UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended
June 30, 2020
 
 
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ____________________________ to __________________________
 
 
 
Commission file number
 
0-5703
 
Siebert Financial Corp.
(Exact Name of Registrant as Specified in its Charter)
 
New York
 
11-1796714
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
120 Wall Street, New York, NY 10005
(Address of Principal Executive Offices) (Zip Code)
 
(212) 644-2400
(Registrant’s Telephone Number, Including Area Code)
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock - $0.01 par value
SIEB
The Nasdaq Capital Market


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
 
Emerging growth company ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐ No ☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of August 13, 2020, there were 30,653,710 shares of the registrant’s outstanding common stock.


SIEBERT FINANCIAL CORP.

INDEX



PART I - FINANCIAL INFORMATION 
ITEM 1. FINANCIAL STATEMENTS
 
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
   
June 30, 2020
   
December 31, 2019*
 
ASSETS
           
             
Current assets
           
 Cash and cash equivalents
 
$
4,179,000
   
$
4,670,000
 
 Cash and securities segregated for regulatory purposes
   
255,683,000
     
224,924,000
 
 Receivables from customers
   
80,378,000
     
86,331,000
 
 Receivables from broker-dealers and clearing organizations
   
2,738,000
     
3,524,000
 
 Other receivables
   
1,000,000
     
762,000
 
 Prepaid expenses and other assets
   
673,000
     
970,000
 
 Securities borrowed
   
167,252,000
     
193,529,000
 
 Securities owned, at fair value
   
2,374,000
     
3,018,000
 
Total Current assets
   
514,277,000
     
517,728,000
 
                 
 Deposits with broker-dealers and clearing organizations
   
6,593,000
     
4,951,000
 
 Prepaid service contract – non-current
   
2,099,000
     
 
 Furniture, equipment and leasehold improvements, net
   
950,000
     
1,150,000
 
 Software, net
   
1,671,000
     
1,888,000
 
 Lease right-of-use assets
   
3,062,000
     
3,951,000
 
 Deferred tax assets
   
5,155,000
     
5,388,000
 
 Intangible assets, net
   
891,000
     
1,022,000
 
 Goodwill
   
1,989,000
     
1,989,000
 
Total Assets
 
$
536,687,000
   
$
538,067,000
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities
               
Current liabilities
               
 Payables to customers
 
$
314,098,000
   
$
308,091,000
 
 Payables to non-customers
   
7,719,000
     
8,063,000
 
 Drafts payable
   
1,975,000
     
2,834,000
 
 Payables to broker-dealers and clearing organizations
   
3,582,000
     
523,000
 
 Accounts payable and accrued liabilities
   
2,600,000
     
2,443,000
 
 Securities loaned
   
159,447,000
     
170,443,000
 
 Securities sold, not yet purchased, at fair value
   
17,000
     
116,000
 
 Interest payable
   
30,000
     
10,000
 
 Notes payable - related party
   
8,000,000
     
8,000,000
 
 Taxes payable
   
39,000
     
 
 Current portion of lease liabilities
   
1,921,000
     
2,227,000
 
Total Current liabilities
   
499,428,000
     
502,750,000
 
                 
 Lease liabilities, less current portion
   
1,522,000
     
2,182,000
 
Total Liabilities
   
500,950,000
     
504,932,000
 
                 
Commitments and Contingencies
               
Stockholders’ equity
               
 Common stock, $.01 par value; 100 million shares authorized; 30,653,710 and 30,459,804 shares
 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively**
   
306,000
     
304,000
 
 Additional paid-in capital
   
21,022,000
     
19,897,000
 
 Retained earnings
   
14,409,000
     
12,934,000
 
Total Stockholders’ equity
   
35,737,000
     
33,135,000
 
                 
Total Liabilities and stockholders' equity
 
$
536,687,000
   
$
538,067,000
 

*Statement of financial condition as of December 31, 2019 represents the pro forma combination of Siebert and StockCross balances. See “Note 3 – Acquisitions” for additional detail.
**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. 
- 1 -

SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenue
                       
 Commissions and fees
 
$
4,887,000
   
$
2,591,000
   
$
10,470,000
   
$
4,859,000
 
 Margin interest, marketing and distribution fees
   
2,125,000
     
3,693,000
     
5,419,000
     
7,249,000
 
 Principal transactions
   
2,581,000
     
1,921,000
     
5,784,000
     
3,811,000
 
 Interest income
   
909,000
     
1,186,000
     
2,240,000
     
2,359,000
 
 Market making
   
615,000
     
410,000
     
1,085,000
     
973,000
 
 Stock borrow / stock loan
   
771,000
     
423,000
     
1,215,000
     
1,004,000
 
 Advisory fees
   
243,000
     
193,000
     
505,000
     
361,000
 
 Other income
   
488,000
     
264,000
     
702,000
     
343,000
 
Total Revenue
   
12,619,000
     
10,681,000
     
27,420,000
     
20,959,000
 
                                 
Expenses
                               
 Employee compensation and benefits
   
6,614,000
     
4,476,000
     
13,905,000
     
9,004,000
 
 Clearing fees, including execution costs
   
1,339,000
     
726,000
     
2,637,000
     
1,528,000
 
 Technology and communications
   
953,000
     
400,000
     
1,934,000
     
822,000
 
 Other general and administrative
   
401,000
     
1,185,000
     
1,255,000
     
1,918,000
 
 Data processing
   
754,000
     
418,000
     
1,603,000
     
961,000
 
 Rent and occupancy
   
698,000
     
593,000
     
1,425,000
     
1,124,000
 
 Professional fees
   
744,000
     
902,000
     
1,399,000
     
1,785,000
 
 Depreciation and amortization
   
377,000
     
251,000
     
825,000
     
445,000
 
 Referral fees
   
162,000
     
     
273,000
     
 
 Interest expense
   
88,000
     
31,000
     
164,000
     
52,000
 
Total Expenses
   
12,130,000
     
8,982,000
     
25,420,000
     
17,639,000
 
                                 
Income before provision (benefit) for (from) income taxes
   
489,000
     
1,699,000
     
2,000,000
     
3,320,000
 
 Provision (benefit) for (from) income taxes
   
(10,000
)
   
620,000
     
525,000
     
1,017,000
 
Net income
 
$
499,000
   
$
1,079,000
   
$
1,475,000
   
$
2,303,000
 
                                 
Net income per share of common stock
                               
 Basic and diluted
 
$
0.02
   
$
0.04
   
$
0.05
   
$
0.08
 
                                 
Weighted average shares outstanding
                               
  Basic and diluted
   
30,587,794
     
30,455,962
     
30,521,878
     
30,455,962
 


Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
- 2 -


SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
       
   
Number of Shares Issued
   
$.01 Par Value
   
Additional Paid-
In Capital
   
Retained Earnings
   
Total
 
Balance – January 1, 2020
   
27,157,188
   
$
271,000
   
$
7,641,000
   
$
12,869,000
   
$
20,781,000
 
Shares issued for  StockCross purchase
   
3,302,616
     
33,000
     
12,256,000
     
65,000
     
12,354,000
 
Net income
   
     
     
     
976,000
     
976,000
 
Balance – March 31, 2020
   
30,459,804
   
$
304,000
   
$
19,897,000
   
$
13,910,000
   
$
34,111,000
 
Shares issued for payment of professional services
   
193,906
     
2,000
     
1,125,000
     
     
1,127,000
 
Net income
   
     
     
