ITEM 7. MANAGEMENT’S DISCUSSIONS AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and the related notes included in Part II, Item 8 - Financial Statements and Supplementary Data 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 this Report, 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.
Trends and Key Factors
Affecting our Operations
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.
We primarily earn 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 these securities 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.
Technology Initiatives
During 2022 and 2023 we terminated
agreements with prior technology vendors that were primarily developing our Retail Platform, refer to Note 7 - Prepaid Service Contract
and Note 10 – Software, Net for further detail. During 2023, we reassessed our technology needs and strategic direction and hired
new technology personnel, changed our primary software development vendor, and made additional investments in technology development related
to our Retail Platform and additional technology services for our customers.
We believe these changes will
be key to creating a Retail Platform and additional technology services for the next generation of retail customers, correspondent clearing,
as well as the overall growth of our business. The termination of agreements with our prior technology vendors had minimal impact on our
current operations.
Recent
Developments
Transaction
with Kakaopay
On
April 27, 2023, we entered into the First Tranche Stock Purchase Agreement with Kakaopay, a company established under the Laws of the
Republic of Korea, pursuant to which we issued to Kakaopay 8,075,607 shares of our common stock at a per share price of Two Dollars Fifteen
Cents ($2.15), which represented at the time of issuance 19.9% of our outstanding equity securities on a fully diluted basis (the “First
Tranche”). Concurrent with the execution of the First Tranche Stock Purchase Agreement, Siebert and Kakaopay entered into a Stock
Purchase Agreement (the “Second Tranche Stock Purchase Agreement”), pursuant to which we agreed to issue to Kakaopay additional
shares at a per share price of Two Dollars Thirty Five Cents ($2.35), that would have resulted in Kakaopay owning 51% of the outstanding
equity securities of Siebert on a fully diluted basis.
Siebert 2023 Form-10K 20
The
First Tranche closed on May 18, 2023 and, in connection therewith, we entered into the Registration Rights Agreement and a Stockholders’
Agreement (the “Original Stockholders’ Agreement”) with Kakaopay.
On
December 19, 2023, we entered into a Termination and Settlement Agreement (the “Settlement Agreement”) with Kakaopay, Kakaopay
Securities Corp. (“Kakaopay Securities”), MSCO and certain Gebbia parties named therein. Under the Settlement Agreement, the
parties mutually agreed to terminate the Second Tranche Stock Purchase Agreement. The parties terminated the Second Tranche Stock Purchase
Agreement after reaching a compromise regarding their disagreement over, among other things, the occurrence of a “Purchaser Material
Adverse Effect” in the Second Tranche Stock Purchase Agreement, and the ability of the closing conditions in the Second Tranche
Stock Purchase Agreement to be satisfied. Certain related agreements were also terminated, including the Foreign Broker-Dealer Fee Sharing
Agreement, dated April 27, 2023, between MSCO and Kakaopay Securities, and the Support and Restrictive Covenant Agreements by certain
Gebbia stockholders, each dated April 27, 2023. The parties also agreed (i) to amend and restate the Original Stockholders’ Agreement
as described below, (ii) that Siebert will pay Kakaopay a fee of $5 million (payable in ten quarterly installments beginning on March
29, 2024) and (iii) to customary releases. Kakaopay continues to own the 8,075,607 shares of our common stock that it purchased from Siebert
in May 2023, and Kakaopay agreed to certain standstill restrictions with respect to its ownership of our common stock, subject to certain
conditions.
In
connection with the foregoing, on December 19, 2023, we entered into an Amended and Restated Stockholders’ Agreement (the “A&R
Stockholders’ Agreement”) with Kakaopay, certain stockholders listed on Schedule I thereto and John J. Gebbia (in his individual
capacity and as representative of the Gebbia Stockholders (as defined therein)) to amend and restate the Original Stockholders’
Agreement.
Under
the A&R Stockholders’ Agreement, Kakaopay is entitled to nominate one director to our board of directors (the “Board”)
and the Gebbia Stockholders are entitled to designate six directors to the Board, in each case, subject to certain conditions. Kakaopay
and each Gebbia Stockholder agreed to vote all shares of common stock held by such stockholder to elect directors nominated by Kakaopay
and Gebbia Stockholders.
