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 | March 31,September 30, 2019 |
| | |
| 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 May 15,November 13, 2019, there were 27,157,188 shares of the registrant'sregistrant’s common stock outstanding.
SIEBERT FINANCIAL CORP.
INDEX
| 1 |
| 1 |
| 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 1314 |
| 1820 |
| 1921 |
| 2022 |
| 2022 |
| 2022 |
| 2223 |
| 24 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
| | | September 30, 2019 | | | December 31, 2018 | |
| | | (unaudited) | | | | |
ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 4,231,000 | | | $ | 7,229,000 | |
| Receivables from clearing and other brokers | | | 2,436,000 | | | | 2,030,000 | |
| Escrow deposit | | | 2,000,000 | | | | — | |
| Receivable from related party | | | 1,000,000 | | | | 1,000,000 | |
| Receivable from lessors | | | — | | | | 171,000 | |
| Other receivables | | | 103,000 | | | | 96,000 | |
| Prepaid expenses and other assets | | | 302,000 | | | | 470,000 | |
| Furniture, equipment and leasehold improvements, net | | | 1,000,000 | | | | 468,000 | |
| Software, net | | | 1,806,000 | | | | 1,137,000 | |
| Lease right-of-use assets | | | 2,501,000 | | | | — | |
| Equity method investment in related party | | | 3,509,000 | | | | — | |
| Deferred tax assets | | | 5,105,000 | | | | 5,576,000 | |
| | | $ | 23,993,000 | | | $ | 18,177,000 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 744,000 | | | $ | 699,000 | |
| Due to clearing brokers and related parties | | | 27,000 | | | | 133,000 | |
| Income taxes payable | | | 38,000 | | | | — | |
| Lease incentive obligation | | | — | | | | 171,000 | |
| Lease liabilities | | | 2,817,000 | | | | — | |
| Other liabilities | | | 91,000 | | | | — | |
| | | | 3,717,000 | | | | 1,003,000 | |
| | | | | | | | | |
Commitments and Contingencies | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, $.01 par value; 49,000,000 shares authorized, 27,157,188 shares issued and outstanding as of September 30, 2019 and December 31, 2018 | | | 271,000 | | | | 271,000 | |
| Additional paid-in capital | | | 7,641,000 | | | | 7,641,000 | |
| Retained earnings | | | 12,364,000 | | | | 9,262,000 | |
| | | | 20,276,000 | | | | 17,174,000 | |
| | | | | | | | | |
| | | $ | 23,993,000 | | | $ | 18,177,000 | |
| | | March 31, 2019 | | | December 31, 2018 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| Cash and cash equivalents | | $ | 3,767,000 | | | $ | 7,229,000 | |
| Receivables from clearing and other brokers | | | 2,275,000 | | | | 2,030,000 | |
| Receivable from related party | | | 1,000,000 | | | | 1,000,000 | |
| Receivable from lessors | | | — | | | | 171,000 | |
| Other receivables | | | 96,000 | | | | 96,000 | |
| Prepaid expenses and other assets | | | 568,000 | | | | 470,000 | |
| Furniture, equipment and leasehold improvements, net | | | 992,000 | | | | 468,000 | |
| Software, net | | | 1,404,000 | | | | 1,137,000 | |
| Lease right-of-use assets | | | 2,257,000 | | | | — | |
| Investment in related party | | | 3,704,000 | | | | — | |
| Deferred tax assets | | | 5,486,000 | | | | 5,576,000 | |
| | | $ | 21,549,000 | | | $ | 18,177,000 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Liabilities: | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 579,000 | | | $ | 699,000 | |
| Due to clearing brokers and related parties | | | 64,000 | | | | 133,000 | |
| Income tax payable | | | 196,000 | | | | — | |
| Lease incentive obligation | | | — | | | | 171,000 | |
| Lease liabilities | | | 2,530,000 | | | | — | |
| | | | 3,369,000 | | | | 1,003,000 | |
| | | | | | | | | |
| Commitments and Contingencies | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
Common stock, $.01 par value; 49,000,000 shares authorized, 27,157,188 shares issued and outstanding as of March 31, 2019 and December 31, 2018 | | | 271,000 | | | | 271,000 | |
| Additional paid-in capital | | | 7,641,000 | | | | 7,641,000 | |
| Retained earnings | | | 10,268,000 | | | | 9,262,000 | |
| | | | 18,180,000 | | | | 17,174,000 | |
| | | | | | | | | |
| | | $ | 21,549,000 | | | $ | 18,177,000 | |
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Revenue: | | | | | | | | | | | | | | | | | | |
| Margin interest, marketing and distribution fees | | $ | 2,772,000 | | | $ | 2,535,000 | | | $ | 2,944,000 | | | $ | 2,731,000 | | | $ | 8,499,000 | | | $ | 7,953,000 | |
| Commissions and fees | | | 1,864,000 | | | | 2,674,000 | | | | 1,925,000 | | | | 2,347,000 | | | | 6,030,000 | | | | 7,380,000 | |
| Principal transactions | | | 1,610,000 | | | | 2,941,000 | | | 2,041,000 | | | 2,634,000 | | | 5,479,000 | | | 7,838,000 | |
| Advisory fees | | | 168,000 | | | | 16,000 | | | | 211,000 | | | | 138,000 | | | | 572,000 | | | | 309,000 | |
| Interest | | | 15,000 | | | | 11,000 | | | | 23,000 | | | | 34,000 | | | | 54,000 | | | | 69,000 | |
| Total Revenue | | | 6,429,000 | | | | 8,177,000 | | | | 7,144,000 | | | | 7,884,000 | | | | 20,634,000 | | | | 23,549,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee compensation and benefits | | | 2,835,000 | | | | 3,662,000 | | | 3,157,000 | | | 3,668,000 | | | 8,882,000 | | | 10,619,000 | |
| Clearing fees, including execution costs | | | 654,000 | | | | 902,000 | | | | 617,000 | | | | 631,000 | | | | 1,849,000 | | | | 2,212,000 | |
| Professional fees | | | 502,000 | | | | 608,000 | | | 439,000 | | | 477,000 | | | 1,388,000 | | | 1,572,000 | |
| Other general and administrative | | | 385,000 | | | | 386,000 | | | | 589,000 | | | | 501,000 | | | | 1,861,000 | | | | 1,360,000 | |
| Technology and communications | | | 247,000 | | | | 234,000 | | | 291,000 | | | 228,000 | | | 800,000 | | | 792,000 | |
| Rent and occupancy | | | 295,000 | | | | 242,000 | | | | 380,000 | | | | 248,000 | | | | 995,000 | | | | 737,000 | |
| Depreciation and amortization | | | 175,000 | | | | 24,000 | | | 244,000 | | | 41,000 | | | 670,000 | | | 91,000 | |
| Advertising and promotion | | | — | | | | 13,000 | | | | — | | | | 6,000 | | | | — | | | | 40,000 | |
| Total Expenses | | | 5,093,000 | | | | 6,071,000 | | | 5,717,000 | | | 5,800,000 | | | 16,445,000 | | | 17,423,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income before provision for income tax and before earnings of equity method investment | | | 1,336,000 | | | | 2,106,000 | | |
| Provision for income tax | | | 369,000 | | | | 413,000 | | |
| Income before earnings of equity method investment | | | 967,000 | | | | 1,693,000 | | |
Earnings of equity method investment in related party
| | | 30,000 | | | — | | | 84,000 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings of equity method investment | | | 39,000 | | | | — | | |
| | | | | | | | | | |
Income before provision (benefit) for (from) income taxes | | | 1,457,000 | | | 2,084,000 | | | 4,273,000 | | | 6,126,000 | |
| Provision (benefit) for (from) income taxes | | | | 353,000 | | | | (1,035,000 | ) | | | 1,171,000 | | | | (485,000 | ) |
| Net income | | $ | 1,006,000 | | | $ | 1,693,000 | | | $ | 1,104,000 | | | $ | 3,119,000 | | | $ | 3,102,000 | | | $ | 6,611,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per share of common stock | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | 0.04 | | | $ | 0.06 | | | $ | 0.04 | | | $ | 0.11 | | | $ | 0.11 | | | $ | 0.24 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | | 27,157,188 | | | | 27,157,188 | | | | 27,157,188 | | | | 27,157,188 | | | | 27,157,188 | | | | 27,157,188 | |
