**Shares outstanding as of December 31, 2019 represents the combined total of the Company’s shares outstanding and the shares issued for the Company’s acquisition of StockCross. See “Note 1 – Organization and Basis of Presentation” for additional detail.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization
Overview
Siebert Financial Corp., a New York corporation incorporated in 1934, is a holding company that conducts its retail brokerage business through its wholly-owned subsidiary, Muriel Siebert & Co.,
Inc. (“MSCO”), a Delaware corporation and registered broker-dealer, its investment advisory business through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the U.S. Securities and Exchange
Commission (“SEC”) as a Registered Investment Adviser under the Investment Advisers Act of 1940, as amended, and its insurance business through its wholly-owned subsidiary, Park Wilshire Companies, Inc. (“PWC”), a Texas corporation and licensed
insurance agency. Siebert conducts operations through its wholly-owned subsidiary, Siebert Technologies, LLC. (“STCH”), a Nevada limited liability company and developer of robo-advisory technology. Siebert offers prime brokerage services through its
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 nine months ended September 30,
2020 and 2019 were derived from its operations in the U.S.
As of September 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 Financial Services, Inc.
(“StockCross”). Subsequently, as previously disclosed in a Current Report on Form 8-K filed on January 7, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of the Company’s common stock.
Effective January 1, 2020, StockCross was merged with and into MSCO, and as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
Change in Reporting Entity
As of the date of the Company’s acquisition of StockCross, the Company and StockCross were entities under common control of Gloria E. Gebbia, the Company’s principal stockholder, and members of her
immediate family (collectively, the “Gebbia Family”). The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for all periods presented in the unaudited condensed consolidated
financial statements (“financial statements”). See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.
The challenges posed by the COVID-19 pandemic on the global economy increased significantly starting in the first quarter of 2020. COVID-19 has spread across the globe during 2020 and has impacted
economic activity worldwide. In response to COVID-19, national and local governments around the world 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, all of the Company’s branch offices have been re-opened while
maintaining compliance with federal, state and local mandates and guidelines. The Company has taken significant steps to ensure that its employees and customers are operating in a safe environment by implementing measures such as social distancing,
sanitizing workstations, temperature checks, requiring masks, and alternating staff. The impact from the COVID-19 pandemic has caused the revenue and income of the Company to decrease; however, the Company has implemented various initiatives to
offset this decline.
The Company is actively monitoring the impact of COVID-19 on the Company’s business, financial condition, liquidity, operations, employees, clients and business partners. Based on management’s
assessment as of September 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 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 September 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 Exchange Act Rule 15c3-3, referred to as the “Customer Protection Rule,” 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 15 – 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 September 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 nine months ended September 30, 2020 were both self-cleared and cleared on a fully disclosed basis through National Financial Services Corp. (“NFS”). MSCO
customer transactions for the nine months ended September 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.
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 September 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 September 30, 2020 and December 31, 2019, MSCO had deposits with and other non-current receivables from multiple broker-dealers and clearing organizations of approximately
$2.1 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 clearing agreements and include the net
receivable from net monthly revenues as well as cash on deposit. As of both September 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 September 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 11 –
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.
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 September 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 September 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. The companies have been presented on a combined basis for all periods presented in the financial statements in a manner similar to a pooling of interests, as the period of common control existed prior to the periods presented in the
financial statements. Accordingly, the historical financial statements of the Company have been presented under the “as if pooling” method.
Prior to the Company’s acquisition of StockCross, StockCross sold its treasury stock totaling $172,000 to third parties and the Company purchased approximately 15% of the outstanding shares of
StockCross from an unrelated party for $3,665,000. On September 5, 2019, StockCross made a return of capital distribution in the aggregate amount of $1.6 million, of which the Company received approximately 15%, or $241,000. All of these cash
transactions are reflected in the “Cash flows from financing activities” section of the statements of cash flows for the nine months ended September 30, 2019.
