UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
10-Q
(Mark
One)
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2023
OR
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to __________
Commission
file number 0-5703
| Siebert Financial Corp. |
| (Exact Name of Registrant as Specified in its Charter) |
| New York | | 11-1796714 |
(State or Other Jurisdiction of
Incorporation or Organization) | | (I.R.S. Employer
Identification No.) |
|
653 Collins Avenue,
Miami Beach, FL 33139 |
| (Address of Principal Executive Offices) (Zip Code) |
| (212) 644-2400 |
(Registrant’s Telephone Number, Including Area Code) |
| 535 Fifth Avenue, 4th Floor, New York, NY 10017 |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock - $0.01 par value | | SIEB | | The Nasdaq Capital Market |
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.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| | Emerging growth company ☐ |
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 November
10, 2023, there were 40,580,936 issued and 39,580,936 shares outstanding 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., its wholly-owned and majority-owned 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; 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; the closing conditions relating
to the Second Tranche Purchase Agreement with Kakaopay may not be satisfied and the transactions contemplated by the Second Tranche Purchase
Agreement may not be consummated; and other consequences associated with risks and uncertainties detailed in Part I, Item 1A - Risk
Factors of our Annual Report on Form 10-K for the year ended December 31, 2022, (“2022 Form 10-K”), and 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
| | |
September 30,
2023 (unaudited) | | |
December 31,
2022 | |
| ASSETS | |
| | |
| |
| Current assets | |
| | |
| |
| Cash and cash equivalents | |
$ | 4,932,000 | | |
$ | 23,672,000 | |
| Cash and securities segregated for regulatory purposes | |
| 237,378,000 | | |
| 276,166,000 | |
| Receivables from customers | |
| 71,761,000 | | |
| 52,057,000 | |
| Receivables from broker-dealers and clearing organizations | |
| 8,366,000 | | |
| 9,094,000 | |
| Receivables from non-customers | |
| 30,000 | | |
| 100,000 | |
| Other receivables | |
| 2,433,000 | | |
| 2,119,000 | |
| Prepaid expenses and other assets | |
| 1,613,000 | | |
| 2,055,000 | |
| Securities borrowed | |
| 404,924,000 | | |
| 336,909,000 | |
| Securities owned, at fair value | |
| 18,687,000 | | |
| 3,204,000 | |
| Total Current assets | |
| 750,124,000 | | |
| 705,376,000 | |
| Deposits with broker-dealers and clearing organizations | |
| 1,478,000 | | |
| 1,311,000 | |
| Property, office facilities, and equipment, net | |
| 9,305,000 | | |
| 8,328,000 | |
| Software, net | |
| 1,701,000 | | |
| 991,000 | |
| Lease right-of-use assets | |
| 3,045,000 | | |
| 2,222,000 | |
| Equity method investment in related party | |
| — | | |
| 2,584,000 | |
| Investments, cost | |
| — | | |
| 850,000 | |
| Deferred tax assets | |
| 3,504,000 | | |
| 4,397,000 | |
| Goodwill | |
| 1,989,000 | | |
| 1,989,000 | |
| Total Assets | |
$ | 771,146,000 | | |
$ | 728,048,000 | |
| | |
| | | |
| | |
| LIABILITIES AND EQUITY | |
| | | |
| | |
| Liabilities | |
| | | |
| | |
| Current liabilities | |
| | | |
| | |
| Payables to customers | |
$ | 270,221,000 | | |
$ | 321,391,000 | |
| Payables to non-customers | |
| 991,000 | | |
| 11,506,000 | |
| Drafts payable | |
| 1,016,000 | | |
| 2,384,000 | |
| Payables to broker-dealers and clearing organizations | |
| 3,446,000 | | |
| 660,000 | |
| Accounts payable and accrued liabilities | |
| 4,102,000 | | |
| 2,507,000 | |
| Taxes payable | |
| 2,496,000 | | |
| 1,052,000 | |
| Securities loaned | |
| 408,395,000 | | |
| 327,180,000 | |
| Securities sold, not yet purchased, at fair value | |
| 1,000 | | |
| 2,000 | |
| Current portion of lease liabilities | |
| 846,000 | | |
| 1,158,000 | |
| Current portion of long-term debt | |
| 84,000 | | |
| 1,073,000 | |
| Current portion of deferred contract incentive | |
| 733,000 | | |
| 808,000 | |
| Total Current liabilities | |
| 692,331,000 | | |
| 669,721,000 | |
| Lease liabilities, less current portion | |
| 2,376,000 | | |
| 1,245,000 | |
| Long-term debt, less current portion | |
| 4,249,000 | | |
| 5,974,000 | |
| Deferred contract incentive, less current portion | |
| 625,000 | | |
| 1,188,000 | |
| Total Liabilities | |
| 699,581,000 | | |
| 678,128,000 | |
| | |
| | | |
| | |
| Commitments and Contingencies | |
| | | |
| | |
| Equity | |
| | | |
| | |
| Stockholders’ equity | |
| | | |
| | |
| Common stock, $.01 par value; 100,000,000 shares authorized; 40,580,936 shares issued and 39,580,936 shares outstanding as of September 30, 2023, respectively. 32,505,329 shares issued and outstanding as of December 31, 2022. | |
| 406,000 | | |
| 325,000 | |
| Treasury stock, at cost; 1,000,000 and 0 shares held as of September 30, 2023 and December 31, 2022, respectively | |
| (2,510,000 | ) | |
| — | |
| Additional paid-in capital | |
| 45,016,000 | | |
| 29,642,000 | |
| Retained earnings | |
| 27,642,000 | | |
| 18,982,000 | |
| Total Stockholders’ equity | |
| 70,554,000 | | |
| 48,949,000 | |
| Noncontrolling interests | |
| 1,011,000 | | |
| 971,000 | |
| Total Equity | |
| 71,565,000 | | |
| 49,920,000 | |
| Total Liabilities and Equity | |
$ | 771,146,000 | | |
$ | 728,048,000 | |
Numbers
are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT
FINANCIAL CORP. & SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Revenue | |
| | |
| | |
| | |
| |
| Commissions and fees | |
$ | 1,986,000 | | |
$ | 1,750,000 | | |
$ | 5,839,000 | | |
$ | 5,943,000 | |
| Interest, marketing and distribution fees | |
| 7,194,000 | | |
| 5,204,000 | | |
| 21,583,000 | | |
| 10,717,000 | |
| Principal transactions and proprietary trading | |
| 3,753,000 | | |
| 953,000 | | |
| 9,207,000 | | |
| 1,767,000 | |
| Market making | |
| 223,000 | | |
| 723,000 | | |
| 836,000 | | |
| 2,022,000 | |
| Stock borrow / stock loan | |
| 4,008,000 | | |
| 4,183,000 | | |
| 11,963,000 | | |
| 11,909,000 | |
| Advisory fees | |
| 506,000 | | |
| 437,000 | | |
| 1,421,000 | | |
| 1,420,000 | |
| Other income | |
| 380,000 | | |
| 1,086,000 | | |
| 963,000 | | |
| 2,589,000 | |
| Total Revenue | |
| 18,050,000 | | |
| 14,336,000 | | |
| 51,812,000 | | |
| 36,367,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Expenses | |
| | | |
| | | |
| | | |
| | |
| Employee compensation and benefits | |
| 8,723,000 | | |
| 7,290,000 | | |
| 23,770,000 | | |
| 21,752,000 | |
| Clearing fees, including execution costs | |
| 581,000 | | |
| 398,000 | | |
| 1,265,000 | | |
| 1,267,000 | |
| Technology and communications | |
| 827,000 | | |
| 1,214,000 | | |
| 2,409,000 | | |
| 3,374,000 | |
| Other general and administrative | |
| 1,108,000 | | |
| 1,072,000 | | |
| 3,320,000 | | |
| 2,939,000 | |
| Data processing | |
| 725,000 | | |
| 932,000 | | |
| 2,317,000 | | |
| 2,135,000 | |
| Rent and occupancy | |
| 467,000 | | |
| 562,000 | | |
| 1,436,000 | | |
| 1,491,000 | |
| Professional fees | |
| 979,000 | | |
| 874,000 | | |
| 3,060,000 | | |
| 2,602,000 | |
| Depreciation and amortization | |
| 265,000 | | |
| 240,000 | | |
| 716,000 | | |
| 760,000 | |
| Interest expense | |
| 40,000 | | |
| 108,000 | | |
| 222,000 | | |
| 335,000 | |
| Advertising and promotion | |
| 62,000 | | |
| 58,000 | | |
| 52,000 | | |
| 230,000 | |
| Total Expenses | |
| 13,777,000 | | |
| 12,748,000 | | |
| 38,567,000 | | |
| 36,885,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating income (loss) | |
| 4,273,000 | | |
| 1,588,000 | | |
| 13,245,000 | | |
| (518,000 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Impairment of investments | |
| — | | |
| — | | |
| (1,035,000 | ) | |
| — | |
| Earnings of (loss from) equity method investment in related party | |
| — | | |
| (148,000 | ) | |
| 111,000 | | |
| 67,000 | |
| Non-operating income (loss) | |
| — | | |
| (148,000 | ) | |
| (924,000 | ) | |
| 67,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Income (loss) before provision for (benefit from) income taxes | |
| 4,273,000 | | |
| 1,440,000 | | |
| 12,321,000 | | |
| (451,000 | ) |
| Provision for (benefit from) income taxes | |
| 1,516,000 | | |
| 473,000 | | |
| 3,621,000 | | |
| (836,000 | ) |
| Net income | |
| 2,757,000 | | |
| 967,000 | | |
| 8,700,000 | | |
| 385,000 | |
| Less net income (loss) attributable to noncontrolling interests | |
| (4,000 | ) | |
| (85,000 | ) | |
| 40,000 | | |
| (405,000 | ) |
| Net income available to common stockholders | |
$ | 2,761,000 | | |
$ | 1,052,000 | | |
$ | 8,660,000 | | |
$ | 790,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net income available to common stockholders per share of common stock | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | 0.07 | | |
$ | 0.03 | | |
$ | 0.24 | | |
$ | 0.02 | |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted average shares outstanding | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 39,678,762 | | |
| 32,403,235 | | |
| 36,224,313 | | |
| 32,419,398 | |
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)
| | |
Common Stock | | |
Treasury Stock | | |
| | |
| | |
| | |
| | |
| |
| | |
Number of
Shares
Issued | | |
$.01 Par
Value | | |
Number of
Shares | | |
Amount | | |
Additional
Paid-In
Capital | | |
Retained
Earnings | | |
Total
Stockholders’
Equity | | |
Noncontrolling
Interests | | |
Total Equity | |
| Balance – January 1, 2022 | |
| 32,403,235 | | |
$ | 324,000 | | |
| — | | |
$ | — | | |
$ | 27,967,000 | | |
$ | 20,972,000 | | |
$ | 49,263,000 | | |
$ | 1,243,000 | | |
$ | 50,506,000 | |
| Issuance and transfers of RISE membership interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,573,000 | | |
| — | | |
| 1,573,000 | | |
| 1,841,000 | | |
| 3,414,000 | |
| Net loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (973,000 | ) | |
| (973,000 | ) | |
| (119,000 | ) | |
| (1,092,000 | ) |
| Balance – March 31, 2022 | |
| 32,403,235 | | |
$ | 324,000 | | |
| — | | |
$ | — | | |
$ | 29,540,000 | | |
$ | 19,999,000 | | |
$ | 49,863,000 | | |
$ | 2,965,000 | | |
$ | 52,828,000 | |
| Net income (loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 711,000 | | |
| 711,000 | | |
| (201,000 | ) | |
| 510,000 | |
| Balance – June 30, 2022 | |
| 32,403,235 | | |
$ | 324,000 | | |
| — | | |
$ | — | | |
$ | 29,540,000 | | |
| 20,710,000 | | |
$ | 50,574,000 | | |
$ | 2,764,000 | | |
$ | 53,338,000 | |
| Termination of agreement with technology partner | |
| — | | |
| — | | |
| 193,906 | | |
| (293,000 | ) | |
| — | | |
| — | | |
| (293,000 | ) | |
| — | | |
| (293,000 | ) |
| Share-based compensation | |
| 138,000 | | |
| 1,000 | | |
| — | | |
| — | | |
| 233,000 | | |
| — | | |
| 234,000 | | |
| — | | |
| 234,000 | |
| Net income (loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,052,000 | | |
| 1,052,000 | | |
| (85,000 | ) | |
| 967,000 | |
| Balance – September 30, 2022 | |
| 32,541,235 | | |
$ | 325,000 | | |
| 193,906 | | |
$ | (293,000 | ) | |
$ | 29,773,000 | | |
$ | 21,762,000 | | |
$ | 51,567,000 | | |
$ | 2,679,000 | | |
$ | 54,246,000 | |
| | |
Common Stock | | |
Treasury Stock | | |
| | |
| | |
| | |
| | |
| |
| | |
Number of
Shares
Issued | | |
$.01 Par
Value | | |
Number of
Shares | | |
Amount | | |
Additional
Paid-In Capital | | |
Retained
Earnings | | |
Total
Stockholders’
Equity | | |
Noncontrolling
Interests | | |
Total Equity | |
| Balance – January 1, 2023 | |
| 32,505,329 | | |
$ | 325,000 | | |
| — | | |
$ | — | | |
$ | 29,642,000 | | |
$ | 18,982,000 | | |
$ | 48,949,000 | | |
$ | 971,000 | | |
$ | 49,920,000 | |
| Net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,196,000 | | |
| 3,196,000 | | |
| 19,000 | | |
| 3,215,000 | |
| Balance – March 31, 2023 | |
| 32,505,329 | | |
$ | 325,000 | | |
| — | | |
$ | — | | |
$ | 29,642,000 | | |
$ | 22,178,000 | | |
$ | 52,145,000 | | |
$ | 990,000 | | |
$ | 53,135,000 | |
| Kakaopay transaction, net of issuance cost | |
| 8,075,607 | | |
| 81,000 | | |
| — | | |
| — | | |
| 15,374,000 | | |
| — | | |
| 15,455,000 | | |
| — | | |
| 15,455,000 | |
| Net income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,703,000 | | |
| 2,703,000 | | |
| 25,000 | | |
| 2,728,000 | |
| Balance – June 30, 2023 | |
| 40,580,936 | | |
$ | 406,000 | | |
| — | | |
$ | — | | |
$ | 45,016,000 | | |
$ | 24,881,000 | | |
$ | 70,303,000 | | |
$ | 1,015,000 | | |
$ | 71,318,000 | |
| Reacquisition of shares outstanding | |
| — | | |
| — | | |
| 1,000,000 | | |
| (2,510,000 | ) | |
| — | | |
| — | | |
| (2,510,000 | ) | |
| — | | |
| (2,510,000 | ) |
| Net income (loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,761,000 | | |
| 2,761,000 | | |
| (4,000 | ) | |
| 2,757,000 | |
| Balance – September 30, 2023 | |
| 40,580,936 | | |
$ | 406,000 | | |
| 1,000,000 | | |
$ | (2,510,000 | ) | |
$ | 45,016,000 | | |
$ | 27,642,000 | | |
$ | 70,554,000 | | |
$ | 1,011,000 | | |
$ | 71,565,000 | |
Numbers
are rounded for presentation purposes. See notes to condensed consolidated financial statements.
