of impairment is generally measured based on the fair value of the securities acting as collateral, which is measured based on current prices from independent sources such as listed market prices or
broker-dealer price quotations. Securities beneficially owned by customers, including those that collateralize margin or other similar transactions, are not reflected in the statements of financial condition. No valuation allowance for doubtful
accounts was necessary as of March 31, 2020 and December 31, 2019.
Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Accounts receivable from and payable to broker-dealers and clearing organizations includes amounts due from / to introducing broker-dealers, fail-to-deliver and fail-to-receive items, and amounts
receivable for unsettled regular-way transactions. Deposits with broker-dealers and clearing organizations include amounts held on deposit with broker-dealers and clearing organizations and are included in the line item “Deposits with broker-dealers
and clearing organizations.”
MSCO customer transactions for the three months ended March 31, 2020 were both self-cleared and cleared on a fully disclosed basis through National Financial Services Corp. (“NFS”). MSCO customer
transactions for the three months ended March 31, 2019 were cleared on a fully disclosed basis through NFS and StockCross, the former of which was an affiliate. As of January 1, 2020, all clearing and other services provided by StockCross are
performed by MSCO.
The Company operates on a month to month basis with its broker-dealers and clearing organizations and their fees are offset against the Company's revenues on a monthly basis. As of March 31,
2020, cash clearing deposits with NFS were $50,000. As of December 31, 2019, cash clearing deposits with NFS and StockCross were $50,000 and $75,000, respectively. Upon the closing of the Company’s acquisition of StockCross on January 1, 2020,
all deposits with StockCross were eliminated. As of March 31, 2020 and December 31, 2019, the Company had deposits with and other non current receivables from broker-dealers and clearing organizations of approximately $2.2 million and $1.8
million, respectively.
Institutional customer transactions clear on a fully disclosed basis through two clearing broker-dealers, The Goldman Sachs Group, Inc. (“Goldman Sachs”) and Pershing LLC (“Pershing”). Amounts
payable to broker-dealers and clearing organizations are offset against amounts receivables from broker-dealers and clearing organizations. Receivables from these broker-dealers and clearing organizations are subject to clearance agreements and
include the net receivable from net monthly revenues as well as cash on deposit. As of both March 31, 2020 and December 31, 2019, cash clearing deposits with Goldman Sachs and Pershing were approximately $2 million and $1 million.
The Company evaluates receivables from broker-dealers and clearing organizations and other receivables for collectability noting no amount was considered uncollectable as of March 31, 2020 and
December 31, 2019. No valuation allowance is recognized for these receivables as the Company does not have a history of losses from these receivables and does not anticipate losses in the future. See “Note 9 –
Revenue Recognition” for additional detail on the accounting policies for the revenue related to these receivables.
Securities Borrowed and Securities Loaned
Securities borrowed are recorded at the amount of cash collateral advanced. Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the
lender. Securities loaned are recorded at the amount of cash collateral received. For securities borrowed and loaned, the Company monitors the market value of the securities and obtains or refunds collateral as necessary.
Securities Owned, at Fair Value
Securities owned, at fair value represent marketable securities owned by the Company at trade-date valuation. See “Note 5 – Fair Value Measurements” for
additional detail.
Payables to Non-Customers
Accounts payable to non-customers includes amounts due on cash and margin transactions on accounts owned and controlled by principal officers, directors and stockholders of the Company. Payables to
non-customers amounts include any amounts received from interest on credit balances.
Payables to non-customers also include amounts due on cash transactions owned and controlled by the Company’s proprietary accounts of introducing broker-dealers. Effective upon the Company’s
acquisition of StockCross on January 1, 2020, the Company no longer had any proprietary accounts of introducing broker-dealers.
Securities Sold, Not Yet Purchased, at Fair Value
Securities sold, not yet purchased, at fair value represent marketable securities sold by the Company prior to purchase at trade-date valuation. See “Note 5 –
Fair Value Measurements” for additional detail.
2. New Accounting Standards
Recently Adopted Accounting Pronouncements
ASU 2018-15 - In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers to apply the same criteria for capitalizing implementation
costs incurred in a cloud computing arrangement that is hosted by the vendor as they would for an arrangement that has a software license. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption
is permitted. The standard can be adopted prospectively or retrospectively. The Company adopted this new standard on January 1, 2020 and determined it was immaterial to the Company’s financial statements as of March 31, 2020.
ASU 2018-13 - In August 2018, the FASB issued ASU 2018-13, Fair value Measurement (Accounting Standards Codification (“ASC”) 820): Disclosure
Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The standard is effective for annual periods, including interim
periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The Company adopted the new standard on its effective date, January 1, 2020, and determined it was immaterial to the Company’s financial
statements as of March 31, 2020.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the Company’s financial statements and
related disclosures as of March 31, 2020.
