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 | September 30, | ||
OR
☐ | |||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from | |||
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.) |
535 Fifth Avenue, 4th Floor, New York, NY | ||
(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 November 16, 2020,12, 2021, there were 30,953,710 shares of the registrant’s common stock.
SIEBERT FINANCIAL CORP.
INDEX
Forward-Looking Statements
For purposes of this Quarterly Report on Form 10-Q (“Report”), the terms “Siebert,” “Company,” “we,” “us” and “our” refer to Siebert Financial Corp., and its subsidiaries collectively, unless the context otherwise requires.
The statements contained throughout this Report, including any documents incorporated by reference, that are not historical facts, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect our beliefs, objectives, and expectations as of the date hereof, are based on the best judgement of management. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following: economic, social and political conditions, global economic downturns resulting from extraordinary events such as the COVID-19 pandemic and other securities industry risks; interest rate risks; liquidity risks; credit risk with clients and counterparties; risk of liability for errors in clearing functions; systemic risk; systems failures, delays and capacity constraints; network security risks; competition; reliance on external service providers; new laws and regulations affecting our business; net capital requirements; extensive regulation, regulatory uncertainties and legal matters; failure to maintain relationships with employees, customers, business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with risks and uncertainties detailed in under Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”) as well as in our filings with the SEC.
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.
-1-
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2021 (unaudited) | December 31, 2020 | |||||||
ASSETS | ||||||||
| ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4,260,000 | $ | 3,632,000 | ||||
Cash and securities segregated for regulatory purposes | 327,367,000 | 324,924,000 | ||||||
Receivables from customers | 86,913,000 | 95,358,000 | ||||||
Receivables from non-customers | 25,000 | 0— | ||||||
Receivables from broker-dealers and clearing organizations | 7,550,000 | 15,815,000 | ||||||
Other receivables | 2,759,000 | 1,692,000 | ||||||
Prepaid service contract - current | 709,000 | 809,000 | ||||||
Prepaid expenses and other assets | 1,518,000 | 2,095,000 | ||||||
Securities borrowed | 791,349,000 | 905,785,000 | ||||||
Securities owned, at fair value | 4,016,000 | 2,623,000 | ||||||
Total Current assets | 1,226,466,000 | 1,352,733,000 | ||||||
| ||||||||
Deposits with broker-dealers and clearing organizations | 8,327,000 | 7,209,000 | ||||||
Prepaid service contract – non-current | 473,000 | 1,004,000 | ||||||
Furniture, equipment and leasehold improvements, net | 724,000 | 762,000 | ||||||
Software, net | 845,000 | 1,334,000 | ||||||
Lease right-of-use assets | 3,002,000 | 2,290,000 | ||||||
Investments, cost | 850,000 | 0— | ||||||
Deferred tax assets | 4,528,000 | 4,857,000 | ||||||
Intangible assets, net | 0— | 809,000 | ||||||
Goodwill | 1,989,000 | 1,989,000 | ||||||
Total Assets | $ | 1,247,204,000 | $ | 1,372,987,000 | ||||
| ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| ||||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Payables to customers | $ | 373,843,000 | $ | 380,524,000 | ||||
Payables to non-customers | 16,211,000 | 11,570,000 | ||||||
Drafts payable | 1,060,000 | 4,021,000 | ||||||
Payables to broker-dealers and clearing organizations | 3,132,000 | 1,810,000 | ||||||
Accounts payable and accrued liabilities | 4,118,000 | 3,777,000 | ||||||
Securities loaned | 789,836,000 | 920,811,000 | ||||||
Securities sold, not yet purchased, at fair value | 27,000 | 21,000 | ||||||
Taxes payable | 1,280,000 | 0— | ||||||
Current portion of notes payable - related party | 2,000,000 | 5,200,000 | ||||||
Current portion of lease liabilities | 1,348,000 | 1,314,000 | ||||||
Current portion of long-term debt | 998,000 | 998,000 | ||||||
Current portion of deferred contract incentive | 750,000 | 0— | ||||||
Total Current liabilities | 1,194,603,000 | 1,330,046,000 | ||||||
| ||||||||
Notes payable - related party, less current portion | 3,000,000 | 0— | ||||||
Lease liabilities, less current portion | 1,944,000 | 1,298,000 | ||||||
Long-term debt, less current portion | 2,909,000 | 3,657,000 | ||||||
Deferred contract incentive, less current portion | 2,125,000 | 0— | ||||||
Total Liabilities | 1,204,581,000 | 1,335,001,000 | ||||||
| ||||||||
Commitments and Contingencies | ||||||||
Stockholders’ equity | ||||||||
Common stock, $.01 par value; 100 million shares authorized; 30,953,710 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | 309,000 | 309,000 | ||||||
Additional paid-in capital | 21,831,000 | 21,768,000 | ||||||
Retained earnings | 20,483,000 | 15,909,000 | ||||||
Total Stockholders’ equity | 42,623,000 | 37,986,000 | ||||||
| ||||||||
Total Liabilities and stockholders' equity | $ | 1,247,204,000 | $ | 1,372,987,000 | ||||
| September 30, 2020 | December 31, 2019* | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4,536,000 | $ | 4,670,000 | ||||
Cash and securities segregated for regulatory purposes | 263,980,000 | 224,924,000 | ||||||
Receivables from customers | 91,842,000 | 86,331,000 | ||||||
Receivables from broker-dealers and clearing organizations | 3,312,000 | 3,524,000 | ||||||
Other receivables | 873,000 | 762,000 | ||||||
Prepaid expenses and other assets | 1,444,000 | 970,000 | ||||||
Securities borrowed | 283,757,000 | 193,529,000 | ||||||
Securities owned, at fair value | 3,480,000 | 3,018,000 | ||||||
Total Current assets | 653,224,000 | 517,728,000 | ||||||
Deposits with broker-dealers and clearing organizations | 5,094,000 | 4,951,000 | ||||||
Prepaid service contract – non-current | 1,890,000 | — | ||||||
Furniture, equipment and leasehold improvements, net | 850,000 | 1,150,000 | ||||||
Software, net | 1,503,000 | 1,888,000 | ||||||
Lease right-of-use assets | 2,813,000 | 3,951,000 | ||||||
Deferred tax assets | 5,239,000 | 5,388,000 | ||||||
Intangible assets, net | 850,000 | 1,022,000 | ||||||
Goodwill | 1,989,000 | 1,989,000 | ||||||
Total Assets | $ | 673,452,000 | $ | 538,067,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Payables to customers | $ | 342,156,000 | $ | 308,091,000 | ||||
Payables to non-customers | 9,346,000 | 8,063,000 | ||||||
Drafts payable | 1,635,000 | 2,834,000 | ||||||
Payables to broker-dealers and clearing organizations | 356,000 | 523,000 | ||||||
Accounts payable and accrued liabilities | 2,754,000 | 2,443,000 | ||||||
Securities loaned | 266,777,000 | 170,443,000 | ||||||
Securities sold, not yet purchased, at fair value | 25,000 | 116,000 | ||||||
Interest payable | — | 10,000 | ||||||
Current portion of notes payable - related party | 3,000,000 | 8,000,000 | ||||||
Current portion of lease liabilities | 1,633,000 | 2,227,000 | ||||||
Current portion of long-term debt | 997,000 | — | ||||||
Total Current liabilities | 628,679,000 | 502,750,000 | ||||||
Lease liabilities, less current portion | 1,548,000 | 2,182,000 | ||||||
Notes payable – related party, less current portion | 3,000,000 | — | ||||||
Long-term debt, less current portion | 3,907,000 | — | ||||||
Total Liabilities | 637,134,000 | 504,932,000 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ equity | ||||||||
Common stock, $.01 par value; 100 million shares authorized; 30,653,710 and 30,459,804 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively** | 306,000 | 304,000 | ||||||
Additional paid-in capital | 21,022,000 | 19,897,000 | ||||||
Retained earnings | 14,990,000 | 12,934,000 | ||||||
Total Stockholders’ equity | 36,318,000 | 33,135,000 | ||||||
Total Liabilities and stockholders' equity | $ | 673,452,000 | $ | 538,067,000 | ||||
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
-2-
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenue | ||||||||||||||||
Commissions and fees | $ | 4,019,000 | $ | 4,679,000 | $ | 15,352,000 | $ | 15,149,000 | ||||||||
Interest, marketing and distribution fees | 3,435,000 | 3,226,000 | 10,517,000 | 10,885,000 | ||||||||||||
Principal transactions | 3,924,000 | 2,342,000 | 12,279,000 | 8,126,000 | ||||||||||||
Market making | 1,514,000 | 423,000 | 4,886,000 | 1,508,000 | ||||||||||||
Stock borrow / stock loan | 3,465,000 | 1,267,000 | 7,552,000 | 2,482,000 | ||||||||||||
Advisory fees | 441,000 | 305,000 | 1,200,000 | 810,000 | ||||||||||||
Other income | 253,000 | 333,000 | 982,000 | 1,035,000 | ||||||||||||
Total Revenue | 17,051,000 | 12,575,000 | 52,768,000 | 39,995,000 | ||||||||||||
| ||||||||||||||||
Expenses | ||||||||||||||||
Employee compensation and benefits | 9,294,000 | 6,584,000 | 27,205,000 | 20,489,000 | ||||||||||||
Clearing fees, including execution costs | 986,000 | 1,270,000 | 4,128,000 | 3,907,000 | ||||||||||||
Technology and communications | 1,196,000 | 1,322,000 | 3,537,000 | 3,256,000 | ||||||||||||
Other general and administrative | 927,000 | 455,000 | 2,885,000 | 1,710,000 | ||||||||||||
Data processing | 787,000 | 784,000 | 2,279,000 | 2,387,000 | ||||||||||||
Rent and occupancy | 441,000 | 694,000 | 1,481,000 | 2,119,000 | ||||||||||||
Professional fees | 759,000 | 760,000 | 1,951,000 | 2,159,000 | ||||||||||||
Depreciation and amortization | 354,000 | 368,000 | 1,120,000 | 1,193,000 | ||||||||||||
Referral fees | 374,000 | 154,000 | 1,134,000 | 427,000 | ||||||||||||
Impairment loss | 699,000 | 0— | 699,000 | 0— | ||||||||||||
Interest expense | 86,000 | 89,000 | 278,000 | 253,000 | ||||||||||||
Advertising | 13,000 | 0— | 13,000 | 0— | ||||||||||||
Total Expenses | 15,916,000 | 12,480,000 | 46,710,000 | 37,900,000 | ||||||||||||
| ||||||||||||||||
Income before provision for income taxes | 1,135,000 | 95,000 | 6,058,000 | 2,095,000 | ||||||||||||
Provision for (benefit from) income taxes | 265,000 | (486,000 | ) | 1,484,000 | 39,000 | |||||||||||
Net income | $ | 870,000 | $ | 581,000 | $ | 4,574,000 | $ | 2,056,000 | ||||||||
| ||||||||||||||||
Net income per share of common stock | ||||||||||||||||
Basic and diluted | $ | 0.03 | $ | 0.02 | $ | 0.15 | $ | 0.07 | ||||||||
| ||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic and diluted | 31,125,703 | 30,653,710 | 31,194,007 | 30,565,822 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue | ||||||||||||||||
Commissions and fees | $ | 4,679,000 | $ | 2,273,000 | $ | 15,149,000 | $ | 7,132,000 | ||||||||
Margin interest, marketing and distribution fees | 2,311,000 | 3,912,000 | 7,730,000 | 11,161,000 | ||||||||||||
Principal transactions | 2,342,000 | 2,327,000 | 8,126,000 | 6,138,000 | ||||||||||||
Interest income | 915,000 | 1,061,000 | 3,155,000 | 3,417,000 | ||||||||||||
Market making | 423,000 | 330,000 | 1,508,000 | 1,303,000 | ||||||||||||
Stock borrow / stock loan | 1,267,000 | 349,000 | 2,482,000 | 1,353,000 | ||||||||||||
Advisory fees | 305,000 | 211,000 | 810,000 | 572,000 | ||||||||||||
Other income | 333,000 | 290,000 | 1,035,000 | 633,000 | ||||||||||||
Total Revenue | 12,575,000 | 10,753,000 | 39,995,000 | 31,709,000 | ||||||||||||
Expenses | ||||||||||||||||
Employee compensation and benefits | 6,584,000 | 4,809,000 | 20,489,000 | 13,812,000 | ||||||||||||
Clearing fees, including execution costs | 1,270,000 | 798,000 | 3,907,000 | 2,325,000 | ||||||||||||
Technology and communications | 1,322,000 | 441,000 | 3,256,000 | 1,264,000 | ||||||||||||
Other general and administrative | 455,000 | 868,000 | 1,710,000 | 2,787,000 | ||||||||||||
Data processing | 784,000 | 527,000 | 2,387,000 | 1,487,000 | ||||||||||||
Rent and occupancy | 694,000 | 630,000 | 2,119,000 | 1,754,000 | ||||||||||||
Professional fees | 760,000 | 783,000 | 2,159,000 | 2,568,000 | ||||||||||||
Depreciation and amortization | 368,000 | 244,000 | 1,193,000 | 689,000 | ||||||||||||
Referral fees | 154,000 | — | 427,000 | — | ||||||||||||
Interest expense | 89,000 | 31,000 | 253,000 | 84,000 | ||||||||||||
Total Expenses | 12,480,000 | 9,131,000 | 37,900,000 | 26,770,000 | ||||||||||||
Income before provision (benefit) for (from) income taxes | 95,000 | 1,622,000 | 2,095,000 | 4,939,000 | ||||||||||||
Provision (benefit) for (from) income taxes | (486,000 | ) | 349,000 | 39,000 | 1,365,000 | |||||||||||
Net income | $ | 581,000 | $ | 1,273,000 | $ | 2,056,000 | $ | 3,574,000 | ||||||||
Net income per share of common stock | ||||||||||||||||
Basic and diluted | $ | 0.02 | $ | 0.04 | $ | 0.07 | $ | 0.12 | ||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic and diluted | 30,653,710 | 30,455,962 | 30,565,822 | 30,455,962 | ||||||||||||
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
-3-
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)
Number of Shares Issued | $.01 Par Value | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||
Balance – January 1, 2021 | 30,953,710 | $ | 309,000 | $ | 21,768,000 | $ | 15,909,000 | $ | 37,986,000 | |||||||
Shares issued for OpenHand purchase | 329,654 | 3,000 | 1,378,000 | — | 1,381,000 | |||||||||||
Net income | — | — | — | 2,275,000 | 2,275,000 | |||||||||||
Balance – March 31, 2021 | 31,283,364 | $ | 312,000 | $ | 23,146,000 | $ | 18,184,000 | $ | 41,642,000 | |||||||
Net income | — | — | — | 1,429,000 | 1,429,000 | |||||||||||
Balance – June 30, 2021 | 31,283,364 | $ | 312,000 | $ | 23,146,000 | $ | 19,613,000 | $ | 43,071,000 | |||||||
Shares retired from OpenHand transaction | (329,654 | ) | (3,000 | ) | (1,315,000 | ) | — | (1,318,000 | ) | |||||||
Net income | — | — | — | 870,000 | 870,000 | |||||||||||
Balance – September 30, 2021 | 30,953,710 | $ | 309,000 | $ | 21,831,000 | $ | 20,483,000 | $ | 42,623,000 | |||||||
Number of Shares Issued | $.01 Par Value | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||
Balance – January 1, 2020 | 27,157,188 | $ | 271,000 | $ | 7,641,000 | $ | 12,869,000 | $ | 20,781,000 | |||||||
Shares issued for StockCross purchase | 3,302,616 | 33,000 | 12,256,000 | 65,000 | 12,354,000 | |||||||||||
Net income | — | — | — | 976,000 | 976,000 | |||||||||||
Balance – March 31, 2020 | 30,459,804 | $ | 304,000 | $ | 19,897,000 | $ | 13,910,000 | $ | 34,111,000 | |||||||
Shares issued for payment of professional services | 193,906 | 2,000 | 1,125,000 | — | 1,127,000 | |||||||||||
Net income | — | — | — | 499,000 | 499,000 | |||||||||||
Balance – June 30, 2020 | 30,653,710 | $ | 306,000 | $ | 21,022,000 | $ | 14,409,000 | $ | 35,737,000 | |||||||
Net income | — | — | — | 581,000 | 581,000 | |||||||||||
Balance – September 30, 2020 | 30,653,710 | $ | 306,000 | $ | 21,022,000 | $ | 14,990,000 | $ | 36,318,000 | |||||||
Number of Shares Issued | $.01 Par Value | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||
Balance – January 1, 2020 | 27,157,188 | $ | 271,000 | $ | 7,641,000 | $ | 12,869,000 | $ | 20,781,000 | |||||||||||
Shares issued for StockCross purchase | 3,302,616 | 33,000 | 12,256,000 | 65,000 | 12,354,000 | |||||||||||||||
Net income | — | — | — | 976,000 | 976,000 | |||||||||||||||
Balance – March 31, 2020 | 30,459,804 | $ | 304,000 | $ | 19,897,000 | $ | 13,910,000 | $ | 34,111,000 | |||||||||||
Shares issued for payment of professional services | 193,906 | 2,000 | 1,125,000 | — | 1,127,000 | |||||||||||||||
Net income | — | — | — | 499,000 | 499,000 | |||||||||||||||
Balance – June 30, 2020 | 30,653,710 | $ | 306,000 | $ | 21,022,000 | $ | 14,409,000 | $ | 35,737,000 | |||||||||||
Net income | — | — | — | 581,000 | 581,000 | |||||||||||||||
Balance – September 30, 2020 | 30,653,710 | $ | 306,000 | $ | 21,022,000 | $ | 14,990,000 | $ | 36,318,000 | |||||||||||
Number of Shares Issued | $.01 Par Value | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||
Balance – January 1, 2019 | 27,157,188 | $ | 271,000 | $ | 7,641,000 | $ | 9,262,000 | $ | 17,174,000 | |||||||||||
Shares issued for StockCross purchase | 3,302,616 | 33,000 | 14,037,000 | — | 14,070,000 | |||||||||||||||
Net income | — | — | — | 1,224,000 | 1,224,000 | |||||||||||||||
Balance – March 31, 2019 | 30,459,804 | $ | 304,000 | $ | 21,678,000 | $ | 10,486,000 | $ | 32,468,000 | |||||||||||
Net income | — | — | — | 1,079,000 | 1,079,000 | |||||||||||||||
Balance – June 30, 2019 | 30,459,804 | $ | 304,000 | $ | 21,678,000 | $ | 11,565,000 | $ | 33,547,000 | |||||||||||
