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Acquisitions

6 Months Ended

Jun. 30, 2020

3. Acquisitions

StockCross

Overview of Acquisition

Established in 1971, StockCross was one of the largest privately-owned brokerage firms in the nation and its operations consisted primarily of market making, fixed-income products distribution, online or broker-assisted equity trading, securities lending, and equity stock plan services.

Prior to being acquired by the Company, StockCross and the Company were affiliated entities through common ownership and had various related party transactions. In January 2019, the Company acquired approximately 15% ownership of StockCross. Effective January 1, 2020, pursuant to an Agreement and Plan of Merger, the Company acquired the remaining 85% of StockCross’ outstanding shares and StockCross was merged with and into MSCO. The purchase price paid was approximately $29,750,000 or 3,298,774 shares of the Company’s restricted common stock which was issued in connection with the acquisition. Prior to the acquisition, MSCO had a clearing agreement with StockCross whereby StockCross provided custody and clearing services to MSCO for its securities broker-dealer business; however, as of January 1, 2020, all clearing and other services provided by StockCross are performed by MSCO.

Accounting for Acquisition

Prior to and as of the date of the acquisition, the Company and StockCross were entities under common control of the Gebbia Family. As such, the acquisition was accounted for as a transaction between entities under common control.

A common-control transaction is similar to a business combination for the Company as it is the entity that received the net assets of StockCross; however, this common-control transaction does not meet the definition of a business combination in accordance with GAAP because there is no change in control over the net assets.

The acquisition represented a change in reporting entity. As such, upon the closing of the acquisition, the net assets of the Company were combined with those of StockCross at their historical carrying amounts and 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. In addition, the Company purchased approximately 15% of the outstanding shares of StockCross from an unrelated party for $3,665,000 as indicated above. Both of these transactions are reflected in the “Cash flows from financing activities” section of the statements of cash flows.

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. StockCross’ financial statements have already been consolidated in the Company’s financial statements for the periods presented for 2020:

Three Months Ended June 30, 2019 (unaudited)

	Three Months Ended June 30, 2019
	Siebert		StockCross		Pro Forma Adjustments			Total Combined Siebert

Revenue
Commissions and fees	$	2,241,000	$	350,000	$	—		$	2,591,000
Margin interest, marketing and distribution fees		2,783,000		910,000		—			3,693,000
Principal transactions		1,828,000		93,000		—			1,921,000
Interest income		16,000		1,170,000		—			1,186,000
Market making		—		410,000		—			410,000
Stock borrow / stock loan		—		423,000		—			423,000
Advisory fees		193,000		—		—			193,000
Other income		—		327,000		(63,000	)		264,000
Total Revenue		7,061,000		3,683,000		(63,000	)		10,681,000

Expenses
Employee compensation and benefits		2,890,000		1,586,000		—			4,476,000
Clearing fees, including execution costs		578,000		211,000		(63,000	)		726,000
Technology and communications		262,000		138,000		—			400,000
Other general and administrative		887,000		298,000		—			1,185,000
Data processing		—		418,000		—			418,000
Rent and occupancy		320,000		273,000		—			593,000
Professional fees		447,000		455,000		—			902,000
Depreciation and amortization		251,000		—		—			251,000
Interest expense		—		31,000		—			31,000
Total Expenses		5,635,000		3,410,000		(63,000	)		8,982,000

Earnings of equity method investment in related party		15,000		—		(15,000	)		—

Income before provision (benefit) for (from) income taxes		1,441,000		273,000		(15,000	)		1,699,000
Provision (benefit) for (from) income taxes		449,000		175,000		(4,000	)		620,000
Net income / (loss)	$	992,000	$	98,000	$	(11,000	)	$	1,079,000

Net income per share of common stock
Basic and diluted	$	0.04	$	0.02				$	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

Six Months Ended June 30, 2019 (unaudited)

	Six Months Ended June 30, 2019
	Siebert		StockCross		Pro Forma Adjustments			Total Combined Siebert

Revenue
Commissions and fees	$	4,105,000	$	754,000	$	—		$	4,859,000
Margin interest, marketing and distribution fees		5,555,000		1,694,000		—			7,249,000
Principal transactions		3,438,000		373,000		—			3,811,000
Interest income		31,000		2,328,000		—			2,359,000
Market making		—		973,000		—			973,000
Stock borrow / stock loan		—		1,004,000		—			1,004,000
Advisory fees		361,000		—		—			361,000
Other income		—		465,000		(122,000	)		343,000
Total Revenue		13,490,000		7,591,000		(122,000	)		20,959,000