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
| | Number of Shares | | $.01 Par Value | | Additional Paid-In Capital | | Retained Earnings / (Accumulated Deficit) | | Total | |
| Balance - December 31, 2017 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | (2,700,000 | ) | | $ | 5,212,000 | |
| Net income | | | — | | | | — | | | | — | | | | 1,693,000 | | | | 1,693,000 | |
| Balance - March 31, 2018 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | (1,007,000 | ) | | $ | 6,905,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | $.01 Par Value | | Additional Paid-In Capital | | Retained Earnings | | Total | |
| Balance - December 31, 2018 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | 9,262,000 | | | $ | 17,174,000 | |
| Net income | | | — | | | | — | | | | — | | | | 1,006,000 | | | | 1,006,000 | |
| Balance - March 31, 2019 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | 10,268,000 | | | $ | 18,180,000 | |
| | | Nine Months Ended September 30, 2019 | |
| | | 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 | |
| Net income | | | - | | | | - | | | | - | | | | 1,006,000 | | | | 1,006,000 | |
| Balance – March 31, 2019 | | | 27,157,188 | | | | 271,000 | | | | 7,641,000 | | | | 10,268,000 | | | | 18,180,000 | |
| Net income | | | - | | | | - | | | | - | | | | 992,000 | | | | 992,000 | |
| Balance – June 30, 2019 | | | 27,157,188 | | | | 271,000 | | | | 7,641,000 | | | | 11,260,000 | | | | 19,172,000 | |
| Net income | | | - | | | | - | | | | - | | | | 1,104,000 | | | | 1,104,000 | |
| Balance – September 30, 2019 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | 12,364,000 | | | $ | 20,276,000 | |
| | | Nine Months Ended September 30, 2018 | |
| | | Number of Shares Issued | | | $.01 Par Value | | | Additional Paid-In Capital | | | Retained Earnings / (Accumulated Deficit) | | | Total | |
| Balance – January 1, 2018 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | (2,700,000 | ) | | $ | 5,212,000 | |
| Net income | | | - | | | | - | | | | - | | | | 1,693,000 | | | | 1,693,000 | |
| Balance – March 31, 2018 | | | 27,157,188 | | | | 271,000 | | | | 7,641,000 | | | | (1,007,000 | ) | | | 6,905,000 | |
| Net income | | | - | | | | - | | | | - | | | | 1,800,000 | | | | 1,800,000 | |
| Balance – June 30, 2018 | | | 27,157,188 | | | | 271,000 | | | | 7,641,000 | | | | 793,000 | | | | 8,705,000 | |
| Net income | | | - | | | | - | | | | - | | | | 3,119,000 | | | | 3,119,000 | |
| Balance – September 30, 2018 | | | 27,157,188 | | | $ | 271,000 | | | $ | 7,641,000 | | | $ | 3,912,000 | | | $ | 11,824,000 | |
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | |
Cash Flows From Operating Activities: | | | | | | |
| Net income | | $ | 3,102,000 | | | $ | 6,611,000 | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | | | | | | |
| Deferred income tax expense | | | 471,000 | | | | (1,393,000 | ) |
| Depreciation and amortization | | | 670,000 | | | | 91,000 | |
| Earnings of equity method investment in related party | | | (84,000 | ) | | | — | |
| Return on investment in equity method investment in related party | | | 84,000 | | | | — | |
| | | | | | | | | |
Changes in: | | | | | | | | |
| Receivables from clearing and other brokers | | | (406,000 | ) | | | (781,000 | ) |
| Receivable from related party | | | — | | | | (717,000 | ) |
| Receivable from lessors | | | 171,000 | | | | — | |
| Other receivables | | | (7,000 | ) | | | — | |
| Prepaid expenses and other assets | | | 168,000 | | | | (142,000 | ) |
| Accounts payable and accrued liabilities | | | 45,000 | | | | 200,000 | |
| Due to clearing brokers and related parties | | | (106,000 | ) | | | (127,000 | ) |
| Income taxes payable | | | 38,000 | | | | 784,000 | |
| Lease incentive obligation | | | (171,000 | ) | | | — | |
| Other liabilities | | | 91,000 | | | | — | |
| Lease liability | | | 316,000 | | | | — | |
Net cash provided by operating activities | | | 4,382,000 | | | | 4,526,000 | |
| | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | |
| Return of investment in equity method investment in related party | | | 156,000 | | | | — | |
| Equity method investment in related party | | | (3,665,000 | ) | | | — | |
| Escrow deposit | | | (2,000,000 | ) | | | — | |
| Purchase of furniture, equipment, and leasehold improvements | | | (785,000 | ) | | | (272,000 | ) |
| Purchase of software | | | (1,086,000 | ) | | | (678,000 | ) |
Net cash used in investing activities | | | (7,380,000 | ) | | | (950,000 | ) |
| | | | | | | | | |
Net (decrease) / increase in cash and cash equivalents | | | (2,998,000 | ) | | | 3,576,000 | |
| Cash and cash equivalents - beginning of period | | | 7,229,000 | | | | 3,765,000 | |
Cash and cash equivalents - end of period | | $ | 4,231,000 | | | $ | 7,341,000 | |
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
| | | Three Months Ended March 31, | |
| | | 2019 | | | 2018 | |
| Cash Flows From Operating Activities: | | | | | | |
| Net income | | $ | 1,006,000 | | | $ | 1,693,000 | |
| Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | | | | | | |
| Deferred tax expense | | | 90,000 | | | | — | |
| Depreciation and amortization | | | 175,000 | | | | 24,000 | |
| Earnings of equity method investment | | | (39,000 | ) | | | — | |
| | | | | | | | | |
| Changes in: | | | | | | | | |
| Securities owned, at fair value | | | — | | | | (346,000 | ) |
| Receivables from clearing and other brokers | | | (245,000 | ) | | | (1,146,000 | ) |
| Receivable from related party | | | — | | | | 283,000 | |
| Prepaid expenses and other assets | | | (98,000 | ) | | | (149,000 | ) |
| Receivable from lessors | | | 171,000 | | | | — | |
| Accounts payable and accrued liabilities | | | (120,000 | ) | | | 563,000 | |
| Due to clearing brokers and related parties | | | (69,000 | ) | | | 330,000 | |
| Income tax payable | | | 196,000 | | | | 413,000 | |
| Net cash provided by operating activities | | | 1,067,000 | | | | 1,665,000 | |
| | | | | | | | | |
| Cash Flows From Investing Activities: | | | | | | | | |
| Investment in related party | | | (3,665,000 | ) | | | — | |
| Purchase of furniture, equipment, and leasehold improvements | | | (476,000 | ) | | | (46,000 | ) |
| Purchase of software | | | (388,000 | ) | | | — | |
| Net cash used in investing activities | | | (4,529,000 | ) | | | (46,000 | ) |
| | | | | | | | | |
| Net increase / (decrease) in cash and cash equivalents | | | (3,462,000 | ) | | | 1,619,000 | |
| Cash and cash equivalents - beginning of period | | | 7,229,000 | | | | 3,765,000 | |
| Cash and cash equivalents - end of period | | $ | 3,767,000 | | | $ | 5,384,000 | |
| | | | | | | | | |
| Supplemental Cash Flow Information: | | | | | | | | |
| Non-Cash Investing and Financing Activities | | | | | | | | |
| Initial recognition of lease right-of-use assets | | $ | 2,257,000 | | | | — | |
| Initial recognition of lease liabilities | | $ | 2,530,000 | | | | — | |
See notes to condensed consolidated financial statements.
