# BERENBERG CAPITAL MARKETS LLC X-17A-5 (2021-03-02) — Broker-dealer annual report
- Company: BERENBERG CAPITAL MARKETS LLC
- Form: X-17A-5
- Filed: 2021-03-02
- Period: 2020-12-31
- Accession: 0001514067-21-000002
- CIK: 1514067
- File #: 8-68821
- Material weakness: No
- Auditor: BDO USA LLP
- Auditor location: New York, NY
- Contact: Louis Soulios
- Phone: 6469499190
- Website: bdo.com
- Signed by: Lars Schwartau (Co-CEO)
Original filing: https://www.sec.gov/Archives/edgar/data/1514067/000151406721000002/public.pdf
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# **Berenberg Capital Markets LLC**
Statement of Financial Condition December 31, 2020
FILED PURSUANT TO RULE 17A-S(e)(3) AS A PUBLIC DOCUMENT
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| Facing page to Form X-17A-5 3A | |
|-------------------------------------------------------------|--|
| Affirmation of Officer 3B | |
| Independent Auditors' Report 4 | |
| Statement of Financial Condition as of December 31, 2020 5 | |
| Notes to Statement of Financial Condition 6-17 | |
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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549**
0MB APPROVAL 0MB Number: 3235-0123 Expires: October 31, 2023 Estimated average burden hours per response •. . ... 12.00
# **ANNUAL AUDITED REPORT FORM X-17 A-5 PART Ill**
| | SEC FILE NUMBER |
|----------|-----------------|
| 8- 68821 | |
#### **FACING PAGE Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder**
| REPORT FOR THE PERIOD BEGINNING | -----------
01/01/20 | AND ENDING | -----------
12/31/20 |
|-------------------------------------------------------------------------------------------|---------------------------------------------------------------------|------------|--------------------------------|
| | MM/DD/YY | | MM/DD/YY |
| | A. REGISTRANT IDENTIFICATION | | |
| NAME OF BROKER-DEALER: | Berenberg Capital Market LLC | | OFFICIAL USE ONLY |
| ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) | | | FIRM I.D. NO. |
| | 1251 Avenue of the Americas, 53rd Floor | | |
| | (No. and Street) | | |
| NewYork | NewYork | | 10020 |
| (City) | (State) | | (Zip Code) |
| NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT
Lars Schwartau | | | 646-949-9000 |
| | | | (Area Code - Telephone Number) |
| | B. ACCOUNTANT IDENTIFICATION | | |
| INDEPENDENT PUBLIC ACCOUNT ANT whose opinion is contained in this Report* | | | |
| | BDOUSA,LLP | | |
| | (Name - if individual, state last, first, middle name) | | |
| 100 Park Avenue | NewYork | New York | 10017 |
| (Address) | (City) | (State) | (Zip Code) |
| CHECK ONE: | | | |
| [{]certified Public Accountant | | | |
| Public Accountant | | | |
| B | Accountant not resident in United States or any of its possessions. | | |
| | FOR OFFICIAL USE ONLY | | |
| | | | |
| | | | |
| | | | |
*\*Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17a-5(e)(2)*
> **Potential persons who are to respond to the collection of information contained** in **this form are not required to respond unless tt,e form displays a currently valid 0MB control number.**
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#### **OATH OR AFFIRMATION**
| | I, __ Lars~~S~ch_w~artau~=--------
Berenberg Capital Markets LLC | -----------------,
swear (or affirm) that, to the best of
my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of | as |
|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| of | December 31 | __
~, are true and correct. I further swear ( or affirm) that
_20_2_0 | |
| | | neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account | |
| | classified solely as that of a customer, except as follows: | | |
| °'1 | Alyssa s. Clements
Notary Public, State cf New York
Reg. No. 01CL6370331
Qualified in Ne~j York Coun~2
Commission Exrure.s 01/29/2
J,
Pihl?/
o/~
otary Public | Signature
Co-CEO
Title | |
| | This report** contains (check all applicable boxes): | | |
| | @ (a) Facing Page. | | |
| (1)
~ | [Z] (b) Statement of Financial Condition.
of Comprehensive Income (as defined in §210.1-02 of Regulation S-X).
