ITEM 1A. RISK FACTORS
Regulatory Risks
Legislation has and may continue to result in changes to rules and regulations applicable to our business, which may negatively impact our business and financial results.
New laws, rules, regulations and guidance, or changes in the interpretation and enforcement of existing federal, state, foreign and self-regulatory organization ("SRO") laws, rules, regulations and
guidance may directly affect our business and the profitability of Siebert or the operation of specific business lines. In addition, new and changing laws, rules, regulation and guidance could result in limitations on the lines of business we
conduct, modifications to our business practices, more stringent capital and liquidity requirements or other costs and could limit our ability to return capital to stockholders.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), enacted in 2010, required many federal agencies to adopt new rules and regulations applicable to the financial
services industry and called for many studies regarding various industry practices. In particular, the Dodd-Frank Act gave the SEC discretion to adopt rules regarding standards of conduct for broker-dealers providing investment advice to retail
customers.
The U.S. Department of Labor (“DOL”) has enacted regulations changing the definition of who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (“ERISA”), and
how such advice can be provided to account holders in retirement accounts such as 401(k) plans and IRAs. The DOL's final rule defining the term "fiduciary" and exemptions related to it in the context of ERISA and retirement accounts was vacated in
June 2018 by the U.S. Court of Appeals for the Fifth Circuit. The SEC and several states then proposed heightened standard of conduct regulations, with the SEC adopting such regulations in June 2019.
The rules and interpretations adopted by the SEC in June 2019 include Regulation Best Interest and the new Form CRS Relationship Summary, which are intended to enhance the quality and transparency of
retail investors' relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations, requiring compliance with disclosure, care, conflict of
interest and compliance obligations. The regulation requires that a broker-dealer or natural person who is an associated person of the broker-dealer shall act in the best interest of the retail customer at the time it makes a recommendation of any
securities transaction or investment strategy involving securities, prioritizing the interests of the customer above any interests of the broker-dealer or its associated persons. Among other things, this requires the broker-dealer to mitigate
conflicts of interest arising from financial incentives in selling securities products. The compliance date for Regulation Best Interest and Form CRS is June 30, 2020.
The new rules and processes related thereto will most likely involve increased costs, including, but not limited to, compliance costs associated with new or enhanced technology.
It is not possible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed, or whether any existing proposals will become law. Conformance with any new
laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.
We are subject to extensive government regulation and to third party litigation risk and regulatory risk which could result in significant liabilities and reputational harm which,
in turn, could materially adversely affect our business, results of operations and financial condition.
Our business is subject to extensive regulation in the U.S., at both the federal and state level. We are also subject to regulation by SROs and other regulatory bodies in the U.S., such as the SEC,
the NYSE, FINRA, MSRB, the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). MSCO is registered as a broker-dealer in 50 states, the District of Columbia, and Puerto Rico. The regulations to which MSCO and
WPS are subject as broker-dealers cover all aspects of the securities business including training of personnel, sales methods, trading practices, uses and safe keeping of customers’ funds and securities, capital structure, record keeping, fee
arrangements, disclosure and the conduct of directors, officers and employees.
SNXT is registered as an investment adviser with the SEC under the Advisers Act, and its business is highly regulated. The Advisers Act imposes numerous obligations on RIAs, including fiduciary,
record keeping, operational and disclosure obligations. Moreover, the Advisers Act grants broad administrative powers to regulatory agencies such as the SEC to regulate investment advisory businesses. If the SEC or other government agencies believe
that SNXT has failed to comply with applicable laws or regulations, these agencies have the power to impose fines, suspensions of a registrant and individual employees or other sanctions, which could include revocation of SNXT’s registration under
the Advisers Act. SNXT is also subject to the provisions and regulations of ERISA, to the extent that SNXT acts as a “fiduciary” under ERISA with respect to certain of its clients. ERISA and the applicable provisions of the federal tax laws impose a
number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain other related parties) to such
plans. Our subsidiaries, WPS and MSCO, are also regulated by the National Futures Association (“NFA”) and function as a registered introducing broker.
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The laws, rules and regulations, as well as governmental policies and accounting principles, governing our business and the financial services and banking industries generally have changed
significantly over recent years and are expected to continue to do so. We cannot predict which changes in laws, rules, regulations, governmental policies or accounting principles will be adopted. Any changes in the laws, rules, regulations,
governmental policies or accounting principles relating to our business could materially and adversely affect our business, results of operations and financial condition.
Additionally, like other participants in the financial services industry, we and our subsidiaries face the risks of lawsuits by clients and risks of regulatory proceeding against us. The outcome of
regulatory proceedings and client lawsuits is uncertain and difficult to predict. An adverse resolution of any regulatory proceeding or client lawsuit against us could result in substantial costs or reputational harm to us. Further, adverse
proceedings could have an adverse effect on our ability to retain key registered representatives, investment advisers and wealth managers, and to retain existing clients or attract new clients, any of which could have a material adverse effect on our
business, financial condition, results of operations and prospects.
We are subject to net capital requirements.
The SEC, FINRA, and various other securities and commodities exchanges and other regulatory bodies in the U.S. have rules with respect to net capital requirements which affect us. These rules have
the effect of requiring that at least a substantial portion of a broker-dealer’s assets be kept in cash or highly liquid investments. Our compliance with the net capital requirements could limit operations that require intensive use of capital, such
as underwriting or trading activities. These rules could also restrict our ability to withdraw our capital, even in circumstances where we have more than the minimum amount of required capital, which, in turn, could limit our ability to implement
growth strategies. In addition, a change in such rules, or the imposition of new rules, affecting the scope, coverage, calculation or amount of such net capital requirements, or a significant operating loss or any unusually large charge against net
capital, could have similar adverse effects.
Risks Related to Our Technology and Information Systems
We rely on information processing and communications systems to process and record our transactions.
