10-Q 1 a52325671.htm SIEBERT FINANCIAL CORP. 10-Q

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, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from ____________________________ to __________________________
| Commission file number |  | 0-5703

Siebert Financial Corp.
(Exact Name of Registrant as Specified in its Charter)

New York |  | 11-1796714
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

120 Wall Street, New York, NY 10005
(Address of Principal Executive Offices) (Zip Code)

(212) 644-2400
(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock - $0.01 par value | SIEB | The Nasdaq Capital Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ | Accelerated filer ☐
Non-accelerated filer ☒ | Smaller reporting company ☒
| Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 16, 2020, there were 30,953,710 shares of the registrant’s common stock.

SIEBERT FINANCIAL CORP.
INDEX

PART I - FINANCIAL INFORMATION | 1
| ITEM 1. FINANCIAL STATEMENTS | 1
|  | CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | 1
|  | CONDENSED CONSOLIDATED STATEMENTS OF INCOME | 2
|  | CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | 3
|  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | 4
|  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 5
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 27
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 37
| ITEM 4. CONTROLS AND PROCEDURES | 38
PART II - OTHER INFORMATION | 39
| ITEM 1. LEGAL PROCEEDINGS | 39
| ITEM 1A. RISK FACTORS | 39
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 39
| ITEM 6. EXHIBITS | 40
|  | SIGNATURES | 41

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)

|  | 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 |

*Statement of financial condition as of December 31, 2019 represents the pro forma combination of Siebert and StockCross balances. See “Note 3 – Acquisitions” for additional detail.
**Shares outstanding as of December 31, 2019 represents the combined total of the Company’s shares outstanding and the shares issued for the Company’s acquisition of StockCross. See “Note 1 – Organization and Basis of Presentation” for additional detail.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
- 1 -

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

|  | Three Months Ended 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.
- 2 -

SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited)

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

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

|  | 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.
- 4 -

SIEBERT FINANCIAL CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization
Overview
Siebert Financial Corp., a New York corporation incorporated in 1934, is a holding company that conducts its retail brokerage business through its wholly-owned subsidiary, Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and registered broker-dealer, its investment advisory business through its wholly-owned subsidiary, Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the U.S. Securities and Exchange Commission (“SEC”) as a Registered Investment Adviser under the Investment Advisers Act of 1940, as amended, and its insurance business through its wholly-owned subsidiary, Park Wilshire Companies, Inc. (“PWC”), a Texas corporation and licensed insurance agency. Siebert conducts operations through its wholly-owned subsidiary, Siebert Technologies, LLC. (“STCH”), a Nevada limited liability company and developer of robo-advisory technology. Siebert offers prime brokerage services through its wholly-owned subsidiary, WPS Prime Services, LLC, (“WP”), a Delaware limited liability company and a broker-dealer registered with the SEC. Siebert also owns StockCross Digital Solutions, Ltd. (“STXD”), an inactive subsidiary headquartered in Bermuda. For purposes of this Quarterly Report on Form 10-Q, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PWC, STCH, WP, and STXD collectively, unless the context otherwise requires.
The Company is headquartered in New York, NY, with primary operations in New Jersey, Florida, and California. The Company has 16 branch offices throughout the U.S. and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock, par value $.01 per share, trades on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates in the securities brokerage and asset management industry and has no other reportable segments. All of the Company's revenues for the nine months ended September 30, 2020 and 2019 were derived from its operations in the U.S.
As of September 30, 2020, the Company is comprised of a single operating segment based on the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of the Company from a consolidated perspective.
WPS Prime Services, LLC
As previously disclosed in a Current Report on Form 8-K filed on June 26, 2020, on June 22, 2020, the Company and WPS Acquisitions, LLC entered into an agreement pursuant to which the Company at closing would have sold all of the member interests in WP to WPS Acquisitions, LLC for a purchase price of $7.3 million. As reported in a Current Report on Form 8-K filed on July 30, 2020, effective July 24, 2020, the agreement was terminated by the Company.
Acquisition of StockCross
As previously disclosed in a Current Report on Form 8-K filed on January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross Financial Services, Inc. (“StockCross”). Subsequently, as previously disclosed in a Current Report on Form 8-K filed on January 7, 2020, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of the Company’s common stock. Effective January 1, 2020, StockCross was merged with and into MSCO, and as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
Change in Reporting Entity
As of the date of the Company’s acquisition of StockCross, the Company and StockCross were entities under common control of Gloria E. Gebbia, the Company’s principal stockholder, and members of her immediate family (collectively, the “Gebbia Family”). The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for all periods presented in the unaudited condensed consolidated financial statements (“financial statements”). See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.
- 5 -

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 of the date of the filing of this report, all of the Company’s branch offices have been re-opened while maintaining compliance with federal, state and local mandates and guidelines. The Company has taken significant steps to ensure that its employees and customers are operating in a safe environment by implementing measures such as social distancing, sanitizing workstations, temperature checks, requiring masks, and alternating staff. The impact from the COVID-19 pandemic has caused the revenue and income of the Company to decrease; however, the Company has implemented various initiatives to offset this decline.
The Company is actively monitoring the impact of COVID-19 on the Company’s business, financial condition, liquidity, operations, employees, clients and business partners. Based on management’s assessment as of September 30, 2020, the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.
See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional detail on COVID-19 and its impact on the Company.
Basis of Presentation
The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). The financial statements include the accounts of Siebert and its wholly-owned subsidiaries and upon consolidation, all intercompany balances and transactions are eliminated. The U.S. dollar is the functional currency of the Company and numbers are rounded for presentation purposes.
Significant Accounting Policies
The Company’s significant accounting policies are included in “Note 2 – Summary of Significant Accounting Policies” in the Company’s 2019 Form 10-K. The following changes to the Company’s significant accounting policies as of September 30, 2020 are primarily due to the acquisition of StockCross. Other than the updates indicated below and in “Note 2 – New Accounting Standards,” there have been no significant changes to the Company’s significant accounting policies.
Cash and Securities Segregated For Regulatory Purposes
MSCO is subject to Exchange Act Rule 15c3-3, referred to as the “Customer Protection Rule,” which requires segregation of funds in a special reserve account for the exclusive benefit of customers. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined. See “Note 15 – Capital Requirements” for additional detail.
Receivables From and Payables To Customers
Accounts receivable from and payable to customers include amounts due and owed on cash and margin transactions. Securities owned by customers are held as collateral for receivables. Receivables from customers are reported at their outstanding principal balance, adjusted for any allowance for doubtful accounts. An allowance is established when collectability is not reasonably assured. When the receivable from a brokerage client is considered to be impaired, the amount of impairment is generally measured based on the fair value of the securities acting as collateral, which is measured based on current prices from independent sources such as listed market prices or broker-dealer price quotations. Securities beneficially owned by customers, including those that collateralize margin or other similar transactions, are not reflected in the statements of financial condition. No valuation allowance for doubtful accounts was necessary as of September 30, 2020 and December 31, 2019.
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Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Accounts receivable from and payable to broker-dealers and clearing organizations includes amounts due from / to introducing broker-dealers, fail-to-deliver and fail-to-receive items, and amounts receivable for unsettled regular-way transactions. Deposits with broker-dealers and clearing organizations include amounts held on deposit with broker-dealers and clearing organizations and are included in the line item “Deposits with broker-dealers and clearing organizations.”
MSCO customer transactions for the nine months ended September 30, 2020 were both self-cleared and cleared on a fully disclosed basis through National Financial Services Corp. (“NFS”). MSCO customer transactions for the nine months ended September 30, 2019 were cleared on a fully disclosed basis through NFS and StockCross, the former of which was an affiliate. As of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
The Company operates on a month to month basis with its broker-dealers and clearing organizations and their fees are offset against the Company's revenues on a monthly basis. As of September 30, 2020, the Company’s cash clearing deposits with NFS were $50,000. As of December 31, 2019, MSCO’s cash clearing deposits with NFS and StockCross were $50,000 and $75,000, respectively. Upon the closing of the Company’s acquisition of StockCross on January 1, 2020, all MSCO deposits with StockCross were eliminated. As of September 30, 2020 and December 31, 2019, MSCO had deposits with and other non-current receivables from multiple broker-dealers and clearing organizations of approximately $2.1 million and $1.9 million, respectively.
WP’s customer transactions clear on a fully disclosed basis through two clearing broker-dealers, The Goldman Sachs Group, Inc. (“Goldman Sachs”) and Pershing LLC (“Pershing”). Amounts payable to broker-dealers and clearing organizations are offset against amounts receivables from broker-dealers and clearing organizations. Receivables from these broker-dealers and clearing organizations are subject to clearing agreements and include the net receivable from net monthly revenues as well as cash on deposit. As of both September 30, 2020 and December 31, 2019, WP’s cash clearing deposits with Goldman Sachs and Pershing were approximately $2 million and $1 million, respectively.
The Company evaluates receivables from broker-dealers and clearing organizations and other receivables for collectability noting no amount was considered uncollectable as of September 30, 2020 and December 31, 2019. No valuation allowance is recognized for these receivables as the Company does not have a history of losses from these receivables and does not anticipate losses in the future. See “Note 11 – Revenue Recognition” for additional detail on the accounting policies for the revenue related to these receivables.
Securities Borrowed and Securities Loaned
Securities borrowed are recorded at the amount of cash collateral advanced. Securities borrowed transactions require the Company to deposit cash, letters of credit, or other collateral with the lender. Securities loaned are recorded at the amount of cash collateral received. For securities borrowed and loaned, the Company monitors the market value of the securities and obtains or refunds collateral as necessary.
Securities Owned, at Fair Value
Securities owned, at fair value represent marketable securities owned by the Company at trade-date valuation. See “Note 6 – Fair Value Measurements” for additional detail.
Payables to Non-Customers
Accounts payable to non-customers includes amounts due on cash and margin transactions on accounts owned and controlled by principal officers, directors and stockholders of the Company. Payables to non-customers amounts include any amounts received from interest on credit balances.
Payables to non-customers also include amounts due on cash transactions owned and controlled by the Company’s proprietary accounts of introducing broker-dealers. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the Company no longer had any proprietary accounts of introducing broker-dealers.
Securities Sold, Not Yet Purchased, at Fair Value
Securities sold, not yet purchased, at fair value represent marketable securities sold by the Company prior to purchase at trade-date valuation. See “Note 6 – Fair Value Measurements” for additional detail.
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2. New Accounting Standards
Recently Adopted Accounting Pronouncements
ASU 2018-15 - In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Intangibles, Goodwill and Other Internal-Use Software, (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers to apply the same criteria for capitalizing implementation costs incurred in a cloud computing arrangement that is hosted by the vendor as they would for an arrangement that has a software license. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted. The standard can be adopted prospectively or retrospectively. The Company adopted this new standard on January 1, 2020. See “Note 5 – Prepaid Service Contract” for additional detail.
ASU 2018-13 - In August 2018, the FASB issued ASU 2018-13, Fair value Measurement (Accounting Standards Codification (“ASC”) 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The Company adopted the new standard on its effective date, January 1, 2020, and determined it was immaterial to the Company’s financial statements as of September 30, 2020.
ASU 2018-07 - In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718). ASU 2018-07 is intended to reduce cost and complexity of financial reporting for non-employee share-based payments. Currently, the accounting requirements for non-employee and employee share-based payments are significantly different. ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, “Equity - Equity-Based Payments to Nonemployees.” The amendments to ASU 2018-07 are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of ASU No. 2014-09, (Topic 606), “Revenue from Contracts with Customers.” The Company adopted this accounting pronouncement on January 1, 2020.
Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on the Company’s financial statements and related disclosures as of September 30, 2020.
3. Acquisitions
StockCross
Overview of Acquisition
Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.
Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, pursuant to an Agreement and Plan of Merger, the Company acquired the remaining 85% of StockCross’ outstanding shares and StockCross was merged with and into MSCO. The purchase price paid was approximately $29,750,000 or 3,298,774 shares of the Company’s restricted common stock which was issued in connection with the acquisition. Prior to the acquisition, MSCO had a clearing agreement with StockCross whereby StockCross provided custody and clearing services to MSCO for its securities broker-dealer business; however, as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.
Accounting for Acquisition
Prior to and as of the date of the acquisition, the Company and StockCross were entities under common control of the Gebbia Family. As such, the acquisition was accounted for as a transaction between entities under common control.
A common-control transaction is similar to a business combination for the Company as it is the entity that received the net assets of StockCross; however, this common-control transaction does not meet the definition of a business combination in accordance with GAAP because there is no change in control over the net assets.
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The acquisition represented a change in reporting entity. As such, upon the closing of the acquisition, the net assets of the Company were combined with those of StockCross at their historical carrying amounts. The companies have been presented on a combined basis for all periods presented in the financial statements in a manner similar to a pooling of interests, as the period of common control existed prior to the periods presented in the financial statements. Accordingly, the historical financial statements of the Company have been presented under the “as if pooling” method.
Prior to the Company’s acquisition of StockCross, StockCross sold its treasury stock totaling $172,000 to third parties and the Company purchased approximately 15% of the outstanding shares of StockCross from an unrelated party for $3,665,000. On September 5, 2019, StockCross made a return of capital distribution in the aggregate amount of $1.6 million, of which the Company received approximately 15%, or $241,000. All of these cash transactions are reflected in the “Cash flows from financing activities” section of the statements of cash flows for the nine months ended September 30, 2019.
Assets Acquired and Liabilities Assumed
The Company acquired various assets and liabilities from StockCross which were recorded at their historical carrying amounts and summarized below:

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

Pro Forma Statements
The following pro forma financial statements present the statements of income of the Company as if the acquisition of StockCross had occurred on January 1, 2019, inclusive of pro forma adjustments (unaudited). The combined results of these pro forma financial statements are also reflected in the Company’s financial statements for the periods presented for 2019. StockCross’ financial statements have already been consolidated in the Company’s financial statements for the periods presented for 2020:
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Statements of Operations
Three Months Ended September 30, 2019 (unaudited)

|  | Three Months Ended September 30, 2019 |
|  | Siebert |  |  | StockCross |  |  | Pro Forma Adjustments |  |  | Total Combined Siebert |
Revenue |  |  |  |  |  |  |  |  |  |  |  |
Commissions and fees |  | $ | 1,925,000 |  |  | $ | 348,000 |  |  | $ | — |  |  | $ | 2,273,000 |
Margin interest, marketing and distribution fees |  |  | 2,944,000 |  |  |  | 968,000 |  |  |  | — |  |  |  | 3,912,000 |
Principal transactions |  |  | 2,041,000 |  |  |  | 286,000 |  |  |  | — |  |  |  | 2,327,000 |
Interest income |  |  | 23,000 |  |  |  | 1,038,000 |  |  |  | — |  |  |  | 1,061,000 |
Market making |  |  | — |  |  |  | 330,000 |  |  |  | — |  |  |  | 330,000 |
Stock borrow / stock loan |  |  | — |  |  |  | 349,000 |  |  |  | — |  |  |  | 349,000 |
Advisory fees |  |  | 211,000 |  |  |  | — |  |  |  | — |  |  |  | 211,000 |
Other income |  |  | — |  |  |  | 351,000 |  |  |  | (61,000 | ) |  |  | 290,000 |
Total Revenue |  |  | 7,144,000 |  |  |  | 3,670,000 |  |  |  | (61,000 | ) |  |  | 10,753,000 |
Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Employee compensation and benefits |  |  | 3,157,000 |  |  |  | 1,652,000 |  |  |  | — |  |  |  | 4,809,000 |
Clearing fees, including execution costs |  |  | 617,000 |  |  |  | 242,000 |  |  |  | (61,000 | ) |  |  | 798,000 |
Technology and communications |  |  | 291,000 |  |  |  | 150,000 |  |  |  | — |  |  |  | 441,000 |
Other general and administrative |  |  | 589,000 |  |  |  | 279,000 |  |  |  | — |  |  |  | 868,000 |
Data processing |  |  | — |  |  |  | 527,000 |  |  |  | — |  |  |  | 527,000 |
Rent and occupancy |  |  | 380,000 |  |  |  | 250,000 |  |  |  | — |  |  |  | 630,000 |
Professional fees |  |  | 439,000 |  |  |  | 344,000 |  |  |  | — |  |  |  | 783,000 |
Depreciation and amortization |  |  | 244,000 |  |  |  | — |  |  |  | — |  |  |  | 244,000 |
Interest expense |  |  | — |  |  |  | 31,000 |  |  |  | — |  |  |  | 31,000 |
Total Expenses |  |  | 5,717,000 |  |  |  | 3,475,000 |  |  |  | (61,000 | ) |  |  | 9,131,000 |
Earnings of equity method investment in related party |  |  | 30,000 |  |  |  | — |  |  |  | (30,000 | ) |  |  | — |
Income before provision (benefit) for (from) income taxes |  |  | 1,457,000 |  |  |  | 195,000 |  |  |  | (30,000 | ) |  |  | 1,622,000 |
Provision (benefit) for (from) income taxes |  |  | 353,000 |  |  |  | 4,000 |  |  |  | (8,000 | ) |  |  | 349,000 |
Net income / (loss) |  | $ | 1,104,000 |  |  | $ | 191,000 |  |  | $ | (22,000 | ) |  | $ | 1,273,000 |
Net income per share of common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  | $ | 0.04 |  |  | $ | 0.03 |  |  |  |  |  |  | $ | 0.04 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  |  | 27,157,188 |  |  |  | 6,152,500 |  |  |  |  |  |  |  |  |
Pro forma shares used to compute net income per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 30,455,962 |

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Nine Months Ended September 30, 2019 (unaudited)

|  | Nine Months Ended September 30, 2019 |
|  | Siebert |  |  | StockCross |  |  | Pro Forma Adjustments |  |  | Total Combined Siebert |
Revenue |  |  |  |  |  |  |  |  |  |  |  |
Commissions and fees |  | $ | 6,030,000 |  |  | $ | 1,102,000 |  |  | $ | — |  |  | $ | 7,132,000 |
Margin interest, marketing and distribution fees |  |  | 8,499,000 |  |  |  | 2,662,000 |  |  |  | — |  |  |  | 11,161,000 |
Principal transactions |  |  | 5,479,000 |  |  |  | 659,000 |  |  |  | — |  |  |  | 6,138,000 |
Interest income |  |  | 54,000 |  |  |  | 3,363,000 |  |  |  | — |  |  |  | 3,417,000 |
Market making |  |  | — |  |  |  | 1,303,000 |  |  |  | — |  |  |  | 1,303,000 |
Stock borrow / stock loan |  |  | — |  |  |  | 1,353,000 |  |  |  | — |  |  |  | 1,353,000 |
Advisory fees |  |  | 572,000 |  |  |  | — |  |  |  | — |  |  |  | 572,000 |
Other income |  |  | — |  |  |  | 816,000 |  |  |  | (183,000 | ) |  |  | 633,000 |
Total Revenue |  |  | 20,634,000 |  |  |  | 11,258,000 |  |  |  | (183,000 | ) |  |  | 31,709,000 |
Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Employee compensation and benefits |  |  | 8,882,000 |  |  |  | 4,930,000 |  |  |  | — |  |  |  | 13,812,000 |
Clearing fees, including execution costs |  |  | 1,849,000 |  |  |  | 659,000 |  |  |  | (183,000 | ) |  |  | 2,325,000 |
Technology and communications |  |  | 800,000 |  |  |  | 464,000 |  |  |  | — |  |  |  | 1,264,000 |
Other general and administrative |  |  | 1,861,000 |  |  |  | 926,000 |  |  |  | — |  |  |  | 2,787,000 |
Data processing |  |  | — |  |  |  | 1,487,000 |  |  |  | — |  |  |  | 1,487,000 |
Rent and occupancy |  |  | 995,000 |  |  |  | 759,000 |  |  |  | — |  |  |  | 1,754,000 |
Professional fees |  |  | 1,388,000 |  |  |  | 1,180,000 |  |  |  | — |  |  |  | 2,568,000 |
Depreciation and amortization |  |  | 670,000 |  |  |  | 19,000 |  |  |  | — |  |  |  | 689,000 |
Interest expense |  |  | — |  |  |  | 84,000 |  |  |  | — |  |  |  | 84,000 |
Total Expenses |  |  | 16,445,000 |  |  |  | 10,508,000 |  |  |  | (183,000 | ) |  |  | 26,770,000 |
Earnings of equity method investment in related party |  |  | 84,000 |  |  |  | — |  |  |  | (84,000 | ) |  |  | — |
Income before provision (benefit) for (from) income taxes |  |  | 4,273,000 |  |  |  | 750,000 |  |  |  | (84,000 | ) |  |  | 4,939,000 |
Provision (benefit) for (from) income taxes |  |  | 1,171,000 |  |  |  | 218,000 |  |  |  | (24,000 | ) |  |  | 1,365,000 |
Net income / (loss) |  | $ | 3,102,000 |  |  | $ | 532,000 |  |  | $ | (60,000 | ) |  | $ | 3,574,000 |
Net income per share of common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  | $ | 0.11 |  |  | $ | 0.09 |  |  |  |  |  |  | $ | 0.12 |
Weighted average shares outstanding |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted |  |  | 27,157,188 |  |  |  | 6,152,500 |  |  |  |  |  |  |  |  |
Pro forma shares used to compute net income per share |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 30,455,962 |