Return of capital distribution | — | — | (1,600,000 | ) | — | (1,600,000 | ) | |||||||||||||
Net income | — | — | — | 1,273,000 | 1,273,000 | |||||||||||||||
Balance – September 30, 2019 | 30,459,804 | $ | 304,000 | $ | 20,078,000 | $ | 12,838,000 | $ | 33,220,000 | |||||||||||
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
-4-
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | $ | 4,574,000 | $ | 2,056,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Deferred income tax expense | 329,000 | 148,000 | ||||||
Depreciation and amortization | 1,120,000 | 1,193,000 | ||||||
Downward adjustment due to changes in observable prices | 63,000 | 0— | ||||||
Impairment loss | 699,000 | 0— | ||||||
| ||||||||
Changes in | ||||||||
Receivables from customers | 8,445,000 | (5,511,000 | ) | |||||
Receivables from non-customers | (25,000 | ) | 0— | |||||
Receivables from and deposits with broker-dealers and clearing organizations | 7,147,000 | 69,000 |
| |||||
Securities borrowed | 114,436,000 | (90,228,000 | ) | |||||
Securities owned, at fair value | (1,393,000 | ) | (462,000 | ) | ||||
Prepaid expenses and other assets | (490,000 | ) | (586,000 | ) | ||||
Prepaid service contract | 631,000 | (763,000 | ) | |||||
Payables to customers | (6,681,000 | ) | 34,065,000 | |||||
Payables to non-customers | 4,641,000 | 1,283,000 |
| |||||
Drafts payable | (2,961,000 | ) | (1,199,000 | ) | ||||
Payables to broker-dealers and clearing organizations | 1,322,000 | (167,000 | ) | |||||
Accounts payable and accrued liabilities | 341,000 | 311,000 | ||||||
Securities loaned | (130,975,000 | ) | 96,334,000 |
| ||||
Securities sold, not yet purchased, at fair value | 6,000 | (91,000 | ) | |||||
Interest payable | 0— | (10,000 | ) | |||||
Lease liabilities | (32,000 | ) | (90,000 | ) | ||||
Taxes payable | 1,280,000 | 0— | ||||||
NFS business development credits | 2,875,000 | 0— | ||||||
Net cash provided by / (used in) operating activities | 5,352,000 | 36,352,000 | ||||||
| ||||||||
Cash Flows From Investing Activities | ||||||||
Purchase of OpenHand common stock | (850,000 | ) | 0— | |||||
Purchase of furniture, equipment, and leasehold improvements | (274,000 | ) | 0— | |||||
Purchase of software | (209,000 | ) | (334,000 | ) | ||||
Net cash provided by / (used in) investing activities | (1,333,000 | ) | (334,000 | ) | ||||
| ||||||||
Cash Flows From Financing Activities | ||||||||
Repayments of notes payable – related party | (200,000 | ) | (2,000,000 | ) | ||||
Repayments of long-term debt | (748,000 | ) | 4,904,000 | |||||
Net cash provided by / (used in) financing activities | (948,000 | ) | 2,904,000 | |||||
| ||||||||
Net change in cash and cash equivalents, and cash and securities segregated for regulatory purposes | 3,071,000 | 38,922,000 | ||||||
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - beginning of year | 328,556,000 | 229,594,000 | ||||||
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | $ | 331,627,000 | $ | 268,516,000 | ||||
| ||||||||
Cash and cash equivalents - end of period | $ | 4,260,000 | $ | 4,536,000 | ||||
Cash and securities segregated for regulatory purposes - end of period | 327,367,000 | 263,980,000 | ||||||
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | $ | 331,627,000 | $ | 268,516,000 | ||||
| ||||||||
Supplemental cash flow information | ||||||||
Cash paid during the period for income taxes | $ | 295,000 | $ | 133,000 | ||||
Cash paid during the period for interest | $ | 278,000 | $ | 263,000 | ||||
| ||||||||
Non-cash investing and financing activities | ||||||||
Shares issued for payment of professional services | $ | 0— | $ | 1,127,000 | ||||
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
Cash Flows From Operating Activities | ||||||||
| Net income | $ | 2,056,000 | $ | 3,574,000 | ||||
Adjustments to reconcile net income to net cash provided by / (used in) operating activities: | ||||||||
Deferred income tax expense | 148,000 | 672,000 | ||||||
Depreciation and amortization | 1,193,000 | 689,000 | ||||||
| Changes in | ||||||||
| Receivables from customers | (5,511,000 | ) | (15,339,000 | ) | ||||
| Receivables from non-customers | — | (103,000 | ) | |||||
| Receivables from and deposits with broker-dealers and clearing organizations | 69,000 | (14,000 | ) | |||||
| Securities borrowed | (90,228,000 | ) | 43,382,000 | |||||
| Securities owned, at fair value | (462,000 | ) | 1,671,000 | |||||
| Prepaid expenses and other assets | (586,000 | ) | 167,000 | |||||
| Prepaid service contract – non-current | (763,000 | ) | — | |||||
| Payables to customers | 34,065,000 | (3,541,000 | ) | |||||
| Payables to non-customers | 1,283,000 | (3,847,000 | ) | |||||
| Drafts payable | (1,199,000 | ) | 234,000 | |||||
| Payables to broker-dealers and clearing organizations | (167,000 | ) | 1,004,000 | |||||
| Accounts payable and accrued liabilities | 311,000 | (143,000 | ) | |||||
| Securities loaned | 96,334,000 | (35,905,000 | ) | |||||
| Securities sold, not yet purchased, at fair value | (91,000 | ) | (4,000 | ) | ||||
| Interest payable | (10,000 | ) | — | |||||
| Lease liabilities | (90,000 | ) | 334,000 | |||||
| Taxes payable | — | 14,000 | ||||||
| Other liabilities | — | 91,000 | ||||||
Net cash provided by / (used in) operating activities | 36,352,000 | (7,064,000 | ) | |||||
Cash Flows From Investing Activities | ||||||||
| Escrow deposit | — | (2,000,000 | ) | |||||
| Purchase of furniture, equipment, and leasehold improvements | — | (783,000 | ) | |||||
| Purchase of software | (334,000 | ) | (1,086,000 | ) | ||||
Net cash used in investing activities | (334,000 | ) | (3,869,000 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Notes payable – related party | (2,000,000 | ) | 2,000,000 | |||||
Long-term debt | 4,904,000 | — | ||||||
Purchase of StockCross common stock | — | (3,425,000 | ) | |||||
Return of capital distribution - StockCross | — | (1,600,000 | ) | |||||
Treasury stock sales - StockCross | — | 172,000 | ||||||
Net cash provided by / (used in) financing activities | 2,904,000 | (2,853,000 | ) | |||||
Net increase / (decrease) in cash and cash equivalents, and cash and securities segregated for regulatory purposes | 38,922,000 | (13,786,000 | ) | |||||
| Cash and cash equivalents, and cash and securities segregated for regulatory purposes - beginning of year | 229,594,000 | 214,038,000 | ||||||
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | $ | 268,516,000 | $ | 200,252,000 | ||||
Cash and cash equivalents - end of period | $ | 4,536,000 | $ | 5,883,000 | ||||
Cash and securities segregated for regulatory purposes - end of period | 263,980,000 | 194,369,000 | ||||||
Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | $ | 268,516,000 | $ | 200,252,000 | ||||
Supplemental cash flow information | ||||||||
Cash paid during the period for income taxes | $ | 133,000 | $ | 635,000 | ||||
Cash paid during the period for interest | $ | 263,000 | $ | 84,000 | ||||
Non-cash investing and financing activities | ||||||||
Shares issued for payment of professional services | $ | 1,127,000 | $ | — | ||||
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
-5-
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
(unaudited)
1. Organization and Basis of Presentation
Organization
Overview
Siebert Financial Corp., a New York corporation, incorporated in 1934, is a holding company that conducts its retail brokeragethe following lines of business through its wholly-owned subsidiary,subsidiaries:
•
Retail brokerage business through Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and broker-dealer registered broker-dealer, its investmentwith the SEC
•
Investment advisory businessservices through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the U.S. Securities and Exchange Commission (“SEC”)SEC as a Registered Investment Adviser (“RIA”) under the Investment Advisers Act of 1940, as amended and its insurance business
•
Insurance services through its wholly-owned subsidiary, Park Wilshire Companies, Inc. (“PWC”PW”), a Texas corporation and licensed insurance agency. Siebert conducts operationsagency
•
Robo-advisory technology development through its wholly-owned subsidiary, Siebert Technologies, LLC.LLC (“STCH”), a Nevada limited liability company and developer of robo-advisory technology. Siebert offers prime
•
Prime brokerage services through its wholly-owned subsidiary, WPS Prime Services, LLC (“WP”WPS”), a Delaware limited liability company and a broker-dealer registered with the SEC. Siebert also owns SEC
•
StockCross Digital Solutions, Ltd. (“STXD”), an inactive subsidiary headquartered in Bermuda. Bermuda
For purposes of this Quarterly Report on Form 10-Q, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PWC,PW, STCH, WP,WPS, and STXD collectively, unless the context otherwise requires.
The Company is headquartered in New York, NY, with primary operations in New Jersey, Florida, and California. The Company has 1615+ branch offices throughout the U.S. and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock, par value $.01 per share, trades on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates in the securities brokerage and asset management industry and has no other reportable segments. All of the Company's revenues for the three and nine months ended September 30, 20202021 and 20192020 were derived from its operations in the U.S.
As of September 30, 2020,2021, the Company is comprised of a single operating segment based on the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of the Company from a consolidated perspective.
Non-Binding Letter of Intent with Tigress
On August 23, 2021, the Company signed a Current Report on Form 8-K filed on June 26, 2020, on June 22, 2020,non-binding letter of intent between the Company and WPS Acquisitions,Tigress Holdings, LLC, entereda Delaware limited liability company (“Tigress Holdings”). The letter of intent memorializes the parties’ intention to enter into an agreementdefinitive written agreements pursuant to which (i) Tigress Holdings will transfer to the Company limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests in Tigress Financial Partners, LLC, a Delaware limited liability company (“Tigress Financial”); and (ii) the Company will transfer to Tigress Holdings limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests of the Company’s wholly-owned subsidiary, WPS, and such number of shares of the Company’s common stock that shall represent an amount equal to the difference between the parties’ agreed valuation of Tigress Financial and WPS.
Approval of 2021 Equity Incentive Plan
On September 17, 2021, the Company’s shareholders approved the Siebert Financial Corp. 2021 Equity Incentive Plan (the “Plan”) at closing would have soldthe Company’s 2021 Annual Meeting of Shareholders. The Plan provides for the grant of stock options, restricted stock, and other equity awards of the Company’s common stock to employees, officers, consultants, directors, and other service providers. There are 3 million shares reserved under the Plan, and the Company issued no securities under the Plan for the three and nine months ended September 30, 2021.
-6-
Partnership with JonesTrading and Termination of Goldman Sachs Clearing Arrangement
On August 30, 2021, Goldman Sachs & Co. LLC ("GSCO") notified WPS that its clearing arrangement with WPS will be terminated.
Due to the termination of WPS’s clearing arrangement with GSCO, substantially all of the member interestsrevenue producing customers of WPS will transition to other prime service providers. The Company does not anticipate the impact of this development will materially adversely affect the Company’s results of operations for the year ended December 31, 2021; however, it will materially adversely affect the Company’s results of operations in WPfuture periods.
As a result of this development, the Company recorded a full impairment of its WPS customer relationships intangible asset, and WPS revenue, expenses, and institutional customer assets are expected to be significantly reduced in future periods.
On October 7, 2021, the Company signed an agreement with JonesTrading Institutional Services LLC (“JonesTrading”) to transfer certain customers of WPS Acquisitions, LLC forto JonesTrading. In exchange, JonesTrading will pay the Company a purchase pricepercentage of $7.3 million. As reportedthe revenue produced by those clients less any related expenses. The percentage paid to the Company related to this agreement will decline every year and the arrangement will end in a Current Report on Form 8-K filed on July 30, 2020, effective July 24, 2020, the agreement was terminated by the Company.
Acquisition of StockCross
On January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross Financial Services, Inc. (“StockCross”). Subsequently, as previously disclosed in a Current Report on Form 8-K filed on January 7, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of the Company’s common stock. Effective January 1, 2020, StockCross was merged with and into MSCO, and as of January 1, 2020, all clearing and other services provided by StockCross arewere performed by MSCO.
Prior to and as of the date of the Company’s acquisition of StockCross, the Company and StockCross were entities under common control of Gloria E. Gebbia, the Company’s principal stockholder, and members of her immediate family (collectively, the “Gebbia Family”). The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for all periods presented in the unaudited condensed consolidated financial statements (“financial statements”). See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.
COVID-19
The challenges posed by the COVID-19 pandemic on the global economy increased significantly starting in the first quarter of 2020. COVID-19 has spread across the globe during 2020 and has impacted economic activity worldwide. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.
The Company instituted a number of temporary closures of branch offices; however, as ofprimary financial impact on the date of the filing of this report, all of the Company’s branch offices have been re-opened while maintaining compliance with federal, state and local mandates and guidelines. The Company has taken significant steps to ensure that its employees and customers are operating in a safe environment by implementing measures such as social distancing, sanitizing workstations, temperature checks, requiring masks, and alternating staff. The impact from the COVID-19 pandemic has causedfor the three and nine months ended September 30, 2021 and 2020 was lower interest revenue and income of the Company to decrease; however, the Company has implemented various initiatives to offset this decline.
The Company is actively monitoring the impact of COVID-19 on the Company’sits business, financial condition, liquidity, operations, employees, clients and business partners. Based on management’s assessment as of September 30, 2020,2021, the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
Refer to Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations of this Report for additional detail on COVID-19 and its impact on the Company.
Basis of Presentation
The accompanying condensed consolidated financial statements (“financial statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on2020 Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).10-K. The financial statements include the accounts of Siebert and its wholly-owned subsidiaries, and upon consolidation, all intercompany balances and transactions are eliminated. The U.S. dollar is the functional currency of the Company and numbers are rounded for presentation purposes.
-7-
Significant Accounting Policies
The Company’s significant accounting policies are included in “Note 2 – Summary of Significant Accounting Policies” Policies in the Company’s 20192020 Form 10-K. The following10-K, and any updates as of September 30, 2021 are listed below.
Investments, Cost
Accounting Standards Update (“ASU”) 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815,” generally requires entities to measure equity investments (other than equity method investments, controlling financial interests that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. However, entities will be able to elect a measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient in ASC 820 to estimate fair value using the net asset value (“NAV”) per share.
