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 2024 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. Financial Overview In the second quarter of 2025, loss per share was $0.12, compared to earnings per share of $0.10 in the second quarter of 2024. In the second quarter of 2025, our revenues were $14.9 million and operating loss before taxes was $5.8 million, compared to revenues of $20.9 million and operating income before taxes of $5.6 million in the second quarter of 2024. A substantial portion of our operating loss for the three months ended June 30, 2025 is due to the realized and unrealized gain (loss) on our Investment in Equity Security described in the section below. Financial highlights as of June 30, 2025: ● Principal transactions decreased by 206% to negative $3.8 million compared to the prior-year quarter ● Stock borrow / stock loan increased by 60% to $7.5 million compared to the prior-year quarter ● Advisory fees increased by 44% to $0.8 million compared to the prior-year quarter Investment in Equity Security In the first quarter of 2025, we acquired the Investment in Equity Security in connection with a private placement from a private U.S company that subsequently completed an IPO. Following the IPO, these shares were subject to resale restrictions until they were registered with the SEC. There was significant volatility in the price of the shares, and in the three months ended March 31, 2025, we recorded an unrealized gain of approximately $9.2 million as the per share price closed at $85.31 on March 31, 2025. In June 2025, after the lifting of contractual sale restrictions, we sold the majority of our Investment in Equity Security for an average price of $19.00 per share and recognized a total gain of $2.4 million for the six months ended June 30, 2025. However, we recognized a total realized and unrealized loss of $6.8 million for the three months ended June 30, 2025, which drove our operating loss for the current quarter. - 26 - Following the IPO, we value the remaining shares of the Investment in Equity Security at its public trading price. We have recorded an unrealized gain of $0.1 million in relation to our remaining shares in the Investment in Equity Security for the three months ended June 30, 2025. The realized and unrealized and gain (loss) associated with the Investment in Equity Security is recorded in the line item “Principal transactions and proprietary trading” in our statement of operations, the detail of which is displayed below. Three Months Ended June 30, 2025 2024 Increase (Decrease) Principal transactions and proprietary trading Realized and unrealized gain on primarily riskless principal transactions $ 3,024,000 $ 3,480,000 $ (456,000 ) Realized and unrealized gain (loss) on Investment in Equity Security (6,803,000 ) — (6,803,000 ) Realized and unrealized gain on portfolio of U.S. government securities 8,000 94,000 (86,000 ) Total Principal transactions and proprietary trading $ (3,771,000 ) $ 3,574,000 $ (7,345,000 ) Six Months Ended June 30, 2025 2024 Increase (Decrease) Principal transactions and proprietary trading Realized and unrealized gain on primarily riskless principal transactions $ 6,736,000 $ 6,923,000 $ (187,000 ) Realized and unrealized gain (loss) on Investment in Equity Security 2,430,000 — 2,430,000 Realized and unrealized gain on portfolio of U.S. government securities 24,000 157,000 (133,000 ) Total Principal transactions and proprietary trading $ 9,190,000 $ 7,080,000 $ 2,110,000 Acquisition of BMLG Assets In the second quarter of 2025, we acquired certain assets from BMLG related to music masters, including associated copyrights and artwork and serves an expansion upon our acquisition of GM. This acquisition gives Siebert ownership of recorded masters from artists such as Daughtry, Badflower, Sammy Hagar, Olive Vox, and Ryan Perdz, among others. The total cost of the acquisition was $441,000, which includes cash consideration of $337,000 and direct transaction costs of $104,000. 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. - 27 - 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. The following table presents simulated changes to net interest revenue over the next 12 months beginning as of June 30, 2025 and December 31, 2024, of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period: As of June 30, 2025 December 31, 2024 Increase of 200 basis points 31 % 32 % Increase of 100 basis points 16 % 18 % Increase of 50 basis points 8 % 11 % Decrease of 50 basis points (7 )% (4 )% Decrease of 100 basis points (15 )% (11 )% Decrease of 200 basis points (30 )% (26 )% The difference in our simulated incremental increases and decreases in the market interest rates as of June 30, 2025 compared to December 31, 2024 is primarily due to an increase in the proportion of segregated cash to segregated securities and an increase 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 projects collectively termed as Siebert’s Retail Platform. Technology development projects such as the online platform for Siebert’s retail customer base and corporate service clients have been placed into service in the six months ended June 30, 2025 and projects are anticipated to go live by the end of 2025. We believe that these ongoing investments in technology will be key in meeting the needs of our retail customers, correspondent clearing, corporate services as well as our expansion 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 June 30, 2025 December 31, 