SIEBERT FINANCIAL CORP - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

OR

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 23, 2022, there were 32,403,235 shares of the registrant’s common stock.

SIEBERT FINANCIAL CORP.

INDEX

Forward-Looking Statements

For purposes of this Quarterly Report on Form 10-Q (“Report”), the terms “Siebert,” “Company,” “we,” “us” and “our” refer to Siebert Financial Corp., and its subsidiaries collectively, unless the context otherwise requires.

The statements contained throughout this Report, including any documents incorporated by reference, that are not historical facts, including statements about our beliefs and expectations, are “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar words or expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements, which reflect our beliefs, objectives, and expectations as of the date hereof, are based on the best judgement of management. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following: economic, social and political conditions, global economic downturns resulting from extraordinary events such as the COVID-19 pandemic and other securities industry risks; interest rate risks; liquidity risks; credit risk with clients and counterparties; risk of liability for errors in clearing functions; systemic risk; systems failures, delays and capacity constraints; network security risks; competition; reliance on external service providers; new laws and regulations affecting our business; net capital requirements; extensive regulation, regulatory uncertainties and legal matters; failure to maintain relationships with employees, customers, business partners or governmental entities; the inability to achieve synergies or to implement integration plans and other consequences associated with risks and uncertainties detailed in under Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021, as amended on May 20, 2022 (“2021 Form 10-K”), as well as in our filings with the SEC.

We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(unaudited)

 

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

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

SIEBERT FINANCIAL CORP. & SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Basis of Presentation

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 subsidiaries and variable interest entity (“VIE”):

•

Muriel Siebert & Co., Inc. (“MSCO”) provides retail brokerage services. MSCO is a Delaware corporation and broker-dealer registered with the Securities and Exchange Commission (“SEC”) under the 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”).

•

Siebert AdvisorNXT, Inc. (“SNXT”) provides investment advisory services. SNXT is a New York corporation registered with the SEC as a Registered Investment Advisor (“RIA”) under the Investment Advisers Act of 1940

•

Park Wilshire Companies, Inc. (“PW”) provides insurance services. PW is a Texas corporation and licensed insurance agency.  

•

Siebert Technologies, LLC (“STCH”) provides robo-advisory technology development. STCH is a Nevada limited liability company.  

•

RISE Financial Services, LLC (“RISE”) provides prime brokerage services. RISE was formerly known as WPS Prime Services, LLC (“WPS”), and is 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 Report on Form 10-Q, 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 14 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 three months ended March 31, 2022 and 2021 were derived from its operations in the U.S.

As of March 31, 2022, 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 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. Refer to Note 9 – Other Equity Investment in Related Party, at Fair Value for additional detail.

Change in Membership Interests of RISE

During the three months ended March 31, 2022, RISE issued and Siebert sold membership interests in RISE to certain employees, directors, and affiliates of RISE and Siebert.

From January 1, 2022 to March 30, 2022, RISE issued 8.3% of RISE’s total issued and outstanding membership interests in exchange for a net increase in assets of $1,000,000. Siebert sold membership interests representing 2% of RISE’s total issued and outstanding membership interests to two Siebert employees. Through March 30, 2022 Siebert continued to hold a majority ownership interest in RISE.

On March 31, 2022, Siebert exchanged $2,880,000 in aggregate of notes payable to Gloria E. Gebbia for 24% ownership interest in RISE. As a result of the aforementioned transactions, Siebert’s direct ownership percentage in RISE declined from 76% as of December 31, 2021 to approximately 44% as of March 31, 2022. The change in membership interest on March 31, 2022 required Siebert to reassess its interest in RISE in accordance with Accounting Standards Codification (“ASC”) Topic 810 – Consolidation. As of March 31, 2022, Siebert determined that RISE is a VIE as the equity holders lack the characteristics of a controlling financial interest. Siebert holds a variable interest in RISE and is the primary beneficiary of RISE since it holds both the power to direct the activities of RISE that most significantly impact RISE’s economic performance, as well as the obligation to absorb losses and right to receive the returns from RISE that would be significant to RISE. Accordingly, Siebert consolidates RISE as a VIE. Refer to Note 3 – Consolidation of Variable Interest Entity for further information.

Basis of Presentation

The accompanying condensed consolidated financial statements (“financial statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements.

In the opinion of management, the financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s 2021 Form 10-K.

Principles of Consolidation

The consolidated financial statements include the accounts of Siebert and its consolidated subsidiaries, each of which is a wholly-owned subsidiary, as well as the 44% investment in a VIE for which the Company has determined it is the primary beneficiary. 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 or at fair value, until such time that they become wholly or majority-owned. Earnings attributable to noncontrolling interests are recorded on the statements of operations 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.

Significant Accounting Policies

The Company’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in the Company’s 2021 Form 10-K. Other than the below, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2022.

Variable Interest Entities

The Company evaluates whether an entity is a VIE and determines if the primary beneficiary status is appropriate on a quarterly basis. The Company consolidates a VIE for which it is the primary beneficiary. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including factors such as the power to direct the activities of the VIE that most significantly impact its economic performance, the obligation to absorb the losses and/or the right to receive the expected returns of the VIE. Through this evaluation, the Company determined that RISE is a VIE and the Company is the primary beneficiary, primarily due to the Company having the power to direct the activities of RISE that most significantly impact its economic performance. Additionally, the Company may be obligated to fund RISE’s operations at an amount that is disproportional to its ownership percentage.