Pursuant to ASU 2020-01, the Company has made an accounting policy election to measure equity securities without readily determinable fair value at cost, less any impairment, adjusted for any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Other than the updates described above, there have been no material changes to the Company’s significant accounting policies as of September 30, 2020 are primarily due to the acquisition of StockCross. Other than the updates indicated below and in “Note 2 – New Accounting Standards,” there have been no significant changes to the Company’s significant accounting policies.
2. New Accounting Standards
Accounting Standards Adopted Accounting Pronouncements
ASU 2018
ASU 2019-12 - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes”, as part of its initiative to reduce complexity in the accounting standards. The ASU eliminates certain exceptions from ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09, (Topic 606), “Revenue from Contracts with Customers.”2020 and for interim periods within those fiscal years. The Company adopted this accounting pronouncementASU on January 1, 2020.
Accounting Standards Not Yet Adopted
ASU 2016-13 - In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial- Instruments”. The ASU changes the impairment model and requires financial assets measured at amortized cost basis, including finance receivables (loans), HTM debt securities, trade receivables, and off-balance sheet credit exposures not accounted for as insurance to be presented at the net amount expected to be collected. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequent ASUs, including 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, and 2020-02 were issued to clarify certain aspects of ASU 2016-13 and to provide transition reliefs. Adoption requires modified retrospective transition through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the entity applies the new guidance. The Company plans to adopt this ASU and all subsequent ASU guidance and is in the process of assessing its impact on the Company’s financial statements.
Management has evaluated other recently issued accounting pronouncementsstandards and does not believe that any of these pronouncementsstandards will have a significantmaterial impact on the Company’s financial statements and related disclosures as of September 30, 2020.2021.
-8-
3. Acquisitions
StockCross
Overview of Acquisition
Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.
Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, pursuant to an Agreement and Plan of Merger, the Company acquired the remaining 85% of StockCross’ outstanding shares and StockCross was merged with and into MSCO. The purchase price paid was approximately $29,750,000 or 3,298,774 shares of the Company’s restricted common stock which was issued in connection with the acquisition. PriorThe acquisition of StockCross added incremental business lines, revenue streams, cost synergies and additional experienced management team members to the acquisition, MSCO had a clearing agreement with StockCross whereby StockCross provided custody and clearing services to MSCO for its securities broker-dealer business; however, as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
Accounting for Acquisition
Prior to and as of the date of the acquisition, the Company and StockCross were entities under common control of the Gebbia Family. As such, the acquisition was accounted for as a transaction between entities under common control.
The acquisition represented a change in reporting entity. As such, upon the closing of the acquisition, the net assets of the Company were combined with those of StockCross at their historical carrying amounts. The companies have been presented on a combined basis for all periods presented in the financial statements in a manner similar to a pooling of interests,amounts and no goodwill was recorded as the period of common control existed prior to the periods presented in the financial statements. Accordingly, the historical financial statementspart of the Company have been presented under the “as if pooling” method.
The Company acquired various assets and liabilities from StockCross which were recorded at their historical carrying amounts and summarized below:
Historical Carrying Value | |||
| |||
Assets acquired | |||
Cash and cash equivalents | $ | 1,588,000 | |
Cash and securities segregated for regulatory purposes | 224,814,000 | ||
Receivables from customers | 86,331,000 | ||
Receivables from broker-dealers and clearing organizations | 3,105,000 | ||
Other receivables | 627,000 | ||
Prepaid expenses and other assets | 346,000 | ||
Securities borrowed | 193,529,000 | ||
Securities owned, at fair value | 3,018,000 | ||
Furniture, equipment and leasehold improvements, net | 19,000 | ||
Lease right-of-use assets | 1,141,000 | ||
Deferred tax assets | 407,000 | ||
Total Assets acquired | 514,925,000 | ||
| |||
Liabilities assumed | |||
Payables to customers | 308,091,000 | ||
Payables to non-customers | 9,151,000 | ||
Drafts payable | 2,834,000 | ||
Payables to broker-dealers and clearing organizations | 1,406,000 | ||
Accounts payable and accrued liabilities | 963,000 | ||
Securities loaned | 170,443,000 | ||
Securities sold, not yet purchased, at fair value | 28,000 | ||
Notes payable – related party | 5,000,000 | ||
Lease liabilities | 1,295,000 | ||
Total Liabilities assumed | 499,211,000 | ||
| |||
Net Assets acquired | $ | 15,714,000 | |
Historical Carrying Value | ||||
Assets acquired | ||||
Cash and cash equivalents | $ | 1,588,000 | ||
Cash and securities segregated for regulatory purposes | 224,814,000 | |||
Receivables from customers | 86,331,000 | |||
Receivables from broker-dealers and clearing organizations | 3,105,000 | |||
Other receivables | 627,000 | |||
Prepaid expenses and other assets | 346,000 | |||
Securities borrowed | 193,529,000 | |||
Securities owned, at fair value | 3,018,000 | |||
Furniture, equipment and leasehold improvements, net | 19,000 | |||
Lease right-of-use assets | 1,141,000 | |||
Deferred tax assets | 407,000 | |||
Total Assets acquired | 514,925,000 | |||
Liabilities assumed | ||||
Payables to customers | 308,091,000 | |||
Payables to non-customers | 9,151,000 | |||
Drafts payable | 2,834,000 | |||
Payables to broker-dealers and clearing organizations | 1,406,000 | |||
Accounts payable and accrued liabilities | 963,000 | |||
Securities loaned | 170,443,000 | |||
Securities sold, not yet purchased, at fair value | 28,000 | |||
Notes payable – related party | 5,000,000 | |||
Lease liabilities | 1,295,000 | |||
Total Liabilities assumed | 499,211,000 | |||
Net Assets acquired | $ | 15,714,000 | ||
-9-
| Three Months Ended September 30, 2019 | ||||||||||||||||
| Siebert | StockCross | Pro Forma Adjustments | Total Combined Siebert | |||||||||||||
Revenue | ||||||||||||||||
Commissions and fees | $ | 1,925,000 | $ | 348,000 | $ | — | $ | 2,273,000 | ||||||||
Margin interest, marketing and distribution fees | 2,944,000 | 968,000 | — | 3,912,000 | ||||||||||||
Principal transactions | 2,041,000 | 286,000 | — | 2,327,000 | ||||||||||||
Interest income | 23,000 | 1,038,000 | — | 1,061,000 | ||||||||||||
Market making | — | 330,000 | — | 330,000 | ||||||||||||
Stock borrow / stock loan | — | 349,000 | — | 349,000 | ||||||||||||
Advisory fees | 211,000 | — | — | 211,000 | ||||||||||||
Other income | — | 351,000 | (61,000 | ) | 290,000 | |||||||||||
Total Revenue | 7,144,000 | 3,670,000 | (61,000 | ) | 10,753,000 | |||||||||||
Expenses | ||||||||||||||||
Employee compensation and benefits | 3,157,000 | 1,652,000 | — | 4,809,000 | ||||||||||||
Clearing fees, including execution costs | 617,000 | 242,000 | (61,000 | ) | 798,000 | |||||||||||
Technology and communications | 291,000 | 150,000 | — | 441,000 | ||||||||||||
Other general and administrative | 589,000 | 279,000 | — | 868,000 | ||||||||||||
Data processing | — | 527,000 | — | 527,000 | ||||||||||||
Rent and occupancy | 380,000 | 250,000 | — | 630,000 | ||||||||||||
Professional fees | 439,000 | 344,000 | — | 783,000 | ||||||||||||
Depreciation and amortization | 244,000 | — | — | 244,000 | ||||||||||||
Interest expense | — | 31,000 | — | 31,000 | ||||||||||||
Total Expenses | 5,717,000 | 3,475,000 | (61,000 | ) | 9,131,000 | |||||||||||
Earnings of equity method investment in related party | 30,000 | — | (30,000 | ) | — | |||||||||||
Income before provision (benefit) for (from) income taxes | 1,457,000 | 195,000 | (30,000 | ) | 1,622,000 | |||||||||||
Provision (benefit) for (from) income taxes | 353,000 | 4,000 | (8,000 | ) | 349,000 | |||||||||||
Net income / (loss) | $ | 1,104,000 | $ | 191,000 | $ | (22,000 | ) | $ | 1,273,000 | |||||||
Net income per share of common stock | ||||||||||||||||
Basic and diluted | $ | 0.04 | $ | 0.03 | $ | 0.04 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic and diluted | 27,157,188 | 6,152,500 | ||||||||||||||
Pro forma shares used to compute net income per share | 30,455,962 | |||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||
| Siebert | StockCross | Pro Forma Adjustments | Total Combined Siebert | |||||||||||||
Revenue | ||||||||||||||||
Commissions and fees | $ | 6,030,000 | $ | 1,102,000 | $ | — | $ | 7,132,000 | ||||||||
Margin interest, marketing and distribution fees | 8,499,000 | 2,662,000 | — | 11,161,000 | ||||||||||||
Principal transactions | 5,479,000 | 659,000 | — | 6,138,000 | ||||||||||||
Interest income | 54,000 | 3,363,000 | — | 3,417,000 | ||||||||||||
Market making | — | 1,303,000 | — | 1,303,000 | ||||||||||||
Stock borrow / stock loan | — | 1,353,000 | — | 1,353,000 | ||||||||||||
Advisory fees | 572,000 | — | — | 572,000 | ||||||||||||
Other income | — | 816,000 | (183,000 | ) | 633,000 | |||||||||||
Total Revenue | 20,634,000 | 11,258,000 | (183,000 | ) | 31,709,000 | |||||||||||
Expenses | ||||||||||||||||
Employee compensation and benefits | 8,882,000 | 4,930,000 | — | 13,812,000 | ||||||||||||
Clearing fees, including execution costs | 1,849,000 | 659,000 | (183,000 | ) | 2,325,000 | |||||||||||
Technology and communications | 800,000 | 464,000 | — | 1,264,000 | ||||||||||||
Other general and administrative | 1,861,000 | 926,000 | — | 2,787,000 | ||||||||||||
Data processing | — | 1,487,000 | — | 1,487,000 | ||||||||||||
Rent and occupancy | 995,000 | 759,000 | — | 1,754,000 | ||||||||||||
Professional fees | 1,388,000 | 1,180,000 | — | 2,568,000 | ||||||||||||
Depreciation and amortization | 670,000 | 19,000 | — | 689,000 | ||||||||||||
Interest expense | — | 84,000 | — | 84,000 | ||||||||||||
Total Expenses | 16,445,000 | 10,508,000 | (183,000 | ) | 26,770,000 | |||||||||||
Earnings of equity method investment in related party | 84,000 | — | (84,000 | ) | — | |||||||||||
Income before provision (benefit) for (from) income taxes | 4,273,000 | 750,000 | (84,000 | ) | 4,939,000 | |||||||||||
Provision (benefit) for (from) income taxes | 1,171,000 | 218,000 | (24,000 | ) | 1,365,000 | |||||||||||
Net income / (loss) | $ | 3,102,000 | $ | 532,000 | $ | (60,000 | ) | $ | 3,574,000 | |||||||
Net income per share of common stock | ||||||||||||||||
Basic and diluted | $ | 0.11 | $ | 0.09 | $ | 0.12 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic and diluted | 27,157,188 | 6,152,500 | ||||||||||||||
Pro forma shares used to compute net income per share | 30,455,962 | |||||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Siebert | StockCross | Pro Forma Adjustments (unaudited) | Total Combined Siebert (unaudited) | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 3,082,000 | $ | 1,588,000 | $ | — | $ | 4,670,000 | ||||||||
Cash and securities segregated for regulatory purposes | 110,000 | 224,814,000 | — | 224,924,000 | ||||||||||||
Receivables from customers | — | 86,331,000 | — | 86,331,000 | ||||||||||||
Receivables from broker-dealers and clearing organizations | 3,067,000 | 1,265,000 | (808,000 | ) | 3,524,000 | |||||||||||
Receivables from related party | 1,000,000 | — | (1,000,000 | ) | — | |||||||||||
Other receivables | 223,000 | 627,000 | (88,000 | ) | 762,000 | |||||||||||
Prepaid expenses and other assets | 624,000 | 346,000 | — | 970,000 | ||||||||||||
Securities borrowed | — | 193,529,000 | — | 193,529,000 | ||||||||||||
Securities owned, at fair value | — | 3,018,000 | — | 3,018,000 | ||||||||||||
Total Current assets | 8,106,000 | 511,518,000 | (1,896,000 | ) | 517,728,000 | |||||||||||
Deposits with broker-dealers and clearing organizations | 3,186,000 | 1,840,000 | (75,000 | ) | 4,951,000 | |||||||||||
| Furniture, equipment and leasehold improvements, net | 1,131,000 | 19,000 | — | 1,150,000 | ||||||||||||
Software, net | 1,888,000 | — | — | 1,888,000 | ||||||||||||
Lease right-of-use assets | 2,810,000 | 1,141,000 | — | 3,951,000 | ||||||||||||
Equity method investment in related party | 3,360,000 | — | (3,360,000 | ) | — | |||||||||||
Deferred tax assets | 4,981,000 | 407,000 | — | 5,388,000 | ||||||||||||
Intangible assets, net | 1,022,000 | — | — | 1,022,000 | ||||||||||||
Goodwill | 1,989,000 | — | — | 1,989,000 | ||||||||||||
Total Assets | $ | 28,473,000 | $ | 514,925,000 | $ | (5,331,000 | ) | $ | 538,067,000 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
Payables to customers | $ | — | $ | 308,091,000 | $ | — | $ | 308,091,000 | ||||||||
Payables to non-customers | — | 9,151,000 | (1,088,000 | ) | 8,063,000 | |||||||||||
Drafts payable | — | 2,834,000 | — | 2,834,000 | ||||||||||||
Payables to broker-dealers and clearing organizations | — | 1,406,000 | (883,000 | ) | 523,000 | |||||||||||
Payables to related parties | 7,000 | — | (7,000 | ) | — | |||||||||||
Accounts payable and accrued liabilities | 1,473,000 | 963,000 | 7,000 | 2,443,000 | ||||||||||||
Securities loaned | — | 170,443,000 | — | 170,443,000 | ||||||||||||
Securities sold, not yet purchased, at fair value | 88,000 | 28,000 | — | 116,000 | ||||||||||||
Interest payable | 10,000 | — | — | 10,000 | ||||||||||||
Current portion of notes payable - related party | 3,000,000 | 5,000,000 | — | 8,000,000 | ||||||||||||
Current portion of lease liabilities | 1,291,000 | 936,000 | — | 2,227,000 | ||||||||||||
Total Current liabilities | 5,869,000 | 498,852,000 | (1,971,000 | ) | 502,750,000 | |||||||||||
Lease liabilities, less current portion | 1,823,000 | 359,000 | — | 2,182,000 | ||||||||||||
Total Liabilities | 7,692,000 | 499,211,000 | (1,971,000 | ) | 504,932,000 | |||||||||||
Commitments and Contingencies | ||||||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock, $.01 par value | 271,000 | 10,000 | 23,000 | 304,000 | ||||||||||||
Additional paid-in capital | 7,641,000 | 12,436,000 | (180,000 | ) | 19,897,000 | |||||||||||
Retained earnings | 12,869,000 | 3,268,000 | (3,203,000 | ) | 12,934,000 | |||||||||||
Total Stockholders’ equity | 20,781,000 | 15,714,000 | (3,360,000 | ) | 33,135,000 | |||||||||||
Total Liabilities and stockholders' equity | $ | 28,473,000 | $ | 514,925,000 | $ | (5,331,000 | ) | $ | 538,067,000 | |||||||
| Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
| Revenue | $ | 14,372,000 | $ | 41,191,000 | ||||
| Operating income | $ | 1,905,000 | $ | 3,693,000 | ||||
| Net income | $ | 1,577,000 | $ | 2,407,000 | ||||
4. Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Amounts receivable from, payables to, and deposits with broker-dealers and clearing organizations consisted of the following as of the periods indicated:
As of September 30, 2021 | As of December 31, 2020 | |||||||
Receivables from and deposits with broker-dealers and clearing organizations | ||||||||
DTCC / OCC / NSCC | $ | 11,030,000 | $ | 17,841,000 | ||||
Goldman Sachs | 2,496,000 | 2,430,000 | ||||||
Pershing Capital | 1,178,000 | 1,266,000 | ||||||
NFS | 1,006,000 | 1,061,000 | ||||||
Securities fail-to-deliver | 128,000 | 379,000 | ||||||
Globalshares | 21,000 | 46,000 | ||||||
Other receivables | 18,000 | 0— | ||||||
Total Receivables from and deposits with broker-dealers and clearing organizations | $ | 15,877,000 | $ | 23,023,000 | ||||
| ||||||||
Payables to broker-dealers and clearing organizations | ||||||||
Securities fail-to-receive | $ | 3,093,000 | $ | 1,810,000 | ||||
Payables to broker-dealers | 39,000 | 0— | ||||||
Total Payables to broker-dealers and clearing organizations | $ | 3,132,000 | $ | 1,810,000 | ||||
As of September 30, 2020 | As of December 31, 2019 | |||||||
Receivables from and deposits with broker-dealers and clearing organizations | ||||||||
DTCC / OCC / NSCC | $ | 3,678,000 | $ | 3,059,000 | ||||
Goldman Sachs | 2,105,000 | 2,841,000 | ||||||
Pershing Capital | 1,279,000 | 1,192,000 | ||||||
NFS | 1,113,000 | 1,328,000 | ||||||
Securities fail-to-deliver | 207,000 | 43,000 | ||||||
Globalshares | 24,000 | 2,000 | ||||||
ICBC | — | 10,000 | ||||||
Total Receivables from and deposits with broker-dealers and clearing organizations | $ | 8,406,000 | $ | 8,475,000 | ||||
Payables to broker-dealers and clearing organizations | ||||||||
Securities fail-to-receive | $ | 356,000 | $ | 523,000 | ||||
Total Payables to broker-dealers and clearing organizations | $ | 356,000 | $ | 523,000 | ||||
Under the DTCC shareholders’ agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of September 30, 2021 and December 31, 2020, MSCO had shares of DTCC common stock valued at approximately $905,000 and $937,000, respectively, which are included within the line item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.