Recently Issued Accounting Pronouncements
ASU 2018-07 - In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718). ASU 2018-07 is intended to reduce
cost and complexity of financial reporting for non-employee share-based payments. Currently, the accounting requirements for non-employee and employee share-based payments are significantly different. ASU 2018-07 expands the scope of Topic 718, which
currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned.
This ASU supersedes Subtopic 505-50, “Equity - Equity-Based Payments to Nonemployees.” The amendments to ASU 2018-07 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December
15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09, (Topic 606), “Revenue from Contracts with Customers.” The Company determined the impact from this accounting pronouncement was immaterial to the
Company’s financial statements as of March 31, 2020.
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 consist primarily of market making, fixed-income products, 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, pursuant to an Agreement and Plan of Merger, 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 restricted common stock which was issued in connection with the acquisition. Prior to the acquisition, MSCO had a clearing agreement with StockCross whereby StockCross
provided custody and clearing services to MSCO for its securities broker-dealer business; however, as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
The acquisition of StockCross provides new business lines to the Company such as market making, equity stock plan services, self-clearing and custody, and securities lending. Merging StockCross into
MSCO increases MSCO’s total net capital and assets under management as well as adds two offices. In addition, StockCross provides an equity stock plan service business line that offers integrated and comprehensive solutions to corporate service
clients and employee participants.
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.
A common-control transaction is similar to a business combination for the Company as it is the entity that received the net assets of StockCross; however, this common-control transaction does not
meet the definition of a business combination in accordance with GAAP because there is no change in control over the net assets.
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 the companies have been presented on a combined basis for all periods presented in the financial statements in a manner similar to a pooling of interests, as the period of common control existed
prior to the periods presented in the financial statements. Accordingly, the historical financial statements of the Company have been presented under the “as if pooling” method.
Prior to the Company’s acquisition of StockCross, StockCross sold its treasury stock totaling $172,000 to third parties, and as
indicated above, the Company purchased approximately 15% of the outstanding shares of StockCross from an unrelated party for $3,665,000. These transactions are reflected in the “Cash flows from financing activities” section of the statements
of cash flows.
Assets Acquired and Liabilities Assumed
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 acquired
|
|
|
|
|
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 acquired
|
|
|
499,211,000
|
|
|
|
|
|
|
Net Assets acquired
|
|
$
|
15,714,000
|
|
Pro Forma Statements
The following pro forma financial statements present the statements of income of the Company as if the acquisition of StockCross had occurred on January 1, 2019, inclusive of pro forma adjustments
(unaudited). The combined results of these pro forma financial statements are also reflected in the Company’s financial statements. StockCross’ statement of income and statement of financial condition have already been consolidated in the Company’s
financial statements for the periods presented for 2020:
Statements of Operations (unaudited)
|
|
Three Months Ended March 31, 2019
|
|
|
|
Siebert
|
|
|
StockCross
|
|
|
Pro Forma
Adjustments
|
|
|
Total Combined
Siebert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
