# KOVACK SECURITIES INC. X-17A-5 (2019-02-28) — Broker-dealer annual report - Company: KOVACK SECURITIES INC. - Form: X-17A-5 - Filed: 2019-02-28 - Period: 2018-12-31 - Accession: 0001056451-19-000001 - CIK: 1056451 - File #: 8-50847 - Material weakness: No - Auditor: DeJoy, Knauf and Blood LLP - Auditor location: Rochester, NY - Contact: Isabelle Shick - Phone: 954-782-4771 - Signed by: Dr. Ronald J. Kovack (Chairman and FINOP) Original filing: https://www.sec.gov/Archives/edgar/data/1056451/000105645119000001/KSI2018AAPUB.pdf --- {0}------------------------------------------------ #### **KOVACK SECURITIES, INC. (a wholly owned subsidiary of Kovack Financial LLC)** #### **FINANCIAL STATEMENT** ### **DECEMBER 31, 2018 and REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** **\*This report is deemed PUBLIC in accordance with Rule 17a-5(e)(3) under the Securities and Exchange Act of 1934** {1}------------------------------------------------ ### **TABLE OF CONTENTS** - 1. Report of Independent Registered Public Accounting Firm - 2. Statement of Financial Condition - 3. Notes to Financial Statement {2}------------------------------------------------ ![](_page_2_Picture_0.jpeg) ### **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** To the Board of Directors and Stockholder of Kovack Securities Inc. ### **Opinion on the Financial Statement** We have audited the accompanying statement of financial condition of Kovack Securities Inc. as of December 31, 2018, and the related notes (collectively referred to as the "financial statement"). In our opinion, the statement of financial condition presents fairly, in all material respects, the financial position of Kovack Securities Inc. as of December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. #### **Basis for Opinion** This financial statement is the responsibility of Kovack Securities Inc.'s management. Our responsibility is to express an opinion on Kovack Securities Inc.'s financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to Kovack Securities Inc. in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. We have served as Kovack Securities Inc.'s auditor since 2017. February 27, 2019. {3}------------------------------------------------ ### **KOVACK SECURITIES, INC. (a wholly owned subsidiary of Kovack Financial LLC)** # **STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2018** #### **ASSETS** | Cash and cash equivalents | \$3,707,783 | |--------------------------------------------------------------------------------------------------------------------------------------------|---------------| | Cash with clearing organizations | 509,875 | | Cash with clearing organizations, restricted | 355,087 | | Receivables: | | | Clearing brokers and insurance companies | 1,729,768 | | Representative and employee advances, net | 225,619 | | Other Receivable | 28,304 | | Prepaid expenses | 183,882 | | Property and equipment, net of accumulated depreciation | 493,761 | | Intangible assets, net of accumulated amortization | 462,523 | | Deposits and other assets | 37,340 | | | \$7,733,942 | | LIABILITIES AND STOCKHOLDER'S EQUITY | | | Accounts payable and accrued expenses | \$
916,147 | | Commissions payable | 2,549,874 | | Due to related parties | 214,007 | | Deferred rent | 141,891 | | | 3,821,919 | | Stockholder's equity: | | | Common stock voting, no par value per share, 1,000 shares
authorized, 182 shares issued, and outstanding at December
31, 2018 | 3,196 | | Common stock von-voting, no par value per share,
99,000 shares authorized, 17,988 shares issued and
outstanding at December 31, 2018 | 316,471 | | Additional paid-in capital | 4,569 | | Retained earnings | 3,587,787 | | Total stockholder's equity | 3,912,023 | | | \$ 7,733,942 | The accompanying notes are an integral part of this financial statement. {4}------------------------------------------------ ### **1. BUSINESS** Kovack Securities, Inc. ("KSI" or the "Company") was incorporated in the State of Florida on April 23, 1997, and is a registered securities broker-dealer with the SEC, FINRA and SIPC. The Company's corporate office is located in Fort Lauderdale, Florida. ### **2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** **Basis of accounting** - The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). **Cash and cash equivalents** - The Company considers all unrestricted deposits and highly liquid investments, readily convertible to known amounts, with an original maturity of three months or less when originated to be cash equivalents. **Receivables from clearing brokers and commissions:** Receivables from clearing brokers and commissions receivable primarily consist of commission and transaction-related receivables. **Receivables from representatives and employees:** From time to time, the Company provides advances to certain representatives and employees. These advances are repaid to the Company by deducting a portion of the representatives' commission payout throughout