SIEBERT
FINANCIAL CORP. & SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | |
Nine Months Ended September 30, | |
| | |
2023 | | |
2022 | |
| Cash Flows From Operating Activities | |
| | |
| |
| Net income | |
$ | 8,700,000 | | |
$ | 385,000 | |
| Adjustments to reconcile net income to net cash (used in) operating activities: | |
| | | |
| | |
| Deferred income tax expense / (benefit) | |
| 893,000 | | |
| (22,000 | ) |
| Depreciation and amortization | |
| 716,000 | | |
| 760,000 | |
| Net lease liabilities | |
| (4,000 | ) | |
| (74,000 | ) |
| Earnings of equity method investment in related party | |
| (111,000 | ) | |
| (67,000 | ) |
| Impairment of investments | |
| 1,035,000 | | |
| — | |
| Share-based compensation | |
| — | | |
| 234,000 | |
| | |
| | | |
| | |
| Changes in | |
| | | |
| | |
| Receivables from customers | |
| (19,704,000 | ) | |
| 19,721,000 | |
| Receivables from non-customers | |
| 70,000 | | |
| 19,000 | |
| Receivables from and deposits with broker-dealers and clearing organizations | |
| 561,000 | | |
| 4,285,000 | |
| Securities borrowed | |
| (68,015,000 | ) | |
| 324,494,000 | |
| Securities owned, at fair value | |
| (15,483,000 | ) | |
| 523,000 | |
| Prepaid expenses and other assets | |
| (190,000 | ) | |
| (823,000 | ) |
| Prepaid service contract | |
| — | | |
| 711,000 | |
| Payables to customers | |
| (51,170,000 | ) | |
| (54,067,000 | ) |
| Payables to non-customers | |
| (10,515,000 | ) | |
| (8,081,000 | ) |
| Drafts payable | |
| (1,368,000 | ) | |
| (496,000 | ) |
| Payables to broker-dealers and clearing organizations | |
| 2,786,000 | | |
| 188,000 | |
| Accounts payable and accrued liabilities | |
| 1,594,000 | | |
| (1,824,000 | ) |
| Securities loaned | |
| 81,215,000 | | |
| (313,034,000 | ) |
| Securities sold, not yet purchased, at fair value | |
| (1,000 | ) | |
| (13,000 | ) |
| Taxes payable | |
| 1,444,000 | | |
| (855,000 | ) |
| Deferred contract incentive | |
| (638,000 | ) | |
| (621,000 | ) |
| Cloud computing implementation | |
| (776,000 | ) | |
| — | |
| Net cash (used in) operating activities | |
| (68,961,000 | ) | |
| (28,657,000 | ) |
| | |
| | | |
| | |
| Cash Flows From Investing Activities | |
| | | |
| | |
| Distribution from equity method investment in related party | |
| — | | |
| 172,000 | |
| Purchase of office facilities and equipment | |
| (241,000 | ) | |
| (165,000 | ) |
| Purchase of software | |
| (246,000 | ) | |
| (379,000 | ) |
| Build out of property | |
| (1,140,000 | ) | |
| (892,000 | ) |
| Net cash (used in) investing activities | |
| (1,627,000 | ) | |
| (1,264,000 | ) |
| | |
| | | |
| | |
| Cash Flows From Financing Activities | |
| | | |
| | |
| Issuance of RISE membership interests | |
| — | | |
| 600,000 | |
| Transfers of RISE membership interests | |
| — | | |
| 240,000 | |
| Kakaopay issuance cost | |
| (1,589,000 | ) | |
| — | |
| Shares issued for Kakaopay transaction | |
| 17,363,000 | | |
| — | |
| Repayments of notes payable – related party | |
| — | | |
| (1,470,000 | ) |
| Repayments of long-term debt | |
| (2,714,000 | ) | |
| (411,000 | ) |
| Net cash provided by (used in) financing activities | |
| 13,060,000 | | |
| (1,041,000 | ) |
| | |
| | | |
| | |
| Net change in cash and cash equivalents, and cash and securities segregated for regulatory purposes | |
| (57,528,000 | ) | |
| (30,962,000 | ) |
| Cash and cash equivalents, and cash and securities segregated for regulatory purposes - beginning of year | |
| 299,838,000 | | |
| 330,584,000 | |
| Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | |
$ | 242,310,000 | | |
$ | 299,622,000 | |
| | |
| | | |
| | |
| Reconciliation of cash, cash equivalents, and cash and securities segregated for regulatory purposes | |
| | | |
| | |
| Cash and cash equivalents - end of period | |
$ | 4,932,000 | | |
$ | 4,489,000 | |
| Cash and securities segregated for regulatory purposes - end of period | |
| 237,378,000 | | |
| 295,133,000 | |
| Cash and cash equivalents, and cash and securities segregated for regulatory purposes - end of period | |
$ | 242,310,000 | | |
$ | 299,622,000 | |
| | |
| | | |
| | |
| Supplemental cash flow information | |
| | | |
| | |
| Cash paid during the period for income taxes | |
$ | 1,284,000 | | |
$ | 42,000 | |
| Cash paid during the period for interest | |
$ | 222,000 | | |
$ | 335,000 | |
| | |
| | | |
| | |
| Non-cash investing and financing activities | |
| | | |
| | |
| Treasury
stock (1) | |
$ | (2,500,000 | ) | |
$ | (293,000 | ) |
| Kakaopay issuance cost (2) | |
$ | 318,000 | | |
$ | — | |
| Transfers of RISE membership interests (3) | |
$ | — | | |
$ | 2,880,000 | |
| Purchase of equity method investment in related party, net of cash paid of $350,000 (1) | |
$ | — | | |
$ | 650,000 | |
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
Siebert Financial Corp., a
New York corporation, incorporated in 1934, is a holding company that conducts the following lines of business through its wholly-owned
and majority-owned subsidiaries:
| ● | 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 technology development. STCH is a Nevada
limited liability company. |
| ● | RISE
Financial Services, LLC (“RISE”) is a Delaware limited liability company and
a broker-dealer registered with the SEC and NFA. |
| ● | StockCross
Digital Solutions, Ltd. (“STXD”) is 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 Miami Beach, FL with primary operations in Florida, New Jersey, and California. The Company has 12 branch offices throughout the U.S.
and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where
investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock, par value $.01 per
share, trades on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates
in the securities brokerage and asset management industry and has no other reportable segments. All of the Company’s revenues for the
three and nine months ended September 30, 2023 and 2022 were derived from its operations in the U.S.
As
of September 30, 2023, 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.
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements (“financial statements”) of the Company have been prepared on the accrual basis
of accounting in conformity 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. The U.S. dollar is the functional currency of the Company and numbers are rounded
for presentation purposes.
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 2022 Form
10-K.
Principles of Consolidation
The
financial statements include the accounts of Siebert and its wholly-owned and majority-owned consolidated subsidiaries. Upon consolidation,
all intercompany balances and transactions are eliminated. For the period of March 31, 2022 to October 18, 2022, the Company determined
that RISE was a variable interest entity (“VIE”) for which the Company was the primary beneficiary. As discussed in more detail
in Note 4 – RISE, as of October 18, 2022, the Company’s ownership in RISE increased to 68% and therefore, the Company continued
to consolidate RISE under the voting interest model (“VOE model”). The Company’s ownership in RISE remained 68% as of
September 30, 2023.
For
consolidated subsidiaries that are not wholly-owned, the third-party holdings of equity interests are referred to as noncontrolling interests.
The net income or loss attributable to noncontrolling interests for such subsidiaries is presented as net income or loss attributable
to noncontrolling interests in the statements of operations. The portion of total equity that is attributable to noncontrolling interests
for such subsidiaries is presented as noncontrolling interests in the statements of financial condition.
For
investments in entities in which the Company does not have a controlling financial interest but has significant influence over its operating
and financial decisions, the Company applies the equity method of accounting with net income and losses recorded in earnings of equity
method investment in related party.
Significant Accounting Policies
The Company’s significant
accounting policies are included in Note 2 – Summary of Significant Accounting Policies in the Company’s 2022 Form 10-K. During
the three and nine months ended September 30, 2023, there were no significant changes made to the Company’s significant accounting
policies.
2. New Accounting Standards
The
Company did not adopt any new accounting standards during the three and nine months ended September 30, 2023. 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 September 30, 2023.
3. Transactions with
Tigress and Hedge Connection
In
2021 and 2022, the Company entered into agreements and subsequent reorganization agreements and termination agreements with Tigress Holdings,
LLC (“Tigress”) and Hedge Connection, LLC (“Hedge Connection”). Refer to Note 3 – Transactions with Tigress
and Hedge Connection in the Company’s 2022 Form 10-K and Note 12 – Equity Method Investment in Related Party in this Report
for more detail on these transactions and information that impacted the periods presented.
On
January 21, 2022, the Company purchased Hedge Connection for $1,000,000, of which $400,000 was noncash consideration and $600,000 was
a note payable. The Company paid off $350,000 of its note payable to Hedge Connection during the nine months
ended September 30, 2022.
On
July 10, 2023, the Company entered into a Share Redemption Agreement with Cynthia DiBartolo, CEO of Tigress, pursuant to which
the Company repurchased from Ms. DiBartolo one million shares of its common stock held by Ms. DiBartolo in exchange for conveying to Ms.
DiBartolo the Company’s 17% interest in Tigress. Refer to Siebert’s Current Report on Form 8-K filed on July 14, 2023, incorporated
herein by reference, and Note 12 – Equity Method Investment in Related Party in this Report
for more detail on these transactions and information that impacted the periods presented.
4. 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 through
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 Siebert employees.
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, Siebert’s
direct ownership percentage in RISE declined from 76% as of December 31, 2021 to approximately 44% as of March 31, 2022. As
of March 31, 2022, Siebert determined that RISE was a VIE and that Siebert was the primary beneficiary, requiring RISE to be consolidated
in accordance with Accounting Standards Codification (“ASC”) Topic 810 – Consolidation.
As a result of transactions
described in Note 3 – Transactions with Tigress and Hedge Connection, Siebert’s ownership in RISE increased to 68%, and therefore
Siebert continued to consolidate RISE from October 18, 2022 through December 31, 2022 under the VOE model. There have been no further
transactions completed by the Company related to RISE’s membership interests for the three and nine months ended September 30, 2023.
