Siebert Financial Corp SIEB US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included in Part II, Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A - Risk Factors.

Overview

We are a financial services company and provide a wide variety of financial services to our clients. We operate in the following business lines through our wholly-owned and majority-owned subsidiaries:

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Retail brokerage business through Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and broker-dealer registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Commodity Exchange Act of 1936, and member of the Financial Industry Regulatory Authority (“FINRA”), the New York Stock Exchange (“NYSE”), the Securities Investor Protection Corporation (“SIPC”), and the National Futures Association (“NFA”). MSCO engages in the business of providing brokerage services for retail customers and trading securities for its own account.

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Investment advisory services through Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the SEC as a Registered Investment Adviser (“RIA”) under the Investment Advisers Act of 1940. SNXT engages in providing investment advisory services to retail and high net worth clients.

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Insurance services through Park Wilshire Companies, Inc. (“PW”), a Texas corporation and licensed insurance agency. PW provides insurance agency services to retail and institutional accounts.

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Robo-advisory technology development through Siebert Technologies, LLC (“STCH”), a Nevada limited liability company.

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Prime brokerage services through RISE Financial Services, LLC (“RISE”), formerly known as WPS Prime Services, LLC (“WPS”), a Delaware limited liability company and a broker-dealer registered with the SEC and NFA. RISE is a woman-owned and operated financial services firm that offers a comprehensive suite of prime brokerage services aligned with the growing mission-driven Environmental Social and Governance (“ESG”) initiatives of institutional investors.

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StockCross Digital Solutions, Ltd. (“STXD”), an inactive subsidiary headquartered in Bermuda.

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, as well as 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

The World Health Organization declared the spread of COVID-19 a worldwide pandemic in March 2020. The COVID‐19 pandemic has adversely impacted the economic environment, leading to lower interest rates across the curve and heightened volatility in the financial markets. We are actively monitoring the impact of COVID-19 and the possible effects of the roll-out of various vaccines on our business, financial condition, liquidity, operations, employees, clients and business partners.

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Financial Impact

In the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate to near zero. This decline in interest rates led to a decrease in our revenue from interest, marketing and distribution fees, and may continue to have a negative impact on these revenue streams in the near future.

The primary financial impact on Siebert from the COVID-19 pandemic for both the year ended December 31, 2021 and 2020 was lower interest revenue resulting from lower benchmark interest rates beginning in 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 all of our branch offices.

Expense Reduction

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 successfully transitioned certain branch offices out of legacy office space into more cost-efficient locations resulting in savings related to rent and occupancy expense. We do not believe any of the changes described 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 liquidity position or future outlook 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 possible effects of the roll-out of various vaccines, 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.

Significant Events

Purchase of Office Building in Miami

On December 30, 2021, we acquired a commercial office building and associated property located at 653 Collins Ave, Miami Beach, FL (“Miami office building”) for approximately $6.8 million. The Miami office building contains approximately 12,000 square feet of office space and will be used as one of our primary operating centers.

Transaction with Tigress Holdings, LLC

On November 16, 2021, we entered into an agreement with Tigress, a Delaware limited liability company. As part of the agreement, (i) Tigress transferred to us limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests in Tigress; and (ii) we transferred to Tigress limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests of RISE and 1,449,525 shares of Siebert common stock. For the year ended December 31, 2021, we recognized $172,000 from our equity method investment in Tigress, which is within the line item titled, “Earnings of equity method investment in related party” on the statements of income.

Tigress Financial Partners is a disabled and woman-owned financial services firm providing institutional and high net worth investors with expertise in investment banking, capital markets, research, corporate advisory and global trade execution services, asset management and global wealth management. Tigress Financial Partners serves as a strategic diversity partner to corporate issuers, bookrunners, hedge funds and private equity firms.

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Relaunch of RISE Financial Services, LLC

As part of the transaction with Tigress, WPS Prime Services, LLC was renamed to RISE Financial Services, LLC, and Tigress’ founder, Cynthia DiBartolo, will continue as CEO of Tigress, and assumed the position as CEO of RISE. Gloria E. Gebbia, one of Siebert’s and RISE’s directors, assumed the position of Chief Impact Officer at RISE. Ms. DiBartolo was appointed to Siebert’s and RISE’s Board of Directors and Ms. Gebbia was appointed to Tigress’ Board of Directors.

RISE relaunched its business as a woman-owned and operated prime brokerage with a specific emphasis on aligning the mission-driven initiatives with the technological needs of institutional customers.

While we believe our expertise and industry relationships will enable us to execute our new strategic direction, our business plan for RISE is new and untested, and it is uncertain whether our efforts will attract the prime brokerage customers and revenue necessary to compete in a new market for prime customers. Any failure to adapt to these evolving trends may reduce our revenue or operating margins and could have a material adverse effect on our business, results of operations and financial condition.

Arrangements with JonesTrading and Goldman Sachs

On August 30, 2021, Goldman Sachs & Co. LLC ("GSCO") notified RISE that its clearing arrangement with RISE will be terminated.

Due to the termination of RISE’s clearing arrangement with GSCO, substantially all the revenue producing customers of RISE have transitioned to other prime service providers. Revenue from customers that have transitioned to other prime service providers was approximately $12.6 million and $13.9 million for the year ended December 31, 2021 and 2020, respectively. Pre-tax income from these customers was approximately $1.8 million and $1.3 million for the year ended December 31, 2021, and 2020, respectively.

As a result of this development, we recorded a full impairment of the RISE customer relationships intangible asset of $699,000 and RISE collected its clearing deposit from GSCO of approximately $2 million as of December 31, 2021. In addition, RISE’s institutional customer assets under management were significantly reduced in the year ended December 31, 2021.

On October 7, 2021, RISE signed an agreement with JonesTrading Institutional Services, LLC (“JonesTrading”) to transfer certain customers of RISE to JonesTrading. In exchange, JonesTrading agreed to pay RISE a percentage of the net revenue produced by those clients less any related expenses. The percentage paid to RISE related to this agreement will decline every year and the arrangement will end in October 2024. For the year ended December 31, 2021, this agreement resulted in a net expense of $22,000 as RISE was in the process of transitioning certain customers to JonesTrading. We do not anticipate the revenue related to this agreement will offset the reduction in revenue from customers that have transitioned to other prime service providers.

Contract with NFS

Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. As part of this agreement, we received a one-time business development credit of $3 million, and NFS will pay us four annual credits of $100,000, which are recorded within the line item “Deferred contract incentive” on the statements of financial condition. The business development credit and annual credits will be recognized as contra expense over four years and one year, respectively, in the line item “Clearing fees, including execution costs” on the statements of income. These credits reduced our expenses for clearing fees, including executions, by $354,000 for the year ended December 31, 2021, and we anticipate an annual expense reduction of approximately $850,000 for the years thereafter through the end of the agreement.

OpenHand

On January 31, 2021, we entered into a stock purchase agreement with OpenHand Holdings, Inc. (“OpenHand”) whereby we acquired an interest of 5% of OpenHand common stock for consideration of a total of $2,231,000 consisting of $850,000 in cash and 329,654 restricted shares of our common stock valued at $1,381,000 or $4.19 per share. We intended to develop a subscription-based brokerage platform with OpenHand, providing zero-commission trading for equity and option transactions and crediting its members daily with rebates of revenues generated by the clients, less operational expenses.

The value of our restricted stock was determined using the thirty-day trading average. We agreed to register the shares issued to OpenHand by filing a selling shareholder registration statement. We also received an option to purchase an additional 7.5% of OpenHand for approximately $4.5 million, based upon a $60 million valuation of OpenHand. This option expires 18 months after the launch of the OpenHand platform.

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On August 18, 2021, we agreed with OpenHand to terminate our working relationship. In connection therewith, Siebert and OpenHand amended and restated their January 31, 2021 stock purchase agreement to provide that we would pay $850,000 in cash in exchange for 2% of the outstanding common stock of OpenHand as of January 31, 2021, and receive a 15-month option to purchase an additional 2% of the outstanding common stock of OpenHand at an exercise price equal to a company valuation of $42.5 million. The parties agreed to rescind OpenHand’s purchase of the 329,654 restricted shares of our common stock.

StockCross Acquisition

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 and broker-assisted equity trading, securities lending, and equity stock plan services.

In January 2019, we acquired approximately 15% ownership of StockCross. 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 were performed by MSCO.

StockCross Highlights

We have completed the merger of StockCross into MSCO and the acquired business lines have added new revenue streams and supplemented existing ones within MSCO. In addition, the nature of StockCross’ self-clearing business line requires the presentation of various assets and corresponding liabilities on the statements of financial condition.