0 ( d) Statement of Changes in Financial Condition.
D (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital.
D (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
§ (g) Computation of Net Capital.
(h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3.
(i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3.
consolidation.
An Oath or Affirmation.
(m) A copy of the SIPC Supplemental Report. | D (c) Statement oflncome (Loss) or, if there is other comprehensive income in the period(s) presented, a Statement
D (j) A Reconciliation, including appropriate explanation of the Computation ofNet Capital Under Rule 15c3-l and the
Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3.
0 (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of
• (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. | |
| | | ** For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5(e)(3). | |
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Fax: 212-697-1299 www.bdo.com
#### **Report of Independent Registered Public Accounting Firm**
Board of Directors Berenberg Capital Markets LLC New York, New York
#### **Opinion on Financial Statement**
We have audited the accompanying statement of financial condition of Berenberg Capital Markets LLC (the "Company") as of December 31, 2020, and the related notes (collectively referred to as "the financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company at December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
#### **Basis for Opinion**
The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'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 the Company 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 statement. 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 statement. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company's auditor since 2011 .
New York, New York March 1 , 2021
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# **Berenberg Capital Markets LLC**
Statement of Financial Condition
| December 31, 2020 | | |
|-------------------|--|--|
|-------------------|--|--|
| Assets | |
|----------------------------------------------------------------------|-------------------|
| Cash & cash equivalents | \$
18,526,348 |
| Financial instruments owned, at fair value | 32,241,275 |
| Due from clearing broker | 10,543,538 |
| Clearing deposit | 1,000,000 |
| Accounts receivable from Berenberg Bank | 178,822 |
| Accounts receivable | 4,986,383 |
| Fails to deliver | 6,866,226 |
| Due from customer | 6,742,598 |
| Property and equipment, net of accumulated depreciation of 4,842,909 | 7,887,333 |
| Right-of-use assets | 21,871,641 |
| Prepaid expenses and other assets | 1,300,042 |
| Tax receivable | 169,654 |
| Deferred taxes receivable | 3,491,774 |
| Total Assets | \$
115,805,634 |
| Liabilities and Member's Equity | |
| | |
| Liabilities: | |
| Accounts payable and accrued expenses | \$
1,393,911 |
| Compensation payable | 9,663,990 |
| Due to Berenberg Bank | 5,540,732 |
| Due to Parent | 1,474,987 |
| Operating lease liability | 26,620,909 |
| Fails to receive | 6,742,598 |
| Due to customer | 6,866,226 |
| Total Liabilities | 58,303,353 |
| Commitments and Contingencies (Note 8) | |
| Member's Equity: | |
| Member's equity | 57,502,281 |
| Total Member's Equity | 57,502,281 |
See accompanying notes to financial statements.
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# **1. Business**
Beren berg Capital Markets LLC ("Company"), a Delaware limited liability company, is a registered broker-dealer in securities under the Securities Exchange Act of 1934 and is a registered member of the Financial Industry Regulatory Authority ("FINRA") as of November 9, 2011, incorporated on December 8, 2010 and commenced operations on January 1, 2011. The Company is whollyowned by Berenberg Asset Management LLC ("Parent"), an investment advisor registered with the SEC.
The Company conducts its Securities and Exchange Commission ("SEC") Rule 15a-6 activities on a receive versus payment ("RVP")/delivery versus payment ("DVP") basis. The Company is allowed to conduct a settlement system that stipulates cash payment must be made simultaneously with the delivery of a security. The Company is related through ownership to Joh. Berenberg, Gassler & Co. KG, ("Berenberg Bank"), an affiliated German financial institution based in Hamburg with the Parent as the intermediary holding company. Beren berg Bank has only been given the right to settle trades on behalf of the Company through the Prezioso interpreted letter in SEC Rule 15a-6.