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Statements of Financial Condition

|  | As of December 31, 2019 |
|  | Siebert |  |  | StockCross |  |  | Pro Forma Adjustments (unaudited) |  |  | Total Combined Siebert (unaudited) |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 3,082,000 |  |  | $ | 1,588,000 |  |  | $ | — |  |  | $ | 4,670,000 |
Cash and securities segregated for regulatory purposes |  |  | 110,000 |  |  |  | 224,814,000 |  |  |  | — |  |  |  | 224,924,000 |
Receivables from customers |  |  | — |  |  |  | 86,331,000 |  |  |  | — |  |  |  | 86,331,000 |
Receivables from broker-dealers and clearing organizations |  |  | 3,067,000 |  |  |  | 1,265,000 |  |  |  | (808,000 | ) |  |  | 3,524,000 |
Receivables from related party |  |  | 1,000,000 |  |  |  | — |  |  |  | (1,000,000 | ) |  |  | — |
Other receivables |  |  | 223,000 |  |  |  | 627,000 |  |  |  | (88,000 | ) |  |  | 762,000 |
Prepaid expenses and other assets |  |  | 624,000 |  |  |  | 346,000 |  |  |  | — |  |  |  | 970,000 |
Securities borrowed |  |  | — |  |  |  | 193,529,000 |  |  |  | — |  |  |  | 193,529,000 |
Securities owned, at fair value |  |  | — |  |  |  | 3,018,000 |  |  |  | — |  |  |  | 3,018,000 |
Total Current assets |  |  | 8,106,000 |  |  |  | 511,518,000 |  |  |  | (1,896,000 | ) |  |  | 517,728,000 |
Deposits with broker-dealers and clearing organizations |  |  | 3,186,000 |  |  |  | 1,840,000 |  |  |  | (75,000 | ) |  |  | 4,951,000 |
Furniture, equipment and leasehold improvements, net |  |  | 1,131,000 |  |  |  | 19,000 |  |  |  | — |  |  |  | 1,150,000 |
Software, net |  |  | 1,888,000 |  |  |  | — |  |  |  | — |  |  |  | 1,888,000 |
Lease right-of-use assets |  |  | 2,810,000 |  |  |  | 1,141,000 |  |  |  | — |  |  |  | 3,951,000 |
Equity method investment in related party |  |  | 3,360,000 |  |  |  | — |  |  |  | (3,360,000 | ) |  |  | — |
Deferred tax assets |  |  | 4,981,000 |  |  |  | 407,000 |  |  |  | — |  |  |  | 5,388,000 |
Intangible assets, net |  |  | 1,022,000 |  |  |  | — |  |  |  | — |  |  |  | 1,022,000 |
Goodwill |  |  | 1,989,000 |  |  |  | — |  |  |  | — |  |  |  | 1,989,000 |
Total Assets |  | $ | 28,473,000 |  |  | $ | 514,925,000 |  |  | $ | (5,331,000 | ) |  | $ | 538,067,000 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payables to customers |  | $ | — |  |  | $ | 308,091,000 |  |  | $ | — |  |  | $ | 308,091,000 |
Payables to non-customers |  |  | — |  |  |  | 9,151,000 |  |  |  | (1,088,000 | ) |  |  | 8,063,000 |
Drafts payable |  |  | — |  |  |  | 2,834,000 |  |  |  | — |  |  |  | 2,834,000 |
Payables to broker-dealers and clearing organizations |  |  | — |  |  |  | 1,406,000 |  |  |  | (883,000 | ) |  |  | 523,000 |
Payables to related parties |  |  | 7,000 |  |  |  | — |  |  |  | (7,000 | ) |  |  | — |
Accounts payable and accrued liabilities |  |  | 1,473,000 |  |  |  | 963,000 |  |  |  | 7,000 |  |  |  | 2,443,000 |
Securities loaned |  |  | — |  |  |  | 170,443,000 |  |  |  | — |  |  |  | 170,443,000 |
Securities sold, not yet purchased, at fair value |  |  | 88,000 |  |  |  | 28,000 |  |  |  | — |  |  |  | 116,000 |
Interest payable |  |  | 10,000 |  |  |  | — |  |  |  | — |  |  |  | 10,000 |
Current portion of notes payable - related party |  |  | 3,000,000 |  |  |  | 5,000,000 |  |  |  | — |  |  |  | 8,000,000 |
Current portion of lease liabilities |  |  | 1,291,000 |  |  |  | 936,000 |  |  |  | — |  |  |  | 2,227,000 |
Total Current liabilities |  |  | 5,869,000 |  |  |  | 498,852,000 |  |  |  | (1,971,000 | ) |  |  | 502,750,000 |
Lease liabilities, less current portion |  |  | 1,823,000 |  |  |  | 359,000 |  |  |  | — |  |  |  | 2,182,000 |
Total Liabilities |  |  | 7,692,000 |  |  |  | 499,211,000 |  |  |  | (1,971,000 | ) |  |  | 504,932,000 |
Commitments and Contingencies |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Common stock, $.01 par value |  |  | 271,000 |  |  |  | 10,000 |  |  |  | 23,000 |  |  |  | 304,000 |
Additional paid-in capital |  |  | 7,641,000 |  |  |  | 12,436,000 |  |  |  | (180,000 | ) |  |  | 19,897,000 |
Retained earnings |  |  | 12,869,000 |  |  |  | 3,268,000 |  |  |  | (3,203,000 | ) |  |  | 12,934,000 |
Total Stockholders’ equity |  |  | 20,781,000 |  |  |  | 15,714,000 |  |  |  | (3,360,000 | ) |  |  | 33,135,000 |
Total Liabilities and stockholders' equity |  | $ | 28,473,000 |  |  | $ | 514,925,000 |  |  | $ | (5,331,000 | ) |  | $ | 538,067,000 |

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Pro Forma Adjustments
The pro forma results include adjustments made for the consolidation of both entities. The statements of income reflects the elimination of StockCross’ other income and the Company’s corresponding custody and clearing fees resulting from the fully disclosed clearing relationship between MSCO and StockCross. In addition, the Company’s earnings recognized as part of its equity method investment in StockCross for the three and nine months ended September 30, 2019 were eliminated upon consolidation. These adjustments to pre-tax income were tax affected using an estimated effective tax rate of 28.0%.
The statements of financial condition reflects the elimination of intercompany payables and receivables between the Company and StockCross as part of their ongoing business relationship, as well as reflects the elimination of the Company’s 15% ownership of StockCross. The statements of financial condition reflects an adjustment to increase the Company’s common stock by the par value of the shares issued in connection with the transaction and to eliminate the par value of StockCross’ common stock. The adjustments also increase additional paid-in capital for the net difference, as well as the change in retained earnings from the adjustments in the statements of operations.
Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.
WP
Overview of Acquisition
As previously disclosed in the Company’s 2019 Form 10-K, the Company completed its acquisition of 100% of the member interests in WP and effective December 1, 2019, WP became a wholly-owned subsidiary of the Company. The acquisition was accounted for under the acquisition method of accounting for business combinations pursuant to ASC 805 - Business Combinations and resulted in $1,989,000 of goodwill.
Pro Forma Statements
The following pro forma summary presents the statements of income of the Company as if the acquisition of WP had occurred on January 1, 2019, inclusive of pro forma adjustments (unaudited). WP’s financial statements have already been consolidated as part of the Company’s financial statements for the periods presented for 2020.

|  | Three Months Ended September 30, 2019 |  |  | Nine Months Ended September 30, 2019 |
Revenue |  | $ | 14,372,000 |  |  | $ | 41,191,000 |
Operating income |  | $ | 1,905,000 |  |  | $ | 3,693,000 |
Net income |  | $ | 1,577,000 |  |  | $ | 2,407,000 |

The pro forma results include adjustments made for the consolidation of both entities. These adjustments take into consideration the interest expense on the promissory note used in financing the acquisition, the amortization of the acquired intangible assets, as well as the tax effect of pro forma adjustments using an estimated combined statutory rate of 28.0%.
Pro forma data may not be indicative of the results that would have been obtained had these events occurred at the beginning of the periods presented, nor is it intended to be a projection of future results.
4. Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Amounts receivable from, payables to, and deposits with broker-dealers and clearing organizations consisted of the following as of the periods indicated:
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|  | As of September 30, 2020 |  |  | As of December 31, 2019 |
Receivables from and deposits with broker-dealers and clearing organizations |  |  |  |  |  |
DTCC / OCC / NSCC |  | $ | 3,678,000 |  |  | $ | 3,059,000 |
Goldman Sachs |  |  | 2,105,000 |  |  |  | 2,841,000 |
Pershing Capital |  |  | 1,279,000 |  |  |  | 1,192,000 |
NFS |  |  | 1,113,000 |  |  |  | 1,328,000 |
Securities fail-to-deliver |  |  | 207,000 |  |  |  | 43,000 |
Globalshares |  |  | 24,000 |  |  |  | 2,000 |
ICBC |  |  | — |  |  |  | 10,000 |
Total Receivables from and deposits with broker-dealers and clearing organizations |  | $ | 8,406,000 |  |  | $ | 8,475,000 |
Payables to broker-dealers and clearing organizations |  |  |  |  |  |  |  |
Securities fail-to-receive |  | $ | 356,000 |  |  | $ | 523,000 |
Total Payables to broker-dealers and clearing organizations |  | $ | 356,000 |  |  | $ | 523,000 |