Operationally, the merger resulted in the expansion of our client services areas and provided additional resources for the combined client base without any material loss of clients during the transition. Further, at the time of acquisition, StockCross added approximately $1.5 billion in retail customer net worth and approximately 30,000 retail accounts to Siebert.

Effective March 16, 2021, MSCO received approval to become an IRA nonbank custodian and trustee. MSCO successfully completed the custodian conversion from StockCross, and MSCO continues to offer IRA services to its clients.

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.

Client Account Metrics – Total Assets Under Management

As of December 31,

Total assets under management (in billions) $ 17.3 $ 16.2

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Total assets under management represents the total of our retail and institutional customer net worth

Client Account Metrics – Retail Customers

As of December 31,

Retail customer net worth (in billions) $ 16.8 $ 14.6

Retail customer margin debit balances (in billions) $ 0.5 $ 0.5

Retail customer credit balances (in billions) $ 0.8 $ 0.7

Retail customer money market fund value (in billions) $ 0.8 $ 0.8

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

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

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Retail customer credit balances represents client cash held in brokerage accounts

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

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Retail customer accounts represents the number of retail customers

Client Account Metrics – Institutional Customers

As of December 31,

Institutional customer net worth (in billions) $ 0.5 $ 1.6

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Institutional customer net worth represents the total value of securities and cash in the institutional customer accounts after deducting margin debits and short positions.

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Client Activity Metrics

Year Ended December 31,

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Total retail trades represent client trades through our subsidiary MSCO

Statements of Income and Financial Condition

Overview

The following table sets forth metrics we use in analyzing our financial performance for the periods indicated:

Year Ended December 31,

Statements of Income for the Year Ended December 31, 2021 and 2020

Revenue

Commissions and fees for the year ended December 31, 2021 were $18,252,000 and decreased by $1,927,000 from the corresponding period in the prior year, primarily due to a loss in institutional customers due to the termination of GSCO’s clearing agreement with RISE.

Interest, marketing and distribution fees for the year ended December 31, 2021 were $12,897,000 and decreased by $1,298,000 from the corresponding period in the prior year, primarily due to the reduction of 12b-1 fees from money market funds and lower interest received on bank deposits from our retail customers of an aggregate of approximately $2 million. This decrease was partially offset by an increase of approximately $0.7 million in interest revenue from institutional customers that have since transitioned to other prime brokerages.

Principal transactions for the year ended December 31, 2021 were $15,647,000 and increased by $3,797,000 from the corresponding period in the prior year, primarily due to strong market conditions during 2021.

Market making for the year ended December 31, 2021 was $5,897,000 and increased by $3,855,000 from the corresponding period in the prior year, primarily due to favorable market conditions during 2021.

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Stock borrow / stock loan for the year ended December 31, 2021 was $11,864,000 and increased by $7,819,000 from the corresponding period in the prior year, primarily due to the addition of key personnel, expansion of our stock locate revenues, and additional securities lending and locate counterparty relationships. The increase in this business line was a significant component of the increase in our income before provision for income taxes for the year ended December 31, 2021 from the corresponding period in the prior year.

Advisory fees for the year ended December 31, 2021 were $1,668,000 and increased by $526,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line and favorable market conditions.

Other income for the year ended December 31, 2021 was $1,282,000 and decreased by $137,000 from the corresponding period in the prior year, primarily due to a reduction in foreign exchange volumes and a decrease in institutional custody fees.

Operating Expenses

Employee compensation and benefits for the year ended December 31, 2021 were $36,424,000 and increased by $7,922,000 from the corresponding period in the prior year, primarily due to increased commission payouts corresponding to the increase in principal transactions, market making, and stock borrow / stock loan revenue in 2021. This increase was partially offset by a decrease in commissions payouts from RISE related to the loss of institutional customers.

Clearing fees, including execution costs for the year ended December 31, 2021 were $4,817,000 and decreased by $290,000 from the corresponding period in the prior year, primarily due to the recognition of the business development credit and annual credits from NFS as contra expense in 2021.

Technology and communications expenses for the year ended December 31, 2021 were $4,762,000 and increased by $140,000 from the corresponding period in the prior year, primarily due to an increase in software licenses and technology support services.

Other general and administrative expenses for the year ended December 31, 2021 were $3,686,000 and increased by $1,322,000 from the corresponding period in the prior year, primarily due to an increase in regulatory fees and exchange fees related to incremental trading volumes and counterparties, as well as an increase in office expenses and insurance cost.

Data processing expenses for the year ended December 31, 2021 were $2,849,000 and increased by $52,000 from the corresponding period in the prior year, primarily due to an increase in our service bureau costs.

Rent and occupancy expenses for the year ended December 31, 2021 were $1,930,000 and decreased by $837,000 from the corresponding period in the prior year, primarily due to a decrease in rent from our transition out of legacy office space into more cost-efficient locations as well as the termination of certain leases within RISE.

Professional fees for the year ended December 31, 2021 were $2,695,000 and decreased by $169,000 from the corresponding period in the prior year, primarily due to a decrease in legal fees.

Depreciation and amortization expenses for the year ended December 31, 2021 were $1,445,000 and decreased by $121,000 from the corresponding period in the prior year, primarily due to the full impairment of the RISE customer relationships intangible asset in August 2021.

Referral fees for the year ended December 31, 2021 were $1,213,000 and increased by $475,000 from the corresponding period in the prior year, primarily due to RISE entering into a referral fee arrangement with a significant customer in 2021.

Impairment loss for the year ended December 31, 2021 was $699,000 and increased by $699,000 from the corresponding period in the prior year, primarily due to the impairment of the RISE customer relationships intangible asset due to the termination of RISE’s clearing arrangement with GSCO.

Interest expense for the year ended December 31, 2021 was $361,000 and increased by $12,000 from the corresponding period in the prior year, primarily due to a full year of interest on the line of credit with East West Bank in 2021, partially offset by a reduction in notes payable related party in 2021.

Advertising expense for the year ended December 31, 2021 was $44,000 and increased by $44,000 from the corresponding period in the prior year, due to an increase in various promotional expenses.

Earnings of Equity Method Investment in Related Party

Earnings of equity method investment in related party for the year ended December 31, 2021 was $172,000 and increased by $172,000 from the corresponding period in the prior year, due to the Company recognizing its proportional earnings from Tigress for 2021.

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Provision For Income Taxes

Provision for income taxes for the year ended December 31, 2021 was $1,721,000 and increased by $1,500,000 from the corresponding period in the prior year. Refer to Note 19 – “Income Taxes” for additional detail.

Net Loss Attributable to Noncontrolling Interests

We are the majority owner of RISE, as such, operate and control all of the business and affairs of RISE and consolidate RISE’s financial results into our financial statements. As of December 31, 2021, we held approximately 76% ownership interest in RISE, and Tigress held 24% ownership interest in RISE. We reflect Tigress’ ownership of RISE as a noncontrolling interest in our financial statements. The net loss attributable to noncontrolling interests for the two months and the year ended December 31, 2021 was $30,000, and increased by $30,000 from the corresponding period in the prior year.

Statements of Financial Condition as of December 31, 2021 and 2020

Assets

Assets as of December 31, 2021 were $1,404,235,000 and increased by $31,248,000 from December 31, 2020, primarily due to an increase in securities borrowed. In addition, there was an increase in property related to the purchase of the Miami office building and our equity method investment in Tigress; however, these were substantially offset by a decrease in receivables from customers and receivables from broker-dealers and clearing organizations.

Liabilities

Liabilities as of December 31, 2021 were $1,353,729,000 and increased by $18,728,000 from December 31, 2020, primarily due to an increase in securities loaned, debt from the mortgage with East West Bank, as well as the deferred contract incentive from NFS.

Liquidity and Capital Resources

Overview

In terms of the overall performance of the business in relation to liquidity, for the periods presented, we have had strong operating cash flows despite lower interest rates and the effects of COVID-19. We also have had sufficient cash flows to meet liquidity needs and believe our ability to generate cash flows will continue into the foreseeable future.

As of December 31, 2021, we had a variety of sources of borrowing capability such as a short-term overnight demand borrowing with BMO Harris Bank, notes payable to Gloria E. Gebbia, and a line of credit and a mortgage with East West Bank.

The indicators of our liquidity are cash and cash equivalents, and as of the date of this Report, there are no known or material events that would require us to use large amounts of our liquid assets to cover expenses. As of December 31, 2021, we had a sufficient amount of remaining availability on our various credit lines to facilitate incremental capital needs.

We believe that our operating cash flows, cash and cash equivalents, borrowing capacity, and overall access to capital markets are sufficient to fund our operating, investing and financing requirements for the next twelve months.