Our operations rely heavily on information processing and communications systems. Our system for processing securities transactions is highly automated. Failure of our information processing or
communications systems for a significant period of time could limit our ability to process a large volume of transactions accurately and rapidly. This could cause us to be unable to satisfy our obligations to customers and other securities firms and
could result in regulatory violations. External events, such as an earthquake, terrorist attack or power failure, loss of external information feeds, such as security price information, as well as internal malfunctions such as those that could occur
during the implementation of system modifications, could render part or all of these systems inoperative.
Failure to protect client data or prevent breaches of our information systems could expose us to liability or reputational damage.
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our branch offices and with our clients and
vendors. As the breadth and complexity of this infrastructure continues to grow, the potential risk of security breaches and cyber-attacks increases. As a financial services company, we are continuously subject to cyber-attacks by third parties. Any
such security breach could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. In addition, vulnerabilities of our external service providers and other third parties could pose security
risks to client information. The secure transmission of confidential information over public networks is also a critical element of our operations.
In providing services to clients, we manage, utilize and store sensitive and confidential client data, including personal data. As a result, we are subject to numerous laws and regulations designed
to protect this information, such as U.S. federal and state laws governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. If any
person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages,
regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions. Unauthorized disclosure of sensitive or confidential client data, whether through systems failure, employee negligence, fraud or misappropriation, could
damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, whether by our employees or third parties, including a cyber-attack by third parties who may deploy viruses, worms or other
malicious software programs, could result in negative publicity, significant remediation costs, legal liability, and damage to our reputation and could have a material adverse effect on our results of operations. In addition, our liability insurance
might not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.
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We may be exposed to damage to our business or our reputation by cybersecurity breaches.
As the world becomes more interconnected through the use of the Internet and users rely more extensively on the Internet and the cloud for the transmission and storage of data, such information
becomes more susceptible to incursion by hackers and other parties intent on stealing or destroying data on which we or our customers rely. We face an evolving landscape of cybersecurity threats in which hackers use a complex array of means to
perpetrate cyber-attacks, including the use of stolen access credentials, malware, ransomware, phishing, structured query language injection attacks, and distributed denial-of-service attacks, among other means. These cybersecurity incidents have
increased in number and severity and it is expected that these trends will continue. Should we be affected by such an incident, we may incur substantial costs and suffer other negative consequences, which may include:
● Loss of reputation.
Increasingly, intruders attempt to steal significant amounts of data, including personally identifiable data and either hold such data for ransom or release it onto the Internet, exposing our clients
to financial or other harm and thereby significantly increasing our liability in such cases. Our regulators have introduced programs to review our protections against such incidents which, if they determined that our systems do not reasonably protect
our clients’ assets and their data, could result in enforcement activity and sanctions.
We have and continue to introduce systems and software to prevent any such incidents and review and increase our defenses to such issues through the use of various services, programs and outside
vendors. We contract cybersecurity consultants and also review and revise our cybersecurity policy to ensure that it remains up to date. In the event that we experience a material cybersecurity incident or identify a material cybersecurity threat, we
will make all reasonable efforts to properly disclose it in a timely fashion. It is impossible, however, for us to know when or if such incidents may arise or the business impact of any such incident.
As a result of such risks, we have and are likely to incur significant costs in preparing our infrastructure and maintaining it to resist any such attacks.
An increase in volume on our systems or other events could cause them to malfunction.
Most of our trade orders are received and processed electronically. This method of trading is heavily dependent on the integrity of the electronic systems supporting it. While we have never
experienced a significant failure of our trading systems, heavy stress placed on our systems during peak trading times could cause our systems to operate at unacceptably low speeds or fail altogether. Any significant degradation or failure of our
systems or the systems of third parties involved in the trading process (e.g., online and Internet service providers, record keeping and data processing functions performed by third parties, and third party software), even for a short time, could
cause customers to suffer delays in trading. These delays could cause substantial losses for customers and could subject us to claims from these customers for losses. There can be no assurance that our network structure will operate appropriately in
the event of a subsystem, component or software failure. In addition, we cannot assure that we will be able to prevent an extended systems failure in the event of a power or telecommunications failure, an earthquake, terrorist attack, fire or any act
of God. Any systems failure that causes interruptions in our operations could have a material adverse effect on our business, financial condition and operating results.
Rapid market or technological changes may render our technology obsolete or decrease the attractiveness of our products and services to our clients.
We must continue to enhance and improve our technology and electronic services. The electronic financial services industry is characterized by significant structural changes, increasingly complex
systems and infrastructures, changes in clients’ needs and preferences, and new business models. If new industry standards and practices emerge and our competitors release new technology before us, our existing technology, systems and electronic
trading services may become obsolete or our existing business may be harmed.
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Our future success will depend on our ability to:
● Enhance our existing products and services;
● Continue to attract highly-skilled technology personnel; and
Developing our electronic services, our implementation and utilization of our Robo-Advisor and other technology entails significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our electronic trading platform, information databases and network infrastructure to client requirements or emerging industry standards. If we face material delays in introducing new services, products and
enhancements, our clients may forego the use of our products and use those of our competitors.
Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. We cannot assure that we will be
able to successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standards. We cannot assure that we will be able to respond in a timely manner to
changing market conditions or client requirements.
Risks Related to Our Business Operations
Potential strategic acquisitions and other business growth could increase costs and regulatory and integration risks.
Acquisitions involve risks that could adversely affect our business. We may pursue acquisitions of businesses and technologies. Acquisitions and other transactions entail numerous risks, including:
● Difficulties in the integration of acquired operations, services and products;
● Failure to achieve expected synergies;
● Diversion of management’s attention from other business concerns;
● Assumption of unknown material liabilities of acquired companies;
● Potential loss of clients or key employees of acquired companies; and
● Dilution to existing stockholders.
As part of our growth strategy, we regularly consider and from time to time engage in discussions and negotiations regarding transactions such as acquisitions, mergers and combinations within our
industry. The purchase price for possible acquisitions could be paid in cash through the issuance of Common Stock or other securities, borrowings or a combination of these methods.
Our transactions are typically subject to closing conditions including regulatory approvals and the absence of material adverse changes in the business, operations or financial condition of the
entity or part of an entity being acquired or sold. To the extent we enter into an agreement to buy or sell an entity or part of an entity, there can be no guarantee that the transaction will close when expected or at all. If a material transaction
does not close our stock price could decline.
