SIEBERT FINANCIAL CORP 10-Q

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 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 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 Stock Purchase Agreement 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 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). A copy of the First Tranche Stock Purchase Agreement and Second Tranche Stock Purchase Agreement, both dated April 27, 2023 are attached in this Report as Exhibit 10.28 and Exhibit 10.29, respectively. Concurrent with the consummation of the First Tranche, Siebert, Kakaopay, and the certain family members related to Directors John J. Gebbia and Gloria E. Gebbia (“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 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. - 20 - As of the date of this Report, prior to the close of the Second Tranche, Gloria E. Gebbia, members of her family, and affiliated entities are collectively Siebert’s largest stockholders (such stockholders, the “Gebbia 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 (the “Siebert Board”). 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 Siebert Board 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 Siebert’s Board, 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 Siebert Board are required to be independent directors in accordance with Nasdaq Listing Rule 5605. In addition to obtaining authorizations, approvals or permits from FINRA, state, and Korean regulators, as described in the Second Tranche Stock Purchase Agreement, and other customary conditions to closing ( e.g. , no breach of fundamental representations and warranties and no material adverse effect), the consummation of the Second Tranche Stock Purchase Agreement is contingent upon Siebert meeting certain business performance targets, as described in the Second Tranche Stock Purchase Agreement, and obtaining certain Siebert Board and shareholder approvals, entering into certain agreements with key personnel and stockholders, obtaining certain third-party consents, and appointing certain directors to Siebert’s Board, each as described further in the Second Tranche Stock Purchase Agreement. Siebert and Kakaopay do not expect the closing of the Second Tranche to result in reorganization or significant changes to the Company’s business; rather, the primary motivation for entering into the transaction with Kakaopay is to mutually expand Kakaopay’s and Siebert’s business leveraging the strengths of both firms. Kakaopay offers a diverse array of financial services and has approximately 40 million registered users according to Kakaopay. The Gebbia Family will continue to hold significant ownership of Siebert, and Siebert’s current management team, led by the Gebbia Family, will continue to manage Siebert’s operations and branch locations. Siebert intends to utilize the additional capital from the first tranche and second tranche primarily to launch correspondent clearing, expand its securities lending business, corporate services, order flow opportunities, and other initiatives. Refer to Siebert’s Current Report on Form 8-K filed on May 3, 2023 for further detail regarding this transaction. 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 $0.3 million and $0.7 million for RISE for the three and six months ended June 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 June 30, 2023 and 2022, this agreement resulted in pre-tax income of $82,000 and $36,000, respectively. For the six months ended June 30, 2023 and 2022, this agreement resulted in pre-tax income of $148,000 and $119,000, 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. As of June 30, 2023 and the date of this Report, Siebert owned 17% and 0% of Tigress, respectively. 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. - 21 - Technology Partner In third quarter of 2022, we entered into a software license agreement with a new technology provider for the development of a new retail trading platform which will replace our current platforms and resulted in the termination of our original technology relationship. In June 2023, we launched a new trading platform to our retail clients. We believe this new technology provider will be key to creating a platform for the next generation of retail customers. 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 June 30, 2023 December 31, 2022 Retail customer net worth (in billions) $ 15.2 $ 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 126,143 122,394 ● 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 Client Activity Metrics Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Total retail trades 192,976 91,389 275,197 201,341 ● Total retail trades represent retail trades that generate commissions Statements of Operations and Financial Condition Statements of Operations for the Three Months Ended June 30, 2023 and 2022 Revenue Commissions and fees for the three months ended June 30, 2023 were $1,952,000 and increased by $99,000 from the corresponding period in the prior year, primarily due to market conditions. Interest, marketing and distribution fees for the three months ended June 30, 2023 were $7,416,000 and increased by $4,265,000 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. Principal transactions and proprietary trading for the three months ended June 30, 2023 were $2,654,000 and increased by $1,573,000 from the corresponding period in the prior year, primarily due to the factors discussed below. - 22 - 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 $2.4 million as of June 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 June 30, 2023 2022 Increase (Decrease) Principal transactions and proprietary trading Realized and unrealized gain on primarily riskless principal transactions $ 2,186,000 $ 1,698,000 $ 488,000 Unrealized gain (loss) on portfolio of U.S. government securities 468,000 (617,000 ) 1,085,000 Total Principal transactions and proprietary trading $ 2,654,000 $ 1,081,000 $ 1,573,000 Market making for the three months ended June 30, 2023 was $268,000 and decreased by $267,000 