     
499,000
     
499,000
 
Balance – June 30, 2020
   
30,653,710
   
$
306,000
   
$
21,022,000
   
$
14,409,000
   
$
35,737,000
 


       
   
Number of Shares Issued
   
$.01 Par Value
   
Additional Paid-
In Capital
   
Retained Earnings
   
Total
 
Balance – January 1, 2019
   
27,157,188
   
$
271,000
   
$
7,641,000
   
$
9,262,000
   
$
17,174,000
 
Shares issued for  StockCross purchase
   
3,302,616
     
33,000
     
14,037,000
     
     
14,070,000
 
Net income
   
     
     
     
1,224,000
     
1,224,000
 
Balance – March 31, 2019
   
30,459,804
   
$
304,000
   
$
21,678,000
   
$
10,486,000
   
$
32,468,000
 
Net income
   
     
     
     
1,079,000
     
1,079,000
 
Balance – June 30, 2019
   
30,459,804
   
$
304,000
   
$
21,678,000
   
$
11,565,000
   
$
33,547,000
 


Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
- 3 -

SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
   
Six Months Ended
June 30,
 
   
2020
   
2019
 
Cash Flows From Operating Activities
           
Net income
 
$
1,475,000
   
$
2,303,000
 
Adjustments to reconcile net income to net cash provided by / (used in) operating activities:
               
   Deferred income tax expense
   
233,000
     
703,000
 
   Depreciation and amortization
   
825,000
     
445,000
 
                 
Changes in
               
 Receivables from customers
   
5,953,000
     
(9,286,000
)
 Receivables from non-customers
   
     
(125,000
)
 Receivables from and deposits with broker-dealers and clearing organizations
   
(856,000
)
   
(877,000
)
 Securities borrowed
   
26,277,000
     
130,507,000
 
 Securities owned, at fair value
   
644,000
     
(794,000
)
 Prepaid expenses and other assets
   
58,000
     
(178,000
)
 Prepaid service contract - non-current
   
(972,000
)
   
 
 Payables to customers
   
6,007,000
     
(4,582,000
)
 Payables to non-customers
   
(344,000
)
   
(4,689,000
)
 Drafts payable
   
(859,000
)
   
1,114,000
 
 Payables to broker-dealers and clearing organizations
   
3,059,000
     
189,000
 
 Accounts payable and accrued liabilities
   
157,000
     
(181,000
)
 Securities loaned
   
(10,996,000
)
   
(138,219,000
)
 Securities sold, not yet purchased, at fair value
   
(99,000
)
   
64,000
 
 Interest payable
   
20,000
     
 
 Lease liabilities
   
(77,000
)
   
320,000
 
 Taxes payable
   
39,000
     
(15,000
)
 Bank loan payable
   
     
5,000,000
 
Net cash provided by / (used in) operating activities
   
30,544,000
     
(18,301,000
)
                 
Cash Flows From Investing Activities
               
Purchase of furniture, equipment, and leasehold improvements
   
     
(722,000
)
Purchase of software
   
(276,000
)
   
(612,000
)
Net cash used in investing activities
   
(276,000
)
   
(1,334,000
)
                 
Cash Flows From Financing Activities
               
  Purchase of StockCross common stock
   
     
(3,666,000
)
  Treasury stock sales - StockCross
   
     
172,000
 
 Net cash used in financing activities
   
     
(3,494,000
)
                 
Net increase / (decrease) in cash and cash equivalents, and cash and securities segregated for regulatory purposes
   
30,268,000
     
(23,129,000
)
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - beginning of year
   
229,594,000
     
214,038,000
 
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period
 
$
259,862,000
   
$
190,909,000
 
                 
Cash and cash equivalents - end of period
 
$
4,179,000
   
$
5,231,000
 
Cash and securities segregated for regulatory purposes - end of period
   
255,683,000
     
185,678,000
 
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period
 
$
259,862,000
   
$
190,909,000
 
                 
Supplemental cash flow information
               
  Cash paid during the period for income taxes
 
$
130,000
   
$
630,000
 
  Cash paid during the period for interest
 
$
150,000
   
$
52,000
 
                 
Non-cash investing and financing activities
               
  Shares issued for payment of professional services
 
$
1,127,000
   
$
 


Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
- 4 -

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 wholly-owned subsidiary, WPS Prime Services, LLC, (“WP”), a Delaware limited liability company and a broker-dealer registered with the SEC. Siebert 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, Florida, and California. The Company has 16 branch offices throughout the U.S. and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock, par value $.01 per share, trades on the Nasdaq Capital Market under the symbol “SIEB.”

The Company primarily operates in the securities brokerage and asset management industry and has no other reportable segments. All of the Company's revenues for the six months ended June 30, 2020 and 2019 were derived from its operations in the U.S.

As of June 30, 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.

WPS Prime Services, LLC

As previously disclosed in a Current Report on Form 8-K filed on June 26, 2020, on June 22, 2020, the Company and WPS Acquisitions, LLC entered into an agreement pursuant to which the Company at closing would have sold all of the member interests in WP to WPS Acquisitions, LLC for a purchase price of $7.3 million. As reported in a Current Report on Form 8-K filed on July 30, 2020, effective July 24, 2020, the agreement was terminated by the Company.

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.
- 5 -


COVID-19

The challenges posed by the COVID-19 pandemic on the global economy increased significantly during the first and second quarter of 2020. COVID-19 has spread across the globe during 2020 and has impacted economic activity worldwide. In response to COVID-19, national and local governments around the world 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. The Company instituted a number of temporary closures of branch offices; however, as of the date of the filing of this report, many branch offices have been re-opened. Based on management’s assessment as of June 30, 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 June 30, 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 14 – 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 June 30, 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 six months ended June 30, 2020 were both self-cleared and cleared on a fully disclosed basis through National Financial Services Corp. (“NFS”). MSCO customer transactions for the six months ended June 30, 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.
- 6 -


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 June 30, 2020, the Company’s cash clearing deposits with NFS were $50,000. As of December 31, 2019, MSCO’s 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 MSCO deposits with StockCross were eliminated. As of June 30, 2020 and December 31, 2019, MSCO had deposits with and other non-current receivables from multiple broker-dealers and clearing organizations of approximately $3.6 million and $1.9 million, respectively.

WP’s 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 June 30, 2020 and December 31, 2019, WP’s cash clearing deposits with Goldman Sachs and Pershing were approximately $2 million and $1 million, respectively.

The Company evaluates receivables from broker-dealers and clearing organizations and other receivables for collectability noting no amount was considered uncollectable as of June 30, 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 10 – 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 6 – 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 6 – 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. See “Note 5 – Prepaid Service Contract” for additional detail.
- 7 -


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 June 30, 2020.

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 adopted this accounting pronouncement on January 1, 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 June 30, 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 consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.

Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, 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.

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. In addition, the Company purchased approximately 15% of the outstanding shares of StockCross from an unrelated party for $3,666,000 as indicated above. Both of these transactions are reflected in the “Cash flows from financing activities” section of the statements of cash flows.