Shelf Registration Statement

On February 18, 2022, we filed a shelf registration statement on Form S-3 that was declared effective on March 2, 2022 by the SEC for the potential offering, issuance and sale by us of up to $100.0 million of our Common Stock, preferred stock, warrants to purchase our Common Stock and/or preferred stock, units consisting of all or some of these securities and subscription rights to purchase all or some of these securities. The registration statement was filed in reliance on General Instruction I.B.6 of Form S-3, which imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any twelve-month period. Assuming we remain subject to General Instruction I.B.6, at the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior twelve months in reliance on Instruction I.B.6 may not exceed one-third of the aggregate market value of our outstanding Common Stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital.

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Cash and Cash Equivalents

Our cash and cash equivalents are unrestricted and are used primarily to fund our working capital needs. Our cash and cash equivalents as of December 31, 2021 and 2020 were approximately $3.8 million and $3.6 million, respectively.

Net Capital, Reserve Accounts, Segregation of Funds, and Other Regulatory Requirements

MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) and the Customer Protection Rule (15c3-3) of the Securities Exchange Act of 1934 and maintains capital and segregated cash reserves in excess of regulatory requirements. Requirements under these regulations may vary; however, MSCO has adequate reserves and continency funding plans in place to sufficiently meet any regulatory requirements. In addition to net capital requirements, as a self-clearing broker-dealer, MSCO is subject to cash deposit and collateral requirements with clearing houses, such as the DTCC and the Options Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading activity and market volatility.

RISE, 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. RISE is also subject to the CFTC's minimum financial requirements which require that RISE 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.

MSCO can transfer funds to Siebert as long as it maintains its liquidity and regulatory capital requirements. RISE can transfer funds to its shareholders, of which Siebert is entitled to its proportional ownership interest, as long as RISE maintains its liquidity and regulatory capital requirements. For the year ended December 31, 2021 and 2020, MSCO and RISE had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 20 – “Capital Requirements” for more detail on our capital requirements.

Sources of Liquidity

Mortgage with East West Bank

On December 30, 2021, we entered into a mortgage with East West Bank for approximately $4 million to finance part of the purchase of the Miami office building.

Our obligations under the mortgage are secured by a lien on the Miami office building and the term of the loan is ten years. The repayment schedule will utilize a 30-year amortization period, with a balloon on the remaining amount due at the end of ten years. The agreement contains certain financial and non-financial covenants, and as of December 31, 2021, we have an unused commitment of $338,000 with East West Bank which we intend to use for the build out of the Miami office building. Refer to Note 13 – “Long-Term Debt” for additional detail on this agreement.

Future remaining annual minimum principal payments for the mortgage with East West Bank as of December 31, 2021 were as follows:

Amount

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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. The agreement contains certain financial and non-financial covenants, and our obligation under the agreement is 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 December 31, 2021, we have drawn down a $5.0 million term loan under this agreement which has an outstanding balance of $3.7 million. We have an additional $5.0 million remaining to draw down from this line of credit. Both lending agreements with East West Bank are considered senior debt facilities. Refer to Note 13 – “Long-Term Debt” for additional detail on this agreement.

Future remaining annual minimum principal payments for the line of credit with East West Bank as of December 31, 2021 were as follows:

Amount

Notes Payable – Related Party

As of December 31, 2021 and 2020, we had $7 million and $5.2 million, respectively, in notes payable to Gloria E. Gebbia. As of December 31, 2021, these notes payable have maturity dates in 2022 and we have sufficient liquidity to meet all maturities of these notes. Refer to Note 14 – “Notes Payable - Related Party” for additional detail.

Overnight Financing

As of December 31, 2021, we had an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank. As of December 31, 2020, we had $15 million line of credit with BMO Harris Bank and a $15 million line of credit with Texas Capital Bank, the latter of which was not renewed as of December 31, 2021. The removal of this line of credit was the result of Texas Capital Bank exiting the business line and did not impact our ability to meet liquidity requirements.

As of December 31, 2021, we had no outstanding loan balance and there were no commitment fees or other restrictions on this line of credit. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.

Statements of Cash Flows

The total changes in our statements of cash flows are not necessarily indicative of the ongoing results of our business as we have customer assets and liabilities on our statements of financial condition.

For the year ended December 31, 2021, we had positive operating cash flow. We had investing cash outflows related to the purchase of the Miami office building, equity of OpenHand, software assets and miscellaneous office facilities. We had financing cash inflow related to the mortgage from East West Bank to finance part of the purchase of the Miami office building as well as an incremental notes payable from Gloria E. Gebbia.

For the year ended December 31, 2020, we had positive operating cash flow and a minor investing cash outflow related to software development. We had a financing cash inflow for the line of credit secured with East West Bank and for the shares issued for employee stock purchases, which was partially offset by a financing cash outflow for the maturation of a portion of the notes payable from Gloria E. Gebbia.

Our cash and cash equivalents as of December 31, 2021 were approximately $3.8 million and increased from the same period in the prior year. There is an estimated $700,000 in build out costs for the Miami office building that will be incurred in 2022, of which approximately 50% will be financed by East West Bank. We believe we will have sufficient cash flows to fund our operations for the foreseeable future.

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Leases

As of December 31, 2021, the remaining balance of our lease payments for 2022 for operating leases with initial terms of greater than one year was $1.3 million. The remaining balance of the lease payments for these leases after 2022 was $1.8 million. Refer to Note 9 – “Leases” for more detail on our lease arrangements and corresponding disclosures.

Off-Balance Sheet Arrangements

We enter into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and are, therefore, subject to varying degrees of market and credit risk.

In the normal course of business, our customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose us to off-balance sheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and we are forced to purchase or sell the financial instrument underlying the contract at a loss.

Our customer securities activities are transacted on either a cash or margin basis. In margin transactions, we extend credit to our customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customers' accounts. In connection with these activities, we execute and clear 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. As of December 31, 2021, we had margin loans extended to customers of approximately $0.6 billion, of which $84.2 million is within the line item “Receivables from customers” on the statements of financial condition.

Such transactions may expose us 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, we may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations.

We seek to control the risks associated with our customer activities by requiring customers to maintain margin collateral in compliance with various regulatory requirements and internal guidelines which meet or exceed regulatory requirements. We monitor required margin levels daily and pursuant to such guidelines, require customers to deposit additional collateral or to reduce positions when necessary.

Our customer financing and securities settlement activities may require us 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, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy customer obligations. We seek to mitigate 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, we establish credit limits for such activities and continuously monitor compliance.

Our securities lending transactions are subject to master netting agreements with other broker-dealers; however, amounts are presented gross in the statements of financial condition. We further mitigate risk by using a program with a clearing organization which guarantees the return of cash to us as well as using industry standard software to ensure daily changes to market value are continuously updated and any changes to collateralization are immediately covered.

There were no material losses for unsettled customer transactions for the year ended December 31, 2021 and 2020.

Uncertain Tax Positions

We account for uncertain tax positions in accordance with the authoritative guidance issued under ASC 740-10, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements.

Siebert 2021 Form-10K 31

As of December 31, 2021, we recorded an uncertain tax position of $2,418,000 related to various tax matters. As of December 31, 2020, we recorded an uncertain tax position of $1,105,000 related primarily to our 2017 to 2019 amended tax returns, as the anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold.

We recognize interest and penalties related to unrecognized tax benefits on the provision for income taxes line item in the statements of income. Accrued interest and penalties would be included on the related tax liability line in the statements of financial condition.

Long Term Contracts

Contract with NFS

Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. As part of this agreement, we received a one-time business development credit of $3 million, and NFS will pay us four annual credits of $100,000 over the term of the agreement. The amendment also provides for an early termination fee; however, as of December 31, 2021, we do not expect to terminate the contract with NFS before the end of the contract term. Refer to Note 15 – “Deferred Contract Incentive” and Note 22 – “Commitments, Contingencies and Other” for additional detail.

Prepaid Service Contract

We entered into an agreement with InvestCloud for development work related to our online platform. 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. Refer to Note 5 – “Prepaid Service Contract” for additional detail.

Related Party Disclosures

During the course of business, we enter into various agreements and transactions with related parties. Refer to Note 24 – “Related Party Disclosures” for additional detail.

Fair Value Measurements

We have securities that are valued using the fair value framework under ASC 820 within our assets and liabilities as of December 31, 2021 and 2020. The majority of these assets are level 1 U.S. government securities and equity securities and level 2 equity securities in the line item “Securities owned, at fair value” on the statements of financial condition. The liabilities consist of relatively small amounts of level 2 equity securities in the line item “Securities sold, not yet purchased, at fair value.” Refer to Note 6 – “Fair Value Measurements” for additional detail.