2. New Accounting Standards

The Company did not adopt any new accounting standards during the three months ended March 31, 2022. In addition, the Company has evaluated other recently issued accounting standards and does not believe that any of these standards will have a material impact on the Company’s financial statements and related disclosures as of March 31, 2022.

3. Consolidation of Variable Interest Entity

As of March 31, 2022, the Company owned approximately 44% of RISE. RISE was deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial interest. The major factor that led to the conclusion that the Company is the primary beneficiary of this VIE is that the Company has the power to direct the activities of RISE that most significantly impact its economic performance, as well as the potential obligation to fund operations and absorb losses in amount that is disproportional to the Company’s ownership percentage.

As of March 31, 2022, RISE reported assets of $4 million and liabilities of $0.8 million. There are no restrictions on the consolidated VIE’s assets.

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:

⁽¹⁾ Depository Trust & Clearing Corporation is referred to as (“DTCC”), Options Clearing Corporation is referred to as (“OCC”), and National Securities Clearing Corporation is referred to as (“NSCC”).

Under the DTCC shareholders’ agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of March 31, 2022 and December 31, 2021, MSCO had shares of DTCC common stock valued at approximately $1,054,000 and $905,000, respectively, which are included within the line item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.

5. Fair Value Measurements

Overview

ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Refer to the below as well as Note 6 – Fair Value Measurements in the Company’s 2021 Form 10-K for further information regarding fair value hierarchy, valuation techniques and other items related to fair value measurements.

Municipal securities: Municipal securities are valued using recently executed transactions, market price quotations (when observable), bond spreads 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. Municipal securities are generally categorized in level 2 of the fair value hierarchy.

Options: Options 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.

Other equity investment in related party, at fair value: The Company’s other equity investments in related party are investments in privately held companies. The transaction price, excluding transaction costs, is the best estimate of fair value at acquisition. When evidence supports a change to the carrying value from the transaction price, then adjustments are made to reflect expected exit values in the investment’s principal market under current market conditions. Privately held equity investments are typically valued by using a market approach. Under the fair value hierarchy, these investments are classified as level 3. As of March 31, 2022, the unobservable inputs utilized to estimate the fair value were the original transaction price adjusted for the performance of the investment during the period.

Unit investment trusts (“UITs”): Units of UITs are carried at redemption value, which represents fair value. Units of UITs are categorized as level 2.

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.

*As of March 31, 2022, the Company had U.S. government securities with market values of approximately $9.9 million, $63.4 million, and $24.4 million and corresponding maturity dates of August 31, 2023, December 31, 2023 and January 31, 2024, respectively. As of December 31, 2021, the Company did not have any U.S. government securities classified as cash and securities segregated for regulatory purposes.

**As of both March 31, 2022 and December 31, 2021, the U.S. government securities had a maturity date of August 15, 2024.

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

Changes in Level 3 Investments

Refer to the below as well as Note 6 – Fair Value Measurements in the Company’s 2021 Form 10-K for further information regarding financial instruments not carried at fair value on the statements of financial condition as of March 31, 2022 and December 31, 2021.

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 for regulatory purposes as of March 31, 2022 and December 31, 2021. Securities segregated for regulatory purposes consist solely of U.S. government securities and are included in the fair value hierarchy table above. Cash and cash equivalents and cash and securities segregated for regulatory purposes are classified as level 1.

6. Property, Office Facilities, and Equipment, Net

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

Total depreciation expense for property, office facilities, and equipment was $97,000 and $117,000 for the three months ended March 31, 2022 and 2021, respectively.

Miami Office Building

On December 30, 2021, the Company acquired an office building located at 653 Collins Ave, Miami Beach, FL (“Miami office building”). 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.

As of March 31, 2022, no depreciation expense has been recorded for the Miami office building. Depreciation expense will commence when the Miami office building is completed and placed in service, which is expected to occur in the third quarter of 2022. The Company invested $276,000 in the three months ended March 31, 2022 to build out the Miami office building.

7. Leases

As of March 31, 2022, 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 March 31, 2022, 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.

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 some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the statements of operations 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.

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.

Lease Commitments

Future annual minimum payments for operating leases with initial terms of greater than one year as of March 31, 2022 were as follows:

8. Equity Method Investment in Related Party

Transaction with Tigress

On November 16, 2021, the Company entered into an agreement with Tigress Holdings, LLC, (“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 in the statements of operations. The Company has elected to classify distributions received from equity method investees using the cumulative earnings approach. For the three months ended March 31, 2022 and 2021, the earnings recognized from the Company’s investment in Tigress was $165,000 and $0, respectively. The Company has not received any cash distributions from Tigress for the three months ended March 31, 2022 and 2021.

As of March 31, 2022 and December 31, 2021, the carrying amount of the investment in Tigress was $8,165,000 and $8,156,000, respectively. 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. There were no events or circumstances suggesting the carrying amount of the investment may be impaired as of March 31, 2022 and December 31, 2021.

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

9. Other Equity Investment in Related Party, at Fair Value

Transaction with Hedge Connection

On January 21, 2022, RISE entered into an agreement to acquire a minority stake in 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. Refer to Note 25 – Subsequent Events in the Company’s 2021 Form 10-K for additional details.