5. Prepaid Service Contract
On April 21, 2020, MSCO entered into a Master Services Agreement (“MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide MSCO with the InvestCloud Platform, a new client and back end interface and related functionalities for MSCO’s key operations. MSCO agreed to pay InvestCloud as consideration therefore during the initial three-year term an annual license fee of $600,000 as well as an upfront professional service fee of $1.0 million for one-time configuration, installation and customization of the software. Following the initial three year term, the MSA will automatically renew for additional one-year terms unless terminated by MSCO upon 120 days’ notice.
In connection with the MSA, InvestCloud entered into a Side Letter Agreement (“Side Letter”) with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common stock (the “Shares”) at a per share price of $5.81 (the Company’s share price as of the close of May 12, 2020) for a total of $1.1 million for professional services to integrate the InvestCloud Platform into Siebert’s existing systems and Robo-Advisor. The Shares were issued to InvestCloud on May 12, 2020 without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(a)(2) thereunder. This transaction is reflected in the “Non-cash investing and financing activities” section of the statements of cash flows.
In accordance with ASU 2018-15, Intangibles, Goodwill and Other Internal-Use Software, the Company initially recorded a prepaid asset equal to the $2.1 million of the total professional services related to the development work performed by InvestCloud, which is within the line item “Prepaid service contract – non-current” on the statements of financial condition. The Company will amortize this asset over the 3-year term of the contract, a period during which the arrangement is noncancelable. The license fees related to Siebert’s use of the InvestCloud Platform are prepaid three months in advance and are within the line item “Prepaid expenses and other assets” on the statements of financial condition. These prepaid license fees are amortized over the three month term. The amortization for all the prepaid assets related to InvestCloud development is within the line item titled “Technology and Communications” on the statements of income.
6. Fair Value Measurements
Overview
ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income, or cost approach, as specified by ASC 820, are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
Level 1 - Quoted prices (unadjusted) in active markets for an identical asset or liability that the Company can assess at the measurement date.
Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
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The availability of observable inputs can vary from security to security and is affected by a variety of factors, such as the type of security, the liquidity of markets, and other characteristics particular to the security. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. As such, the degree of judgment exercised in determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date.
A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
U.S. government securities: U.S. government securities are valued using quoted market prices and as such, valuation adjustments are not applied. Accordingly, U.S. government securities are generally categorized in level 1 of the fair value hierarchy.
Municipal securities: Municipal securities are valued using recently executed transactions, market price quotations (when observable), bond spreads from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. Municipal securities are generally categorized in level 2 of the fair value hierarchy.
Corporate bonds and convertible preferred stock: The fair value of corporate bonds and convertible preferred stock are determined using recently executed transactions, market price quotations (when observable), bond spreads, or credit default swap spreads obtained from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. If the spread data does not reference the issuer, then data that references a comparable issuer is used. When position-specific external price data is not observable, fair value is determined based on either benchmarking to similar instruments or cash flow models with yield curves, bond, or single-name credit default swap spreads and recovery rates as significant inputs. Corporate bonds and convertible preferred stocks are generally categorized in level 2 of the fair value hierarchy.
Equity securities: Equity securities are valued based on quoted prices from the exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in level 1 of the fair value hierarchy. Securities quoted in inactive markets or with observable inputs are categorized into level 2. If there are no observable inputs or quoted prices, securities are categorized as level 3 assets in the fair value hierarchy. Level 3 assets are not actively traded and subjective estimates based on managements’ assumptions are utilized for valuation.
Mutual funds: Mutual funds are valued based on the closing net asset value of the publicly traded mutual funds. These securities are actively traded and therefore valuation adjustments are not applied. As such, mutual funds are categorized in level 1 of the fair value hierarchy.
Certificates of deposit: Certificates of deposit included in investments are valued at cost, which approximates fair value. When certificates of deposits are held directly with banking institutions and issued directly to the Company, these are categorized within cash and cash equivalents in level 2 of the fair value hierarchy. When certificates of deposits are available for trading, they are categorized within securities owned, at fair value in level 2 of the fair value hierarchy.
Fair Value Hierarchy Tables
The following tables present the Company's fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of the periods presented.
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|  | As of September 30, 2020 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | $ | — |  |  | $ | 142,000 |  |  | $ | — |  |  | $ | 142,000 |
Securities owned, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government securities* |  | $ | 2,028,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,028,000 |
Certificates of deposit |  |  | — |  |  |  | 91,000 |  |  |  | — |  |  |  | 91,000 |
Corporate bonds |  |  | — |  |  |  | 120,000 |  |  |  | — |  |  |  | 120,000 |
Equity securities |  |  | 765,000 |  |  |  | 343,000 |  |  |  | — |  |  |  | 1,108,000 |
Mutual funds |  |  | 133,000 |  |  |  | — |  |  |  | — |  |  |  | 133,000 |
Total Securities owned, at fair value |  | $ | 2,926,000 |  |  | $ | 554,000 |  |  | $ | — |  |  | $ | 3,480,000 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities sold, not yet purchased, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  | $ | — |  |  | $ | 25,000 |  |  | $ | — |  |  | $ | 25,000 |
Total Securities sold, not yet purchased, at fair value |  | $ | — |  |  | $ | 25,000 |  |  | $ | — |  |  | $ | 25,000 |

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

|  | As of December 31, 2019 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  |  |  |  |  |  |  |  |  |  |
Certificates of deposit |  | $ | — |  |  | $ | 142,000 |  |  | $ | — |  |  | $ | 142,000 |
Segregated securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government securities |  | $ | 1,311,000 |  |  |  | — |  |  |  | — |  |  | $ | 1,311,000 |
Securities owned, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government securities |  | $ | 2,007,000 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,007,000 |
Corporate bonds |  |  | — |  |  |  | 25,000 |  |  |  | — |  |  |  | 25,000 |
Equity securities |  |  | 453,000 |  |  |  | 245,000 |  |  |  | 288,000 |  |  |  | 986,000 |
Total Securities owned, at fair value |  | $ | 2,460,000 |  |  | $ | 270,000 |  |  | $ | 288,000 |  |  | $ | 3,018,000 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities sold, not yet purchased, at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities |  | $ | 88,000 |  |  | $ | 28,000 |  |  | $ | — |  |  | $ | 116,000 |
Total Securities sold, not yet purchased, at fair value |  | $ | 88,000 |  |  | $ | 28,000 |  |  | $ | — |  |  | $ | 116,000 |

|  | Changes in Level 3 Equity Assets |
|  | Nine Months Ended September 30, 2020 |
|  | Amount |  | Valuation Technique | Reason for Change
Balance – January 1, 2020 |  | $ | 288,000 |  | Liquidation value based on valuation report |
Transfers out of level 3 |  |  | (288,000 | ) |  | Sale of equity security
Balance – September 30, 2020 |  | $ | — |  |  |

The following represents financial instruments in which the ending balances as of September 30, 2020 and December 31, 2019 are not carried at fair value in the statements of financial condition:
Short-term financial instruments: The carrying value of short-term financial instruments, including cash and securities segregated for regulatory purposes are recorded at amounts that approximate the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. Cash and securities segregated for regulatory purposes are classified as level 1. Securities segregated for regulatory purposes consist of treasury notes which are categorized in the above tables as level 1 assets.
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Receivables and other assets: Receivables from broker-dealers and clearing organizations, receivables from customers, other receivables, and other assets are recorded at amounts that approximate fair value and are classified as level 2 under the fair value hierarchy.
Securities borrowed and securities loaned: Securities borrowed and securities loaned are recorded at amounts which approximate fair value and are primarily classified as level 2 under the fair value hierarchy. The Company’s securities borrowed and securities loaned balances represent amounts of equity securities borrow and loan contracts and are marked-to-market daily in accordance with standard industry practices which approximate fair value.
Payables: Payables to customers, payables to non-customers, drafts payable, payables to broker-dealers and clearing organizations, accounts payable and accrued liabilities, and interest payable are recorded at amounts that approximate fair value due to their short-term nature and are classified as level 2 under the fair value hierarchy.
Notes payable – related party: The carrying amount of the notes payable – related party approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the notes payable – related party is classified as level 2.
Line of credit: The carrying amount of the line of credit with East West Bank approximates fair value due to the relative short-term nature of the borrowing. Under the fair value hierarchy, the line of credit is classified as level 2.
7. Leases
As of September 30, 2020, the Company rents office space under operating leases expiring in 2021 through 2024, and the Company has no financing leases. The leases call for base rent plus escalations as well as other operating expenses. The following table represents the Company’s lease right-of-use assets and lease liabilities on the statements of financial condition. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the statements of financial condition. The Company acquired two leases from its acquisition of StockCross, the impact of which is reflected in the following disclosures.
As of September 30, 2020, the Company does not believe that any of the renewal options under the existing leases are reasonably certain to be exercised; however, the Company will continue to assess and monitor the lease renewal options on an ongoing basis.

|  | As of September 30, 2020 |  |  | As of December 31, 2019 |
Assets |  |  |  |  |  |
Lease right-of-use assets |  | $ | 2,813,000 |  |  | $ | 3,951,000 |
Liabilities |  |  |  |  |  |  |  |
Lease liabilities |  | $ | 3,181,000 |  |  | $ | 4,409,000 |

The calculated amounts of the lease right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company leases some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the statements of income rather than capitalizing them as lease right-of-use assets. The Company determined a discount rate of 5.0% would approximate the Company’s cost to obtain financing given its size, growth, and risk profile.