Impairment

We have concluded as of December 31, 2021 that there has been no impairment to the carrying value of Siebert’s goodwill and tangible assets. However, due to the termination of RISE’s clearing arrangement with GSCO, substantially all of the revenue producing customers of RISE have transitioned to other prime service providers. The forecasted revenue associated with RISE’s historical customer base was determined to be minimal. As such, we determined that the RISE customer relationships intangible asset was fully impaired, resulting in an impairment loss of $699,000 for the year ended December 31, 2021. Refer to Note 12 – “Goodwill and Intangible Assets, Net” for additional information.

Segment

We concluded as of December 31, 2021, 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.

Subsequent Events

From January 31, 2022 to the date of this Report, RISE issued and Siebert sold membership interests in RISE to certain employees, directors, and affiliates of RISE and Siebert. This amount represented, as of the date of this Report, an aggregate of 7% of the total issued and outstanding membership interests in RISE.

Siebert 2021 Form-10K 32

Transaction with Hedge Connection

On January 21, 2022, RISE entered into an agreement with Hedge Connection, Inc. (“Hedge Connection”), a Florida corporation and a woman-owned fintech company founded by Lisa Vioni that provides capital introduction software solutions for the prime brokerage industry.

Pursuant to the agreement, Hedge Connection transferred to RISE common stock representing twenty percent (20%) of the outstanding post-closing issued and outstanding capitalization in Hedge Connection and an option from Ms. Vioni to acquire 100% of the remaining interest in Hedge Connection at fair value market at the time of the option exercise, provided such valuation of Hedge Connection is not less than $5 million for a consideration of $1,000,000. This consideration is to be paid in three cash installments over 180 days totaling $600,000 as well as approximately 3.33% of the issued and outstanding membership interests of RISE.

In addition, RISE acquired a technology license agreement from Hedge Connection to use its capital introduction software, Fintroz, for an annual license fee of $250,000, Ms. Vioni provided RISE with the right to appoint one director to the Board of Directors of Hedge Connection, and Ms. Vioni was appointed to the Board of Directors of RISE as well as to the position of President of RISE Prime – Capital Introduction, a division of RISE.

Shelf Registration Statement

On February 18, 2022, Siebert filed a shelf registration statement on Form S-3 with the SEC, File No. 333-262895, pursuant to General Instruction I.B.6 to Form S-3 (the “Baby Shelf Rule”), that was declared effective on March 2, 2022 (the “Registration Statement”). Siebert may from time to time sell any combination of the securities described in the Registration Statement in one or more offerings up to an aggregate offering price of $100.0 million; provided, however, at the time Siebert sells securities pursuant to the Registration Statement, the amount of securities to be sold plus the amount of any securities it has sold during the prior twelve months in reliance on General Instruction I.B.6 may not exceed one-third of the aggregate market value of Siebert’s outstanding Common Stock held by non-affiliates as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6 while Siebert remains subject to the Baby Shelf Rule.

Other Items

On September 17, 2021, Siebert’s shareholders approved the Siebert Financial Corp. 2021 Equity Incentive Plan (the “Plan”) at Siebert’s 2021 Annual Meeting of Shareholders. The Plan provides for the grant of stock options, restricted stock, and other equity awards of Siebert’s common stock to employees, officers, consultants, directors, affiliates, and other service providers of Siebert. There are 3 million shares reserved under the Plan, and Siebert issued no securities under the Plan for the year ended December 31, 2021.

Legal and Regulatory Matters

We are party to certain claims, suits and complaints arising in the ordinary course of business. All of the below legal matters are related to activities related to operations of StockCross Financial Services, Inc. (“StockCross”), prior to our acquisition of StockCross on January 1, 2020.

On July 14, 2021, StockCross entered into a Letter of Acceptance, Waiver, and Consent with FINRA in connection with alleged excessive trading and suitability violations by a registered representative of StockCross in a customer’s account, supervisory failures to comply with supervisory requirements relating to certain equity and options and stock lending transactions, and certain record keeping requirements. Pursuant to the consent, we agreed to a censure, pay a fine of $250,000, and made an undertaking to retain an independent consultant to conduct a comprehensive review of our compliance with suitability rules in connection with solicited equity and options transactions, as well as possession-or-control requirements in connection with the firm’s stock loan business. As of December 31, 2021, this legal matter has been resolved and we paid $250,000 for the year ended December 31, 2021, which is within the line item “Other general and administrative” in the statement of income.

On July 9, 2021, StockCross entered into a Consent Order with the California Department of Financial Protection and Innovation in connection with alleged supervisory failures relating to the sale of Unit Investment Trusts to six customers. Pursuant to the consent order, we agreed to desist and refrain from violations of California law relating to supervision by broker-dealers, to make a payment of $100,000 to the California Department of Financial Protection and Innovation for administrative costs, and to offer restitution of commissions of approximately $315,000 in aggregate to the six customers. We paid $100,000 for the year ended December 31, 2021 related to this legal matter, which is within the line item “Other general and administrative” in the statements of income. As of December 31, 2021, this legal matter has been resolved and the six customers rejected the offer of restitutions.

For activity related to operations of StockCross prior to our acquisition of StockCross, FINRA’s Division of Enforcement is currently investigating UIT transactions that were executed by StockCross that the enforcement staff believes were terminated early. We believe that many of these transactions were UIT transactions that were the subject of our prior settlements with the Commonwealth of Massachusetts and the State of California. All of these transactions occurred prior to our acquisition of StockCross on January 1, 2020. Management cannot at this time assess either the duration or the likely outcome or consequences of the FINRA investigation. Nevertheless, FINRA has the authority to impose sanctions on us or require that it make offers of restitution to other customers who FINRA believes incurred sales charges in early liquidations of UITs. No assurances can be given that a mutual settlement with FINRA regarding the investigation can be reached or that any amount paid in settlement will not be material.

Siebert 2021 Form-10K 33

As of December 31, 2021, all other legal matters are without merit or involve amounts which would not have a material impact on our results of operations or financial position.

New Accounting Standards

We have determined that all accounting standards and policies adopted in the year ended December 31, 2021 did not have a material impact on our financial statements. Refer to Note 2 – “Summary of Significant Accounting Policies” for additional detail.

Critical Accounting Policies

Overview

We generally follow accounting policies standard in the brokerage industry and believe that our policies appropriately reflect our financial position and results of operations. Our management team makes significant estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities included in the consolidated financial statements. The estimates relate primarily to revenue and expense items in the normal course of business as to which we receive no confirmations, invoices, or other documentation, at the time the books are closed for a period. We use our best judgment, based on our knowledge of revenue transactions and expenses incurred, to estimate the amount of such revenue and expenses. We are not aware of any material differences between the estimates used in closing our books for the last five years and the actual amounts of revenue and expenses incurred when we subsequently receive the actual confirmations, invoices or other documentation.

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make judgments and estimates that may have a significant impact on our financial results. We believe that the following areas are particularly subject to management's judgments and estimates and could materially affect our results of operations and financial position. Refer to Note 2 – “Summary of Significant Accounting Policies” for additional detail on our significant accounting policies.

Revenue recognition

We have appropriate revenue recognition policies for each our revenue streams. Refer to Note 16 – “Revenue Recognition” for additional detail on our revenue recognition policies.

Estimates of effective income tax rates, uncertain tax positions, deferred income taxes and related valuation allowances.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred taxes in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Siebert 2021 Form-10K 34

We recognize interest and penalties related to unrecognized tax benefits on the provision for income taxes line in the statements of income. Accrued interest and penalties would be included on the related tax liability line in the statements of financial condition.

Goodwill and other intangible assets

Goodwill is recognized as a result of business combinations and represents the excess of the purchase price over the fair value of net tangible assets and identifiable intangible assets acquired.

The valuation of goodwill and acquired intangible assets requires significant judgment and estimates by management. For example, the valuation of certain intangible assets required management’s estimates of future earnings and cash flows as well as judgment in determining market approaches. The useful life of the finite lived intangible assets was determined based on management's estimate of the period over which those intangible assets were expected to provide economic benefit. Management applies judgment in conducting impairment testing for goodwill and intangible assets, including estimates of fair value based on the income or market approach and estimates required to determine the useful lives of finite lived intangible assets.

We test goodwill and all intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, or at least annually. If our estimates of fair value change due to future events differing significantly from the forecasts used to determine fair value or there are changes in our business or other factors, we will assess the amount of impairment and recognize it in our financial statements during that reporting period.

We also evaluate the useful life of finite lived intangible assets on an annual basis to determine if events or trends warrant a change in estimate of the useful life. Changes in the estimated useful lives of finite lived intangible assets could result in the recognition of an impairment or a change in the remaining life of these assets.

We have concluded that as of December 31, 2021, there has been no impairment to the carrying value of Siebert’s goodwill; however, there has been an impairment of $699,000 to the RISE customer relationships intangible asset for the year ended December 31, 2021 due to the termination of GSCO’s clearing arrangement with RISE.