As of September 30, 2023,
RISE reported assets of $1.4 million and no liabilities. As of December 31, 2022, RISE reported assets of $1.3 million and liabilities
of $0.1 million. There are no restrictions on RISE’s assets.
5. Kakaopay Transaction
On April 27, 2023, Siebert
entered into a Stock Purchase Agreement with Kakaopay (the “First Tranche Stock Purchase Agreement”), pursuant to which Siebert
agreed to issue to Kakaopay Corporation (“Kakaopay”), a company established under the Laws of the Republic of Korea and a
fintech subsidiary of Korean-based conglomerate Kakao Corp., 8,075,607 shares of Siebert’s common stock (the “First Tranche
Shares” and, such transaction, the “First Tranche”) at a per share price of Two Dollars Fifteen Cents ($2.15), which
represented 19.9% of the outstanding equity securities of Siebert on a fully diluted basis (taking into account the issuance of the First
Tranche Shares). The First Tranche closed on May 18, 2023.
Concurrent
with the execution of the First Tranche Stock Purchase Agreement, Siebert and Kakaopay entered into a second Stock Purchase Agreement
(the “Second Tranche Stock Purchase Agreement” and, together with the First Tranche Stock Purchase Agreement, the “Stock
Purchase Agreements”), pursuant to which Siebert agreed to issue to Kakaopay an additional 25,756,470 shares of Siebert’s
common stock (the “Second Tranche Shares” and, such transaction, the “Second Tranche”) at a per share price of
Two Dollars Thirty Five Cents ($2.35), so that Kakaopay will own 51% of the outstanding equity securities of Siebert on a fully diluted
basis (taking into account the issuance of the First Tranche Shares and the Second Tranche Shares). The
consummation of the Second Tranche is subject to a number of conditions, which have not yet been satisfied as of the date of this
Report. The conditions to Kakaopay’s obligation to close the Second Tranche include, among
others, (i) the affirmative vote of a majority of the outstanding shares of Siebert’s common stock and the affirmative vote of the
holders of a majority of the outstanding shares of Siebert’s common stock not beneficially owned, directly or indirectly, by certain
family members related to Directors John J. Gebbia and Gloria E. Gebbia (“Gebbia Stockholders”), Kakaopay or any of their
respective affiliates, (ii) approval by FINRA, (iii) favorable completion of the review by the Committee on Foreign Investment in the
United States (“CFIUS”), (iv) certain performance conditions relating to order execution and the execution of employment and
consulting agreements for key personnel of Siebert and MSCO, (v) the approvals in connection to the filing of an overseas direct investment
report as required under the Foreign Exchange Transactions Act of the Republic of Korea, and, if applicable in accordance with applicable
law, any antitrust report or filing with the Korea Fair Trade Commission shall have been obtained or provided, (vi) the listing
by Siebert of the Second Tranche Shares on the Nasdaq Capital Market, (vii) the accuracy of certain representations and warranties of
Siebert as of the closing of the Second Tranche, (viii) the absence of any material adverse effect having occurred with respect to Siebert
between April 27, 2023 and the closing of the Second Tranche, and (ix) the performance by Siebert of all covenants, agreements and obligations
required to be performed by it prior to the closing of the Second Tranche. The conditions to Siebert’s
obligation to close the Second Tranche include, among others, (i) the affirmative vote of the holders
of a majority of the outstanding shares of Siebert’s common stock not beneficially
owned, directly or indirectly, by the Gebbia Stockholders, Kakaopay or any of their respective affiliates, (ii) approval by FINRA, (iii)
favorable completion of the review by CFIUS, (iv) the accuracy of certain representations and warranties of Kakaopay as of the closing
of the Second Tranche, (v) the absence of any material adverse effect having occurred with respect to Kakaopay between April 27, 2023
and the closing of the Second Tranche, and (vi) the performance by Kakaopay of all covenants, agreements and obligations required to be
performed by it prior to the closing of the Second Tranche. Refer to the Company’s Current Report on Form 8-K filed on May
3, 2023, incorporated herein by reference, for further detail regarding this transaction.
Since
the closing of the First Tranche, Korean authorities have taken action against Kakaopay, its parent company, Kakao Corp., and their affiliates.
In addition, Kakao Corp., recently announced that it will establish an independent compliance committee for Kakao Corp. and its subsidiaries
to address what it described as the current crisis at Kakao Corp. and its subsidiaries. Siebert believes these events have had a material
adverse effect on both Kakaopay and its ability to perform its obligations under the Second Tranche Stock Purchase Agreement and consummate
the transactions contemplated therein. Accordingly, on November 11, 2023, Siebert delivered a notice to Kakaopay stating that a material
adverse effect had occurred with respect to Kakaopay and that, as a result, Siebert’s conditions to closing will not be satisfied.
The notice also specified that Kakaopay has indicated that it has no intention of satisfying the conditions precedent to Siebert preparing
the proxy statement contemplated by the Second Tranche Stock Purchase Agreement. Siebert is considering its rights and obligations under
the Second Tranche Stock Purchase Agreement, including evaluating whether and under what circumstances the Second Tranche Stock Purchase
Agreement might be terminated, and has reserved all of its rights and remedies, including Siebert’s right to assert that Kakaopay
has materially breached a number of covenants in the Second Tranche Stock Purchase Agreement. On November 12, 2023, Kakaopay delivered
a letter in response to the notice that expressed Kakaopay’s disagreement with the statements in the notice. As a result of the
foregoing, Siebert has incurred and may incur additional legal expenses evaluating these matters, the amount of which is uncertain as
of the date hereof.
As
of December 31, 2022, the Company capitalized deferred issuance costs related to this transaction of $318,000, which was recorded within
the line item “Prepaid expenses and other assets” in the statements of financial condition. At the time of the issuance, the
total deferred issuance cost of $1,907,000 related to this transaction was reclassified as a reduction to “Additional paid-in capital”
in stockholders’ equity in the statements of financial condition. During the nine months ended September 30, 2023, the Company recognized
$1,589,000 of issuance costs related to this transaction.
During
the three and nine months ended September 30, 2023, the Company incurred deferred issuance costs related to the Second Tranche of $58,000,
which was recorded within the line item “Prepaid expenses and other assets” in the statements of financial condition.
On
May 22, 2023, Gloria E. Gebbia issued a warrant to BCW Securities LLC, a Delaware limited liability company (“BCW”), to purchase
403,780 shares of common stock of the Company held by Ms. Gebbia at an exercise price of $2.15 per share. Ms. Gebbia issued the warrant
pursuant to that certain agreement, dated March 27, 2023, by and among Ms. Gebbia, the Company and BCW relating to the investment by Kakaopay
in the Company.
6. 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:
| | |
As of September 30,
2023 | | |
As of December 31,
2022 | |
| Receivables from and deposits with broker-dealers and clearing organizations | |
| | |
| |
| DTCC / OCC / NSCC (1) | |
$ | 7,277,000 | | |
$ | 8,187,000 | |
| Goldman Sachs & Co. LLC (“GSCO”) | |
| 34,000 | | |
| 31,000 | |
| Pershing Capital | |
| — | | |
| 96,000 | |
| National Financial Services, LLC (“NFS”) | |
| 1,988,000 | | |
| 2,006,000 | |
| Securities fail-to-deliver | |
| 469,000 | | |
| 3,000 | |
| Globalshares | |
| 76,000 | | |
| 82,000 | |
| Total Receivables from and deposits with broker-dealers and clearing organizations | |
$ | 9,844,000 | | |
$ | 10,405,000 | |
| Payables to broker-dealers and clearing organizations | |
| | | |
| | |
| Securities fail-to-receive | |
$ | 2,695,000 | | |
$ | 396,000 | |
| Payables to broker-dealers | |
| 751,000 | | |
| 264,000 | |
| Total Payables to broker-dealers and clearing organizations | |
$ | 3,446,000 | | |
$ | 660,000 | |
Under the DTCC shareholders’
agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of September 30, 2023 and December 31, 2022,
MSCO had shares of DTCC common stock valued at approximately $1,236,000 and $1,054,000, respectively, which are included within the line
item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.
In September 2022, MSCO and
RISE entered into a clearing agreement whereby RISE would introduce clients to MSCO. As part of the agreement, RISE deposited a clearing
fund escrow deposit of $50,000 to MSCO, and had excess cash of approximately $1.0 million in its brokerage account at MSCO as of September
30, 2023. The resulting asset of RISE and liability of MSCO is eliminated in consolidation. The Company terminated its clearing relationships
with GSCO and Pershing in 2022.
7. Prepaid Service
Contract
In
April 2020, the Company entered into an agreement with a technology partner whereby the Company paid the technology partner shares of
the Company’s common stock and cash in exchange for services to develop a new client and back-end interface as well as related functionalities
for the Company’s key operations. In February 2022, the Company entered into a Consulting Services Agreement (“CSA”)
with the technology partner, whereby the Company would provide certain consulting services over an 18-month period. In September 2022,
the Company and the technology partner mutually agreed to terminate the services being provided under both the original agreement as well
as the CSA. Refer to Note 6 – Prepaid Service Contract in the Company’s 2022 Form 10-K for further detail. Information related
to these transactions that impacted the periods presented is shown below.
As part of the termination,
in September 2022, the technology partner returned 193,906 shares of the Company’s common stock previously issued and agreed to
pay the Company a total of $950,000. The Company recorded amortization of prepaid
service contract assets of $357,000 and $711,000 for the three and nine months ended September 30, 2022, respectively, which is included
in the line item “Technology and communications” in the statements of operations. The Company recorded consulting fee income
of $867,000 and $1,700,000 for the three and nine months ended September 30, 2022, respectively, which is recorded in “Other income”
in the statements of operations. The Company did not record consulting fee income or amortization of prepaid service contract assets for
the three and nine months ended September 30, 2023.
8. Fair Value Measurements
Overview
ASC 820 defines fair value,
establishes a framework for measuring fair value as well as a hierarchy of fair value inputs. Refer to the below as well as Note 2 –
Summary of Significant Accounting Policies in the Company’s 2022 Form 10-K for further information regarding fair value hierarchy,
valuation techniques and other items related to fair value measurements.
Financial Assets and
Liabilities Measured at Fair Value on a Recurring Basis
The
tables below present, by level within the fair value hierarchy, financial assets and liabilities, measured at fair value on a recurring
basis for the periods indicated. As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety
based on the lowest level of input that is significant to the respective fair value measurement.
| | |
As of September 30, 2023 | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Assets | |
| | |
| | |
| | |
| |
| Cash and securities segregated for regulatory purposes | |
| | |
| | |
| | |
| |
| U.S. government securities | |
$ | 118,101,000 | | |
$ | — | | |
$ | — | | |
$ | 118,101,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Securities owned, at fair value | |
| | | |
| | | |
| | | |
| | |
| U.S. government securities | |
$ | 17,875,000 | | |
$ | — | | |
$ | — | | |
$ | 17,875,000 | |
| Certificates of deposit | |
| — | | |
| 113,000 | | |
| — | | |
| 113,000 | |
| Municipal securities | |
| — | | |
| 319,000 | | |
| — | | |
| 319,000 | |
| Corporate bonds | |
| — | | |
| 131,000 | | |
| — | | |
| 131,000 | |
| Equity securities | |
| 117,000 | | |
| 132,000 | | |
| — | | |
| 249,000 | |
| Total Securities owned, at fair value | |
$ | 17,992,000 | | |
$ | 695,000 | | |
$ | — | | |
$ | 18,687,000 | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Securities sold, not yet purchased, at fair value | |
| | | |
| | | |
| | | |
| | |
| Equity securities | |
$ | 1,000 | | |
$ | — | | |
$ | — | | |
$ | 1,000 | |
| Total Securities sold, not yet purchased, at fair value | |
$ | 1,000 | | |
$ | — | | |
$ | — | | |
$ | 1,000 | |
| | |
As of December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| Assets | |
| | |
| | |
| | |
| |
| Cash and securities segregated for regulatory purposes | |
| | |
| | |
| | |
| |
| U.S. government securities | |
$ | 140,978,000 | | |
$ | — | | |
$ | — | | |
$ | 140,978,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Securities owned, at fair value | |
| | | |
| | | |
| | | |
| | |
| U.S. government securities | |
$ | 2,808,000 | | |
$ | — | | |
$ | — | | |
$ | 2,808,000 | |
| Certificates of deposit | |
| — | | |
| 92,000 | | |
| — | | |
| 92,000 | |
| Municipal securities | |
| — | | |
| 52,000 | | |
| — | | |
| 52,000 | |
| Corporate bonds | |
| — | | |
| 7,000 | | |
| — | | |
| 7,000 | |
| Equity securities | |
| 63,000 | | |
| 182,000 | | |
| — | | |
| 245,000 | |
| Total Securities owned, at fair value | |
$ | 2,871,000 | | |
$ | 333,000 | | |
$ | — | | |
$ | 3,204,000 | |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Securities sold, not yet purchased, at fair value | |
| | | |
| | | |
| | | |
| | |
| Equity securities | |
$ | 2,000 | | |
$ | — | | |
$ | — | | |
$ | 2,000 | |
| Total Securities sold, not yet purchased, at fair value | |
$ | 2,000 | | |
$ | — | | |
$ | — | | |
$ | 2,000 | |
The
Company had U.S. government securities with the below market values and maturity dates for the periods indicated:
| | |
As of September 30,
2023 | |
| Market value of U.S. government securities portfolio | |
| |
| Maturing in 2023 | |
$ | 67,245,000 | |
| Maturing in 2024 | |
| 64,505,000 | |
| Maturing in 2025 | |
| 3,918,000 | |
| Accrued interest | |
| 308,000 | |
| Total Market value of U.S. government securities portfolio | |
$ | 135,976,000 | |
| | |
| | |
| | |
| As of December 31,
2022 | |
| Market value of U.S. government securities portfolio | |
| | |
| Maturing in 2023 | |
$ | 106,873,000 | |
| Maturing in 2024 | |
| 36,506,000 | |
| Accrued interest | |
| 408,000 | |
| Total Market value of U.S. government securities portfolio | |
$ | 143,787,000 | |
Financial Assets Measured
at Fair Value on a Non-Recurring Basis
The
following table represents information for assets measured at fair value on a nonrecurring basis and displays the carrying value after
measurement as of the periods indicated. The fair value measurement is nonrecurring as these assets are measured at fair value only when
there is a triggering event (e.g., an evidence of impairment). Assets included in the table are those that were impaired during the respective
reporting periods and that are still held as of the reporting date. The estimated fair values for these amounts were determined using
significant unobservable inputs (Level 3).