Assets Acquired and Liabilities Assumed
- 8 -


The Company acquired various assets and liabilities from StockCross which were recorded at their historical carrying amounts and summarized below:

   
Historical
Carrying Value
 
       
Assets acquired
     
 Cash and cash equivalents
 
$
1,588,000
 
 Cash and securities segregated for regulatory purposes
   
224,814,000
 
 Receivables from customers
   
86,331,000
 
 Receivables from broker-dealers and clearing organizations
   
3,105,000
 
 Other receivables
   
627,000
 
 Prepaid expenses and other assets
   
346,000
 
 Securities borrowed
   
193,529,000
 
 Securities owned, at fair value
   
3,018,000
 
 Furniture, equipment and leasehold improvements, net
   
19,000
 
 Lease right-of-use assets
   
1,141,000
 
 Deferred tax assets
   
407,000
 
Total Assets acquired
   
514,925,000
 
         
Liabilities assumed
       
 Payables to customers
   
308,091,000
 
 Payables to non-customers
   
9,151,000
 
 Drafts payable
   
2,834,000
 
 Payables to broker-dealers and clearing organizations
   
1,406,000
 
 Accounts payable and accrued liabilities
   
963,000
 
 Securities loaned
   
170,443,000
 
 Securities sold, not yet purchased, at fair value
   
28,000
 
 Notes payable – related party
   
5,000,000
 
 Lease liabilities
   
1,295,000
 
Total Liabilities assumed
   
499,211,000
 
 
       
Net Assets acquired
 
$
15,714,000
 

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’ financial statements have already been consolidated in the Company’s financial statements for the periods presented for 2020:
- 9 -


Statements of Operations

Three Months Ended June 30, 2019 (unaudited)

   
Three Months Ended June 30, 2019
 
   
Siebert
   
StockCross
   
Pro Forma
Adjustments
   
Total Combined Siebert
 
                         
Revenue
                       
 Commissions and fees
 
$
2,241,000
   
$
350,000
   
$
   
$
2,591,000
 
 Margin interest, marketing and distribution fees
   
2,783,000
     
910,000
     
     
3,693,000
 
 Principal transactions
   
1,828,000
     
93,000
     
     
1,921,000
 
 Interest income
   
16,000
     
1,170,000
     
     
1,186,000
 
 Market making
   
     
410,000
     
     
410,000
 
 Stock borrow / stock loan
   
     
423,000
     
     
423,000
 
 Advisory fees
   
193,000
     
     
     
193,000
 
 Other income
   
     
327,000
     
(63,000
)
   
264,000
 
Total Revenue
   
7,061,000
     
3,683,000
     
(63,000
)
   
10,681,000
 
                                 
Expenses
                               
 Employee compensation and benefits
   
2,890,000
     
1,586,000
     
     
4,476,000
 
 Clearing fees, including execution costs
   
578,000
     
211,000
     
(63,000
)
   
726,000
 
 Technology and communications
   
262,000
     
138,000
     
     
400,000
 
 Other general and administrative
   
887,000
     
298,000
     
     
1,185,000
 
 Data processing
   
     
418,000
     
     
418,000
 
 Rent and occupancy
   
320,000
     
273,000
     
     
593,000
 
 Professional fees
   
447,000
     
455,000
     
     
902,000
 
 Depreciation and amortization
   
251,000
     
     
     
251,000
 
 Interest expense
   
     
31,000
     
     
31,000
 
Total Expenses
   
5,635,000
     
3,410,000
     
(63,000
)
   
8,982,000
 
                                 
 Earnings of equity method investment in related party
   
15,000
     
     
(15,000
)
   
 
                                 
Income before provision (benefit) for (from) income taxes
   
1,441,000
     
273,000
     
(15,000
)
   
1,699,000
 
 Provision (benefit) for (from) income taxes
   
449,000
     
175,000
     
(4,000
)
   
620,000
 
Net income / (loss)
 
$
992,000
   
$
98,000
   
$
(11,000
)
 
$
1,079,000
 
                                 
Net income per share of common stock
                               
 Basic and diluted
 
$
0.04
   
$
0.02
           
$
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
                           
30,455,962
 


- 10 -


Six Months Ended June 30, 2019 (unaudited)

   
Six Months Ended June 30, 2019
 
   
Siebert
   
StockCross
   
Pro Forma
Adjustments
   
Total Combined Siebert
 
                         
Revenue
                       
 Commissions and fees
 
$
4,105,000
   
$
754,000
   
$
   
$
4,859,000
 
 Margin interest, marketing and distribution fees
   
5,555,000
     
1,694,000
     
     
7,249,000
 
 Principal transactions
   
3,438,000
     
373,000
     
     
3,811,000
 
 Interest income
   
31,000
     
2,328,000
     
     
2,359,000
 
 Market making
   
     
973,000
     
     
973,000
 
 Stock borrow / stock loan
   
     
1,004,000
     
     
1,004,000
 
 Advisory fees
   
361,000
     
     
     
361,000
 
 Other income
   
     
465,000
     
(122,000
)
   
343,000
 
Total Revenue
   
13,490,000
     
7,591,000
     
(122,000
)
   
20,959,000
 
                                 
Expenses
                               
 Employee compensation and benefits
   
5,725,000
     
3,279,000
     
     
9,004,000
 
 Clearing fees, including execution costs
   
1,232,000
     
418,000
     
(122,000
)
   
1,528,000
 
 Technology and communications
   
509,000
     
313,000
     
     
822,000
 
 Other general and administrative
   
1,272,000
     
646,000
     
     
1,918,000
 
 Data processing
   
     
961,000
     
     
961,000
 
 Rent and occupancy
   
615,000
     
509,000
     
     
1,124,000
 
 Professional fees
   
949,000
     
836,000
     
     
1,785,000
 
 Depreciation and amortization
   
426,000
     
19,000
     
     
445,000
 
 Interest expense
   
     
52,000
     
     
52,000
 
Total Expenses
   
10,728,000
     
7,033,000
     
(122,000
)
   
17,639,000
 
                                 
 Earnings of equity method investment in related party
   
54,000
     
     
(54,000
)
   
 
                                 
Income before provision (benefit) for (from) income taxes
   
2,816,000
     
558,000
     
(54,000
)
   
3,320,000
 
 Provision (benefit) for (from) income taxes
   
818,000
     
214,000
     
(15,000
)
   
1,017,000
 
Net income / (loss)
 
$
1,998,000
   
$
344,000
   
$
(39,000
)
 
$
2,303,000
 
                                 
Net income per share of common stock
                               
 Basic and diluted
 
$
0.07
   
$
0.06
           
$
0.08
 
                                 
Weighted average shares outstanding
                               
 Basic and diluted
   
27,157,188
     
6,152,500
                 
                                 
Pro forma shares used to compute net income per share
                           
30,455,962
 


- 11 -


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, at fair value
   
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
 


- 12 -


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 and six months ended June 30, 2019 were 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 statements 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 financial statements have already been consolidated as part of the Company’s financial statements for the periods presented for 2020.