On June 10, 2015, the Company was approved to conduct the sales and trading of U.S. securities as an introducing broker dealer. All transactions are cleared on a fully-disclosed basis through Pershing LLC.
The Company does not hold funds or securities for customers and does not carry accounts of customers. Accordingly, the Company operates under the exemptive provisions of SEC Rule 15c3- 3{k)(2)(i) for the 15a-6 activities and under SEC Rule 15c3-3{k)(2)(ii) for the U.S. securities business.
# **2. Significant Accounting Policies**
# *Basis of Presentation*
The Statement of Financial Condition has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
# *Use of Estimates*
The preparation of the Statement of Financial Condition in conformity with U.S. GAAP requires Company 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 Statement of Financial Condition and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
# *Cash and Cash Equivalents*
The Company considers all highly liquid investments, with maturities of ninety days or less, as cash and cash equivalents. Cash and cash equivalents held at financial institutions, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.
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# **Cash and Cash Equivalents (Continued)**
As of December 31, 2020, restricted cash of approximately \$3,074,900, is included in cash and cash equivalents. Restricted cash is collateral for a letter of credit on an operating lease.
The Company maintains a cash account with Berenberg Bank. As of December 31, 2020, the account was overdrawn by approximately \$102,000, and is included in Accounts payable and accrued expenses in the Statement of Financial Condition.
# **Fair Value of Financial Instruments**
The carrying value of the Company's assets and liabilities, which qualify as financial instruments, approximate fair value.
The Company values all investments at fair value. U.S. GAAP establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that market participants would use in pricing the investment based on available market data. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the investment based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on the observability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical investments.
Level 2 - Valuations based on (i) quoted prices in markets that are not active; (ii) quoted prices for similar investments in active markets; and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data.
Level 3 - Valuations based on inputs that are unobservable, supported by little or no market activity, and that are significant to the overall fair value measurement.
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, such as, the type of product, whether the product is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the transaction.
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 in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
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# **Fair Value of Financial Instruments (Continued)**
As of December 31, 2020, the Company held investments in U.S. Treasury securities which are generally valued using quoted market prices or are benchmarked thereto. U.S. Treasury securities with maturities greater than 90 days are classified as Level 1 within the fair value hierarchy.
# **Due from Customer**
Due from customer includes amounts due from customers for the failed foreign securities transactions executed pursuant to SEC Rule lSa-6. The Company records these receivables when the transaction fails to settle on the contracted settlement date.
#### **Fails to Receive**
In the normal course of business, the Company chaperones security transactions pursuant to SEC Rule lSa-6 on behalf of customers on a receipt versus payment basis. If these transactions do not settle due to failure to perform by either the customer or the counterparty, the Company may be obligated to discharge the obligation of the nonperforming party and, as a result, may incur a loss if the market value of the securities is different from the contract amounts. The risk of loss to the Company is normally limited to differences in market values of the securities compared to their contract amounts.
At December 31, 2020, the Company had fails to deliver trades executed and to be settled by Berenberg Bank that amounted to \$6,866,226, and the Company had fails to receive trades executed and to be settled by Berenberg Bank that amounted to \$6,742,598, which are both shown on the Statement of Financial Condition.
# **Property and Equipment**
Furniture and fixtures and other equipment are depreciated over the estimated useful lives of the assets (ranging from 3-7 years) using the straight-line method. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the respective lease (ranging from 1-10 years), using the straight-line method.
#### **leases**
The Company accounts for its leases under Accounting Standard Codification ("ASC") Topic 842, Leases. Under this guidance, lessees classify arrangements meeting the definition of a lease as operating or financing leases, and leases are recorded on the Statement of Financial Condition as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company's incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term.