We cannot be certain that we will be able to identify, consummate and successfully integrate acquisitions, and no assurance can be given with respect to the timing, likelihood or business effect of
any possible transaction. For example, we could begin negotiations that we subsequently decide to suspend or terminate for a variety of reasons. However, opportunities may arise that we will evaluate and any transactions that we consummate would
involve risks and uncertainties to us. These risks could cause the failure of any anticipated benefits of an acquisition to be realized, which could have a material adverse effect on our business, financial condition, results of operations and
prospects.
We may be unable to realize the anticipated benefits of our cost cutting efforts or it may take longer than anticipated for us to realize any benefits from increased cost
efficiencies or economies of scale, if at all.
Our realization of the benefits anticipated as a result of cost cutting efforts and other business efforts and changes will depend in part on the ability of our management team to implement our
business plan. We cannot assure shareholders that there will not be substantial costs associated with these activities or other negative consequences as a result of these changes. These effects include, but are not limited to, incurring unexpected
costs or delays in connection with implementation of a modified business model, or the failure of our business to perform as expected, which could harm our results of operations.
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We depend on our ability to attract and retain key personnel.
We are dependent upon our new and continuing senior management for our success and the loss of the services of any of these individuals could significantly harm our business, financial condition and
operating results.
Our customers may fail to pay us.
A principal credit risk to which we are exposed on a regular basis is that our customers may fail to pay for their purchases or fail to maintain the minimum required collateral for amounts borrowed
against securities positions maintained by them. We cannot assure that our practices and/or the policies and procedures we have established will be adequate to prevent a significant credit loss.
Our advisory services subject us to additional risks.
We provide investment advisory services to investors. Through our RIA, SNXT, we offer robo-advisory and investment services. The risks associated with these investment advisory activities include
those arising from possible conflicts of interest, unsuitable investment recommendations, inadequate due diligence, inadequate disclosure and fraud. Realization of these risks could lead to liability for client losses, regulatory fines, civil
penalties and harm to our reputation and business.
Risks Related to COVID-19
The continuation of the COVID-19 pandemic could adversely affect our business, financial condition, liquidity and results of operations.
The COVID-19 outbreak has caused significant volatility and disruption in the financial markets both globally and in the U.S. If COVID-19, or another highly infectious or
contagious disease, continues to spread or the response to contain it is unsuccessful, we could experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects will depend
on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the outbreak, the measures that may be taken by various governmental
authorities in response to the outbreak (such as quarantines and travel restrictions) and the possible further impacts on the global economy. The continued spread of COVID-19 could also negatively impact the availability of key personnel necessary
to conduct our business.
Certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, to reduce interest rates may adversely affect our results of
operations.
During the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to near zero. These developments have
had, and may continue to have, a negative impact on our revenue from margin interest, marketing, and distribution fees as well as interest income.
Investor behavior may fundamentally change as a result of COVID-19 in both the near and long term which could have an adverse effect on our operations.
We cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. As such, impacts of COVID-19 to
our business are highly uncertain and we will continue to assess the impact as the situation develops. The disruptions to the U.S. and global economies and financial markets may cause investors to be more cautious and to limit their investments.
Trading of securities may be materially and adversely affected with more investors seeking stability. Investment activity may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impacts of job
losses and any recession, resulting from the COVID-19 pandemic. Clients holding savings with us in retirement or investment accounts may be required to liquidate some or all of their savings to pay living expenses. All of these factors could
materially and adversely impact our revenue streams.
Risks Related to Our Common Stock
There may be a limited public market for our Common Stock; Volatility.
9,236,962 shares of Common Stock, or approximately 30% of our shares of Common Stock outstanding, are currently held by non-affiliates as of March 1, 2021. A stock with a small number of shares held
by non-affiliates, known as the “float,” will generally be more volatile than a stock with a large float. Although our Common Stock is traded on the Nasdaq Capital Market, there can be no assurance that an active public market will continue.
Siebert 2020 Form-10K 13
Our principal shareholder has the ability to control key decisions submitted to a vote of our shareholders.
Gloria E. Gebbia, who is a director of Siebert and the managing member of Kennedy Cabot Acquisition, LLC (“KCA”), has, along with other family members, the power to elect the entire Board of
Directors and, except as otherwise provided by law or our Certificate of Incorporation or by-laws, to approve any action requiring shareholder approval without a shareholders meeting.
The price of our Common Stock in the public markets has experienced, and may in the future experience, extreme volatility due to a variety of factors, many of which are beyond our
control.
Since our Common Stock started trading on the Nasdaq Capital Market, our Common Stock has been relatively thinly traded and at times been subject to price volatility. Recently our Common Stock has
experienced extreme price volatility. From January 1, 2021 to January 28, 2021, the average close price of our Common Stock was $3.93 per share. On January 29, 2021, the price increased to a high of $18.50 per share and 33,821,000 shares were traded.
From February 1, 2021 to February 28, 2021, the average close price was $5.60 per share. The average daily trading volume from March 1, 2020 to March 1, 2021 was approximately 200,000 shares per day. We have not experienced any material changes in
our financial condition or results of operations that explain such price volatility or trading volume.
We believe that the trading price of our Common Stock has at times been influenced by trading factors other than industry or Company-specific fundamentals, including, without limitation, the
sentiment of retail investors (including as may be expressed on financial trading and other social media sites), speculation in the press, in the investment community, or on the internet, including on online forums and social media, about Siebert,
our industry or our securities access to margin debt, trading in options and other derivatives on our Common Stock, and the amount and status of short interest in our securities (including a “short squeeze”). A “short squeeze” is a technical market
condition that occurs when the price of a stock increases substantially, forcing market participants who had taken a position that its price would fall (i.e., who had sold the stock “short”), to buy it, which in turn may create significant,
short-term demand for the stock not for fundamental reasons, but rather due to the need for such market participants to acquire the stock in order to forestall the risk of even greater losses. A “short squeeze” condition in the market for a stock can
lead to short-term conditions involving very high volatility and trading that may or may not track fundamental valuation models.