Refer to Note 2 – “Summary of Significant Accounting Policies” and Note 12 – “Goodwill and Intangible Assets, Net” for additional detail.

Accruals for contingent liabilities

Accruals for contingent liabilities related to legal and regulatory claims as well as employee healthcare expenses under our self-insured plan reflect an estimate of probable losses. In making such estimates for legal and regulatory claims, we consider many factors, including the progress of the matter, prior experience and the experience of others in similar matters, available defenses, insurance coverage, indemnification provisions and the advice of legal counsel and other experts. In making such estimates for employee healthcare expenses, we consider many factors, including trends of our health insurance expenses and our insurance reserve limits. We believe that our present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that we will not incur liabilities in excess of recorded reserves or in excess of our insurance limits. Significant judgment is required in making these estimates, and the actual cost may be materially different than the estimated costs. Refer to Note 22 – “Commitments, Contingencies and Other” for additional detail.

Allowance for credit losses

Management adopted CECL for Siebert which changed the methodology for estimating the allowance for credit losses from an incurred loss model to current expected loss model. Management applied quantitative and qualitative assessments in determining the risk characteristics and pooling different assets that are carried at amortized cost. Management applied the collateral maintenance practical expedient for the secured receivables and fully reserved the unsecured assets that are greater than 90 days past due. Adoption of CECL did not have a material impact on the financial statements due to the existing credit management policies and short-term nature of the assets.

Siebert 2021 Form-10K 35

ITEM 7A. 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.

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 Siebert. 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.

Siebert 2021 Form-10K 36

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SIEBERT FINANCIAL CORP.

Page

Report of Independent Registered Public Accounting Firm 38

Notes to Consolidated Financial Statements 43

Siebert 2021 Form-10K 37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 23)

To the Shareholders and the Board of Directors of Siebert Financial Corp.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of Siebert Financial Corp. & Subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, 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 consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Baker Tilly US, LLP

We have served as the Company's auditor since 2017.

New York, New York

March 30, 2022

Siebert 2021 Form-10K 38

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

ASSETS

Current assets

Receivables from broker-dealers and clearing organizations 8,185,000 15,815,000

Receivables from non-customers 81,000 —

Deposits with broker-dealers and clearing organizations 5,541,000 7,209,000

Equity method investment in related party 8,156,000 —

Intangible assets, net — 809,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Current liabilities

Payables to broker-dealers and clearing organizations 254,000 1,810,000

Securities sold, not yet purchased, at fair value 24,000 21,000

Current portion of deferred contract incentive 808,000 —

Deferred contract incentive, less current portion 1,938,000 —

Commitments and Contingencies

Stockholders’ equity

Noncontrolling interests 1,243,000 —

Numbers are rounded for presentation purposes. See notes to consolidated financial statements.

Siebert 2021 Form-10K 39

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,

Revenue

Expenses

Advertising and promotion 44,000 —

Earnings of equity method investment in related party 172,000 —

Less net loss attributable to noncontrolling interests (30,000) —

Net income available to common stockholders per share of common stock

Basic and diluted $ 0.16 $ 0.10

Weighted average shares outstanding

Numbers are rounded for presentation purposes. See notes to consolidated financial statements.

Siebert 2021 Form-10K 40

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Numbers are rounded for presentation purposes. See notes to consolidated financial statements.

Siebert 2021 Form-10K 41

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

Cash Flows From Operating Activities

Loss on sale of OpenHand common stock 63,000 —

Earnings of equity method investment in related party (172,000 ) —

Changes in

Receivables from non-customers (81,000 ) —

Payables to broker-dealers and clearing organizations (1,556,000 ) 1,287,000

Securities sold, not yet purchased, at fair value 3,000 (95,000 )

Interest payable — (10,000 )

Deferred contract incentive 2,746,000 —

Cash Flows From Investing Activities

Equity method investment in related party (64,000 ) —

Purchase of Openhand common stock (850,000 ) —

Purchase of office facilities and equipment (296,000 ) (13,000 )

Cash Flows From Financing Activities

Employee stock purchases — 800,000

Supplemental cash flow information

Non-cash investing and financing activities

Shares issued for payment of professional services $ — $ 1,127,000

Equity method investment in related party $ 7,920,000 $ —

Numbers are rounded for presentation purposes. See notes to consolidated financial statements.

Siebert 2021 Form-10K 42

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Overview

Siebert Financial Corp., a New York corporation, incorporated in 1934, is a holding company that conducts the following lines of business through its wholly-owned and majority-owned subsidiaries:

•

Retail brokerage business through Muriel Siebert & Co., Inc. (“MSCO”), a Delaware corporation and broker-dealer registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”) and the Commodity Exchange Act of 1936, and member of the Financial Industry Regulatory Authority (“FINRA”), the New York Stock Exchange (“NYSE”), the Securities Investor Protection Corporation (“SIPC”), and the National Futures Association (“NFA”). MSCO engages in the business of providing brokerage services for retail customers and trading securities for its own account.

•

Investment advisory services through Siebert AdvisorNXT, Inc. (“SNXT”), a New York corporation registered with the SEC as a Registered Investment Adviser (“RIA”) under the Investment Advisers Act of 1940. SNXT engages in providing investment advisory services to retail and high net worth clients.

•

Insurance services through Park Wilshire Companies, Inc. (“PW”), a Texas corporation and licensed insurance agency. PW provides insurance agency services to retail and institutional accounts.

•

Robo-advisory technology development through Siebert Technologies, LLC (“STCH”), a Nevada limited liability company.

•

Prime brokerage services through RISE Financial Services, LLC (“RISE”), formerly known as WPS Prime Services, LLC (“WPS”), a Delaware limited liability company and a broker-dealer registered with the SEC and NFA. RISE is a woman-owned and operated financial services firm that offers a comprehensive suite of prime brokerage services aligned with the growing mission-driven Environmental Social and Governance (“ESG”) initiatives of institutional investors.

•

StockCross Digital Solutions, Ltd. (“STXD”), an inactive subsidiary headquartered in Bermuda.

For purposes of this Annual Report on Form 10-K, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PW, STCH, RISE, 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 12 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 year ended December 31, 2021 and 2020 were derived from its operations in the U.S.

As of December 31, 2021, 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.

Transaction with Tigress Holdings, LLC

On November 16, 2021, the Company entered into an agreement with Tigress, a Delaware limited liability company. As part of the agreement, (i) Tigress transferred to the Company limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests in Tigress; and (ii) the Company transferred to Tigress limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests of RISE and 1,449,525 shares of the Company’s common stock. The common stock was issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

Siebert 2021 Form-10K 43

As of December 31, 2021 and 2020, Siebert holds a controlling financial interest in RISE and therefore consolidates RISE within its financial statements. Siebert owns the majority of RISE’s membership interest which has voting rights in proportion to its ownership interest in RISE. Siebert’s ownership percentage of RISE as of December 31, 2021 and 2020 was 76% and 100%, respectively. These consolidated financial statements reflect the results of operations and financial position of RISE, including consolidation of its investment in RISE. The noncontrolling interests in RISE are reported as a component of total equity in the consolidated statement of financial condition.

As part of the transaction, WPS Prime Services, LLC was renamed to RISE Financial Services, LLC, and Tigress’ founder, Cynthia DiBartolo, will continue as CEO of Tigress, and assumed the position as CEO of RISE. Gloria E. Gebbia, one of the Company’s and RISE’s directors, assumed the position of Chief Impact Officer at RISE. Ms. DiBartolo was appointed to the Company’s and RISE’s Board of Directors and Ms. Gebbia was appointed to Tigress’ Board of Directors.

RISE relaunched its business as a woman-owned and operated prime brokerage with a specific emphasis on aligning the mission-driven initiatives with the technological needs of institutional customers.

Arrangements with JonesTrading and Goldman Sachs

On August 30, 2021, Goldman Sachs & Co. LLC ("GSCO") notified RISE that its clearing arrangement with RISE will be terminated.

Due to the termination of RISE’s clearing arrangement with GSCO, substantially all the revenue producing customers of RISE have transitioned to other prime service providers. Revenue from customers that have transitioned to other prime service providers was approximately $12.6 million and $13.9 million for the year ended December 31, 2021 and 2020, respectively. Pre-tax income from these customers was approximately $1.8 million and $1.3 million for the year ended December 31, 2021, and 2020, respectively.

As a result of this development, the Company recorded a full impairment of the RISE customer relationships intangible asset of $699,000 and RISE collected its clearing deposit from GSCO of approximately $2 million as of December 31, 2021. In addition, RISE’s institutional customer assets under management were significantly reduced in the year ended December 31, 2021.