1,864,000
|
|
|
$
|
404,000
|
|
|
$
|
—
|
|
|
$
|
2,268,000
|
|
Margin interest, marketing and distribution fees
|
|
|
2,772,000
|
|
|
|
784,000
|
|
|
|
—
|
|
|
|
3,556,000
|
|
Principal transactions
|
|
|
1,610,000
|
|
|
|
280,000
|
|
|
|
—
|
|
|
|
1,890,000
|
|
Interest income
|
|
|
15,000
|
|
|
|
1,158,000
|
|
|
|
—
|
|
|
|
1,173,000
|
|
Market making
|
|
|
—
|
|
|
|
563,000
|
|
|
|
—
|
|
|
|
563,000
|
|
Stock borrow / stock loan
|
|
|
—
|
|
|
|
581,000
|
|
|
|
—
|
|
|
|
581,000
|
|
Advisory fees
|
|
|
168,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
168,000
|
|
Other income
|
|
|
—
|
|
|
|
138,000
|
|
|
|
(59,000
|
)
|
|
|
79,000
|
|
Total Revenue
|
|
|
6,429,000
|
|
|
|
3,908,000
|
|
|
|
(59,000
|
)
|
|
|
10,278,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
2,835,000
|
|
|
|
1,693,000
|
|
|
|
—
|
|
|
|
4,528,000
|
|
Clearing fees, including execution costs
|
|
|
654,000
|
|
|
|
207,000
|
|
|
|
(59,000
|
)
|
|
|
802,000
|
|
Technology and communications
|
|
|
247,000
|
|
|
|
175,000
|
|
|
|
—
|
|
|
|
422,000
|
|
Other general and administrative
|
|
|
385,000
|
|
|
|
348,000
|
|
|
|
—
|
|
|
|
733,000
|
|
Data processing
|
|
|
—
|
|
|
|
543,000
|
|
|
|
—
|
|
|
|
543,000
|
|
Rent and occupancy
|
|
|
295,000
|
|
|
|
236,000
|
|
|
|
—
|
|
|
|
531,000
|
|
Professional fees
|
|
|
502,000
|
|
|
|
381,000
|
|
|
|
—
|
|
|
|
883,000
|
|
Depreciation and amortization
|
|
|
175,000
|
|
|
|
19,000
|
|
|
|
—
|
|
|
|
194,000
|
|
Interest expense
|
|
|
—
|
|
|
|
21,000
|
|
|
|
—
|
|
|
|
21,000
|
|
Total Expenses
|
|
|
5,093,000
|
|
|
|
3,623,000
|
|
|
|
(59,000
|
)
|
|
|
8,657,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investment in related party
|
|
|
39,000
|
|
|
|
—
|
|
|
|
(39,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit) for (from) income taxes
|
|
|
1,375,000
|
|
|
|
285,000
|
|
|
|
(39,000
|
)
|
|
|
1,621,000
|
|
Provision (benefit) for (from) income taxes
|
|
|
369,000
|
|
|
|
39,000
|
|
|
|
(11,000
|
)
|
|
|
397,000
|
|
Net income / (loss)
|
|
$
|
1,006,000
|
|
|
$
|
246,000
|
|
|
$
|
(28,000
|
)
|
|
$
|
1,224,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
27,157,188
|
|
|
|
6,152,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares used to compute net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,459,804
|
|
Statements of Financial Condition
|
|
As of December 31, 2019
|
|
|
|
Siebert
|
|
|
StockCross
|
|
|
Pro Forma
Adjustments
(unaudited)
|
|
|
Total Combined Siebert
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,082,000
|
|
|
$
|
1,588,000
|
|
|
$
|
—
|
|
|
$
|
4,670,000
|
|
Cash and securities segregated for regulatory purposes
|
|
|
110,000
|
|
|
|
224,814,000
|
|
|
|
—
|
|
|
|
224,924,000
|
|
Receivables from customers
|
|
|
—
|
|
|
|
86,331,000
|
|
|
|
—
|
|
|
|
86,331,000
|
|
Receivables from broker-dealers and clearing organizations
|
|
|
3,067,000
|
|
|
|
1,265,000
|
|
|
|
(808,000
|
)
|
|
|
3,524,000
|
|
Receivables from related party
|
|
|
1,000,000
|
|
|
|
—
|
|
|
|
(1,000,000
|
)
|
|
|
—
|
|
Other receivables
|
|
|
223,000
|
|
|
|
627,000
|
|
|
|
(88,000
|
)
|
|
|
762,000
|
|
Prepaid expenses and other assets
|
|
|
624,000
|
|
|
|
346,000
|
|
|
|
—
|
|
|
|
970,000
|
|
Securities borrowed
|
|
|
—
|
|
|
|
193,529,000
|
|
|
|
—
|
|
|
|
193,529,000
|
|
Securities owned, at fair value
|
|
|
—
|
|
|
|
3,018,000
|
|
|
|
—
|
|
|
|
3,018,000
|
|
Total Current assets
|
|
|
8,106,000
|
|
|
|
511,518,000
|
|
|
|
(1,896,000
|
)
|
|
|
517,728,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with broker-dealers and clearing organizations
|
|
|
3,186,000
|
|
|
|
1,840,000
|
|
|
|
(75,000
|
)
|
|
|
4,951,000
|
|
Furniture, equipment and leasehold improvements, net
|
|
|
1,131,000
|
|
|
|
19,000
|
|
|
|
—
|
|
|
|
1,150,000
|
|
Software, net
|
|
|
1,888,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,888,000
|
|
Lease right-of-use assets
|
|
|
2,810,000
|
|
|
|
1,141,000
|
|
|
|
—
|
|
|
|
3,951,000
|
|
Equity method investment in related party
|
|
|
3,360,000
|
|
|
|
—
|
|
|
|
(3,360,000
|
)
|
|
|
—
|
|
Deferred tax assets
|
|
|
4,981,000
|
|
|
|
407,000
