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Acquisitions | 12 Months Ended
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Dec. 31, 2020
Acquisitions Abstract |
Acquisitions | 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 and 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, 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 were 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. This common-control transaction does not meet the definition of a business combination in accordance with GAAP because there was no change in control over the net assets. The acquisition represented a change in reporting entity. As such, upon the closing of the acquisition, the net assets of the Company were combined with those of StockCross at their historical carrying amounts. The companies have been presented on a combined basis for all periods presented in the financial statements in a manner similar to a pooling of interests, as the period of common control existed prior to the periods presented in the financial statements. Accordingly, the historical financial statements of the Company have been presented under the “as if pooling” method. The statement of income for the year ended December 31, 2019 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 loss recognized as part of its equity method investment in StockCross for the year ended December 31, 2019 was eliminated upon consolidation. These adjustments to pre-tax income were tax affected using an estimated effective tax rate of 28.0%. The statement of financial condition as of December 31, 2019 reflects the elimination of intercompany payables and receivables between the Company and StockCross as part of their ongoing business relationship and reflects the elimination of the Company’s 15% ownership of StockCross. The statement of financial condition as of December 31, 2019 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 statement of income. 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 year ended December 31, 2019. 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. Assets Acquired and Liabilities Assumed The Company acquired various assets and assumed 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 |
WPS Overview of Acquisition WPS is a Delaware limited liability company originally organized as a corporation under the laws of the State of Florida in 2007. WPS is a registered broker-dealer with the SEC and Commodity Futures Trading Commission ("CFTC"), and is a member of the FINRA, National Futures Association ("NFA"), and SIPC. WPS operations consist primarily of trade execution and risk management services for customers and is an introducing broker for the transactions of institutional customers. Prior to being acquired by the Company, WPS was comprised of two members, Weeden Investors L.P. (“WILP”), a Delaware limited partnership, and Weeden Securities Corporation (“WSC”), a Delaware corporation, and was managed by a Board of Managers. Effective December 1, 2019, the Company purchased 100% of the member interests of WPS from WILP and WSC and WPS became a wholly-owned subsidiary of the Company. The purchase price was approximately $7.1 million paid in cash and the Company borrowed $3 million in a promissory note payable to Gloria E. Gebbia to finance part of the purchase. The operating results for the 31-day period ended December 31, 2019 were included in the Company’s statement of income for the year ended December 31, 2019. Accounting for Acquisition The transaction was accounted for under the acquisition method of accounting for business combinations pursuant to ASC 805 - Business Combinations. ASC 805, requires, among other things, that the assets acquired and liabilities assumed be recognized at their fair values as of the proposed acquisition date. ASC 820 - Fair Value Measurements, which establishes a framework for measuring fair values, defines fair value as “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.” Assets Acquired and Liabilities Assumed The Company was required to allocate the WPS purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of November 30, 2019. The excess of the purchase price over those fair values was recorded as goodwill. In accordance with ASC 805, the Company was required to finalize the fair value of net assets of the business combination on the acquisition date. As of December 31, 2019, the Company completed its allocation of the WPS purchase price and adjustments were made for tax considerations. In determining the fair value of assets acquired and liabilities assumed, the Company primarily used discounted cash flow analyses and market approaches. Inputs to the discounted cash flow analyses and other aspects of the allocation of purchase price required judgment. The more significant inputs used in the discounted cash flow analyses and other areas of judgment included assumptions such as future revenue growth or attrition rates, projected margins, discount rates used to present value future cash flows, the amount of synergies expected from the acquisition, and the economic useful life of assets. The following table summarizes the Company’s allocation of the purchase price as of the date of acquisition:
|  | Estimated Fair Value |
Cash and cash equivalents |  | $ | 301,000 |
Cash segregated for regulatory purpose |  |  | 152,000 |
Receivables from broker-dealers and clearing organizations |  |  | 4,616,000 |
Furniture, equipment, and leasehold improvements, net |  |  | 41,000 |
Software, net |  |  | 51,000 |
Intangible assets, net |  |  | 1,057,000 |
Lease right-of-use assets |  |  | 214,000 |
Prepaid expenses and other assets |  |  | 271,000 |
Total Assets acquired |  |  | 6,703,000 |
Accounts payable and accrued liabilities |  |  | 1,353,000 |
Lease liabilities |  |  | 214,000 |
Total Liabilities assumed |  |  | 1,567,000 |
Net Assets acquired |  |  | 5,136,000 |
Goodwill |  |  | 1,989,000 |
Purchase price |  | $ | 7,125,000 |
The transaction resulted in $1,989,000 of goodwill, all of which is expected to be deductible for tax purposes. Financial Results from WPS The following table summarizes the revenue and net income from operations of WPS included in the Company’s statement of income for the year ended December 31, 2019 since the date of acquisition (for the 31-day period ended December 31, 2019):
|  | Year Ended December 31, 2019 |
Revenue |  | $ | 968,000 |
Net income |  | $ | 203,000 |
Pro Forma Statements The following pro forma summary presents the statement of income of the Company as if the acquisition of WPS had occurred on January 1, 2019, inclusive of pro forma adjustments (unaudited). WPS financial statements have already been consolidated as part of the Company’s financial statements for the period presented for 2020. 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 effective 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.
|  | Year Ended December 31, 2019 |
Revenue |  | $ | 53,938,000 |
Net income |  | $ | 1,704,000 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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