| | |
As of September 30,
2023 | | |
As of
December 31,
2022 | |
| Equity method investment in related party | |
$ | — | | |
$ | 2,584,000 | |
As a result of the 2022 transaction
discussed in Note 3 – Transactions with Tigress and Hedge Connection, the Company recognized an impairment charge for its investment
in Tigress of approximately $4,015,000 for the year ended December 31, 2022. The fair value of the Company’s investment in Tigress
was determined using the income and market approach. For the income approach, the Company utilized estimated discounted future cash flow
expected to be generated by Tigress. For the market approach, the Company utilized market multiples of revenue and earnings derived from
comparable publicly-traded companies.
As a result of the 2023 transaction
discussed in Note 3 – Transactions with Tigress and Hedge Connection, the Company recognized an impairment charge for its investment
in Tigress of approximately $185,000 during the nine months ended September 30, 2023, which is included in “Impairment of investments”
in the statements of operations. The fair value of the Company’s investment in Tigress was determined using observed current market
prices of Tigress’ membership interests that were below the Company’s carrying value of its equity investment in Tigress.
Following the 2023 transaction discussed in Note 3 – Transactions with Tigress and Hedge Connection, the Company had no remaining
interest in Tigress.
Financial Assets and
Liabilities Not Carried at Fair Value
The following represents financial
instruments in which the ending balances as of September 30, 2023 and December 31, 2022 are not carried at fair value in the statements
of financial condition:
Short-term
financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents as well as cash
and securities segregated for regulatory purposes, are recorded at amounts that approximate the fair value of these instruments. These
financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities
and carry interest rates that approximate market rates. The Company had no cash equivalents for regulatory purposes as of September 30,
2023 and December 31, 2022. 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.
Receivables
and other assets: Receivables from customers, receivables from non-customers, receivables from and deposits with broker-dealers and clearing
organizations, other receivables, and prepaid expenses and other assets are recorded at amounts that approximate fair value and are classified
as level 2 under the fair value hierarchy. The Company may hold cash equivalents related to rent deposits in prepaid expenses and other
assets that are categorized as level 2 under the fair value hierarchy.
Securities
borrowed and securities loaned: Securities borrowed and securities loaned are recorded at amounts which approximate fair value and are
primarily classified as level 2 under the fair value hierarchy. The Company’s securities borrowed and securities loaned balances
represent amounts of equity securities borrow and loan contracts and are marked-to-market daily in accordance with standard industry practices
which approximate fair value.
Investments,
cost: The Company’s non-marketable equity securities are investments in privately held companies without readily determinable market
values due to the absence of quoted market prices, the inherent lack of liquidity and the fact that inputs used to measure fair value
are unobservable and require management’s judgment. As there is no readily determinable fair value, the carrying amount of these
investments minus impairment approximates the fair value. The cost will be adjusted upwards or downwards in accordance with observable
market transactions. Under the fair value hierarchy, investments, cost is classified as level 3.
Payables:
Payables to customers, payables to non-customers, drafts payable, payables to broker-dealers and clearing organizations, accounts payable
and accrued liabilities, and taxes payable are recorded at amounts that approximate fair value due to their short-term nature and are
classified as level 2 under the fair value hierarchy.
Deferred
contract incentive: The carrying amount of the deferred contract incentive approximates fair value due to the relative short-term
nature of the liability. Under the fair value hierarchy, the deferred contract incentive is classified as level 2.
Long-term
debt: The carrying amount of the mortgage with East West Bank approximates fair value as it reflects terms that approximate current market
terms for similar arrangements. Under the fair value hierarchy, the mortgage is classified as level 2.
9. Property, Office Facilities, and Equipment,
Net
Property, office facilities,
and equipment consisted of the following as of the periods indicated:
| | |
As of September 30,
2023 | | |
As of December 31,
2022 | |
| Property | |
$ | 6,815,000 | | |
$ | 6,815,000 | |
| Office facilities | |
| 3,806,000 | | |
| 2,616,000 | |
| Equipment | |
| 864,000 | | |
| 674,000 | |
| Total Property, office facilities, and equipment | |
| 11,485,000 | | |
| 10,105,000 | |
| Less accumulated depreciation | |
| (2,180,000 | ) | |
| (1,777,000 | ) |
| Total Property, office facilities, and equipment, net | |
$ | 9,305,000 | | |
$ | 8,328,000 | |
Total depreciation expense
for property, office facilities, and equipment was $168,000 and $102,000 for the three months ended September 30, 2023 and 2022, respectively.
Total depreciation expense for property, office facilities, and equipment was $403,000 and $298,000 for the nine months ended September
30, 2023 and 2022, respectively.
Miami Office Building
On
December 30, 2021, the Company purchased 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 and serves as the headquarters of the Company.
Depreciation
expense commenced in April 2023 when the Miami office building was completed and placed in service. The Company invested $299,000 and
$296,000 in the three months ended September 30, 2023 and 2022, respectively, to build out the Miami office building. The Company invested
$1,140,000 and $892,000 in the nine months ended September 30, 2023 and 2022 respectively, to build out the Miami office building.
10. Software, Net
Software consisted of the
following as of the periods indicated:
| | |
As of September 30,
2023 | | |
As of December 31,
2022 | |
| Robo-advisor | |
$ | 763,000 | | |
$ | 763,000 | |
| Other software | |
| 4,365,000 | | |
| 3,342,000 | |
| Total Software | |
| 5,128,000 | | |
| 4,105,000 | |
| Less accumulated amortization – robo-advisor | |
| (763,000 | ) | |
| (763,000 | ) |
| Less accumulated amortization – other software | |
| (2,664,000 | ) | |
| (2,351,000 | ) |
| Total Software, net | |
$ | 1,701,000 | | |
$ | 991,000 | |
In the fourth quarter of 2022,
the Company partnered with a technology partner to develop a new retail trading platform for the Company’s customers and integrate
this platform into the Company’s operations. The total capitalized software development work related to this project was $1,133,000
as of September 30, 2023, of which $219,000 and $776,000 was capitalized during the three and nine months ended September 30, 2023, respectively.
Total amortization of software
was $98,000 and $138,000 for the three months ended September 30, 2023 and 2022, respectively. Total amortization of software was $312,000
and $461,000 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, the Company estimates future
amortization of software assets of $176,000, $684,000, $537,000, and $304,000 in the years ended December 31, 2023, 2024, 2025, and 2026,
respectively.
11. Leases
As
of September 30, 2023, all of the Company’s leases are classified as operating and primarily consist of office space leases expiring
in 2023 through 2028. 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. 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 balance of the lease right-of-use assets and lease liabilities are displayed
on the statements of financial condition and the below tables display further detail on the Company’s leases.
On
July 7, 2023, the Company entered into a new lease agreement expiring in December 2028 for office space in the World Financial Center
in New York City. This office will replace the New Jersey office as one of the Company’s key operating centers and the total commitment
of the lease is approximately $2.1 million. The estimated build out cost for this office space is approximately $500,000.
| Lease Term and Discount Rate | |
As of September 30,
2023 | | |
As of December 31,
2022 | |
| Weighted average remaining lease term – operating leases (in years) | |
| 3.9 | | |
| 2.7 | |
| Weighted average discount rate – operating leases | |
| 6.7 | % | |
| 5.0 | % |
| | |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| Operating lease cost | |
$ | 356,000 | | |
$ | 283,000 | | |
$ | 965,000 | | |
$ | 1,008,000 | |
| Short-term lease cost | |
| 67,000 | | |
| 151,000 | | |
| 346,000 | | |
| 228,000 | |
| Variable lease cost | |
| 44,000 | | |
| 128,000 | | |
| 125,000 | | |
| 255,000 | |
| Total Rent and occupancy | |
$ | 467,000 | | |
$ | 562,000 | | |
$ | 1,436,000 | | |
$ | 1,491,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Cash paid for amounts included in the measurement of lease liabilities | |
| | | |
| | | |
| | | |
| | |
| Operating cash flows from operating leases | |
$ | 315,000 | | |
$ | 299,000 | | |
$ | 969,000 | | |
$ | 1,074,000 | |
| | |
| | | |
| | | |
| | | |
| | |
| Lease right-of-use assets obtained in exchange for new lease liabilities | |
| | | |
| | | |
| | | |
| | |
| Operating leases | |
$ | 1,693,000 | | |
$ | 152,000 | | |
$ | 1,693,000 | | |
$ | 754,000 | |
Lease Commitments
Future annual minimum payments
for operating leases with initial terms of greater than one year as of September 30, 2023 were as follows:
| Year | |
Amount | |
| 2023 | |
$ | 287,000 | |
| 2024 | |
| 938,000 | |
| 2025 | |
| 861,000 | |
| 2026 | |
| 694,000 | |
| 2027 | |
| 520,000 | |
| 2028 | |
| 443,000 | |
| Remaining balance of lease payments | |
| 3,743,000 | |
| Less: difference between undiscounted cash flows and discounted cash flows | |
| 521,000 | |
| Lease liabilities | |
$ | 3,222,000 | |
12. Equity Method Investment in Related Party
Transaction with Tigress
On
November 16, 2021, the Company entered into an agreement with Tigress and a subsequent reorganization agreement with Tigress on October
18, 2022. Refer to Note 3 – Transactions with Tigress and Hedge Connection in the Company’s 2022 Form 10-K for further detail.
As
a result of the reorganization agreement with Tigress on October 18, 2022, the Company’s ownership interest of Tigress decreased
from 24% to 17%. Based on the level of the Company’s ownership of Tigress, the Company concluded that it was still able to
exercise significant influence over Tigress following the reorganization agreement. Therefore, the Company continued to account for this
investment under the equity method of accounting through the Company’s sale of its interest in Tigress on July 10, 2023.
On
July 10, 2023, the Company entered into a Share Redemption Agreement with Cynthia DiBartolo, pursuant to the Share Redemption Agreement,
the Company repurchased from Ms. DiBartolo one million (1,000,000) of its common stock held by Ms. DiBartolo in exchange for conveying
to Ms. DiBartolo the Company’s 17% interest in Tigress. The Company has accounted for the Share Redemption Agreement as a sale
of a financial asset in accordance with ASC 860. As the one million shares of Company common stock that the Company received from Ms.
DiBartolo had a fair value equal to the fair value of the Company’s 17% interest in Tigress sold to Ms. DiBartolo, no gain or loss
was recognized as a result of the transaction. Following the transaction, the Company had no remaining interest in Tigress.
For
the three months ended September 30, 2023 and 2022, the loss recognized from the Company’s investment in Tigress was $0
and $148,000, respectively. For the nine months ended September 30, 2023 and 2022, the earnings recognized from the Company’s
investment in Tigress were $111,000 and $67,000, respectively. The Company received cash distributions from Tigress of $0 and $172,000
during the three and nine months ended September 30, 2022, respectively.