Assets Acquired and Liabilities Assumed
The Company acquired various assets and liabilities from StockCross which were recorded at their historical carrying amounts and summarized below:
|
|
Historical
Carrying Value
|
|
|
|
|
|
Assets acquired
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,588,000
|
|
Cash and securities segregated for regulatory purposes
|
|
|
224,814,000
|
|
Receivables from customers
|
|
|
86,331,000
|
|
Receivables from broker-dealers and clearing organizations
|
|
|
3,105,000
|
|
Other receivables
|
|
|
627,000
|
|
Prepaid expenses and other assets
|
|
|
346,000
|
|
Securities borrowed
|
|
|
193,529,000
|
|
Securities owned, at fair value
|
|
|
3,018,000
|
|
Furniture, equipment and leasehold improvements, net
|
|
|
19,000
|
|
Lease right-of-use assets
|
|
|
1,141,000
|
|
Deferred tax assets
|
|
|
407,000
|
|
Total Assets acquired
|
|
|
514,925,000
|
|
|
|
|
|
|
Liabilities 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 for the periods presented for 2019. StockCross’ financial statements have already been consolidated in the Company’s
financial statements for the periods presented for 2020:
Statements of Operations
Three Months Ended September 30, 2019 (unaudited)
|
|
Three Months Ended September 30, 2019
|
|
|
|
Siebert
|
|
|
StockCross
|
|
|
Pro Forma
Adjustments
|
|
|
Total Combined
Siebert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
1,925,000
|
|
|
$
|
348,000
|
|
|
$
|
—
|
|
|
$
|
2,273,000
|
|
Margin interest, marketing and distribution fees
|
|
|
2,944,000
|
|
|
|
968,000
|
|
|
|
—
|
|
|
|
3,912,000
|
|
Principal transactions
|
|
|
2,041,000
|
|
|
|
286,000
|
|
|
|
—
|
|
|
|
2,327,000
|
|
Interest income
|
|
|
23,000
|
|
|
|
1,038,000
|
|
|
|
—
|
|
|
|
1,061,000
|
|
Market making
|
|
|
—
|
|
|
|
330,000
|
|
|
|
—
|
|
|
|
330,000
|
|
Stock borrow / stock loan
|
|
|
—
|
|
|
|
349,000
|
|
|
|
—
|
|
|
|
349,000
|
|
Advisory fees
|
|
|
211,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
211,000
|
|
Other income
|
|
|
—
|
|
|
|
351,000
|
|
|
|
(61,000
|
)
|
|
|
290,000
|
|
Total Revenue
|
|
|
7,144,000
|
|
|
|
3,670,000
|
|
|
|
(61,000
|
)
|
|
|
10,753,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,157,000
|
|
|
|
1,652,000
|
|
|
|
—
|
|
|
|
4,809,000
|
|
Clearing fees, including execution costs
|
|
|
617,000
|
|
|
|
242,000
|
|
|
|
(61,000
|
)
|
|
|
798,000
|
|
Technology and communications
|
|
|
291,000
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
441,000
|
|
Other general and administrative
|
|
|
589,000
|
|
|
|
279,000
|
|
|
|
—
|
|
|
|
868,000
|
|
Data processing
|
|
|
—
|
|
|
|
527,000
|
|
|
|
—
|
|
|
|
527,000
|
|
Rent and occupancy
|
|
|
380,000
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
630,000
|
|
Professional fees
|
|
|
439,000
|
|
|
|
344,000
|
|
|
|
—
|
|
|
|
783,000
|
|
Depreciation and amortization
|
|
|
244,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
244,000
|
|
Interest expense
|
|
|
—
|
|
|
|
31,000
|
|
|
|
—
|
|
|
|
31,000
|
|
Total Expenses
|
|
|
5,717,000
|
|
|
|
3,475,000
|
|
|
|
(61,000
|
)
|
|
|
9,131,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investment in related party
|
|
|
30,000
|
|
|
|
—
|
|
|
|
(30,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit) for (from) income taxes
|
|
|
1,457,000
|
|
|
|
195,000
|
|
|
|
(30,000
|
)
|
|
|
1,622,000
|
|
Provision (benefit) for (from) income taxes
|
|
|
353,000
|
|
|
|
4,000
|
|
|
|
(8,000
|
)
|
|
|
349,000
|
|
Net income / (loss)
|
|
$
|
1,104,000
|
|
|
$
|
191,000
|
|
|
$
|
(22,000
|
)
|
|
$
|
1,273,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
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
|
|
Nine Months Ended September 30, 2019 (unaudited)
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Siebert
|
|
|
StockCross
|
|
|
Pro Forma
Adjustments
|
|
|
Total Combined
Siebert
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
6,030,000
|
|
|
$
|
1,102,000
|
|
|
$
|
—
|
|
|
$
|
7,132,000
|
|