   
Three Months Ended June 30, 2019
   
Six Months Ended June 30, 2019
 
Revenue
 
$
13,805,000
   
$
26,819,000
 
Operating income
 
$
454,000
   
$
1,788,000
 
Net income / (loss)
 
$
(137,000
)
 
$
830,000
 
                 

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:
- 13 -


   
As of
June 30, 2020
   
As of
December 31, 2019
 
Receivables from and deposits with broker-dealers and clearing organizations
           
  DTCC / OCC / NSCC
 
$
4,461,000
   
$
3,059,000
 
  Goldman Sachs
   
2,676,000
     
2,841,000
 
  Pershing Capital
   
1,195,000
     
1,192,000
 
  NFS
   
972,000
     
1,328,000
 
  Securities fail-to-deliver
   
19,000
     
43,000
 
  Globalshares
   
8,000
     
2,000
 
  ICBC
   
     
10,000
 
Total Receivables from and deposits with broker-dealers and clearing organizations
 
$
9,331,000
   
$
8,475,000
 
                 
Payables to broker-dealers and clearing organizations
               
  Securities fail-to-receive
 
$
3,582,000
   
$
523,000
 
Total Payables to broker-dealers and clearing organizations
 
$
3,582,000
   
$
523,000
 

5. Prepaid Service Contract

On April 21, 2020, MSCO entered into a Master Services Agreement (“MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide MSCO with the InvestCloud Platform, a new client and back end interface and  related functionalities for MSCO’s key operations. MSCO agreed to pay InvestCloud as consideration therefore during the initial three year term an annual license fee of $600,000 as well as an upfront professional service fee of $1.0 million for one time configuration, installation and customization of the software. Following the initial three year term, the MSA will automatically renew for additional one-year terms unless terminated by MSCO upon 120 days’ notice.

In connection with the MSA, InvestCloud entered into a Side Letter Agreement (“Side Letter”) with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common stock (the “Shares”) at a per share price of $5.81 (the Company’s share price as of the close of May 12, 2020) for a total of $1.1 million for professional services to integrate the InvestCloud Platform into Siebert’s existing systems and Robo-Advisor. 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. This transaction is reflected in the “Non-cash investing and financing activities” section of the statements of cash flows.

In accordance with ASU 2018-15, Intangibles, Goodwill and Other Internal-Use Software, the Company recorded a prepaid asset equal to the $2.1 million of the total professional services related to the development work performed by InvestCloud, which is within the line item “Prepaid service contract – non-current” on the statements of financial condition. The Company will amortize this asset over the 3-year term of the contract, a period during which the arrangement is noncancelable. The license fees related to Siebert’s use of the InvestCloud Platform are prepaid three months in advance and are within the line item “Prepaid expenses and other assets” on the statements of financial condition. These prepaid license fees are amortized over the three month term. The amortization for all the prepaid assets related to InvestCloud development is within the line item titled “Technology and Communications.”

6. Fair Value Measurements

Overview

ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income, or cost approach, as specified by ASC 820, are used to measure fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1 - Quoted prices (unadjusted) in active markets for an identical asset or liability that the Company can assess at the measurement date.

Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability.
- 14 -

 
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 the periods presented.
- 15 -


   
As of June 30, 2020
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
Cash and cash equivalents
                       
 Certificates of deposit
 
$
   
$
143,000
   
$
   
$
143,000
 
                                 
Securities owned, at fair value
                               
  U.S. government securities*
 
$
2,042,000
   
$
   
$
   
$
2,042,000
 
  Corporate bonds
   
     
23,000
     
     
23,000
 
  Equity securities
   
161,000
     
148,000
     
     
309,000
 
Total Securities owned, at fair value
 
$
2,203,000
   
$
171,000
   
$
   
$
2,374,000
 
                                 
Liabilities
                               
Securities sold, not yet purchased, at fair value
                               
  Equity securities
 
$
   
$
17,000
   
$
   
$
17,000
 
Total Securities sold, not yet purchased, at fair value
 
$
   
$
17,000
   
$
   
$
17,000
 

*As of June 30, 2020, U.S. government securities mature on 08/31/2021

   
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
 
    Six Months Ended June 30, 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 – June 30, 2020
 
$
      

The following represents financial instruments in which the ending balances as of June 30, 2020 and December 31, 2019 are 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.
- 16 -


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.

7. Leases

As of June 30, 2020, the Company rents office space under operating leases expiring in 2021 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 June 30, 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
June 30, 2020
   
As of
December 31, 2019
 
Assets
           
 Lease right-of-use assets
 
$
3,062,000
   
$
3,951,000
 
Liabilities
               
 Lease liabilities
 
$
3,443,000
   
$
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
June 30, 2020
 
 Weighted average remaining lease term – operating leases (in years)
   
2.3
 
 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.
- 17 -


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
 Operating lease cost
 
$
575,000
   
$
396,000
   
$
1,146,000
   
$
759,000
 
 Short-term lease cost
   
24,000
     
110,000
     
63,000
     
240,000
 
 Variable lease cost
   
99,000
     
87,000
     
216,000
     
125,000
 
 Sublease income
   
     
     
     
 
Total Rent and occupancy
 
$
698,000
   
$
593,000
   
$
1,425,000
   
$
1,124,000
 
                                 
Cash paid for amounts included in the measurement of lease liabilities
                               
 Operating cash flows from operating leases
 
$
617,000
   
$
444,000
   
$
1,231,000
   
$
826,000
 
                                 
Lease right-of-use assets obtained in exchange for new lease liabilities
                               
 Operating leases
 
$
160,000
   
$
106,000
   
$
2,075,000
   
$
4,943,000
 

Lease Commitments

Future annual minimum payments for operating leases with initial terms of greater than one year as of June 30, 2020 were as follows:

Year
 
Amount
 
 2020
 
$
1,214,000
 
 2021
   
1,208,000
 
 2022
   
624,000
 
 2023
   
543,000
 
 2024
   
56,000
 
Remaining balance of lease payments
   
3,645,000
 
 Difference between undiscounted cash
 flows and discounted cash flows
   
202,000
 
Lease liabilities
 
$
3,443,000
 

Rent and occupancy expenses were $698,000 and $593,000 for the three months ended June 30, 2020 and 2019, respectively. Rent and occupancy expenses were $1,425,000 and $1,124,000 for the six months ended June 30, 2020 and 2019, respectively.

8. Goodwill and Intangible Assets, Net

Goodwill

As of June 30, 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 a result of the Company’s acquisition of WP, 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. As of June 30, 2020, the value of the WP trade name was zero.

Impairment

For the six months ended June 30, 2020, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and other tangible and intangible assets.

- 18 -



9. Notes Payable - Related Party

As of June 30, 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 June 30, 2020 and 2019 was $88,000 and $31,000, respectively. The interest expense incurred for the six months ended June 30, 2020 and 2019 was $164,000 and $52,000, respectively. The interest payable for these notes was $30,000 and $10,000 as of June 30, 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 from 2.75% and 1.75%, respectively, 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.

10. 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.
- 19 -


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 June 30, 2020 stock borrow / stock loan revenue was $771,000 ($2,008,000 gross revenue less $1,237,000 expenses). For the three months ended June 30, 2019 stock borrow / stock loan revenue was $423,000 ($2,831,000 gross revenue minus $2,408,000 expenses).