the compensation cycle until the advance has been paid off. Management performs periodic evaluations of outstanding advances and provides for an allowance based on its assessment of specifically identified unsecured receivables. Amounts are charged off against the allowance when management determines such amounts are uncollectible. As of December 31, 2018, the Company recorded an allowance for receivables of \$84,556. **Property and equipment**: Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets or the term of lease, if shorter, using the straight-line method. **Intangible assets:** Intangible assets represent purchase price to acquire customer relationships. Intangible assets are amortized over an estimated useful life of 5 years using the straight-line method. As of December 2018, intangible assets consist of the following: | Intangible assets at cost | \$
682,605 | |--------------------------------|---------------| | Less: accumulated amortization | (220,082) | | Intangible assets, net | \$
462,523 | **Accounting estimates:** The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to, revenue and expense accruals and the depreciable lives of property and equipment. Actual results could differ from those estimates. **Fair value of financial instruments:** The fair value of the Company's financial instruments, such as cash and cash equivalents and accounts payable approximate their carrying value because of the short maturity of the instruments. {5}------------------------------------------------ ### **2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)** **Income taxes:** The Company has elected, by consent of its stockholder, to be taxed as an S Corporation under the provisions of Section 1361 of the Internal Revenue Code. Under these provisions, the Company does not pay federal corporate income tax on its taxable income. Instead, the stockholder is liable for federal income taxes on its respective share of the Company's taxable income. Therefore, only state income taxes have been included in the accompanying financial statements. GAAP prescribes a threshold and measurement attribute for financial statement recognition of a tax position that an entity takes or expects to take in a tax return. An entity may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. This pronouncement is applicable to pass-through entities, such as S Corporations, which are potentially subject to income taxes. The Company assesses its income tax positions, including its continuing tax status as an S Corporation, based on management's evaluation of the facts, circumstances and information available at the reporting date. The Company uses the prescribed more likely than not threshold when making its assessment. The Company did not accrue any interest expense or penalties related to tax positions. There are no open Federal or State tax years under audit. Beginning with the tax year ending December 31, 2011, the Company has filed consolidated federal and state income tax returns with its parent. The Company believes that it is no longer subject to examination for years prior to 2015. **Recent accounting pronouncements:** In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, *Leases*, which amended the guidance on accounting for leases. ASU 2016-02 requires lessees to recognize assets and liabilities on the statement of financial condition for the rights and obligations created by all qualifying leases with terms of more than twelve months. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee remains substantially unchanged and depends on classification as a finance or operating lease. ASU 2016-02 also requires quantitative and qualitative disclosures that provide information about the amounts related to leasing arrangements recorded in the financial statements. ASU 2016-02 will be effective for interim and annual periods beginning on January 1, 2019. The Company expects to recognize right-of-use assets and related obligations on its statement of financial condition upon adoption of ASU 2016-02. In May 2014, the FASB issued ASU 2014-09, *Revenue from Contracts with Customers*. ASU 2014-09 replaced most existing revenue recognition guidance under GAAP when it became effective. The Company adopted ASU 2014-09 effective January 1, 2018. The implementation of ASU 2014-09 did not have a material impact on the measurement or recognition of revenue from prior periods. See Note 3 – Revenue Recognition for additional accounting policy information and the additional disclosures required by this ASU. ## **3. REVENUE RECOGNITION** As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent ASUs that modified Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. The Company elected to apply the standard utilizing the modified retrospective method applied to contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-09. There was no impact to previously reported retained earnings upon adoption of ASU 2014-09, as policies affecting the amount and timing of revenue recognition did not change. Revenue is recognized when or as the promised services are provided to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. {6}------------------------------------------------ ### **4. PROPERTY AND EQUIPMENT** Property and equipment at December 31, 2018 consists of the following: | | | Estimated