The Company paid Hedge Connection for licensing and consulting fees related to this agreement in an aggregate amount of $108,000 and $0, for the three months ended March 31, 2022 and 2021, respectively. The Company has not received any cash distributions from Hedge Connection for the three months ended March 31, 2022 and 2021.

10. 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 March 31, 2022. There was no impairment or observable price changes (orderly transactions for the identical or similar security from the same issuer) which required an adjustment to the carrying value of the Company’s investment in OpenHand as of March 31, 2022.

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.

Management concluded that there have been no additional adjustments as there were no other identified events or changes in circumstances as of March 31, 2022 that could have a significant effect on the original valuation of the investment.

11. Goodwill

As of both March 31, 2022 and December 31, 2021, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of RISE. As of March 31, 2022, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and no impairment charges related to goodwill were recognized in the three months ended March 31, 2022 and 2021. Additionally, the Company determined there was not a material risk for future possible impairments to goodwill as of the date of the assessment.

12. Long-Term Debt

Mortgage with East West Bank

Overview

On December 30, 2021, the Company acquired the Miami office building for approximately $6.8 million, and the Company entered into a mortgage with East West Bancorp, Inc. (“East West Bank”) for approximately $4 million to finance part of the purchase of the Miami office building.

The Company’s 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 interest rate is 3.6% for the first 7 years, and thereafter the interest rate shall be at the prime rate as reported by the Wall Street Journal, provided that the minimum interest rate on any term loan will not be less than 3.6%. As part of the agreement, the Company must maintain a debt service coverage ratio of 1.4 to 1. The loan is subject to a prepayment penalty over the first five years which is calculated as a percentage of the principal amount outstanding at the time of prepayment. This percentage is 5% in the first year and decreases by 1% each year thereafter, with the prepayment penalty ending after 5 years.

As of both March 31, 2022 and December 31, 2021, the Company had an unused commitment of $338,000 with East West Bank which the Company intended to use for the build out of the Miami office building.

Remaining Payments

Future remaining annual minimum principal payments for the mortgage with East West Bank as of March 31, 2022 were as follows:

The interest expense related to this mortgage was $25,000 and $0 for the three months ended March 31, 2022, and 2021, respectively. The effective interest rate related to this line of credit was 3.6% for the periods this line of credit has been in place.

Line of Credit with East West Bank

Overview

On July 22, 2020, the Company entered into a loan and security agreement with East West Bank. In accordance with the terms of this agreement, the Company has 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 Company’s obligations under the agreement are secured by a lien on all of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.

Term loans made pursuant to the agreement shall bear interest at the prime rate as reported by the Wall Street Journal, provided that the minimum interest rate on any term loan will not be less than 3.25%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.

This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of March 31, 2022 and the date of the filing of this Report, the Company was in compliance with all of its covenants related to this agreement.

In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia and Gloria E. Gebbia, individually, and as a co-trustees of the John and Gloria Living Trust, U/D/T December 8, 1994 (“John and Gloria Gebbia Trust”).

As of March 31, 2022, the Company has drawn down a $5.0 million term loan under this agreement and has an outstanding balance of $3.4 million. The Company has an additional $5.0 million remaining to draw down from this line of credit.

Remaining Payments

Future remaining annual minimum payments for the line of credit with East West Bank as of March 31, 2022 were as follows:

The interest expense related to this line of credit was $29,000 and $37,000 for the three months ended March 31, 2022 and 2021, respectively. The effective interest rate related to this line of credit was 3.50% and 3.25% for the three months ended March 31, 2022 and 2021, respectively.

13. Notes Payable - Related Party

As of March 31, 2022, the Company had various notes payable to Gloria E. Gebbia and Hedge Connection, the details of which are presented below:

As of December 31, 2021, the Company had various notes payable to Gloria E. Gebbia, the details of which are presented below:

*On January 21, 2022, the Company entered into a $600,000 note payable to Hedge Connection.

**On March 31, 2022, $2,880,000 in aggregate of notes payable to Gloria E. Gebbia was exchanged for 24% ownership interest in RISE.

***This note payable is subordinated to MSCO and is subordinated to the claims of general creditors, approved by FINRA, and is included in MSCO’s calculation of net capital and the capital requirements under FINRA and SEC regulations. On August 17, 2021, this note payable was renewed with a maturity of November 30, 2022.

The Company’s interest expense for these notes payable for the three months ended March 31, 2022 and 2021 was $70,000 and $52,000, respectively.

14. Deferred Contract Incentive

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, the Company received a one-time business development credit of $3 million from NFS which is within the line item “Deferred contract incentive” on the statements of financial condition. This credit will be recognized as contra expense over the term of the agreement in the line item “Clearing fees, including execution costs” on the statements of operations. For the three months ended March 31, 2022 and 2021, the Company recognized $213,000 and $0 in contra expense, respectively. As of March 31, 2022 and December 31, 2021, the balance of the deferred contract incentive was $2.5 million and $2.7 million, respectively.

15. Revenue Recognition

Overview of Revenue

The primary sources of revenue for the Company are as follows:

Commissions and Fees

The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.

Principal Transactions and Proprietary Trading

Principal transactions and proprietary trading primarily represent two business lines. The first business line is riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the securities with a markup or markdown to satisfy the order. The second business line is entering into transactions where proprietary U.S. government securities and other securities are traded by the Company.