The
A&R Stockholders’ Agreement also, among other things, provides that certain specified events, including certain significant
merger and acquisition transactions and related party transactions, stock exchange delistings, amendments to organizational documents
that materially and disproportionally prejudice Kakaopay and certain equity issuances, will require the prior written consent of two-thirds
of the Board, including at least one Kakaopay director and one Gebbia director. The A&R Stockholders’ Agreement also provides
Siebert and the non-transferring party a right of first refusal if Kakaopay or any of the Gebbia Stockholders desires to accept a bona
fide offer to transfer all or any portion of its or their shares, subject to certain exceptions, and includes tag-along rights in favor
of Kakaopay and the Gebbia Stockholders. The A&R Stockholders’ Agreement will terminate at such time as either the Gebbia Stockholders,
in the aggregate, or Kakaopay, hold less than five percent of the issued and outstanding Common Stock on a fully-diluted basis.
We
incurred $5,943,000 associated with the termination of the transaction with Kakaopay which is recorded in the line item “Transaction
termination costs” in the consolidated statements of operations. This amount consisted of the $5,000,000 fee to Kakaopay (payable
in ten quarterly installments beginning on March 29, 2024) adjusted for the present value of the payments, as well as legal and other
consulting costs associated with the transaction of approximately $1,481,000.
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. Net revenue from customers that have transitioned to other prime service providers was approximately $0.3 million for
the year ended December 31, 2022. 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 years ended
December 31, 2023 and 2022, this agreement resulted in income of $265,000 and $137,000, respectively, which is recorded in the line item
“Other income” in the consolidated statements of operations.
As
a result of the 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. There have
been no further transactions completed by Siebert related to RISE’s membership interests for the year ended December 31, 2023.
Siebert 2023 Form-10K 21
Transactions with
Tigress and Hedge Connection
On November 16, 2021, we purchased
24% of the outstanding membership interests in Tigress, a disabled and woman-owned financial services firm, in exchange for 24% of RISE
and shares of Siebert common stock. On January 21, 2022, we purchased 20% of Hedge Connection, a woman-owned fintech company, and an option
to acquire the remaining interest in Hedge Connection in exchange for consideration of $600,000 and 3.33% of RISE.
As part of these transactions,
Tigress’ founder, Cynthia DiBartolo, continued as CEO of Tigress, and assumed the position as CEO of RISE. Gloria E. Gebbia, one
of Siebert’s and RISE’s directors, assumed the position of Chief Impact Officer at RISE. Ms. DiBartolo was appointed to Siebert’s
and RISE’s Board of Directors and Ms. Gebbia was appointed to Tigress’ Board of Directors. In addition, Lisa
Vioni, founder of Hedge Connection, provided RISE with the right to appoint one director to the Board of Directors of Hedge Connection,
and Ms. Vioni was appointed to the Board of Directors of RISE as well as to the position of President of RISE Prime – Capital Introduction,
a division of RISE.
Based upon the strategic direction
of these ventures, management of the respective businesses decided to unwind the original transactions with Siebert, RISE, Hedge Connection
and Tigress. As a result, we exchanged our 7% ownership of Tigress for all of Tigress’ ownership of RISE. We also entered into an
agreement with Hedge Connection whereby we re-conveyed 20% of the common stock of Hedge Connection and the related option to acquire 100%
of Hedge Connection in exchange for 3.17% of RISE and the cancellation of Siebert’s note payable to Hedge Connection.
As
part of these agreements, Ms. DiBartolo and Ms. Vioni resigned from their respective positions within Siebert and RISE. Gloria E. Gebbia
also resigned from her position within Tigress.
The
financial impact of the transaction with Hedge Connection was a one-time loss of $719,000 for the year ended December 31, 2022, which
is in the line item “Loss on sale of equity method investment in related party” on the consolidated statements of operations.
The Company recognized impairment charges of its investment in Tigress of approximately $185,000 and $4,015,000 during the years ended
December 31, 2023 and 2022, respectively, which are in the line item “Impairment of investments” on the consolidated statements
of operations. Refer to Note 3 – Transactions with Tigress and Hedge Connection for further detail on the terms and accounting treatment
of these transactions.
Client Account and Activity Metrics
The following tables set forth
metrics we use in analyzing our client account and activity trends for the periods indicated.