5. Prepaid Service Contract
On April 21, 2020, MSCOthe Company entered into a Master Services Agreement (“MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide MSCOthe Company with the InvestCloud Platform, a new client and back end interface and related functionalities for MSCO’sthe Company’s key operations. MSCOThe Company agreed to pay InvestCloud as consideration therefore during the initial three-year term an annual license fee of $600,000 as well as an upfront professional service fee of $1.0 million for one-time configuration, installation and customization of the software. Following the initial three yearthree-year term, the MSA will automatically renew for additional one-year terms unless terminated by MSCOthe Company upon 120 days’ notice.
In connection with the MSA, InvestCloud entered into a Side Letter Agreement (“Side Letter”)side letter agreement with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common stock (the “Shares”) at a per share price of $5.81 (the Company’s share price as of the close of May 12, 2020) for a total of $1.1 million for professional services, which approximates the cost of services to be provided, to integrate the InvestCloud Platform into Siebert’sthe Company’s existing systems and Robo-Advisor.systems. The Shares were issued to InvestCloud on May 12, 2020 without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(a)(2) thereunder. This transaction is reflected in the “Non-cash investing and financing activities” section of the statements of cash flows.
The Company initially recorded a prepaid asset equal to the $2.1 million of the total professional services related to the development work to be performed by InvestCloud, which is within the line item “Prepaid service contract – non-current”contract” on the statements of financial condition. The Company will amortizeamortizes this asset over the 3-year term of the contract, a period during which the arrangement is noncancelable. The license fees related to Siebert’sthe Company’s use of the InvestCloud Platform are prepaid three months in advance and are within the line item “Prepaid expenses and other assets”service contract” on the statements of financial condition. These prepaid license fees are amortized over the three monththree-month term. The amortization for all the prepaid assets related to InvestCloud development is within the line item titled “Technology and Communications” on the statements of income.
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The expense related to share-based payments to InvestCloud for professional services was $94,000 for both the three months ended September 30, 2021, and 2020. The expense related to share-based payments to InvestCloud for professional services was $282,000 and $125,000 for the nine months ended September 30, 2021, and 2020, respectively.
The total cost related to InvestCloud was $178,000 and $327,000 for the three months ended September 30, 2021, and 2020, respectively. The total cost related to InvestCloud was $782,000 and $436,000 for the nine months ended September 30, 2021, and 2020, respectively.
6. Fair Value Measurements
Overview
ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income, or cost approach, as specified by ASC 820, are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 - Quoted prices (unadjusted) in active markets for an identical asset or liability that the Company can assess at the measurement date.
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
The availability of observable inputs can vary from security to security and is affected by a variety of factors, such as the type of security, the liquidity of markets, and other characteristics particular to the security. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. As such, the degree of judgment exercised in determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
U.S. government securities:
U.S. government securities are valued using quoted market prices and as such, valuation adjustments are not applied. Accordingly, U.S. government securities are generally categorized in level 1 of the fair value hierarchy.Certificates of deposit: Certificates of deposit included in investments are valued using recently executed transactions, market price quotations (when observable), bond spreads from independent external parties such as vendorsat cost, which approximates fair value. When certificates of deposits are held directly with banking institutions and brokers, adjusted for any basis difference between cashissued directly to the Company, these are categorized within prepaid expenses and derivative instruments. The spread data used is for the same maturity as the bond. Municipal securities are generally categorizedother assets in level 2 of the fair value hierarchy. When certificates of deposits are available for trading, they are categorized within securities owned, at fair value in level 2 of the fair value hierarchy.
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Corporate bonds and convertible preferred stock:
The fair value of corporate bonds and convertible preferred stock are determined using recently executed transactions, market price quotations (when observable), bond spreads, or credit default swap spreads obtained from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is used. When position-specific external price data is not observable, fair value is determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond, or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds and convertible preferred stocks are generally categorized in level 2 of the fair value hierarchy.Equity securities:
Equity securities are valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in level 1 of the fair value hierarchy. Securities quoted in inactive markets or with observable inputs are categorized into level 2. If there are no observable inputs or quoted prices, securities are categorized as level 3 assets in the fair value hierarchy. Level 3 assets are not actively traded and subjective estimates based on managements’ assumptions are utilized for valuation.Fair Value Hierarchy Tables
The following tables present the Company's fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of the periods presented.
As of September 30, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Securities owned, at fair value | ||||||||||||||||
U.S. government securities* | $ | 2,990,000 | $ | 0— | $ | 0— | $ | 2,990,000 | ||||||||
Certificates of deposit | 0— | 92,000 | 0— | 92,000 | ||||||||||||
Corporate bonds | 0— | 38,000 | 0— | 38,000 | ||||||||||||
Equity securities | 648,000 | 248,000 | 0— | 896,000 | ||||||||||||
Total Securities owned, at fair value | $ | 3,638,000 | $ | 378,000 | $ | 0— | $ | 4,016,000 | ||||||||
| ||||||||||||||||
Liabilities | ||||||||||||||||
Securities sold, not yet purchased, at fair value | ||||||||||||||||
Equity securities | $ | 0— | $ | 27,000 | $ | 0— | $ | 27,000 | ||||||||
Total Securities sold, not yet purchased, at fair value | $ | 0— | $ | 27,000 | $ | 0— | $ | 27,000 | ||||||||
As of December 31, 2020 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Securities owned, at fair value | ||||||||||||||||
U.S. government securities* | $ | 2,029,000 | $ | 0— | $ | 0— | $ | 2,029,000 | ||||||||
Certificates of deposit | 0— | 91,000 | 0— | 91,000 | ||||||||||||
Corporate bonds | 0— | 24,000 | 0— | 24,000 | ||||||||||||
Equity securities | 345,000 | 134,000 | 0— | 479,000 | ||||||||||||
Total Securities owned, at fair value | $ | 2,374,000 | $ | 249,000 | $ | 0— | $ | 2,623,000 | ||||||||
| ||||||||||||||||
Liabilities | ||||||||||||||||
Securities sold, not yet purchased, at fair value | ||||||||||||||||
Equity securities | $ | 0— | $ | 21,000 | $ | 0— | $ | 21,000 | ||||||||
Total Securities sold, not yet purchased, at fair value | $ | 0— | $ | 21,000 | $ | 0— | $ | 21,000 | ||||||||
| As of September 30, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | ||||||||||||||||
Certificates of deposit | $ | — | $ | 142,000 | $ | — | $ | 142,000 | ||||||||
Securities owned, at fair value | ||||||||||||||||
U.S. government securities* | $ | 2,028,000 | $ | — | $ | — | $ | 2,028,000 | ||||||||
Certificates of deposit | — | 91,000 | — | 91,000 | ||||||||||||
Corporate bonds | — | 120,000 | — | 120,000 | ||||||||||||
Equity securities | 765,000 | 343,000 | — | 1,108,000 | ||||||||||||
Mutual funds | 133,000 | — | — | 133,000 | ||||||||||||
Total Securities owned, at fair value | $ | 2,926,000 | $ | 554,000 | $ | — | $ | 3,480,000 | ||||||||
Liabilities | ||||||||||||||||
Securities sold, not yet purchased, at fair value | ||||||||||||||||
Equity securities | $ | — | $ | 25,000 | $ | — | $ | 25,000 | ||||||||
Total Securities sold, not yet purchased, at fair value | $ | — | $ | 25,000 | $ | — | $ | 25,000 | ||||||||
*As of September 30, 2021 and December 31, 2020, the U.S. government securities mature on 08/31/had maturity dates of August 15, 2024 and August 31, 2021,
| As of December 31, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | ||||||||||||||||
Certificates of deposit | $ | — | $ | 142,000 | $ | — | $ | 142,000 | ||||||||
Segregated securities | ||||||||||||||||
U.S. government securities | $ | 1,311,000 | — | — | $ | 1,311,000 | ||||||||||
Securities owned, at fair value | ||||||||||||||||
U.S. government securities | $ | 2,007,000 | $ | — | $ | — | $ | 2,007,000 | ||||||||
Corporate bonds | — | 25,000 | — | 25,000 | ||||||||||||
Equity securities | 453,000 | 245,000 | 288,000 | 986,000 | ||||||||||||
Total Securities owned, at fair value | $ | 2,460,000 | $ | 270,000 | $ | 288,000 | $ | 3,018,000 | ||||||||
Liabilities | ||||||||||||||||
Securities sold, not yet purchased, at fair value | ||||||||||||||||
Equity securities | $ | 88,000 | $ | 28,000 | $ | — | $ | 116,000 | ||||||||
Total Securities sold, not yet purchased, at fair value | $ | 88,000 | $ | 28,000 | $ | — | $ | 116,000 | ||||||||
| Changes in Level 3 Equity Assets | ||||||
| Nine Months Ended September 30, 2020 | ||||||
| Amount | Valuation Technique | Reason for Change | ||||
Balance – January 1, 2020 | $ | 288,000 | Liquidation value based on valuation report | |||
Transfers out of level 3 | (288,000 | ) | Sale of equity security | |||
Balance – September 30, 2020 | $ | — | ||||
The following represents financial instruments in which the ending balances as of September 30, 20202021 and December 31, 20192020 are not carried at fair value inon the statements of financial condition:
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Receivables and other assets
: Receivables from customers, receivables from non-customers, receivables from and deposits with broker-dealers and clearing organizations,Securities borrowed and securities loaned
: Securities borrowed and securities loaned are recorded at amounts which approximate fair value and are primarily classified as level 2 under the fair value hierarchy. The Company’s securities borrowed and securities loaned balances represent amounts of equity securities borrow and loan contracts and are marked-to-market daily in accordance with standard industry practices which approximate fair value.Payables
: Payables to customers, payables to non-customers, drafts payable, payables to broker-dealers and clearing organizations, accounts payable and accrued liabilities, andNotes payable – related party:
The carrying amount of the notes payable – related party approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the notes payable – related party is classified as level 2.Line of credit
: The carrying amount of the line of credit with East West Bank approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the line of credit is classified as level 2.Investments, cost: As there is no readily determinable fair value, the carrying amount of this investment minus impairment approximates the fair value. The cost will be adjusted upwards or downwards in accordance with observable market transactions. Under the fair value hierarchy, the investment is classified as level 3.
7. Leases
As of September 30, 2020,2021, the Company rents office space under operating leases expiring in 20212022 through 2024,2026, and the Company has no financing leases. The leases call for base rent plus escalations as well as other operating expenses. The following table represents the Company’s lease right-of-use assets and lease liabilities on the statements of financial condition. The Company elected not to include short-term leases (i.e., leases with initial terms of less than twelve months or less)months), or equipment leases (deemed immaterial) on the statements of financial condition. The Company acquired two leases from its acquisition of StockCross, the impact of which is reflected in the following disclosures.
As of September 30, 2020,2021, the Company does not believe that any of the renewal options under the existing leases are reasonably certain to be exercised; however, the Company will continue to assess and monitor the lease renewal options on an ongoing basis.
As of September 30, 2021 | As of December 31, 2020 | ||||||||
Assets | |||||||||
Lease right-of-use assets | $ | 3,002,000 | $ | 2,290,000 | |||||
Liabilities | |||||||||
Lease liabilities | $ | 3,292,000 | $ | 2,612,000 | |||||
As of September 30, 2020 | As of December 31, 2019 | |||||||
| Assets | ||||||||
| Lease right-of-use assets | $ | 2,813,000 | $ | 3,951,000 | ||||
| Liabilities | ||||||||
| Lease liabilities | $ | 3,181,000 | $ | 4,409,000 | ||||
The calculated amounts of the lease right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company leases some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the statements of income rather than capitalizing them as lease right-of-use assets. The Company determined a discount rate of 5.0% would approximate the Company’s cost to obtain financing given its size, growth, and risk profile.
Lease Term and Discount Rate | As of September 30, 2021 | As of December 31, 2020 | ||||||
Weighted average remaining lease term – operating leases (in years) | 3.0 | 2.2 | ||||||
Weighted average discount rate – operating leases | 5.0 | % | 5.0 | % | ||||
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The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate lease and non-lease components, and as such, the variable lease cost primarily represents variable payments such as common area maintenance and utilities which are usually determined by the leased square footage in proportion to the overall office building.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Operating lease cost | $ | 377,000 | $ | 609,000 | $ | 1,274,000 | $ | 1,755,000 | ||||||||
Short-term lease cost | 24,000 | 20,000 | 68,000 | 83,000 | ||||||||||||
Variable lease cost | 40,000 | 65,000 | 139,000 | 281,000 | ||||||||||||
Sublease income | 0— | 0— | 0— | 0— | ||||||||||||
Total Rent and occupancy | $ | 441,000 | $ | 694,000 | $ | 1,481,000 | $ | 2,119,000 | ||||||||
| ||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
Operating cash flows from operating leases | $ | 374,000 | $ | 614,000 | $ | 1,268,000 | $ | 1,845,000 | ||||||||
| ||||||||||||||||
Lease right-of-use assets obtained in exchange for new lease liabilities | ||||||||||||||||
Operating leases | $ | 91,000 | $ | 278,000 | $ | 1,966,000 | $ | 2,353,000 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating lease cost | $ | 609,000 | $ | 509,000 | $ | 1,755,000 | $ | 1,268,000 | ||||||||
Short-term lease cost | 20,000 | 81,000 | 83,000 | 321,000 | ||||||||||||
Variable lease cost | 65,000 | 40,000 | 281,000 | 165,000 | ||||||||||||
Sublease income | — | — | — | — | ||||||||||||
Total Rent and occupancy | $ | 694,000 | $ | 630,000 | $ | 2,119,000 | $ | 1,754,000 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
Operating cash flows from operating leases | $ | 614,000 | $ | 512,000 | $ | 1,845,000 | $ | 1,338,000 | ||||||||
Lease right-of-use assets obtained in exchange for new lease liabilities | ||||||||||||||||
Operating leases | $ | 278,000 | $ | — | $ | 2,353,000 | $ | 4,943,000 | ||||||||
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of September 30, 20202021 were as follows:
Year | Amount | |||
2021 | $ | 397,000 | ||
2022 | 1,344,000 | |||
2023 | 940,000 | |||
2024 | 399,000 | |||
2025 | 325,000 | |||
Thereafter | 139,000 | |||
Remaining balance of lease payments | 3,544,000 | |||
Less: difference between undiscounted cash flows and discounted cash flows | 252,000 | |||
Lease liabilities | $ | 3,292,000 | ||
| Year | Amount | |||
2020 | $ | 606,000 | ||
2021 | 1,403,000 | |||
2022 | 755,000 | |||
2023 | 543,000 | |||
2024 | 56,000 | |||
Remaining balance of lease payments | 3,363,000 | |||
Difference between undiscounted cash flows and discounted cash flows | 182,000 | |||
Lease liabilities | $ | 3,181,000 | ||
8. Investments, Cost
OpenHand
On January 31, 2021, the Company and OpenHand Holdings, Inc. (“OpenHand”) entered into a stock purchase agreement whereby the Company acquired an interest of 5% of OpenHand common stock for consideration of a total of $2,231,000 consisting of $850,000 in cash and 329,654 restricted shares of the Company’s common stock valued at $1,381,000 or $4.19 per share. The Company and OpenHand intended to develop a subscription-based brokerage platform providing zero-commission trading for equity and option transactions and crediting its members daily with rebates of revenues generated by the clients, less operational expenses.