For the six months ended June 30, 2020 stock borrow / stock loan revenue was $1,215,000 ($3,671,000 gross revenue less $2,456,000 expenses). For the six months ended June 30, 2019 stock borrow / stock loan revenue was $1,004,000 ($6,270,000 gross revenue minus $5,266,000 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.
- 20 -


Categorization of Revenue

The following table presents the Company’s major revenue categories and when each category is recognized:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
   
Revenue Category
 
2020
   
2019
   
2020
   
2019
 
Timing of Recognition
                                
Trading Execution and Clearing Services
                             
 Commissions and fees
 
$
4,887,000
   
$
2,591,000
   
$
10,470,000
   
$
4,859,000
 
Recorded on trade date
 Principal transactions
   
2,581,000
     
1,921,000
     
5,784,000
     
3,811,000
 
Recorded on trade date
 Market making
   
615,000
     
410,000
     
1,085,000
     
973,000
 
Recorded on trade date
 Stock borrow / stock loan
   
771,000
     
423,000
     
1,215,000
     
1,004,000
 
Recorded as earned
 Advisory fees
   
243,000
     
193,000
     
505,000
     
361,000
 
Recorded as earned
Total Trading Execution and Clearing Services
   
9,097,000
     
5,538,000
     
19,059,000
     
11,008,000
   
                                        
Other Income
                                     
Margin interest, marketing and distribution fees
                     
 Margin interest
   
1,829,000
     
2,870,000
     
4,335,000
     
5,687,000
 
Recorded as earned
 12b1 fees
   
296,000
     
823,000
     
1,084,000
     
1,562,000
 
Recorded as earned
 Total Margin interest, marketing and distribution fees
   
2,125,000
     
3,693,000
     
5,419,000
     
7,249,000
   
                                        
 Interest income
   
909,000
     
1,186,000
     
2,240,000
     
2,359,000
 
Recorded as earned
 Other income
   
488,000
     
264,000
     
702,000
     
343,000
 
Recorded as earned
                                        
 Total Other Income
   
3,522,000
     
5,143,000
     
8,361,000
     
9,951,000
   
                                        
Total Revenue
 
$
12,619,000
   
$
10,681,000
   
$
27,420,000
   
$
20,959,000
   

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 of approximately $134,000 and $352,000 for the three months and six months ended June 30, 2020, respectively. The Company had an outstanding receivable and payable of approximately $7,000 and $207,000, respectively, as of June 30, 2020. The receivable and payable are in the line items “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statement of financial condition.

As of June 30, 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.
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Other Items

For the six months ended June 30, 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.

11. 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 $162,000 and $273,000 for the three and six months ended June 30, 2020, respectively, which are presented in the line item “Referral fees” in the statements of income.

12. Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of June 30, 2020, the Company’s conclusion regarding the realizability of its deferred tax assets did not change.

CARES Act

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhanced recoverability of AMT tax credits. The CARES Act did not have a significant impact on the Company’s financial statements as of June 30, 2020.

Effective Tax Rate

For the three months ended June 30, 2020, the Company recorded an income tax benefit of $10,000 on income before provision for income taxes of $489,000. The effective tax rate for the three months ended June 30, 2020 was (2)%. The Company recorded an income tax benefit of $94,000 primarily related to certain return to provision adjustments as the Company finalized the filing of its 2019 federal and material state and local taxes for the three months ended June 30, 2020.

For the six months ended June 30, 2020, the Company recorded an income tax provision of $525,000 on income before provision for income taxes of $2,000,000. The effective tax rate for the six months ended June 30, 2020 was 26%. The effective tax rate differs from the statutory rate of 21% primarily related to certain permanent tax differences and state and local taxes. The Company recorded a discrete tax expense of $152,000 primarily related to an adjustment of certain deferred tax assets and the impact of finalizing the 2019 federal and material state and local taxes for the six months ended June 30, 2020.

For the three and six months ended June 30, 2019, the Company recorded an income tax provision of $620,000 and $1,017,000, respectively. The effective tax rate for the three and six months ended June 30, 2019 was 36% and 31%, respectively. The effective tax rate differs from the statutory rate of 21% is primarily related to changes in deferred tax expense calculated by using federal and state net operating losses.

13. 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 $449,000 and $1,079,000 for the three months ended June 30, 2020 and 2019, respectively. The Company had net income of $1,475,000 and $2,303,000 for the six months ended June 30, 2020 and 2019, respectively.


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14. 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 June 30, 2020, MSCO’s net capital was $24.8 million, which was approximately $22.9 million in excess of its required net capital of $1.9 million, and its percentage of aggregate debit balances to net capital was 25.7%.

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 June 30, 2020, MSCO had cash deposits of $255.6 million in the special reserve accounts which was $13.4 million in excess of the deposit requirement of $242.2 million. After adjustments for deposit(s) and / or withdrawal(s) made on July 1, 2020, MSCO had $1 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 June 30, 2020, WP’s net capital was approximately $4.0 million which was $3.7 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.
15. 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.
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The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. 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.
16. 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 of $340,000 and $169,000 for the three months ended June 30, 2020 and 2019, respectively. As part of this plan, the Company recognized expenses of $550,000 and $458,000 for the six months ended June 30, 2020 and 2019, respectively.

The Company had an accrual of $78,000 as of June 30, 2020, which represents the historical estimate of future claims to be recognized for claims incurred prior to the period.
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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.

17. Related Party Disclosures

StockCross

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 branch 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

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 six months ended June 30, 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 $7,000 and $35,000 for the three months ended June 30, 2020 and 2019, respectively. Revenue for PWC from related parties was $44,000 and $64,000 for the six months ended June 30, 2020 and 2019, respectively.

Gloria E. Gebbia and John J. Gebbia

The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. See “Note 9 – Notes Payable - Related Party” for additional detail.
In addition, the Company’s obligations under its Agreement with East West Bank are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994 (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust. See “Note 18 – Subsequent Events” for additional detail.
Gebbia Sullivan County Land Trust

The Company operates on a month-to-month lease agreement for its branch office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a relative of the Gebbia Family. For both the three months ended June 30, 2020 and 2019, the Company paid $15,000 in rent for this branch office. For both the six months ended June 30, 2020 and 2019, the Company paid $30,000 in rent for this branch office.

18. Subsequent Events

The Company has evaluated events that have occurred subsequent to June 30, 2020 and through August 13, 2020, the date of the filing of this report.
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Loan and Security Agreement with East West Bank
As previously reported in a Current Report on Form 8-K filed July 28, 2020, on July 22, 2020, the Company entered into a Loan and Security Agreement (the “Agreement”) with East West Bank. In accordance with the terms of this Agreement, the Company has the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two year period after July 22, 2020. The Company’s obligations under the Agreement are secured by a lien on all of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing.
Term loans made pursuant to the Agreement shall bear interest, at the Company’s option, (i) at the prime rate, as reported by the Wall Street Journal, or (ii) 3.0% above the LIBOR rate, provided that the minimum interest rate on any term loan will not be less than 3.25%. As of the end of July 2020, the Company has drawn down approximately $5.0 million under this agreement.
In addition, the Company’s obligations under the Agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994 (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust.
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 June 30, 2020.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of our operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes to financial statements.

Forward-Looking Statements

 The statements contained in the following MD&A and elsewhere throughout this Quarterly Report on Form 10-Q, including any documents incorporated by reference, that are not historical facts, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements, which reflect our management’s beliefs, objectives, and expectations as of the date hereof, are based on the best judgement of our management. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following: economic, social and political conditions, global economic downturns resulting from extraordinary events such as the COVID-19 pandemic and other securities industry risks; interest rate risks; liquidity risks; credit risk with clients and counterparties; risk of liability for errors in clearing functions; systemic risk; systems failures, delays and capacity constraints; network security risks; competition; reliance on external service providers; new laws and regulations affecting our business; net capital requirements; extensive regulation, regulatory uncertainties and legal matters; failure to maintain relationships with employees, customers, business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with risks and uncertainties detailed in our filings with the SEC, including our most recent filings on Forms 10-K and 10-Q.

 We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.