As a result of the foregoing, investors in our Common Stock may be subject to the risk of significant, short-term price volatility of our Common Stock and the trading price of our Common Stock could
decline for reasons unrelated to our business, financial condition, or results of operations. Further, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class
action litigation has often been instituted against these companies. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to
management.
Our future ability to pay dividends to holders of our Common Stock is subject to the discretion of our Board of Directors and will be limited by our ability to generate sufficient
earnings and cash flows.
Payment of future cash dividends on our Common Stock will depend on our ability to generate earnings and cash flows. However, sufficient cash may not be available to pay such dividends. Payment of
future dividends, if any, will be at the discretion of our Board of Directors and will depend upon a number of factors that the Board of Directors deems relevant, including future earnings, the success of our business activities, capital
requirements, the general financial condition and future prospects of our business and general business conditions. If we are unable to generate sufficient earnings and cash flows from our business, we may not be able to pay dividends on our Common
Stock.
Our ability to pay cash dividends on our Common Stock is also dependent on the ability of our subsidiaries to pay dividends or capital distributions to the Company. MSCO and WPS are subject to
requirements of the SEC and FINRA relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for payments to the Company.
Risks Related to Our Industry and Market
Securities market volatility and other securities industry risk could adversely affect our business.
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Most of our revenues are derived from our securities brokerage business. Like other businesses operating in the securities industry, our business is directly affected by volatile trading markets,
fluctuations in the volume of market activity, economic and political conditions, upward and downward trends in business and finance at large, legislation and regulation affecting the national and international business and financial communities,
currency values, inflation, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived credit-worthiness of the securities industry in the marketplace and the level and volatility of
interest rates. We also face risks relating to losses resulting from the ownership of securities, counterparty failure to meet commitments, customer fraud, employee fraud, issuer fraud, errors and misconduct, failures in connection with the
processing of securities transactions and litigation. A reduction in our revenues or a loss resulting from our ownership of securities or sales or trading of securities could have a material adverse effect on our business, results of operations and
financial condition. In addition, as a result of these risks, our revenues and operating results may be subject to significant fluctuations from quarter to quarter and from year to year.
A prolonged economic slowdown, volatility in the markets, a recession, and uncertainty in the markets could impair our business and harm our operating results.
Our businesses are, and will continue to be, susceptible to economic slowdowns, recessions and volatility in the markets, which may lead to financial losses for our customers, and a decrease in
revenues and operating results. In addition, global macroeconomic conditions and U.S. financial markets remain vulnerable to the potential risks posed by exogenous shocks, which could include, among other things, political and financial uncertainty
in the U.S. and the European Union, renewed concern about China’s economy, complications involving terrorism and armed conflicts around the world, or other challenges to global trade or travel, such as might occur in the event of a wider pandemic
involving COVID-19. More generally, because our business is closely correlated to the macroeconomic outlook, a significant deterioration in that outlook or an exogenous shock would likely have an immediate negative impact on our overall results of
operations.
There is intense competition in the brokerage industry.
We encounter significant competition from full-commission, no commission, online and other discount brokerage firms, as well as from financial institutions, mutual fund sponsors and other
organizations many of which are significantly larger and better capitalized than we are. Over the past several years, price wars and lower or no commission rates in the discount brokerage business in general have strengthened our competitors. In
addition, while the decline of commissions has been ongoing for decades, some of our competitors charging zero commissions on trades could potentially have an adverse effect on our commission revenue.
The securities brokerage industry has experienced significant consolidation, which may continue in the future, likely increasing competitive pressures in the industry. Consolidation could enable
other firms to offer a broader range of products and services than we do, or offer them on better terms, such as higher interest rates paid on cash held in client accounts. We believe that such changes in the industry will continue to strengthen
existing competitors and attract additional competitors such as banks, insurance companies, providers of online financial and information services, and others. Many of these competitors are larger, more diversified, have greater capital resources,
and offer a wider range of services and financial products than we do. We compete with a wide variety of vendors of financial services for the same customers. We may not be able to compete effectively with current or future competitors.
Some competitors in the discount brokerage business offer services which we may not offer. In addition, some competitors have continued to offer flat rate execution fees that are lower than some of
our published rates. Industry-wide changes in trading practices are expected to cause continuing pressure on fees earned by discount brokers for the sale of order flow. Continued or increased competition from ultra-low cost, flat-fee brokers and
broader service offerings from other discount brokers could limit our growth or lead to a decline in our customer base which would adversely affect our business, results of operations and financial condition.
Lower price levels in the securities markets may reduce our profitability.
Lower price levels of securities may result in (i) reduced volumes of securities, options and futures transactions, with a consequent reduction in our commission revenues, and (ii) losses from
declines in the market value of securities we hold in investment. In periods of low volume, our levels of profitability are further adversely affected because certain of our expenses remain relatively fixed. Sudden sharp declines in market values of
securities and the failure of issuers and counterparties to perform their obligations can result in illiquid markets which, in turn, may result us having difficulty selling securities. Such negative market conditions, if prolonged, may lower our
revenues. A reduction in our revenues could have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We currently maintain 18 branch offices, one of which is our corporate headquarters. Customers can visit our branch offices to obtain market information, place orders, open accounts, deliver and
receive checks and securities, and obtain related customer services in person. Nevertheless, most of our activities are conducted on the Internet or by telephone and mail. We operate our business out of the following branch offices:
Approximate Square Feet
Corporate Headquarters
New York, NY – 120 Wall Street 250
Service and Other Office Spaces
Beverly Hills, CA – 190 N Canon 900
Rye Brook, NY 800
Seal Beach, CA 800
ITEM 3. LEGAL PROCEEDINGS
We are party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of management, all such matters are without merit, or involve amounts which would not
have a significant effect on our financial position.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock traded on the Nasdaq Global Market until June 29, 2011 when our Common Stock started trading on the Nasdaq Capital Market, under the symbol “SIEB”. The high and low sales prices of
our Common Stock reported by Nasdaq during the following calendar quarters were as follows:
High Low High Low
The closing sale price of our Common Stock as reported on the Nasdaq Capital Market on March 1, 2021 was $4.89 per share. As of March 1, 2021, there were 100 holders of record of our Common Stock
based on information provided by our transfer agent. The number of stockholders of record does not reflect the number of individual or institutional stockholders that beneficially own our stock because most stock is held in the name of nominees.