Margin interest, marketing and distribution fees
|
|
|
8,499,000
|
|
|
|
2,662,000
|
|
|
|
—
|
|
|
|
11,161,000
|
|
Principal transactions
|
|
|
5,479,000
|
|
|
|
659,000
|
|
|
|
—
|
|
|
|
6,138,000
|
|
Interest income
|
|
|
54,000
|
|
|
|
3,363,000
|
|
|
|
—
|
|
|
|
3,417,000
|
|
Market making
|
|
|
—
|
|
|
|
1,303,000
|
|
|
|
—
|
|
|
|
1,303,000
|
|
Stock borrow / stock loan
|
|
|
—
|
|
|
|
1,353,000
|
|
|
|
—
|
|
|
|
1,353,000
|
|
Advisory fees
|
|
|
572,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
572,000
|
|
Other income
|
|
|
—
|
|
|
|
816,000
|
|
|
|
(183,000
|
)
|
|
|
633,000
|
|
Total Revenue
|
|
|
20,634,000
|
|
|
|
11,258,000
|
|
|
|
(183,000
|
)
|
|
|
31,709,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
8,882,000
|
|
|
|
4,930,000
|
|
|
|
—
|
|
|
|
13,812,000
|
|
Clearing fees, including execution costs
|
|
|
1,849,000
|
|
|
|
659,000
|
|
|
|
(183,000
|
)
|
|
|
2,325,000
|
|
Technology and communications
|
|
|
800,000
|
|
|
|
464,000
|
|
|
|
—
|
|
|
|
1,264,000
|
|
Other general and administrative
|
|
|
1,861,000
|
|
|
|
926,000
|
|
|
|
—
|
|
|
|
2,787,000
|
|
Data processing
|
|
|
—
|
|
|
|
1,487,000
|
|
|
|
—
|
|
|
|
1,487,000
|
|
Rent and occupancy
|
|
|
995,000
|
|
|
|
759,000
|
|
|
|
—
|
|
|
|
1,754,000
|
|
Professional fees
|
|
|
1,388,000
|
|
|
|
1,180,000
|
|
|
|
—
|
|
|
|
2,568,000
|
|
Depreciation and amortization
|
|
|
670,000
|
|
|
|
19,000
|
|
|
|
—
|
|
|
|
689,000
|
|
Interest expense
|
|
|
—
|
|
|
|
84,000
|
|
|
|
—
|
|
|
|
84,000
|
|
Total Expenses
|
|
|
16,445,000
|
|
|
|
10,508,000
|
|
|
|
(183,000
|
)
|
|
|
26,770,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of equity method investment in related party
|
|
|
84,000
|
|
|
|
—
|
|
|
|
(84,000
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit) for (from) income taxes
|
|
|
4,273,000
|
|
|
|
750,000
|
|
|
|
(84,000
|
)
|
|
|
4,939,000
|
|
Provision (benefit) for (from) income taxes
|
|
|
1,171,000
|
|
|
|
218,000
|
|
|
|
(24,000
|
)
|
|
|
1,365,000
|
|
Net income / (loss)
|
|
$
|
3,102,000
|
|
|
$
|
532,000
|
|
|
$
|
(60,000
|
)
|
|
$
|
3,574,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
Current portion of notes payable - related party
|
|
|
3,000,000
|
|
|
|
5,000,000
|
|
|
|
—
|
|
|
|
8,000,000
|
|
Current portion of lease liabilities
|
|
|
1,291,000
|
|
|
|
936,000
|
|
|
|
—
|
|
|
|
2,227,000
|
|
Total Current liabilities
|
|
|
5,869,000
|
|
|
|
498,852,000
|
|
|
|
(1,971,000
|
)
|
|
|
502,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities, less current portion
|
|
|
1,823,000
|
|
|
|
359,000
|
|
|
|
—
|
|
|
|
2,182,000
|
|
Total Liabilities
|
|
|
7,692,000
|
|
|
|
499,211,000
|
|
|
|
(1,971,000
|
)
|
|
|
504,932,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value
|
|
|
271,000
|
|
|
|
10,000
|
|
|
|
23,000
|
|
|
|
304,000
|
|
Additional paid-in capital
|
|
|
7,641,000
|
|
|
|
12,436,000
|
|
|
|
(180,000
|
)
|
|
|
19,897,000
|
|
Retained earnings
|
|
|
12,869,000
|
|
|
|
3,268,000
|
|
|
|
(3,203,000
|
)
|
|
|
12,934,000
|
|
Total Stockholders’ equity
|
|
|
20,781,000
|
|
|
|
15,714,000
|
|
|
|
(3,360,000
|
)
|
|
|
33,135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and stockholders' equity
|
|
$
|
28,473,000
|
|
|
$
|
514,925,000
|
|
|
$
|
(5,331,000
|
)
|
|
$
|
538,067,000
|
|
Pro Forma Adjustments
The pro forma results include adjustments made for the consolidation of both entities. The statements of income reflects the elimination of StockCross’ other income and the Company’s corresponding
custody and clearing fees resulting from the fully disclosed clearing relationship between MSCO and StockCross. In addition, the Company’s earnings recognized as part of its equity method investment in StockCross for the three and nine months ended
September 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 its 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 September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
Revenue
|
|
$
|
14,372,000
|
|
|
$
|
41,191,000