2024 Retail customer net worth (in billions) $ 17.4 $ 18.0 Retail customer margin debit balances (in billions) $ 0.4 $ 0.4 Retail customer credit balances (in billions) $ 0.4 $ 0.4 Retail customer money market fund value (in billions) $ 0.8 $ 0.8 Retail customer accounts 163,616 160,054 ● 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 - 28 - Statements of Operations and Financial Condition Statements of Operations for the Three Months Ended June 30, 2025 and 2024 Revenue Commissions and fees for the three months ended June 30, 2025 were $2,014,000 and decreased by $589,000 from the corresponding period in the prior year, primarily due to weaker market conditions. Interest, marketing and distribution fees for the three months ended June 30, 2025 were $6,869,000 and decreased by $966,000 from the corresponding period in the prior year primarily due to a decline in interest rates. Principal transactions and proprietary trading for the three months ended June 30, 2025 was negative $3,771,000 and decreased by $7,345,000 from the corresponding period in the prior year, primarily due to the realized and unrealized loss of $6,803,000 in our Investment in Equity Security, which is explained further in the section above titled “Investment in Equity Security.” Market making for the three months ended June 30, 2025 was $497,000 and increased by $60,000 from the corresponding period in the prior year. Stock borrow / stock loan for the three months ended June 30, 2025 was $7,522,000 and increased by $2,826,000 from the corresponding period in the prior year, primarily due to growth in stock locate services and securities lending businesses. Advisory fees for the three months ended June 30, 2025 were $791,000 and increased by $240,000 from the corresponding period in the prior year, primarily due to growth in platform assets. Other income for the three months ended June 30, 2025 was $952,000 and decreased by $215,000 from the corresponding period in the prior year, primarily due to fees related to administrative services. Operating Expenses Employee compensation and benefits for the three months ended June 30, 2025 were $13,388,000 and increased by $3,081,000 from the corresponding period in the prior year, primarily due to an increase in equity compensation as well as additional personnel related to technology initiatives and expansion into investment banking and servicing active trader customers. Clearing fees, including execution costs for the three months ended June 30, 2025 were $448,000 and increased by $210,000 from the corresponding period in the prior year, primarily due to a reclassification of certain fees in 2025. Technology and communications expenses for the three months ended June 30, 2025 were $1,045,000 and increased by $165,000 from the corresponding period in the prior year, primarily due to an expansion of technological infrastructure. Other general and administrative expenses for the three months ended June 30, 2025 were $1,840,000 and increased by $770,000 from the corresponding period in the prior year primarily due to fees related to expansion into investment banking and servicing active trader customers. Data processing expenses for the three months ended June 30, 2025 were $1,147,000 and increased by $415,000 from the corresponding period in the prior year, primarily due to expansion of technology infrastructure. Rent and occupancy expenses for the three months ended June 30, 2025 were $442,000 and increased by $64,000 from the corresponding period in the prior year. - 29 - Professional fees for the three months ended June 30, 2025 were $1,451,000 and increased by $211,000 from the corresponding period in the prior year primarily due to the establishment of the Siebert advisory committee and the expansion into new business lines. Depreciation and amortization expenses for the three months ended June 30, 2025 were $629,000 and increased by $293,000 from the corresponding period in the prior year, primarily due to an increase in amortization for the technology projects placed in service in the second quarter of 2025. Interest expense for the three months ended June 30, 2025 was $98,000 and increased by $38,000 from the corresponding period in the prior year primarily due to interest related to an agreement with Kakaopay in 2024. Advertising and promotion expense for the three months ended June 30, 2025 was $218,000 and increased by $175,000 from the corresponding period in the prior year, primarily due to an increase in marketing initiatives. Provision For (Benefit From) Income Taxes The benefit from income taxes for the three months ended June 30, 2025 was $1,113,000 and decreased from the provision for income taxes by $2,645,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to a pre-tax loss incurred in the second quarter of 2025. Refer to Note 14 – 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 interest in our financial statements. The net income attributable to noncontrolling interests for the three months ended June 30, 2025 was $0 and decreased by $7,000 from the corresponding period in the prior year. Statements of Operations for the Six Months Ended June 30, 2025 and 2024 Revenue Commissions and fees for the six months ended June 30, 2025 were $4,116,000 and decreased by $787,000 from the corresponding period in the prior year, primarily due to weaker market conditions. Interest, marketing and distribution fees for the six months ended June 30, 2025 were $13,814,000 and decreased by $2,784,000 from the corresponding period in the prior year primarily due to a due to a decline in interest rates. Principal transactions and proprietary trading for the six months ended June 30, 2025 were $9,190,000 and increased by $2,110,000 from the corresponding period in the prior year, primarily due to the realized and unrealized gain of $2,430,000 in our Investment in Equity Security, which is explained further in the section above titled “Investment in Equity Security.” Market making for the six months ended June 30, 2025 was $1,049,000 and decreased by $60,000 from the corresponding period in the prior year. Stock borrow / stock loan for the six months ended June 30, 2025 was $12,359,000 and increased by $3,565,000 from the corresponding period in the prior year, primarily due to growth in stock locate services and securities lending businesses. Advisory fees for the six months ended June 30, 2025 were $1,539,000 and increased by $498,000 from the corresponding period in the prior year, primarily due to growth in platform assets. Other income for the six months ended June 30, 2025 was 1,726,000 and decreased by $68,000 from the corresponding period in the prior year, primarily due to fees related to administrative services. - 30 - Operating Expenses Employee compensation and benefits for the six months ended June 30, 2025 were $25,310,000 and increased by $4,627,000 from the corresponding period in the prior year, primarily due to an increase in equity compensation as well as additional personnel related to technology initiatives and expansion into investment banking and servicing active trader customers. Clearing fees, including execution costs for the six months ended June 30, 2025 were $902,000 and increased by $236,000 from the corresponding period in the prior year, primarily due to primarily due to a reclassification of certain fees in 2025. Technology and communications expenses for the six months ended June 30, 2025 were $2,150,000 and increased by $394,000 from the corresponding period in the prior year, primarily due to an expansion of technological infrastructure. Other general and administrative expenses for the six months ended June 30, 2025 were $3,349,000 and increased by $1,250,000 from the corresponding period in the prior year primarily due to fees related to expansion into investment banking and servicing active trader customers. Data processing expenses for the six months ended June 30, 2025 were $2,096,000 and increased by $613,000 from the corresponding period in the prior year, primarily due to expansion of technology infrastructure. Rent and occupancy expenses for the six months ended June 30, 2025 were $909,000 and increased by $34,000 from the corresponding period in the prior year. Professional fees for the six months ended June 30, 2025 were $2,810,000 and increased by $533,000 from the corresponding period in the prior year primarily due to the establishment of the Siebert advisory committee and expansion into new business lines. Depreciation and amortization expenses for the six months ended June 30, 2025 were $1,044,000 and increased by $453,000 from the corresponding period in the prior year, primarily due to an increase in amortization for the technology projects placed in service in the second quarter of 2025. Interest expense for the six months ended June 30, 2025 was 187,000 and increased by $76,000 from the corresponding period in the prior year related to an agreement with Kakaopay in 2024. Advertising and promotion expense for the six months ended June 30, 2025 was $372,000 and increased by $275,000 from the corresponding period in the prior year, primarily due to an increase in marketing initiatives. Provision For (Benefit From) Income Taxes The provision from income taxes for the six months ended June 30, 2025 was $722,000 and decreased from the provision for income taxes by $2,225,000 from the corresponding period in the prior year. The change from the corresponding period in the prior year is primarily due to a decrease in pre-tax earnings in the six months ending June 30, 2025. Refer to Note 14 – Income Taxes for additional detail. - 31 - 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 interest in our financial statements. The net loss attributable to noncontrolling interests for the six months ended June 30, 2025 was $3,000 and increased by $9,000 from the corresponding period in the prior year. Statements of Financial Condition As of June 30, 2025 and December 31, 2024 Assets Assets as of June 30, 2025 were $560,512,000 and increased by $40,844,000 from December 31, 2024, primarily due to a increase in securities borrowed, partially offset by a decrease in cash and securities segregated for regulatory purposes. Liabilities Liabilities as of June 30, 2025 were $470,524,000 and increased by $35,948,000 from December 31, 2024, primarily due to an increase in securities loaned partially offset by a decrease in payables to customers. Liquidity and Capital Resources Overview As of June 30, 2025, 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 cash requirements 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 transaction was approximately $14.8 million after the issuance cost. This capital is used to enhance our regulatory capital, and is primarily invested in U.S. government securities and is in the line item “Securities owned, at fair value” on the statements of financial condition. Refer to Note 6 – Kakaopay Transaction in our 2024 Form 10-K for further detail. Cash and Cash Equivalents Our cash and cash equivalents were $28.9 million and $32.6 million as of June 30, 2025 and December 31, 2024, 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 us 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 our borrowing position and help secure favorable terms. - 32 - 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 bears 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. 