SIEBERT FINANCIAL CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our 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. Financial Overview In 2024, earnings per share were $0.33, compared to earnings per share of $0.21 in 2023. In 2024, our net revenues were $83.9 million and net income was $13.3 million, compared to net revenues of $71.5 million and net income of $7.8 million in 2023. Financial highlights as of December 31, 2024: ● Retail customer net worth increased by 13% to $18.0 billion compared to 2023 ● Revenue related to stock borrow / stock loan increased by 19% to 19.2 million compared to 2023 ● Revenue related to commissions and fees increased by 32% to $9.6 million compared to 2023 Trends and Key Factors Affecting our Operations Market Risk Market risk is our risk of loss resulting from the impact of changes in market prices on our trading inventory and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations. Through our broker-dealer subsidiary, we trade debt obligations and equity securities and maintain trading inventories to ensure availability of securities to facilitate client transactions. Inventory levels may fluctuate daily as a result of client demand. Our primary market risks relate to interest rates and equity prices. Equity risk results from changes in prices of equity securities, affecting the value of the equity securities and other instruments that derive their value from a particular stock. We may enter into underwriting commitments and, as a result, we may be subject to market risk on any unsold securities issued in the offerings to which we are committed. Risk exposure is controlled by limiting our participation, the transaction size, or through the syndication process. 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. 23 The following table presents simulated changes to net interest revenue over the next 12 months beginning December 31, 2024 and 2023 of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period: As of December 31, 2024 2023 Increase of 200 basis points 32 % 36 % Increase of 100 basis points 18 % 20 % Increase of 50 basis points 11 % 5 % Decrease of 50 basis points (4 )% (3 )% Decrease of 100 basis points (11 )% (10 )% Decrease of 200 basis points (26 )% (25 )% The difference in our simulated incremental increases and decreases in the market interest rates as of December 31, 2024 compared to 2023 is primarily due to an increase in the proportion of segregated cash to segregated securities and a decrease in the proportion of margin debit balances to cash credit balances. Technology Initiatives At the end of 2023, we hired new technology personnel, changed our primary software development vendor, and made investments in technology development. Some of these technology investments include the development of a Siebert mobile trading application, online platform for our retail customer base and corporate services clients, as well as upgrades to our technological and operational infrastructure to support these platforms and future growth. We believe that these ongoing investments in technology will be key to meeting the needs of our retail customers, correspondent clearing, corporate services as well as expand into new markets and demographics. 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, 2024 2023 Retail customer net worth (in billions) $ 18.0 $ 15.9 Retail customer margin debit balances (in billions) $ 0.4 $ 0.3 Retail customer credit balances (in billions) $ 0.4 $ 0.5 Retail customer money market fund value (in billions) $ 0.8 $ 0.7 Retail customer accounts 160,054 153,727 ● 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 represent credit extended to our customers to finance their purchases against current positions ● Retail customer credit balances represent 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 represent the number of retail customers 24 Consolidated Statements of Operations and Financial Condition Consolidated Statements of Operations for the Years Ended December 31, 2024 and 2023 Revenue Commissions and fees for the year ended December 31, 2024 were $9,615,000 and increased by $2,339,000 from the corresponding period in the prior year, primarily due to strong market conditions. Interest, marketing and distribution fees for the year ended December 31, 2024 were $32,407,000 and increased by $2,830,000 from the corresponding period in the prior year primarily due to an increase in interest income received on U.S. government securities and bank deposits. Principal transactions and proprietary trading for the year ended December 31, 2024 were $14,616,000 and increased by $1,522,000 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 decrease in unrealized gain on our portfolio of U.S. government securities was due to the maturity of certain U.S. government securities and a decrease in investment 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, 2024 2023 Year over Year Increase Principal transactions and proprietary trading Realized and unrealized gain on primarily riskless principal transactions $ 14,251,000 $ 9,275,000 $ 4,976,000 Realized and unrealized gain (loss) on portfolio of U.S. government securities 365,000 3,819,000 (3,454,000 ) Total Principal transactions and proprietary trading $ 14,616,000 $ 13,094,000 $ 1,522,000 Market making for the year ended December 31, 2024 was $2,255,000 and increased by $951,000 from the corresponding period in the prior year, primarily due to strong equity markets. Stock borrow / stock loan for the year ended December 31, 2024 was $19,249,000 and increased by $3,077,000 from the corresponding period in the prior year, primarily due to a growth in stock locate services. Advisory fees for the year ended December 31, 2024 were $2,369,000 and increased by $441,000 from the corresponding period in the prior year, primarily due to growth in platform assets. Other income for the year ended December 31, 2024 was $3,390,000 and increased by $1,227,000 from the corresponding period in the prior year, primarily due to fees related to an increase in maintenance fees during the current year. Operating Expenses Employee compensation and benefits for the year ended December 31, 2024 were $43,999,000 and increased by $12,063,000 from the corresponding period in the prior year, primarily due to an increase in commission payouts and executive compensation. Clearing fees, including execution costs for the year ended December 31, 2024 were $1,607,000 and decreased by $65,000 from the corresponding period in the prior year. Technology and communications expenses for the year ended December 31, 2024 were $3,940,000 and increased by $576,000 from the corresponding period in the prior year, primarily due to an expansion of technological infrastructure. 