|
|
Operating income
|
|
$
|
1,905,000
|
|
|
$
|
3,693,000
|
|
Net income
|
|
$
|
1,577,000
|
|
|
$
|
2,407,000
|
|
The pro forma results include adjustments made for the consolidation of both entities. These adjustments take into consideration the interest expense on the promissory note used in financing the
acquisition, the amortization of the acquired intangible assets, as well as the tax effect of pro forma adjustments using an estimated combined statutory rate of 28.0%.
Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of
future results.
4. Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Amounts receivable from, payables to, and deposits with broker-dealers and clearing organizations consisted of the following as of the periods indicated:
|
|
As of
September 30, 2020
|
|
|
As of
December 31, 2019
|
|
Receivables from and deposits with broker-dealers and clearing organizations
|
|
|
|
|
|
|
DTCC / OCC / NSCC
|
|
$
|
3,678,000
|
|
|
$
|
3,059,000
|
|
Goldman Sachs
|
|
|
2,105,000
|
|
|
|
2,841,000
|
|
Pershing Capital
|
|
|
1,279,000
|
|
|
|
1,192,000
|
|
NFS
|
|
|
1,113,000
|
|
|
|
1,328,000
|
|
Securities fail-to-deliver
|
|
|
207,000
|
|
|
|
43,000
|
|
Globalshares
|
|
|
24,000
|
|
|
|
2,000
|
|
ICBC
|
|
|
—
|
|
|
|
10,000
|
|
Total Receivables from and deposits with broker-dealers and clearing organizations
|
|
$
|
8,406,000
|
|
|
$
|
8,475,000
|
|
|
|
|
|
|
|
|
|
|
Payables to broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
|
Securities fail-to-receive
|
|
$
|
356,000
|
|
|
$
|
523,000
|
|
Total Payables to broker-dealers and clearing organizations
|
|
$
|
356,000
|
|
|
$
|
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 initially 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” on the statements
of income.
6. Fair Value Measurements
Overview
ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income, or cost approach, as specified by ASC 820, are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 - Quoted prices (unadjusted) in active markets for an identical asset or liability that the Company can assess at the measurement date.
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
The availability of observable inputs can vary from security to security and is affected by a variety of factors, such as the type of security, the liquidity of markets, and other characteristics
particular to the security. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. As such, the degree of judgment exercised in
determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair
value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily
available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
U.S. government securities: U.S. government securities are valued using quoted market prices and as such, valuation adjustments are not applied.
Accordingly, U.S. government securities are generally categorized in level 1 of the fair value hierarchy.
Municipal securities: Municipal securities are valued using recently executed transactions, market price quotations (when observable), bond spreads from
independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. Municipal securities are generally categorized in level
2 of the fair value hierarchy.
Corporate bonds and convertible preferred stock: The fair value of corporate bonds and convertible preferred stock are determined using recently executed
transactions, market price quotations (when observable), bond spreads, or credit default swap spreads obtained from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments.
The spread data used is for the same maturity as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is used. When position-specific external price data is not observable, fair value is
determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond, or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds and convertible preferred stocks are
generally categorized in level 2 of the fair value hierarchy.