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### **leases (Continued)**
For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less as an accounting policy election, and instead recognizes rent expense on a straight-line basis over the lease term.
# **Principal Transactions**
The Company records principal transactions on a trade date basis, with realized and unrealized gains and losses reflected in Principal transactions on the Statement of Operations. In many cases, the Company participates in these principal transactions for the purpose of facilitating customer trade orders on a riskless principal basis.
# **Revenue Recognition and Related Party Transactions**
# *Transfer Pricing*
Effective January 1, 2018, the Company entered into a Transfer Pricing Agreement ("TPA") with Berenberg Bank to allocate and distribute global equities profits across all reporting entities. Under this agreement, Berenberg Bank splits the profits derived from commission based sales services, client related proprietary trading equities and underwriting business, and according to the accounting transaction types and their distribution keys as defined the TPA. The TPA provides for a net profit split to be paid to the Company through a Net Profit Split distribution earned by the Company. The Company recognizes income when it is earned and, from time to time, there are nominal intercompany transactions incurred between the Company and Berenberg Bank.
As of December 31, 2020, the Company had a payable of TPA compensation overpayment of \$2,104,413, which is included in Due to Berenberg Bank on the Statement of Financial Condition.
#### *Commissions*
The Company earns commissions from executing transactions through its fully disclosed clearing broker, Pershing LLC, on behalf of its customers, as well as Berenberg Bank. The execution of each trade order on trade date represents a distinct performance obligation and the transaction price at the point in time the trade order is fixed. The Company believes that the performance obligation is satisfied on trade date because that is when the underlying financial instrument or purchasers are identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from the customer.
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# **Revenue Recognition and Related Party Transactions (Continued)**
For the year ended December 31, 2020, income earned by the Company from commissions was \$11,196,833, of which \$9,338,729 was attributable to customers and \$1,858,104 was attributable to Berenberg Bank. As of December 31, 2020, the Company had a receivable from these commissions attributable from Beren berg Bank of \$156,387, which is included in Accounts receivable from Berenberg Bank on the Statement of Financial Condition.
The Company records all securities transactions on a settlement date basis. There is no material difference between settlement date and trade date.
#### Investment Banking
The Company participates in securities underwriting transactions. Underwriting fees are recognized in Investment banking underwriting revenues on the Statement of Operations. The Company recognizes underwriting fees on the trade date of the transaction as there are no significant actions which the Company needs to take subsequent to this date and the client obtains the control and benefits of the offering at that point. Payment for investment banking revenue is typically collected from the lead underwriter within 90 days of the closing of the transaction. Costs associated with fulfilling underwriting assignments are deferred until the related revenue is recognized or the assignment is otherwise concluded. All other underwriting costs are expensed as incurred.
#### Research Income
The Company produces equity research reports for distribution to its US institutional customers ("customers"). In turn, these customers compensate the Company with payment for research at the customer's discretion, per SEC Rule 28E. At the customer's discretion, the Company invoices the customer for the period of research coverage as indicated by the customer and the revenue is recorded in the coverage period.
The Company entered into an Agreement of Sublease with the Parent on June 1, 2019. Under this agreement, the Parent is subleasing a 100 square foot single office within the Company's New York office space.
#### **Foreign Currency**
In the normal course of business, the Company may enter into transactions not denominated in U.S. dollars. The Company's balances denominated in foreign currencies are translated into U.S. dollars at the end of each period, whereas the corresponding operating results denominated in foreign currencies are translated into U.S. dollars on the respective dates of such transactions.
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#### **Income Taxes**
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
When applicable, a valuation allowance is established to reduce any deferred tax asset when it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized. It is the policy of the Company to comply with the provisions applicable to companies, as defined by Subchapter C of the Internal Revenue Code.
The Company files Federal, state and local income tax returns. On the Federal and various State returns, the Company files on a group basis with the Parent. As the Company was able to utilize previous net operating losses generated by the Parent, the Company recorded a liability to the Parent for the tax benefit received of \$1,480,908, which is included in Due to Parent on the Statement of Financial Condition. No income tax returns are currently under examination.