Client Account Metrics – Retail Customers
As of December 31,
Retail customer net worth (in billions) $ 15.9 $ 13.5
Retail customer margin debit balances (in billions) $ 0.3 $ 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 represents the number of retail customers
Account Growth Initiatives
During 2023, our management
team engaged in several account growth initiatives that led to significant growth in our retail customer accounts from 2022. The primary
drivers of this growth were related to a partnership with NFS as well as new retail accounts from corporate services.
Siebert 2023 Form-10K 22
Consolidated Statements of Operations and Financial
Condition
Consolidated Statements of Operations for
the Years Ended December 31, 2023 and 2022
Revenue
Commissions and fees for the
year ended December 31, 2023 were $7,541,000 and increased by $201,000 from the corresponding period
in the prior year, primarily due to market conditions.
Interest, marketing and distribution
fees for the year ended December 31, 2023 were $29,577,000 and increased by $12,343,000 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 year ended December 31, 2023 were $13,094,000 and increased by $9,351,000
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 recorded the reversal of the unrealized
loss resulting in a realized and unrealized gain due to the securities coming closer to maturity, the latest maturity being April 2025.
We continually invest in U.S. government securities based on market yields and cash needs.
Below
is a summary of the change in the principal transactions and proprietary trading line item for the periods presented.
Year Ended December 31
Principal transactions and proprietary trading
Market making for the year
ended December 31, 2023 was $1,304,000 and decreased by $1,139,000 from the corresponding period
in the prior year, primarily due to market conditions.
Stock borrow / stock loan
for the year ended December 31, 2023 was $16,172,000 and increased by $1,654,000 from the corresponding
period in the prior year, primarily due to the growth of stock locate and securities lending businesses.
Advisory fees for the year
ended December 31, 2023 were $1,928,000 and increased by $66,000 from the corresponding period in
the prior year.
Other income for the year
ended December 31, 2023 was $1,898,000 and decreased by $1,064,000 from the corresponding period
in the prior year, primarily due to the termination of consulting fee income from a technology vendor.
Operating Expenses
Employee compensation and
benefits for the year ended December 31, 2023 were $31,936,000 and increased by $3,202,000 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 year ended December 31, 2023 were $1,672,000 and decreased by $471,000 from the corresponding
period in the prior year, primarily due to the elimination of RISE clearing and execution charges.
Technology and communications
expenses for the year ended December 31, 2023 were $3,364,000 and decreased by $1,107,000 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 an agreement with a technology vendor that was terminated in 2022.
Other general and administrative
expenses for the year ended December 31, 2023 were $4,410,000 and increased by $400,000 from the
corresponding period in the prior year, primarily due to an increase in travel expenses as well as expense primarily related to the Miami
office building.
Siebert 2023 Form-10K 23
Data processing expenses for
the year ended December 31, 2023 were $3,236,000 and increased by $67,000 from the corresponding
period in the prior year.
Rent and occupancy expenses
for the year ended December 31, 2023 were $1,873,000 and decreased by $82,000 from the corresponding
period in the prior year, primarily due to the elimination of certain leases in 2023.
Professional fees for the
year ended December 31, 2023 were $4,459,000 and increased by $1,257,000 from the corresponding
period in the prior year, primarily due to an increase in board of director compensation, executive officer compensation, as well as other
consulting costs.
Depreciation and amortization
expenses for the year ended December 31, 2023 were $2,020,000 and increased by $1,025,000 from the
corresponding period in the prior year, primarily due to the write-off of certain technology assets in 2023.
Interest expense for the year
ended December 31, 2023 was $263,000 and decreased by $177,000 from the corresponding period in
the prior year, primarily due to the elimination in interest related to notes payable at the end of 2022.
Advertising
and promotion expenses for the year ended December 31, 2023 were $155,000 and decreased by $388,000 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 earnings of equity method
investment in related party for the year ended December 31, 2023 was $111,000 and increased by $107,000
from the corresponding period in the prior year, primarily due to an increase in our proportional income from our investment in Tigress.
The
impairment of investments for the year ended December 31, 2023 was a loss of $1,035,000 and decreased by $2,980,000 from the corresponding
period in the prior year, primarily due to the impairment of our investment in Tigress occurring in 2022, partially offset by the impairment
in 2023 of our investment in a technology provider of a trading platform (“Trading Technology Provider”).
Loss on sale of equity method
investment in related party for the year ended December 31, 2023 was $0 and decreased by $719,000 from the corresponding period in the
prior year due to our loss on the transactions between Siebert, RISE, Hedge Connection and Tigress in 2022.