On October 7, 2021, RISE signed an agreement with JonesTrading Institutional Services, LLC (“JonesTrading”) to transfer certain customers of RISE to JonesTrading. In exchange, JonesTrading agreed to pay RISE a percentage of the net revenue produced by those clients less any related expenses. The percentage paid to RISE related to this agreement will decline every year and the arrangement will end in October 2024. For the year ended December 31, 2021, this agreement resulted in a net expense of $22,000 as RISE was in the process of transitioning customers to JonesTrading.

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 spread across the globe during 2020 and impacted economic activity worldwide. In response to COVID-19, national and local governments around the world 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 primary financial impact on the Company from the COVID-19 pandemic for both the year ended December 31, 2021 and 2020 was lower interest revenue resulting from lower benchmark interest rates beginning in early 2020.

The Company is actively monitoring the impact of COVID-19 on its business, financial condition, liquidity, operations, employees, clients and business partners. Based on management’s assessment as of December 31, 2021, 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.

Siebert 2021 Form-10K 44

Acquisition of StockCross

On January 25, 2019, the Company purchased approximately 15% of the outstanding shares of StockCross Financial Services, Inc. (“StockCross”). Subsequently, the Company acquired the remaining 85% of StockCross’ outstanding shares in exchange for 3,298,774 shares of the Company’s common stock. The Company’s common stock was issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. 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 were performed by MSCO.

Prior to and 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.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting of financial condition. The consolidated financial statements include the accounts of Siebert and its wholly-owned and majority-owned subsidiaries. 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.

The Company’s investments in non-majority-owned partnerships and affiliates are accounted for using the equity method until such time that they become wholly or majority-owned. Earnings attributable to noncontrolling interests are recorded on the statements of income relating to wholly or majority-owned subsidiaries with the appropriate noncontrolling interest that represents the portion of equity not related to the Company’s ownership interest recorded on the statements of financial condition in each period.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

These estimates relate primarily to revenue and expenses in the normal course of business as to which the Company receives no confirmations, invoices, or other documentation at the time the books are closed. The Company uses its best judgment, based on knowledge of these revenue transactions and expenses incurred, to estimate the amount of such revenue and expenses. Actual results could differ from those estimates. The Company is not aware of any material differences between the estimates used in closing the Company’s books for the last five years and the actual amounts of revenue and expenses incurred when the Company subsequently receives the actual confirmations, invoices, or other documentation.

Estimates are used in the allowance for credit losses, valuation of certain investments, intangible asset valuations and useful lives, depreciation, income taxes, and the contingent liabilities related to legal and healthcare expenses. The Company also estimates the valuation allowance for its deferred tax assets based on the more likely than not criteria. The Company believes that its estimates are reasonable.

Accounting for Acquisitions

ASC 805 is used for accounting in business acquisitions. ASC 805 requires that goodwill be recognized separately from assets acquired and liabilities assumed at their acquisition date fair values. Goodwill, as of the date of acquisition, is determined as the excess of the consideration transferred net of the acquisition date fair values of assets acquired and liabilities assumed. Fair value estimates at acquisition date may be assessed internally or externally using third parties. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated acquisition date fair values to assets and liabilities. These fair value estimations are subjective and require careful consideration and sound judgment. Management reviews the third-party reports for fairness of the assigned values.

Concentrations of Credit Risk

The Company is engaged in various trading and brokerage activities whose contra-parties include broker-dealers, banks and other financial institutions.

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In the event contra-parties do not fulfill their obligations, the Company may sustain a loss if the market value of the instrument is different from the contract value of the transaction. The risk of default primarily depends upon the credit worthiness of the contra-parties involved in the transactions. It is the Company’s policy to review, as necessary, the credit standing of each contra-party with which it conducts business. The Company has experienced no material historical losses in relation to its contra-parties for the year ended December 31, 2021 and 2020.

As of December 31, 2021 and 2020, the Company maintained its cash balances at various financial institutions. These balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per institution. The Company is subject to credit risk to the extent that the financial institution with which it conducts business is unable to fulfill its contractual obligations and deposits exceed FDIC limits.

Allowance for Credit Losses

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial-Instruments.” This ASU amends several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses model (“CECL”). Under CECL, the allowance for credit losses on financial assets that are measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of the financial assets. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, would be recognized in earnings, and adoption of the ASU will generally result in earlier recognition of credit losses. Expected credit losses will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount, and credit losses will be generally recognized earlier than under previous U.S. GAAP.

The Company’s adoption of this ASU using the modified retrospective approach for all in-scope assets did not result in an adjustment to the opening balance in retained earnings. The ASU impacts only those financial instruments that are carried by the Company at amortized cost such as securities borrowed / loaned, receivables from customers, receivables from broker-dealers and clearing organizations, and other receivables. The adoption of this ASU did not have a material impact to the Company's financial statements.

Cash and Cash Equivalents

Cash and cash equivalents are all cash balances that are unrestricted. The Company has defined cash equivalents as highly liquid investments with original maturities of less than 90 days that are not held for sale in the ordinary course of business. As of December 31, 2021 and 2020, the Company did not hold any cash equivalents. At certain times, cash balances may exceed FDIC insured limits.

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. As of December 31, 2021, and 2020 the Company did not have any securities segregated for regulatory purposes. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the requirements and special reserve accounts of MSCO and StockCross were combined.

Receivables From and Payables To Customers

Receivables from and payables to customers include amounts due and owed on cash and margin transactions. Receivables from customers include margin loans to securities brokerage clients and other trading receivables. Margin loans are collateralized by customers securities and are carried at the amount receivable, net of an allowance for credit losses. Collateral is required to be maintained at specified minimum levels at all times. The Company monitors margin levels and requires customers to provide additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. The Company expects the borrowers will continually replenish the collateral as necessary because the Company subjects the borrowers to an internal qualification process to align investing objectives and risk tolerance in addition to monitoring customer activity.

The Company elected the practical expedient for Topic 326 which permits it to compare the amortized cost basis of the loaned amount with the fair value of collateral received at the reporting date to measure the estimate of expected credit losses. The Company has no expectation of credit losses for its receivables from customers as of December 31, 2021 and 2020. Securities beneficially owned by customers, including those that collateralize margin or other similar transactions, are not reflected in the statements of financial condition.

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Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations

Receivables from and payables to broker-dealers includes receivables from or payables to MSCO and RISE clearing 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.

Amounts payables to broker-dealers and clearing organizations are offset against corresponding 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.

Receivables from and deposits with broker-dealers and clearing organizations are in scope of the amended guidance for Topic 326. The Company continually reviews the credit quality of its counterparties and historically has not experienced a default. Further, management reassessed the risk characteristics of its receivables and applied the collateral maintenance practical expedient for the secured receivables in line with the CECL guidance. As a result, the Company has no expectation of credit losses for these arrangements as of December 31, 2021 and 2020.

MSCO customer transactions for the year ended December 31, 2021 and 2020 were both self-cleared and cleared on a fully disclosed basis through National Financial Services Corp. (“NFS”). RISE customer transactions for the year ended December 31, 2021 and 2020 were cleared on fully disclosed basis through GSCO and Pershing LLC (“Pershing”).

The Company signed a four-year renewal with NFS commencing August 1, 2021 and ending on July 31, 2025, and NFS’s fees are offset against the Company’s revenues on a monthly basis. All other broker-dealer and clearing organization relationships operate on a month-to-month basis.

Securities Borrowed and Securities Loaned

Securities borrowed transactions are recorded at the amount of cash collateral delivered to the counterparty. 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.

The Company can elect to use an approach to measure the allowance for credit losses using the fair value of collateral where the borrower is required to, and reasonably expected to, continually adjust and replenish the amount of collateral securing the instrument to reflect changes in the fair value of such collateral. The Company has elected to use this approach for its allowance for credit losses on securities borrowed. As a result of this election, and the fully collateralized nature of these arrangements, the Company has no expectation of credit losses on its securities borrowed balances as of December 31, 2021 and 2020.

Securities Owned and Securities Sold, Not Yet Purchased at Fair Value

Securities owned, at fair value represent marketable securities owned by the Company at trade-date valuation. Securities sold, not yet purchased, at fair value represent marketable securities sold by the Company prior to purchase at trade-date valuation.

Property, Office Facilities, and Equipment, Net

Property, office facilities, and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation for equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally not exceeding four years. Office facilities are amortized over the shorter of their estimated useful life or the remaining lease term unless the lease transfers ownership of the underlying asset to the lessee, or the lessee is reasonably certain to exercise an option to purchase the underlying asset, in which case the lessee will amortize over the estimated useful life of the leasehold improvements. Depreciation for property is calculated using the straight-line-method over the estimated useful life of the property, not exceeding 40 years.