As
of September 30, 2023 and December 31, 2022, the carrying amount of the Company’s investment in Tigress was $0 and $2,584,000, respectively.
Below
is a table showing the summary of the consolidated statements of operations and financial condition for Tigress based on the most recent
financials prior to the transaction on July 10, 2023 (unaudited):
| | |
Six Months Ended June 30, | |
| | |
2023 | | |
2022 | |
| Revenue | |
$ | 4,025,000 | | |
$ | 5,732,000 | |
| Operating income | |
$ | 650,000 | | |
$ | 823,000 | |
| Net income | |
$ | 650,000 | | |
$ | 823,000 | |
| | |
As of | |
| | |
June 30,
2023 | | |
December 31, 2022 | |
| Assets | |
$ | 8,795,000 | | |
$ | 8,169,000 | |
| Liabilities | |
$ | 5,821,000 | | |
$ | 5,301,000 | |
| Stockholders’ Equity | |
$ | 2,974,000 | | |
$ | 2,868,000 | |
13. Investments, Cost
As of both September 30, 2023
and December 31, 2022, the Company maintained a 2% ownership interest in a retail platform (“Retail Platform”).
In
June 2023, in view of the Retail Platform’s business performance and near-term business outlook that were below the Company’s
previous expectations, as well as observed market transactions of the Retail Platform’s equity that were below the carrying value
of the Company’s investment of the Retail Platform, the Company determined that an other than temporary impairment existed. For
the three months ended September 30, 2023, the Company did not recognize an impairment charge for its investment in the Retail Platform.
For the nine months ended September 30, 2023, the Company recognized an impairment charge
for its investment in the Retail Platform of $850,000. The impairment loss was included in “Impairment of investments” in
the statements of operations for the nine months ended September 30, 2023.
14. Goodwill
As of both September 30, 2023
and December 31, 2022, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition
of RISE. As of September 30, 2023, 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 during the three and nine months ended September 30, 2023 and 2022.
Additionally, the Company determined there was not a material risk for future possible impairments to goodwill as of the date of the assessment.
15. Long-Term Debt
Mortgage with East
West Bank
Overview
On
December 30, 2021, the Company purchased 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 as well as $338,000 to finance part of the build out 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 September 30, 2023, the Company was in compliance
with all of its covenants related to this agreement.
Remaining Payments
Future
remaining annual minimum principal payments for the mortgage with East West Bank as of September 30, 2023 were as follows:
| | |
Amount | |
| 2023 | |
$ | 22,000 | |
| 2024 | |
| 84,000 | |
| 2025 | |
| 88,000 | |
| 2026 | |
| 91,000 | |
| Thereafter | |
| 4,048,000 | |
| Total | |
$ | 4,333,000 | |
The
interest expense related to this mortgage was $40,000 and $39,000 for the three months ended September 30,
2023, and 2022, respectively. The interest expense related to this mortgage was $119,000 and $104,000 for the nine months ended September
30, 2023, and 2022, respectively. As of September 30, 2023, the interest rate for this mortgage
was 3.6%.
Loan with East West Bank
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 borrowed $5.0 million and paid off the full remaining balance of the loan of approximately $2.7 million in the second quarter
of 2023. Refer to Note 13 – Long-Term Debt in the Company’s 2022 Form 10-K for more information.
16. Deferred Contract Incentive
Effective
August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extended the term of the 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 was recorded in 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. The Company recognized
$213,000 and $196,000 in contra expense for the three months ended September 30, 2023 and
2022, respectively. The Company recognized $637,000 and $621,000 in contra expense for the nine months ended September 30,
2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022, the balance of the deferred contract incentive was $1.4 million
and $2.0 million, respectively.
17. Revenue Recognition
Refer to Note 2 – Summary
of Significant Accounting Policies in Company’s 2022 Form 10-K for detail on the Company’s primary sources of revenue and
the corresponding accounting treatment. Information related to items that impact certain revenue streams within the periods presented
is shown below.
Principal Transactions and Proprietary Trading
In 2022, the Company invested
in treasury bill and treasury notes, which are primarily in the line item “Cash and securities segregated for regulatory purposes”
on the statements of financial condition, in order to enhance its yield on its excess 15c3-3 deposits. During 2022, there was an
increase in U.S. government securities yields, which created an unrealized loss on the Company’s U.S. government securities
portfolio. The Company continuously invests in treasury bills and treasury notes as part of its normal operations to meet deposit requirements.
The aggregate unrealized loss on the portfolio of approximately $1.3 million as of September 30, 2023 will be returned over the duration
of the government securities, at a point no later than the maturity of the securities. Refer to Note 8 – Fair Value Measurements
for additional detail.
The
following table represents detail related to principal transactions and proprietary trading.
| | |
Three Months Ended September 30, | |
| | |
2023 | | |
2022 | | |
Increase (Decrease) | |
| Principal transactions and proprietary trading | |
| | |
| | |
| |
| Realized and unrealized gain on primarily riskless principal transactions | |
$ | 2,657,000 | | |
$ | 2,340,000 | | |
$ | 317,000 | |
| Unrealized gain (loss) on portfolio of U.S. government securities | |
| 1,096,000 | | |
| (1,387,000 | ) | |
| 2,483,000 | |
| Total Principal transactions and proprietary trading | |
$ | 3,753,000 | | |
$ | 953,000 | | |
$ | 2,800,000 | |
| | |
| Nine Months Ended September 30, | |
| | |
| 2023 | | |
| 2022 | | |
| Increase (Decrease) | |
| Principal transactions and proprietary trading | |
| | | |
| | | |
| | |
| Realized and unrealized gain on primarily riskless principal transactions | |
$ | 6,642,000 | | |
$ | 5,956,000 | | |
$ | 686,000 | |
| Unrealized gain (loss) on portfolio of U.S. government securities | |
| 2,565,000 | | |
| (4,189,000 | ) | |
| 6,754,000 | |
| Total Principal transactions and proprietary trading | |
$ | 9,207,000 | | |
$ | 1,767,000 | | |
$ | 7,440,000 | |
Stock Borrow / Stock
Loan
For
the three and nine months ended September 30, 2023, stock borrow / stock loan revenue was $4,008,000 ($13,000,000 gross revenue less $8,992,000
expenses) and $11,963,000 ($34,300,000 gross revenue less $22,337,000 expenses), respectively. For the three and nine months ended September
30, 2022, stock borrow / stock loan revenue was $4,183,000 ($9,921,000 gross revenue minus $5,738,000 expenses) and $11,909,000 ($26,222,000
gross revenue less $14,313,000 expenses), respectively.
18. 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 September 30, 2023, the Company has concluded
that its deferred tax assets are realizable on a more-likely-than-not basis with the with the exception of investments that are expected
to generate a capital loss when realized and certain state net operating losses.
For
the three months ended September 30, 2023, the Company recorded an income tax provision of $1,516,000 on pre-tax book income of $4,273,000.
For the nine months ended September 30, 2023, the Company recorded an income tax provision of $3,621,000 on pre-tax book income of $12,321,000.
The effective tax rate for the three and nine months ended September 30, 2023 was 35% and 29% respectively. The effective tax rate differs
from the federal statutory rate of 21% primarily related to certain permanent tax differences and state and local taxes including the
impact of finalizing the prior year tax filings.
For
the three months ended September 30, 2022, the Company recorded an income tax provision of $473,000 on pre-tax book income of $1,440,000.
For the nine months ended September 30, 2022, the Company recorded an income tax benefit of $836,000 on pre-tax book loss of $451,000.
The effective tax rate for the three and nine months ended September 30, 2022 was 33% and 185%, respectively. The effective tax rate differs
from the federal statutory rate of 21% primarily related to the benefit from the reversal of the uncertain tax position related to the
2018 amended tax return due to the expiration of the statute of limitations and certain permanent tax differences and state and local
taxes.
As of both September 30, 2023
and December 31, 2022, the Company recorded an uncertain tax position of $1,596,000 related to various tax matters, which is included
in the line item “Taxes payable” in the statements of financial condition.
19. 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 September 30,
2023, MSCO’s net capital was $54.1 million, which was approximately $52.3 million in excess of its required net capital of $1.8
million, and its percentage of aggregate debit balances to net capital was 60.50%.
As of December 31, 2022, MSCO’s
net capital was $30.6 million, which was approximately $29.2 million in excess of its required net capital of $1.4 million, and its percentage
of aggregate debit balances to net capital was 44.49%.
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
September 30, 2023, MSCO had cash and securities deposits of $236.2 million (cash of $118.1 million, securities with a fair value of $118.1
million) in the special reserve accounts which was $26.1 million in excess of the deposit requirement of $210.1 million. After adjustments
for deposit(s) and / or withdrawal(s) made on October 2, 2023, MSCO had $2.0 million in excess of the deposit requirement.
As
of December 31, 2022, MSCO had cash and securities deposits of $276.2 million (cash of $135.2 million, securities with a fair
value of $141.0 million) in the special reserve accounts which was $11.9 million in excess of the deposit requirement of $264.3 million.
The Company made no subsequent deposits or withdrawals on January 3, 2023.
As
of September 30, 2023, the Company was 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.
As of September 30, 2023, the Company had $1.2 million in the special reserve account which
was approximately $0.2 million in excess of the deposit requirement of approximately $1.0 million. The Company made no subsequent deposits
or withdrawals on October 2, 2023. As of December 31, 2022, the Company did not hold any proprietary accounts of introducing broker-dealers.
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 September 30, 2023, RISE’s
regulatory net capital was approximately $1.2 million which was $1.0 million in excess of its minimum requirement of $250,000 under 15c3-1.
As of December 31, 2022, RISE’s regulatory net capital was approximately $1.2 million which was $0.9 million in excess of its minimum
requirement of $250,000 under 15c3-1.
20. 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 2022 Form 10-K for further information.
As
of September 30, 2023, the Company had margin loans extended to its customers of approximately $359.3 million, of which $71.8 million
is within the line item “Receivables from customers” on the statements of financial condition. As of December 31, 2022, the
Company had margin loans extended to its customers of approximately $365.4 million, of which $52.1 million is in the line item “Receivables
from customers” on the statements of financial condition. There were no material losses for unsettled customer transactions for
the three and nine months ended September 30, 2023 and 2022.
21. 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. As of September 30, 2023, all 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 September 30, 2023 and December 31, 2022, MSCO had an available line of credit for short term overnight demand borrowing with
BMO Harris Bank (“BMO Harris”) of up to $25 million. As of those dates, MSCO had no outstanding loan balance and there were
no commitment fees or other restrictions on this line of credit. On May 23, 2022, MSCO increased its principal amount for this line of
credit from $15 million to $25 million.
At the Market Offering
On
May 27, 2022, the Company entered into a Capital on DemandTM Sales Agreement (the “Sales Agreement”) with JonesTrading
as agent, pursuant to which the Company may offer and sell, from time to time through JonesTrading, shares of the Company’s common
stock having an aggregate offering amount of up to $9.6 million under the Company’s shelf registration statement on Form S-3. The
Company is not obligated to make any sales of shares under the Sales Agreement. The Company agreed to pay JonesTrading a commission rate
equal to 3.0% of the aggregate gross proceeds from each sale of shares. The Company or JonesTrading may suspend or terminate the offering
upon notice to the other party and subject to other conditions. Whether the Company sells securities under the Sales Agreement will depend
on a number of factors, including the market conditions at that time, the Company’s cash position at that time and the availability
and terms of alternative sources of capital. For the three and nine months ended September 30, 2023 and 2022, the Company did not sell
any shares pursuant to this Sales Agreement.
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 the 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:
| Date of Termination | |
Early Termination Fee | |
| Prior to August 1, 2024 | |
$ | 4,500,000 | |
| Prior to August 1, 2025 | |
$ | 3,250,000 | |
For the three and nine months
ended September 30, 2023 and 2022, 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 early termination fees and has not recorded any contingent liability in the
financial statements related to this arrangement.
Technology Vendor
On
March 31, 2023, the Company entered into an agreement with a technology vendor for certain development projects. As of September 30,
2023, the total budget for this project was approximately $1.1 million over a term of 2 years. For the three and nine months ended September
30, 2023, we incurred $214,000 in expenses related to this project.
General Contingencies
The
Company’s general contingencies are included in Note 22 – Commitments, Contingencies, and Other in the Company’s 2022
Form 10-K. Other than the below, there have been no material updates to the Company’s general contingencies during the three and
nine months ended September 30, 2023.
The
Company, through its affiliate, Kennedy Cabot Acquisition, LLC (“KCA”), is self-insured with respect to employee health claims.
As part of this plan, the Company recognized expenses of $336,000 and $234,000 for the three months ended September 30, 2023 and 2022,
respectively. The Company recognized expenses as part of this plan of $782,000 and $1,139,000 for the nine months ended September 30,
2023 and 2022, respectively.