|
|
|
|
—
|
|
|
|
5,388,000
|
|
Intangible assets, net
|
|
|
1,022,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,022,000
|
|
Goodwill
|
|
|
1,989,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,989,000
|
|
Total Assets
|
|
$
|
28,473,000
|
|
|
$
|
514,925,000
|
|
|
$
|
(5,331,000
|
)
|
|
$
|
538,067,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables to customers
|
|
$
|
—
|
|
|
$
|
308,091,000
|
|
|
$
|
—
|
|
|
$
|
308,091,000
|
|
Payables to non-customers
|
|
|
—
|
|
|
|
9,151,000
|
|
|
|
(1,088,000
|
)
|
|
|
8,063,000
|
|
Drafts payable
|
|
|
—
|
|
|
|
2,834,000
|
|
|
|
—
|
|
|
|
2,834,000
|
|
Payables to broker-dealers and clearing organizations
|
|
|
—
|
|
|
|
1,406,000
|
|
|
|
(883,000
|
)
|
|
|
523,000
|
|
Payables to related parties
|
|
|
7,000
|
|
|
|
—
|
|
|
|
(7,000
|
)
|
|
|
—
|
|
Accounts payable and accrued liabilities
|
|
|
1,473,000
|
|
|
|
963,000
|
|
|
|
7,000
|
|
|
|
2,443,000
|
|
Securities loaned
|
|
|
—
|
|
|
|
170,443,000
|
|
|
|
—
|
|
|
|
170,443,000
|
|
Securities sold, not yet purchased
|
|
|
88,000
|
|
|
|
28,000
|
|
|
|
—
|
|
|
|
116,000
|
|
Interest payable
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
Notes payable - related party
|
|
|
3,000,000
|
|
|
|
5,000,000
|
|
|
|
—
|
|
|
|
8,000,000
|
|
Current portion of lease liabilities
|
|
|
1,291,000
|
|
|
|
936,000
|
|
|
|
—
|
|
|
|
2,227,000
|
|
Total Current liabilities
|
|
|
5,869,000
|
|
|
|
498,852,000
|
|
|
|
(1,971,000
|
)
|
|
|
502,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities, less current portion
|
|
|
1,823,000
|
|
|
|
359,000
|
|
|
|
—
|
|
|
|
2,182,000
|
|
Total Liabilities
|
|
|
7,692,000
|
|
|
|
499,211,000
|
|
|
|
(1,971,000
|
)
|
|
|
504,932,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value
|
|
|
271,000
|
|
|
|
10,000
|
|
|
|
23,000
|
|
|
|
304,000
|
|
Additional paid-in capital
|
|
|
7,641,000
|
|
|
|
12,436,000
|
|
|
|
(180,000
|
)
|
|
|
19,897,000
|
|
Retained earnings
|
|
|
12,869,000
|
|
|
|
3,268,000
|
|
|
|
(3,203,000
|
)
|
|
|
12,934,000
|
|
Total Stockholders’ equity
|
|
|
20,781,000
|
|
|
|
15,714,000
|
|
|
|
(3,360,000
|
)
|
|
|
33,135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and stockholders' equity
|
|
$
|
28,473,000
|
|
|
$
|
514,925,000
|
|
|
$
|
(5,331,000
|
)
|
|
$
|
538,067,000
|
|
Pro Forma Adjustments
The pro forma results include adjustments made for the consolidation of both entities. The statements of income reflects the elimination of StockCross’ other income and the Company’s corresponding
custody and clearing fees resulting from the fully disclosed clearing relationship between MSCO and StockCross. In addition, the Company’s earnings recognized as part of its equity method investment in StockCross for the three months ended March 31,
2019 was eliminated upon consolidation. These adjustments to pre-tax income were tax affected using an estimated effective tax rate of 28.0%.
The statements of financial condition reflects the elimination of intercompany payables and receivables between the Company and StockCross as part of their ongoing business relationship, as well as
reflects the elimination of the Company’s 15% ownership of StockCross. The statements of financial condition reflects an adjustment to increase the Company’s common stock by the par value of the shares issued in connection with the transaction and to
eliminate the par value of StockCross’ common stock. The adjustments also increase additional paid-in capital for the net difference, as well as the change in retained earnings from the adjustments in the statements of operations.
Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is
it intended to be a projection of future results.
WP
Overview of Acquisition
As previously disclosed in the Company’s 2019 Form 10-K, the Company completed the acquisition of 100% of the member interests in WP and effective December 1, 2019, WP
became a wholly-owned subsidiary of the Company. The acquisition was accounted for under the acquisition method of accounting for business combinations pursuant to ASC 805 - Business Combinations and resulted in $1,989,000 of goodwill.