The value of the Company’s restricted stock was determined using the thirty-day trading average. The Company agreed to register the shares issued to OpenHand by filing a selling shareholder registration statement. The Company also received an option to purchase an additional 7.5% of OpenHand for approximately $4.5 million, based upon a $60 million valuation of OpenHand. This option expires 18 months after the launch of the OpenHand platform.
On August 18, 2021, the Company and OpenHand agreed to terminate their working relationship. In connection therewith, the Company and OpenHand amended and restated their January 31, 2021 stock purchase agreement to provide that the Company would pay $850,000 in cash in exchange for 2% of the total outstanding common stock of OpenHand as of January 31, 2021, and receive a 15-month option to purchase an additional 2% of the outstanding common stock of OpenHand at an exercise price equal to a company valuation of $42.5 million. The parties agreed to rescind OpenHand’s purchase of the 329,654 restricted shares of the Company’s common stock.
No value was attributed to the option because it is not a derivative and there were no transaction costs associated with this option as of September 30, 2021. As of September 30, 2021 and December 31, 2020, the Company had an operating lease agreement for an office space in Beverly Hills, CA with a term of approximately 5 years. The total commitmentcarrying value of the leaseCompany’s investment in OpenHand was $850,000 and $0, respectively.
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The investment does not have a readily determinable fair value since OpenHand is approximately $1.5 million,a private company and its shares are not publicly traded. The Company made an accounting policy election to measure this investment at cost less any impairment adjusted for any changes resulting from observable price changes in orderly transactions for the lease will commenceidentical or a similar investment of the same issuer.
The transaction on March 1, 2021.
9. Goodwill and Intangible Assets, Net
Goodwill
As of September 30, 20202021 and December 31, 2019,2020, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of WP.
Intangible Assets, Net
As a result of the Company’s acquisition of WP,WPS, the Company hadacquired intangible assets consisting of WP’sWPS customer relationships and WP’s trade name, the fair values of which were $987,000 and $70,000, respectively, as of the acquisition date. Pursuant to the Company’s agreement with the original owners of WP,WPS, the Company agreed to discontinue using the name of Weeden Prime Services, LLC and filed to change it to WPS Prime Services, LLC in May 2020. AsThe Company amortizes its acquired intangible assets over their useful lives, and as of September 30, 2020,2021, the WPWPS trade name has beenwas fully amortized.
Impairment
On August 30, 2021, GSCO notified WPS that its clearing arrangement with WPS will be terminated. The termination of the clearing arrangement was indicative of a potential impairment and required impairment testing of the Company’s goodwill and intangible assets.
The Company elected to rely on a qualitative assessment to evaluate goodwill, which indicated that the fair value of the Company’s goodwill was in excess of its carrying value. The Company concluded that it has one reportable segment, and in addition to other qualitative factors such current market conditions and macro-economic factors, the Company’s market capitalization was well above its book value as of the date of the assessment. Accordingly, no further impairment assessment was necessary, and no impairment charges related to goodwill were recognized in the three and nine months ended September 30, 2021. Additionally, the Company determined there was not a material risk for future possible impairments to goodwill as of the date of the assessment.
The Company performed a qualitative assessment to evaluate definite-lived intangible assets. The qualitative assessment performed indicated that the fair value of the WPS customer relationships intangible asset was less than its carrying amount, and the Company proceeded to performing the quantitative assessment. Due to the termination of WPS’s clearing arrangement with GSCO, substantially all of the revenue producing customers of WPS will transition to other prime service providers. The forecasted revenue associated with WPS’s remaining customer base was determined to be minimal. As such, the Company determined that the WPS customer relationships intangible asset was fully impaired, resulting in an impairment loss of $699,000 for the three and nine months ended September 30, 2021.
For the three and nine months ended September 30, 2021 and 2020, management concluded that there have beenwere no impairments to the carrying valueCompany’s assets other than the one described above.
10. Deferred Contract Incentive
Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with National Financial Services LLC (“NFS”) that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025.
As part of this agreement, the Company received a one-time business development credit of $3 million from NFS which is within the line item “Deferred contract incentive” on the statements of financial condition. This credit will be recognized as contra expense over the term of the Company’s goodwillagreement in the line item “Clearing fees, including execution costs” on the statements of income. For the three and other tangiblenine months ended September 30, 2021, the Company recognized $125,000 in contra expense, and intangible assets.the balance of the deferred contract incentive was $2.9 million as of September 30, 2021.
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11. Long-Term Debt
Line of Credit with East West Bank
Overview
On July 22, 2020, the Company entered into a Loan and Security Agreement with East West Bank. In accordance with the terms of this agreement, the Company has the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. The Company’s obligations under the agreement are secured by a lien on all of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.
Term loans made pursuant to the agreement shall bear interest at the Company’s option, (i) at the prime rate as reported by the Wall Street Journal, or (ii) 3.0% above the LIBOR rate, provided that the minimum interest rate on any term loan will not be less than 3.25%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.
This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of September 30, 20202021 and the date of the filing of this report,Report, the Company was in compliance with all of its covenants related to this agreement.
In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually, and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994, (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust.
As of September 30, 2020,2021, the Company has drawn down a $5.0 million term loan of approximately $4.9 million under this agreement.agreement and has an outstanding balance of $3.9 million. The Company has incurredan additional $5.0 million remaining to draw down from this line of credit.
Remaining Payments
Future remaining annual minimum payments for the line of credit with East West Bank as of September 30, 2021 were as follows:
Amount | ||||
2021 | $ | 250,000 | ||
2022 | 998,000 | |||
2023 | 998,000 | |||
2024 | 1,661,000 | |||
Total | $ | 3,907,000 | ||
The interest expense in relationrelated to this term loanline of credit was $34,000 and $107,000 for the three and nine months ended September 30, 2021, respectively. The interest expense related to this line of credit was $15,000 for both the three and nine months ended September 30, 2020. The effective interest rate related to this line of credit was 3.25% for the periods this line of credit has been in place.
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12. Notes Payable - Related Party
As of September 30, 2020,2021, the Company had various notes payable to Gloria E. Gebbia, the Company’s principal stockholder, the details of which are presented below:
Description | Issuance Date | Face Amount | Unpaid Principal Amount | ||||
4.00% due October 31, 2021* | September 17, 2021 | $ | 2,000,000 | $ | 2,000,000 | ||
4.00% due November 30, 2022** | November 30, 2020 | 3,000,000 | 3,000,000 | ||||
| |||||||
Total Notes payable – related party | $ | 5,000,000 | $ | 5,000,000 |
| Description | Issuance Date | Face Amount | |||
4% due December 2, 2020 | December 2, 2019 | $ | 3,000,000 | ||
Subordinated to MSCO* | |||||
4% due November 30, 2021** | November 30, 2018 | $ | 3,000,000 | ||
Total Notes payable – related party | $ | 6,000,000 | |||
As of December 31, 2020, the Company had various notes payable to Gloria E. Gebbia, the details of which are presented below:
Description | Issuance Date | Face Amount | Unpaid Principal Amount | ||||
4.00% due May 31, 2021* | December 1, 2020 | $ | 2,200,000 | $ | 2,200,000 | ||
4.00% due November 30, 2021** | November 30, 2020 | 3,000,000 | 3,000,000 | ||||
| |||||||
Total Notes payable – related party | $ | 5,200,000 | $ | 5,200,000 |
*TheOn May 31, 2021, this note payable subordinated to MSCO was acquired as partrenewed with a maturity of the acquisitionSeptember 30, 2021. On September 30, 2021, this notes payable was renewed with a maturity of StockCross.
**This note payable was renewed on November 30, 2019 for a term of one year. Subsequently, a rate adjustment and extension of its maturity with permissive prepayment was completed on March 3, 2020.
The Company’s interest expense incurred for these notes payable for the three months ended September 30, 2021 and 2020 was $52,000 and 2019 was $104,000 and $24,000,$74,000, respectively. The Company’s interest expense incurred for these notes payable for the nine months ended September 30, 2021 and 2020 was $156,000 and 2019 was $220,000, and $66,000, respectively. The Company’s interest payable related to these notes payable was $0 and $10,000 as of both September 30, 20202021 and December 31, 2019, respectively. Effective March 3, 2020, the interest rate on the loan due November 30, 2021 was renegotiated from 2.75% to 4%. There was no consideration paid or received as part of this renegotiation.
13. Revenue Recognition
Overview of Revenue
The primary sources of revenue for the Company are as follows:
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.
Principal Transactions
Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.
Market Making
Market making revenue is revenue generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty. Securities owned are recorded at fair market value at the end of the reporting period.
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Stock Borrow / Stock Loan
The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin and fully-paid securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company recognizes self-clearing revenues net of operating expenses related to stock borrow / stock loan. Stock borrow / stock loan also includes any revenues generated from the Company’s fully paid lending programs on a self-clearing or introducing basis. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions. Stock borrow / stock loan revenue is reported on a monthly basis net of expense.
The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.
For the three months ended September 30, 2021, stock borrow / stock loan revenue was $3,465,000 ($7,754,000 gross revenue less $4,289,000 expenses). For the three months ended September 30, 2020, stock borrow / stock loan revenue was $1,267,000 ($2,499,000 gross revenue lessminus $1,232,000 expenses).
For the threenine months ended September 30, 2019,2021, stock borrow / stock loan revenue was $349,000$7,552,000 ($2,111,00019,605,000 gross revenue minus $1,762,000less $12,053,000 expenses).
Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.
Interest, Income
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balancesbalances. Interest income also includes interest payouts from introducing relationships related to short interest, net of charges.
The Company also earns margin interest which is the net interest charged to customers for holding financed margin positions. Marketing and isdistribution fees consist of 12b-1 fees which are trailing payments from money market funds. Interest, marketing and distribution fees are recorded as earned.
For the periods presented, the Company combined revenue from interest income and revenue from margin interest, marketing and distribution fees as these revenue streams are similar in nature. These revenue streams were historically disaggregated; however, the Company has combined these revenue streams to most accurately present the statements of income.
Other Income
Other income represents fees generated from correspondent clearing fees, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.
Categorization of Revenue
The following table presents the Company’s major revenue categories and when each category is recognized:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
Revenue Category | 2021 | 2020 | 2021 | 2020 | Timing of Recognition | |||||||||||||
| ||||||||||||||||||
Trading Execution and Clearing Services | ||||||||||||||||||
Commissions and fees | $ | 4,019,000 | $ | 4,679,000 | $ | 15,352,000 | $ | 15,149,000 | Recorded on trade date | |||||||||
Principal transactions | 3,924,000 | 2,342,000 | 12,279,000 | 8,126,000 | Recorded on trade date | |||||||||||||
Market making | 1,514,000 | 423,000 | 4,886,000 | 1,508,000 | Recorded on trade date | |||||||||||||
Stock borrow / stock loan | 3,465,000 | 1,267,000 | 7,552,000 | 2,482,000 | Recorded as earned | |||||||||||||
Advisory fees | 441,000 | 305,000 | 1,200,000 | 810,000 | Recorded as earned | |||||||||||||
Total Trading Execution and Clearing Services | 13,363,000 | 9,016,000 | 41,269,000 | 28,075,000 | ||||||||||||||
| ||||||||||||||||||
Other Income | ||||||||||||||||||
Interest, marketing and distribution fees | ||||||||||||||||||
Interest | 1,014,000 | 915,000 | 3,331,000 | 3,155,000 | Recorded as earned | |||||||||||||
Margin interest | 2,251,000 | 2,130,000 | 6,698,000 | 6,465,000 | Recorded as earned | |||||||||||||
12b-1 fees | 170,000 | 181,000 | 488,000 | 1,265,000 | Recorded as earned | |||||||||||||
Total Interest, marketing and distribution fees | 3,435,000 | 3,226,000 | 10,517,000 | 10,885,000 | ||||||||||||||
| ||||||||||||||||||
Other income | 253,000 | 333,000 | 982,000 | 1,035,000 | Recorded as earned | |||||||||||||
| ||||||||||||||||||
Total Revenue | $ | 17,051,000 | $ | 12,575,000 | $ | 52,768,000 | $ | 39,995,000 | ||||||||||
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| Revenue Category | 2020 | 2019 | 2020 | 2019 | Timing of Recognition | ||||||||||||
| Trading Execution and Clearing Services | |||||||||||||||||
Commissions and fees | $ | 4,679,000 | $ | 2,273,000 | $ | 15,149,000 | $ | 7,132,000 | Recorded on trade date | ||||||||
Principal transactions | 2,342,000 | 2,327,000 | 8,126,000 | 6,138,000 | Recorded on trade date | ||||||||||||
Market making | 423,000 | 330,000 | 1,508,000 | 1,303,000 | Recorded on trade date | ||||||||||||
Stock borrow / stock loan | 1,267,000 | 349,000 | 2,482,000 | 1,353,000 | Recorded as earned | ||||||||||||
Advisory fees | 305,000 | 211,000 | 810,000 | 572,000 | Recorded as earned | ||||||||||||
Total Trading Execution and Clearing Services | 9,016,000 | 5,490,000 | 28,075,000 | 16,498,000 | |||||||||||||
Other Income | |||||||||||||||||
Margin interest, marketing and distribution fees | |||||||||||||||||
Margin interest | 2,130,000 | 3,068,000 | 6,465,000 | 8,755,000 | Recorded as earned | ||||||||||||
12b1 fees | 181,000 | 844,000 | 1,265,000 | 2,406,000 | Recorded as earned | ||||||||||||
Total Margin interest, marketing and distribution fees | 2,311,000 | 3,912,000 | 7,730,000 | 11,161,000 | |||||||||||||
Interest income | 915,000 | 1,061,000 | 3,155,000 | 3,417,000 | Recorded as earned | ||||||||||||
Other income | 333,000 | 290,000 | 1,035,000 | 633,000 | Recorded as earned | ||||||||||||
Total Other Income | 3,559,000 | 5,263,000 | 11,920,000 | 15,211,000 | |||||||||||||
Total Revenue | $ | 12,575,000 | $ | 10,753,000 | $ | 39,995,000 | $ | 31,709,000 | |||||||||
The following table presents each revenue category and its related performance obligation:
Revenue Stream | Performance Obligation |
Commissions and fees, Principal transactions, Market making, Stock borrow / stock loan, Advisory fees | Provide financial services to customers and counterparties |
Interest, marketing and distribution fees, | n/a |
Soft Dollar Arrangement
For certain clients of the acquisition of WP,WPS, the Company has soft dollar and commission sharing arrangements with customers that fall both within, and outside of, the safe harbor provisions of Rule 28(e) of the Securities Exchange Act of 1934 ("Rule 28(e)"), as amended. These soft dollar arrangements were determined to be a separate performance obligation that should be allocated a portion of the transaction price.
Under these arrangements, the Company charges additional dollars on customer trades and uses these fees to pay third parties for research, brokerage services, market data, and related expenses (“research services”) on behalf of clients. The Company is an agent in these arrangements, as it does not control the research services before they are transferred to the customer. As such, the revenue from these agreements are recognized net of cost in the statements of income inwithin the line item “Commissions and fees.”
The Company paid client expenses of approximately $170,000 and $142,000 for the three months ended September 30, 2021 and 2020, respectively. The Company paid client expenses of approximately $500,000 and $494,000 for the three months and nine months ended September 30, 2021 and 2020, respectively.
The Company had an outstanding receivable and payable of approximately $5,000$33,000 and $150,000,$261,000, respectively, as of September 30, 2020.2021 related to these arrangements. The receivable and payable related to soft dollar arrangements are inwithin the line items “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statementstatements of financial condition.
As of September 30, 20202021 and December 31, 2019,2020, no allowance for uncollectible commissions was necessary as the Company believes all commissions receivable and prepaid research services expenses will be realized.
Other Items
For the three and nine months ended September 30, 20202021 and 2019,2020, 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.
14. Referral Fees
In relation to the acquisitionoperations of WP,WPS, the Company has agreements with various third parties to share commissions and pay fees as defined in the respective agreements. These expenses totaledwere approximately $154,000$374,000 and $427,000$154,000 for the three and nine months ended September 30, 2021 and 2020, respectively, which are presentedwithin in the line item “Referral fees” inon the statements of income.
15. Income Taxes
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2020,2021, the Company has concluded that its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain New Jerseyfederal net operating losses that are expected to expire unutilized and certain state net operating losses.