Software, Net

The Company capitalizes certain costs for software such as website and other internal technology development and amortizes them over their useful life, generally not exceeding three years. Depending on the terms of the contract, the Company either records costs from software hosting arrangements as prepaid assets and amortizes them over the contract term, or the costs are expensed as incurred.

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The Company enters into certain software hosting arrangements where the cost for professional development services is capitalized and then amortized over the term of the contract.

Other software costs such as routine maintenance and various data services to provide market information to customers are expensed as incurred.

Equity Method Investments

Investments in which the Company has the ability to exercise significant influence, but does not control, are accounted for under the equity method of accounting and are included in the equity method investment in related party line item in the statements of financial condition. Under this method of accounting, the Company’s share of the net income or loss of the investee is presented before the income before provision for income taxes on the statements of income.

The Company evaluates its equity method investments whenever events or changes in circumstance indicate that the carrying amounts of such investments may be impaired. If the impairment is determined to be other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment.

Investments, Cost

The Company measures equity investments (other than equity method investments, controlling financial interests that result in consolidation of the investee and certain other investments) at fair value and recognizes any changes in fair value in net income.

Pursuant to ASU 2020-01, the Company has made an accounting policy election to measure equity securities without readily determinable fair value at cost, less any impairment, adjusted for any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Intangible Assets, Net

Certain identifiable intangible assets the Company acquires such as customer relationships and trade names are amortized over their estimated useful lives on a straight-line basis. Amortization expense associated with such intangible assets is included in the line item “Depreciation and amortization” on the statements of income.

The Company evaluates intangible assets for impairment on an annual basis or when events or changes indicate the carrying value may not be recoverable. The Company also evaluates the remaining useful lives of intangible assets on an annual basis or when events or changes warrants the remaining period of amortization to be revised.

Goodwill

Goodwill is recognized as a result of business combinations and represents the excess of the purchase price over the fair value of net tangible assets and identifiable intangible assets. The Company evaluates goodwill for impairment on an annual basis or when events or changes indicate the carrying value may not be recoverable. The Company has the option of performing a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of its equity is less than the carrying value. If it is more likely than not that the fair value exceeds the carrying value, then no further testing is necessary; otherwise, the Company must perform a two-step quantitative assessment of goodwill. The Company may elect to bypass the qualitative assessment and proceed directly to performing a two-step quantitative assessment.

Payables to Non-Customers

Payables to non-customers includes amounts due on cash and margin transactions on accounts owned and controlled by principal officers and directors of MSCO. Payables to non-customers amounts include any amounts received from interest on credit balances. Effective upon the Company’s acquisition of StockCross on January 1, 2020, the Company no longer had any proprietary accounts of introducing broker-dealers.

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Drafts Payable

Drafts payable represent checks drawn by the Company against customer accounts which remained outstanding and had not cleared the bank as of the end of the period.

Deferred Contract Incentive

The Company entered into an amendment with its agreement with NFS whereby the Company received a one-time business development credit of $3 million, and NFS will pay the Company four annual credits of $100,000, which are recorded within the line item “Deferred contract incentive” on the statements of financial condition. Annual credits shall be paid on the anniversary of the date on which the first credit was paid. The business development credit and annual credits will be recognized as contra expense over four years and one year, respectively, in the line item “Clearing fees, including execution costs” on the statements of income.

Revenue Recognition

Revenue from contracts with customers and counterparties includes commissions and fees, principal transactions, market making, stock borrow / stock loan, advisory fees, interest, marketing and distribution fees, as well as other income. The recognition and measurement of revenue is based on the assessment of individual contract terms. Significant judgment is required to determine whether performance obligations are satisfied at a point in time or over time, how to allocate transaction prices where multiple performance obligations are identified, when to recognize revenue based on the appropriate measure of the Company’s progress under the contract, and whether constraints on variable consideration should be applied due to uncertain future events.

Advertising Costs

Advertising costs are expensed as incurred and were $44,000 and $0 for the year ended December 31, 2021, and 2020, respectively.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred taxes in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits on the provision for income taxes line in the statements of income. Accrued interest and penalties would be included on the related tax liability line in the statements of financial condition.

Capital Stock

The authorized capital stock of the Company consists of a single class of common stock. Shares authorized were 100 million as of both December 31, 2021 and 2020.

Per Share Data

Basic earnings per share is calculated by dividing net income available to the Company’s common stockholders by the weighted average number of outstanding common shares during the year. Diluted earnings per share is calculated by dividing net income available to the Company’s common stockholders by the number of shares outstanding under the basic calculation and adding, all dilutive securities, which consist of options. The Company has no dilutive securities as of December 31, 2021 and 2020.

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Accounting Standards Adopted in Fiscal 2021

ASU 2020-01 - In January 2020, the FASB issued ASU 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.

ASU 2019-12 - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes”, as part of its initiative to reduce complexity in the accounting standards. The ASU eliminates certain exceptions from ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The Company adopted this ASU on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.

ASU 2016-13 - In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial-Instruments”. This ASU amends several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses model (“CECL”). Under CECL, the allowance for losses for financial assets that are measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of the financial assets. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, would be recognized in earnings, and adoption of the ASU will generally result in earlier recognition of credit losses. Expected credit losses will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount, and credit losses will be generally recognized earlier than under previous U.S. GAAP.

The Company adopted this ASU on January 1, 2021 using the modified retrospective approach for all in-scope assets, which did not result in an adjustment to the opening balance in retained earnings. The ASU impacts only those financial instruments that are carried by the Company at amortized cost such as securities borrowed / loaned, receivables from customers, non-customers, broker dealers and clearing organizations and other receivables. The adoption of this ASU did not have a material impact to the Company's financial statements.

Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a material impact on the Company’s financial statements and related disclosures as of December 31, 2021.

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, 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 common stock which was issued in connection with the acquisition. The acquisition of StockCross added incremental business lines, revenue streams, cost synergies and additional experienced management team members to 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.

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 no goodwill was recorded as part of the transaction.

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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 broker-dealers and clearing organizations 3,105,000

Prepaid expenses and other assets 346,000

Securities owned, at fair value 3,018,000

Furniture, equipment and leasehold improvements, net 19,000

Liabilities assumed

Payables to broker-dealers and clearing organizations 1,406,000

Accounts payable and accrued liabilities 963,000

Securities sold, not yet purchased, at fair value 28,000

Notes payable – related party 5,000,000

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:

Receivables from and deposits with broker-dealers and clearing organizations

Other receivables 27,000 —

Payables to broker-dealers and clearing organizations

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Under the Depository Trust and Clearing Corporation (“DTCC”) shareholders’ agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of December 31, 2021 and 2020, MSCO had shares of DTCC common stock valued at approximately $905,000 and $937,000, respectively, which are included within the line item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.

5. Prepaid Service Contract

On April 21, 2020, the Company entered into a Master Services Agreement (“MSA”), with InvestCloud, Inc. (“InvestCloud”). Pursuant to the MSA, InvestCloud agreed to provide the Company with the InvestCloud Platform, a new client and back end interface and related functionalities for the Company’s key operations. The Company 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 the Company upon 120 days’ notice.

In connection with the MSA, InvestCloud entered into a side letter agreement with the Company pursuant to which InvestCloud acquired 193,906 shares of the Company’s restricted common stock 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, which approximates the cost of services to be provided, to integrate the InvestCloud Platform into the Company’s existing systems. The common stock was issued on May 12, 2020 pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

The Company initially recorded a prepaid asset equal to the $2.1 million of the total professional services related to the development work to be performed by InvestCloud, which is within the line item “Prepaid service contract” on the statements of financial condition. The Company amortizes this asset over the 3-year term of the contract, a period during which the arrangement is noncancelable. The license fees related to the Company’s use of the InvestCloud Platform are prepaid three months in advance and are within the line item “Prepaid service contract” 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 is within the line item “Technology and Communications” on the statements of income.

The expense related to share-based payments to InvestCloud for professional services was $376,000 and $219,000 for the year ended December 31, 2021, and 2020, respectively.

The total cost related to InvestCloud was $959,000 and $764,000 for the year ended December 31, 2021, and 2020, respectively.

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.

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.

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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.

Certificates of deposit: Certificates of deposit are included in investments 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 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.

Corporate bonds: The fair value of corporate bonds is 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 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.

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.

Level 1 Level 2 Level 3 Total

Assets

Securities owned, at fair value

Liabilities

Securities sold, not yet purchased, at fair value

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Level 1 Level 2 Level 3 Total

Assets

Securities owned, at fair value

Liabilities

Securities sold, not yet purchased, at fair value

*As of December 31, 2021 and 2020, the U.S. government securities had maturity dates of August 15, 2024 and August 31, 2021, respectively.