The
Company had an accrual of $76,000 as of September 30, 2023, which represents the estimate of future expense 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.
As
a result of the transaction and recent developments with Kakaopay, the Company has incurred and may incur additional legal expenses evaluating
these matters, the amount of which is uncertain as of the date hereof. Refer to Note 5 – Kakaopay Transaction for further detail.
22. 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. For 401(k) employee contribution matching, the Company incurred $26,000 and $135,000 of expense for the three and nine months
ended September 30, 2023, respectively. The Company did not incur any expense for 401(k) employee contribution matching in 2022.
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 were 3 million
shares reserved under the equity incentive plan and 2,704,000 shares remained as of September 30, 2023. For the three and nine months
ended September 30, 2022, the Company granted 138,000 restricted units that were fully vested upon grant date. The restricted
units had a grant date fair value of $1.70 per share and compensation expense of $235,000 was recognized and is included in
the line item “Employee compensation and benefits” in the statements of operations both for the three and nine months ended
September 30, 2022. The Company did not issue any shares under this plan for the three and nine months ended September 30, 2023.
23. 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 the first quarter of 2023, KCA entered into an agreement with the Company for payroll processing services.
The Company incurred $10,000 and $40,000 of expenses related to these services for the three and nine months ended September 30, 2023,
respectively.
KCA
owns a license from the Muriel Siebert Estate / Foundation to use the names “Muriel Siebert & Co., Inc.” and “Siebert”
within business activities, which expires in 2025. For the use of these names, KCA passed through to the Company $15,000 and $45,000 for
the three and nine months ended September 30, 2023, respectively. There were no costs passed through to the Company for the use of these
names in 2022.
Other than the above arrangements,
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 for the three and nine months ended September 30, 2023 and 2022. As of September 30, 2023 and December 31, 2022, the Company
had a payable to KCA for miscellaneous expenses of $11,000 and $4,000, respectively, which are in the line item “Accounts payable
and accrued liabilities” on the statements of financial condition.
PW
PW
brokers the insurance policies for related parties. Revenue for PW from related parties was $8,000 and $7,000 for the three months ended
September 30, 2023 and 2022, respectively. Revenue for PW from related parties was $99,000 and $102,000 for the nine months ended September
30, 2023 and 2022, respectively.
Gloria E. Gebbia,
John J. Gebbia, and Gebbia Family Members
On
March 31, 2022, Gloria E. Gebbia, a director of the Company, exchanged approximately $2.9 million of the Company’s notes payable
to Gloria E. Gebbia for 24% of the outstanding and issued membership interests in RISE.
The
Company has entered into various notes payable with Gloria E. Gebbia. The Company paid off this notes payable in 2022 and as such,
the Company had no interest expense related to these notes payable in 2023. The Company had interest expense related to these notes payable
of $30,000 and $131,000 for the three and nine months ended September 30, 2022, respectively.
Gloria
E. Gebbia had 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 $748,000 and $820,000 for the three months ended September 30, 2023 and 2022, respectively. The compensation for the sons
of Gloria E. Gebbia and John J. Gebbia was in aggregate $1,878,000 and $1,894,000 for the nine months ended September 30, 2023 and 2022,
respectively. Part of their compensation includes performance-based payments related to key revenue streams.
On
May 22, 2023, Gloria E. Gebbia issued a warrant to BCW Securities LLC, a Delaware limited liability company, to purchase 403,780 shares
of common stock of the Company held by Gloria E. Gebbia at an exercise price of $2.15 per share.
On
May 24, 2023, the Board of Directors of the Company appointed John J. Gebbia as Chairman of the Board and Chief Executive Officer.
The
Company compensated Gloria E. Gebbia and John J. Gebbia $90,000 each for the nine months ended September 30, 2023 for board of director
fees.
On July
1, 2023, Gloria E. Gebbia and John J. Gebbia entered into a consulting agreement with the Company for services. The compensation for the
consulting agreement for Gloria E. Gebbia was $30,000 for both the three and nine months ended September 30, 2023. The compensation for
the consulting agreement for John J. Gebbia was $125,000 for both the three and nine months ended September 30, 2023.
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 September 30, 2023 and 2022, rent expense was $15,000 for this branch
office. For both the nine months ended September 30, 2023 and 2022, rent expense was $45,000 for this branch office.
RISE
During the year ended December
31, 2022, RISE issued and Siebert sold membership interests of RISE to Siebert employees, directors and affiliates, refer to Note 4 –
RISE for further detail. RISE entered into a clearing arrangement with MSCO and deposited a clearing fund escrow deposit of $50,000 to
MSCO and had excess cash of approximately $1.0 million in its brokerage account at MSCO as of September 30, 2023.
Kakaopay and Affiliates
On
April 27, 2023, the Company entered into the First Tranche Stock Purchase Agreement, pursuant to which the Company agreed to issue to
Kakaopay the First Tranche Shares at a per share price of Two Dollars Fifteen Cents ($2.15). Refer to Note 5 – Kakaopay Transaction
for further details on the transaction. MSCO entered into an agreement whereby it would provide an omnibus trading account for Kakaopay’s
subsidiary, Kakao Pay Securities Corp., and provide trade execution services to Kakao Pay Securities Corp, subject to compliance with
applicable U.S. laws, rules and regulations.
24. Subsequent Events
The Company has evaluated
events that have occurred subsequent to September 30, 2023 and through November 14, 2023, the date of the filing of this Report.
On October 20, 2023, the Company relocated its headquarters to 653 Collins
Avenue, Miami Beach, FL 33139.
Since
the closing of the First Tranche with Kakaopay, there have been numerous developments related to Kakaopay and the transaction with Siebert.
Refer to Note 5 – Kakaopay Transaction for further detail.
Based on the Company’s
assessment, other than the events described above, 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 September 30, 2023.
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. 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 our 2022 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 business lines such as
retail brokerage, investment advisory, insurance, and technology development 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.
Transaction with
Kakaopay
On
April 27, 2023, Siebert entered into the First Tranche Stock Purchase Agreement, pursuant to which Siebert agreed to issue to Kakaopay
the First Tranche Shares at a per share price of Two Dollars Fifteen Cents ($2.15), which represented 19.9% of the outstanding equity
securities of Siebert on a fully diluted basis (taking into account the issuance of the First Tranche Shares). The First Tranche Stock
Purchase Agreement closed on May 18, 2023.
Concurrent
with the execution of the First Tranche Stock Purchase Agreement, Siebert and Kakaopay entered into the Second Tranche Stock Purchase
Agreement, pursuant to which Siebert agreed to issue to Kakaopay the Second Tranche Shares at a per share price of Two Dollars Thirty
Five Cents ($2.35), so that Kakaopay will own 51% of the outstanding equity securities of Siebert on a fully diluted basis (taking into
account the issuance of the First Tranche Shares and the Second Tranche Shares). The consummation of the Second Tranche is subject to
a number of conditions, which have not yet been satisfied as of the date of this Report. Refer to Note 5 – Kakaopay Transaction
for further detail regarding these conditions.
Concurrent
with the consummation of the First Tranche, Siebert, Kakaopay, and the Gebbia Stockholders entered into a Stockholders’ Agreement
(the “Stockholders’ Agreement”) whereby the parties agreed that Siebert’s Board of Directors would consist of
seven directors. The parties agreed that following the consummation of the First Tranche, one of the seven directors would be designated
by Kakaopay, and six (the “Gebbia Directors”) would be nominated by the Gebbia Stockholders, of whom three shall be independent
directors.
Pursuant
to the Stockholders’ Agreement, on May 24, 2023, the Board of Directors appointed Shin Ho-cheol, also known as Simon Shin, to the
Board of Directors. The Board of Directors at that time also appointed John J. Gebbia as Chairman of the Board and Chief Executive Officer.
Concurrent
with the consummation of the First Tranche, Siebert and Kakaopay entered into a Registration Rights Agreement (the “Registration
Rights Agreement”) whereby Siebert agreed to grant Kakaopay certain registration rights with respect to certain securities of Siebert
held by Kakaopay. In exchange for such registration rights, the parties agreed to a lock-up period ending the earlier of the outside date
pursuant to the Second Tranche Stock Purchase Agreement and the date that such agreement is terminated.
As
of the date of this Report, prior to the close of the Second Tranche, the Gebbia Stockholders are collectively Siebert’s largest
stockholders, controlling approximately 43% of Siebert’s outstanding equity securities, under the Stockholders’ Agreement,
holding the right to appoint six (6) of Siebert’s seven (7)-member Board of Directors. As discussed above, Kakaopay currently has
the right to appoint the seventh director, and exercised that right through the appointment of Simon Shin to the Company’s Board
of Directors on May 24, 2023. Upon the closing of the Second Tranche, Kakaopay will own approximately 51% of Siebert’s outstanding
equity securities and will have the right to appoint four (4) out of seven (7) directors of the Company’s Board of Directors, while
the Gebbia Stockholders will have the right to appoint the remaining three (3) directors. Pursuant to the Stockholders’ Agreement,
at all times, three (3) of the seven (7) directors of the Company’s Board of Directors are required to be independent directors
in accordance with Nasdaq Listing Rule 5605. Refer to the Company’s Current Report on Form 8-K filed on May 3, 2023, incorporated
herein by reference, for further detail regarding this transaction.
Since
the closing of the First Tranche, Korean authorities have taken action against Kakaopay, its parent company, Kakao Corp., and their affiliates.
In addition, Kakao Corp., recently announced that it will establish an independent compliance committee for Kakao Corp. and its subsidiaries
to address what it described as the current crisis at Kakao Corp. and its subsidiaries. Siebert believes these events have had a material
adverse effect on both Kakaopay and its ability to perform its obligations under the Second Tranche Stock Purchase Agreement and consummate
the transactions contemplated therein. Accordingly, on November 11, 2023, Siebert delivered a notice to Kakaopay stating that a material
adverse effect had occurred with respect to Kakaopay and that, as a result, Siebert’s conditions to closing will not be satisfied.
The notice also specified that Kakaopay has indicated that it has no intention of satisfying the conditions precedent to Siebert preparing
the proxy statement contemplated by the Second Tranche Stock Purchase Agreement. Siebert is considering its rights and obligations under
the Second Tranche Stock Purchase Agreement, including evaluating whether and under what circumstances the Second Tranche Stock Purchase
Agreement might be terminated, and has reserved all of its rights and remedies, including Siebert’s right to assert that Kakaopay
has materially breached a number of covenants in the Second Tranche Stock Purchase Agreement. On November 12, 2023, Kakaopay delivered
a letter in response to the notice that expressed Kakaopay’s disagreement with the statements in the notice. As a result of the
foregoing, Siebert has incurred and may incur additional legal expenses evaluating these matters, the amount of which is uncertain as
of the date hereof.
RISE
RISE was an institutional
brokerage for which all its revenue producing customers transitioned to other prime service providers by the first quarter of 2022. The
expenses associated with the transition resulted in a loss of $0.2 million and $0.9 million for RISE for the three and nine months ended
September 30, 2022, respectively. During 2022, there were various transactions involving the ownership of RISE. Refer to Note 3 –
Transactions with Tigress and Hedge Connection and Note 4 – RISE for additional detail.
As part of this transition,
Siebert had an agreement with JonesTrading Institutional Service, LLC (“JonesTrading”) whereby JonesTrading pays RISE a percentage
of the net revenue produced by certain historical clients of RISE less any related expenses. For the three months ended September 30,
2023 and 2022, this agreement resulted in pre-tax income of $78,000 and $61,000, respectively. For the nine months ended September 30,
2023 and 2022, this agreement resulted in pre-tax income of $232,000 and $137,000, respectively. 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.
Management is assessing the
future strategic direction of RISE, taking into consideration current market conditions, demand trends, and resources. While we believe
our expertise and industry relationships will enable us to execute a new strategic direction, our business plan for RISE is untested,
and it is uncertain whether our efforts will attract the customers and revenue necessary to compete in the market.
Transactions with Tigress and Hedge Connection
Siebert and RISE engaged
in certain transactions with Tigress and Hedge Connection to exchange equity, cash, and respective leadership positions. Based upon the
strategic direction of these ventures, management of the respective businesses decided to unwind the original transactions with these
entities. See Note 3 – Transactions with Tigress and Hedge Connection and Note 12 – Equity Method Investment in Related Party
for further detail.
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 of U.S. government securities
within our portfolio decline, we anticipate the impact to be temporary as we intend to hold our U.S. government securities portfolio
to maturity. We seek to mitigate this risk by managing the average maturities of our U.S. government securities portfolio and setting
risk parameters for securities owned, at fair value.
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. For the periods presented, there were no
institutional client accounts or client activity metrics.