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On March 27, 2020,11, 2021, the Coronavirus Aid, Relief and Economic SecurityAmerican Rescue Plan Act of 2021 (“CARES Act”American Rescue Plan”) was enactedsigned into law to provide additional relief in responseconnection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to COVID-19 pandemic.PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of changes in tax rates and lawsnew legislation are recognized inupon enactment. The enactment of the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhanced recoverability of AMT tax credits. The CARES ActAmerican Rescue Plan did not have a significant impact on the Company’s financial statements as ofincome tax provision.
For the three and nine months ended September 30, 2020.
For the three and nine months ended September 30, 2020, the Company recorded an income tax benefit of $486,000 onand an income before benefit from income taxestax provision of $95,000.$39,000, respectively. The effective tax rate for the three and nine months ended September 30, 2020 was (511.6)(512)%. and 2%, respectively. The effective tax rate was lower than the federal statutory rate of 21% asprimarily due to two factors: (i) the Company recorded a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled withand (ii) the recognition of additional deferred tax assets for federal net operating losses as the Company determined that it can utilize additional net operating losses under Section 382.
As of September 30, 2021 and December 31, 2020, the Company recorded an uncertain tax position of $1,041,000 attributable$1,103,000 and $1,105,000, respectively, related primarily to the Company’s 2017 to 2019 amended tax returns, as the Company’s anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold. The net impact from the uncertain tax position was recorded as a reduction of the Company’s income tax receivable. The Company expects to receive an income tax refund of approximately $248,000 by the first quarter of 2021. In the event that the Company concludes that the Company is subject to interest and / or penalties arising from uncertain tax positions, the Company will present interest and penalties as a component of income taxes.
16. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average of the number of outstanding common shares during the period. The Company had net income of $581,000$870,000 and $1,273,000$581,000 for the three months ended September 30, 20202021 and 2019,2020, respectively. The Company had net income of $2,056,000$4,574,000 and $3,574,000$2,056,000 for the nine months ended September 30, 2021 and 2020, and 2019, respectively.
17. Capital Requirements
MSCO and StockCross
Net Capital
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) of the Securities Exchange Act of 1934. Under the alternate method permitted by this rule, net capital, as defined, shall not be less than the lower of $1 million or 2% of aggregate debit items arising from customer transactions. As of September 30, 2021, MSCO’s net capital was $35.5 million, which was approximately $33.4 million in excess of its required net capital of $2.1 million, and its percentage of aggregate debit balances to net capital was 33.8%.
As of December 31, 2020, MSCO’s net capital was $27.9$27.5 million, which was approximately $25.6$25.2 million in excess of its required net capital of $2.3 million, and its percentage of aggregate debit balances to net capital was 24.4%24.3%.
Effective upon the Company’s acquisition of StockCross on January 1, 2020, the capital of MSCO and StockCross was combined.
Special Reserve Account
MSCO is subject to Customer Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of September 30, 2020,2021, MSCO had cash deposits of $264.0$327.4 million in the special reserve accounts which was $16.6$30 million in excess of the deposit requirement of $247.4$297.4 million. After adjustments for deposit(s) and / or withdrawal(s) made on October 1, 2020,2021, MSCO had $7.1$27.5 million in excess of the customer reservedeposit requirement.
As of December 31, 2019,2020, MSCO did not have any special reserve accounts. As of December 31, 2019, StockCross had cash deposits of $223.4$324.9 million (cash of $222.1 million and securities with fair value of $1.3 million) in the special reserve accountaccounts which was $4$5.0 million in excess of the deposit requirement of $219.4$319.9 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2020, StockCross2021, MSCO had $1$1.0 million in excess of the customer reservedeposit requirement.
Effective upon the Company’s acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined.
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WPS
Net Capital
WPS, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn, or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. WPWPS is also subject to the CFTC's minimum financial requirements which require that WPWPS maintain net capital, as defined, equal to the greater of its requirements under Regulation 1.17 under the Commodity Exchange Act or Rule 15c3-1.
As of September 30, 2020, WP’s2021, WPS’s net capital was approximately $3.7$3.2 million which was $3.5$3.0 million in excess of its minimum requirement of $250,000 under 15c3-1. As of December 31, 2019, WP’s2020, WPS’s net capital was approximately $3.9 million which was $3.7 million in excess of its minimum requirement of $250,000 under 15c3-1.
18. Financial Instruments with Off-Balance Sheet Risk
The Company enters into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and is, therefore, subject to varying degrees of market and credit risk.
In the normal course of business, the Company's customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose the Company to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and internal margin requirements, and is collateralized by cash and securities in the customers' accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines.guidelines which meet or exceed regulatory requirements. The Company monitors required margin levels daily and pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controlsseeks to mitigate this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, the Company establishes credit limits for such activities and continuously monitors compliance oncompliance.
The Company’s securities lending transactions are subject to master netting agreements with other broker-dealers; however, amounts are presented gross in the statements of financial condition. The Company further mitigates risk by using a program with a clearing organization which guarantees the return of cash to the Company as well as using industry standard software to ensure daily basis.
There were no material losses for unsettled customer transactions for the three and nine months ended September 30, 2021 and 2020.
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19. 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
On July 14, 2021, StockCross entered into a Letter of Acceptance, Waiver, and Consent with FINRA in connection with alleged excessive trading and suitability violations by a registered representative of StockCross in a customer’s account, supervisory failures to comply with supervisory requirements relating to certain equity and options and stock lending transactions, and certain record keeping requirements. Pursuant to the opinionconsent, MSCO agreed to a censure, pay a fine of $250,000, and made an undertaking to retain an independent consultant to conduct a comprehensive review of MSCO’s compliance with suitability rules in connection with solicited equity and options transactions, as well as possession-or-control requirements in connection with the firm’s stock loan business.
On July 9, 2021, StockCross entered into a Consent Order with the California Department of Financial Protection and Innovation in connection with alleged supervisory failures relating to the sale of Unit Investment Trusts to six customers. Pursuant to the Consent Order, StockCross agreed to desist and refrain from violations of California law relating to supervision by broker-dealers, to make a payment of $100,000 to the California Department of Financial Protection and Innovation for administrative costs, and to offer restitution of commissions of approximately $315,000 in aggregate to the six customers.
The foregoing matters were related to activities that occurred prior to the Company’s acquisition of StockCross on January 1, 2020.
During the three months ended June 30, 2021, the Company booked an accrual of $250,000 for the FINRA fine and an accrual of $100,000 for the California administrative costs, which are both within the line item “Other general and administrative” in the statements of income. During the three months ended September 30, 2021, the Company made the payments for the above accruals and the six customers rejected the offer of restitutions.
As of September 30, 2021, all suchother legal matters are without merit or involve amounts which would not have a significant effectmaterial impact on the Company’s results of operations or financial statements.position.
Overnight Financing
The Company has an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank as of September 30, 2021. As of September 30, 2021, the Company had no outstanding loan balance with BMO Harris Bank and there are no commitment fees or other restrictions on this line of credit. As of December 31, 2020, in addition to the $15 million line of credit with BMO Harris Bank, MSCO had a $15 million line of credit with Texas Capital Bank, which MSCO did not renew as of September 30, 2021. The removal of this line of credit did not impact MSCO’s ability to meet its liquidity requirements. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.
The interest expense for these credit lines was $0 for both the three months ended September 30, 2021 and 2020. The interest expense for these credit lines was $15,000 and $18,000 for the nine months ended September 30, 2021 and 2020, respectively. There were no fees associated with these credit lines for the three and nine months ended September 30, 2021 and 2020.
NFS Contract
Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. If the Company chooses to exit this agreement before the end of the contract term, the Company is under the obligation to pay an early termination fee upon occurrence pursuant to the table below:
Date of Termination | Early Termination Fee | ||
Prior to August 1, 2022 | $ | 8,000,000 | |
Prior to August 1, 2023 | $ | 7,250,000 | |
Prior to August 1, 2024 | $ | 4,500,000 | |
Prior to August 1, 2025 | $ | 3,250,000 |
For the three and nine months ended September 30, 2021, there has been no expense recognized for any early termination fees. The Company believes that it is unlikely it will have to make material payments related to this arrangement and has not recorded any contingent liability in the financial statements related to this arrangement.
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General Contingencies
In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company is self-insured with respect to employee health claims. The Company maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately $50,000$65,000 per employee.employee as of September 30, 2021. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the financial statements.
As part of this plan, the Company recognized expenses of $412,000$404,000 and $136,000$412,000 for the three months ended September 30, 20202021 and 2019,2020, respectively. As part of this plan, the Company recognized expenses of $962,000$1,054,000 and $594,000$962,000 for the nine months ended September 30, 2021 and 2020, and 2019, respectively.
The Company had an accrual of $78,000$102,000 as of September 30, 2020,2021, which represents the historical estimate of future claims to be recognized for claims incurred prior toduring 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.
20. Related Party Disclosures
StockCross
Prior to being acquired by the Company, StockCross and the Company were underaffiliated entities through common ownership and prior to January 1, 2020, StockCross served as one of the clearing broker-dealers for the Company. The StockCross clearing agreement with the Company provided that StockCross passed through all revenue and charged the Company forhad various related clearing expenses. Outside of the clearing agreement, the Company had an expense sharing agreement with StockCross for its Beverly Hills and Jersey City branch offices, and StockCross paid some vendors for miscellaneous expenses which it passed through to the Company.
Kennedy Cabot Acquisition, LLC
Kennedy Cabot Acquisition, LLC (“KCA”) is an affiliate of the Company and is under common ownership with the Company. To gain efficiencies and economies of scale with billing and administrative functions, KCA serves as a paymaster for the Company for payroll and related functions, the entirety of which KCA passes through to the subsidiaries of the Company proportionally. In addition, KCA has purchased the naming rights of the Company for the Company to use.
KCA sponsors a 401(k) profit sharing plan which covers substantially all of the Company’s employees. Employee contributions to the plan are at the discretion of eligible employees. There were no contributions by the Company or KCA to the plan for the three and nine months ended September 30, 20202021 and 2019.
For the three and nine months ended September 30, 2021 and 2020, KCA has earned no profit for providing any services to the Company as KCA passes through any revenue or expenses to the Company’s subsidiaries.
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Park Wilshire Companies, Inc.
PW brokers the insurance policies for related parties. Revenue for PWCPW from related parties was $21,000$6,000 and $3,000$21,000 for the three months ended September 30, 20202021 and 2019,2020, respectively. Revenue for PWCPW from related parties was $65,000$62,000 and $67,000$65,000 for the nine months ended September 30, 2021 and 2020, and 2019, respectively.
Gloria E. Gebbia and John J. Gebbia
The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. See “Note 10Refer to Note 12 – Notes Payable - Related Party”Party for additional detail.
In addition, the Company’s obligations under its Agreementagreement with East West Bank are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually, and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994, (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust. See “Note 9Refer to Note 11 – Long-Term Debt”Debt for additional detail.
Gloria E. Gebbia has extended loans to certain Company employees for the purchase of the Company’s shares. These transactions have not materially impacted the Company’s financial statements.
Gebbia Sullivan County Land Trust
The Company operates on a month-to-month lease agreement for its branch office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a relativemember of the Gebbia Family. For both the three months ended September 30, 20202021 and 2019,2020, rent expense was $15,000 for this branch office. For both the nine months ended September 30, 20202021 and 2019,2020, rent expense was $45,000 for this branch office.
21. Subsequent Events
The Company has evaluated events that have occurred subsequent to September 30, 20202021 and through November 16, 2020,15, 2021, the date of the filing of this report.
On November 10, 2020,October 31, 2021, the notes payable of $2 million to Gloria E. Gebbia was renewed with a maturity of December 31, 2021.
On October 7, 2021, the Company issued 150,000 sharessigned an agreement with JonesTrading to transfer certain customers of its restricted common stock (the “Shares”)WPS to each of Anthony Palmeri and Gerard Losurdo, each new employees of MSCO, as part of their employment agreements. Mr. Palmeri and Mr. Losurdo each paidJonesTrading. In exchange, JonesTrading will pay the Company approximately $400,000 for their Shares, which was equal to 70%a percentage of the closing pricerevenue produced by those clients less any related expenses. The percentage paid to the Company related to this agreement will decline every year and the arrangement will end in October 2024. The financial impact related to this development cannot be determined as of the common stock as reported on Nasdaq on November 9, 2020. The Shares issued to Mr. Palmeri and Mr. Losurdo are subject to a three-year restriction on transfer commencing on the daydate of issuance. The issuance of the Shares were each approved by unanimous written consent of the Company's board of directors. The shares were issued to Mr. Palmeri and Mr. Losurdo as part of their employment agreements in accordance with Nasdaq Listing Rule 5635(c)(4). The Shares were issued without registration under the Securities Exchange Act of 1933, as amended in reliance upon the exemption provided in Section 4(a)(2) thereunder.
Other than the eventevents described above, there have been no material subsequent events that occurred during such period that would require disclosure in this reportReport or would be required to be recognized in the financial statements as of September 30, 2020.
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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the resultsdiscussion provides a narrative of our operationsfinancial performance and financial condition. This MD&A is provided as a supplement to, andcondition that should be read in conjunction with ourthe accompanying financial statements and accompanyingrelated notes to financial statements.
Overview
We are not historical facts, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
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Retail brokerage business through MSCO, a Delaware corporation and broker-dealer registered with the SEC
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Investment advisory services through SNXT, a New York corporation registered with the SEC as a RIA
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Insurance services through PW, a Texas corporation and licensed insurance agency
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Robo-advisory technology development through STCH, a Nevada limited liability company
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Prime brokerage services through WPS, a Delaware limited liability company and a broker-dealer registered with the SEC
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STXD, an inactive subsidiary headquartered in Bermuda
Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed-income markets. Market volatility, overall market conditions, interest rates, economic, political, and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants who include investors and competitors, impacting their level of participation in the financial markets. In addition, in periods of reduced financial market activity, profitability is likely to be adversely affected because certain expenses remain relatively fixed, including salaries and related costs, portions of communications costs and occupancy expenses. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.
COVID-19
Impact
Overview
The World Health Organization declared the spread of COVID-19 a worldwide pandemic. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.pandemic in March 2020. The COVID‑19 pandemic has adversely impacted the economic environment, leading to lower interest rates across the curve lower equity market valuations and heightened volatility in the financial markets. We are actively monitoring the impact of COVID-19 and the possible effects of the roll-out of various vaccines on our business, financial condition, liquidity, operations, employees, clients and business partners.
Financial Impact
In the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to near zero. This decline in interest rates has led to a decrease in our revenue from margin interest, marketing and distribution fees, and interest income and may continue to have a negative impact on these revenue streams in the foreseeable future.
Management Response
Operations
In response to the pandemic and for the protection of our employees, clients and business partners, we implemented remote work arrangements for nearly 100% of our employees, restricted business travel and temporarily closed some of our branch offices. With our ability to meet a vast majority of our clients' needs through our technology-based platforms and services, these arrangements did not materially affect our ability to maintain our business operations.
Expense Reduction
As of the date of this report,Report, we are actively involved in contract negotiations with key vendors to reduce many of our fixed costs.
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We do not believe any of the changes listeddescribed above will have a negative impact on the operations or financials of our business.
Liquidity and Capital Resources
The situation surrounding COVID-19 has not materially impacted our liquidity position or future outlook related to liquidity as we have been able to meet all obligations and believe we will be able to do so in the foreseeable future.
Conclusion
We note that the ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related lengthpossible effects of its impact on the global economy,roll-out of various vaccines, which are uncertain and cannot be predicted at this time. We are currently monitoring the COVID-19 situation and will continue to respond to meet the demands of our clients as well as protect our employees.
Significant Events
Non-Binding Letter of Intent with Tigress
On August 23, 2021, Siebert signed a non-binding letter of intent between Siebert and Tigress Holdings, LLC, a Delaware limited liability company (“Tigress Holdings”). The letter of intent memorializes the parties’ intention to enter into definitive written agreements pursuant to which (i) Tigress Holdings will transfer to Siebert limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests in Tigress Financial Partners, LLC, a Delaware limited liability company (“Tigress Financial”); and (ii) Siebert will transfer to Tigress Holdings limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests of Siebert’s wholly-owned subsidiary, WPS, and such number of shares of the Siebert’s common stock that shall represent an amount equal to the difference between the parties’ agreed valuation of Tigress Financial and WPS.
Partnership with JonesTrading and Termination of Goldman Sachs Clearing Arrangement
On August 30, 2021, GSCO notified WPS that the clearing arrangement with WPS will be terminated.