Lease Term and Discount Rate |  | As of September 30, 2020 |
Weighted average remaining lease term – operating leases (in years) |  |  | 2.3 |
Weighted average discount rate – operating leases |  |  | 5.0 | %

The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate lease and non-lease components, and as such, the variable lease cost primarily represents variable payments such as common area maintenance and utilities which are usually determined by the leased square footage in proportion to the overall office building.
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|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Operating lease cost |  | $ | 609,000 |  |  | $ | 509,000 |  |  | $ | 1,755,000 |  |  | $ | 1,268,000 |
Short-term lease cost |  |  | 20,000 |  |  |  | 81,000 |  |  |  | 83,000 |  |  |  | 321,000 |
Variable lease cost |  |  | 65,000 |  |  |  | 40,000 |  |  |  | 281,000 |  |  |  | 165,000 |
Sublease income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Total Rent and occupancy |  | $ | 694,000 |  |  | $ | 630,000 |  |  | $ | 2,119,000 |  |  | $ | 1,754,000 |
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 614,000 |  |  | $ | 512,000 |  |  | $ | 1,845,000 |  |  | $ | 1,338,000 |
Lease right-of-use assets obtained in exchange for new lease liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating leases |  | $ | 278,000 |  |  | $ | — |  |  | $ | 2,353,000 |  |  | $ | 4,943,000 |

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

Year |  | Amount |
2020 |  | $ | 606,000 |
2021 |  |  | 1,403,000 |
2022 |  |  | 755,000 |
2023 |  |  | 543,000 |
2024 |  |  | 56,000 |
Remaining balance of lease payments |  |  | 3,363,000 |
Difference between undiscounted cash flows and discounted cash flows |  |  | 182,000 |
Lease liabilities |  | $ | 3,181,000 |

As of September 30, 2020, the Company had an operating lease agreement for an office space in Beverly Hills, CA with a term of approximately 5 years. The total commitment of the lease is approximately $1.5 million, and the lease will commence on March 1, 2021.
Rent and occupancy expenses were $694,000 and $630,000 for the three months ended September 30, 2020 and 2019, respectively. Rent and occupancy expenses were $2,119,000 and $1,754,000 for the nine months ended September 30, 2020 and 2019, respectively.
8. Goodwill and Intangible Assets, Net
Goodwill
As of September 30, 2020 and December 31, 2019, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of WP.
Intangible Assets, Net
As a result of the Company’s acquisition of WP, the Company had intangible assets consisting of WP’s customer relationships and WP’s trade name, the fair values of which were $987,000 and $70,000, respectively, as of the acquisition date. Pursuant to the Company’s agreement with the original owners of WP, the Company agreed to discontinue using the name of Weeden Prime Services, LLC and filed to change it to WPS Prime Services, LLC in May 2020. As of September 30, 2020, the WP trade name has been fully amortized.
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Impairment
For the nine months ended September 30, 2020, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and other tangible and intangible assets.
9. Long-Term Debt
Line of Credit with East West Bank
As previously reported in a Current Report on Form 8-K filed July 28, 2020, on July 22, 2020, the Company entered into a Loan and Security Agreement with East West Bank. In accordance with the terms of this agreement, the Company has the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. The Company’s obligations under the agreement are secured by a lien on all of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.
Term loans made pursuant to the agreement shall bear interest, at the Company’s option, (i) at the prime rate, as reported by the Wall Street Journal, or (ii) 3.0% above the LIBOR rate, provided that the minimum interest rate on any term loan will not be less than 3.25%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.
This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of September 30, 2020 and the date of the filing of this report, the Company was in compliance with all of its covenants related to this agreement.
In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994 (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust.
As of September 30, 2020, the Company has drawn down a term loan of approximately $4.9 million under this agreement. The Company has incurred interest expense in relation to this term loan of $15,000 for both the three and nine months ended September 30, 2020.
10. Notes Payable - Related Party
As of September 30, 2020, the Company had various notes payable to Gloria E. Gebbia, the Company’s principal stockholder, the details of which are presented below:

Description | Issuance Date |  | Face Amount |
4% due December 2, 2020 | December 2, 2019 |  | $ | 3,000,000 |
Subordinated to MSCO* |  |  |  |
4% due November 30, 2021** | November 30, 2018 |  | $ | 3,000,000 |
Total Notes payable – related party |  |  | $ | 6,000,000 |

*The note payable subordinated to MSCO was acquired as part of the acquisition of StockCross.
**This note payable was renewed on November 30, 2019 for a term of one year. Subsequently, a rate adjustment and extension of its maturity with permissive prepayment was completed on March 3, 2020.
Notes subordinated to MSCO are subordinated to the claims of general creditors, approved by FINRA, and are included in MSCO’s calculation of net capital and the capital requirements under FINRA and SEC regulations.
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The Company’s interest expense incurred for these notes for the three months ended September 30, 2020 and 2019 was $104,000 and $24,000, respectively. The Company’s interest expense incurred for these notes for the nine months ended September 30, 2020 and 2019 was $220,000 and $66,000, respectively. The Company’s interest payable was $0 and $10,000 as of September 30, 2020 and December 31, 2019, respectively. Effective March 3, 2020, the interest rate on the loan due November 30, 2021 was renegotiated from 2.75% to 4%. There was no consideration paid or received as part of this renegotiation.
11. Revenue Recognition
Overview of Revenue
The primary sources of revenue for the Company are as follows:
Margin Interest, Marketing and Distribution fees
Margin interest, marketing and distribution fees consists of two components: margin interest and 12b1 fees resulting from rebates in money market funds. Margin interest is the net interest charged to customers for holding financed margin positions, and 12b1 fees are fees paid to the Company related to trailing payments from money market funds. Margin interest, marketing and distribution fees are recorded as earned.
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to / from the customer.
Principal Transactions
Principal transactions primarily represent riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the securities with a markup or markdown to satisfy the order. Principal transactions are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to / from the customer.
Market Making
Market making is revenue generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty. Securities owned are recorded at fair market value at the end of the reporting period.
Stock Borrow / Stock Loan
The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions. Stock borrow / stock loan revenue is reported on a monthly basis net of expense. The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.
For the three months ended September 30, 2020, stock borrow / stock loan revenue was $1,267,000 ($2,499,000 gross revenue less $1,232,000 expenses). For the three months ended September 30, 2019, stock borrow / stock loan revenue was $349,000 ($2,111,000 gross revenue minus $1,762,000 expenses).
For the nine months ended September 30, 2020, stock borrow / stock loan revenue was $2,482,000 ($6,170,000 gross revenue less $3,688,000 expenses). For the nine months ended September 30, 2019, stock borrow / stock loan revenue was $1,353,000 ($8,381,000 gross revenue minus $7,028,000 expenses).
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Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.
Interest Income
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances and is recorded as earned.
Other Income
Other income represents fees generated from correspondent clearing fees, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.
Categorization of Revenue
The following table presents the Company’s major revenue categories and when each category is recognized:

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |  |
Revenue Category |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  | Timing of Recognition
Trading Execution and Clearing Services |  |  |  |  |  |  |  |  |  |  |  |  |
Commissions and fees |  | $ | 4,679,000 |  |  | $ | 2,273,000 |  |  | $ | 15,149,000 |  |  | $ | 7,132,000 |  | Recorded on trade date
Principal transactions |  |  | 2,342,000 |  |  |  | 2,327,000 |  |  |  | 8,126,000 |  |  |  | 6,138,000 |  | Recorded on trade date
Market making |  |  | 423,000 |  |  |  | 330,000 |  |  |  | 1,508,000 |  |  |  | 1,303,000 |  | Recorded on trade date
Stock borrow / stock loan |  |  | 1,267,000 |  |  |  | 349,000 |  |  |  | 2,482,000 |  |  |  | 1,353,000 |  | Recorded as earned
Advisory fees |  |  | 305,000 |  |  |  | 211,000 |  |  |  | 810,000 |  |  |  | 572,000 |  | Recorded as earned
Total Trading Execution and Clearing Services |  |  | 9,016,000 |  |  |  | 5,490,000 |  |  |  | 28,075,000 |  |  |  | 16,498,000 |  |
Other Income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Margin interest, marketing and distribution fees |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Margin interest |  |  | 2,130,000 |  |  |  | 3,068,000 |  |  |  | 6,465,000 |  |  |  | 8,755,000 |  | Recorded as earned
12b1 fees |  |  | 181,000 |  |  |  | 844,000 |  |  |  | 1,265,000 |  |  |  | 2,406,000 |  | Recorded as earned
Total Margin interest, marketing and distribution fees |  |  | 2,311,000 |  |  |  | 3,912,000 |  |  |  | 7,730,000 |  |  |  | 11,161,000 |  |
Interest income |  |  | 915,000 |  |  |  | 1,061,000 |  |  |  | 3,155,000 |  |  |  | 3,417,000 |  | Recorded as earned
Other income |  |  | 333,000 |  |  |  | 290,000 |  |  |  | 1,035,000 |  |  |  | 633,000 |  | Recorded as earned
Total Other Income |  |  | 3,559,000 |  |  |  | 5,263,000 |  |  |  | 11,920,000 |  |  |  | 15,211,000 |  |
Total Revenue |  | $ | 12,575,000 |  |  | $ | 10,753,000 |  |  | $ | 39,995,000 |  |  | $ | 31,709,000 |  |

The following table presents each revenue category and its related performance obligation:

Revenue Stream | Performance Obligation
Commissions and fees, Principal transactions, Market making, Stock borrow / stock loan, Advisory fees | Provide financial services to customers and counterparties
Margin interest, marketing and distribution fees, Interest income, Other income | n / a