Transaction termination costs
for the year ended December 31, 2023 was $5,943,000 and increased by $5,943,000 from the corresponding period in the prior year due to
costs associated with the termination of the Kakaopay transaction.
Provision For (Benefit From) Income Taxes
The provision for income taxes
for the year ended December 31, 2023 was $3,415,000 and increased from the benefit for income taxes by $4,715,000 from the corresponding
period in the prior year. The change from the corresponding period in the prior year is primarily due to substantial increase in pre-tax
earnings for the year ended December 31, 2023. Refer to Note 18 – Income Taxes for additional detail.
Net Income (Loss)
Attributable to Noncontrolling Interests
As
further discussed in Note 2 – Summary of Significant Accounting Policies, we consolidate RISE’s financial results into our
consolidated financial statements and reflect the portion of RISE not held by Siebert as
a noncontrolling interests in our consolidated financial statements. The
net income attributable to noncontrolling interests for the year ended December 31, 2023 was $18,000, and increased by $1,018,000 from
the corresponding period in the prior year, primarily due to expenses in RISE in 2022 associated with the exiting of the prime brokerage
business.
Siebert 2023 Form-10K 24
Consolidated Statements of Financial Condition
as of December 31, 2023 and 2022
Assets
Assets as of December 31,
2023 were $801,800,000 and increased by $73,752,000 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.
Liabilities
Liabilities as of December
31, 2023 were $731,091,000 and increased by $52,963,000 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, 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 $14.8 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 consolidated statements of financial condition.
Cash and Cash Equivalents
Our
cash and cash equivalents were $5.7 million and $23.7 million as of December 31, 2023 and 2022, respectively.
Debt Agreements
We
have a $4.3 million mortgage with East West Bank and an unutilized line of credit for short term overnight demand borrowing of up to $25
million with BMO Harris as of December 31, 2023. For the year ended December 31, 2023, we paid off our $2.7 million loan outstanding with
East West Bank. As of December 31, 2023, we were in compliance with all covenants related to our debt agreements.
Cash Requirements
The
following table summarizes our short- and long-term material cash requirements as of December 31, 2023.
Payments Due By Period
Siebert 2023 Form-10K 25
Shelf Registration
Statement
On
February 18, 2022, we filed a shelf registration statement on Form S-3 that was declared effective on March 2, 2022 by the SEC for the
potential offering, issuance and sale by us of up to $100.0 million of our common stock, preferred stock, warrants to purchase our common
stock and/or preferred stock, units consisting of all or some of these securities and subscription rights to purchase all or some of these
securities. However, since we filed this Report after its scheduled due date, we no longer satisfy the eligibility requirements for use
of registration statements on Form S-3, which requires that we file in a timely manner all reports required to be filed during the prior
twelve calendar months. As a result, we have suspended use of the shelf registration statement.
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 years ended December 31, 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. As noted above, since we
filed this Report after its scheduled due date, we no longer satisfy the eligibility requirements for use of registration statements on
Form S-3. As a result, we have suspended use of the shelf registration statement and we are not able to access the At the Market program
as of the date of this Report.
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 it maintains its liquidity and regulatory capital requirements. RISE can transfer funds to its shareholders, of which
Siebert is entitled to its proportional ownership interest, as long as RISE maintains its liquidity and regulatory capital requirements.
For the years ended December 31, 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 on 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 consolidated 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 consolidated statements
of financial condition.
For the year ended December
31, 2023, cash used in operating activities increased by $5.7 million compared to 2022, which was primarily driven by an increase in working
capital partially offset by an increase in net income. The net change of receivables and payables from / to customers, receivables and
payables from / to non-customers, and securities borrowed and securities loaned between the periods offset each other.
For the year ended December
31, 2023, cash used in investing activities increased by $0.7 million compared to 2022, which was primarily driven by the build out of
the Miami office building as well as investment in our Retail Platform and other technology initiatives in 2023.
For the year ended December
31, 2023, cash flows provided by financing activities increased by $17.3 million compared to 2022, which was primarily driven by the issuance
of the Company’s common stock related to the transaction with Kakaopay. Refer to Note 5 – Kakaopay Transaction for additional
detail.