Due to the termination of WPS’s clearing arrangement with GSCO, substantially all of the revenue producing customers of WPS will transition to other prime service providers. We do not anticipate that impact of this development will materially adversely affect Siebert's results of operations for the year ended December 31, 2021; however, it will materially adversely affect Siebert's results of operations in future periods. For the nine months ended September 30, 2021, WPS contributed approximately 22% and 31% of the Company’s total revenue and pretax income, respectively. We anticipate the increase in revenue and pretax income from Siebert's other business lines in future periods will partially offset the reduction in WPS's revenue and pretax income associated with this development.
As a result of this development, we recorded a full impairment of the WPS customer relationships intangible asset, and WPS revenue, expenses, and institutional customer assets are expected to be significantly reduced in future periods.
On October 7, 2021, Siebert signed an agreement with JonesTrading to transfer certain customers of WPS to JonesTrading. In exchange, JonesTrading will pay Siebert a percentage of the revenue produced by those clients less any related expenses. The percentage paid to Siebert related to this agreement will decline every year and the arrangement will end in October 2024. We anticipate the amount Siebert will receive in relation to this agreement will partially offset the reduction in revenue and pretax income related to the development with GSCO.
JonesTrading is comprised of JonesTrading Institutional Services LLC (“JTIS”), JonesTrading Canada Inc. (“JTC”), and JonesTrading International Limited (“JTIL”). JonesTrading is a leading global equities and derivatives broker. Since 1975, JonesTrading has been a trusted, high-touch execution partner for institutional money managers and hedge funds. JonesTrading Institutional Services LLC is a Member of FINRA and SIPC.
OpenHand
On January 31, 2021, Siebert and OpenHand entered into a stock purchase agreement whereby we acquired an interest of 5% of OpenHand common stock for consideration of a total of $2,231,000 consisting of $850,000 in cash and 329,654 restricted shares of the Company’s common stock valued at $1,381,000 or $4.19 per share. Siebert and OpenHand intended to develop a subscription-based brokerage platform providing zero-commission trading for equity and option transactions and crediting its members daily with rebates of revenues generated by the clients, less operational expenses.
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The value of Siebert’s restricted stock was determined using the thirty-day trading average. Siebert agreed to register the shares issued to OpenHand by filing a selling shareholder registration statement. Siebert also received an option to purchase an additional 7.5% of OpenHand for approximately $4.5 million, based upon a $60 million valuation of OpenHand. This option expires 18 months after the launch of the OpenHand platform.
On August 18, 2021, Siebert and OpenHand agreed to terminate their working relationship. In connection therewith, Siebert and OpenHand amended and restated their January 31, 2021 stock purchase agreement to provide that Siebert would pay $850,000 in cash in exchange for 2% of the total outstanding common stock of OpenHand as of January 31, 2021, and receive a 15-month option to purchase an additional 2% of the outstanding common stock of OpenHand at an exercise price equal to a company valuation of $42.5 million. The parties agreed to rescind OpenHand’s purchase of the 329,654 restricted shares of Siebert’s common stock.
Expansion of Clearing Operations
In December 2020, MSCO was admitted as a member of Euroclear. The admission into Euroclear is a strategic step to enhance our clearing capabilities and to provide additional services to our clients, corporate services companies and counterparties. In addition, we are expanding our clearing services in the U.S. by acting as a correspondent clearing firm for other broker-dealers and anticipate being able to offer these services in 2021.
Hired New Leaders of Securities Finance Group
In November 2020, we hired Anthony Palmeri and Gerard Losurdo to lead our Securities Finance Group, which primarily consists of our stock borrow / stock loan and related services. Mr. Palmeri joined from JPMorgan Chase & Co. where he was an Executive Director, and Mr. Losurdo joined from TD Prime Services, LLC where, as a Managing Director, he led its Securities Lending and Equity Finance division.
Mr. Palmeri and Mr. Losurdo have continued to expand this business line and have added numerous counterparty relationships in both the securities lending and securities locate areas. For the three months ended September 30, 2021, our Securities Finance Group again achieved its highest quarterly revenue of approximately $3.5 million, which represents an increase of over 173% from the three months ended September 30, 2020.
Fin-Tech Partnership with InvestCloud
In May 2020, we announced a partnership with InvestCloud, a tech provider of flexible and fully integrated digital apps for financial services, to provide a variety of enhancements and upgrades to our online and mobile client experience. We are working to implement InvestCloud's full suite of applications, ranging from intuitive client-facing portals and mobile apps to back-office operational automation, as well as centralize our digital transformation into a single partner.
StockCross
Overview
Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online orand broker-assisted equity trading, securities lending, and equity stock plan services.
In January 2019, we acquired approximately 15% ownership of StockCross which was accounted for under the equity method.StockCross. Effective January 1, 2020, we acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of our common stock, and StockCross was merged with and into MSCO. As of January 1, 2020, the business and operations of StockCross became part of MSCO, and all clearing and other services provided by StockCross arewere performed by MSCO. In addition, as of January 1, 2020, our equity method investment in
StockCross was eliminated.
We have completed the date of our acquisitionmerger of StockCross Siebert and StockCross were entities under common control of the Gebbia Family. The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for all periods presented in the financial statements. This presentation is reflected in the section below comparing statements of income and statements of financial condition to prior periods.
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Operationally, the majoritymerger resulted in the expansion of our existing items within our statementsclient services areas and provided additional resources for the combined client base without any material loss of financial condition such as receivables from broker-dealers and clearing organizations and notes payable – related party.
Effective December 1, 2019, we acquired all ofMarch 16, 2021, MSCO received approval to become an IRA nonbank custodian and trustee. MSCO successfully completed the issuedcustodian conversion from StockCross, and outstanding membership interests of WP, a prime brokerageMSCO continues to offer IRA services provider, for a cash consideration of approximately $7.1 million, and WP became a wholly-owned subsidiary of Siebert.
Client Account and Activity Metrics
The following tables set forth metrics we use in analyzing our client account and activity trends for the periods indicated. Retail customers are customers who have accounts with MSCO; institutional customers were acquired from WP as part of the acquisition effective December 1, 2019.
Client Account Metrics – Total Assets Under Management
| As of September 30, | ||||||||
| 2020 | 2019 | |||||||
| Total assets under management (in billions) | $ | 14.5 | $ | 12.5 | ||||
As of | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Retail and institutional customer net worth (in billions) | $ | 17.6 | $ | 16.2 | ||||
Client Account Metrics – Retail Customers
As of | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Retail customer net worth (in billions) | $ | 15.7 | $ | 14.6 | ||||
Retail customer margin debit balances (in billions) | $ | 0.6 | $ | 0.5 | ||||
Retail customer credit balances (in billions) | $ | 0.8 | $ | 0.7 | ||||
Retail customer money market fund value (in billions) | $ | 0.8 | $ | 0.8 | ||||
Retail customer accounts | 114,155 | 110,699 | ||||||
| As of September 30, | ||||||||
| 2020 | 2019 | |||||||
| Retail customer net worth (in billions) | $ | 13.1 | $ | 12.5 | ||||
| Retail customer margin debit balances (in billions) | $ | 0.4 | $ | 0.4 | ||||
| Retail customer credit balances (in billions) | $ | 0.6 | $ | 0.6 | ||||
| Retail customer money market fund value (in billions) | $ | 0.7 | $ | 0.6 | ||||
| Retail customer accounts | 110,044 | 105,470 | ||||||
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Retail customer net worth represents the total value of securities and cash in the retail customer accounts after deducting margin debits
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Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions
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Retail customer credit balances represents client cash held in brokerage accounts
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Retail customer money market fund value represents all retail customers accounts invested in money market funds
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Retail customer accounts represents the number of retail customers
Client Account Metrics – Institutional Customers
As of | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Institutional customer net worth (in billions) | $ | 1.9 | $ | 1.6 | ||||
As of September 30, 2020 | ||||
| Institutional customer net worth (in billions) | $ | 1.4 | ||
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Institutional customer net worth represents the total value of securities and cash in the institutional customer accounts after deducting margin debits and short positions. We did not have institutional customers until our purchase of WP in December 2019.
Client Activity Metrics – Retail Customers
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||
Total retail trades | 94,705 | 112,264 | 348,608 | 353,580 | |||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Total retail trades | 112,264 | 75,969 | 353,580 | 230,267 | ||||||||||||
| Average commission per retail trade | $ | 15.55 | $ | 17.38 | $ | 15.32 | $ | 18.35 | ||||||||
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Total retail trades represents retail trades that generate commissions
Statements of Income and Financial Condition
Statements of Income for the Three Months Ended September 30, 20202021 and 2019
Revenue
Commissions and fees for the three months ended September 30, 20202021 were $4,679,000$4,019,000 and increaseddecreased by $2,406,000$660,000 from the corresponding period in the prior year, primarily due to the addition of WP’s commissions and feesa decrease in 2020.
Interest, marketing and distribution fees for the three months ended September 30, 20202021 were $2,311,000$3,435,000 and decreasedincreased by $1,601,000$209,000 from the corresponding period in the prior year, primarily due to an increase in our margin financing and institutional short stock interest revenue. Note that for the decliningperiods presented, we combined revenue from interest rate environment, partially offset by the addition of WP’sincome and revenue from margin interest, incomemarketing and distribution fees as these revenue streams are similar in 2020.nature. These revenue streams were historically disaggregated; however, we are combining these revenue streams as this most accurately presents the statements of income.
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Principal transactions for the three months ended September 30, 20202021 were $2,342,000$3,924,000 and increased by $15,000 from the corresponding period in the prior year.
Market making for the three months ended September 30, 20202021 was $423,000$1,514,000 and increased by $93,000$1,091,000 from the corresponding period in the prior year, primarily due to favorable market conditions and customer growth during the three months ended September 30, 2020.
Stock borrow / stock loan for the three months ended September 30, 20202021 was $1,267,000$3,465,000 and increased by $918,000$2,198,000 from the corresponding period in the prior year, primarily due to the organic growth of the business, the addition of key personnel, expansion of our stock locate function,revenues, and strong market conditions.
Advisory fees for the three months ended September 30, 20202021 were $305,000$441,000 and increased by $94,000$136,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line which included revenue growth related to our Robo-Advisor.
Other income for the three months ended September 30, 20202021 was $333,000$253,000 and increaseddecreased by $43,000$80,000 from the corresponding period in the prior year, primarily due to an increasea reduction in miscellaneous account fees.
Operating Expenses
Employee compensation and benefits for the three months ended September 30, 20202021 were $6,584,000$9,294,000 and increased by $1,775,000$2,710,000 from the corresponding period in the prior year, primarily due to increased commission payouts corresponding to the increase in principal transactions, market making, and stock borrow / stock loan revenue in the third quarter of 2021.
Clearing fees, including execution costs for the three months ended September 30, 2021 were $986,000 and decreased by $284,000 from the corresponding period in the prior year, primarily due to the addition of WP salariesdecrease in clearing costs corresponding to the decrease in institutional commissions.
Technology and commission payouts in 2020.
Other general and administrative expenses for the three months ended September 30, 2021 were $927,000 and increased by $472,000 from the corresponding period in the prior year, primarily due to the additionrecovery of WP’s operationstraveling activities and the increase in 2020.
Data processing expenses for the three months ended September 30, 20202021 were $1,322,000$787,000 and increased by $881,000$3,000 from the corresponding period in the prior year.
Rent and occupancy expenses for the three months ended September 30, 2021 were $441,000 and decreased by $253,000 from the corresponding period in the prior year, primarily due to a decrease in rent related to our transition out of legacy office space into more cost-efficient locations.
Professional fees for the three months ended September 30, 2021 were $759,000 and decreased by $1,000 from the corresponding period in the prior year.
Depreciation and amortization expenses for the three months ended September 30, 2021 were $354,000 and decreased by $14,000 from the corresponding period in the prior year, primarily due to the additionimpairment of WP’s technology operations in 2020 as well as development work with InvestCloud related to our online platform and Robo-Advisor.
Referral fees for the three months ended September 30, 20202021 were $455,000 and decreased by $413,000 from the corresponding period in the prior year, primarily due to a reduction in office expense as well as travel-related expenses due to COVID-19.
Impairment loss for the three months ended September 30, 2020 were $760,000 and decreased by $23,000 from the corresponding period in the prior year, primarily due to a reduction in legal fees.
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Interest expense for the three months ended September 30, 2020 were $154,0002021 was $86,000 and decreased by $3,000 from the corresponding period in the prior year.
Advertising expense for the three months ended September 30, 2021 was $13,000 and increased by $154,000$13,000 from the corresponding period in the prior year, primarily due to the commission payouts to other institutional brokers for WP in 2020.
Provision (Benefit) For (From) Income Taxes
Provision for income taxes for the three months ended September 30, 20202021 was $486,000, a decrease of income tax expense of $835,000$265,000 and increased by $751,000 from the corresponding period in the prior year,year. The increase was driven by primarily due totwo factors: (i) the three months ended September 30, 2020 was positively impacted by a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claimwhich permitted a refund of previously paid taxes coupled withand the recognition of additional deferred tax assets for federal net operating losses as we determined that we can utilizeand (ii) an increase in pretax earnings for the three months ended September 30, 2021 which resulted in additional net operating losses under Section 382.
Statements of Income for the Nine Months Ended September 30, 20202021 and 2019
Revenue
Commissions and fees for the nine months ended September 30, 20202021 were $15,149,000$15,352,000 and increased by $8,017,000 from the corresponding period in the prior year, primarily due to the addition of WP’s commissions and fees in 2020.
Interest, incomemarketing and distribution fees for the nine months ended September 30, 2020 was $3,155,0002021 were $10,517,000 and decreased by $262,000$368,000 from the corresponding period in the prior year, primarily due to the decliningreduction of the 12b-1 fees from money market funds and interest rate environment,received on bank deposits, partially offset by an increase in the addition of WP’sinterest from our institutional business. The reduction in interest and 12b-1 fee income was primarily due to lower short-term interest rates in the COVID-19 environment. Note that for the periods presented, we combined revenue from interest income and revenue from margin interest, marketing and distribution fees as these revenue streams are similar in 2020.
Principal transactions for the nine months ended September 30, 2021 were $12,279,000 and increased by $4,153,000 from the corresponding period in the prior year, primarily due to strong market conditions during the first nine months of 2021.
Market making for the nine months ended September 30, 20202021 was $1,508,000$4,886,000 and increased by $205,000$3,378,000 from the corresponding period in the prior year, primarily due to favorable market conditions and customer growth during 2020.
Stock borrow / stock loan for the nine months ended September 30, 20202021 was $2,482,000$7,552,000 and increased by $1,129,000$5,070,000 from the corresponding period in the prior year, primarily due to the organic growth of the business, the addition of key personnel, expansion of our stock locate function,revenues, and strong market conditions.
Advisory fees for the nine months ended September 30, 20202021 were $810,000$1,200,000 and increased by $238,000$390,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line which included revenue growth related to our Robo-Advisor.
Other income for the nine months ended September 30, 20202021 was $1,035,000$982,000 and increaseddecreased by $402,000$53,000 from the corresponding period in the prior year primarily due to the addition of WP’s businessa reduction in 2020 and an increase in miscellaneous account fees.
Operating Expenses
Employee compensation and benefits for the nine months ended September 30, 20202021 were $20,489,000$27,205,000 and increased by $6,677,000$6,716,000 from the corresponding period in the prior year, primarily due to the addition of WP salaries and commission payouts in 2020 as well as increased commission payouts corresponding to the increase in commissions and fees, principal transaction revenue.
Clearing fees, including execution costs for the nine months ended September 30, 20202021 were $3,907,000$4,128,000 and increased by $1,582,000$221,000 from the corresponding period in the prior year, primarily due to the addition of WP’s operationsan increase in 2020.
Technology and communications expenses for the nine months ended September 30, 20202021 were $3,256,000$3,537,000 and increased by $1,992,000$281,000 from the corresponding period in the prior year, primarily due to the addition of WP’s technology operations in 2020 as well as development work with InvestCloud related to our online platform and Robo-Advisor.platform.
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Other general and administrative expenses for the nine months ended September 30, 20202021 were $1,710,000$2,885,000 and increased by $1,175,000 from the corresponding period in the prior year, primarily due to regulatory fees, increase in office expenses, and the increase in exchange and regulatory fees related to incremental trading activities.
Data processing expenses for the nine months ended September 30, 2021 were $2,279,000 and decreased by $1,077,000$108,000 from the corresponding period in the prior year, primarily due to a reduction in our service bureau costs.