Pro Forma Statements
The following pro forma summary presents the statement of income of the Company as if the acquisition of WP had occurred on January 1, 2019, inclusive of pro forma adjustments (unaudited). WP’s
statement of income and statement of financial condition have already been consolidated as part of the Company’s financial statements for the periods presented for 2020:
|
|
Three Months Ended
March 31, 2019
|
|
Revenue
|
|
$
|
13,014,000
|
|
Operating income
|
|
$
|
1,334,000
|
|
Net income
|
|
$
|
967,000
|
|
The pro forma results include adjustments made for the consolidation of both entities. These adjustments take into consideration the interest expense on the promissory note used in
financing the acquisition, the amortization of the acquired intangible assets, as well as the tax effect of pro forma adjustments using an estimated combined statutory rate of 28.0%.
Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods
presented, nor is it intended to be a projection of future results.
4. Receivables From, 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, 2020
|
|
|
As of
December 31, 2019
|
|
Receivables from and deposits with broker-dealers and clearing organizations
|
|
|
|
|
|
|
DTCC / OCC / NSCC
|
|
$
|
2,956,000
|
|
|
$
|
3,059,000
|
|
Goldman Sachs
|
|
|
2,763,000
|
|
|
|
2,841,000
|
|
Pershing Capital
|
|
|
1,467,000
|
|
|
|
1,192,000
|
|
NFS
|
|
|
1,348,000
|
|
|
|
1,328,000
|
|
Securities fail-to-deliver
|
|
|
24,000
|
|
|
|
43,000
|
|
Globalshares
|
|
|
16,000
|
|
|
|
2,000
|
|
ICBC
|
|
|
10,000
|
|
|
|
10,000
|
|
Total Receivables from and deposits with broker-dealers and clearing organizations
|
|
$
|
8,584,000
|
|
|
$
|
8,475,000
|
|
|
|
|
|
|
|
|
|
|
Payables to broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
|
NFS
|
|
$
|
727,000
|
|
|
$
|
—
|
|
Securities fail-to-receive
|
|
|
306,000
|
|
|
|
523,000
|
|
Total Payables to broker-dealers and clearing organizations
|
|
$
|
1,033,000
|
|
|
$
|
523,000
|
|
5. 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. These are
categorized within cash and cash equivalents 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 March 31, 2020 and December 31,
2019.
|
|
As of March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
2,040,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,040,000
|
|
Municipal securities
|
|
|
—
|
|
|
|
938,000
|
|
|
|
—
|
|
|
|
938,000
|
|
Corporate bonds
|
|
|
—
|
|
|
|
303,000
|
|
|
|
—
|
|
|
|
303,000
|
|
Equity securities
|
|
|
139,000
|
|
|
|
259,000
|
|
|
|
—
|
|
|
|
398,000
|
|
Unit investment trusts
|
|
|
1,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000
|
|
Total Securities owned, at fair value
|
|
$
|
2,180,000
|
|
|
$
|
1,500,000
|
|
|
$
|
—
|
|
|
$
|
3,680,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
31,000
|
|
|
$
|
—
|
|
|
$
|
31,000
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
—
|
|
|
$
|
31,000
|
|
|
$
|
—
|
|
|
$
|
31,000
|
|
|
|
As of December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segregated securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
1,311,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,311,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
$
|
2,007,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,007,000
|
|
Corporate bonds
|
|
|
—
|
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
Equity securities
|
|
|
453,000
|
|
|
|
245,000
|
|
|
|
288,000
|
|
|
|
986,000
|
|
Total Securities owned, at fair value
|
|
$
|
2,460,000
|
|
|
$
|
270,000
|
|
|
$
|
288,000
|
|
|
$
|
3,018,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
88,000
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
116,000
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
88,000
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
116,000
|
|
|
|
|
Changes in Level 3 Equity Assets
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
Amount
|
|
|
Valuation Technique
|
Reason for Change
|
|
Balance – January 1, 2020
|
|
$
|
288,000
|
|
|
Liquidation value based on valuation report
|
|
|
Transfers out of level 3
|
|
|
(288,000
|
)
|
|
|
Sale of equity security
|
|
Balance – March 31, 2020
|
|
$
|
—
|
|
|
|
|
|
The following represents financial instruments in which the ending balance as of March 31, 2020 and December 31, 2019 is not carried at fair value in the
statements of financial condition:
Short-term financial instruments: The carrying value of short-term financial instruments, including cash and securities segregated for regulatory
purposes are recorded at amounts that approximate the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have
short-term maturities and carry interest rates that approximate market rates. Cash and securities segregated for regulatory purposes are classified as level 1. Securities segregated for
regulatory purposes consist of treasury notes which are categorized in the above tables as level 1 assets.
Receivables and other assets: Receivables from broker-dealers and clearing organizations, receivables from customers, other receivables, and other assets are
recorded at amounts that approximate fair value and are classified 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, and interest 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.
6. Leases
As of March 31, 2020, the Company rents office space under operating leases expiring in 2020 through 2024, and the Company has no financing leases. The leases call for base rent
plus escalations as well as other operating expenses. The following table represents the Company’s lease right-of-use assets and lease liabilities on the 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. The Company acquired two leases from its acquisition of StockCross, the impact of which is reflected in the
following disclosures.