Expenses
Employee compensation and benefits		5,725,000		3,279,000		—			9,004,000
Clearing fees, including execution costs		1,232,000		418,000		(122,000	)		1,528,000
Technology and communications		509,000		313,000		—			822,000
Other general and administrative		1,272,000		646,000		—			1,918,000
Data processing		—		961,000		—			961,000
Rent and occupancy		615,000		509,000		—			1,124,000
Professional fees		949,000		836,000		—			1,785,000
Depreciation and amortization		426,000		19,000		—			445,000
Interest expense		—		52,000		—			52,000
Total Expenses		10,728,000		7,033,000		(122,000	)		17,639,000

Earnings of equity method investment in related party		54,000		—		(54,000	)		—

Income before provision (benefit) for (from) income taxes		2,816,000		558,000		(54,000	)		3,320,000
Provision (benefit) for (from) income taxes		818,000		214,000		(15,000	)		1,017,000
Net income / (loss)	$	1,998,000	$	344,000	$	(39,000	)	$	2,303,000

Net income per share of common stock
Basic and diluted	$	0.07	$	0.06				$	0.08

Weighted average shares outstanding
Basic and diluted		27,157,188		6,152,500

Pro forma shares used to compute net income per share									30,455,962

Statements of Financial Condition

	As of December 31, 2019
	Siebert		StockCross		Pro Forma Adjustments (unaudited)			Total Combined Siebert (unaudited)

ASSETS
Cash and cash equivalents	$	3,082,000	$	1,588,000	$	—		$	4,670,000
Cash and securities segregated for regulatory purposes		110,000		224,814,000		—			224,924,000
Receivables from customers		—		86,331,000		—			86,331,000
Receivables from broker-dealers and clearing organizations		3,067,000		1,265,000		(808,000	)		3,524,000
Receivables from related party		1,000,000		—		(1,000,000	)		—
Other receivables		223,000		627,000		(88,000	)		762,000
Prepaid expenses and other assets		624,000		346,000		—			970,000
Securities borrowed		—		193,529,000		—			193,529,000
Securities owned, at fair value		—		3,018,000		—			3,018,000
Total Current assets		8,106,000		511,518,000		(1,896,000	)		517,728,000

Deposits with broker-dealers and clearing organizations		3,186,000		1,840,000		(75,000	)		4,951,000
Furniture, equipment and leasehold improvements, net		1,131,000		19,000		—			1,150,000
Software, net		1,888,000		—		—			1,888,000
Lease right-of-use assets		2,810,000		1,141,000		—			3,951,000
Equity method investment in related party		3,360,000		—		(3,360,000	)		—
Deferred tax assets		4,981,000		407,000		—			5,388,000
Intangible assets, net		1,022,000		—		—			1,022,000
Goodwill		1,989,000		—		—			1,989,000
Total Assets	$	28,473,000	$	514,925,000	$	(5,331,000	)	$	538,067,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Payables to customers	$	—	$	308,091,000	$	—		$	308,091,000
Payables to non-customers		—		9,151,000		(1,088,000	)		8,063,000
Drafts payable		—		2,834,000		—			2,834,000
Payables to broker-dealers and clearing organizations		—		1,406,000		(883,000	)		523,000
Payables to related parties		7,000		—		(7,000	)		—
Accounts payable and accrued liabilities		1,473,000		963,000		7,000			2,443,000
Securities loaned		—		170,443,000		—			170,443,000
Securities sold, not yet purchased, at fair value		88,000		28,000		—			116,000
Interest payable		10,000		—		—			10,000
Notes payable - related party		3,000,000		5,000,000		—			8,000,000
Current portion of lease liabilities		1,291,000		936,000		—			2,227,000
Total Current liabilities		5,869,000		498,852,000		(1,971,000	)		502,750,000

Lease liabilities, less current portion		1,823,000		359,000		—			2,182,000
Total Liabilities		7,692,000		499,211,000		(1,971,000	)		504,932,000

Commitments and Contingencies
Stockholders’ equity
Common stock, $.01 par value		271,000		10,000		23,000			304,000
Additional paid-in capital		7,641,000		12,436,000		(180,000	)		19,897,000
Retained earnings		12,869,000		3,268,000		(3,203,000	)		12,934,000
Total Stockholders’ equity		20,781,000		15,714,000		(3,360,000	)		33,135,000

Total Liabilities and stockholders' equity	$	28,473,000	$	514,925,000	$	(5,331,000	)	$	538,067,000

Pro Forma Adjustments

The pro forma results include adjustments made for the consolidation of both entities. The statements of income reflects the elimination of StockCross’ other income and the Company’s corresponding custody and clearing fees resulting from the fully disclosed clearing relationship between MSCO and StockCross. In addition, the Company’s earnings recognized as part of its equity method investment in StockCross for the three and six months ended June 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.

Overview of Acquisition

As previously disclosed in the Company’s 2019 Form 10-K, the Company completed the 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 June 30, 2019			Six Months Ended June 30, 2019
Revenue	$	13,805,000		$	26,819,000
Operating income	$	454,000		$	1,788,000
Net income / (loss)	$	(137,000	)	$	830,000

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%.