Principal transactions and proprietary trading are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.

For the three months ended March 31, 2022, the Company invested in a portfolio of U.S. government securities, which is primarily within the line item cash and securities segregated for regulatory purposes on the statements of financial condition. The following table represents detail related to principal transactions and proprietary trading. Refer to the year-over-year comparisons within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Report for additional detail.

Market Making

Market making revenue is generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty. Securities owned are recorded at fair market value at the end of the reporting period.

Stock Borrow / Stock Loan

The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin and fully-paid securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company recognizes self-clearing revenues net of operating expenses related to stock borrow / stock loan. Stock borrow / stock loan also includes any revenues generated from the Company’s fully paid lending programs on a self-clearing or introducing basis. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions.

The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.

For the three months ended March 31, 2022, stock borrow / stock loan revenue was $3,578,000 ($7,465,000 gross revenue less $3,887,000 expenses). For the three months ended March 31, 2021, stock borrow / stock loan revenue was $1,847,000 ($4,830,000 gross revenue minus $2,983,000 expenses).

Advisory Fees

The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.

Interest, Marketing and Distribution Fees

The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances. Interest income also includes interest payouts from introducing relationships related to short interest, net of charges.

The Company also earns margin interest which is the net interest charged to customers for holding financed margin positions. Marketing and distribution fees consist of 12b-1 fees which are trailing payments from money market funds. Interest, marketing and distribution fees are recorded as earned.

Other Income

Other income represents fees generated from consulting services to institutional partners, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.

Categorization of Revenue

The following table presents the Company’s major revenue categories and when each category is recognized:

The following table presents each revenue category and its related performance obligation:

Other Items

For the periods presented, there were no costs capitalized related to obtaining or fulfilling a contract with a customer, and thus the Company has no balances for contract assets or contract liabilities. The Company concludes that its revenue streams have the same underlying economic factors, and as such, no disaggregation of revenue is required.

16. Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of March 31, 2022, the Company has concluded that its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain federal net operating losses that are expected to expire unutilized and certain state net operating losses.

On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact the Company’s income tax provision.

For the three months ended March 31, 2022, the Company recorded an income tax benefit of $282,000 on pre-tax book loss of $1,374,000. The effective tax rate for the three months ended March 31, 2022 was 21%.

For the three months ended March 31, 2021, the Company recorded an income tax provision of $735,000 on pre-tax book income of $3,010,000. The effective tax rate for the three months ended March 31, 2021 was 24%. The effective tax rate differs from the federal statutory rate of 21% primarily related to certain permanent tax differences and state and local taxes.

As of both March 31, 2022 and December 31, 2021, the Company recorded an uncertain tax position of $2,418,000. The uncertain tax position related primarily to the Company’s 2017 to 2019 amended tax returns, as the anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold.

17. Capital Requirements

MSCO

Net Capital

MSCO is subject to the Uniform Net Capital Rules of the SEC (Rule 15c3-1) of the Exchange Act. Under the alternate method permitted by this rule, net capital, as defined, shall not be less than the lower of $1 million or 2% of aggregate debit items arising from customer transactions. As of March 31, 2022, MSCO’s net capital was $30.5 million, which was approximately $28.7 million in excess of its required net capital of $1.8 million, and its percentage of aggregate debit balances to net capital was 33.4%.

As of December 31, 2021, MSCO’s net capital was $36.4 million, which was approximately $34.3 million in excess of its required net capital of $2.1 million, and its percentage of aggregate debit balances to net capital was 34.9%.

Special Reserve Account

MSCO is subject to Customer Protection Rule 15c3-3 which requires segregation of funds in a special reserve account for the exclusive benefit of customers. As of March 31, 2022, MSCO had cash deposits of $278.6 million in the special reserve accounts which was $4.5 million in excess of the deposit requirement of $274.1 million. After adjustments for deposit(s) and / or withdrawal(s) made on April 1, 2022, MSCO had $11.5 million in excess of the deposit requirement.

As of December 31, 2021, MSCO had cash deposits of $326.8 million in the special reserve accounts which was $31.9 million in excess of the deposit requirement of $294.9 million. After adjustments for deposit(s) and / or withdrawal(s) made on January 3, 2022, MSCO had $1.9 million in excess of the deposit requirement.

RISE

Net Capital

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.

As of March 31, 2022, RISE’s net capital was approximately $1.7 million which was $1.5 million in excess of its minimum requirement of $250,000 under 15c3-1. As of December 31, 2021, RISE’s net capital was approximately $1.7 million which was $1.4 million in excess of its minimum requirement of $250,000 under 15c3-1.

18. Financial Instruments with Off-Balance Sheet Risk

The Company enters into various transactions to meet the needs of customers, conduct trading activities, and manage market risks and is, therefore, subject to varying degrees of market and credit risk. Refer to the below as well as Note 21 – Financial Instruments with Off-Balance Sheet Risk in the Company’s 2021 Form 10-K for further information.

As of March 31, 2022, the Company had margin loans extended to its customers of approximately $0.5 billion, of which $76.2 million is within the line item “Receivables from customers” on the statements of financial condition. As of December 31, 2021, the Company had margin loans extended to its 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. There were no material losses for unsettled customer transactions for the three months ended March 31, 2022 and 2021.