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Soft Dollar Arrangement
As a result of the acquisition of WP, the Company has soft dollar and commission sharing arrangements with customers that fall both within, and outside of, the safe harbor provisions of Rule 28(e) of the Securities Exchange Act of 1934 ("Rule 28(e)"), as amended. These soft dollar arrangements were determined to be a separate performance obligation that should be allocated a portion of the transaction price.
Under these arrangements, the Company charges additional dollars on customer trades and uses these fees to pay third parties for research, brokerage services, market data, and related expenses (“research services”) on behalf of clients. The Company is an agent in these arrangements, as it does not control the research services before they are transferred to the customer. As such, the revenue from these agreements are recognized net of cost in the statements of income in the line item “Commissions and fees.”
The Company paid client expenses of approximately $142,000 and $494,000 for the three months and nine months ended September 30, 2020, respectively. The Company had an outstanding receivable and payable of approximately $5,000 and $150,000, respectively, as of September 30, 2020. The receivable and payable are in the line items “Other receivables” and “Accounts payable and accrued liabilities,” respectively, on the statement of financial condition.
As of September 30, 2020 and December 31, 2019, no allowance for uncollectible commissions was necessary as the Company believes all commissions receivable and prepaid research services expenses will be realized.
Other Items
For the nine months ended September 30, 2020 and 2019, there were no costs capitalized related to obtaining or fulfilling a contract with a customer, and thus the Company has no balances for contract assets or contract liabilities.
The Company concludes that its revenue streams have the same underlying economic factors, and as such, no disaggregation of revenue is required.
12. Referral Fees
Upon the acquisition of WP, the Company has agreements with various third parties to share commissions and pay fees as defined in the respective agreements. These expenses totaled approximately $154,000 and $427,000 for the three and nine months ended September 30, 2020, respectively, which are presented in the line item “Referral fees” in the statements of income.
13. Income Taxes
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2020, the Company has concluded that its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain New Jersey net operating losses.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhanced recoverability of AMT tax credits. The CARES Act did not have a significant impact on the Company’s financial statements as of September 30, 2020.
Income Tax / Benefit and Effective Tax Rate
For the three months ended September 30, 2020, the Company recorded an income tax benefit of $486,000 on income before benefit from income taxes of $95,000. The effective tax rate for the three months ended September 30, 2020 was (511.6)%. The effective tax rate was lower than the federal statutory rate of 21% as the Company recorded a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as the Company determined that it can utilize additional net operating losses under Section 382.
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For the nine months ended September 30, 2020, the Company recorded an income tax provision of $39,000 on income before provision for income taxes of $2,095,000. The effective tax rate for the nine months ended September 30, 2020 was 1.9%. The effective tax rate was lower than the federal statutory rate of 21% as the Company recorded a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as the Company determined that it can utilize additional net operating losses under Section 382.
For the three and nine months ended September 30, 2019, the Company recorded an income tax provision of $349,000 and $1,365,000, respectively. The effective tax rate for the three and nine months ended September 30, 2019 was 21.5% and 27.6%, respectively. The effective tax rate differs from the statutory rate of 21% primarily related to state taxes.
Uncertain Tax Positions
Income tax benefits are recognized for a tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.
As of September 30, 2020, the Company recorded an uncertain tax position of $1,041,000 attributable to the Company’s 2017 to 2019 amended tax returns as the Company’s anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold. The net impact from the uncertain tax position was recorded as a reduction of the Company’s income tax receivable. The Company expects to receive an income tax refund of approximately $248,000 by the first quarter of 2021. In the event that the Company concludes that the Company is subject to interest and / or penalties arising from uncertain tax positions, the Company will present interest and penalties as a component of income taxes.
The Company recognized the anticipated refunds in three months ended September 30, 2020, as this is the period the Company concluded it would amend its federal tax returns and file refund claims as well as calculated the amount of refund to be received.
14. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average of the number of outstanding common shares during the period. The Company had net income of $581,000 and $1,273,000 for the three months ended September 30, 2020 and 2019, respectively. The Company had net income of $2,056,000 and $3,574,000 for the nine months ended September 30, 2020 and 2019, respectively.
15. Capital Requirements
MSCO and StockCross
Net Capital
MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) of the Securities Exchange Act of 1934. Under the alternate method permitted by this rule, net capital, as defined, shall not be less than the lower of $1 million or 2% of aggregate debit items arising from customer transactions. As of September 30, 2020, MSCO’s net capital was $27.9 million, which was approximately $25.6 million in excess of its required net capital of $2.3 million, and its percentage of aggregate debit balances to net capital was 24.4%.
As of December 31, 2019, MSCO’s net capital was $4.4 million, which was $4.2 million in excess of its required net capital of $250,000. As of December 31, 2019, StockCross’ net capital was $18.8 million, which was $16.7 million in excess of its required net capital of $2.1 million, and its percentage of aggregate debit balances to net capital was 17.6%. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the capital of MSCO and StockCross was combined.
Special Reserve Account
MSCO is subject to Customer Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of September 30, 2020, MSCO had cash deposits of $264.0 million in the special reserve accounts which was $16.6 million in excess of the deposit requirement of $247.4 million. After adjustments for deposit(s) and / or withdrawal(s) made on October 1, 2020, MSCO had $7.1 million in excess of the customer reserve requirement.
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As of December 31, 2019, MSCO did not have any special reserve accounts. As of December 31, 2019, StockCross had deposits of $223.4 million (cash of $222.1 million and securities with fair value of $1.3 million) in the special reserve account which was $4 million in excess of the deposit requirement of $219.4 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2020, StockCross had $1 million in excess of the customer reserve requirement. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined.
As of December 31, 2019, StockCross was also subject to the PAB Account Rule 15c3-3 of the SEC which requires segregation of funds in a special reserve account for the exclusive benefit of proprietary accounts of introducing broker-dealers. As of December 31, 2019, StockCross had segregated cash of $1.4 million under rule 15c3-3. As of December 31, 2019, StockCross had $1.4 million in the special reserve account which was $282,000 in deficit of the deposit requirement of $1.7 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 2, 2020, StockCross had $218,000 in excess of the PAB reserve requirement. Effective upon the Company’s acquisition of StockCross on January 1, 2020, MSCO no longer had a PAB requirement.
WP
Net Capital
WP, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn, or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. WP is also subject to the CFTC's minimum financial requirements which require that WP maintain net capital, as defined, equal to the greater of its requirements under Regulation 1.17 under the Commodity Exchange Act or Rule 15c3-1.
As of September 30, 2020, WP’s net capital was approximately $3.7 million which was $3.5 million in excess of its minimum requirement of $250,000 under 15c3-1. As of December 31, 2019, WP’s net capital was approximately $3.9 million which was $3.7 million in excess of its minimum requirement of $250,000 under 15c3-1.
16. Financial Instruments with Off-Balance Sheet Risk
The Company enters into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and is, therefore, subject to varying degrees of market and credit risk.
In the normal course of business, the Company's customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose the Company to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.
The Company seeks to control the risks associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and pursuant to such guidelines, requires customers to deposit additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities may require the Company to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Company controls this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, the Company establishes credit limits for such activities and monitors compliance on a daily basis.
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17. Commitments, Contingencies, and Other
Legal and Regulatory Matters
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of the Company, all such matters are without merit, or involve amounts which would not have a significant effect on the financial statements.
General Contingencies
In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.
The Company is self-insured with respect to employee health claims. The Company maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately $50,000 per employee. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the financial statements.
As part of this plan, the Company recognized expenses of $412,000 and $136,000 for the three months ended September 30, 2020 and 2019, respectively. As part of this plan, the Company recognized expenses of $962,000 and $594,000 for the nine months ended September 30, 2020 and 2019, respectively.
The Company had an accrual of $78,000 as of September 30, 2020, which represents the historical estimate of future claims to be recognized for claims incurred prior to the period.
The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.
18. Related Party Disclosures
StockCross
StockCross and the Company were under common ownership, and prior to January 1, 2020, StockCross served as one of the clearing broker-dealers for the Company. The StockCross clearing agreement with the Company provided that StockCross passed through all revenue and charged the Company for related clearing expenses. Outside of the clearing agreement, the Company had an expense sharing agreement with StockCross for its Beverly Hills and Jersey City branch offices, and StockCross paid some vendors for miscellaneous expenses which it passed through to the Company.
In January 2019, the Company purchased approximately 15% of StockCross’ outstanding shares. Effective January 1, 2020, the Company acquired the remaining 85% of StockCross in exchange for 3,298,774 shares of the Company’s common stock and StockCross was merged with and into MSCO. Upon the closing of this transaction on January 1, 2020, all receivables and payables between the Company and StockCross as well as any earnings from the Company’s equity method investment in StockCross were eliminated upon consolidation.
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Kennedy Cabot Acquisition, LLC
Kennedy Cabot Acquisition, LLC (“KCA”) is an affiliate of the Company and is under common ownership with the Company. To gain efficiencies and economies of scale with billing and administrative functions, KCA serves as a paymaster for the Company for payroll and related functions, the entirety of which KCA passes through to the subsidiaries of the Company proportionally. In addition, KCA has purchased the naming rights of the Company for the Company to use.
KCA sponsors a 401(k) profit sharing plan which covers substantially all of the Company’s employees. Employee contributions to the plan are at the discretion of eligible employees. There were no contributions by the Company or KCA to the plan for the nine months ended September 30, 2020 and 2019.
In January 2020, MSCO sold approximately $290,000 worth of a private equity security to KCA at cost.
Park Wilshire Companies, Inc.
PWC brokers the insurance policies for related parties. Revenue for PWC from related parties was $21,000 and $3,000 for the three months ended September 30, 2020 and 2019, respectively. Revenue for PWC from related parties was $65,000 and $67,000 for the nine months ended September 30, 2020 and 2019, respectively.