25 Other general and administrative expenses for the year ended December 31, 2024 were $4,488,000 and increased by $78,000 from the corresponding period in the prior year. Data processing expenses for the year ended December 31, 2024 were $3,200,000 and decreased by $36,000 from the corresponding period in the prior year. Rent and occupancy expenses for the year ended December 31, 2024 were $1,631,000 and decreased by $242,000 from the corresponding period in the prior year, primarily due to a discontinued rent expense related to the temporary Miami office. Professional fees for the year ended December 31, 2024 were $5,578,000 and increased by $1,119,000 from the corresponding period in the prior year, primarily due to an increase in legal and accounting fees offset by a decrease in consulting services. Depreciation and amortization expenses for the year ended December 31, 2024 were $1,380,000 and decreased by $640,000 from the corresponding period in the prior year, primarily due to the write off of development related to integration of a technology platform that occurred in the prior year. Interest expense for the year ended December 31, 2024 was $262,000 and decreased by $1,000 from the corresponding period in the prior year. Advertising and promotion expenses for the year ended December 31, 2024 were $348,000 and increased by $193,000 from the corresponding period in the prior year, primarily due to an increase in marketing initiatives in 2024. Non-Operating Income (Loss) The earnings of equity method investment in related party for the year ended December 31, 2024 was $0 and decreased by $111,000 from the corresponding period in the prior year, primarily due to the exit of our investment in Tigress in the third quarter of 2023. The impairment of investments for the year ended December 31, 2024 was $0 and decrease by $1,035,000 from the corresponding period in the prior year, primarily due to the impairment of our investment in a technology provider of a trading platform and the impairment of our investment in Tigress occurring in 2023. Transaction termination costs for the year ended December 31, 2024 was $0 and decreased by $5,943,000 from the corresponding period in the prior year due to costs associated with the termination of the Kakaopay transaction in 2023. Provision For (Benefit From) Income Taxes The provision for income taxes for the year ended December 31, 2024 was $4,165,000 and increased by $750,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to increased profitability year over year. Refer to Note 17 – 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, 2024 was $17,000, and decreased by $1,000 from the corresponding period in the prior year. 26 Consolidated Statements of Financial Condition as of December 31, 2024 and 2023 Assets Assets as of December 31, 2024 were $519,668,000 and decreased by $282,132,000 from December 31, 2023, primarily due to a decrease in securities borrowed and cash and securities segregated, partially offset by an increase in cash and cash equivalents. Liabilities Liabilities as of December 31, 2024 were $434,576,000 and decreased by $296,515,000 from December 31, 2023, primarily due to a decrease in securities loaned and payables to customers. Liquidity and Capital Resources Overview As of December 31, 2024, a significant portion of our assets were liquid in nature, providing us with flexibility in financing our business. A significant portion of our assets not held by customers or used for stock borrow / stock loan consisted primarily of cash and cash equivalents, securities owned, at fair value, which are marked-to-market daily, and receivables from and deposits with broker-dealers and clearing organizations. 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 $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” in the consolidated statements of financial condition. Refer to Note 6 – Kakaopay Transaction for further detail. Cash and Cash Equivalents Our cash and cash equivalents were $32.6 million and $5.7 million as of December 31, 2024 and 2023, respectively. Credit Agreement On August 15, 2024, we entered into the Credit Agreement with East West Bank providing a $20 million revolving credit facility, which offers substantial financial flexibility to support our strategic initiatives. This credit facility allows the Company to fund acquisitions, execute stock buybacks, and meet general corporate needs up to $10 million, ensuring access to capital for both growth and operational purposes. The two-year term of the Credit Agreement, combined with a competitive interest rate structure that is tied to either the one-month Term SOFR plus 3.15% or a minimum of 7.50%, provides a stable and predictable financing source. The personal guarantees provided by key executives, John J. Gebbia and Gloria E. Gebbia, and their trust, further strengthen the Company’s borrowing position and help secure favorable terms. 