Siebert 2023 Form-10K 26
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. As part of this agreement, we received
a one-time business development credit of $3 million, and NFS will pay us four annual credits of $100,000 over the term of the agreement.
The amendment also provides for an early termination fee; however, as of December 31, 2023, we do not expect to terminate the contract
with NFS before the end of the contract term. 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 $1.2 million over the duration of the contract.
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 years ended December
31, 2023 and 2022. Refer to Note 20 – Financial Instruments with Off-Balance Sheet Risk for additional detail.
Transaction with J2
Financial Technology
On
January 18, 2024, Siebert Technologies, LLC (“STCH”) entered into a Purchase Agreement (the “Purchase Agreement”)
with J2 Financial Technology, Inc., d/b/a “Guild”, a Delaware corporation.
Under
the Purchase Agreement, STCH purchased a mobile self-directed trading app for the total purchase price of $385,000. The purchase price
consisted of 200,000 restricted shares of our common stock (priced at the historical 30-day moving average as of January 18, 2024) worth
approximately $350,000 and $35,000 cash.
Critical Accounting Policies and Estimates
We generally follow accounting
policies standard in the brokerage industry and believe that our policies appropriately reflect our financial position and results of
operations. Our management team makes significant estimates that affect the reported amounts of assets, liabilities, and expenses, and
the related disclosure of contingent assets and liabilities included in the consolidated financial statements. The estimates relate primarily
to expense items in the normal course of business as to which we receive no confirmations, invoices, or other documentation, at the time
the books are closed for a period. We use our best judgment, based on our knowledge of expenses incurred, to estimate the amount of such
expenses. We are not aware of any material differences between the estimates used in closing our books for the periods presented and the
actual amounts of expenses incurred when we subsequently receive the actual confirmations, invoices or other documentation.
Our consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The preparation of our consolidated financial statements requires us to make judgments and estimates that may have a significant
impact on our financial results. We believe that the critical accounting policies listed below are particularly subject to management’s
judgments and estimates and could materially affect our results of operations and financial position. Refer to Note 2 – Summary
of Significant Accounting Policies for additional detail on our significant accounting policies.
Estimates of effective income tax rates,
uncertain tax positions, deferred income taxes and related valuation allowances
We account for income taxes
under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated financial statements.
Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the consolidated
financial statements and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences
are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date.
Siebert 2023 Form-10K 27
We recognize deferred tax
assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider
all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable
income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize deferred taxes in
the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would
reduce the provision for income taxes.
We record uncertain tax positions
in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax
positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not
recognition threshold we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate
settlement with the related tax authority.
We recognize interest and
penalties related to unrecognized tax benefits on the provision for income taxes line on the consolidated statements of operations. Accrued
interest and penalties would be included on the related tax liability line on the consolidated statements of financial condition.
Goodwill and other intangible assets
Goodwill
is recognized as a result of business combinations and represents the excess of the purchase price over the fair value of net tangible
assets and identifiable intangible assets acquired.
The
valuation of goodwill and acquired intangible assets requires significant judgment and estimates by management. For example, the valuation
of certain intangible assets required management’s estimates of future earnings and cash flows as well as judgment in determining
market approaches. The useful life of the finite lived intangible assets was determined based on management’s estimate of the period over
which those intangible assets were expected to provide economic benefit. Management applies judgment in conducting impairment testing
for goodwill and intangible assets, including estimates of fair value based on the income or market approach and estimates required to
determine the useful lives of finite lived intangible assets.
We
test goodwill and all intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable, or at least annually. If our estimates of fair value change due to future events differing significantly from the
forecasts used to determine fair value or there are changes in our business or other factors, we will assess the amount of impairment
and recognize it in our consolidated financial statements during that reporting period.
We
also evaluate the useful life of finite lived intangible assets on an annual basis to determine if events or trends warrant a change in
estimate of the useful life. Changes in the estimated useful lives of finite lived intangible assets could result in the recognition of
an impairment or a change in the remaining life of these assets.
We
have concluded that as of December 31, 2023 and 2022, there has been no impairment to the carrying value of Siebert’s goodwill;
however, there has been an impairment to the carrying value of our investment in the Trading Technology Provider and our equity method
investment in Tigress for the years ended December 31, 2023 and 2022, which is included in line item “Impairment of investments”
on the consolidated statements of operations.