Client Account Metrics
| | |
As of | |
| | |
September 30,
2023 | | |
December 31,
2022 | |
| Retail customer net worth (in billions) | |
$ | 14.6 | | |
$ | 13.5 | |
| Retail customer margin debit balances (in billions) | |
$ | 0.4 | | |
$ | 0.4 | |
| Retail customer credit balances (in billions) | |
$ | 0.5 | | |
$ | 0.6 | |
| Retail customer money market fund value (in billions) | |
$ | 0.7 | | |
$ | 0.6 | |
| Retail customer accounts | |
| 128,727 | | |
| 122,394 | |
| ● | 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 |
Statements of Operations and Financial Condition
Statements of Operations for the Three
Months Ended September 30, 2023 and 2022
Revenue
Commissions and fees for
the three months ended September 30, 2023 were $1,986,000 and increased by $236,000 from the corresponding period in the prior year,
primarily due to market conditions.
Interest, marketing and distribution
fees for the three months ended September 30, 2023 were $7,194,000 and increased by $1,990,000 from the corresponding period in the prior
year primarily due to rising interest rates that resulted in an increase in margin interest income and interest income received on U.S.
government securities and bank deposits.
Principal transactions and
proprietary trading for the three months ended September 30, 2023 were $3,753,000 and increased by $2,800,000 from the corresponding
period in the prior year, primarily due to the factors discussed below.
The increase in realized
and unrealized gain on primarily riskless principal transactions was primarily due to market conditions. The increase in unrealized gain
on our portfolio of U.S. government securities was due to the following. We invested in 1-year treasury bills and 2-year treasury notes
in order to enhance our yield on excess 15c3-3 deposits. During 2022, there was an increase in U.S. government securities yields, which
created an unrealized loss on our U.S. government securities portfolio. In 2023, we began to record the reversal of the unrealized loss
resulting in an unrealized gain due to the securities coming closer to maturity. We continually invest in US government securities based
on market yields and cash needs.
We intend to hold our U.S.
government securities portfolio to maturity and as such, the aggregate unrealized loss of $1.3 million as of September 30, 2023 will
be returned over the duration of the government securities, at a point no later than the maturity of the securities, the latest maturity
being April 2025. If the value of our portfolio of U.S. government securities declines further, we will incur further unrealized losses;
however, we anticipate this loss to be temporary as we intend to hold our portfolio of U.S. government securities to maturity. 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 for the periods presented.
| | |
Three Months Ended September 30, | |
| | |
2023 | | |
2022 | | |
Increase
(Decrease) | |
| Principal transactions and proprietary trading | |
| | |
| | |
| |
| Realized and unrealized gain on primarily riskless principal transactions | |
$ | 2,657,000 | | |
$ | 2,340,000 | | |
$ | 317,000 | |
| Unrealized gain (loss) on portfolio of U.S. government securities | |
| 1,096,000 | | |
| (1,387,000 | ) | |
| 2,483,000 | |
| Total Principal transactions and proprietary trading | |
$ | 3,753,000 | | |
$ | 953,000 | | |
$ | 2,800,000 | |
Market making for the three
months ended September 30, 2023 was $223,000 and decreased by $500,000 from the corresponding period in the prior year, primarily due
to market conditions.
Stock borrow / stock loan
for the three months ended September 30, 2023 was $4,008,000 and decreased by $175,000 from the corresponding period in the prior year.
Advisory fees for the three
months ended September 30, 2023 were $506,000 and increased by $69,000 from the corresponding period in the prior year, primarily due
to market conditions.
Other income for the three
months ended September 30, 2023 was $380,000 and decreased by $706,000 from the corresponding period in the prior year, primarily due
to the termination of consulting fee income from a technology partner.
Operating Expenses
Employee compensation and
benefits for the three months ended September 30, 2023 were $8,723,000 and increased by $1,433,000 from the corresponding period in the
prior year, primarily due to an increase in commission payouts and incentive compensation.
Clearing fees, including
execution costs for the three months ended September 30, 2023 were $581,000 and increased by $183,000 from the corresponding period in
the prior year, primarily due to an increase in market activity.
Technology and communications
expenses for the three months ended September 30, 2023 were $827,000 and decreased by $387,000 from the corresponding period in the prior
year, primarily due to a decrease in costs related to a technology partner.
Other general and administrative
expenses for the three months ended September 30, 2023 were $1,108,000 and increased by $36,000 from the corresponding period in the
prior year, primarily due to an increase in travel and entertainment expenses.
Data processing expenses
for the three months ended September 30, 2023 were $725,000 and decreased by $207,000 from the corresponding period in the prior year,
primarily due to the termination of a technology vendor.
Rent and occupancy
expenses for the three months ended September 30, 2023 were $467,000 and decreased by $95,000 from the corresponding period in the
prior year primarily due to the termination of certain short term leases in 2023.
Professional fees for the three
months ended September 30, 2023 were $979,000 and increased by $105,000 from the corresponding period in the prior year, primarily due
to an increase in consulting and board of directors fees partially offset by a decrease in legal fees.
Depreciation and amortization
expenses for the three months ended September 30, 2023 were $265,000 and increased by $25,000 from the corresponding period in the prior
year.
Interest expense for the three
months ended September 30, 2023 was $40,000 and decreased by $68,000 from the corresponding period in the prior year, primarily due to
a decrease in interest related to notes payable.
Advertising and promotion expense
for the three months ended September 30, 2023 was $62,000 and increased by $4,000 from the corresponding period in the prior year.
Non-Operating Income (Loss)
The impairment of investments
for the three months ended September 30, 2023 was $0 and there was no change from the corresponding period in the prior year.
The loss from equity method
investment in related party for the three months ended September 30, 2023 was $0 and decreased by $148,000 from the corresponding period
in the prior year, primarily due to no proportional loss from our investment in Tigress in the third quarter of 2023.
Provision For (Benefit From) Income Taxes
The
provision from income taxes for the three months ended September 30, 2023 was $1,516,000 and increased from the provision for income
taxes by $1,043,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily
due to an increase in pre-tax earnings in the third quarter of 2023. Refer to Note 18 – Income Taxes for additional detail.
Net Income (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 September 30, 2023 was $4,000, and decreased by $81,000 from the
corresponding period in the prior year, due to more expenses in RISE in 2022 associated with the exiting of the prime brokerage business.
Statements of Operations for the Nine Months
Ended September 30, 2023 and 2022
Revenue
Commissions and fees for
the nine months ended September 30, 2023 were $5,839,000 and decreased by $104,000 from the corresponding period in the prior year, primarily
due to market conditions.
Interest, marketing and distribution
fees for the nine months ended September 30, 2023 were $21,583,000 and increased by $10,866,000 from the corresponding period in the
prior year primarily due to rising interest rates that resulted in an increase in margin interest income and interest income received
on U.S. government securities and bank deposits.
Principal transactions and
proprietary trading for the nine months ended September 30, 2023 were $9,207,000 and increased by $7,440,000 from the corresponding period
in the prior year due to multiple factors, which is detailed in the table below as well as in the above section titled “Statements
of Operations for the Three Months Ended September 30, 2023 and 2022.”
| | |
Nine Months Ended September 30, | |
| | |
2023 | | |
2022 | | |
Increase
(Decrease) | |
| Principal transactions and proprietary trading | |
| | |
| | |
| |
| Realized and unrealized gain on primarily riskless principal transactions | |
$ | 6,642,000 | | |
$ | 5,956,000 | | |
$ | 686,000 | |
| Unrealized gain (loss) on portfolio of U.S. government securities | |
| 2,565,000 | | |
| (4,189,000 | ) | |
| 6,754,000 | |
| Total Principal transactions and proprietary trading | |
$ | 9,207,000 | | |
$ | 1,767,000 | | |
$ | 7,440,000 | |
Market making for the nine
months ended September 30, 2023 was $836,000 and decreased by $1,186,000 from the corresponding period in the prior year, primarily due
to market conditions.
Stock borrow / stock loan
for the nine months ended September 30, 2023 was $11,963,000 and increased by $54,000 from the corresponding period in the prior year,
primarily due to the growth of stock locate and securities lending businesses.
Advisory fees for the nine
months ended September 30, 2023 were $1,421,000 and increased by $1,000 from the corresponding period in the prior year.
Other income for the nine
months ended September 30, 2023 was $963,000 and decreased by $1,626,000 from the corresponding period in the prior year, primarily due
to the termination of consulting fee income from a technology partner.
Operating Expenses
Employee compensation and benefits
for the nine months ended September 30, 2023 were $23,770,000 and increased by $2,018,000 from the corresponding period in the prior year,
primarily due to an increase in incentive compensation and commission payouts, partially offset by lower employee healthcare costs and
the elimination of compensation expenses related to RISE in 2023.
Clearing fees, including execution
costs for the nine months ended September 30, 2023 were $1,265,000 and decreased by $2,000 from the corresponding period in the prior
year.
Technology and communications
expenses for the nine months ended September 30, 2023 were $2,409,000 and decreased by $965,000 from the corresponding period in the prior
year, primarily due to a decrease in technology costs related to RISE as well as a decrease in costs related to a technology partner,
partially offset by an increase in software license costs.
Other general and administrative
expenses for the nine months ended September 30, 2023 were $3,320,000 and increased by $381,000 from the corresponding period in the prior
year, primarily due to an increase in travel and entertainment expenses.
Data processing expenses for the
nine months ended September 30, 2023 were $2,317,000 and increased by $182,000 from the corresponding period in the prior year, primarily
due to an increase from timing of financial and trading technology costs partially offset by a decrease from the termination of a technology
vendor.
Rent and occupancy expenses for
the nine months ended September 30, 2023 were $1,436,000 and decreased by $55,000 from the corresponding period in the prior year.
Professional fees for the nine
months ended September 30, 2023 were $3,060,000 and increased by $458,000 from the corresponding period in the prior year, primarily due
to an increase in consulting and board of director fees partially offset by a reduction in legal fees.
Depreciation and amortization
expenses for the nine months ended September 30, 2023 were $716,000 and decreased by $44,000 from the corresponding period in the prior
year, primarily due to the completion of useful lives of certain software assets in 2022, offset by depreciation expense from the Miami
office building.
Interest expense for the nine
months ended September 30, 2023 was $222,000 and decreased by $113,000 from the corresponding period in the prior year, primarily due
to a decrease in interest related to notes payable.
Advertising and promotion expenses
for the nine months ended September 30, 2023 were $52,000 and decreased by $178,000 from the corresponding period in the prior year, primarily
due to a decrease in promotional costs for various marketing initiatives.
Non-Operating Income (Loss)
The impairment of investments
for the nine months ended September 30, 2023 was a loss of $1,035,000 and increased by $1,035,000 from the corresponding period in the
prior year, primarily due to the impairment of our investment in a Retail Platform and Tigress.
The earnings of equity method
investment in related party for the nine months ended September 30, 2023 was $111,000 and increased by $44,000 from the corresponding
period in the prior year, primarily due to an increase in our proportional income from our investment in Tigress.
Provision For (Benefit From) Income Taxes
The
provision from income taxes for the nine months ended September 30, 2023 was $3,621,000 and increased from the benefit for income taxes
by $4,457,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily
due to increased pre-tax earnings in the nine months ending September 30, 2023. Refer to Note 18 – Income Taxes for additional
detail.
Net Income (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 income
attributable to noncontrolling interests for the nine months ended September 30, 2023 was $40,000, and increased by $445,000 from the
corresponding period in the prior year, primarily due to more expenses in RISE in 2022 associated with the exiting of the prime brokerage
business.
Statements of Financial Condition as of
September 30, 2023 and December 31, 2022
Assets
Assets as of September 30,
2023 were $771,146,000 and increased by $43,098,000 from December 31, 2022, primarily due to an increase in securities borrowed, receivables
from customers, and securities owned, at fair value, partially offset by a decrease in cash and cash equivalents and cash and securities
segregated for regulatory purposes.
Liabilities
Liabilities as of September
30, 2023 were $699,581,000 and increased by $21,453,000 from December 31, 2022, primarily due to an increase in securities loaned partially
offset by a decrease in payables to customers and payables to non-customers.
Liquidity and Capital Resources
Overview
We
expect to use our available cash, cash equivalents, and potential future borrowings under our debt agreements and potential issuance
of new debt or equity, to support and invest in our core business, including investing in new ways to serve our customers, potentially
seeking strategic acquisitions to leverage existing capabilities, and for general capital needs (including capital, deposit, and collateral
requirements imposed by regulators and SROs). Based on our current level of operations, we believe our available cash, available lines
of credit, overall access to capital markets, and cash provided by operations will be adequate to meet our current liquidity needs for
the foreseeable future. As of the date of this Report, other than the items detailed in the section below, there are no known or material
events that would require us to use large amounts of our liquid assets to cover expenses.