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Organization
Siebert Financial Corp., a New York corporation incorporated in 1934, is a holding company that conducts its retail discount brokerage business through its wholly-owned subsidiary, Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and registered broker-dealer, its investment advisory business through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“AdvisorNXT”SNXT”), a New York corporation registered with the SECU.S. Securities and Exchange Commission (“SEC”) as a Registered Investment Advisor 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. It also conducts operations through a fourth wholly-owned subsidiary, KCASiebert Technologies, LLC. (“KCAT”STCH”), a Nevada limited liability company and developer of robo-advisory technology. In September 2019, the name of this subsidiary was changed from KCA Technologies, LLC. to Siebert Technologies, LLC. For purposes of this Quarterly Report on Form 10-Q, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, AdvisorNXT,SNXT, PWC, and KCATSTCH collectively, unless the context otherwise requires.
As previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 and in a current report on Form 8-K filed on July 19, 2019, the Company signed a binding letter of intent to purchase the remaining 85% of StockCross Financial Services, Inc. (“StockCross”). Upon completion of the transaction, which is pending regulatory approval, the Company will own 100% of StockCross. In addition, as reported in a current report on Form 8-K filed October 3, 2019, the Company entered into an agreement, dated as of September 27, 2019, with, Weeden Investors L.P., a Delaware limited partnership and Weeden Securities Corporation, a Delaware corporation (the “Sellers”) pursuant to which the Company will acquire all of the Sellers’ member interests in Weeden Prime Services, LLC (“Weeden Prime”), a broker-dealer registered with the SEC offering prime brokerage services. As part of the transaction, the Company deposited $2.0 million in an escrow account pursuant to the agreement. Upon completion of the transaction, which is pending regulatory approval, the $2.0 million held in the escrow account will be part of the purchase price and Weeden Prime will be a wholly-owned subsidiary of the Company.
The Company is headquartered in New York, NY, with primary operations in New Jersey and California. The Company has 13 offices throughout the United States of America (“U.S.”) and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebertnet.com, where investors are able tocan obtain copies of the Company’s public filings free of charge. The Company’s common stock (“Common Stock”), par value $.01 per share, trades on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates in the securities brokerage and asset management industry and has no other reportable segments. All of the Company's revenues for the three months ended March 31,and nine months ended September 30, 2019 and 2018 were derived from its operations in the U.S.
Basis of Presentation
Basis of Presentation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP)(“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 unaudited condensed consolidated 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 unaudited condensed consolidated 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, 2018 (“2018 Form 10-K”). The condensed consolidated financial statements include the accounts of Siebert and its wholly-owned subsidiaries and upon consolidation, all intercompany balances and transactions are eliminated. The U.S. dollar is the functional currency of the Company.Company and numbers are rounded for presentation purposes.
Certain prior period amounts have been reclassified to conform to the current year’s presentation. The reclassifications consisted of breaking out certain commissions and fees into advisory fees as well as breaking out certain other general and administrative expenses into technology and communications and depreciation which is consistent with the current year presentation. These reclassifications have no effect on previously reported total revenue, total expenses, or net income or total assets or total liabilities.income.
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 2 in the Company’s 2018 Form 10-K. There have been no significant changes to these accounting policies for the threenine months ended March 31,September 30, 2019 except as described in the sections “Equity Method Investment”Investments” and the “Note 2 – New Accounting Standards” below.
Equity Method Investments
Investments in which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method of accounting and are included in the equity method investment in related party asset in the condensed consolidated statements of financial condition. Under this method of accounting, the Company’s share of the net earnings or losses of the investee is presented belowbefore the income tax linebefore provision (benefit) for (from) income taxes on the condensed consolidated statements of operations. operations.
The Company evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.
2. New Accounting Standards
Recently Adopted Accounting Pronouncements
ASU 2016-02 – In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model that requires a lessee to recognize a lease right-of-use asset and lease liability on the statement of financial condition for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company adopted the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on January 1, 2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. As of March 31,September 30, 2019, the Company recognized lease right-of-use assets of approximately $2.3$2.5 million and corresponding lease liabilities of approximately $2.5$2.8 million. This accounting pronouncement had no material impact to the condensed consolidated statement of operations for the three months ended March 31, 2019.
The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permits the Company not to reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the hindsight practical expedient at transition.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize lease right-of-use assets or lease liabilities,liabilities.
ASU 2018-15 – In August 2018, the FASB issued 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 is currently evaluating the expected impact of this includes not recognizing lease right-of-use assets or lease liabilities for existing short-term leases of those assets in transition.new standard.
3. Capital Requirements
MSCO is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 or “Uniform Net Capital Rule”), which requires the maintenance of minimum net capital. MSCO has elected to use the alternative method, permitted by the Uniform Net Capital Rule, which requires that MSCO maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions, as defined. The Uniform Net Capital Rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital would be less than 5% of aggregate debits. As of March 31,September 30, 2019, MSCO had net capital of approximately $5.1$5.7 million, which was approximately $4.8$5.4 million in excess of required net capital of $250,000. As of December 31, 2018, MSCO had net capital of approximately $8.9 million, which was approximately $8.7 million in excess of required net capital of $250,000.
MSCO claims exemption from the reserve requirements under the SEC’s Rule 15c 3-315c-3-3 pursuant to paragraph (k)(2)(ii) as it clears its customer transactions through one unaffiliated and one affiliated clearing firm on a fully disclosed basis.
The Company’s cash and cash equivalents are unrestricted and are used to fund working capital needs. The Company’s total assets as of March 31,September 30, 2019 were approximately $21.5$24.0 million, of which $3.8$4.2 million, or approximately 17%18%, is highly liquid. The Company’s total assets as of December 31, 2018 were approximately $18.2 million, of which $7.2 million, or approximately 40%, is highly liquid.
4. Receivables from and Payable to Brokers, Dealers and Clearing Organizations
The Company evaluates receivables from clearing organizations and other brokers for collectability noting no amount was considered uncollectable as of March 31,September 30, 2019 and the year endedas of December 31, 2018. No valuation allowance is recognized for receivables from clearing organizations and other brokers as the Company does not have a history of losses from these receivables from clearing and other brokers and does not anticipate losses in the future.
Amounts receivable from / payable to brokers, dealers and clearing organizations consisted of the following as of the periods indicated:
| | | As of March 31, 2019 (unaudited) | | | As of December 31, 2018 | | | As of September 30, 2019 (unaudited) | | | As of December 31, 2018 | |
| Receivables from clearing and other brokers | | | | | | | | | | | | |
| National Financial Services (“NFS”) | | $ | 1,408,000 | | | $ | 1,664,000 | | | $ | 1,743,000 | | | $ | 1,664,000 | |
| StockCross Financial Services, Inc. (“StockCross”) | | | 708,000 | | | | 310,000 | | |
| StockCross | | | | 693,000 | | | | 310,000 | |
| Other receivables | | | 117,000 | | | | 31,000 | | | | — | | | 56,000 | |
| Citibank | | | 42,000 | | | | 25,000 | | |
| Total Receivables from clearing and other brokers | | $ | 2,275,000 | | | $ | 2,030,000 | | | $ | 2,436,000 | | | $ | 2,030,000 | |
| | | | | | | | | | | | | | | |
| Receivable from related party | | | | | | | | | | | | | | | | |
| StockCross | | $ | 1,000,000 | | | $ | 1,000,000 | | | $ | 1,000,000 | | | $ | 1,000,000 | |
| Total Receivable from related party | | $ | 1,000,000 | | | $ | 1,000,000 | | | $ | 1,000,000 | | | $ | 1,000,000 | |
| | | | | | | | | | | | | | | |
| Due to clearing brokers and related parties | | | | | | | | | | | | | | | | |
| Kennedy Cabot Acquisition, LLC (“KCA”) | | $ | 33,000 | | | $ | — | | |
| MSCO | | | $ | — | | | $ | 29,000 | |
| StockCross | | | 21,000 | | | | 46,000 | | | | 27,000 | | | | 46,000 | |
| MSCO | | | 10,000 | | | | 29,000 | | |
| NFS | | | — | | | | 58,000 | | | | — | | | 58,000 | |
| Total Due to clearing brokers and related parties | | $ | 64,000 | | | $ | 133,000 | | | $ | 27,000 | | | $ | 133,000 | |
5. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases”Leases (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 affected the accounting treatment for operating lease agreements in which the Company is the lessee.