19. Commitments, Contingencies, and Other

Legal and Regulatory Matters

The Company is party to certain claims, suits and complaints arising in the ordinary course of business. The below legal matter is related to operations of StockCross Financial Services, Inc. (“StockCross”), prior to the Company’s acquisition of StockCross on January 1, 2020.

For activity related to operations of StockCross prior to the Company’s 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. Management cannot at this time assess either the duration or the likely outcome or consequences of this matter. Nevertheless, FINRA has the authority to impose sanctions on the Company 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 this matter can be reached or that any amount paid in settlement will not be material.

As of both March 31, 2022 and December 31, 2021, all other legal matters are without merit or involve amounts which would not have a material impact on the Company’s results of operations or financial position.

Overnight Financing

As of both March 31, 2022 and December 31, 2021, MSCO had an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank (“BMO Harris”); however, as of those dates, MSCO had no outstanding loan balance and there were no commitment fees or other restrictions on this line of credit.

The interest expense for this line of credit was $0 and $14,000 for the three months ended March 31, 2022 and 2021, respectively. There were no fees related to this line of credit for both the three months ended March 31, 2022 and 2021.

NFS Contract

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. If the Company chooses to exit this agreement before the end of the contract term, the Company is under the obligation to pay an early termination fee upon occurrence pursuant to the table below:

For the three months ended March 31, 2022 and 2021, there has been no expense recognized for any early termination fees. The Company believes that it is unlikely it will have to make material payments related to this early termination arrangement and has not recorded any contingent liability in the financial statements related to this arrangement.

General Contingencies

In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

The Company, through its affiliate, Kennedy Cabot Acquisition, LLC (“KCA”), is self-insured with respect to employee health claims. KCA maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately $65,000 per employee as of March 31, 2022. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the financial statements.

As part of this plan, the Company recognized expenses of $496,000 and $291,000 for the three months ended March 31, 2022 and 2021, respectively.

The Company had an accrual of $65,000 as of March 31, 2022, which represents the historical estimate of future claims to be recognized for claims incurred during the period.

The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.

Employee Benefit Plans

The Company, through KCA, sponsors a defined-contribution retirement plan under Section 401(k) of the Internal Revenue Code that covers substantially all employees. Participant contributions to the plan are voluntary and are subject to certain limitations. The Company may also make discretionary contributions to the plan. No contributions were made by the Company or KCA for the three months ended March 31, 2022 and 2021. On August 6, 2021, the Company’s Board of Directors approved a 401(k) matching program for employees of the Company.

The Company has an equity incentive plan that provides for the grant of stock options, restricted stock, and other equity awards of the Company’s common stock to employees, officers, consultants, directors, affiliates and other service providers of the Company. There are 3 million shares reserved under the plan, and the Company issued no securities under the plan for the three months ended March 31, 2022 and 2021.

20. Related Party Disclosures

KCA

KCA is an affiliate of the Company and is under common ownership with the Company. To gain efficiencies and economies of scale with billing and administrative functions, KCA serves as a paymaster for the Company for payroll and related functions, the entirety of which KCA passes through to the subsidiaries of the Company proportionally. In addition, KCA has purchased the naming rights of the Company for the Company to use.

KCA sponsors a 401(k) profit sharing plan which covers substantially all of the Company’s employees. For the three months ended March 31, 2022 and 2021, KCA has earned no profit for providing any services to the Company as KCA passes through any revenue or expenses to the Company’s subsidiaries.

PW

PW brokers the insurance policies for related parties. Revenue for PW from related parties was $75,000 and $49,000 for the three months ended March 31, 2022 and 2021, respectively.

Gloria E. Gebbia, John J. Gebbia, and Gebbia Family Members

On March 31, 2022, Gloria E. Gebbia exchanged approximately $2.9 million of her notes payable to Company for 24% of the outstanding and issued membership interests in RISE.

The Company has entered into various debt agreements with Gloria E. Gebbia, the Company’s principal stockholder. Refer to Note 13 – Notes Payable - Related Party for additional detail.

The Company’s obligations under its line of credit with East West Bank are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia and Gloria E. Gebbia, individually, and as a co-trustees of the John and Gloria Gebbia Trust. Refer to Note 12 – Long-Term Debt for additional detail.

Gloria E. Gebbia has extended loans to certain Company employees for the purchase of the Company’s shares. These transactions have not materially impacted the Company’s financial statements.

The sons of Gloria E. Gebbia and John J. Gebbia hold executive positions within the Company’s subsidiaries and their compensation was in aggregate $443,000 and $188,000 for the three months ended March 31, 2022 and 2021, respectively.

Gebbia Sullivan County Land Trust

The Company operates on a month-to-month lease agreement for its branch office in Omaha, Nebraska with the Gebbia Sullivan County Land Trust, the trustee of which is a member of the Gebbia Family. For both the three months ended March 31, 2022 and 2021, rent expense was $15,000 for this branch office.

Tigress and Cynthia DiBartolo

On November 16, 2021, the Company entered into an agreement with Tigress in exchange for 24% of RISE and shares of the Company’s common stock. Refer to Note 8 – Equity Method Investment in Related Party for additional detail.

As part of the transaction, 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.

Hedge Connection and Lisa Vioni

On January 21, 2022, RISE entered into an agreement with 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.