Equity securities: Equity securities are valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation
adjustments are not applied, and they are categorized in level 1 of the fair value hierarchy. Securities quoted in inactive markets or with observable inputs are categorized into level 2. If there are no observable inputs or quoted prices,
securities are categorized as level 3 assets in the fair value hierarchy. Level 3 assets are not actively traded and subjective estimates based on managements’ assumptions are utilized for valuation.
Mutual funds: Mutual funds are valued based on the closing net asset value of the publicly traded mutual funds. These securities are actively traded and
therefore valuation adjustments are not applied. As such, mutual funds are categorized in level 1 of the fair value hierarchy.
Certificates of deposit: Certificates of deposit included in investments are valued at cost, which approximates fair value. When certificates of deposits
are held directly with banking institutions and issued directly to the Company, these are categorized within cash and cash equivalents in level 2 of the fair value hierarchy. When certificates of deposits are available for trading, they are
categorized within securities owned, at fair value in level 2 of the fair value hierarchy.
Fair Value Hierarchy Tables
The following tables present the Company's fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of the periods presented.
|
|
As of September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
$
|
—
|
|
|
$
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities*
|
|
$
|
2,028,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,028,000
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
91,000
|
|
|
|
—
|
|
|
|
91,000
|
|
Corporate bonds
|
|
|
—
|
|
|
|
120,000
|
|
|
|
—
|
|
|
|
120,000
|
|
Equity securities
|
|
|
765,000
|
|
|
|
343,000
|
|
|
|
—
|
|
|
|
1,108,000
|
|
Mutual funds
|
|
|
133,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
133,000
|
|
Total Securities owned, at fair value
|
|
$
|
2,926,000
|
|
|
$
|
554,000
|
|
|
$
|
—
|
|
|
$
|
3,480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
Total Securities sold, not yet purchased, at fair value
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
25,000
|
|
*As of September 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
|
|
|
|
Nine Months Ended September 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 – September 30, 2020
|
|
$
|
—
|
|
|
|
The following represents financial instruments in which the ending balances as of September 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.
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.
Line of credit: The carrying amount of the line of credit with East West Bank approximates fair value due to the relative short-term nature of the borrowing.
Under the fair value hierarchy, the line of credit is classified as level 2.
7. Leases
As of September 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 September 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
September 30, 2020
|
|
|
As of
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
Lease right-of-use assets
|
|
$
|
2,813,000
|
|
|
$
|
3,951,000
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Lease liabilities
|
|
$
|
3,181,000
|
|
|
$
|
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
September 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 usually determined by the leased square footage in proportion to the overall office building.
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
609,000
|
|
|
$
|
509,000
|
|
|
$
|
1,755,000
|
|
|
$
|
1,268,000
|
|
Short-term lease cost
|
|
|
20,000
|
|
|
|
81,000
|
|
|
|
83,000
|
|
|
|
321,000
|
|
Variable lease cost
|
|
|
65,000
|
|
|
|
40,000
|
|
|
|
281,000
|
|
|
|
165,000
|
|
Sublease income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Rent and occupancy
|
|
$
|
694,000
|
|
|
$
|
630,000
|
|
|
$
|
2,119,000
|
|
|
$
|
1,754,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
614,000
|
|
|
$
|
512,000
|
|
|
$
|
1,845,000
|
|
|
$
|
1,338,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
278,000
|
|
|
$
|
—
|
|
|
$
|
2,353,000
|
|
|
$
|
4,943,000
|
|
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of September 30, 2020 were as follows:
Year
|
|
Amount
|
|
2020
|
|
$
|
606,000
|
|
2021
|
|
|
1,403,000
|
|
2022
|
|
|
755,000
|
|
2023
|
|
|
543,000
|
|
2024
|
|
|
56,000
|
|
Remaining balance of lease payments
|
|
|
3,363,000
|
|
Difference between undiscounted cash flows and
discounted cash flows
|
|
|
182,000
|
|
Lease liabilities
|
|
$
|
3,181,000
|
|
As of September 30, 2020, the Company had an operating lease agreement for an office space in Beverly Hills, CA with a term of approximately 5 years. The total commitment of the lease is
approximately $1.5 million, and the lease will commence on March 1, 2021.