TheAs of September 30, 2019, the Company rents office space under operating leases expiring in 2019 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 condensed consolidated 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 condensed consolidated statements of financial condition.
| | As of March 31, 2019 (unaudited) | | As of December 31, 2018 | | | As of September 30, 2019 (unaudited) | | | As of December 31, 2018 | |
| Assets | | | | | | | | | | |
| Lease right-of-use assets | | $ | 2,257,000 | | | | — | | | $ | 2,501,000 | | | — | |
| Liabilities | | | | | | | | | | | | | | | | |
| Lease liabilities | | $ | 2,530,000 | | | | — | | | $ | 2,817,000 | | | — | |
The calculated amountamounts 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. As of March 31,September 30, 2019, 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. The Company also leases some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the condensed consolidated statementsstatement of operations rather than capitalizedcapitalizing 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 | | | |
| Weighted average remaining lease term – operating leases (in years) | | | 4.3 | 3.5 |
| Weighted average discount rate – operating leases | | | 5.0 | %5.0% |
The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate the lease and non-lease components, and as such, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.utilities which are determined by the leased square footage in proportion to the overall office building.
| | | Three Months Ended March 31, 2019 | | | Three Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2019 | |
| Operating lease cost | | $ | 148,000 | | | $ | 294,000 | | | $ | 624,000 | |
| Short-term lease cost | | | 130,000 | | | 81,000 | | | 321,000 | |
| Variable lease cost | | | 17,000 | | | | 5,000 | | | | 50,000 | |
| Sublease income | | | — | | | | — | | | | — | |
| Total lease cost | | $ | 295,000 | | | $ | 380,000 | | | $ | 995,000 | |
| | | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | | | | | |
| Operating cash flows from operating leases | | $ | 147,000 | | | $ | 275,000 | | | $ | 632,000 | |
| | | | | | | | | | | | | |
| Lease right-of-use assets obtained in exchange for new lease liabilities | | | | | | | | | | |
| Operating leases | | $ | 1,680,000 | | | $ | 813,000 | | | $ | 3,028,000 | |
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of March 31,September 30, 2019 were as follows:
| Year | | Amount | | | Amount | |
| 2019 | | $ | 676,000 | | | $ | 259,000 | |
| 2020 | | | 891,000 | | | 992,000 | |
| 2021 | | | 728,000 | | | | 759,000 | |
| 2022 | | | 489,000 | | | 513,000 | |
| 2023 | | | 468,000 | | | | 493,000 | |
| 2024 | | | 39,000 | | | 56,000 | |
| Thereafter | | | — | | | | — | |
| Remaining balance of lease payments | | | 3,291,000 | | | 3,072,000 | |
Lease payments related to leases not commenced as of March 31, 2019 | | | 480,000 | | |
Difference between undiscounted cash flows and discounted cash flows | | | 304,000 | | | | 255,000 | |
| Other reconciling items | | | (23,000 | ) | |
| Lease liabilities | | $ | 2,530,000 | | | $ | 2,817,000 | |
Rent and related operating expenses were $295,000$380,000 and $242,000$248,000 for the three months ended March 31,September 30, 2019 and 2018, respectively. As of March 31,Rent and related operating expenses were $995,000 and $737,000 for the nine months ended September 30, 2019 the Company had an operating lease agreement for an office space in Miami, FL with a term of 2 years. The total commitment of the lease is approximately $480,000 and the lease will commence on April 1, 2019.2018, respectively.
6. Equity Method Investments
In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. The number of shares purchased by the Company was 922,875 at a per share price of approximately $3.97. The Company’s ownership in StockCross is accounted for under the equity method of accounting.
In determining whether the investment in StockCross should be accounted for under the equity method of accounting, the Company leveragedconsidered the guidance under ASC 323, Investments – Equity Method and Joint Ventures.Ventures. Although the Company maintains approximately 15% ownership interest in StockCross, the Company evaluated the positive evidence related to criteria such as common representation on the board of directors, participation in policy-making processes, material intra-entity transactions, interchange of managerial personnel and technological interdependency of the Company and StockCross. Based on these criteria, the Company determined that it was able to exercise significant influence of StockCross, and therefore the equity method of accounting was used for this transaction.
Under the equity method, the Company recognizes its share of StockCross’ net incomeearnings in the earnings of equity method investment in related party line item in the condensed consolidated statements of operations. The Company has elected to classify distributions received from equity method investees using the cumulative earnings approach. For the three months and nine months ended March 31,September 30, 2019, the amount of net incomeearnings recognized from the Company’s investment in StockCross was approximately $39,000.were $30,000 and $84,000, respectively. This investment is reported in the equity method investment in related party line itemasset in the condensed consolidated statements of financial condition. In September 2019, StockCross made a $1.6 million cash distribution to its shareholders, of which Siebert received $241,000, which reduced the carrying amount of the investment in StockCross. As of March 31,September 30, 2019, the carrying amount of the investment in StockCross was approximately $3,704,000.$3,509,000.
The Company evaluates its equity method investments for impairment when events or changes indicate the carrying value may not be recoverable. If the impairment is determined to be other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment. As of March 31,September 30, 2019, the fair value of the investment in StockCross is not estimated because there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and thus, no impairment was recorded.
Below is a table showing illustrating the summary from the condensed consolidated statements of operations for StockCross for the period indicated:periods indicated (unaudited):
| | | Three Months Ended March 31, 2019 (unaudited) | | | Three Months Ended September 30, 2019 | | | Nine Months Ended September 30, 2019 | |
| Revenue | | $ | 4,014,000 | | | $ | 3,757,000 | | | $ | 11,552,000 | |
| Gross profit | | $ | 285,000 | | |
Operating income | | | $ | 189,000 | | | $ | 747,000 | |
| Net income | | $ | 246,000 | | | $ | 189,000 | | | $ | 534,000 | |
7. 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 of the Company.
General Contingencies
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of the Company’s management, all such matters are without merit, or involve amounts which would not have a significant effect on the financial statements of the Company.
In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company is self-insured with respect to employee health claims. The Company maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately $50,000 per employee. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the financial statements.
As part of this plan, the Company recognized expenses totaling $289,000$136,000 and $240,000$374,000 for the three months ended March 31,September 30, 2019 and 2018, respectively. The Company recognized expenses totaling $594,000 and $874,000 for the nine months ended September 30, 2019 and 2018, respectively.
The Company had an accrual of $75,000 and $70,000$48,000 as of the three months ended March 31,September 30, 2019, and 2018, respectively, which represents the historical estimate of future claims to be recognized for claims incurred prior to March 31, 2019 and 2018, respectively.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.
8. Revenue Recognition
The primary sources of revenue for the Company are as follows: revenue from contracts with customers which includes commissions and fees, principal transactions, and advisory fees as well as other income which includes margin interest, marketing, and distribution fees. The recognition and measurement of revenue is based on the assessment of individual contract terms. The amount of revenue recognized by the Company is based on the consideration specified in contracts with its clients. The Company recognizes revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discusseddetailed below. Significant judgment is required to determine whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on the appropriate measure of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events. For the three months and nine months ended March 31,September 30, 2019 and 2018, 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.