Refer to Note 9 – Other Equity Investment in Related Party, at Fair Value and Note 13 – Notes Payable – Related Party for additional detail.

21. Subsequent Events

The Company has evaluated events that have occurred subsequent to March 31, 2022 and through May 23, 2022, the date of the filing of this Report. Based on the Company’s assessment, there have been no material subsequent events that occurred during such period that would require disclosure in this Report or would be required to be recognized in the financial statements as of March 31, 2022.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying financial statements and related notes included under Part I, Item 1 of this Report.

Overview

We are a financial services company and provide a wide variety of financial services to our clients. We operate in business lines such as retail brokerage, investment advisory, insurance, robo-advisory technology development, and prime brokerage through our wholly-owned and majority-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, 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.

Interest Rates

We are exposed to market risk from changes in interest rates. Such changes in interest rates primarily impact revenue from interest, marketing, and distribution fees. The Company primarily earns interest, marketing and distribution fees from margin interest charged on clients’ margin balances, interest on cash and securities segregated for regulatory purposes, and distribution fees from money market mutual funds in clients’ accounts. Securities segregated for regulatory purposes consist solely of U.S. government securities. If prices in U.S. government securities decline, we anticipate the impact to be temporary as we intend to hold these securities to maturity. We seek to mitigate this risk by managing the average maturities of its U.S. government securities portfolio and setting risk parameters for securities owned, at fair value.

RISE

Arrangements with GSCO and JonesTrading

On August 30, 2021, 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 and pre-tax income from customers that have transitioned to other prime service providers was approximately $5.0 million and $1.0 million, respectively, for the three months ended March 31, 2021.

On October 7, 2021, RISE signed an agreement with 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. For the three months ended March 31, 2022, this agreement resulted in pre-tax income of $39,000, and we do not anticipate the pre-tax income related to this agreement will offset the reduction in pre-tax income from customers that have transitioned to other prime service providers.

Relaunch of RISE

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. Cynthia DiBartolo was appointed as the new CEO of RISE, and Gloria E. Gebbia, one of Siebert’s and RISE’s directors, was appointed as the Chief Impact Officer of RISE.

As part of this new strategic direction, on January 21, 2022, RISE entered into an agreement with Hedge Connection, a woman-owned fintech company founded by Lisa Vioni that provides capital introduction software solutions for the prime brokerage industry. Hedge Connection’s powerful platform, branded as “FUEL,” allows hedge fund managers to connect with a global pool of institutional investors and retain control over how their information is shared while helping allocators to streamline due diligence. FUEL serves as a fintech differentiator and provides RISE with a technology solution to efficiently scale a comprehensive capital introduction program for clients. FUEL also serves as a complementary revenue stream for RISE, and Ms. Vioni serves as a key partner in growing the business.

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.

Change in Membership Interests of RISE

During the three months ended March 31, 2022, RISE issued and Siebert sold membership interests in RISE to certain employees, directors, and affiliates of RISE and Siebert. As a result of these transactions, Siebert’s ownership percentage in RISE declined from 76% as of December 31, 2021 to approximately 44% as of March 31, 2022. As RISE continues to grow and the operations of the entity change, management will assess whether RISE remains a VIE and whether Siebert remains the primary beneficiary on an on-going basis. Refer to Note 1 – Organization and Basis of Presentation for additional detail.

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 – Retail and Institutional Customer Net Worth

Client Account Metrics – Retail Customers

•

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

•

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

•

Retail customer credit balances represents client cash held in brokerage accounts

•

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

•

Retail customer accounts represents the number of retail customers

Client Account Metrics – Institutional Customers

•

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

Client Activity Metrics – Retail Customers

•

Total retail trades represents retail trades that generate commissions

Statements of Operations and Financial Condition

Statements of Operations for the Three Months Ended March 31, 2022 and 2021

Revenue

Commissions and fees for the three months ended March 31, 2022 were $2,340,000 and decreased by $4,668,000 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 as well as market conditions during the first quarter of 2022.

Interest, marketing and distribution fees for the three months ended March 31, 2022 were $2,362,000 and decreased by $1,097,000 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.

Principal transactions and proprietary trading for the three months ended March 31, 2022 were a loss of $267,000 and decreased by $4,515,000 from the corresponding period in the prior year, primarily due to the factors discussed below.

The decrease in realized and unrealized gain on primarily riskless principal transactions was primarily due to market conditions. The increase in unrealized loss on our portfolio of U.S. government securities was due to the following. From January to February 2022, Siebert invested approximately $100 million in 2-year treasury notes in order to enhance its yield on its excess 15c3-3 deposits. During February and March 2022, there was a substantial increase in mid-term treasury yields, which created an unrealized loss of approximately $2.2 million on these treasury notes. We intend to hold these securities to maturity and as such, the unrealized loss of $2.2 million will be returned over the duration of the treasury notes, at a point no later than the maturity of the securities, the latest maturity being the beginning of 2024. If the value of treasury notes continue to decline, we will incur further unrealized losses; however, we anticipate this loss to be temporary as we intend to hold these securities to maturity. The portfolio of U.S. government securities represents less than half of the total value of our cash and securities segregated for regulatory purposes, and we believe that the level invested reduces the risk of having to liquidate the securities prior to maturity.