27 BMO Credit Agreement On November 22, 2024, MSCO entered into a Credit Agreement (the “BMO Credit Agreement”) with BMO Harris Bank (“BMO Harris”). The BMO Credit Agreement provides for a revolving credit facility of up to $20,000,000. We may use any borrowings under the BMO Credit Agreement to finance NSCC Deposit Requirements (other than an Adequate Assurance Deposit) and withdrawals from a Reserve Account. As part of the agreement, we entered into a Parent Guaranty agreement guaranteeing repayment of any debt issued to MSCO. Borrowings under the BMO Credit Agreement will bear interest on the outstanding daily balance at a rate of interest per annum equal 2.5% plus the greater of: (a) Term SOFR for such day plus 0.11448% and (b) Federal Funds Target Range – Upper Limit and (c) 0.25%. The annual commitment fee is equal to one half of one percent (0.50%) of the average daily unused portion of the commitment of $20,000,000. The BMO Credit Agreement contains customary affirmative covenants and negative covenants and requires MSCO maintain minimum total regulatory capital of $45,000,000, excess net capital of 20,000,000, assets to total regulatory capital ratio of not more than 5.0 to 1.0, and a minimum liquidity ratio of not less than 1.0. We satisfied its condition precedent to deliver a legal option to BMO Harris on December 18, 2024. Debt Agreements We have $4.2 million outstanding on our 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, 2024. As of December 31, 2024, 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, 2024. Payments Due by Period 2025 2026 2027 2028 2029 Thereafter Total Operating lease commitments $ 1,048,000 $ 836,000 $ 594,000 $ 503,000 $ 45,000 $ — $ 3,026,000 Kakaopay fee (1) 2,000,000 1,000,000 — — — — 3,000,000 Mortgage with East West Bank (2) 88,000 91,000 95,000 98,000 112,000 3,744,000 4,228,000 Technology vendors (3) 872,000 — — — — — 872,000 Broadridge contract (4) 407,000 170,000 — — — — 577,000 Total $ 4,415,000 $ 2,097,000 $ 689,000 $ 601,000 $ 157,000 $ 3,744,000 $ 11,703,000 (1) Pursuant to the Settlement Agreement with Kakaopay, we are obligated to pay Kakaopay a fee of $5 million payable in ten quarterly installments that began in the first quarter of 2024. Refer to Note 6 – Kakaopay Transaction for further detail. 28 (2) On December 30, 2021, we purchased the Miami office building and financed part of the purchase price with a mortgage with East West Bank. (3) We have entered into agreements with technology vendors for certain development projects related to our Retail Platform. As of December 31, 2024, we have incurred approximately $3.4 million out of the $4.3 million total budget for these vendors. (4) In June 2023, we entered into an amendment to its service agreement with Broadridge Securities Processing Solutions, LLC with a total minimum expense of approximately $1.2 million for this arrangement. 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, 2024 and 2023, MSCO and RISE had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 18 – 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, 2024, cash used in operating activities increased by $14.9 million compared to 2023, which was primarily driven by the inclusion of cash and securities segregated for regulatory purposes, which were previously not presented in the operating section. The increase was further impacted by the outflows related to the Kakao settlement and contract termination payments, as well as a decrease in payables to customers and securities loaned. These outflows were partially offset by inflows from securities borrowed, receivables from customers, and other working capital adjustments. For the year ended December 31, 2024, cash used in investing activities increased by $3.5 million compared to 2023, which was primarily driven by the acquisition of GE as well as certain development projects related to our Retail Platform in 2024. For the year ended December 31, 2024, we had a cash outflow of $0.1 million from financing activities, compared to a net cash inflow of $13.0 million in 2023, which was primarily driven by the issuance of the Company’s common stock related to the transaction with Kakaopay in 2023. Refer to Note 6 – Kakaopay Transaction for additional detail. 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, 2024, 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. 29 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, 2024 and 2023. Refer to Note 19 – 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 FASB ASC Subtopic 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 consolidated 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 consolidated 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. FASB ASC Subtopic 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 in the statements of operations. Accrued interest and penalties would be included on the related tax liability line in the statements of financial condition. As of both December 31, 2024 and 2023, the Company recorded an uncertain tax position of $1,354,000 and $1,405,000, respectively, related to various tax matters, which is included in the line item “Taxes payable” in the statements of financial condition. 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. 30 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 FASB ASC Topic 740 – “Improvements to Income Tax Disclosures” (“Topic 740”) on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We recognize interest and penalties related to unrecognized tax benefits on the provision for income taxes line in the consolidated statements of operations. Accrued interest and penalties would be included on the related tax liability line in the consolidated statements of financial condition. Disregarded entities and income tax treatment Starting in 2024, both MSCO and SNXT are single member limited liability companies that will be treated as disregarded entities for tax purposes. As such, both MSCO and SNXT will no longer be subject to direct taxation and will be disregarded by the relevant tax authorities. The guidance in Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes specifies that an entity is not required to allocate income tax provision to a legal entity that is both not subject to tax and disregarded by the taxing authority, but an entity may elect to do so. MSCO and SNXT are not making the available election to allocate income taxes. Accordingly, on a prospective basis, MSCO and SNXT will no longer record current or deferred income taxes. Recent Accounting Pronouncements Refer to Note 2 – Summary of Significant Accounting Policies for information regarding new Accounting Standards Updates (“ASU”s) issued by the FASB.