Categorization of Revenue by Service
The following table presents the major revenue categories and when each category is recognized:recognized (unaudited):
| | | Three Months Ended March 31, | | | | Three Months Ended
September 30, | | | Nine Months Ended September 30, | | |
| Revenue Category | | 2019 (unaudited) | | | 2018 (unaudited) | | Timing of Recognition | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Timing of Recognition |
| Trading Execution and Clearing Services | | | | | | | | | | | | | | | | | | | | |
| Commissions and fees | | $ | 1,864,000 | | | $ | 2,674,000 | | Recorded on trade date | | $ | 1,925,000 | | | $ | 2,347,000 | | | $ | 6,030,000 | | | $ | 7,380,000 | | Recorded trade date |
| Principal transactions | | $ | 1,610,000 | | | $ | 2,941,000 | | Recorded on trade date | | | 2,041,000 | | | | 2,634,000 | | | | 5,479,000 | | | | 7,838,000 | | Recorded trade date |
| Advisory fees and additional income | | $ | 183,000 | | | $ | 27,000 | | Recorded as earned | | 234,000 | | | 172,000 | | | 626,000 | | | 378,000 | | Recorded as earned |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Income | | | | | | | | | | | | | | | | | | | | | | |
| Margin interest, marketing and distribution fees | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Margin interest | | $ | 2,066,000 | | | $ | 1,635,000 | | Recorded as earned | | 2,151,000 | | | 1,943,000 | | | 6,254,000 | | | 5,454,000 | | Recorded as earned |
| 12b1 fees | | | 706,000 | | | | 900,000 | | Recorded as earned | | | 793,000 | | | | 788,000 | | | | 2,245,000 | | | | 2,499,000 | | Recorded as earned |
| Total Margin interest, marketing and distribution fees | | $ | 2,772,000 | | | $ | 2,535,000 | | | | 2,944,000 | | | 2,731,000 | | | 8,499,000 | | | 7,953,000 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 6,429,000 | | | $ | 8,177,000 | | | | $ | 7,144,000 | | | $ | 7,884,000 | | | $ | 20,634,000 | | | $ | 23,549,000 | | |
The following table presents each revenue category and its related performance obligation:
| Revenue Stream | Performance Obligation |
| Commissions and fees, Principal transactions, Advisory fees and additional income | Provide security trading services to customer and act as agent |
| Margin interest, marketing and distribution fees | n/a |
Disaggregation of Revenue – Legacy Siebert vs. StockCross Accounts
The following table presents a breakdown of the Company’s revenue between the amounts attributed to the retail customer accounts that were originally part of Siebert (“Legacy Siebert”) vs. the retail customer accounts acquired from StockCross (“StockCross accounts”) (unaudited):
| | | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Revenue from Margin interest, marketing and distribution fees: | | | | | | | | | | | | | |
Margin interest, marketing and distribution fees – Legacy Siebert | | | $ | 2,566,000 | | | $ | 2,409,000 | | | $ | 7,451,000 | | | $ | 7,049,000 | |
Margin interest, marketing and distribution fees – StockCross accounts | | | | 378,000 | | | | 322,000 | | | | 1,048,000 | | | | 904,000 | |
Total Revenue from Margin interest, marketing and distribution fees | | | 2,944,000 | | | 2,731,000 | | | 8,499,000 | | | 7,953,000 | |
| | | | | | | | | | | | | | | | | | |
| Revenue from Commissions and fees: | | | | | | | | | | | | | |
| Commissions and fees – Legacy Siebert | | | | 1,544,000 | | | | 1,950,000 | | | | 5,043,000 | | | | 5,914,000 | |
| Commissions and fees – StockCross accounts | | | | 381,000 | | | 397,000 | | | 987,000 | | | 1,466,000 | |
| Total Revenue from Commissions and fees | | | | 1,925,000 | | | | 2,347,000 | | | | 6,030,000 | | | | 7,380,000 | |
| | | 2019 (unaudited) | | | 2018 (unaudited) | | | | | | | | | | | | | |
| Revenue from Principal transactions: | | | | | | | | | | | | | | | | | | | | | | |
| Principal transactions – Legacy Siebert | | $ | 379,000 | | | $ | 572,000 | | | 582,000 | | | 437,000 | | | 1,496,000 | | | 1,514,000 | |
| Principal transactions – StockCross accounts | | | 1,231,000 | | | | 2,369,000 | | | | 1,459,000 | | | | 2,197,000 | | | | 3,983,000 | | | | 6,324,000 | |
| Total Revenue from Principal transactions | | $ | 1,610,000 | | | $ | 2,941,000 | | | 2,041,000 | | | 2,634,000 | | | 5,479,000 | | | 7,838,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue from Commissions and fees: | | | | | | | | | |
| Commissions and fees – Legacy Siebert | | $ | 1,580,000 | | | $ | 1,955,000 | | |
| Commissions and fees – StockCross accounts | | | 284,000 | | | | 719,000 | | |
| Total Revenue from Commissions and fees | | $ | 1,864,000 | | | | 2,674,000 | | |
| | | | | | | | | | |
| Revenue from Margin interest, marketing and distribution fees: | | | | | | | | | |
| Margin interest, marketing and distribution fees – Legacy Siebert | | $ | 2,445,000 | | | $ | 2,328,000 | | |
| Margin interest, marketing and distribution fees – StockCross accounts | | | 327,000 | | | | 207,000 | | |
| Total Revenue from Margin interest, marketing and distribution fees | | $ | 2,772,000 | | | $ | 2,535,000 | | |
| | | | | | | | | | |
| Additional Revenue: | | | | | | | | | | | | | | | | | | | | |
| Advisory fees – Legacy Siebert | | | 168,000 | | | | 16,000 | | | | 211,000 | | | | 138,000 | | | | 572,000 | | | | 309,000 | |
| Interest – Legacy Siebert | | | 15,000 | | | | 11,000 | | | 23,000 | | | 34,000 | | | 54,000 | | | 69,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | $ | 6,429,000 | | | $ | 8,177,000 | | | $ | 7,144,000 | | | $ | 7,884,000 | | | $ | 20,634,000 | | | $ | 23,549,000 | |
| | | | | | | | | | |
9. Provision for(Benefit) For (From) Income TaxTaxes
Provision (benefit) for (from) income taxtaxes consists of the following:
Current income tax expense (benefit), which represents the amount of federal tax and state and local tax currently payable, including interest and penalties and amounts accrued for unrecognized tax benefits, if any, and;
Deferred income tax expense (benefit), which represents the net change in the deferred tax assets balance during the year, including any change in the valuation allowance.allowance of the deferred tax assets, if any.
| | | Three Months Ended March 31, | |
| | | 2019 (unaudited) | | | 2018 (unaudited) | |
| Current income tax expense | | | | | | |
| Federal | | $ | 203,000 | | | $ | 272,000 | |
| State | | | 76,000 | | | | 141,000 | |
| | | | 279,000 | | | | 413,000 | |
| | | | | | | | | |
| Deferred income tax | | | | | | | | |
| Federal | | $ | 47,000 | | | $ | — | |
| State | | | 43,000 | | | | — | |
| | | | 90,000 | | | | — | |
| | | | | | | | | |
| Total Provision for income tax | | $ | 369,000 | | | $ | 413,000 | |
For the three and nine months ended September 30, 2019, there was no change in the valuation allowance of the historical net operating losses. For the three and nine months ended September 2018, there was a partial release of the valuation allowance of historical net operating losses of approximately $1.4 million.
The change in deferred tax assets for the three and nine months ended September 30, 2019 was due to the utilization of federal and state net operating losses and temporary differences in the depreciation of fixed assets.
The following table presents the components of provision (benefit) for (from) for income taxes for the periods indicated (unaudited):
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Current income tax expense (benefit) | | | | | | | | | | | | |
| Federal | | $ | 161,000 | | | $ | 300,000 | | | $ | 295,000 | | | $ | 847,000 | |
| State | | | 223,000 | | | | 58,000 | | | | 405,000 | | | | 61,000 | |
| | | | 384,000 | | | | 358,000 | | | | 700,000 | | | | 908,000 | |
| | | | | | | | | | | | | | | | | |
Deferred income tax expense (benefit) | | | | | | | | | | | | | | | | |
| Federal | | | (50,000 | ) | | | (423,000 | ) | | | 261,000 | | | | (423,000 | ) |
| State | | | 19,000 | | | | (970,000 | ) | | | 210,000 | | | | (970,000 | ) |
| | | | (31,000 | ) | | | (1,393,000 | ) | | | 471,000 | | | | (1,393,000 | ) |
| | | | | | | | | | | | | | | | | |
| Total Provision (Benefit) For (From) Income Taxes | | $ | 353,000 | | | $ | (1,035,000 | ) | | $ | 1,171,000 | | | $ | (485,000 | ) |
Effective Tax Rate
For interim financial reporting, the Company estimates the effective tax rate for tax jurisdictions which is applied to the year to date income before tax.provision (benefit) for (from) income taxes. For the three months ended March 31,September 30, 2019 and 2018, the Company’s effective tax rate was 28%24% and 20%-50%, respectively. The increase inFor the nine months ended September 30, 2019 and 2018, the Company’s effective tax rate was due to an increase in deferred income tax expense. 27% and -8%, respectively.