Gloria E. Gebbia and John J. Gebbia
The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. See “Note 10 – Notes Payable - Related Party” for additional detail.
In addition, the Company’s obligations under its Agreement with East West Bank are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia, individually and as a co-trustee of the John and Gloria Living Trust, U/D/T December 8, 1994 (the “Trust”) and Gloria E. Gebbia, individually and as a co-trustee of the Trust. See “Note 9 – Long-Term Debt” for additional detail.
Gebbia Sullivan County Land Trust
The Company operates on a month-to-month lease agreement for its branch office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a relative of the Gebbia Family. For both the three months ended September 30, 2020 and 2019, rent expense was $15,000 for this branch office. For both the nine months ended September 30, 2020 and 2019, rent expense was $45,000 for this branch office.
19. Subsequent Events
The Company has evaluated events that have occurred subsequent to September 30, 2020 and through November 16, 2020, the date of the filing of this report.
On November 10, 2020, the Company issued 150,000 shares of its restricted common stock (the “Shares”) to each of Anthony Palmeri and Gerard Losurdo, each new employees of MSCO, as part of their employment agreements. Mr. Palmeri and Mr. Losurdo each paid the Company approximately $400,000 for their Shares, which was equal to 70% of the closing price of the common stock as reported on Nasdaq on November 9, 2020. The Shares issued to Mr. Palmeri and Mr. Losurdo are subject to a three-year restriction on transfer commencing on the day of issuance. The issuance of the Shares were each approved by unanimous written consent of the Company's board of directors. The shares were issued to Mr. Palmeri and Mr. Losurdo as part of their employment agreements in accordance with Nasdaq Listing Rule 5635(c)(4). The Shares were issued without registration under the Securities Exchange Act of 1933, as amended in reliance upon the exemption provided in Section 4(a)(2) thereunder.
Other than the event described above, there have been no material subsequent events that occurred during such period that would require disclosure in this report or would be required to be recognized in the financial statements as of September 30, 2020.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of our operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and accompanying notes to financial statements.
Forward-Looking Statements
The statements contained in the following MD&A and elsewhere throughout this Quarterly Report on Form 10-Q, including any documents incorporated by reference, that are not historical facts, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect our management’s beliefs, objectives, and expectations as of the date hereof, are based on the best judgement of our management. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following: economic, social and political conditions, global economic downturns resulting from extraordinary events such as the COVID-19 pandemic and other securities industry risks; interest rate risks; liquidity risks; credit risk with clients and counterparties; risk of liability for errors in clearing functions; systemic risk; systems failures, delays and capacity constraints; network security risks; competition; reliance on external service providers; new laws and regulations affecting our business; net capital requirements; extensive regulation, regulatory uncertainties and legal matters; failure to maintain relationships with employees, customers, business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with risks and uncertainties detailed in our filings with the SEC, including our most recent filings on Forms 10-K and 10-Q.
We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.
This discussion should be read in conjunction with our financial statements on our 2019 Form 10-K, and our financial statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Executive Overview
We operate as a financial services company and provide a wide variety of financial services to our clients. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed-income markets. Market volatility, overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants who include investors and competitors, impacting their level of participation in the financial markets. In addition, in periods of reduced financial market activity, profitability is likely to be adversely affected because certain expenses remain relatively fixed, including salaries and related costs, portions of communications costs and occupancy expenses. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.
COVID-19
Impact
Overview
In March 2020, the World Health Organization declared the spread of COVID-19 a worldwide pandemic. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The COVID‑19 pandemic has adversely impacted the economic environment, leading to lower interest rates across the curve, lower equity market valuations and heightened volatility in the financial markets. We are actively monitoring the impact of COVID-19 on our business, financial condition, liquidity, operations, employees, clients and business partners.
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Financial Impact
During the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to near zero. This decline in interest rates has led to a decrease in our revenue from margin interest, marketing and distribution fees and interest income and may continue to have a negative impact on these revenue streams in the foreseeable future.
Our commissions and fees and principal transaction revenues decreased due to the high market volatility; however, revenue from our institutional customer base has declined only slightly since the first quarter of 2020. We note that the revenue from our business lines acquired from StockCross that are not directly correlated to interest rates such as market making, stock loan and other income have either increased or been relatively flat from the first quarter of 2020.
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.
As of the date of this report, we have reopened our branch offices while ensuring compliance with federal, state, and local laws as well as health and safety guidelines. We have taken significant steps to ensure that our 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. Throughout this challenging time, our unwavering focus on continuing to earn our clients’ trust is made possible by the significant contributions of our employees, and we remain committed to serving our clients while protecting our employees’ wellbeing.
Expense Reduction
To offset the decrease in our earnings associated with COVID-19, we have reduced the salary of higher-level employees and made a reduction in force in certain areas of our business. In addition, all members of our board of directors have either reduced their annual fees or are currently functioning without an annual fee.
We are strategically evaluating our clearing relationship opportunities within our institutional operations to gain more income. We are assessing all of our vendors to identify areas where we can optimize our cost structure while maintaining operational efficiency and quality of the customer experience. As of the date of this report, we are actively involved in contract negotiations with key vendors to reduce many of our fixed costs.
In addition, we have evaluated our branch offices and are transitioning out of legacy office space into more cost-efficient locations. We anticipate the benefits of these transitions to provide cost reductions beginning in the second quarter of 2021 and are looking into ways to further consolidate our office space.
We do not believe any of the changes listed 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 position or future outlook related to liquidity as we have been able to meet all obligations and believe we will be able to do so in the foreseeable future.
Conclusion
We note that the ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time. We are currently monitoring the COVID-19 situation and will continue to respond to meet the demands of our clients as well as protect our employees.
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Acquisitions
StockCross
Overview
Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.
In January 2019, we acquired approximately 15% ownership of StockCross which was accounted for under the equity method. Effective January 1, 2020, we acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of our common stock and StockCross was merged with and into MSCO. As of January 1, 2020, the business and operations of StockCross became part of MSCO, and all clearing and other services provided by StockCross are performed by MSCO. In addition, as of January 1, 2020, our equity method investment in StockCross was eliminated.
Accounting for Acquisition
Prior to and as of the date of our acquisition of StockCross, Siebert and StockCross were entities under common control of the Gebbia Family. The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for all periods presented in the financial statements. This presentation is reflected in the section below comparing statements of income and statements of financial condition to prior periods.
We acquired various assets and liabilities from StockCross as of the acquisition date, the fair values of which were assumed to be the historical carrying amounts. The excess of the purchase price over the fair value of the net assets acquired was eliminated due to the transaction being between entities under common control. See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and the corresponding accounting.
Recent Results
The new business lines acquired from StockCross have added additional revenue streams to our statements of income. These new revenue streams include interest income from clearing operations, market making, and stock borrow / stock loan, all of which have contributed approximately $5.3 million of revenue for the nine months ended September 30, 2020. In terms of our existing revenue streams, StockCross added incremental commissions and fees, margin interest, marketing and distribution fees, and principal transactions from their client base and operations. Our existing expenses primarily related to compensation, occupancy as well as clearing and technology costs have also increased from the corresponding increase in StockCross revenue and operations. See “Note 11 – Revenue Recognition” for further detail on our revenue streams and corresponding accounting policies.
The acquisition of StockCross has also impacted our statements of financial condition as the nature of StockCross’ business requires the presentation of various customer and securities assets and corresponding liabilities on the statements of financial condition. StockCross has added new assets to our statements of financial condition such as cash and securities segregated for regulatory purposes, receivables from customers, and securities borrowed as well as new liabilities such as payables to customers, payables to non-customers and securities loaned. StockCross has also added incremental assets and liabilities to the majority of our existing items within our statements of financial condition such as receivables from broker-dealers and clearing organizations and notes payable – related party.
Further, as of January 1, 2020, the acquisition of StockCross added approximately $1.5 billion in retail customer net worth and approximately 30,000 retail accounts to Siebert.
WP
Overview
Effective December 1, 2019, we acquired all of the issued and outstanding membership interests of WP, a prime brokerage services provider, for a cash consideration of approximately $7.1 million, and WP became a wholly-owned subsidiary of Siebert.
The acquisition resulted in approximately $1,989,000 of goodwill and we acquired two intangible assets, WP’s customer relationships and WP’s trade name. We also acquired other assets consisting mostly of receivables from broker-dealers and clearing organizations and assumed liabilities consisting mostly of accounts payable and accrued expenses.
As previously disclosed in a Current Report on Form 8-K filed on June 26, 2020, on June 22, 2020, we entered into an agreement pursuant to which upon closing we would have sold all our member interests in WP to WPS Acquisitions, LLC for a purchase price of $7.3 million. As reported in a Current Report on Form 8-K filed on July 30, 2020, effective July 24, 2020, we terminated the agreement.
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Client Account and Activity Metrics
The following tables set forth metrics we use in analyzing our client account and activity trends for the periods indicated. Retail customers are customers who have accounts with MSCO; institutional customers were acquired from WP as part of the acquisition effective December 1, 2019.
We acquired StockCross in January 2020; however, the client account and client activity metrics for Siebert and StockCross have been presented on a combined basis for all periods shown below to maintain consistency to the presentation of the financial statements. As such, the results of StockCross are included in metrics for the 2019 data shown below.
Client Account Metrics – Total Assets Under Management