This discussion should be read in conjunction with our financial statements on our 2019 Form 10-K, and our financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.

Executive Overview

We operate as a financial services company and provide a wide variety of financial services to our clients. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed-income markets. Market volatility, overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants who include investors and competitors, impacting their level of participation in the financial markets. In addition, in periods of reduced financial market activity, profitability is likely to be adversely affected because certain expenses remain relatively fixed, including salaries and related costs, portions of communications costs and occupancy expenses. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.

COVID-19

Overview

In March 2020, the World Health Organization declared the spread of COVID-19 a worldwide pandemic. 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. The COVID‑19 pandemic has adversely impacted the economic environment, leading to lower interest rates across the curve, lower equity market valuations and heightened volatility in the financial markets. We are actively monitoring the impact of COVID-19 on our business, financial condition, liquidity, operations, employees, clients and business partners.
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Operations

In response to the pandemic and for the protection of our employees, clients and business partners, we implemented remote work arrangements for nearly 100% of our employees, restricted business travel and temporarily closed some of our branch offices. To date, with our ability to meet a vast majority of our clients' needs through our technology-based platforms and services, these arrangements have not materially affected our ability to maintain our business operations. Throughout this challenging time, our unwavering focus on continuing to earn our clients’ trust is made possible by the significant contributions of our employees, and we remain committed to serving our clients while protecting our employees’ wellbeing. As of the date of this report, we have started reopening some of our branch offices while ensuring compliance with federal, state, and local laws as well as health and safety guidelines. We have implemented a number of safety precautions such as social distancing and proper sanitation of work spaces to ensure the safety of those in our branch offices. We plan to fully reopen our branch offices once we believe it is safe and in compliance with laws and guidelines to do so.

Financial Impact

During the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to near zero. This decline in interest rates has led to a decrease in our revenue from margin interest, marketing and distribution fees and interest income and may continue to have a negative impact on these revenue streams in the foreseeable future.

Our commissions and fees and principal transaction revenues decreased but were relatively resilient considering the volatility of the market starting at the end of the first quarter and continuing through the second quarter of 2020. In addition, revenue from our institutional customer base has stayed consistent from the first quarter of 2020. We note that the revenue from our business lines acquired from StockCross that are not directly correlated to interest rates such as market making, stock loan and other income have increased from the prior quarter.

In terms of expenses, we have reduced the salary of higher-level employees and we have made a reduction in force in certain areas of our business; however, we do not believe these changes will have a material impact on the operations of our business. We are also evaluating vendor arrangements to identify areas where we can optimize our cost structure while maintaining operational efficiency and quality of the customer experience. In addition, we are evaluating our branch office spaces and various lease agreements especially in light of our ability to work remotely.

The situation surrounding COVID-19 has not materially impacted our position or future outlook related to liquidity as we have been able to meet all obligations and believe we will be able to do so in the foreseeable future.

Conclusion

We note that the ultimate impact of COVID-19 on our 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. We are currently monitoring the COVID-19 situation and will continue to respond to meet the demands of our clients as well as protect our employees.

Acquisitions

StockCross

Overview

Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.

In January 2019, we acquired approximately 15% ownership of StockCross which was accounted for under the equity method. Effective January 1, 2020, we acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of our common stock and StockCross was merged with and into MSCO. As of January 1, 2020, the business and operations of StockCross became part of MSCO, and all clearing and other services provided by StockCross are performed by MSCO. In addition, as of January 1, 2020, our equity method investment in StockCross was eliminated.
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Accounting for Acquisition

Prior to and as of the date of our acquisition of StockCross, Siebert and StockCross were entities under common control of 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 financial statements. This presentation is reflected in the section below comparing statements of income and statements of financial condition to prior periods.

The Company acquired various assets and liabilities from StockCross as of the acquisition date, the fair values of which were assumed to be the historical carrying amounts. The excess of the purchase price over the fair value of the net assets acquired was eliminated due to the transaction being between entities under common control. See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.

Recent Results

The new business lines acquired from StockCross have added additional revenue streams to our statements of income. These new revenue streams include interest income from clearing operations, market making, and stock borrow / stock loan, all of which have contributed approximately $3.3 million of revenue for the six months ended June 30, 2020. In terms of our existing revenue streams, StockCross added incremental commissions and fees, margin interest, marketing and distribution fees, and principal transactions from their client base and operations. Our existing expenses primarily related to compensation, occupancy as well as clearing and technology costs have also increased from the corresponding increase in StockCross revenue and operations. See “Note 10 – Revenue Recognition” for further detail on our revenue streams and corresponding accounting policies.

The acquisition of StockCross has also impacted our statements of financial condition as the nature of StockCross’ business requires the presentation of various customer and securities assets and corresponding liabilities on the statements of financial condition. StockCross has added new assets to our statements of financial condition such as cash and securities segregated for regulatory purposes as well as receivables from customers and securities borrowed as well as new liabilities such as payables to customers, payables to non-customers and securities loaned. StockCross has also added incremental assets and liabilities to the majority of our existing items within our statements of financial condition such as receivables from broker-dealers and clearing organizations and notes payable – related party.

Further, as of January 1, 2020, the acquisition of StockCross added approximately $1.5 billion in retail customer net worth and approximately 30,000 retail accounts to Siebert.

WP

Overview

Effective December 1, 2019, we acquired all of the issued and outstanding membership interests of WP, a prime brokerage services provider, for a cash consideration of approximately $7.1 million, and WP became a wholly-owned subsidiary of Siebert.

The acquisition resulted in approximately $1,989,000 of goodwill and we acquired two intangible assets, WP’s customer relationships and WP’s trade name. We also acquired other assets consisting mostly of receivables from broker-dealers and clearing organizations and assumed liabilities consisting mostly of accounts payable and accrued expenses.

Recent Developments

As previously disclosed in a Current Report on Form 8-K filed on June 26, 2020, on June 22, 2020, we entered into an agreement pursuant to which upon closing we would have sold all our member interests in WP to WPS Acquisitions, LLC for a purchase price of $7.3 million. As reported in a Current Report on Form 8-K filed on July 30, 2020, effective July 24, 2020, we terminated the agreement.

Client Account and Activity Metrics

The following tables set forth metrics we use in analyzing our client account and activity trends for the periods indicated. Retail customers are customers who have accounts with MSCO; institutional customers were acquired from WP as part of the acquisition effective December 1, 2019.

We acquired StockCross in January 2020; however, the client account and client activity metrics for Siebert and StockCross have been presented on a combined basis for all periods shown below to maintain consistency to the presentation of the financial statements. As such, the results of StockCross are included in metrics for the 2019 data shown below.
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Client Account Metrics – Retail Customers
   
As of June 30,
 
   
2020
   
2019
 
Retail customer margin debit balances (in billions)
 
$
0.4
   
$
0.3
 
Retail customer credit balances (in billions)
 
$
0.6
   
$
0.6
 
Retail customer money market fund value (in billions)
 
$
0.7
   
$
0.6
 
Retail customer net worth (in billions)
 
$
12.3
   
$
12.5
 
Retail customer accounts
   
109,294
     
104,551
 

Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions
Retail customer credit balances represents client cash held in brokerage accounts
Retail customer money market fund value represents all retail customers accounts invested in money market funds
Retail customer net worth represents the total value of securities and cash in the retail customer accounts after deducting margin debits
Retail customer accounts represents the number of retail customers

Client Account Metrics – Institutional Customers
   
As of
June 30, 2020
 
Institutional customer net worth (in billions)
 
$
1.3
 

Institutional customer net worth represents the total value of securities and cash in the institutional customer accounts after deducting margin debits and short positions

Client Activity Metrics
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Total retail trades
   
120,821
     
74,944
     
241,316
     
154,298
 
Average commission per retail trade
 
$
14.96
   
$
18.77
   
$
15.21
   
$
18.83
 

Total retail trades represents retail trades that generate commissions
Average commission per retail trade represents the average commission generated for all types of retail customer trades

Statements of Income and Financial Condition

Overview

We acquired StockCross in January 2020; however, Siebert and StockCross have been presented on a combined basis for all periods presented. As such, the results of StockCross are included in the statements of income and statements of financial condition discussed below.