As of December 31, 2018, the Company recorded an income tax benefit related to the recognition of deferred tax assets of $5,576,000. ForThe increase in the three months ended March 31,effective tax rate in 2019 the Company incurredwas due to an increase in deferred income tax expense corresponding to the decrease in the deferred tax assets. Deferred income tax expense (benefit) was $90,000-$31,000 and $471,000 for the three months ended March 31, 2019 compared to zero for the threeand nine months ended March 31, 2018.September 30, 2019, respectively.
10. 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 $1,006,000$1,104,000 for the three months ended March 31,September 30, 2019 as compared to net income of $1,693,000$3,119,000 for the three months ended March 31,September 30, 2018. The Company had net income of $3,102,000 for the nine months ended September 30, 2019 as compared to net income of $6,611,000 for the nine months ended September 30, 2018.
11. Related Party Disclosures
StockCross
StockCross and the Company are under common ownership and StockCross serves as one of the two clearing brokers for the Company. StockCross has a clearing agreement with MSCO in which StockCross passes through all revenue and charges MSCO for related clearing expenses. Outside of the clearing agreement, MSCO has an expense sharing agreement with StockCross for its Beverly Hills officeand Jersey City offices and StockCross pays some of the vendors for miscellaneous expenses which it passes through to MSCO. As of March 31,September 30, 2019 and December 31, 2018, MSCO had receivables from StockCross totaling approximately $1.7 million and $1.3 million, respectively, consisting of financing for inventory positions, the net monthly clearing fees StockCross owes MSCO, and a clearing deposit. As of March 31,September 30, 2019 and December 31, 2018, MSCO had a payable to StockCross totaling $21,000$27,000 and $46,000, respectively. respectively. In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares.shares and in July 2019 the Company entered into a binding letter of intent to purchase the remaining 85% of StockCross. For the three months and nine months ended September 30, 2019, the earnings recognized from the Company’s 15% investment in StockCross was $30,000 and $84,000, respectively. Please see Item 4. Financial Statements and Supplementary Data – “Note 6 – Equity Method Investments” for additional detail on the transaction with StockCross.
Kennedy Cabot Acquisition (“KCA”)
KCA is an affiliate of the Company and StockCross. To gain efficiencies and economies of scale with billing and administrative functions, KCA serves as a paymaster for the Company and StockCross for compensation and benefits expenses, the entirety of which KCA passes through to the Company and StockCross proportionally. In addition, KCA has purchased the naming rights for the Company for the Company to use.
PWC
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties was approximately $22,000$3,000 and $67,000 for the three months and nine months ended March 31, 2019.September 30, 2019, respectively. Revenue for PWC from related parties was $16,000 and $61,000 for the three and nine months ended September 30, 2018.
12. Subsequent Events
The Company has evaluated events that have occurred subsequent to March 31, 2019 and through May 15, 2019, the date of the filing of this report. There have been no additional material subsequent events that have occurred during such period that would require disclosure in this report or would be required to be recognized in the financial statements as of March 31,September 30, 2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. 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 particular,addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, contained in this discussion includewhich reflect our management’s beliefs, objectives, and expectations regardingas of the effectdate hereof, are based on the best judgement of client trading activityour management. All forward-looking statements speak only as of the date on our results of operations; the effect of changes in interest rates on our net interest spreads; the amount of net revenues; average commissions per trade; the amounts of total operating expenses; our effective income tax rate;which they are made. Such forward-looking statements are subject to certain risks, uncertainties and our capital and liquidity needs.
Ourassumptions relating to factors that could cause actual results couldto differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to:statements, including, without limitation, the following: economic, social and political conditions 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; difficulties and delays in integrating the StockCross, PWC, or KCAT businesses or fully realizing cost savings and other benefits from the acquisitions; disruptions from the StockCross, PWC, or KCAT acquisitions or other factors making it more difficultfailure to maintain relationships with employees, customers, other business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with other acquisitions; and the other risks and uncertainties set forth under Item 1A. Risk Factors ofdetailed in our 2018 Form 10-K.filings with the SEC, including our most recent filings on Forms 10-K and 10-Q.
The forward-looking statements contained in this reportherein speak only as of the date on which the statements were made. 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 consolidated financial statements on our 2018 Form 10-K, and our condensed consolidated 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 and marketmarkets. 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, portionsoccupancy expenses and components of communications costs and occupancy expenses.costs. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.
Significant Events in the First Quarter of 2019Event
In January 2019, we purchased approximately 15% of StockCross’ outstanding shares to further our partnership with StockCross. As of March 31,reported in a current report on Form 8-K filed October 3, 2019, the carrying amountCompany entered into an agreement to acquire Weeden Prime, a broker-dealer registered with the SEC offering prime brokerage services. Upon completion of the investment in StockCross, accounted for under the equity method, was $3,704,000, and the investment contributed $39,000 to net income for the three months ended March 31, 2019.
In March 2019, we committed to an office lease in Miami, FL and have commenced retail operations there as parttransaction, which is pending regulatory approval, Weeden Prime will be a wholly-owned subsidiary of the continued expansion of our business.Company.
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:
Client Account Metrics
| | | As of March 31, | | | As of September 30, | |
| | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Retail customer net worth (in billions) | | | $ | 11.2 | | | $ | 11.7 | |
| Retail customer margin debit balances (in billions) | | $ | 0.4 | | | $ | 0.3 | | | $ | 0.4 | | | $ | 0.4 | |
| Retail customer credit balances (in billions) | | $ | 0.4 | | | $ | 0.5 | | | $ | 0.4 | | | $ | 0.4 | |
| Retail customer money market fund value (in billions) | | $ | 0.6 | | | $ | 0.7 | | | $ | 0.6 | | | $ | 0.6 | |
| Retail customer net worth (in billions) | | $ | 11.1 | | | $ | 11.0 | | |
| Retail customer accounts | | | 75,306 | | | | 73,425 | | | | 76,270 | | | | 74,450 | |
● | Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions. |
Retail customer net worth represents the total value of securities and cash in the retail customer accounts before deducting margin debits.
● | Retail customer credit balances represents client cash held in brokerage accounts. |
Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions.
● | Retail customer money market fund value represents all retail customers accounts invested in money market funds. |
Retail customer credit balances represents client cash held in brokerage accounts.
● | Retail customer net worth represents the total value of securities and cash in the retail customer accounts before deducting margin debits.Retail customer money market fund value represents all retail customers accounts invested in money market funds. |
● | Retail customer accounts represents the number of retail customers. Effective in December 2018, the retail customer accounts metric was revised to include all retail accounts regardless of the amount of assets. Prior periods have been updated to conform to the current presentation. |
Retail customer accounts represents the number of retail customers. Effective in December 2018, the retail customer accounts metric was revised to include all retail accounts regardless of the amount of assets. Prior periods have been updated to conform to the current presentation.
Client Activity Metrics
| | Three Months Ended March 31, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2019 | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
| Total retail trades | | | 69,709 | | | | 96,219 | | | | 65,828 | | | | 82,120 | | | | 199,668 | | | | 262,610 | |
| Average commission per retail trade | | $ | 19.05 | | | $ | 23.14 | | | $ | 17.31 | | | $ | 23.43 | | | $ | 18.40 | | | $ | 22.87 | |
● | Total retail trades represents retail trades that generate commissions. |
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. |
Average commission per retail trade represents the average commission generated for all types of retail customer trades.