The Company's Federal tax returns since 2017 are currently open to examination. As of the end of the tax year 2020, the Company has various state and local net operating losses, which start expiring in 2036.
Management has analyzed the Company's tax positions taken on income tax returns for all open tax years. The Company has no unrecognized tax benefits at December 31, 2020. In addition, the Company has concluded that it does not have any uncertain tax positions.
Differences between the financial statement carrying amounts and the tax bases of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities are as follows:
| Deferred tax assets: | |
|-----------------------------------|-----------------|
| Operating lease liabilities | 7,150,117 |
| Bonus accrual | 2,595,653 |
| Net operating losses carryforward | 2,157,516 |
| State bonus depreciation | 34,976 |
| Unrealized losses | 17,022 |
| Total deferred tax assets | 11,955,284 |
| Right of Use assets | (5,874,509) |
| Property and equipment, net | (2,100,279) |
| 481(a) adjustment | (481,330) |
| Unrealized gains | (7,392) |
| Net deferred tax asset | \$
3,491,774 |
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### **Income Taxes (Continued)**
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the existence of, or generation of, taxable income in the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, taxes paid in carryback years, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the Company's analysis of the cumulative three year income test, which is generally regarded as one of the strongest pieces of positive evidence when determining the necessity of a valuation allowance, management has determined that a valuation allowance is no longer required to netted against deferred tax assets. Additionally, the Company has considered additional pieces of both positive and negative evidence in this assessment.
# **Adopted Accounting Standards**
# Changes to the Disclosure Requirements for Fair Value Measurement {ASC 820}
In August 2018, the FASB issued ASU No. 2018-13, "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." The objective of this guidance is to improve the effectiveness of disclosures related to Fair Value measurement in the notes to the Statement of Financial Condition by eliminating certain disclosure requirements for fair value measurement, requiring public business entities to disclose certain new information and modifying some disclosure requirement. The Company adopted this standard for the year ended December 31, 2020.
#### Financial Instruments - Credit Losses {ASC 326}
Effective January 1, 2020, the Company adopted ASC Topic 326, Financial Instruments - Credit Losses ("ASC 326"). ASC 326 impacts the impairment model for certain financial assets by requiring a current expected credit loss ("CECL") methodology to estimate expected credit losses over the entire life of the financial asset. Under the accounting update, the Company could determine there are no expected credit losses in certain circumstances (e.g., based on the credit quality of the client). The Company identified fees and other receivables (including, but not limited to, receivables related to securities transactions, and advisory fees) as impacted by the new guidance. ASC 326 specifies that the Company adopt the new guidance prospectively by means of a cumulative-effect adjustment to the opening member's equity as of the December 31, 2019. Accordingly, the Company recognized no adjustment upon adoption.
The allowance for credit losses is based on the Company's expectation of the collectability of financial instruments, including fees and other receivables utilizing the CECL framework. The Company considers factors such as historical experience, credit quality, age of balances and current and future economic conditions that may affect the Company's expectation of the collectability in determining the allowance for credit losses. The Company's expectation is that
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# **Adopted Accounting Standards (Continued)**
the credit risk associated with fees and other receivables is not significant until they are 120 days past due based on the contractual arrangement and expectation of collection in accordance with industry standards. Accordingly, the Company has not provided an allowance for credit losses at December 31, 2020.
# **Accounting Standards to be Adopted in Future Periods**
# Income Taxes {ASC 740}
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The objective of the guidance is to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and to provide more consistent application to improve the comparability of Statement of Financial Condition. The guidance is effective in the first quarter of fiscal 2022. We are currently evaluating the impact of the new guidance on our Statement of Financial Condition.