Based on information available to us, we believe there are approximately 5,789 beneficial holders of our Common Stock as of March 1, 2021.
Dividend Policy
Our Board of Directors periodically considers whether to declare dividends. In considering whether to pay such dividends, our Board of Directors will review our earnings, capital requirements,
economic forecasts and such other factors as are deemed relevant. Some portion of our earnings will be retained to provide capital for the operation and expansion of our business.
Share Price Volatility
Since our Common Stock started trading on the Nasdaq Capital Market, our Common Stock has been relatively thinly traded and at times been subject to price volatility. Recently, our Common Stock has
experienced extreme price volatility. From January 1, 2021 to January 28, 2021, the average close price of our Common Stock was $3.93 per share. On January 29, 2021, the price increased to a high of $18.50 per share and 33,821,000 shares were traded.
From February 1, 2021 to February 28, 2021, the average close price was $5.60 per share. The average daily trading volume from March 1, 2020 to March 1, 2021 was approximately 200,000 shares per day. We have not experienced any material changes in
our financial condition or results of operations that explain such price volatility or trading volume.
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Performance Graph
The graph below compares our Common Stock performance from December 31, 2015 through December 31, 2020 against the performance of the Nasdaq Composite Index and a customized peer group.
Cumulative Total Return*
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with our consolidated financial statements and the related notes thereto.
(In thousands except share and per share data)
Year Ended December 31,
Consolidated Statements of Operations Data:
Net income / (loss) per share of Common Stock
Performance Metrics:
Year over year revenue increase / (decrease) 28 % 59 %** 129 % 34 % (3 %)
Income / (loss) before income taxes margin 6 % 10 %** 25 % 18 % (57 %)
As of December 31,
Cash dividends declared on common shares — — — — $ 0.20
*Statement of financial condition and statement of income as of and for the year ended December 31, 2019 represent the pro forma combination of Siebert and
StockCross balances, which corresponds to the presentation of the financial statements within this report. See “Note 3 – Acquisitions” for additional detail. The periods prior to 2019 presented in the table
above represent Siebert’s standalone results.
**Siebert standalone results for 2019 were $28,593,000 in revenue and $3,607,000 in net income, with an income before income taxes margin of 17%.
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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
subsidiaries:
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, 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. Since that time 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.
Financial Impact
The COVID-19 pandemic had varied impacts across our business. In the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to
near zero. This decline in interest rates led to a decrease in our revenue from margin interest, marketing and distribution fees as well as interest income, and may continue to have a negative impact on these
revenue streams in the foreseeable future as we do not anticipate short-term interest rates to recover to the level at the beginning of 2020 during 2021.
Market volatility caused by the pandemic resulted in an increase in revenue streams related to our institutional clients within WPS as well as a higher volume of principal
transactions and commissions and fees within our retail customer base.
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.
Siebert 2020 Form-10K 20
As of the date of this report, we have reopened our branch offices while ensuring compliance with federal, state, and local laws as well as health and safety guidelines. We
have taken numerous steps to ensure that our employees and customers are operating in a safe environment by implementing measures such as social distancing, sanitizing workstations, temperature checks, requiring masks, and alternating staff.
Throughout this challenging time, our unwavering focus on continuing to earn our clients’ trust is made possible by the significant contributions of our employees, and we remain committed to serving our clients while protecting our employees’
wellbeing.
Expense Reduction
To offset the decrease in certain revenue streams associated with COVID-19, we have reduced the salary of higher-level employees and made a reduction in force in certain areas
of our business. In addition, some members of our board of directors reduced their annual fees during 2020.
We are strategically evaluating our clearing relationship opportunities within our institutional operations to increase profitability. We are assessing all of our vendors to
identify areas where we can optimize our cost structure while maintaining operational efficiency and quality of the customer experience. 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 have evaluated our branch offices and are transitioning out of legacy office space into more cost-efficient locations. We anticipate the benefits of these
transitions to provide cost reductions beginning in the second quarter of 2021 and are looking into ways to further consolidate our office space.
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 related length of its impact on the global economy, 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
Hired New Leaders of Securities Finance Group
In November 2020, we hired Anthony Palmeri and Jerry Losurdo to lead our Securities Finance Group, which generally consists of our stock borrow / stock loan and related
services. Mr. Palmeri joined from JPMorgan Chase & Co. where he was an Executive Director, and Mr. Losurdo joined from TD Prime Services, LLC where, as a Managing Director, he led its Securities Lending and Equity Finance division. During the
fourth quarter of 2020, our Securities Finance Group achieved its highest quarterly revenue of over $1.5 million, which represents an increase of over 500% from the fourth quarter of 2019.
New Fin-Tech Partnership with InvestCloud
In May 2020, we announced a partnership with InvestCloud Inc. (“InvestCloud”), a tech provider of flexible and fully integrated digital apps for financial services, to provide
a variety of enhancements and upgrades to our online and mobile client experience, including a state-of-the-art Robo Advisor product. We will implement InvestCloud's full suite of applications, ranging from intuitive client-facing portals and
mobile apps to back-office operational automation, as well as centralize our digital transformation into a single partner.
Siebert 2020 Form-10K 21
Expansion of Clearing Operations
In December 2020, MSCO was admitted as a member of Euroclear. The admission into Euroclear is a strategic step in our ability to enhance our clearing capabilities and provide
additional services to our clients and counterparties. We anticipate finalizing our Euroclear offerings early in 2021. In addition, we are in the process of expanding our clearing services in the U.S. by acting as a correspondent clearing firm for
other broker-dealers and anticipate being able to offer these services in early 2021.