Below is a summary of the change in the principal transactions and proprietary trading line item as well as a maturity schedule of our portfolio of U.S. government securities for the periods presented.

Market making for the three months ended March 31, 2022 was $764,000 and decreased by $850,000 from the corresponding period in the prior year, primarily due to market conditions.

Stock borrow / stock loan for the three months ended March 31, 2022 was $3,578,000 and increased by $1,731,000 from the corresponding period in the prior year, primarily due to the growth of the business, expansion of our stock locate revenues, and additional securities lending and locate counterparty relationships.

Advisory fees for the three months ended March 31, 2022 were $507,000 and increased by $151,000 from the corresponding period in the prior year, primarily due to overall expansion of the advisory business line.

Other income for the three months ended March 31, 2022 was $1,060,000 and increased by $668,000 from the corresponding period in the prior year primarily due to an increase in consulting services to institutional partners.

Operating Expenses

Employee compensation and benefits for the three months ended March 31, 2022 were $7,094,000 and decreased by $2,072,000 from the corresponding period in the prior year, primarily due to a decrease in commissions payouts from RISE related to the loss of our institutional customers.

Clearing fees, including execution costs for the three months ended March 31, 2022 were $494,000 and decreased by $1,359,000 from the corresponding period in the prior year, primarily due to a decrease in our institutional clearing costs.

Technology and communications expenses for the three months ended March 31, 2022 were $1,182,000 and decreased by $59,000 from the corresponding period in the prior year, primarily due to a decrease in licensing fees, partially offset by an increase in other technology expenses.

Other general and administrative expenses for the three months ended March 31, 2022 were $932,000 and increased by $162,000 from the corresponding period in the prior year, primarily due to an increase in exchange and regulatory fees related to trading activities as well as travel and entertainment expenses, partially offset by lower office expenses.

Data processing expenses for the three months ended March 31, 2022 were $516,000 and decreased by $281,000 from the corresponding period in the prior year, primarily due to a reduction in market data analytics and service bureau costs.

Rent and occupancy expenses for the three months ended March 31, 2022 were $473,000 and decreased by $97,000 from the corresponding period in the prior year, primarily due to a decrease in rent related to our transition out of legacy office space into more cost-efficient locations.

Professional fees for the three months ended March 31, 2022 were $696,000 and increased by $81,000 from the corresponding period in the prior year, primarily due to the increase in consulting services for various marketing initiatives.

Depreciation and amortization expenses for the three months ended March 31, 2022 were $259,000 and decreased by $133,000 from the corresponding period in the prior year, primarily due to write-offs and the completion of the useful lives of assets within RISE and STCH in 2021.

Referral fees for the three months ended March 31, 2022 were $0 and decreased by $407,000 from the corresponding period in the prior year, primarily due to the transition of our institutional clients related to the termination of our clearing arrangement with GSCO.

Interest expense for the three months ended March 31, 2022 was $124,000 and increased by $21,000 from the corresponding period in the prior year, primarily due to the interest on the mortgage with East West Bank in 2022.

Advertising and promotion expense for the three months ended March 31, 2022 was $113,000 and increased by $113,000 from the corresponding period in the prior year, primarily due to an increase in promotional costs for various marketing initiatives.

Benefit From Income Taxes

The benefit from income taxes for the three months ended March 31, 2022 was ($282,000) and decreased by $1,017,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to lower pre-tax earnings in the first quarter of 2022. Refer to Note 16 – Income Taxes for additional detail.

Net Loss Attributable to Noncontrolling Interests

As further discussed in Note 1 – Organization and Basis of Presentation, we consolidate RISE’s financial results into our financial statements and reflect the portion of RISE not held by Siebert as a noncontrolling interests in our financial statements. The net loss attributable to noncontrolling interests for the three months ended March 31, 2022 was $119,000, and increased by $119,000 from the corresponding period in the prior year.

Statements of Financial Condition as of March 31, 2022 and December 31, 2021

Assets

Assets as of March 31, 2022 were $1,127,836,000 and decreased by $276,399,000 from December 31, 2021, primarily due to a decrease in securities borrowed and cash and securities segregated for regulatory purposes.

Liabilities

Liabilities as of March 31, 2022 were $1,065,372,000 and decreased by $278,010,000 from December 31, 2021, primarily due to a decrease in securities loaned and payables to customers.

Liquidity and Capital Resources

Overview

The indicators of our liquidity are 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 March 31, 2022 and December 31, 2021 were $7.7 million and $3.8 million, respectively. 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 foreseeable future.

Sources of Liquidity and Planned Obligations

As of March 31, 2022, we had a variety of debt instruments and sources of borrowing capability. As of March 31, 2022, the debt instruments and their outstanding obligations were as follows: $4.0 million mortgage with East West Bank, $3.4 million line of credit with East West Bank, and $4.1 in notes payable to related parties. We have an additional $5.0 million available on our line of credit with East West Bank and have an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris. Our ability to borrow incremental amounts for the line of credit with East West Bank is set to terminate by July 2022; however, we intend to renew this line of credit before the termination occurs.

As of March 31, 2022, the aggregate future payment obligations related to these debt instruments are $7.8 million through 2026 and $3.7 million thereafter. The remaining balance of our lease payments for operating leases with initial terms of greater than one year was $0.9 million during 2022, and $1.8 million thereafter.