Rent and occupancy expenses were $694,000 and $630,000 for the three months ended September 30, 2020 and 2019, respectively. Rent and occupancy expenses were $2,119,000 and $1,754,000 for the nine
months ended September 30, 2020 and 2019, respectively.
8. Goodwill and Intangible Assets, Net
Goodwill
As of September 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 September 30, 2020, the WP trade name has been fully amortized.
Impairment
For the nine months ended September 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.
9. Long-Term Debt
Line of Credit 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 with East West Bank. In accordance with the terms
of this agreement, the Company has the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. The Company’s obligations under the agreement are secured by a lien on all
of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts
into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will
utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.
Term loans made pursuant to the agreement shall bear interest, at the 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%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term
loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.
This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net
worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or
acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of September 30, 2020 and the date of the filing of this report, the Company was in compliance with all of its covenants related to this agreement.
In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually and as a co-trustee of the John and Gloria
Living Trust, U/D/T December 8, 1994 (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust.
As of September 30, 2020, the Company has drawn down a term loan of approximately $4.9 million under this agreement. The Company has incurred interest expense in relation to this term loan of $15,000
for both the three and nine months ended September 30, 2020.
10. Notes Payable - Related Party
As of September 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, 2021**
|
November 30, 2018
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
Total Notes payable – related party
|
|
|
$
|
6,000,000
|
|
*The note payable subordinated to MSCO was acquired as part of the acquisition of StockCross.
**This note payable was renewed on November 30, 2019 for a term of one year. Subsequently, a rate adjustment and extension of its maturity with permissive prepayment was completed on March 3, 2020.
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.
The Company’s interest expense incurred for these notes for the three months ended September 30, 2020 and 2019 was $104,000 and $24,000, respectively. The Company’s interest expense incurred for
these notes for the nine months ended September 30, 2020 and 2019 was $220,000 and $66,000, respectively. The Company’s interest payable was $0 and $10,000 as of September 30, 2020 and December 31, 2019, respectively. Effective March 3, 2020, the
interest rate on the loan due November 30, 2021 was renegotiated from 2.75% to 4%. There was no consideration paid or received as part of this renegotiation.
11. Revenue Recognition
Overview of Revenue
The primary sources of revenue for the Company are as follows:
Margin Interest, Marketing and Distribution fees
Margin interest, marketing and distribution fees consists of two components: margin interest and 12b1 fees resulting from rebates in money market funds. Margin interest is the net interest charged to
customers for holding financed margin positions, and 12b1 fees are fees paid to the Company related to trailing payments from money market funds. Margin interest, marketing and distribution fees are recorded as earned.
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual
funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is
satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to /
from the customer.
Principal Transactions
Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the
securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that
is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to / from the customer.
Market Making
Market making is revenue generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance
obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.
Securities owned are recorded at fair market value at the end of the reporting period.
Stock Borrow / Stock Loan
The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin securities from client accounts, facilitates borrow and loan contracts for broker-dealer
counterparties, and provides stock locate services to broker-dealer counterparties. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions. Stock borrow / stock loan revenue is reported on a
monthly basis net of expense. The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have
been transferred to / from the counterparty.
For the three months ended September 30, 2020, stock borrow / stock loan revenue was $1,267,000 ($2,499,000 gross revenue less $1,232,000 expenses). For the three months ended September 30, 2019,
stock borrow / stock loan revenue was $349,000 ($2,111,000 gross revenue minus $1,762,000 expenses).
For the nine months ended September 30, 2020, stock borrow / stock loan revenue was $2,482,000 ($6,170,000 gross revenue less $3,688,000 expenses). For the nine months ended September 30, 2019, stock
borrow / stock loan revenue was $1,353,000 ($8,381,000 gross revenue minus $7,028,000 expenses).
Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as
they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.
Interest Income
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances and is recorded as earned.
Other Income
Other income represents fees generated from correspondent clearing fees, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional
fees are recorded concurrently with the related activity. Other income is recorded as earned.