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 which was accounted for under the equity method. 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. In addition, as of January 1, 2020, our equity method investment in StockCross was eliminated.
Accounting for Acquisition
Prior to and as of the date of our acquisition of StockCross, Siebert and StockCross were entities under common control of Gloria E. Gebbia, our principal
stockholder, and members of her immediate family (collectively, the “Gebbia Family”). The acquisition represented a change in reporting entity and as such, the companies have been presented on a combined basis for
all periods presented in the financial statements. As such, this presentation is reflected in the section below comparing our financial statements from 2020 to 2019.
We acquired various assets and liabilities from StockCross as of the acquisition date, the fair values of which were assumed to be the historical carrying amounts.
The excess of the purchase price over the fair value of the net assets acquired was eliminated due to the transaction being between entities under common control. See “Note 3 – Acquisitions” for additional
detail on the transaction with StockCross and the corresponding accounting.
Recent Results
The business lines acquired from StockCross have added new revenue streams to our statements of income. These new revenue streams include interest income from clearing operations, market making,
and stock borrow / stock loan, all of which have contributed approximately $7.5 million of revenue for the year ended December 31, 2020, of which included approximately $793,000 related to equity stock plan services.
In terms of our existing revenue streams, StockCross added incremental commissions and fees, margin interest, marketing and distribution fees, and principal transactions from their client base and
operations. Our existing expenses primarily related to employee compensation, occupancy, clearing and technology costs have also increased from the corresponding increase in StockCross’ revenue and operations. See
“Note 13 – Revenue Recognition” for further detail on our revenue streams and corresponding accounting policies.
The acquisition of StockCross has also impacted our statements of financial condition as the nature of StockCross’ business requires the presentation of various assets and corresponding liabilities
related to the new self-clearing business line on the statements of financial condition.
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.
WPS Acquisition
Effective December 1, 2019, we acquired all of the issued and outstanding membership interests of WPS, a prime brokerage services provider, for a cash consideration of
approximately $7.1 million, and WPS became a wholly-owned subsidiary of Siebert.
Siebert 2020 Form-10K 22
The acquisition resulted in approximately $1,989,000 of goodwill and we acquired two intangible assets, WPS’ customer relationships and trade name. We also acquired other
assets consisting mostly of receivables from broker-dealers and clearing organizations and assumed liabilities consisting mostly of accounts payable and accrued expenses.
Since we acquired WPS at the end of 2019, we have reduced fixed costs related to technology, office space, and have also increased the overall operational efficiency of the company. In addition, WPS
revenue increased by approximately 15% in 2020 due to market conditions as well as organic growth of the business. The net effect of these developments has resulted in WPS achieving operating income of approximately $1.3 million in 2020, an increase
of $2.3 million from an operating loss of $1.0 million in 2019.
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. Retail customers are customers who have accounts
with MSCO and institutional customers were acquired from WPS as part of the acquisition effective December 1, 2019.
We acquired StockCross in January 2020; however, the client account and client activity metrics for Siebert and StockCross have been presented on a combined basis for all
periods shown below to maintain consistency to the presentation of the financial statements. As such, the results of StockCross are included in metrics for the 2019 data shown below.
Client Account Metrics – Total Assets Under Management
As of December 31,
Total Siebert StockCross Combined 2019
Total assets under management (in billions) $ 16.2 $ 13.3 $ 1.5 $ 14.8
Client Account Metrics – Retail Customers
As of December 31,
Total Siebert StockCross Combined 2019
Retail customer net worth (in billions) $ 14.6 $ 11.9 $ 1.5 $ 13.4
Retail customer margin debit balances (in billions) $ 0.5 $ 0.3 $ 0.1 $ 0.4
Retail customer credit balances (in billions) $ 0.7 $ 0.5 $ 0.1 $ 0.6
Retail customer money market fund value (in billions) $ 0.8 $ 0.7 $ 0.0 $ 0.7
● Retail customer accounts represents the number of retail customers
Client Account Metrics – Institutional Customers
As of December 31,
Institutional customer net worth (in billions) $ 1.6 $ 1.4
Siebert 2020 Form-10K 23
Client Activity Metrics
Year Ended December 31,
Total Siebert StockCross Combined 2019
● Total retail trades represent retail trades that generate commissions
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,
Total Siebert StockCross Pro Forma Adj Combined 2019
Effective January 1, 2020, we acquired StockCross and the acquisition represented a change in reporting entity due to common ownership. As such, Siebert and StockCross have been presented on a
combined basis for all periods presented in the financial statements. In addition, we acquired WPS in December 2019 which added new revenue streams and corresponding expenses to our statement of income for the
year ended December 31, 2020. See “Note 3 – Acquisitions” for additional detail on the transaction with StockCross and WPS and the corresponding accounting.
During the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate twice for a total of 150 basis points to near zero, which led a decrease in
our revenue streams related to interest in 2020. Market volatility during 2020 resulted in a benefit for revenue streams related to institutional clients within WPS as well as principal transactions and commission income within our retail customer
base. Our stock loan / stock borrow business line has grown significantly from 2019 due to new management within the business line as well as the addition of a substantial number of new counterparties.
Statements of Income for the Year Ended December 31, 2020 and 2019
Revenue
Commissions and fees for the year ended December 31, 2020 were $20,179,000 and increased by $10,429,000 from the corresponding period in the prior year, primarily due to the
addition of $9,187,000 in WPS commissions and fees in 2020, as well as strong market conditions during the first and fourth quarter of 2020.
Margin interest, marketing and distribution fees for the year ended December 31, 2020 were $10,183,000 and decreased by 4,527,000 from the corresponding period in the prior
year, primarily due to the reduction of the federal funds rate to near zero, partially offset by the addition of $1,255,000 in WPS margin interest income in 2020.
Principal transactions for the year ended December 31, 2020 were $11,850,000 and increased by $2,832,000 from the corresponding period in the prior year, primarily due to
strong market conditions during the first and fourth quarter of 2020.
Interest income for the year ended December 31, 2020 was $4,012,000 and decreased by $223,000 from the corresponding period in the prior year, primarily due to the reduction of
the federal funds rate to near zero, which was almost fully offset by the addition of $2,341,000 in WPS interest income in 2020.