A description of the valuation techniques applied to the Company’s major categories of assets and liabilities measured at fair value on a non-recurring basis is as follows:

Non-marketable equity securities: The Company’s non-marketable equity securities are investments in privately held companies that do not have a readily determinable market value. Due to the absence of quoted market prices, these are classified as level 3 since considerable judgement and estimation is involved in determining the fair value of these securities.

The table below summarized the total carrying value of Level 3 equity assets and changes made during the periods presented.

Changes in Level 3 Equity Assets

Amount Valuation Technique Reason for Change

Securities owned, at fair value

Balance – January 1, 2020 $ 288,000 Liquidation value based on valuation report

Sale of equity security (288,000 ) Sale of equity security

Balance – December 31, 2020 $ —

The following represents financial instruments in which the ending balances as of December 31, 2021 and 2020 are not carried at fair value on the statements of financial condition:

Short-term financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents as well as 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. The Company had no cash equivalents or securities segregated for regulatory purposes as of December 31, 2021 and 2020. Cash and cash equivalents and cash and securities segregated for regulatory purposes are classified as level 1.

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Receivables and other assets: Receivables from customers, receivables from non-customers, receivables from and deposits with broker-dealers and clearing organizations, other receivables, prepaid service contract, and prepaid expenses and other assets are recorded at amounts that approximate fair value and are classified as level 2 under the fair value hierarchy. The Company may hold cash equivalents related to rent deposits that are categorized as level 2 under the fair value hierarchy in other receivables.

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 taxes 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.

Long-term debt: The carrying amount of the line of credit and mortgage with East West Bank approximates fair value as they reflect terms that approximate current market terms for similar arrangements. Under the fair value hierarchy, the line of credit is classified as level 2.

Investments, cost: The Company’s non-marketable equity securities are investments in privately held companies without readily determinable market values. Due to the absence of quoted market prices, the inherent lack of liquidity and the fact that inputs used to measure fair value are unobservable and require management’s judgment. As there is no readily determinable fair value, the carrying amount of these investments minus impairment approximates the fair value. The cost will be adjusted upwards or downwards in accordance with observable market transactions and is recorded in the line item “Other general and administrative” in the statements of income. Under the fair value hierarchy, the investments, cost is classified as level 3.

7. Property, Office Facilities, and Equipment, Net

Property, office facilities, and equipment consisted of the following as of the periods indicated:

As of December 31,

Total Property, office facilities, and equipment, net $ 7,463,000 $ 762,000

Total depreciation expense for property, office facilities, and equipment was 410,000 and $402,000 for the year ended December 31, 2021 and 2020, respectively.

Purchase of Office Building

On December 30, 2021, the Company acquired the Miami office building located at 653 Collins Ave, Miami Beach, FL. The Miami office building contains approximately 12,000 square feet of office space, which will be used as one of the primary operating centers for the Company. The seller of the property is City National Bank of Florida, a national banking association, as trustee under the provisions of a certain Trust Agreement, dated March 22, 1993 (the “Seller”). The Seller has no material relationship with the Company.

The contract purchase price for the Miami office building was $6,750,000, exclusive of customary real estate transaction costs. The Company funded the purchase price via approximately $750,000 of the Company’s cash, a $2 million notes payable with Gloria E. Gebbia, and the remaining $4 million via the mortgage with East West Bank.

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8. Software, Net

Software consisted of the following as of the periods indicated:

As of December 31,

Less accumulated amortization – robo-advisor (763,000 ) (509,000 )

Less accumulated amortization – other software (1,760,000 ) (1,090,000 )

Total amortization of software was $925,000 and $951,000 for the year ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company estimates future amortization of software assets of $506,000, $187,000, and $59,000, in the year ended December 31, 2022, 2023, and 2024, respectively.

9. Leases

As of December 31, 2021, the Company rents office space under operating leases expiring in 2022 through 2026, 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 less than twelve months), or equipment leases (deemed immaterial) on the statements of financial condition.

As of December 31, 2021, 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.

Assets

Liabilities

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 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.

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Lease Term and Discount Rate As of December 31, 2021 As of December 31, 2020

Weighted average remaining lease term – operating leases (in years) 2.9 2.2

Weighted average discount rate – operating leases 5.0 % 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.

Year Ended December 31,

Sublease income — —

Cash paid for amounts included in the measurement of lease liabilities

Lease right-of-use assets obtained in exchange for new lease liabilities

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Lease Commitments

Future annual minimum payments for operating leases with initial terms of greater than one year as of December 31, 2021 were as follows:

Year Amount

Remaining balance of lease payments 3,147,000

10. Equity Method Investment in Related Party

On November 16, 2021, the Company entered into an agreement with Tigress, a Delaware limited liability company. As part of the agreement, (i) Tigress transferred to the Company limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests in Tigress; and (ii) the Company transferred to Tigress limited liability company membership interests representing twenty-four percent (24%) of the outstanding membership interests of RISE, and 1,449,525 shares of the Company’s common stock. The value of the shares of the Company’s common stock was determined using a 60-day average of the Company’s common stock price as reported by the NASDAQ Capital Market. The common stock was issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

The Company’s ownership in Tigress is accounted for under the equity method of accounting. In determining whether the investment in Tigress should be accounted for under the equity method of accounting, the Company considered the guidance under ASC 323, Investments – Equity Method and Joint Ventures. The Company maintains 24% ownership interest in Tigress, which represents a significant ownership level, the Company and Tigress have common representation on their respective board of directors, and certain employees of Tigress are employees of RISE. Based on these criteria, the Company determined that it was able to exercise significant influence of Tigress, and therefore the equity method of accounting was used for this transaction.

This investment is reported in the equity method investment in related party in the statements of financial condition. Under the equity method, the Company recognizes its share of Tigress’ income or loss in the earnings of equity method investment in related party line item on the statements of income. The Company has elected to classify distributions received from equity method investees using the cumulative earnings approach. For the year ended December 31, 2021, the earnings recognized from the Company’s investment in Tigress was $172,000 and the Company did not receive any cash distributions. As of December 31, 2021, the carrying amount of the investment in Tigress was $8,156,000.

The Company evaluates its equity method investments for impairment when events or changes indicate the carrying value may not be recoverable. If the impairment is determined to be other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment. As of December 31, 2021, the fair value of the investment in Tigress is not estimated because there were no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment and thus, no impairment was recorded.

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Below is a table showing the summary from the consolidated statements of operations and financial condition for Tigress for the periods indicated (unaudited):

Year Ended December 31,

As of December 31,

11. Investments, Cost

OpenHand

On January 31, 2021, the Company and OpenHand Holdings, Inc. (“OpenHand”) entered into a stock purchase agreement whereby the Company acquired an interest of 5% of OpenHand common stock for consideration of a total of $2,231,000 consisting of $850,000 in cash and 329,654 restricted shares of the Company’s common stock valued at $1,381,000 or $4.19 per share. The Company’s common stock was issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. The Company and OpenHand intended to develop a subscription-based brokerage platform providing zero-commission trading for equity and option transactions and crediting its members daily with rebates of revenues generated by the clients, less operational expenses.

The value of the Company’s restricted stock was determined using the thirty-day trading average. The Company agreed to register the shares issued to OpenHand by filing a selling shareholder registration statement. The Company also received an option to purchase an additional 7.5% of OpenHand for approximately $4.5 million, based upon a $60 million valuation of OpenHand. This option expires 18 months after the launch of the OpenHand platform.

On August 18, 2021, the Company and OpenHand agreed to terminate their working relationship. In connection therewith, the Company and OpenHand amended and restated their January 31, 2021 stock purchase agreement to provide that the Company would pay $850,000 in cash in exchange for 2% of the outstanding common stock of OpenHand as of January 31, 2021, and receive a 15-month option to purchase an additional 2% of the outstanding common stock of OpenHand at an exercise price equal to a company valuation of $42.5 million. The parties agreed to rescind OpenHand’s purchase of the 329,654 restricted shares of the Company’s common stock.

No value was attributed to the option because it is not a derivative and there were no transaction costs associated with this option as of December 31, 2021. As of December 31, 2021 and 2020, the carrying value of the Company’s investment in OpenHand was $850,000 and $0, respectively.

The investment does not have a readily determinable fair value since OpenHand is a private company and its shares are not publicly traded. The Company made an accounting policy election to measure this investment at cost less any impairment adjusted for any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

For the year ended December 31, 2021, there was a loss on sale of $63,000 as a result of the August 18, 2021 amendment and is included within the line item titled “Other general and administrative” on the statements of income. Management concluded that there have been no additional adjustments as there were no other identified events or changes in circumstances during the reporting period that could have a significant effect on the original valuation of the investment.

12. Goodwill and Intangible Assets, Net

Goodwill

Overview

As of both December 31, 2021 and 2020, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of RISE.

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