from the corresponding period in the prior year, primarily due to market conditions. Stock borrow / stock loan for the three months ended June 30, 2023 was $4,513,000 and increased by $365,000 from the corresponding period in the prior year, primarily due to the expansion of stock locate counterparties and the growth of stock locate and securities lending businesses. Advisory fees for the three months ended June 30, 2023 were $471,000 and decreased by $5,000 from the corresponding period in the prior year. Other income for the three months ended June 30, 2023 was $318,000 and decreased by $161,000 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 June 30, 2023 were $8,080,000 and increased by $712,000 from the corresponding period in the prior year, primarily due to timing of commission payouts and an increase in incentive compensation. Clearing fees, including execution costs for the three months ended June 30, 2023 were $329,000 and decreased by $46,000 from the corresponding period in the prior year, primarily due to a decrease in clearing costs with NFS. Technology and communications expenses for the three months ended June 30, 2023 were $793,000 and decreased by $185,000 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 cost. Other general and administrative expenses for the three months ended June 30, 2023 were $1,119,000 and increased by $184,000 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 June 30, 2023 were $741,000 and increased by $54,000 from the corresponding period in the prior year, primarily due to an increase in trading technology cost. Rent and occupancy expenses for the three months ended June 30, 2023 were $491,000 and increased by $35,000 from the corresponding period in the prior year. - 23 - Professional fees for the three months ended June 30, 2023 were $1,007,000 and decreased by $25,000 from the corresponding period in the prior year, primarily due to timing of legal fees, partially offset by an increase in board fees. Depreciation and amortization expenses for the three months ended June 30, 2023 were $261,000 and had no change from the corresponding period in the prior year. Interest expense for the three months ended June 30, 2023 was $94,000 and decreased by $9,000 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 June 30, 2023 was $18,000 and decreased by $41,000 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 three months ended June 30, 2023 was $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 the Retail Platform and our investment in Tigress. The earnings of equity method investment in related party for the three months ended June 30, 2023 was $73,000 and increased by $59,000 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 three months ended June 30, 2023 was $969,000 and increased from the benefit for income taxes by $1,996,000 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 second 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 income attributable to noncontrolling interests for the three months ended June 30, 2023 was $25,000, and increased by $226,000 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 Six Months Ended June 30, 2023 and 2022 Revenue Commissions and fees for the six months ended June 30, 2023 were $3,853,000 and decreased by $340,000 from the corresponding period in the prior year, primarily due to market conditions. Interest, marketing and distribution fees for the six months ended June 30, 2023 were $14,389,000 and increased by $8,876,000 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. Principal transactions and proprietary trading for the six months ended June 30, 2023 were $5,454,000 and increased by $4,640,000 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 June 30, 2023 and 2022.” Six Months Ended June 30, 2023 2022 Increase (Decrease) Principal transactions and proprietary trading Realized and unrealized gain on primarily riskless principal transactions $ 3,985,000 $ 3,616,000 $ 369,000 Unrealized gain (loss) on portfolio of U.S. government securities 1,469,000 (2,802,000 ) 4,271,000 Total Principal transactions and proprietary trading $ 5,454,000 $ 814,000 $ 4,640,000 Market making for the six months ended June 30, 2023 was $613,000 and decreased by $686,000 from the corresponding period in the prior year, primarily due to market conditions. Stock borrow / stock loan for the six months ended June 30, 2023 was $7,955,000 and increased by $229,000 from the corresponding period in the prior year, primarily due to the expansion of stock locate counterparties and the growth of stock locate and securities lending businesses. - 24 - Advisory fees for the six months ended June 30, 2023 were $915,000 and decreased by $68,000 from the corresponding period in the prior year, primarily due to market conditions. Other income for the six months ended June 30, 2023 was $583,000 and decreased by $920,000 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 six months ended June 30, 2023 were $15,047,000 and increased by $585,000 from the corresponding period in the prior year, primarily due to an increase in incentive compensation, partially offset by lower commission payouts, lower employee healthcare costs and the elimination of compensation expense related to RISE in 2023. Clearing fees, including execution costs for the six months ended June 30, 2023 were $684,000 and decreased by $185,000 from the corresponding period in the prior year, primarily due to a decrease in clearing costs with NFS. Technology and communications expenses for the six months ended June 30, 2023 were $1,582,000 and decreased by $578,000 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 cost. Other general and administrative expenses for the six months ended June 30, 2023 were $2,212,000 and increased by $346,000 from the corresponding period in the prior year, primarily due to an increase in travel and entertainment expenses. Data processing expenses for the six months ended June 30, 2023 were $1,592,000 and increased by $389,000 from the corresponding period in the prior year, primarily due to an increase