We acquired WP in December 2019 which added various revenue streams and corresponding expenses to our statement of income for the three and six months ended June 30, 2020. As such, the results of WP’s operations impact our comparisons for the statements of income and statements of financial condition discussed below.

Statements of Income for the Three Months Ended June 30, 2020 and 2019

Revenue

Commissions and fees for the three months ended June 30, 2020 were $4,887,000 and increased by $2,296,000 from the corresponding period in the prior year, primarily due to the increase in trading activities from WP’s institutional clients.

Margin interest, marketing and distribution fees for the three months ended June 30, 2020 were $2,125,000 and decreased by $1,568,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment.

Principal transactions for the three months ended June 30, 2020 were $2,581,000 and increased by $660,000 from the corresponding period in the prior year, primarily due to market conditions during the second quarter of 2020.
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Interest income for the three months ended June 30, 2020 was $909,000 and decreased by $277,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment.

Market making for the three months ended June 30, 2020 was $615,000 and increased by $205,000 from the corresponding period in the prior year, primarily due to market conditions during the three months ended June 30, 2020.

Stock borrow / stock loan for the three months ended June 30, 2020 was $771,000 and increased by $348,000 from the corresponding period in the prior year, primarily due to the organic growth of the business and strong market conditions.

Advisory fees for the three months ended June 30, 2020 were $243,000 and increased by $50,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line which included revenue growth related to our Robo-Advisor.

Other income for the three months ended June 30, 2020 was $488,000 and increased by $224,000 from the corresponding period in the prior year, primarily due to miscellaneous account fees as well as the addition of WP’s business.

Operating Expenses

Employee compensation and benefits for the three months ended June 30, 2020 were $6,614,000 and increased by $2,138,000 from the corresponding period in the prior year, primarily due to incremental WP salaries and commission payouts as well as increased commission payouts corresponding to the increase in principal transaction revenue, partially offset by the reduction in salaries and staff during the second quarter.

Clearing fees, including execution costs for the three months ended June 30, 2020 were $1,339,000 and increased by $613,000 from the corresponding period in the prior year, primarily due to the addition of WP’s operations.

Technology and communications expenses for the three months ended June 30, 2020 were $953,000 and increased by $553,000 from the corresponding period in the prior year, primarily due to an overall higher level of spend related to technology operating services as well as the addition of WP’s technology operations in 2020.

Other general and administrative expenses for the three months ended June 30, 2020 were $401,000 and decreased by $784,000 from the corresponding period in the prior year, primarily due to the expansion of our Jersey City branch office and the establishment of our Miami branch office occurring in the corresponding period in the prior year.

Data processing expenses for the three months ended June 30, 2020 were $754,000 and increased by $336,000 from the corresponding period in the prior year, primarily due to increased technology costs related to clearing operations.

Rent and occupancy expenses for the three months ended June 30, 2020 were $698,000 and increased by $105,000 from the corresponding period in the prior year, primarily due to the increase in rent from the addition of WP’s offices.

Professional fees for the three months ended June 30, 2020 were $744,000 and decreased by $158,000 from the corresponding period in the prior year, primarily due to a reduction in legal fees.

Depreciation and amortization expenses for the three months ended June 30, 2020 were $377,000 and increased by $126,000 from the corresponding period in the prior year, primarily due to the depreciation and amortization of incremental purchases of fixed assets and software as well as the amortization related to the intangible assets acquired from WP.

Referral fees for the three months ended June 30, 2020 were $162,000 and increased by $162,000 from the corresponding period in the prior year, primarily due to the commission payouts to other institutional brokers.

Interest expense for the three months ended June 30, 2020 was $88,000 and increased by $57,000 from the corresponding period in the prior year, primarily due to the interest on the promissory note to finance part of the acquisition of WP.

Provision (Benefit) For (From) Income Taxes

Benefit from income taxes for the three months ended June 30, 2020 was $10,000, a decrease of income tax expense of $630,000 from the corresponding period in the prior year, primarily due to changes in deferred tax expense calculated by using federal and state net operating losses.

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Statements of Income for the Six Months Ended June 30, 2020 and 2019

Revenue

Commissions and fees for the six months ended June 30, 2020 were $10,470,000 and increased by $5,611,000 from the corresponding period in the prior year, primarily due to the increase in trading activities from WP’s institutional clients.

Margin interest, marketing and distribution fees for the six months ended June 30, 2020 were $5,419,000 and decreased by $1,830,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment.

Principal transactions for the six months ended June 30, 2020 were $5,784,000 and increased by $1,973,000 from the corresponding period in the prior year, primarily due to market conditions during 2020.

Interest income for the six months ended June 30, 2020 was $2,240,000 and decreased by $119,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment.

Market making for the six months ended June 30, 2020 was $1,085,000 and increased by $112,000 from the corresponding period in the prior year, primarily due to market conditions during 2020.

Stock borrow / stock loan for the six months ended June 30, 2020 was $1,215,000 and increased by $211,000 from the corresponding period in the prior year, primarily due to the organic growth of the business and strong market conditions.

Advisory fees for the six months ended June 30, 2020 were $505,000 and increased by $144,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line which included revenue growth related to our Robo-Advisor.

Other income for the six months ended June 30, 2020 was $702,000 and increased by $359,000 from the corresponding period in the prior year, primarily due to miscellaneous account fees and the addition of WP’s business.

Operating Expenses

Employee compensation and benefits for the six months ended June 30, 2020 were $13,905,000 and increased by $4,901,000 from the corresponding period in the prior year, primarily due to incremental WP salaries and commission payouts as well as increased commission payouts corresponding to the increase in principal transaction revenue, partially offset by the reduction in salaries and staff during the second quarter.

Clearing fees, including execution costs for the six months ended June 30, 2020 were $2,637,000 and increased by $1,109,000 from the corresponding period in the prior year, primarily due to the addition of WP’s operations.

Technology and communications expenses for the six months ended June 30, 2020 were $1,934,000 and increased by $1,112,000 from the corresponding period in the prior year, primarily due to an overall higher level of spend related to technology operating services as well as the addition of WP’s technology operations in 2020.

Other general and administrative expenses for the six months ended June 30, 2020 were $1,255,000 and decreased by $663,000 from the corresponding period in the prior year, primarily due to the expansion of our Jersey City branch office and the establishment of our Miami branch office occurring in the corresponding period in the prior year.

Data processing expenses for the six months ended June 30, 2020 were $1,603,000 and increased by $642,000 from the corresponding period in the prior year, primarily due to increased technology costs related to service bureaus.