# **3. Significant Risk Factors**
# Market risk
The Company's revenues are subject to substantial fluctuations due to a variety of factors that cannot be predicted with great certainty, including the overall condition of the economy and the securities markets as a whole. As a result, net income and revenues may vary significantly from year-to-year.
# Credit risk
The Company is engaged in various trading and brokerage activities in which counterparties primarily include broker-dealers and banks. Credit risk represents the potential loss that the Company would incur if the counterparties failed to perform pursuant to the terms of their obligations to the Company. The Company minimizes its exposure to credit risk by conducting transactions with established and reputable financial institutions. Counterparty exposure is monitored on a regular basis.
# Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Company outsources a portion of its critical business functions to third party firms. Accordingly, the Company negotiates its agreements with these firms with attention focused not only on the delivery of core services but also on the safeguards afforded by back-up systems and disaster recovery capabilities.
# Cyber-Security risk
Cyber-security risk is the risk that the Company's computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. To mitigate the risks related to cyber-attacks on our critical
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# **3. Significant Risk Factors (Continued)**
data, the Company takes protective measures and devotes significant resources to maintaining and upgrading its systems and networks. Such measures include intrusion and detection prevention systems, monitoring firewalls to safeguard critical business applications, monitoring third-parties that the Company does business with and employee training.
# *Covid-19*
During the 2020 calendar year, the World Health Organization has declared COVID-19 to constitute a "Public Health Emergency of International Concern". This pandemic has disrupted economic markets and the economic impact, duration and spread of the COVID-19 virus is uncertain at this time. The financial performance of the Company is subject to future developments related to the COVID-19 outbreak and possible government advisories and restrictions placed on the financial markets and business activities. The impact on financial markets and the overall economy, all of which are highly uncertain, cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company's results may be affected. The Statement of Financial Condition does not include any adjustments that might result from the outcome of this uncertainty.
# **4. Due from Clearing Broker**
The Company has a clearing agreement with its clearing broker to carry its customers' Delivery vs. Payment ("DVP") & Receive vs. Payment ("RVP") accounts at Pershing, LLC, as well as the Company's accounts as a customer of the clearing broker. At times, the Company will have receivables (e.g. client commissions received) and/or payables to the broker, which may include cash balances, net of margin debit balances and collateral posted (e.g. clearing deposit). The due from clearing balance of \$10,543,538 includes cash balances, net of margin debit balances as of December 31, 2020.
# **5. Clearing Deposit**
As part of the Company's clearing agreement with its clearing broker, a minimum deposit of \$1,000,000 is to be maintained at all times. As of December 31, 2020, collateral of \$1,000,000 in a certificate of deposit which is shown on the Statement of Financial Condition.
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# **6. Property and Equipment, Net**
At December 31, 2020, property and equipment, net consisted of:
| | Estimated | |
|--------------------------------|-------------|-----------------|
| | Useful Life | Amount |
| Artwork | | 63,554 |
| Leasehold improvements | Lease term | 8,168,688 |
| Computers and equipment | 3-5 years | 3,007,226 |
| Furniture and fixtures | 7 years | 1,490,774 |
| | | 12,730,242 |
| Less: Accumulated depreciation | | (4,842,909) |
| | | \$
7,887,333 |
# **7. Subordinated Borrowings**
On March 27, 2019, the Company entered into a credit facility agreement with Berenberg Bank that provides for borrowings under a line of credit of up to \$50,000,000, in accordance with FINRA Rule 15c3-ld regarding temporary subordinated loans. Berenberg Bank treats the drawings as an overdraft of the Company's bank account held at Beren berg Bank. Interest rates charged on overdraft accounts held at Berenberg Bank is 310 basis points on the overdraft amount. The Subordinated Debt Facility constitutes a satisfactory subordinated agreement under Appendix D to Rule 15c3-1 under the Securities Exchange Act of 1934, as amended. As of December 31, 2020, no amounts were outstanding under the Subordinated Debt Facility.