Market making revenue for the year ended December 31, 2020 was $2,042,000 and increased by $298,000 from the corresponding period in the prior year, primarily due to favorable
market conditions during 2020.
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Stock borrow / stock loan revenue for the year ended December 31, 2020 was $4,045,000 and increased by $2,438,000 from the corresponding period in the prior year, primarily due
to the organic growth of the business, the addition of key personnel, expansion of our stock locate capabilities, and additional counterparty relationships.
Advisory fees for the year ended December 31, 2020 were $1,142,000 and increased by $341,000 from the corresponding period in the prior year, primarily due to overall expansion
of the advisory business line which included revenue growth related to our Robo-Advisor.
Other income for the year ended December 31, 2020 was $1,419,000 and increased by $507,000 from the corresponding period in the prior year, primarily due to the addition of
$143,000 in WPS other income in 2020 and an increase in payment for order flow.
Operating Expenses
Employee compensation and benefits for the year ended December 31, 2020 were $28,502,000 and increased by $8,537,000 from the corresponding period in the prior year, primarily
due to the addition of $6,511,000 in WPS salaries and commission payouts in 2020 as well as increased commission payouts corresponding to the increase in principal transaction, commissions and fees and stock loan / stock borrow revenue in 2020.
Clearing fees, including execution costs for the year ended December 31, 2020 were $5,107,000 and increased by $1,761,000 from the corresponding period in the prior year,
primarily due to the addition of $2,485,000 in WPS clearing fees in 2020, partially offset by a decrease in other clearing costs due to the economies of scale from the acquisition of StockCross.
Technology and communications expenses for the year ended December 31, 2020 were $4,622,000 and increased by $2,752,000 from the corresponding period in the prior year,
primarily due to the addition of $1,213,000 in WPS technology expenses in 2020 as well as development work with InvestCloud related to our online platform and Robo-Advisor.
Other general and administrative expenses for the year ended December 31, 2020 were $2,364,000 and decreased by $1,497,000 from the corresponding period in the prior year,
primarily due to the expansion of our Jersey City branch office and the establishment of our Miami branch office occurred in 2019 as well as a reduction in travel related expenses in 2020 due to COVID-19.
Data processing expenses for the year ended December 31, 2020 were $2,797,000 and increased by $716,000 from the corresponding period in the prior year, primarily due to
increased technology and clearing costs corresponding to increased trading activity.
Rent and occupancy expenses for the year ended December 31, 2020 were $2,767,000 and increased by $197,000 from the corresponding period in the prior year, primarily due to the
increase of $409,000 in rent from the addition of WPS branch offices in 2020, partially offset by a decrease in various occupancy expenses.
Professional fees for the year ended December 31, 2020 were $2,864,000 and decreased by $711,000 from the corresponding period in the prior year, primarily due to a reduction
in legal fees and other professional services as a result of the transaction with StockCross, partially offset by the addition of $432,000 in WPS professional fees in 2020.
Depreciation and amortization expenses for the year ended December 31, 2020 were $1,566,000 and increased by $564,000 from the corresponding period in the prior year, primarily
due to the depreciation and amortization of incremental purchases of fixed assets and software as well as the amortization related to the intangible assets acquired from WPS.
Referral fees for the year ended December 31, 2020 were $738,000 and increased by $652,000 from the corresponding period in the prior year, primarily due to the commission
payouts to other broker-dealers for WPS in 2020.
Interest expense for the year ended December 31, 2020 was $349,000 and increased by $214,000 from the corresponding period in the prior year, primarily due to the interest on
the promissory note to finance part of the acquisition of WPS and the interest on the line of credit with East West Bank.
Advertising and promotion expense for the year ended December 31, 2020 was $2,000 and increased by $2,000 from the corresponding period in the prior year.
Provision For Income Taxes
Provision for income taxes for the year ended December 31, 2020 was $221,000 and decreased by $827,000 from the corresponding period in the prior year. See “Note 16 - Income Taxes” for additional detail.
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Statements of Financial Condition as of December 31, 2020 and 2019
Assets
Assets as of December 31, 2020 were $1,372,987,000 and increased by $834,920,000 from December 31, 2019, primarily due to the increase in securities borrowed, cash and securities
segregated for regulatory purposes, and receivables from broker-dealers and clearing organizations.
Liabilities
Liabilities as of December 31, 2020 were $1,335,001,000 and increased by $830,069,000 from December 31, 2019, primarily due to the increase in securities loaned and payables to
customers.
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 as well as a reasonable and
predictable level of investing activities which are mostly related to software and internal technology development and marginal leasehold improvements.
Despite lower interest rates and the effects of COVID-19, we have performed well and have sufficient cash flows to meet our liquidity needs over the periods presented. We
believe our ability to generate cash flows will continue into the foreseeable future.
We have a variety of sources of borrowing capability. In 2019, we had overnight demand borrowing capability with BMO Harris Bank and Texas Capital Bancshares, Inc. (“Texas
Capital Bank”) as well as notes payable to Gloria E. Gebbia. During 2020, we secured a line of credit from East West Bancorp, Inc. (“East West Bank”) to finance part of our acquisition of WPS and other operating needs of the business.
The indicators of our liquidity are cash and cash equivalents, and as of the date of this report, there are not any known or material events that we would expect to use large amounts of our liquid
assets to cover expenses. As of December 31, 2020, we have 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.
Cash and Cash Equivalents
Our cash and cash equivalents are unrestricted and are used to fund our working capital needs. Our cash and cash equivalents as of December 31, 2020 and 2019 were $3.6 and $4.7 million, respectively.
We had no cash equivalents as of December 31, 2020 and 2019.
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 Depository Trust and Clearing Corporation (“DTCC”) and Options Clearing Corporation, which may fluctuate
significantly from time to time based upon the nature and size of clients’ trading activity and market volatility.