Rent and occupancy expenses for the six months ended June 30, 2020 were $1,425,000 and increased by $301,000 from the corresponding period in the prior year, primarily due to the increase in rent from the addition of WP’s offices.

Professional fees for the six months ended June 30, 2020 were $1,399,000 and decreased by $386,000 from the corresponding period in the prior year, primarily due to a reduction in legal fees.

Depreciation and amortization expenses for the six months ended June 30, 2020 were $825,000 and increased by $380,000 from the corresponding period in the prior year, primarily due to the depreciation and amortization of incremental purchases of fixed assets and software as well as the amortization related to the intangible assets acquired from WP.
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Referral fees for the six months ended June 30, 2020 were $273,000 and increased by $273,000 from the corresponding period in the prior year, primarily due to the commission payouts to other institutional brokers.

Interest expense for the six months ended June 30, 2020 was $164,000 and increased by $112,000 from the corresponding period in the prior year, primarily due to the interest on the promissory note to finance part of the acquisition of WP.

Provision (Benefit) For (From) Income Taxes

Provision for income taxes for the six months ended June 30, 2020 was $525,000 and decreased by $492,000 from the corresponding period in the prior year, primarily due to changes in deferred tax expense calculated by using federal and state net operating losses.

Statements of Financial Condition as of June 30, 2020 and December 31, 2019

Assets

Assets as of June 30, 2020 were $536,687,000 and decreased by $1,380,000 from December 31, 2019, primarily due to the decrease in securities borrowed and receivables from customers, partially offset by the increase in cash and securities segregated for regulatory purposes.

Liabilities

Liabilities as of June 30, 2020 were $500,950,000 and decreased by $3,982,000 from December 31, 2019, primarily due the decrease in securities loaned, partially offset by the increase in payables to customers and payables to broker-dealers and clearing organizations.

Liquidity and Capital Resources

Overview

We believe that our operating cash flows, cash and cash equivalents, borrowing capacity under the notes payable – related party, and access to capital markets are sufficient to fund our operating, investing and financing requirements for the next twelve months.

Net Capital and Special Reserve Account

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. Since MSCO’s aggregate debits may fluctuate, MSCO’s minimum net capital requirements may also fluctuate from period to period. In addition, 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.

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.

See “Note 14 – Capital Requirements” for more detail on our capital requirements.

Loan and Security Agreement with East West Bank
On July 22, 2020, we entered into a Loan and Security Agreement with East West Bank. In accordance with the terms of this agreement, we have the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. Our obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, Gloria E. Gebbia and a trust for which they are mutually co-trustees. As of the end of July 2020, we have drawn down approximately $5.0 million under this agreement. See “Note 18 – Subsequent Events” for more detail on this agreement.
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Contractual Obligations
Leases

Future annual minimum payments for operating leases with initial terms of greater than one year as of June 30, 2020 were as follows:

Year
 
Amount
 
 2020
 
$
1,214,000
 
 2021
   
1,208,000
 
 2022
   
624,000
 
 2023
   
543,000
 
 2024
   
56,000
 
Total
 
$
3,645,000
 

See “Note 7 – Leases” for more detail on our lease arrangements and corresponding disclosures.

Notes Payable – Related Party

We have $8 million in notes payable to Gloria E. Gebbia,  all of which matures in 2020. See “Note 9 – Notes Payable - Related Party” for more detail.

Prepaid Service Contract

We have entered into an agreement with InvestCloud for development work related to our online platform as well as Robo-Advisor. As part of this agreement, we have an obligation to pay for the license fees associated with the InvestCloud Platform for a three year term. See “Note 5 – Prepaid Service Contract” for more detail.

Off-Balance Sheet Arrangements

Customer transactions are cleared through our clearing firms on a fully disclosed basis. If customers do not fulfill their contractual obligations, we may incur loss in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions for the six months ended June 30, 2020 and 2019.

Impairment

We have concluded that as of June 30, 2020, there have been no impairments to the carrying value of the Company’s goodwill and other tangible and intangible assets.

Segment

We concluded as of June 30, 2020, Siebert 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 Siebert from a consolidated perspective.

Related Party Disclosures

During the course of business, we enter into various agreements and transactions with related parties. See “Note 17 – Related Party Disclosures” for more detail on our related party disclosures.

Critical Accounting Policies

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our 2019 Form 10-K. There have been no changes to critical accounting estimates as of June 30, 2020.

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New Accounting Pronouncements

We have adopted certain new accounting pronouncements during the reporting period. See “Note 2 – New Accounting Standards” for more detail on the new accounting pronouncements and their impact on our financial statements.

Fair Value Measurements

We have securities that are valued using the fair value framework under ASC 820 within our assets and liabilities as of June 30, 2020 and December 31, 2019. The majority of the assets are level 1 U.S. government securities and equity securities as well as level 2 equity securities that are in the line items “Cash and securities segregated for regulatory purposes” and “Securities owned, at fair value.” The liabilities consist of relatively small amounts of level 1 and level 2 equity securities in the line item “Securities sold, not yet purchased, at fair value.” See “Note 6 – Fair Value Measurements” for more detail.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Instruments Held For Trading Purposes

We do not directly engage in derivative transactions, have no interest in any special purpose entity and have no liabilities, contingent or otherwise, for the debt of another entity.

Financial Instruments Held For Purposes Other Than Trading

We generally invest our cash and cash equivalents temporarily in dollar denominated bank account(s). These investments are not subject to material changes in value due to interest rate movements.

Retail customer transactions are cleared through clearing brokers on a fully disclosed basis and are also self-cleared by MSCO. If customers do not fulfill their contractual obligations any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations may be incurred by the Company. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions in the last five years.
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ITEM 4. CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Executive Vice President / Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the Executive Vice President / Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Executive Vice President / Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on its evaluation, our management, including our Executive Vice President / Chief Financial Officer, concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) was identified during the end of the period covered by this report, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of our management, all such matters are without merit, or involve amounts which would not have a significant effect on the financial position of the Company.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, investors should carefully consider the risk factors discussed in Part I - Item 1A - Risk Factors, in our 2019 Form 10-K, as supplemented by the risk factors included in our Quarterly Report on Form 10-Q for the period ended March 31, 2020. Each of such risk factors could materially affect our business, financial position, and results of operations. Other than the supplemental risk factors provided in the Quarterly Report on Form 10-Q for the period ended March 31, 2020, there have been no material changes from the risk factors disclosed in our 2019 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On April 21, 2020, we entered into an agreement with InvestCloud pursuant to which InvestCloud acquired 193,906 shares of our restricted common stock (the “Shares”). The Shares were issued on May 12, 2020 at a per share price of $5.81 (Siebert’s share price as of the close of May 12, 2020) for a total of $1.1 million for professional services to integrate InvestCloud’s software into Siebert’s existing platforms as well as its Robo-Advisor. The Shares were issued to InvestCloud without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(a)(2) thereunder. See “Note 5 – Prepaid Service Contract” for more detail.
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ITEM 6. EXHIBITS
 
Exhibit No.
 
Description of Document
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase


- 39 -


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
SIEBERT FINANCIAL CORP.
 
 
 
 
 
 
By:
/s/ Andrew H. Reich
 
 
 
Andrew H. Reich
 
 
 
Executive Vice President, Chief Operating Officer, Chief Financial Officer, and Secretary
 
 
 
(Principal executive, financial and accounting officer)
 
 
 
 
 
 
Dated: August 13, 2020
 
 



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