Categorization of Revenue
The following table presents the Company’s major revenue categories and when each category is recognized:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
Revenue Category
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Timing of Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Execution and Clearing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees
|
|
$
|
4,679,000
|
|
|
$
|
2,273,000
|
|
|
$
|
15,149,000
|
|
|
$
|
7,132,000
|
|
Recorded on trade date
|
Principal transactions
|
|
|
2,342,000
|
|
|
|
2,327,000
|
|
|
|
8,126,000
|
|
|
|
6,138,000
|
|
Recorded on trade date
|
Market making
|
|
|
423,000
|
|
|
|
330,000
|
|
|
|
1,508,000
|
|
|
|
1,303,000
|
|
Recorded on trade date
|
Stock borrow / stock loan
|
|
|
1,267,000
|
|
|
|
349,000
|
|
|
|
2,482,000
|
|
|
|
1,353,000
|
|
Recorded as earned
|
Advisory fees
|
|
|
305,000
|
|
|
|
211,000
|
|
|
|
810,000
|
|
|
|
572,000
|
|
Recorded as earned
|
Total Trading Execution and Clearing Services
|
|
|
9,016,000
|
|
|
|
5,490,000
|
|
|
|
28,075,000
|
|
|
|
16,498,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin interest, marketing and distribution fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin interest
|
|
|
2,130,000
|
|
|
|
3,068,000
|
|
|
|
6,465,000
|
|
|
|
8,755,000
|
|
Recorded as earned
|
12b1 fees
|
|
|
181,000
|
|
|
|
844,000
|
|
|
|
1,265,000
|
|
|
|
2,406,000
|
|
Recorded as earned
|
Total Margin interest, marketing and
distribution fees
|
|
|
2,311,000
|
|
|
|
3,912,000
|
|
|
|
7,730,000
|
|
|
|
11,161,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
915,000
|
|
|
|
1,061,000
|
|
|
|
3,155,000
|
|
|
|
3,417,000
|
|
Recorded as earned
|
Other income
|
|
|
333,000
|
|
|
|
290,000
|
|
|
|
1,035,000
|
|
|
|
633,000
|
|
Recorded as earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income
|
|
|
3,559,000
|
|
|
|
5,263,000
|
|
|
|
11,920,000
|
|
|
|
15,211,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
12,575,000
|
|
|
$
|
10,753,000
|
|
|
$
|
39,995,000
|
|
|
$
|
31,709,000
|
|
|
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 $142,000 and $494,000 for the three months and nine months ended September 30, 2020, respectively. The Company had an outstanding receivable and
payable of approximately $5,000 and $150,000, respectively, as of September 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 September 30, 2020 and December 31, 2019, no allowance for uncollectible commissions was necessary as the Company believes all commissions receivable and prepaid research
services expenses will be realized.
Other Items
For the nine months ended September 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.
12. 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
$154,000 and $427,000 for the three and nine months ended September 30, 2020, respectively, which are presented in the line item “Referral fees” in the statements of income.
13. 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 September 30, 2020, the Company has concluded that its deferred tax assets are
realizable on a more-likely-than-not basis with the exception of certain New Jersey net operating losses.
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 September 30, 2020.
Income Tax / Benefit and Effective Tax Rate
For the three months ended September 30, 2020, the Company recorded an income tax benefit of $486,000 on income before benefit from income taxes of $95,000. The effective tax rate for the three
months ended September 30, 2020 was (511.6)%. The effective tax rate was lower than the federal statutory rate of 21% as the Company recorded a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in
order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as the Company determined that it can utilize additional net operating losses under Section 382.
For the nine months ended September 30, 2020, the Company recorded an income tax provision of $39,000 on income before provision for income taxes of $2,095,000. The effective tax rate for the nine
months ended September 30, 2020 was 1.9%. The effective tax rate was lower than the federal statutory rate of 21% as the Company recorded a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in
order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as the Company determined that it can utilize additional net operating losses under Section 382.
For the three and nine months ended September 30, 2019, the Company recorded an income tax provision of $349,000 and $1,365,000, respectively. The effective tax rate for the three and nine months
ended September 30, 2019 was 21.5% and 27.6%, respectively. The effective tax rate differs from the statutory rate of 21% primarily related to state taxes.
Uncertain Tax Positions
Income tax benefits are recognized for a tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax
position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.