useful lives | |---------------------------------------------------|------------|---------------------------| | Equipment | \$ 500,822 | 5 years | | Furniture | 383,008 | 7
years | | Software | 178,093 | 5 years | | Leasehold improvements | 295,445 | 10 years | | Less accumulated depreciation
and amortization | 1,357,368 | | | | (863,607) | | | | \$ 493,761 | | ### **5. LEASES** The Company has a non-cancelable lease for office facilities that expires in 2021. The Company also has non-cancelable leases for vehicles and equipment that expire from 2019 through 2023. The following is a schedule of future minimum lease payments for operating leases as of December 31, 2018: 2019 - \$342,232, 2020 - \$350,555, 2021 - \$344,148, 2022 - \$21,600, and 2023 - \$16,200. ### **6. 401(k) PLAN** The Company is a participating employer in a 401(k) retirement savings plan for the benefit of its employees. Contributions to the plan included in employee compensation and benefits were \$96,673 for the year ended December 31, 2018. ### **7. COMMITMENTS AND CONTINGENCIES** From time to time the Company is party to certain claims and legal actions arising in the ordinary course of business. In some cases, plaintiffs are seeking compensatory and punitive damages. It is the opinion of management that the ultimate disposition of these matters will not have a material adverse effect on the Company's financial condition or results of operations. The Company accrues for certain claims and legal actions when it is probable and reasonably estimable. The Company has agreed to indemnify its clearing brokers for losses that the clearing brokers may sustain from the customer accounts introduced by the Company. The Company executes transactions and introduces them to clearing brokers on a fully disclosed basis. The Company's exposure to credit risk associated with nonperformance of its customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the customers' ability to satisfy their obligations to the Company. The Company, through its clearing brokers, seeks to manage these risks by requiring customers to maintain sufficient levels of collateral in compliance with various regulatory and internal guidelines. The Company's clearing broker monitors required margin {7}------------------------------------------------ #### **7. COMMITMENTS AND CONTINGENCIES (Continued)** levels daily and, pursuant to such guidelines, requires the customers to deposit additional collateral, or reduce positions, when necessary. The Company's policy is to monitor its market and credit exposure risk. ### **8. RELATED PARTY TRANSACTIONS** The Company acts as the introducing broker/dealer for customer's accounts which are managed through Kovack Advisors, Inc. (KAI), a registered investment advisor and related party. As the introducing broker/dealer, the Company provides back office support in account opening and administration on a fully disclosed basis through either Pershing LLC, or National Financial Services LLC. During the year ended December 31, 2018, the Company was a party to an expense sharing agreement with Kovack Financial, LLC ("KFIN"). KFIN wholly owns the Company and KAI. KFIN has consolidated management of the errors and omissions insurance policies for the Company and KAI and allocates the cost of the policies to the respective companies. ### **9. CONCENTRATIONS** During the year, the Company maintained cash balances in excess of the Federally insured limits. The funds are with major banks and financial institutions. Consequently, the Company does not believe that there is a significant risk in having these balances in any one of these financial institutions. ### **10. REQUIREMENTS OF RULE 15c3-3** The Company is an introducing broker, exempt from making computations of amounts on deposit in the Special Reserve Bank Account for the Exclusive Benefits of Customers, under the provisions of paragraph (k) of Rule 15c3-3 under the Securities and Exchange Act of 1934. ### **11. NET CAPITAL PROVISION OF RULE 15c3-1** The Company is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1) which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. At December 31, 2018, the Company had net capital of \$2,330,504, which was \$2,075,709 in excess of its required net capital of \$254,795. The Company's ratio of aggregate indebtedness to net capital was 1.64 to 1. ### **12. SUBSEQUENT EVENTS** The Company has performed an evaluation of subsequent events through February 27, 2019, which is the date the financial statements were available for issue. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.