Statements of Operations for the Three Months Ended September 30, 2019 and 2018
Net Income
Net income for the three months ended March 31,September 30, 2019 was $1,006,000,$1,104,000, decreasing by $687,000$2,015,000 or 41%65% from the corresponding period in 2018, primarily due to the partial release of the valuation allowance of historical net operating losses in the third quarter of 2018 as well as a reduction in principal transactions and commission and fees revenues as a result of slower market volatilityconditions in the firstthird quarter of 2019. This decrease in revenue was partially offset by the decrease in operating expenses such as commission payouts as well as clearing fees and execution costs related to those revenue streams.
Revenue
Total revenue for the three months ended March 31,September 30, 2019 was $6,429,000,$7,144,000, decreasing by $1,748,000$740,000 or 21%9% from the corresponding period in 2018, primarily due to slower market volatilityconditions in the firstthird quarter of 2019 negatively impacting customer activity and the associated revenue from principal transactions as well as commission and fees. Average commissions per retail trade decreased primarily due to a higher percentage of our clients’ trades receiving reduced commission rates as a result of continued price competition in the industry.
Margin interest, marketing and distribution fees for the three months ended March 31,September 30, 2019 were $2,772,000, decreasing$2,944,000, increasing by $237,000$213,000 or 9%8% from the corresponding period in 2018, primarily due to a slight rise in interest rates.
Commissions and fees for the three months ended March 31,September 30, 2019 were $1,864,000,$1,925,000, decreasing by $810,000$422,000 or 30%18% from the corresponding period in 2018, primarily due to slower market volatilityconditions in the firstthird quarter of 2019 negatively impacting overall demand for retail products and overall client activity.products.
Principal transactions for the three months ended March 31,September 30, 2019 were $1,610,000,$2,041,000, decreasing by $1,331,000$593,000 or 45%23% from the corresponding period in 2018, primarily due to slower market volatilityconditions in the firstthird quarter of 2019 negatively impacting overall demand for retail products and overall client activity.products.
Advisory fees for the three months ended March 31,September 30, 2019 were $168,000, and increased$211,000, increasing by $152,000$73,000 or 950%53% from the corresponding period in 2018, primarily due to overall expansion of the advisory business line which included revenue growth related to AdvisorNXT’sSNXT’s Robo-Advisor.
Interest for the three months ended March 31,September 30, 2019 were $15,000, and increasedwas $23,000, decreasing by $4,000$11,000 or 36%32% from the corresponding period in 2018, primarily due to a rise in interest rates.lower cash balances.
Operating Expenses
Total expenses for the three months ended March 31,September 30, 2019 were $5,093,000, and decreased$5,717,000, decreasing by $978,000$83,000 or 16%1% from the corresponding period in 2018, primarily due to a variety of factors. A significant component of our expenses is variable to particular revenue streams. As such, the decreasereduction in commissions and fees and principal transactions revenues led to less commission payouts to our representatives as well as less clearing fees and execution costs to process those transactions.miscellaneous expenses.
Employee compensation and benefits for the three months ended March 31,September 30, 2019 were $2,835,000, and decreased$3,157,000, decreasing by $827,000$511,000 or 23%14% from the corresponding period in 2018, primarily due to lower commission payouts associated with the decrease in employee commissions and related costs associated with the lower demand for retail productsfees and overall client activity.principal transaction revenues.
Clearing fees, including execution costs for the three months ended March 31,September 30, 2019 were $654,000, and decreased$617,000, decreasing by $248,000$14,000 or 27%2% from the corresponding period in 2018, primarily due to the decrease in clearing and execution services associated with the lower level of overall client activity.
Professional fees for the three months ended March 31,September 30, 2019 were $502,000, and decreased$439,000, decreasing by $106,000$38,000 or 17%8% from the corresponding period in 2018, primarily due to a reduction in one-time legal fees.
Other general and administrative expenses for the three months ended March 31,September 30, 2019 were $385,000, and decreased$589,000, increasing by $1,000$88,000 or 18% from the corresponding period in 2018.2018, primarily due to incremental office expenses related to the Miami office.
Technology and communications for the three months ended March 31,September 30, 2019 were $247,000, and increased$291,000, increasing by $13,000$63,000 or 6%28% from the corresponding period in 2018, primarily due to incremental technology costs related to moving into the New Jersey office space in the first quartera higher level of 2019.technological infrastructure expansion.
Rent and occupancy expenses for the three months ended March 31,September 30, 2019 were $295,000, and increased$380,000, increasing by $53,000$132,000 or 22%53% from the corresponding period in 2018, primarily due to the increase in rent from our new office space in New Jersey.Jersey City and Miami.
Depreciation and amortization for the three months ended March 31,September 30, 2019 were $175,000, and increasedwas $244,000, increasing by $151,000$203,000 or 629%495% from the corresponding period in 2018, primarily due to the depreciation and amortization of incremental leasehold improvements and software development assets.
Advertising and promotion expenses for the three months ended March 31,September 30, 2019 were $0, and decreaseddecreasing by $13,000$6,000 from the corresponding period in 2018, primarily due to the elimination of miscellaneous advertising costs.
Provision for Income TaxEarnings of Equity Method Investment in Related Party
Provision for income taxEarnings of equity method investment in related party for the three months ended March 31,September 30, 2019 were $30,000 due to the Company recognizing its proportional earnings from StockCross for the three months ended September 30, 2019.
Provision (Benefit) For (From) Income Taxes
Provision (benefit) for (from) income taxes for the three months ended September 30, 2019 was $369,000,$353,000, increasing by $1,388,000 or 134% from the corresponding period in 2018, primarily due to the partial release of the valuation allowance of historical net operating losses in the third quarter of 2018.
Statements of Operations for the Nine Months Ended September 30, 2019 and 2018
Net Income
Net income for the nine months ended September 30, 2019 was $3,102,000, decreasing by $3,509,000 or 53% from the corresponding period in 2018, primarily due to a reduction in principal transactions and commission and fees revenues as a result of market volatility in 2019, partially offset by the decrease in operating expenses such as commission payouts related to those revenue streams. In addition, net income decreased on a comparative basis due to the partial release of the valuation allowance of historical net operating losses in the third quarter of 2018.
Revenue
Total revenue for the nine months ended September 30, 2019 was $20,634,000, decreasing by $44,000$2,915,000 or 11%12% from the corresponding period in 2018, primarily due to market volatility in 2019 negatively impacting revenue from principal transactions as well as commission and fees. Average commissions per retail trade decreased primarily due to a higher percentage of our clients’ trades receiving reduced commission rates as a result of continued price competition in the industry.
Margin interest, marketing and distribution fees for the nine months ended September 30, 2019 were $8,499,000, increasing by $546,000 or 7% from the corresponding period in 2018, primarily due to a slight rise in interest rates.
Commissions and fees for the nine months ended September 30, 2019 were $6,030,000, decreasing by $1,350,000 or 18% from the corresponding period in 2018, primarily due to market volatility in 2019 negatively impacting overall demand for retail products.
Principal transactions for the nine months ended September 30, 2019 were $5,479,000, decreasing by $2,359,000 or 30% from the corresponding period in 2018, primarily due to market volatility in 2019 negatively impacting overall demand for retail products.
Advisory fees for the nine months ended September 30, 2019 were $572,000, increasing by $263,000 or 85% from the corresponding period in 2018, primarily due to overall expansion of the advisory business line which included revenue growth related to SNXT’s Robo-Advisor.
Interest for the nine months ended September 30, 2019 was $54,000, decreasing by $15,000 or 22% from the corresponding period in 2018, primarily due to lower cash balances.
Operating Expenses
Total expenses for the nine months ended September 30, 2019 were $16,445,000, decreasing by $978,000 or 6% from the corresponding period in 2018, primarily due to the lower income before provision for income tax, commission payouts associated with less commissions and fees and principal transactions revenues, partially offset by the deferred income tax expenseincrease in other general and administrative expenses related to the expansion of our Jersey City office and the establishment of our Miami office as well as the increase in depreciation and amortization of incremental assets.