As of September 30, 2020, the Company recorded an uncertain tax position of $1,041,000 attributable to the Company’s 2017 to 2019 amended tax returns as the Company’s anticipated tax refunds exceed
the amount that meets the more-likely-than-not recognition threshold. The net impact from the uncertain tax position was recorded as a reduction of the Company’s income tax receivable. The Company expects to receive an income tax refund of
approximately $248,000 by the first quarter of 2021. In the event that the Company concludes that the Company is subject to interest and / or penalties arising from uncertain tax positions, the Company will present interest and penalties as a
component of income taxes.
The Company recognized the anticipated refunds in three months ended September 30, 2020, as this is the period the Company concluded it would amend its federal tax returns and file refund claims as
well as calculated the amount of refund to be received.
14. 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 $581,000 and
$1,273,000 for the three months ended September 30, 2020 and 2019, respectively. The Company had net income of $2,056,000 and $3,574,000 for the nine months ended September 30, 2020 and 2019, respectively.
15. 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 Exchange Act of 1934. Under the alternate method permitted by this rule, net capital, as defined, shall not
be less than the lower of $1 million or 2% of aggregate debit items arising from customer transactions. As of September 30, 2020, MSCO’s net capital was $27.9 million, which was approximately $25.6 million in excess of its required net capital of
$2.3 million, and its percentage of aggregate debit balances to net capital was 24.4%.
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 Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of September 30, 2020, MSCO had cash
deposits of $264.0 million in the special reserve accounts which was $16.6 million in excess of the deposit requirement of $247.4 million. After adjustments for deposit(s) and / or withdrawal(s) made on October 1, 2020, MSCO had $7.1 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 September 30, 2020, WP’s net capital was approximately $3.7 million which was $3.5 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.
16. Financial Instruments with Off-Balance Sheet Risk
The Company enters into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and is, therefore, subject to varying degrees of market and credit
risk.
In the normal course of business, the Company's customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose the
Company to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and
internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased,
substantially all of which are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails
to satisfy obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The
Company monitors required margin levels daily and pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank
loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market
prices in order to satisfy its customer obligations. 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.
17. Commitments, Contingencies, and Other
Legal and Regulatory Matters
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. 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 $412,000 and $136,000 for the three months ended September 30, 2020 and 2019, respectively. As part of this plan, the Company recognized
expenses of $962,000 and $594,000 for the nine months ended September 30, 2020 and 2019, respectively.
The Company had an accrual of $78,000 as of September 30, 2020, which represents the historical estimate of future claims to be recognized for claims incurred prior to the period.
The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities
in excess of recorded reserves or in excess of its insurance limits.
18. Related Party Disclosures
StockCross and the Company were under common ownership, and prior to January 1, 2020, StockCross served as one of the clearing broker-dealers for the Company. The StockCross clearing agreement with
the Company provided that StockCross passed through all revenue and charged the Company for related clearing expenses. Outside of the clearing agreement, the Company had an expense sharing agreement with StockCross for its Beverly Hills and Jersey
City 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 nine months ended September 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 $21,000 and $3,000 for the three months ended September 30, 2020 and 2019, respectively. Revenue for
PWC from related parties was $65,000 and $67,000 for the nine months ended September 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 10 – 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 9 – Long-Term Debt” 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 September 30, 2020 and 2019, rent expense was $15,000 for this branch office. For both the nine months ended September 30, 2020 and 2019, rent expense was $45,000 for this branch office.
19. Subsequent Events
The Company has evaluated events that have occurred subsequent to September 30, 2020 and through November 16, 2020, the date of the filing of this report.
On November 10, 2020, the Company issued 150,000 shares of its restricted common stock (the “Shares”) to each of Anthony Palmeri and Gerard Losurdo, each new employees of MSCO, as part of their
employment agreements. Mr. Palmeri and Mr. Losurdo each paid the Company approximately $400,000 for their Shares, which was equal to 70% of the closing price of the common stock as reported on Nasdaq on November 9, 2020. The Shares issued to Mr.
Palmeri and Mr. Losurdo are subject to a three-year restriction on transfer commencing on the day of issuance. The issuance of the Shares were each approved by unanimous written consent of the Company's board of directors. The shares were issued to
Mr. Palmeri and Mr. Losurdo as part of their employment agreements in accordance with Nasdaq Listing Rule 5635(c)(4). The Shares were issued without registration under the Securities Exchange Act of 1933, as amended in reliance upon the exemption
provided in Section 4(a)(2) thereunder.
Other than the event 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 September 30, 2020.