# **8. Commitments and Contingencies**
# **Operating leases**
The Company leases office space and copiers under non-cancellable operating leases expiring through 2030. The majority of the Company's right-of-use assets and lease liabilities at December 31, 2020 result from an operating lease of 31,700 square feet in New York for its corporate office, which commenced in 2017 and expires in 2030. The Company pays fixed rent and its share of the building's operating costs and real estate taxes. Fixed rate increases every 4 years during the 12-year term, and there is one 5-year renewal option at a mutually agreed upon fair rental value. The Company has an early termination option at the end of the 6th year of the lease after giving 15 months' written notice to the landlord; there is an early termination fee equal to 4 months' of rent and additional rent (operating costs), plus the unamortized portion of the certain defined landlord expenses.
The Company's office space leases do not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Variable expenses generally represent the Company's share of the landlord's operating expenses.
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# **8. Commitments and Contingencies (Continued)**
# **Operating leases (Continued)**
At December 31, 2020, the Company had operating lease liabilities of \$21,871,641 and operating right of use assets of \$26,620,909, which is shown on the Statement of Financial Condition.
The following summarizes quantitative information about the Company's leases as of and for the year ended December 31, 2020:
| | Year ended | |
|----------------------------------------------------------------------------------------------------------|-----------------|-------------|
| Lease cost | December31,2020 | |
| Operating lease cost | \$ | 3,170,754 |
| Short-term lease cost | | 247,070 |
| Variable lease cost | | 235,426 |
| Total lease cost | \$ | 3,653,250 |
| Other information | | |
| Operating cash flows from operating leases | \$ | 3,008,214 |
| Weight-average remaining lease term - operating leases | | 9.37 |
| Weighted-average discount rate - operating leases | | 4.50% |
| Maturities of operating leases, excluding short-term leases, are as follows:
Year ending December 31, | | |
| 2021 | | 3,207,452 |
| 2022 | | 3,281,909 |
| 2023 | | 3,391,900 |
| 2024 | | 3,391,900 |
| 2025 | | 3,319,900 |
| Thereafter | | 16,248,892 |
| Total | | 32,841,953 |
| Discount | | (6,221,044) |
| Operating lease liabilities included in the Statement of Financial Condition | \$ | 26,620,909 |
Berenberg Bank serves as the guarantor under provisions of the lease. Payments under the guaranty are not to exceed \$3,500,000 and are payable under breach of any warranty or default. During the year ended December 31, 2020, the Company made interest payments to Berenberg Bank relating to the guaranty.
*Other*
As of December 31, 2020, the Company declared \$8,558,990 in discretionary bonuses and \$1,105,000 in non-discretionary bonuses, which is included in Compensation and employee benefits on the Statement of Operations at year end and in Compensation payable on the Statement of Financial Condition.
{17}------------------------------------------------
# **8. Commitments and Contingencies (Continued)**
The Company may be subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the ultimate outcome of the claims and litigation, if any, will not have a material adverse effect on the Company's financial position.
# **9. Employee Benefit Plan**
The Company has a defined noncontributory profit sharing plan under Section 401 (k) of the Internal Revenue Code ("Code") covering substantially all of the Company's employees. Participants may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code.
# **10. Regulatory Net Capital Requirements**
As a registered broker-dealer, the Company is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1), which requires that the Company maintain minimum net capital. The Company has elected to use the alternative method, which requires that the Company maintain minimum net capital, as defined, equal to the greater of \$250,000 or 2% of customer debit items, as defined. At December 31, 2020, the Company had net capital of \$44,832,368 which exceeded its requirement of \$250,000 by \$44,582,368.
# **11. Subsequent Events**
Management has evaluated the possibility of subsequent events existing in the Company's Statement of Financial Condition through March 1, 2021, the date the statement of financial condition was available to be issued. Management has determined that there are no material events that would require adjustment to or disclosure in the Company's Statement of Financial Condition.
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.