Employee compensation and benefits for the nine months ended September 30, 2019 were $8,882,000, decreasing by $1,737,000 or 16% from the corresponding period in 2018, primarily due to lower commission payouts associated with the decrease in commissions and fees and principal transaction revenues.
Clearing fees, including execution costs for the nine months ended September 30, 2019 were $1,849,000, decreasing by $363,000 or 16% from the corresponding period in 2018, primarily due to the decrease in clearing and execution services associated with the deferred taxlower level demand for retail products.
Professional fees for the nine months ended September 30, 2019 were $1,388,000, decreasing by $184,000 or 12% from the corresponding period in 2018, primarily due to a reduction in legal fees.
Other general and administrative expenses for the nine months ended September 30, 2019 were $1,861,000, increasing by $501,000 or 37% from the corresponding period in 2018, primarily due to incremental office expenses related to the expansion of our Jersey City office and the establishment of our Miami office.
Technology and communications for the nine months ended September 30, 2019 were $800,000, increasing by $8,000 or 1% from the corresponding period in 2018.
Rent and occupancy expenses for the nine months ended September 30, 2019 were $995,000, increasing by $258,000 or 35% from the corresponding period in 2018, primarily due to the increase in rent from our office space in Jersey City and Miami.
Depreciation and amortization for the nine months ended September 30, 2019 were $670,000, increasing by $579,000 or 636% from the corresponding period in 2018, primarily due to the depreciation and amortization of incremental leasehold improvements and software development assets.
Advertising and promotion expenses for the nine months ended September 30, 2019 were $0, decreasing by $40,000 from the corresponding period in 2018, primarily due to the elimination of miscellaneous advertising costs.
Earnings of Equity Method Investment in Related Party
Earnings of equity method investment in related party for the threenine months ended March 31,September 30, 2019 was $39,000, and increased by $39,000 from the corresponding period in 2018$84,000 due to the Company recognizing its proportional net incomeearnings from StockCross for the threenine months ended March 31,September 30, 2019.
- 15 -Provision (Benefit) For (From) Income Taxes
Provision (benefit) for (from) income taxes for the nine months ended September 30, 2019 was $1,171,000, increasing by $1,656,000 or 341% from the corresponding period in 2018, primarily due to the partial release of the valuation allowance of historical net operating losses in the third quarter of 2018.
Statements of Financial Condition as of September 30, 2019 and December 31, 2018
Assets
Assets as of March 31,September 30, 2019 were $21,549,000$23,993,000 and increased by $3,372,000$5,816,000 or 19%32% from assets as of December 31, 2018, primarily due to the lease right-of-use assetassets recorded per the new lease accounting guidance, thean increase in furniture, equipment and leasehold improvements from the development of the New Jersey office,our technological infrastructure, as well as incremental software development assets. In relation to the purchase of approximately 15% of StockCross’ outstanding shares, there was an increase in the equity method investment in related party asset of approximately $3.7 million and corresponding decrease in cash, with no net change to total assets.
Liabilities
Liabilities as of March 31,September 30, 2019 were $3,369,000$3,717,000 and increased by $2,366,000$2,714,000 or 236%271% from liabilities as of December 31, 2018, primarily due to the lease liabilities recorded per the new lease accounting guidance.
Liquidity and Capital Resources
Our cash and cash equivalents are unrestricted and are used to fund our working capital needs. Our total assets as of March 31,September 30, 2019 were approximately $21.5$24.0 million, of which $3.8$4.2 million, or approximately 17%18% consisted of cash and cash equivalents and were considered highly liquid. Our total assets as of December 31, 2018 were approximately $18.2 million, of which $7.2 million, or approximately 40% consisted of cash and cash equivalents and were considered highly liquid.
MSCO is subject to regulatory requirements that are intended to ensure its liquidity and general financial soundness. Under the SEC's Uniform Net Capital Rule (Exchange Act Rule 15c3-1), MSCO is required to maintain, at all times, at least the minimum level of net capital required under Rule 15c3-1. Since our aggregate debits may fluctuate significantly, our minimum net capital requirements may also fluctuate significantly from period to period. Siebert may make cash capital contributions to MSCO, if necessary, to meet minimum net capital requirements.
MSCO may not repay any subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to Siebert or employees if such payment would result in a net capital amount of less than (a) 5% of aggregate debit balances or (b) 120% of its minimum dollar requirement.
As of March 31,September 30, 2019, MSCO had net capital of approximately $5.1$5.7 million, which was approximately $4.8$5.4 million in excess of required net capital of $250,000. As of December 31, 2018, MSCO had net capital of approximately $8.9 million, which was approximately $8.7 million in excess of required netits minimum capital requirement of $250,000.
Contractual Obligations
Future annual minimum payments for operating leases with initial terms of greater than one year as of March 31,September 30, 2019 were as follows:
| Year | | Amount | | | Amount | |
| 2019 | | $ | 676,000 | | | $ | 259,000 | |
| 2020 | | | 891,000 | | | 992,000 | |
| 2021 | | | 728,000 | | | | 759,000 | |
| 2022 | | | 489,000 | | | 513,000 | |
| 2023 | | | 468,000 | | | | 493,000 | |
| 2024 | | | 39,000 | | | 56,000 | |
| Thereafter | | | — | | | | — | |
| Remaining balance of lease payments | | $ | 3,291,000 | | | $ | 3,072,000 | |
Other than the Miami lease described in the “Significant Events in the First Quarter of 2019” section above, thereThere have been no material changes in our contractual obligations outside the ordinary course of business since December 31, 2018.
Off-Balance Sheet Arrangements
Retail customer transactions are cleared through two clearing brokers on a fully disclosed basis. If customers do not fulfill their contractual obligations, the clearing brokers may charge us for any loss incurred 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 forin the three months ended March 31, 2019 and the year ended December 31, 2018.
Critical Accounting Policies
As ofOn January 1, 2019, we adopted the new standard under ASU 2016-02, Leases (Topic 842), which requires lessees to recognize lease on-balance sheet and disclose key information about leasing arrangements. As of March 31,September 30, 2019, the Company recognized lease right-of-use assets of approximately $2.3$2.5 million and corresponding lease liabilities of approximately $2.5$2.8 million. This accounting pronouncement had no material impact to the condensed consolidated statement of operations for the three months ended March 31, 2019. Please see Item 4. Financial Statements and Supplementary Data – “Note 5 – Leases” for additional detail.
Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies in our 2018 Form 10-K. Except as described above, there have been no changes to critical accounting estimates during the threenine months ended March 31,September 30, 2019.
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 ourtwo clearing brokers on a fully disclosed basis. If customers do not fulfill their contractual obligations, the clearing brokerbrokers may charge us for any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy the customers’customer obligations. We regularly monitor the activity in its customer accounts for compliance with our 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 forin the three months ended March 31, 2019 and the year ended December 31, 2018.last five years.
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 three months ended March 31, 2019,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 three months ended March 31, 2019,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.
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.
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 2018 Form 10-K, which could materially affect our business, financial position, and results of operations. There have been no material changes from the risk factors disclosed in our 2018 Form 10-K.
In addition to10-K other than the following risk factor which updates and replaces the risk factor captioned “There may be no public market for our Common Stock” previouslychanges disclosed in our 2018Quarterly Report on Form 10-K:
“There may be no public market10-Q for our Common Stock.
Only 7,153,506 shares of Common Stock, or approximately 26.3% of our shares of Common Stock outstanding, are currently held by the public as of May 15,period ended March 31, 2019. Although our Common Stock is traded on the Nasdaq Capital Market, there can be no assurance that an active public market will continue.”
Except for the foregoing, there are no material changes from the risk factors set forth in Part I - Item 1A - Risk Factors, in our 2018 Form 10-K.
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.
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| SIEBERT FINANCIAL CORP. | |
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| 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) | |
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| Dated: May 15, 2019
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| Exhibit No. | | Description of Document |
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101.INS | | |
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
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) |
| | | |
101.SCH | | XBRL Taxonomy Extension Schema |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | | XBRL Taxonomy Extension Presentation LinkbaseDated: November 13, 2019 |
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