SIEBERT FINANCIAL CORP 10-K

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: ● Retail brokerage business through MSCO, a Delaware corporation and broker-dealer registered with the SEC ● Investment advisory services through SNXT, a New York corporation registered with the SEC as a RIA under Advisers Act ● Insurance services through PWC, a Texas corporation and licensed insurance agency ● Robo-advisory technology development through STCH, a Nevada limited liability company ● Prime brokerage services through WPS, a Delaware limited liability company and a broker-dealer registered with the SEC 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, 2020 2019 Total Siebert StockCross Combined 2019 Total assets under management (in billions) $ 16.2 $ 13.3 $ 1.5 $ 14.8 ● Total assets under management represents the total of our retail and institutional customer net worth Client Account Metrics – Retail Customers As of December 31, 2020 2019 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 110,699 76,718 30,187 106,905 ● 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 As of December 31, 2020 2019 Institutional customer net worth (in billions) $ 1.6 $ 1.4 ● Institutional customer net worth represents the total value of securities and cash in the customer accounts after deducting margin debits and short positions. We did not have institutional customers until our purchase of WPS in December 2019. Siebert 2020 Form-10K 23 Client Activity Metrics Year Ended December 31, 2020 2019 Total Siebert StockCross Combined 2019 Total retail trades 471,662 276,018 40,256 316,274 Average commission per retail trade $ 15.31 $ 17.86 $ 17.70 $ 17.84 ● Total retail trades represent retail trades that generate commissions ● Average commission per retail trade represents the average commission generated for all types of retail customer trades 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, 2020 2019 Total Siebert StockCross Pro Forma Adj Combined 2019 Revenue $ 54,872,000 $ 28,593,000 $ 14,442,000 $ (258,000 ) $ 42,777,000 Income / (loss) before income taxes $ 3,196,000 $ 4,725,000 $ (507,000 ) $ 66,000 $ 4,284,000 Net income / (loss) $ 2,975,000 $ 3,607,000 $ (419,000 ) $ 48,000 $ 3,236,000 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. Siebert 2020 Form-10K 24 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. Siebert 2020 Form-10K 25 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. A s 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 2021 $ 998,000 2022 998,000 2023 998,000 2024 1,661,000 Total $ 4,655,000 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. Siebert 2020 Form-10K 29 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. Siebert 2020 Form-10K 30 Goodwill, and other intangible assets Goodwill is recognized as a result of business combinations and represents the excess of the purchase price over the fair value of net tangible assets and identifiable intangible assets acquire d. The valuation of goodwill and acquired intangible assets requires significant judgment and estimates by management. For example, the valuation of certain intangible assets required management’s estimates of future earnings and cash flows as well as judgment in determining market approaches. The useful life of the finite lived intangible assets was determined based on management's estimate of the period over which those intangible assets are expected to provide economic benefit. Management applies judgment in conducting impairment testing for goodwill and intangible assets, including estimates of fair value based on the income or market approach and estimates required to determine the useful lives of finite lived intangible assets. We test goodwill and all intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, or at least annually. If our estimates of fair value change due to future events differing significantly from the forecasts used to determine fair value or there are changes in our business or other factors, we will assess the amount of impairment and recognize it in our financial statements during that reporting period. We also evaluate the useful life of finite lived intangible assets on an annual basis to determine if events or trends warrant a change in estimate of the useful life. Changes in the estimated useful lives of finite lived intangible assets could result in the recognition of an impairment or a change in the remaining life of these assets. We have concluded that as of December 31, 2020, there have been no impairments to the carrying value of Siebert’s goodwill or intangible assets. See “Note 2 – Summary of Significant Accounting Policies” and “Note 10 – Goodwill and Intangible Assets, Net” for additional detail on the valuation and impairment policies governing goodwill and acquired intangible assets. Accruals for contingent liabilities Accruals for contingent liabilities related to legal and regulatory claims as well as employee healthcare expenses under our self-insured plan reflect an estimate of probable losses. In making such estimates for legal and regulatory claims, we consider many factors, including the progress of the matter, prior experience and the experience of others in similar matters, available defenses, insurance coverage, indemnification provisions and the advice of legal counsel and other experts. In making such estimates for employee healthcare expenses, we consider many factors, including trends of health insurance expenses and our insurance reserve limits. We believe that our present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that we will not incur liabilities in excess of recorded reserves or in excess of our insurance limits. Significant judgment is required in making these estimates, and the actual cost may be materially different than the estimated costs. See “Note 19 – Commitments, Contingencies, and Other” for additional detail . Siebert 2020 Form-10K 31