On December 30, 2021, we acquired the Miami office building and plan on building out this space so it can be used as one of our primary operating centers for an estimated $1.4 million, with $338,000 being financed through a commitment with East West Bank and the remainder being cash.

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.

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 Exchange Act and maintains capital and segregated cash reserves in excess of regulatory requirements. Requirements under these regulations may vary; however, MSCO has adequate reserves and contingency 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 OCC, 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 and the corresponding regulatory capital requirements.

For the three months ended March 31, 2022 and 2021, MSCO and RISE had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 17 – Capital Requirements for additional detail on our capital requirements.

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. There were no material losses for unsettled customer transactions for the three months ended March 31, 2022 and 2021. Refer to Note 18 – Financial Instruments with Off-Balance Sheet Risk for additional detail.

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.

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

As of both March 31, 2022 and December 31, 2021, the Company recorded an uncertain tax position of $2,418,000. This uncertain tax position was related primarily to the Company’s 2017 to 2019 amended tax returns, as the anticipated tax refunds exceed the amount that meets the more-likely-than-not recognition threshold.

Related Party Disclosures

During the course of business, we enter into various agreements and transactions with related parties. Refer to Note 20 – 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 March 31, 2022 and December 31, 2021. Refer to Note 5 – Fair Value Measurements for additional detail.

Impairment

We have concluded as of March 31, 2022, there has been no impairment to the carrying value of Siebert’s goodwill and tangible assets, and there are no intangible assets. Refer to Note 11 – Goodwill for additional information.

Segment

We concluded as of March 31, 2022, 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.

Critical Accounting Policies

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K as well as in the below section. As of March 31, 2021, there have been no changes to our critical accounting policies or estimates other than the below.

Variable Interest Entities

We evaluate whether an entity is a VIE and determine if the primary beneficiary status is appropriate on a quarterly basis. We consolidate a VIE for which we are the primary beneficiary. When assessing the determination of the primary beneficiary, we consider all relevant facts and circumstances, including factors such as the power to direct the activities of the VIE that most significantly impact its economic performance, the obligation to absorb the losses and/or the right to receive the expected returns of the VIE. Through this evaluation, we determined that RISE is a VIE and we are the primary beneficiary, primarily due to Siebert’s power to direct the activities of RISE that most significantly impact its economic performance. Additionally, Siebert may be obligated to fund RISE’s operations at an amount that is disproportional to its ownership percentage.

New Accounting Standards

We did not adopt any new accounting standards during the three months ended March 31, 2022. In addition, we evaluated other recently issued accounting standards and do not believe that any of these standards will have a material impact on our financial statements and related disclosures as of March 31, 2022.

Regulatory Matters

We are party to certain claims, suits and complaints arising in the ordinary course of business. As of March 31, 2022, we had one pending regulatory matter related to operations of StockCross prior to our acquisition of StockCross on January 1, 2020. Refer to Note 19 – Commitments, Contingencies, and Other for additional detail.

ITEM 3. 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.

We invest cash and securities segregated for regulatory purposes in dollar denominated bank accounts which are not subject to material changes in value due to interest rate movements. We also invest cash and securities segregated for regulatory purposes and securities owned, at fair value in U.S. government securities which may be subject to material changes in value due to interest rate movements. Securities owned, at fair value invested in U.S. government securities are generally purchased to enhance yields on required regulatory deposits. While the value of the government securities may be subject to material changes in value, we believe any reduction in value would be temporary since the securities would mature at par value.

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.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Executive Vice President / Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report pursuant to Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our management, including the Executive Vice President / Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and to ensure that information required to be disclosed is accumulated and communicated to our management, including our Executive Vice President / Chief Financial Officer, to allow timely decisions regarding required disclosure.

Based on its evaluation, our management, including our Executive Vice President / Chief Financial Officer, concluded that as of the end of the period covered by this Report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) was identified during the end of the period covered by this Report, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is party to certain claims, suits and complaints arising in the ordinary course of business. In the opinion of our management, as of the date of this Report, all such matters are without merit, or involve amounts which would not have a significant effect on the results of operations or financial position of the Company.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Report, investors should carefully consider the risk factors discussed in Part I, Item 1A - Risk Factors in our 2021 Form 10-K. Each of such risk factors could materially affect our business, financial position, and results of operations. As of the date of this Report, other than the supplemental risk factor provided below, there have been no material changes from the risk factors disclosed in our 2021 Form 10-K.

There may be a limited public market for our common stock; Volatility.

11,635,458 shares of our common stock, or approximately 36% of our shares of our common stock outstanding, are currently held by non-affiliates as of May 23, 2022. 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.

Interest rate changes could affect our profitability.

The direction and level of interest rates are important factors in our earnings. Such changes in interest rates primarily impact our revenue from interest, marketing, and distribution fees.

As the U.S. economy recovers, aided by stimulus packages and fiscal and monetary policies, inflation has been rising at historically high rates, and the Federal Reserve has signaled that it will continue increasing the target federal funds effective rate. Although we believe we may benefit from a rising interest rate environment, a rise in interest rates may cause our funding costs to increase if market conditions or the competitive environment induces us to raise our interest rates to avoid losing deposits, or replace deposits with higher cost funding sources without offsetting increases in yields on interest-earning assets which can reduce our interest revenue.

ITEM 6. EXHIBITS

# This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.