As of December 31, 2019, StockCross was also subject to the PAB Account Rule 15c3-3 of the SEC which requires segregation of funds in a special reserve account for the exclusive benefit of
proprietary accounts of introducing broker-dealers. Effective upon our acquisition of StockCross on January 1, 2020, MSCO no longer had a PAB requirement.
Siebert 2020 Form-10K 26
WPS, 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. WPS is also subject to the CFTC's minimum financial requirements which
require that WPS 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.
For the years ended December 31, 2020 and 2019, MSCO, StockCross, and WPS had sufficient net capital to meet their respective liquidity and regulatory capital requirements. See “Note 17 – Capital Requirements” for more detail on our capital requirements.
Sources of Liquidity
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. Our obligations under the agreement are 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, 2020, we have drawn down a $5.0 million term loan under this agreement and have an outstanding balance of $4.7 million. We have an additional
$5.0 million remaining to draw down from this line of credit. See “Note 11 – Long-Term Debt” for more detail on this agreement.
Future annual minimum payments for the line of credit with East West Bank as of December 31, 2020 were as follows:
Amount
Overnight Financing
We have available lines of credit for short term overnight demand borrowing of up to $15 million with both BMO Harris Bank and Texas Capital Bank as of December 31, 2020. As of
December 31, 2020, we had no outstanding loan balances with either institution. There are no commitment fees or other restrictions on the credit lines. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.
Notes Payable – Related Party
As of December 31, 2020, we had $5.2 million in notes payable to Gloria E. Gebbia, all of which have maturity dates in 2021. As of December 31, 2019, we had $8 million in notes payable to Gloria E.
Gebbia, all of which have maturity dates by November 2021. We have sufficient liquidity to meet all maturities of these notes. See “Note 12 – Notes Payable - Related Party” for more detail.
Statements of Cash Flows
For the year ended December 31, 2020, our income before provision for income taxes was approximately $93.5 million less than our cash flow from operations primarily due a net increase in securities
loaned and payables to customers, partially offset by an increase in receivables from clearing broker-dealers.
For the year ended December 31, 2019, our income before provision for income taxes was approximately $20.1 million less than our cash flow from operations primarily due to a net increase in
receivables from customers.
For the year ended December 31, 2020, we had positive operating cash flow and we had 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 – related party.
Siebert 2020 Form-10K 27
For the year ended December 31, 2019, we had positive operating cash flow. We had investing cash outflows related to the purchase of WPS, the development of our Jersey City and Miami offices, and
incremental software assets. We had a financing cash outflow related to the acquisition of StockCross and a financing cash inflow related to securing a note payable – related party.
While we note that our liquid cash and cash equivalents has decreased as of December 31, 2020 from the prior year, we note that since the change of ownership, we have had positive operating cash
flow, no liquidity issues, and there are no planned large capital expenditures for the foreseeable future. As such, we believe we will have sufficient cash flows to fund our operations.
Leases
As of December 31, 2020, the remaining balance of our lease payments for operating leases with initial terms of greater than one year was $1.4 million for 2021. The remaining
balance of our lease payments for these leases after 2021 was $1.4 million.
In addition to these leases, as of December 31, 2020, we had an operating lease agreement for an office space in Beverly Hills, California with a term of approximately 5 years.
The total commitment of the lease is approximately $1.6 million, and the lease will commence on March 1, 2021. See “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 have 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.
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 and internal guidelines. 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. On a daily basis, we control this risk by monitoring the market value of securities pledged 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.
There were no material losses for unsettled customer transactions for the years ended December 31, 2020 and 2019.
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 2020 Form-10K 28
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.
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.
Prepaid Service Contract
We have entered into an agreement with InvestCloud for development work related to our online platform and Robo-Advisor. 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. For the year ended December 31, 2020, we have incurred $764,000 of expense related to this contract. See “Note 5 – Prepaid Service Contract” for more
detail.
Related Party Disclosures
During the course of business, we enter into various agreements and transactions with related parties. See “Note 21 – Related Party Disclosures” for more detail on
our related party disclosures.
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, 2020 and 2019. The majority of these assets are level 1 U.S.
government securities and equity securities as well as level 2 equity securities in the line items “Cash and securities segregated for regulatory purposes” and “Securities owned, at fair value” in the statements of financial condition. The
liabilities consist of relatively small amounts of level 1 and level 2 equity securities in the line item “Securities sold, not yet purchased, at fair value.” See “Note 6 – Fair Value Measurements” for more detail.
Impairment
We have concluded that as of December 31, 2020, there have been no impairments to the carrying value of our goodwill and other tangible and intangible assets.
Segment
We concluded as of December 31, 2020, 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.
New Accounting Pronouncements
We evaluated all recently issued and adopted accounting pronouncements during the reporting period and determined that other than ASU 2018-15, ASU 2018-07, and ASU 2016-02, the new accounting
pronouncements have not and will not have a material impact on our consolidated financial statements. See “Note 2 – Summary of Significant Accounting Policies” for more detail on the new
accounting pronouncements and their impact on our financial statements.
Subsequent Events
Acquired 5% Interest in OpenHand
Pursuant to a stock purchase agreement dated as of January 31, 2021, we acquired an interest of 5% of OpenHand Holdings, Inc. ("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.
OpenHand is a subscription-based brokerage platform that will provide zero-commission trading for equity and option transactions and credit its members daily
with rebates of revenues generated by the clients, less operational expenses. Siebert will be the exclusive broker-dealer for all OpenHand account services and will benefit from their cloud-based technology which uses Amazon Web Services. Through
this strategic, operational, regulatory, and technological partnership, OpenHand and the Siebert clients will benefit from numerous financial and operational efficiencies.
The value of the 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.
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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.
Regulatory Matters
On January 22, 2021, the California Department of Financial Protection and Innovation proposed that StockCross enter into a consent order related to StockCross and one of its registered
representatives for activities that occurred prior to its acquisition by Siebert. The California proposed order seeks an aggregate amount of approximately $900,000 in relation to this matter. Based on the facts of the matter as well as historical
resolutions, we do not believe that the matter will have a material impact on our financial statements.
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. See “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. See “Note 13 – 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.
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.
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