in trading technology cost. Rent and occupancy expenses for the six months ended June 30, 2023 were $969,000 and increased by $40,000 from the corresponding period in the prior year. Professional fees for the six months ended June 30, 2023 were $2,081,000 and increased by $353,000 from the corresponding period in the prior year, primarily due to an increase in legal fees, board fees, and other consulting fees partially offset by a reduction in professional fees related to RISE in 2023. Depreciation and amortization expenses for the six months ended June 30, 2023 were $451,000 and decreased by $69,000 from the corresponding period in the prior year, primarily due to the completion of useful lives of certain software assets in 2022. Interest expense for the six months ended June 30, 2023 was $182,000 and decreased by $45,000 from the corresponding period in the prior year, primarily due to a decrease in interest related to notes payable, partially offset by an increase in interest on our line of credit. Advertising and promotion expense for the six months ended June 30, 2023 was a credit of $10,000 and decreased by $182,000 from the corresponding period in the prior year, primarily due to a reversal related to advertising expenses and a decrease in promotional costs for various marketing initiatives. Non-Operating Income (Loss) The impairment of investments for the six months ended June 30, 2023 was $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 the Retail Platform and our investment in Tigress. The earnings of equity method investment in related party for the six months ended June 30, 2023 was $111,000 and decreased by $104,000 from the corresponding period in the prior year, primarily due to a decrease in our proportional income from our investment in Tigress. Provision For (Benefit From) Income Taxes The provision from income taxes for the six months ended June 30, 2023 was $2,105,000 and increased from the benefit for income taxes by $3,414,000 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 six months ending June 30, 2023. Refer to Note 18 – Income Taxes for additional detail. - 25 - 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 six months ended June 30, 2023 was $44,000, and increased by $364,000 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 June 30, 2023 and December 31, 2022 Assets Assets as of June 30, 2023 were $1,065,049,000 and increased by $337,001,000 from December 31, 2022, primarily due to an increase in securities borrowed partially offset by a decrease in cash and cash equivalents and cash and securities segregated for regulatory purposes. Liabilities Liabilities as of June 30, 2023 were $993,731,000 and increased by $315,603,000 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. Kakao Pay The capital infusion from Kakao Pay 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 recorded 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 capital from the First Tranche and Second Tranche provides Siebert with additional liquidity and ability to expand its various business lines. Siebert intends to utilize the additional capital primarily to launch correspondent clearing, expand its securities lending business, corporate services, order flow opportunities, and other initiatives. Cash and Cash Equivalents Our cash and cash equivalents were $7.6 million and $23.7 million as of June 30, 2023 and December 31, 2022, respectively. Cash Requirements The following table summarizes our short- and long-term material cash requirements as of June 30, 2023. Payments Due By Period 2023 2024 2025 2026 Thereafter Total Operating lease commitments $ 592,000 $ 588,000 $ 450,000 $ 234,000 $ 48,000 $ 1,912,000 Mortgage with East West Bank 42,000 84,000 88,000 91,000 4,048,000 4,353,000 Technology vendor* 850,000 350,000 — — — 1,200,000 Total $ 1,484,000 $ 1,022,000 $ 538,000 $ 325,000 $ 4,096,000 $ 7,465,000 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 $2,114,000. *On March 31, 2023, we entered into an agreement with a technology vendor for certain development projects for a total of approximately $1.2 million over a term of 2 years. - 26 - Debt Agreements We have a $4.4 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 June 30, 2023. In the second quarter of 2023, we paid off our $2.7 million loan outstanding with East West Bank. As of June 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 Demand TM 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 six months ended June 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 six months ended June 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 six months ended June 30, 2023, we had negative operating cash flow primarily due to an increase in securities borrowed and securities owned, at fair value, as well as a decrease in payables to customers, partially offset by an increase in securities loaned. We had investing cash outflows primarily from the build out of the Miami office building and development work related to our new retail trading platform and other technology initiatives. We had financing cash inflows primarily due to the Kakao Pay transaction offset by the repayment of our loan with East West Bank. - 27 - For the six months ended June 30, 2022, we had negative operating cash flow primarily due to the decrease in securities loaned, partially offset by the decrease in securities borrowed. We had investing cash outflows primarily from the build out of the Miami office building and development work related to software. We had financing cash outflows related the repayment of a note payable - related party, partially offset by the issuance and transfers of RISE membership interests. Long Term Contracts Contract with NFS 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 June 30, 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 $1.3 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 six months ended June 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 June 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 June 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”). - 28 -