|  | As of September 30, |
|  | 2020 |  |  | 2019 |
Total assets under management (in billions) |  | $ | 14.5 |  |  | $ | 12.5 |

Below is a breakout of the account and activity metrics of our various customer bases.
Client Account Metrics – Retail Customers

|  | 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 |

• | Retail customer net worth represents the total value of securities and cash in the retail customer accounts after deducting margin debits

• | Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions

• | Retail customer credit balances represents client cash held in brokerage accounts

• | Retail customer money market fund value represents all retail customers accounts invested in money market funds

• | Retail customer accounts represents the number of retail customers

Client Account Metrics – Institutional Customers

|  | As of September 30, 2020 |
Institutional customer net worth (in billions) |  | $ | 1.4 |

• | 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

|  | 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 |

• | Total retail trades represents retail trades that generate commissions

• | Average commission per retail trade represents the average commission generated for all types of retail customer trades

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Statements of Income and Financial Condition
Overview
We acquired StockCross in January 2020; however, Siebert and StockCross have been presented on a combined basis for all periods presented. As such, the results of StockCross are included in the statements of income and statements of financial condition discussed below.
We acquired WP in December 2019 which added various revenue streams and corresponding expenses to our statement of income for the three and nine months ended September 30, 2020. As such, the results of WP’s operations impact our comparisons for the statements of income and statements of financial condition discussed below.
Statements of Income for the Three Months Ended September 30, 2020 and 2019
Revenue
Commissions and fees for the three months ended September 30, 2020 were $4,679,000 and increased by $2,406,000 from the corresponding period in the prior year, primarily due to the addition of WP’s commissions and fees in 2020.
Margin interest, marketing and distribution fees for the three months ended September 30, 2020 were $2,311,000 and decreased by $1,601,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment, partially offset by the addition of WP’s margin interest income in 2020.
Principal transactions for the three months ended September 30, 2020 were $2,342,000 and increased by $15,000 from the corresponding period in the prior year.
Interest income for the three months ended September 30, 2020 was $915,000 and decreased by $146,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment, partially offset by the addition of WP’s interest income in 2020.
Market making for the three months ended September 30, 2020 was $423,000 and increased by $93,000 from the corresponding period in the prior year, primarily due to favorable market conditions during the three months ended September 30, 2020.
Stock borrow / stock loan for the three months ended September 30, 2020 was $1,267,000 and increased by $918,000 from the corresponding period in the prior year, primarily due to the organic growth of the business, the expansion of our stock locate function, and strong market conditions.
Advisory fees for the three months ended September 30, 2020 were $305,000 and increased by $94,000 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, 2020 was $333,000 and increased by $43,000 from the corresponding period in the prior year, primarily due to an increase in miscellaneous account fees.
Operating Expenses
Employee compensation and benefits for the three months ended September 30, 2020 were $6,584,000 and increased by $1,775,000 from the corresponding period in the prior year, primarily due to the addition of WP salaries and commission payouts in 2020.
Clearing fees, including execution costs for the three months ended September 30, 2020 were $1,270,000 and increased by $472,000 from the corresponding period in the prior year, primarily due to the addition of WP’s operations in 2020.
Technology and communications expenses for the three months ended September 30, 2020 were $1,322,000 and increased by $881,000 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.
Other general and administrative expenses for the three months ended September 30, 2020 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.
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Data processing expenses for the three months ended September 30, 2020 were $784,000 and increased by $257,000 from the corresponding period in the prior year, primarily due to increased technology costs related to clearing operations.
Rent and occupancy expenses for the three months ended September 30, 2020 were $694,000 and increased by $64,000 from the corresponding period in the prior year, primarily due to the increase in rent from the addition of WP’s offices in 2020.
Professional fees 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.
Depreciation and amortization expenses for the three months ended September 30, 2020 were $368,000 and increased by $124,000 from the corresponding period in the prior year, primarily due to the depreciation and amortization of incremental purchases of fixed assets and software as well as the amortization related to the intangible assets acquired from WP.
Referral fees for the three months ended September 30, 2020 were $154,000 and increased by $154,000 from the corresponding period in the prior year, primarily due to the commission payouts to other institutional brokers for WP in 2020.
Interest expense for the three months ended September 30, 2020 was $89,000 and increased by $58,000 from the corresponding period in the prior year, primarily due to the interest on the promissory note to finance part of the acquisition of WP.
Provision (Benefit) For (From) Income Taxes
Benefit from income taxes for the three months ended September 30, 2020 was $486,000, a decrease of income tax expense of $835,000 from the corresponding period in the prior year, primarily due to a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as we determined that we can utilize additional net operating losses under Section 382.
Statements of Income for the Nine Months Ended September 30, 2020 and 2019
Revenue
Commissions and fees for the nine months ended September 30, 2020 were $15,149,000 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.
Margin interest, marketing and distribution fees for the nine months ended September 30, 2020 were $7,730,000 and decreased by $3,431,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment, partially offset by the addition of WP’s margin interest income in 2020.
Principal transactions for the nine months ended September 30, 2020 were $8,126,000 and increased by $1,988,000 from the corresponding period in the prior year, primarily due to strong market conditions during early 2020.
Interest income for the nine months ended September 30, 2020 was $3,155,000 and decreased by $262,000 from the corresponding period in the prior year, primarily due to the declining interest rate environment, partially offset by the addition of WP’s interest income in 2020.
Market making for the nine months ended September 30, 2020 was $1,508,000 and increased by $205,000 from the corresponding period in the prior year, primarily due to favorable market conditions during 2020.
Stock borrow / stock loan for the nine months ended September 30, 2020 was $2,482,000 and increased by $1,129,000 from the corresponding period in the prior year, primarily due to the organic growth of the business, the expansion of our stock locate function, and strong market conditions.
Advisory fees for the nine months ended September 30, 2020 were $810,000 and increased by $238,000 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, 2020 was $1,035,000 and increased by $402,000 from the corresponding period in the prior year, primarily due to the addition of WP’s business in 2020 and an increase in miscellaneous account fees.
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Operating Expenses
Employee compensation and benefits for the nine months ended September 30, 2020 were $20,489,000 and increased by $6,677,000 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 principal transaction revenue.
Clearing fees, including execution costs for the nine months ended September 30, 2020 were $3,907,000 and increased by $1,582,000 from the corresponding period in the prior year, primarily due to the addition of WP’s operations in 2020.
Technology and communications expenses for the nine months ended September 30, 2020 were $3,256,000 and increased by $1,992,000 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.
Other general and administrative expenses for the nine months ended September 30, 2020 were $1,710,000 and decreased by $1,077,000 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.
Data processing expenses for the nine months ended September 30, 2020 were $2,387,000 and increased by $900,000 from the corresponding period in the prior year, primarily due to increased technology costs related to clearing operations.
Rent and occupancy expenses for the nine months ended September 30, 2020 were $2,119,000 and increased by $365,000 from the corresponding period in the prior year, primarily due to the increase in rent from the addition of WP’s offices in 2020.
Professional fees for the nine months ended September 30, 2020 were $2,159,000 and decreased by $409,000 from the corresponding period in the prior year, primarily due to a reduction in legal fees.
Depreciation and amortization expenses for the nine months ended September 30, 2020 were $1,193,000 and increased by $504,000 from the corresponding period in the prior year, primarily due to the depreciation and amortization of incremental purchases of fixed assets and software as well as the amortization related to the intangible assets acquired from WP.
Referral fees for the nine months ended September 30, 2020 were $427,000 and increased by $427,000 from the corresponding period in the prior year, primarily due to the commission payouts to other institutional brokers for WP in 2020.
Interest expense for the nine months ended September 30, 2020 was $253,000 and increased by $169,000 from the corresponding period in the prior year, primarily due to the interest on the promissory note to finance part of the acquisition of WP.
Provision (Benefit) For (From) Income Taxes
Provision for income taxes for the nine months ended September 30, 2020 was $39,000 and decreased by $1,326,000 from the corresponding period in the prior year, primarily due to a discrete tax benefit related to the anticipated filing of amended 2017 through 2019 federal tax returns in order to claim a refund of previously paid taxes coupled with the recognition of additional deferred tax assets for federal net operating losses as we determined that we can utilize additional net operating losses under Section 382.
Statements of Financial Condition as of September 30, 2020 and December 31, 2019
Assets
Assets as of September 30, 2020 were $673,452,000 and increased by $135,385,000 from December 31, 2019, primarily due to the increase in securities borrowed and cash and securities segregated for regulatory purposes.
Liabilities
Liabilities as of September 30, 2020 were $637,134,000 and increased by $132,202,000 from December 31, 2019, primarily due to the increase in securities loaned and payables to customers.
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Liquidity and Capital Resources
Overview
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.
Net Capital and Special Reserve Account
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. Since MSCO’s aggregate debits may fluctuate, MSCO’s minimum net capital requirements may also fluctuate from period to period. In addition, MSCO is subject to Customer Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers.
WP, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1 and that equity capital may not be withdrawn, or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. WP is also subject to the CFTC's minimum financial requirements which require that WP maintain net capital, as defined, equal to the greater of its requirements under Regulation 1.17 under the Commodity Exchange Act or Rule 15c3-1.
See “Note 15 – Capital Requirements” for more detail on our capital requirements.
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, we have drawn down approximately $4.9 million under this agreement. See “Note 9 – Long-Term Debt” for more detail on this agreement.
Contractual Obligations
Leases
Future annual minimum payments for operating leases with initial terms of greater than one year as of September 30, 2020 were as follows:

Year |  | Amount |
2020 |  | $ | 606,000 |
2021 |  |  | 1,403,000 |
2022 |  |  | 755,000 |
2023 |  |  | 543,000 |
2024 |  |  | 56,000 |
Total |  | $ | 3,363,000 |

As of September 30, 2020, we had an operating lease agreement for an office space in Beverly Hills, CA with a term of approximately 5 years. The total commitment of the lease is approximately $1.5 million, and the lease will commence on March 1, 2021. See “Note 7 – Leases” for more detail on our lease arrangements and corresponding disclosures.
Notes Payable – Related Party
As of September 30, 2020, we have $6 million in notes payable to Gloria E. Gebbia, $3 million of which matures in December 2020 and $3 million of which matures in November 2021. See “Note 10 – Notes Payable - Related Party” for more detail.
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Prepaid Service Contract
We have entered into an agreement with InvestCloud for development work related to our online platform as well as Robo-Advisor. As part of this agreement, we have an obligation to pay for the license fees associated with the InvestCloud Platform for a three year term. See “Note 5 – Prepaid Service Contract” for more detail.
Off-Balance Sheet Arrangements
Customer transactions are cleared through our clearing firms on a fully disclosed basis. If customers do not fulfill their contractual obligations, we may incur loss in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions for the nine months ended September 30, 2020 and 2019.
Impairment
We have concluded that as of September 30, 2020, there have been no impairments to the carrying value of Siebert’s goodwill and other tangible and intangible assets.
Segment
We concluded as of September 30, 2020, Siebert is comprised of a single operating segment based on the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of Siebert from a consolidated perspective.
Related Party Disclosures
During the course of business, we enter into various agreements and transactions with related parties. See “Note 18 – Related Party Disclosures” for more detail on our related party disclosures.
Critical Accounting Policies
Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our 2019 Form 10-K. There have been no changes to critical accounting estimates as of September 30, 2020.
Uncertain Tax Positions
Income tax benefits are recognized for a tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority.
As of September 30, 2020, we recorded an uncertain tax position of $1,041,000 attributable to our 2017 to 2019 amended tax returns as our 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 our income tax receivable. We expect to receive an income tax refund of approximately $248,000 by the first quarter of 2021. In the event that we conclude that we are subject to interest and/or penalties arising from uncertain tax positions, we will present interest and penalties as a component of income taxes.
We recognized the anticipated refunds in three months ended September 30, 2020, as this is the period we concluded we would amend our federal tax returns and file refund claims as well as calculated the amount of refund to be received.
Fair Value Measurements
We have securities that are valued using the fair value framework under ASC 820 within our assets and liabilities as of September 30, 2020 and December 31, 2019. The majority of the assets are level 1 U.S. government securities and equity securities as well as level 2 equity securities that are in the line items “Cash and securities segregated for regulatory purposes” and “Securities owned, at fair value.” The liabilities consist of relatively small amounts of level 1 and level 2 equity securities in the line item “Securities sold, not yet purchased, at fair value.” See “Note 6 – Fair Value Measurements” for more detail.
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New Accounting Pronouncements
We have adopted certain new accounting pronouncements during the reporting period. See “Note 2 – New Accounting Standards” for more detail on the new accounting pronouncements and their impact on our financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instruments Held For Trading Purposes
We do not directly engage in derivative transactions, have no interest in any special purpose entity and have no liabilities, contingent or otherwise, for the debt of another entity.
Financial Instruments Held For Purposes Other Than Trading
We generally invest our cash and cash equivalents temporarily in dollar denominated bank account(s). These investments are not subject to material changes in value due to interest rate movements.
Retail customer transactions are cleared through clearing brokers on a fully disclosed basis and are also self-cleared by MSCO. If customers do not fulfill their contractual obligations any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy customer obligations may be incurred by the Company. We regularly monitor the activity in customer accounts for compliance with margin requirements. We are exposed to the risk of loss on unsettled customer transactions if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions in the last five years.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Executive Vice President / Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the Executive Vice President / Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Executive Vice President / Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based on its evaluation, our management, including our Executive Vice President / Chief Financial Officer, concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) was identified during the end of the period covered by this report, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of our management, all such matters are without merit, or involve amounts which would not have a significant effect on the financial position of the Company.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, investors should carefully consider the risk factors discussed in Part I - Item 1A - Risk Factors, in our 2019 Form 10-K, as supplemented by the risk factors included in our Quarterly Report on Form 10-Q for the period ended March 31, 2020. Each of such risk factors could materially affect our business, financial position, and results of operations. Other than the supplemental risk factors provided in the Quarterly Report on Form 10-Q for the period ended March 31, 2020, there have been no material changes from the risk factors disclosed in our 2019 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None. See “Note 19 – Subsequent Events” for more detail on shares of our restricted common stock issued on November 10, 2020, subsequent to the end of the reporting period.
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ITEM 6. EXHIBITS

Exhibit No. |  | Description of Document
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.
32.1 |  | Certification of Andrew H. Reich of Periodic Financial Report under Section 906 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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| SIEBERT FINANCIAL CORP.
| By: | /s/ Andrew H. Reich
|  | Andrew H. Reich
|  | Executive Vice President, Chief Operating Officer, Chief Financial Officer, and Secretary
|  | (Principal executive, financial and accounting officer)
| Dated: November 16, 2020

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