As of March 31, 2020, 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, 2020
|
|
|
As of
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
Lease right-of-use assets
|
|
$
|
3,430,000
|
|
|
$
|
3,951,000
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Lease liabilities
|
|
$
|
3,845,000
|
|
|
$
|
4,409,000
|
|
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, 2020
|
|
Weighted average remaining lease term – operating leases (in years)
|
|
|
2.5
|
|
Weighted average discount rate – operating leases
|
|
|
5.0
|
%
|
The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate lease and non-lease components, and as such, the variable lease
cost primarily represents variable payments such as common area maintenance and utilities which are determined by the leased square footage in proportion to the overall office building.
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
571,000
|
|
|
$
|
363,000
|
|
Short-term lease cost
|
|
|
39,000
|
|
|
|
130,000
|
|
Variable lease cost
|
|
|
117,000
|
|
|
|
38,000
|
|
Sublease income
|
|
|
—
|
|
|
|
—
|
|
Total Rent and occupancy
|
|
$
|
727,000
|
|
|
$
|
531,000
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
614,000
|
|
|
$
|
382,000
|
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,915,000
|
|
|
$
|
5,732,000
|
|
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of March 31, 2020 were as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
1,772,000
|
|
2021
|
|
|
1,114,000
|
|
2022
|
|
|
599,000
|
|
2023
|
|
|
543,000
|
|
2024
|
|
|
56,000
|
|
Remaining balance of lease payments
|
|
|
4,084,000
|
|
Difference between undiscounted cash flows and discounted cash flows
|
|
|
239,000
|
|
Lease liabilities
|
|
$
|
3,845,000
|
|
Rent and occupancy expenses were $727,000 and $531,000 for the three months ended March 31, 2020 and 2019, respectively.
7. Goodwill and Intangible Assets, Net
Goodwill
As of March 31, 2020 and December 31, 2019, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of WP.
Intangible Assets, Net
As of March 31, 2020 and December 31, 2019, the Company had intangible assets consisting of WP’s customer relationships and WP’s 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 WP, 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.
Impairment
For the three months ended March 31, 2020, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and other tangible and intangible assets.
8. Notes Payable - Related Party
As of March 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
|
|
4% due December 2, 2020
|
December 2, 2019
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
Subordinated to MSCO*
|
|
|
|
|
4% due November 30, 2020**
|
November 30, 2018
|
|
$
|
3,000,000
|
|
4% due September 4, 2020
|
September 4, 2019
|
|
$
|
2,000,000
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
Total Notes payable – related party
|
|
|
$
|
8,000,000
|
|
*The notes payable subordinated to MSCO were acquired as part of the acquisition of StockCross
**This note payable was renewed on November 30, 2019 for a term of one year
The interest expense incurred for the three months ended March 31, 2020 and 2019 was $76,000 and $21,000, respectively. The interest payable
for these notes was $40,000 and $10,000 as of March 31, 2020 and December 31, 2019, respectively. Effective March 3, 2020, the interest rates on the loans due November 30, 2020 and September 4, 2020 were renegotiated to 4%. There was no consideration paid or received as part of this renegotiation.
Notes subordinated to MSCO are 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.
9. Revenue Recognition
Overview of Revenue
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 resulting from rebates in money market funds. 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 money market funds. Margin interest, marketing and distribution fees are recorded as earned.
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual
funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is
satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to /
from the customer.
Principal Transactions
Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the
securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that
is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to / from the customer.
Market Making
Market making is revenue 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 securities from client accounts, facilitates borrow and loan contracts for broker-dealer
counterparties, and provides stock locate services to broker-dealer counterparties. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions. Stock borrow / stock loan revenue is reported on a
monthly basis net of expense.
For the three months ended March 31, 2020 stock borrow / stock loan revenue was $444,000 ($1,663,000 gross revenue less $1,219,000 expenses). For the three months ended March 31, 2019 stock borrow /
stock loan revenue was $581,000 ($3,439,000 gross revenue minus $2,858,000 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 Income
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances and is recorded as earned.