Refer
to Note 2 – Summary of Significant Accounting Policies, Note 3 – Transactions
with Tigress and Hedge Connection, and Note 13 – Investments, Cost for additional detail.
Siebert 2023 Form-10K 28
Accruals for contingent liabilities
Accruals
for contingent liabilities related to legal and regulatory claims as well as employee healthcare expenses under our self-insured plan
reflect an estimate of probable losses. In making such estimates for legal and regulatory claims, we consider many factors, including
the progress of the matter, prior experience and the experience of others in similar matters, available defenses, insurance coverage,
indemnification provisions and the advice of legal counsel and other experts. In making such estimates for employee healthcare expenses,
we consider many factors, including trends of our health insurance expenses and our insurance reserve limits. We believe that our present
insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that we will not
incur liabilities in excess of recorded reserves or in excess of our insurance limits. Significant judgment is required in making these
estimates, and the actual cost may be materially different than the estimated costs. Refer to Note 21 – Commitments,
Contingencies and Other for additional detail.
New Accounting Standards
In
December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Improvements to Income Tax Disclosures”
(“ASU 2023-09”). The ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments
in the ASU address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income
taxes paid information. ASU 2023-09 will be effective for us for annual periods beginning after December 15, 2024, though early adoption
is permitted. We are still evaluating the presentational effect that ASU 2023-09 will have on our consolidated financial statements, but
we expect considerable changes to our income tax footnote.
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 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Instruments Held For Trading Purposes
We
do not directly engage in derivative transactions, have no interest in any special purpose entity and have no liabilities, contingent
or otherwise, for the debt of another entity.
Financial Instruments Held For Purposes Other
Than Trading
We generally invest our cash
and cash equivalents temporarily in dollar denominated bank account(s). These investments are not subject to material changes in value
due to interest rate movements.
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 U.S. 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.
Siebert 2023 Form-10K 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SIEBERT FINANCIAL CORP.
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) 31
Notes to Consolidated Financial Statements 36
Siebert 2023 Form-10K 30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders and the Board of Directors of Siebert Financial
Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated
statements of financial condition of Siebert Financial Corp. (the Company) as of December 31, 2023 and 2022, the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively
referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is
a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated
to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition
As described in Note 2 and Note 17 to the consolidated
financial statements, the Company recognizes revenue from the following types of services: commissions and fees; principal transactions
and proprietary trading; market making; stock borrow and stock loan; advisory fees; interest, marketing, and distribution fees; and other
income.
The principal considerations for our
determination that revenue recognition is a critical audit matter are (i) the significant number of revenue streams and (ii) the
volume of information used in the calculation of each revenue stream. This required an increased extent of audit effort when
performing audit procedures.
How We Addressed the Matter in Our Audit
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included:
● Reviewed management’s revenue recognition policies and related contracts.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since
2017.
New York, New York
May 10, 2024
Siebert 2023 Form-10K 31
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
Current assets
Receivables from broker-dealers and clearing organizations 3,863,000 9,094,000
Deposits with broker-dealers and clearing organizations 7,885,000 1,311,000
Equity method investment in related party — 2,584,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current liabilities
Payables to broker-dealers and clearing organizations 481,000 660,000
Securities sold, not yet purchased, at fair value 2,000 2,000
Current portion of deferred contract incentive 808,000 808,000
Current portion of contract termination liability 1,898,000 —
Deferred contract incentive, less current portion 438,000 1,188,000
Contract termination liability, less current portion 2,564,000 —
Commitments and Contingencies
Equity
Stockholders’ equity
Numbers are rounded for presentation purposes.
See notes to consolidated financial statements.
Siebert 2023 Form-10K 32
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
Revenue
Expenses
Earnings of equity method investment in related party 111,000 4,000
Loss on sale of equity method investment in related party — (719,000 )
Transaction termination costs (5,943,000 ) —
Net income (loss) available to common stockholders $ 7,826,000 $ (1,990,000 )
Net income (loss) available to common stockholders per share of common stock
Basic and diluted $ 0.21 $ (0.06 )
Weighted average shares outstanding
Numbers are rounded for presentation purposes.
See notes to consolidated financial statements.
Siebert 2023 Form-10K 33
SIEBERT FINANCIAL CORP. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
Common Stock Treasury Stock
Numbers are rounded for presentation purposes.
See notes to consolidated financial statements.