Kakaopay
The
net capital infusion from Kakaopay to Siebert from the First Tranche was approximately $15.4 million after the issuance cost. This capital
is currently being used to enhance our regulatory capital, and is primarily invested in U.S. government securities and is in the line
item “Securities owned, at fair value” on the statements of financial condition. The capital to be raised from the close of
the Second Tranche is approximately $60.4 million. The consummation of the Second Tranche is subject to a number of conditions, which
have not yet been satisfied as of the date of this Report. Refer to Note 5 – Kakaopay Transaction for further detail regarding these
conditions. Refer to the Company’s Current Report on Form 8-K filed on May 3, 2023, incorporated
herein by reference, for further detail regarding this transaction.
The
net capital from the First Tranche provides Siebert with additional liquidity and the ability to expand its various business lines. Siebert’s
current management intends to utilize the additional capital primarily to launch correspondent clearing, to expand its securities lending
business, corporate services, order flow opportunities, and other initiatives.
Cash and Cash Equivalents
Our
cash and cash equivalents were $4.9 million and $23.7 million as of September 30, 2023 and December 31, 2022, respectively.
Cash Requirements
The
following table summarizes our short- and long-term material cash requirements as of September 30, 2023.
| | |
Payments Due By Period | |
| | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
| Operating lease commitments | |
$ | 287,000 | | |
$ | 938,000 | | |
$ | 861,000 | | |
$ | 694,000 | | |
$ | 963,000 | | |
$ | 3,743,000 | |
| Mortgage with East West Bank | |
| 22,000 | | |
| 84,000 | | |
| 88,000 | | |
| 91,000 | | |
| 4,048,000 | | |
| 4,333,000 | |
| Technology vendor* | |
| 192,000 | | |
| 575,000 | | |
| 383,000 | | |
| — | | |
| — | | |
| 1,150,000 | |
| Leasehold improvements** | |
| 500,000 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 500,000 | |
| Total | |
$ | 1,001,000 | | |
$ | 1,597,000 | | |
$ | 1,332,000 | | |
$ | 785,000 | | |
$ | 5,011,000 | | |
$ | 9,726,000 | |
| * | On March 31, 2023, we entered into an agreement with a technology
vendor for certain development projects. As of September 30, 2023, the total budget for this project was approximately $1.1 million over
a term of 2 years. |
| ** | On July 7, 2023, we entered into a new lease agreement expiring
in December 2028 for office space in the World Financial Center in New York City. This office will replace the New Jersey office as one
of our key operating centers and the total commitment of the lease is approximately $2.1 million. The estimated build out cost for this
office space is approximately $500,000. |
Debt Agreements
We
have a $4.3 million mortgage outstanding with East West Bank, and an unutilized loan for short term overnight demand borrowing of up
to $25 million with BMO Harris as of September 30, 2023. For the nine months ended September 30, 2023, we paid off our $2.7 million loan
outstanding with East West Bank. As of September 30, 2023, we were in compliance with all covenants related to our debt agreements.
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 Siebert 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.
At the Market
Offering
On
May 27, 2022, we entered into a Capital on DemandTM Sales Agreement with JonesTrading as agent, pursuant to which we may offer
and sell, from time to time through JonesTrading, shares of our common stock having an aggregate offering amount of up to $9.6 million
under our shelf registration statement on Form S-3. For the three and nine months ended September 30, 2023 and 2022, we did not sell
any shares pursuant to this Sales Agreement. Refer to Note 21 – Commitments, Contingencies, and Other for additional detail.
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.
MSCO can transfer funds to
Siebert as long as MSCO maintains its liquidity and regulatory capital requirements. RISE can transfer funds to its shareholders, of
which Siebert is entitled to its proportional ownership interest, as long as RISE maintains its liquidity and regulatory capital requirements.
For the three and nine months ended September 30, 2023 and 2022, MSCO and RISE had sufficient net capital to meet their respective liquidity
and regulatory capital requirements. Refer to Note 19 – Capital Requirements for more detail about our capital requirements.
Cash Flows
Cash
provided by and used in operating activities consisted of net income (loss) adjusted for certain non-cash items. Net operating assets
and liabilities at any specific point in time are subject to many variables, including variability in customer activity, the timing of
cash receipts and payments, and vendor payment terms. The total changes in our statements of cash flows, especially our operating cash
flow, are not necessarily indicative of the ongoing results of our business as we have customer assets and liabilities on our statements
of financial condition.
For
the nine months ended September 30, 2023, we had negative operating cash flow primarily due to the net change in receivables and payables
to customers and non-customers as well as the net change in securities borrowed and securities loaned. We had investing cash outflows
primarily from the build out of the Miami office building and development work related to technology initiatives. We had financing cash
inflows primarily due to the Kakaopay transaction partially offset by the repayment of our loan with East West Bank.
For
the nine months ended September 30, 2022, we had negative operating cash flow primarily due to the net change in receivables and payables
to customers and non-customers as well as the net change in securities borrowed and securities loaned. We had investing cash outflows
primarily from the build out of the Miami office building and development work related to technology initiatives. We had financing cash
outflows related the repayment of a note payable – related party, partially offset by the issuance and transfer of RISE membership interests.
Long Term Contracts
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. Refer to Note 16 – Deferred
Contract Incentive and Note 21 – Commitments, Contingencies and Other for additional detail.
Effective
June 2023, MSCO entered into an amendment to its service agreement with Broadridge Securities Processing Solutions, LLC that, among other
things, extends the term of their arrangement for a five-year period ending June 2028, with an option to terminate after three years.
The total minimum expense for this arrangement is estimated at approximately $1.3 million.
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 their 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 and nine
months ended September 30, 2023 and 2022. Refer to Note 20 – 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 September 30,
2023 and December 31, 2022, the Company recorded an uncertain tax position of $1,596,000 related to various tax matters, which is included
in the line item “Taxes payable” in the statements of financial condition.
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 2022 Form 10-K. As of September 30, 2023, there have
been no changes to our critical accounting policies or estimates.
New Accounting Standards
Refer to Note 2 - Summary
of Significant Accounting Policies for additional information regarding new Accounting Standards Updates (“ASU”s) issued
by the Financial Accounting Standards Board (“FASB”).
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 Chief Executive Officer
and 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 Chief Executive Officer and 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 2022 Form 10-K and under Part II, Item 1A. of our Form 10-Qs. 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 factors provided below,
there have been no material changes from the risk factors disclosed in our 2022 Form 10-K.
There may be a limited public market for
our common stock; Volatility.
12,959,556 shares of our common
stock, or approximately 33% of our shares of our common stock outstanding, are currently held by non-affiliates as of November 10, 2023.
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.
The Closing of the Second Tranche with Kakaopay
is subject to a number of closing conditions, including various regulatory approvals, and there can be no assurance that such conditions
will be satisfied or that the Second Tranche will close.
The
consummation of the Second Tranche of the investment in Siebert by Kakaopay is subject to a number of conditions, which have not yet been
satisfied as of the date of this Report. The conditions to Kakaopay’s obligation to close the Second Tranche include, among others,
(i) the affirmative vote of a majority of the outstanding shares of Siebert’s common stock and the affirmative vote of the holders
of a majority of the outstanding shares of Siebert’s common stock not beneficially owned, directly or indirectly, by the Gebbia
Stockholders, Kakaopay or any of their respective affiliates, (ii) approval by FINRA, (iii) favorable completion of the review
by CFIUS, (iv) certain performance conditions relating to order execution and the execution of employment and consulting agreements for
key personnel of Siebert and MSCO, (v) the approvals in connection to the filing of an overseas
direct investment report as required under the Foreign Exchange Transactions Act of the Republic of Korea, and, if applicable in accordance
with applicable law, any antitrust report or filing with the Korea Fair Trade Commission shall have been obtained or provided; (vi) the
listing by Siebert of the Second Tranche Shares on the Nasdaq Capital Market, (vii) the accuracy of certain representations and warranties
of Siebert as of the closing of the Second Tranche, (viii) the absence of any material adverse effect having occurred with respect to
Siebert between April 27, 2023 and the closing of the Second Tranche, and (ix) the performance by Siebert of all covenants, agreements
and obligations required to be performed by it prior to the closing of the Second Tranche. The conditions to Siebert’s obligation
to close the Second Tranche include, among others, (i) the affirmative vote of the holders of a majority of the outstanding shares of
Siebert’s common stock not beneficially owned, directly or indirectly, by the Gebbia Stockholders, Kakaopay or any of their respective
affiliates, (ii) approval by FINRA, (iii) favorable completion of the review by CFIUS, (iv) the accuracy of certain representations and
warranties of Kakaopay as of the closing of the Second Tranche, (v) the absence of any material adverse effect having occurred with respect
to Kakaopay between April 27, 2023 and the closing of the Second Tranche, and (vi) the performance by Kakaopay of all covenants, agreements
and obligations required to be performed by it prior to the closing of the Second Tranche. There can be no assurance that any or all of
the conditions necessary to close the Second Tranche Stock Purchase Agreement will be satisfied or that the Second Tranche will close.
Certain of the conditions require action by Kakaopay, including providing information related to Kakaopay (and its affiliates) required
to obtain FINRA and CFIUS approval.
Since
the closing of the First Tranche, Korean authorities have taken action against Kakaopay, its parent company, Kakao Corp., and their affiliates.
In addition, Kakao Corp., recently announced that it will establish an independent compliance committee for Kakao Corp. and its subsidiaries
to address what it described as the current crisis at Kakao Corp. and its subsidiaries. Siebert believes these events have had a material
adverse effect on both Kakaopay and its ability to perform its obligations under the Second Tranche Stock Purchase Agreement and consummate
the transactions contemplated therein. Accordingly, on November 11, 2023, Siebert delivered a notice to Kakaopay stating that a material
adverse effect had occurred with respect to Kakaopay and that, as a result, Siebert’s conditions to closing will not be satisfied.
The notice also specified that Kakaopay has indicated that it has no intention of satisfying the conditions precedent to Siebert preparing
the proxy statement contemplated by the Second Tranche Stock Purchase Agreement. Siebert is considering its rights and obligations under
the Second Tranche Stock Purchase Agreement, including evaluating whether and under what circumstances the Second Tranche Stock Purchase
Agreement might be terminated, and has reserved all of its rights and remedies, including Siebert’s right to assert that Kakaopay
has materially breached a number of covenants in the Second Tranche Stock Purchase Agreement. On November 12, 2023, Kakaopay delivered
a letter in response to the notice that expressed Kakaopay’s disagreement with the statements in the notice. As a result of the
foregoing, Siebert has incurred and may incur additional legal expenses evaluating these matters, the amount of which is uncertain as
of the date hereof.
Refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation –
Transaction with Kakaopay above; and Siebert’s Current Report on Form 8-K filed on May 3, 2023, incorporated herein by reference,
for further detail.
ITEM 6. EXHIBITS
| Exhibit No. |
|
Description of Document |
| |
|
|
| 10.40 |
|
Share Redemption Agreement, dated July 10, 2023, by and among Cynthia DiBartolo, Siebert Financial Corp., and Tigress Holdings, LLC |
| |
|
|
| 31.1 |
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 31.2 |
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 32.1# |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 32.2# |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
| 101.INS |
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| |
|
|
| 101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
| |
|
|
| 101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
|
|
| 101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| |
|
|
| 101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
| |
|
|
| 101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| |
|
|
| 104 |
|
Cover Page Interactive Data File (embedded with Inline XBRL document). |
| # | 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.
| |
SIEBERT FINANCIAL CORP. |
| |
|
| |
By: |
/s/ John J. Gebbia |
| |
|
John J. Gebbia |
| |
|
Chief Executive Officer |
| |
|
(Principal executive officer) |
| |
|
|
| |
By: |
/s/ Andrew H. Reich |
| |
|
Andrew H. Reich |
| |
|
Executive Vice President, Chief Operating Officer, Chief Financial Officer, and Secretary |
| |
|
(Principal financial and accounting officer) |
| |
|
|
| |
Dated: November 14, 2023 |
- 34 -
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I, John J. Gebbia, certify that:
I, Andrew H. Reich, certify that:
In connection with the Quarterly
Report of Siebert Financial Corp. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2023, as filed
with the SEC on the date hereof (the “Report”), I, John J. Gebbia, in my capacity as Chief Executive Officer, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
A signed original of this written statement
required by Section 906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been provided to Siebert Financial Corp. and will
be retained by Siebert Financial Corp. and furnished to the SEC or its staff upon request.
In connection with the Quarterly
Report of Siebert Financial Corp. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2023, as filed
with the SEC on the date hereof (the “Report”), I, Andrew H. Reich, in my capacity as Executive Vice President, Chief Operating
Officer, Chief Financial Officer, and Secretary hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to my knowledge:
A signed original of this written statement
required by Section 906, or other documents authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been provided to Siebert Financial Corp. and will
be retained by Siebert Financial Corp. and furnished to the SEC or its staff upon request.