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
|
|
2020
|
|
|
2019
|
|
|
Timing of Recognition
|
|
|
|
|
|
|
|
|
|
Trading Execution and Clearing Services
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
5,583,000
|
|
|
$
|
2,268,000
|
|
|
Recorded on trade date
|
Principal transactions
|
|
|
3,203,000
|
|
|
|
1,890,000
|
|
|
Recorded on trade date
|
Market making
|
|
|
470,000
|
|
|
|
563,000
|
|
|
Recorded on trade date
|
Stock borrow / stock loan
|
|
|
444,000
|
|
|
|
581,000
|
|
|
Recorded as earned
|
Advisory fees
|
|
|
262,000
|
|
|
|
168,000
|
|
|
Recorded as earned
|
Total Trading Execution and Clearing Services
|
|
|
9,962,000
|
|
|
|
5,470,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees
|
|
|
|
|
|
|
|
|
|
|
Margin interest
|
|
|
2,506,000
|
|
|
|
2,817,000
|
|
|
Recorded as earned
|
12b1 fees
|
|
|
788,000
|
|
|
|
739,000
|
|
|
Recorded as earned
|
Total Margin interest, marketing and distribution fees
|
|
|
3,294,000
|
|
|
|
3,556,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,331,000
|
|
|
|
1,173,000
|
|
|
Recorded as earned
|
Other income
|
|
|
214,000
|
|
|
|
79,000
|
|
|
Recorded as earned
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income
|
|
|
4,839,000
|
|
|
|
4,808,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
14,801,000
|
|
|
$
|
10,278,000
|
|
|
|
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
|
Margin interest, marketing and distribution fees, Interest income, Other income
|
n / a
|
Soft Dollar Arrangement
As a result of the acquisition of WP, 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 statements of income in the line item “Commissions and fees.”
The Company paid client expenses approximately $218,000 for the three months ended March 31, 2020 and had an outstanding receivable and payable of approximately $16,000 and $186,000, respectively, as
of March 31, 2020. The receivable and payable are in the line item “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statement of financial condition.
As of March 31, 2020 and December 31, 2019, no allowance for uncollectible commissions was necessary as management believes all commissions receivable and prepaid research
services expenses will be realized.
Other Items
For the three months ended March 31, 2020 and 2019, 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.
10. Referral Fees
Upon the acquisition of WP, the Company has agreements with various third parties to share commissions and pay fees as defined in the respective agreements. These expenses totaled approximately
$111,000 for the three months ended March 31, 2020, which are presented in the line item “Referral fees” in the statements of income.
11. Income Taxes
Provision for income taxes consists of the following:
Current income tax expense, which represents the amount of federal tax and state and local tax currently payable, including interest and penalties and amounts accrued for unrecognized tax benefits,
if any, and;
Deferred income tax expense, which represents the net change in the deferred tax assets balance during the year, including any change in the valuation allowance for the deferred tax assets, if any.
For the three months ended March 31, 2020 and 2019, there was no change in the valuation allowance for the deferred tax assets.
The change in deferred tax assets for the three months ended March 31, 2020 and 2019 was due to the utilization of federal and state net operating losses and temporary differences in the depreciation
of fixed assets and in the net change of the lease liabilities.
The following table presents the components of provision for income taxes for the periods indicated:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current income tax expense
|
|
|
|
|
|
|
Federal
|
|
$
|
184,000
|
|
|
$
|
222,000
|
|
State and local
|
|
|
60,000
|
|
|
|
85,000
|
|
Total Current income tax expense
|
|
|
244,000
|
|
|
|
307,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
Federal
|
|
|
35,000
|
|
|
|
47,000
|
|
State and local
|
|
|
256,000
|
|
|
|
43,000
|
|
Total Deferred income tax expense
|
|
|
291,000
|
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
Total Provision for income taxes
|
|
$
|
535,000
|
|
|
$
|
397,000
|
|
Effective Tax Rate
For interim financial reporting, the Company estimates the effective tax rate for tax jurisdictions which is applied to the year to date income before provision for income taxes. For the three months
ended March 31, 2020 and 2019, the Company’s effective tax rate was 35% and 24%, respectively. The increase in the Company’s effective tax rate is primarily due to changes in deferred tax expense calculated by using federal and state net operating
losses.
12. 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 $976,000 for the
three months ended March 31, 2020 as compared to net income of $1,224,000 for the three months ended March 31, 2019.
13. Capital Requirements
MSCO and StockCross
Net Capital
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) of the Securities 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, 2020, MSCO’s net capital was $23.7 million, which was approximately $21.7 million in excess of its required net capital of $2.0 million,
and its percentage of aggregate debit balances to net capital was 24.1%.
As of December 31, 2019, MSCO’s net capital was $4.4 million, which was $4.2 million in excess of its required net capital of $250,000. As of December 31, 2019, StockCross’ net capital was $18.8
million, which was $16.7 million in excess of its required net capital of $2.1 million, and its percentage of aggregate debit balances to net capital was 17.6%. 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 Account Rule 15c3-3 of the SEC which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of March 31, 2020, MSCO had cash
deposits of $227.4 million in the special reserve accounts which was $16.6 million in excess of the deposit requirement of $210.8 million. After adjustments for deposit(s) and / or withdrawal(s) made on April 1, 2020, MSCO had $1.6 million in excess
of the customer reserve requirement.