Rent and occupancy expenses for the nine months ended September 30, 2021 were $1,481,000 and decreased by $638,000 from the corresponding period in the prior year, primarily due to a decrease in rent related to our transition out of legacy office space into more cost-efficient locations.
Professional fees for the nine months ended September 30, 2021 were $1,951,000 and decreased by $208,000 from the corresponding period in the prior year, primarily due to a decrease in legal fees incurred in 2020 related to the StockCross and WPS acquisitions.
Depreciation and amortization expenses for the nine months ended September 30, 2021 were $1,120,000 and decreased by $73,000 from the corresponding period in the prior year, primarily due to a decrease in the purchases of software in 2021.
Referral fees for the nine months ended September 30, 2021 were $1,134,000 and increased by $707,000 from the corresponding period in the prior year, primarily due to the expansion of our Jersey City branch office and the establishment of our Miami branch office occurring in the corresponding period in the prior year as well as a reduction in travel related expenses in 2020 due to COVID-19.
Impairment loss for the nine months ended September 30, 2020 were $2,387,0002021 was $699,000 and increased by $900,000 from the corresponding period in the prior year, primarily due to increased technology costs related to clearing operations.
Interest expense for the nine months ended September 30, 20202021 was $253,000$278,000 and increased by $169,000$25,000 from the corresponding period in the prior year, primarily due to the interest on the promissory noteline of credit with East West Bank.
Advertising expense for the nine months ended September 30, 2021 was $13,000 and increased by $13,000 from the corresponding period in the prior year, primarily due to finance part of the acquisition of WP.
Provision (Benefit) For (From) Income Taxes
Provision for income taxes for the nine months ended September 30, 20202021 was $39,000$1,484,000 and decreasedincreased by $1,326,000$1,445,000 from the corresponding period in the prior year, primarily due to a discrete tax benefit relatedhigher pretax earnings in the first nine months of 2021. Refer to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled with the recognition ofNote 15 – Income Taxes for additional deferred tax assets for federal net operating losses as we determined that we can utilize additional net operating losses under Section 382.
Statements of Financial Condition as of September 30, 20202021 and December 31, 2019
Assets
Assets as of September 30, 20202021 were $673,452,000$1,247,204,000 and increaseddecreased by $135,385,000$125,783,000 from December 31, 2019,2020, primarily due to the increasea decrease in securities borrowed and cash and securities segregated for regulatory purposes.
Liabilities
Liabilities as of September 30, 20202021 were $637,134,000$1,204,581,000 and increaseddecreased by $132,202,000$130,420,000 from December 31, 2019,2020, primarily due to the increasea decrease in securities loaned and payables to customers.
Liquidity and Capital Resources
Overview
In terms of the overall performance of the business in relation to liquidity, for the periods presented we have had strong operating cash flows as well as a reasonable and predictable level of investing activities which are mostly related to the purchase of OpenHand common stock, software and internal technology development, as well as miscellaneous leasehold improvements and equipment.
Despite lower interest rates and the effects of COVID-19, we have performed well and have sufficient cash flows to meet our liquidity needs over the periods presented. We believe our ability to generate cash flows will continue into the foreseeable future.
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We have a variety of sources of borrowing capability such as a short term overnight demand borrowing capability with BMO Harris Bank, notes payable to Gloria E. Gebbia, and a line of credit with East West Bank.
The indicators of our liquidity are cash and cash equivalents, and as of the date of this Report, there are no known or material events that would require us to use large amounts of our liquid assets to cover expenses. As of September 30, 2021, we had a sufficient amount of remaining availability on our various credit lines to facilitate incremental capital needs.
We believe that our operating cash flows, cash and cash equivalents, borrowing capacity, under the notes payable – related party, line of credit with East West Bank, and overall access to capital markets are sufficient to fund our operating, investing and financing requirements for the next twelve months.
Cash and Cash Equivalents
Our cash and cash equivalents are unrestricted and are used to fund our working capital needs. Our cash and cash equivalents as of September 30, 2021 and December 31, 2020 were $4.3 million and $3.6 million, respectively.
Net Capital, Reserve Accounts, Segregation of Funds, and Special Reserve Account
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) and the Customer Protection Rule (15c3-3) of the Securities Exchange Act of 1934. Under the alternate method permitted by this rule, net1934 and maintains capital as defined, shall not be less than the lowerand segregated cash reserves in excess of $1 million or 2% of aggregate debit items arising from customer transactions. Since MSCO’s aggregate debitsregulatory requirements. Requirements under these regulations may fluctuate, MSCO’s minimumvary; however, MSCO has adequate reserves and continency funding plans in place to sufficiently meet any regulatory requirements. In addition to net capital requirements, may also fluctuate from period to period. In addition,as a self-clearing broker-dealer, MSCO is subject to Customer Protection Rule 15c3-3cash deposit and collateral requirements with clearing houses, such as the DTCC and Options Clearing Corporation, which requires segregationmay fluctuate significantly from time to time based upon the nature and size of funds in a special reserve account for the exclusive benefit of customers.
WPS, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn, or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. WPWPS is also subject to the CFTC's minimum financial requirements which require that WPWPS maintain net capital, as defined, equal to the greater of its requirements under Regulation 1.17 under the Commodity Exchange Act or Rule 15c3-1.
For the three and nine months ended September 30, 2021 and 2020, MSCO and WPS had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 17 – Capital Requirements”Requirements for moreadditional detail on our capital requirements.
Sources of Liquidity
Line of Credit with East West Bank
On July 22, 2020, we entered into a Loan and Security Agreement with East West Bank. In accordance with the terms of this agreement, we have the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. Our obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, Gloria E. Gebbia and a trust for which they are mutually co-trustees.
As of September 30, 2020,2021, we have drawn down approximately $4.9a $5.0 million term loan under this agreement. See “Note 9agreement and have an outstanding balance of $3.9 million. We have an additional $5.0 million remaining to draw down from this line of credit. Refer to Note 11 – Long-Term Debt”Debt for moreadditional detail on this agreement.
Future remaining annual minimum payments for the line of credit with East West Bank as of September 30, 2021 were as follows:
Amount | ||||
2021 | $ | 250,000 | ||
2022 | 998,000 | |||
2023 | 998,000 | |||
2024 | 1,661,000 | |||
Total | $ | 3,907,000 | ||
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Overnight Financing
We have an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank as of September 30, 2021. As of December 31, 2020, in addition to the $15 million line of credit with BMO Harris Bank, we had a $15 million line of credit with Texas Capital Bank, which we did not renew as of September 30, 2021. The removal of this line of credit did not impact our ability to meet our liquidity requirements.
As of September 30, 2021, we had no outstanding loan balance and there are no commitment fees or other restrictions on the line of credit. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.
Notes Payable – Related Party
As of September 30, 2021 and December 31, 2020, we had $5 million and $5.2 million, respectively, in notes payable to Gloria E. Gebbia, all of which have maturity dates between 2021 and 2022. We have sufficient liquidity to meet all maturities of these notes. Refer to Note 12 – Notes Payable - Related Party for additional detail.
Leases
As of September 30, 2021, the remaining balance of our lease payments during 2021 for operating leases with initial terms of greater than one year was $0.4 million. The remaining balance of our lease payments for these leases after 2021 was $3.1 million.
Off-Balance Sheet Arrangements
We enter into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and are, therefore, subject to varying degrees of market and credit risk.
In the normal course of business, our customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose us to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and we have to purchase or sell the financial instrument underlying the contract at a loss.
Our customer securities activities are transacted on either a cash or margin basis. In margin transactions, we extend credit to our customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, we execute and clear customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. As of September 30, 2021, we had margin loans extended to our customers of approximately $1.2 billion, of which $85.4 million is within the line item “Receivables from customers” on the statements of financial condition.
Such transactions may expose us to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy obligations, we may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
We seek to control the risks associated with our customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines which meet or exceed regulatory requirements. We monitor required margin levels daily and pursuant to such guidelines, require customers to deposit additional collateral or to reduce positions when necessary.
Our customer financing and securities settlement activities may require us to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy customer obligations. We seek to mitigate this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, we establish credit limits for such activities and continuously monitor compliance.
Our securities lending transactions are subject to master netting agreements with other broker-dealers; however, amounts are presented gross in the statements of financial condition. We further mitigate risk by using a program with a clearing organization which guarantees the return of cash to us as well as using industry standard software to ensure daily changes to market value are continuously updated and any changes to collateralization are immediately covered.
There were no material losses for unsettled customer transactions for the three and nine months ended September 30, 2021 and 2020.
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Uncertain Tax Positions
We account for uncertain tax positions in accordance with the authoritative guidance issued under ASC 740-10, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements.
We recognize interest and penalties related to unrecognized tax benefits on the provision for income taxes line on the statements of income. Accrued interest and penalties would be included on the related tax liability line on the statements of financial condition.
As of September 30, 2021 and December 31, 2020, we recorded an uncertain tax position of $1,103,000 and $1,105,000, respectively, related primarily to our 2017 to 2019 amended tax returns, as the anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold.
Long Term Contracts
Contract with NFS
Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. The amendment also provides for an early termination fee; however, as of September 30, 2020 were as follows:
| Year | Amount | |||
2020 | $ | 606,000 | ||
2021 | 1,403,000 | |||
2022 | 755,000 | |||
2023 | 543,000 | |||
2024 | 56,000 | |||
Total | $ | 3,363,000 | ||
Prepaid Service Contract
We have entered into an agreement with InvestCloud for development work related to our online platform as well as Robo-Advisor.platform. As part of this agreement, we have an obligation to pay for the license fees associated with the InvestCloud Platform for a three yearthree-year term. See “NoteRefer to Note 5 – Prepaid Service Contract”Contract for moreadditional detail.
Related Party Disclosures
During the course of business, we enter into various agreements and transactions are cleared through our clearing firms on a fully disclosed basis. If customers do not fulfill their contractual obligations, we may incur loss in connection with the purchase or sale of securities at prevailing market pricesrelated parties. Refer to satisfy customer obligations. We regularly monitor the activity in customer accountsNote 20 – Related Party Disclosures for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions for the nine months ended September 30, 2020 and 2019.
Fair Value Measurements
We have concludedsecurities that are valued using the fair value framework under ASC 820 within our assets and liabilities as of September 30, 2020,2021 and December 31, 2020. The majority of these assets are level 1 U.S. government securities and equity securities as well as level 2 equity securities in the line item “Securities owned, at fair value” on the statements of financial condition. The liabilities consist of relatively small amounts of level 2 equity securities in the line item “Securities sold, not yet purchased, at fair value.” Refer to Note 6 – Fair Value Measurements for additional detail.
Impairment
We have concluded as of September 30, 2021, there havehas been no impairmentsimpairment to the carrying value of Siebert’s goodwill and other tangible assets. However, for the three and nine months ended September 30, 2021, there was a full impairment of the WPS customer relationships intangible assets.
Segment
We concluded as of September 30, 2020,2021, Siebert is comprised of a single operating segment based on the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of Siebert from a consolidated perspective.
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Critical Accounting Policies
Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in “Item Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”in our 20192020 Form 10-K. There have been no changes to our critical accounting policies or estimates as of September 30, 2020.
Subsequent Events
On October 31, 2021, the notes payable of $2 million to Gloria E. Gebbia was renewed with a maturity of December 31, 2021.
On October 7, 2021, Siebert signed an agreement with JonesTrading to transfer certain customers of WPS to JonesTrading. In exchange, JonesTrading will pay Siebert a percentage of the revenue produced by those clients less any related expenses. The percentage paid to Siebert related to this agreement will decline every year and the arrangement will end in October 2024. The financial impact related to this development cannot be determined as of the date of this Report.
Other Items
On September 17, 2021, Siebert’s shareholders approved the Siebert Financial Corp. 2021 Equity Incentive Plan (the “Plan”) at Siebert’s 2021 Annual Meeting of Shareholders. The Plan provides for the grant of stock options, restricted stock, and other equity awards of Siebert’s common stock to employees, officers, consultants, directors, and other service providers. There are recognized3 million shares reserved under the Plan, and Siebert issued no securities under the Plan for the three and nine months ended September 30, 2021.
New Accounting Standards
We have determined that all accounting standards and policies adopted in the nine months ended September 30, 2021 did not have a tax position when,material impact on our financial statements. Refer to Note 2 – New Accounting Standards for additional detail.
Regulatory Matters
On July 14, 2021, StockCross entered into a Letter of Acceptance, Waiver, and Consent with FINRA in management’s judgment, it is more likely than not that the position will be sustained upon examinationconnection with alleged excessive trading and suitability violations by a taxing authority. Forregistered representative of StockCross in a tax position that meetscustomer’s account, supervisory failures to comply with supervisory requirements relating to certain equity and options and stock lending transactions, and certain record keeping requirements. Pursuant to the more-likely-than-not recognition threshold,consent, MSCO agreed to a censure, pay a fine of $250,000, and made an undertaking to retain an independent consultant to conduct a comprehensive review of MSCO’s compliance with suitability rules in connection with solicited equity and options transactions, as well as possession-or-control requirements in connection with the tax benefit is measured asfirm’s stock loan business.
On July 9, 2021, StockCross entered into a Consent Order with the largest amount that is judgedCalifornia Department of Financial Protection and Innovation in connection with alleged supervisory failures relating to havethe sale of Unit Investment Trusts to six customers. Pursuant to the Consent Order, StockCross agreed to desist and refrain from violations of California law relating to supervision by broker-dealers, to make a greater than 50% likelihoodpayment of being realized upon ultimate settlement with a taxing authority.
The foregoing matters were related to activities that occurred prior to Siebert’s acquisition of 2021. InStockCross on January 1, 2020.
During the event thatthree months ended June 30, 2021, we conclude that webooked an accrual of $250,000 for the FINRA fine and an accrual of $100,000 for the California administrative costs, which are subject to interest and/or penalties arising from uncertain tax positions, we will present interestboth within the line item “Other general and penalties as a componentadministrative” in the statements of income taxes.
As of September 30, 2020 and December 31, 2019. The majority of the assets2021, all other legal matters are level 1 U.S. government securities and equity securities as well as level 2 equity securities that are in the line items “Cash and securities segregated for regulatory purposes” and “Securities owned, at fair value.” The liabilities consist of relatively smallwithout merit or involve amounts of level 1 and level 2 equity securities in the line item “Securities sold,which would not yet purchased, at fair value.” See “Note 6 – Fair Value Measurements” for more detail.
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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.
Customer transactions are cleared through clearing brokers on a fully disclosed basis and are also self-cleared by MSCO. If customers do not fulfill their contractual obligations any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations may be incurred by the Company. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions in the last five years.
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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 reportReport pursuant to Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the Executive Vice President / Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Executive Vice President / Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based on its evaluation, our management, including our Executive Vice President / Chief Financial Officer, concluded that as of the end of the period covered by this report,Report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) was identified during the end of the period covered by this report,Report, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 results of operations or financial position of the Company.
In addition to the other information set forth in this report,Report, investors should carefully consider the risk factors discussed in Part I, - Item 1A - Risk Factors, in our 20192020 Form 10-K, as supplemented by the risk factors included in our Quarterly Report on Form 10-Q for the period ended March 31, 2020.10-K. Each of such risk factors could materially affect our business, financial position, and results of operations. Other than the supplemental risk factorsfactor provided in the Quarterly Report on Form 10-Q for the period ended March 31, 2020,below, there have been no material changes from the risk factors disclosed in our 20192020 Form 10-K.
There may be a limited public market for more detail onour Common Stock; Volatility.
11,582,785 shares of our restricted common stock, issuedor approximately 37% of our shares of our common stock outstanding, are currently held by non-affiliates as of November 12, 2021. A stock with a small number of shares held by non-affiliates, known as the “float,” will generally be more volatile than a stock with a large float. Although our common stock is traded on November 10, 2020, subsequent to the end of the reporting period.
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Exhibit No. | Description of Document | |
10.16 | Amendment to Fully Disclosed Clearing Agreement by and between Muriel Siebert & Co., Inc. and National Financial Services LLC | |
10.17 | Guaranty Agreement, dated as of August 1, 2021, between Siebert Financial Corp. and National Financial Services LLC | |
10.18 | Amendment No. 1 to Common Stock Purchase Agreement, dated as of August 18, 2021, between Siebert Financial Corp. and OpenHand Holdings, Inc. | |
31.1 | Certification of Andrew H. Reich pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized.
SIEBERT FINANCIAL CORP. | |||
By: | /s/ Andrew H. Reich | ||
Andrew H. Reich | |||
Executive Vice President, Chief Operating Officer, | |||
Chief Financial Officer, and Secretary | |||
(Principal executive, financial and accounting officer) | |||
Dated: November | |||
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