As of December 31, 2019, MSCO did not have any special reserve accounts. As of December 31, 2019, StockCross had deposits of $223.4 million (cash of $222.1 million and securities with fair value of
$1.3 million) in the special reserve account which was $4 million in excess of the deposit requirement of $219.4 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2020, StockCross had $1 million in excess of the
customer reserve 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.
As of December 31, 2019, StockCross was also subject to the PAB Account Rule 15c3-3 of the SEC which requires segregation of funds in a special reserve account for the exclusive benefit of
proprietary accounts of introducing broker-dealers. As of December 31, 2019, StockCross had segregated cash of $1.4 million under rule 15c3-3. As of December 31, 2019, StockCross had $1.4 million in the special reserve account which was $282,000 in
deficit of the deposit requirement of $1.7 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2020, StockCross had $218,000 in excess of the PAB reserve requirement. Effective upon the Company’s acquisition of
StockCross on January 1, 2020, MSCO no longer had a PAB requirement.
WP
Net Capital
WP, 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. WP is also subject to the CFTC's minimum financial requirements which require that
WP 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, 2020, WP’s net capital was approximately $4.4 million which was $4.1 million in excess of its minimum requirement of $250,000 under 15c3-1. As of December 31, 2019, WP’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.
14. 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, require 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. The Company controls this risk by monitoring the market value of securities pledged on a daily basis 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 monitors compliance on a daily basis.
15. 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. 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.
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 totaling $210,000 and $289,000 for the three months ended March 31, 2020 and 2019, respectively.
The Company had an accrual of $63,000 as of March 31, 2020, which represents the historical estimate of future claims to be recognized for claims incurred prior to 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.
16. Related Party Disclosures
StockCross and the Company were under common ownership, and prior to January 1, 2020 StockCross served as one of the clearing broker-dealers for the Company. The StockCross clearing
agreement with the Company provided that StockCross passed through all revenue and charged the Company for related clearing expenses. Outside of the clearing agreement, the Company had an expense sharing agreement with StockCross for its Beverly
Hills and Jersey City offices, and StockCross paid some vendors for miscellaneous expenses which it passed through to the Company.
In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. Effective January 1, 2020, the Company acquired the remaining 85% of StockCross in
exchange for 3,298,774 shares of the Company’s common stock and StockCross was merged with and into MSCO. Upon the closing of this transaction on January 1, 2020, all receivables and payables between the Company and StockCross as well as any
earnings from the Company’s equity method investment in StockCross were eliminated upon consolidation.
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, 2020 and 2019.
In January 2020, MSCO sold approximately $290,000 worth of a private equity security to KCA at cost.
Park Wilshire Companies, Inc.
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties was $37,000 and $22,000 for the three months ended March 31, 2020 and
2019, respectively.
The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. See “Note 8 – Notes Payable - Related Party” for additional detail.
Gebbia Sullivan County Land Trust
The Company operates on a month-to-month lease agreement for its office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a relative of the Gebbia Family. For
both the three months ended March 31, 2020 and 2019, the Company paid $15,000 in rent for this office.
17. Subsequent Events
The Company has evaluated events that have occurred subsequent to March 31, 2020 and through May 28, 2020, the date of the filing of this report.
Agreement with InvestCloud, Inc.
On April 21, 2020, MSCO entered into a Master Services Agreement (the “MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide MSCO with the InvestCloud
System Platform and related functionalities and MSCO agreed to pay InvestCloud as consideration therefore during the initial three (3) year term an annual license fee of $600,000 and a service fee of $1,000,000. Following the initial three (3) year
term, the MSA will automatically renew for additional one-year terms unless terminated by MSCO upon 120 days’ notice.
In connection with the MSA, InvestCloud entered into a Side Letter Agreement (the “Side Letter”) with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common
stock (the “Shares”) at a price of $7.22 per share (the Company’s share price as of the close of March 31, 2020), for a total purchase price of $1,400,000. As consideration for the Shares, InvestCloud agreed to provide MSCO with research and
development services valued at $1,400,000, which will be applied as a credit to the fees payable to InvestCloud under the MSA.
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) thereunder.
The costs incurred by the Company in relation to this agreement that qualify as relating to the implementation of a cloud computing arrangement will be capitalized and amortized over the life of the
contract in accordance with ASU 2018-15.
Pursuant to the Company’s agreement with the original owners of WP, 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.
Other than the events described above, there have been no material subsequent events that occurred during such period that would require disclosure in this report or would be required to be
recognized in the financial statements as of March 31, 2020.