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 June 30, 2025. As of June 30, 2025, we were in compliance with all covenants related to our mortgage agreement. Cash Requirements The following table summarizes our short- and long-term material cash requirements as of June 30, 2025. Payments Due By Period 2025 2026 2027 2028 2029 Thereafter Total Operating lease commitments $ 503,000 $ 864,000 $ 613,000 $ 522,000 $ 58,000 $ — $ 2,560,000 Kakaopay fee (1) 1,000,000 1,000,000 — — — — 2,000,000 Mortgage with East West Bank (2) 44,000 91,000 95,000 98,000 112,000 3,744,000 4,184,000 Technology vendors (3) 144,000 — — — — — 144,000 Broadridge contract (4) 203,000 170,000 — — — — 373,000 Total $ 1,894,000 $ 2,125,000 $ 708,000 $ 620,000 $ 170,000 $ 3,744,000 $ 9,261,000 (1) Pursuant to the Settlement Agreement with Kakaopay, we will 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 in our 2024 Form 10-K for further detail. (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 June 30, 2025, we have incurred approximately $4.5 million out of the $4.6 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. - 33 - Shelf Registration Statement On May 30, 2025, we filed a shelf registration statement on Form S-3 that was declared effective on June 9, 2025 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. As noted below under “At the Market Offering,” we have utilized $50 million of the $100 million capacity under the shelf registration statement for our At the Market program. At the Market Offering On June 27, 2025, we entered into a Sales Agreement (“Sales Agreement”) with our subsidiary, Muriel Siebert & Co., LLC, and Ladenburg Thalmann & Co. Inc., as agents, under which we may offer and sell, through or to the agents, shares of our common stock having an aggregate offering price of up to $50.0 million, from time to time. For the three and six months ended June 30, 2025, we did not sell any shares pursuant to this Sales Agreement. Refer to Note 18 – 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, 2025 and 2024, MSCO and RISE had sufficient net capital to meet their respective liquidity and regulatory capital requirements. Refer to Note 15 – Capital Requirements for more detail about our capital requirements. Cash Flows Cash used in operating activities consisted of net income 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, 2025, cash used in operating activities increased by $5.5 million compared to the prior year period, which was primarily driven by the net change in securities loaned, securities borrowed and payables to customers. For the six months ended June 30, 2025, cash used in investing activities decreased by $1.5 million compared to the prior year period, which was primarily driven by the investment in FusionIQ, partially offset by less investment in office facilities. For the six months ended June 30, 2025, cash flows used in financing activities increased by $36,000 compared to 2024, which was primarily driven by the RISE cash distribution. 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 June 30, 2025, we do not expect to terminate the contract with NFS before the end of the contract term. Refer to Note 12 – Deferred Contract Incentive and Note 18 – 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. As of June 30, 2025, the total remaining minimum expense for this arrangement is estimated at approximately $0.4 million over the duration of the contract. - 34 - 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, 2025 and 2024. Refer to Note 16 – 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, 2025 and December 31, 2024, we recorded an uncertain tax position of $1,354,000 related to various tax matters, which is included in the line item “Taxes payable” in the statements of financial condition. Tax Legislation On July 4, 2025, President Trump signed H.R. 1, the One Big Beautiful Bill Act (“OBBBA”), into law. In accordance with U.S. GAAP, specifically ASC 740 – Income Taxes, we will account for the tax effects of changes in tax law in the period of enactment which is in the third quarter of 2025. We are currently in the process of analyzing the tax impacts of the law change but we do not expect a material impact on our effective tax rate Critical Accounting Policies and Estimates 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 2024 Form 10-K. As of June 30, 2025, there have been no changes to our critical accounting policies or estimates. New Accounting Standards In December 2023, the 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. In November 2024, the FASB issued ASU “2024-03”, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures” (“ASU 2024-03”). The ASU is intended to enhance the transparency and decision usefulness of income statement expense disclosures by requiring greater disaggregation of certain expense categories. ASU 2024-03 will be effective for us for annual periods beginning after December 15, 2025, though early adoption is permitted. We are currently evaluating the impact that ASU 2024-03 will have on our consolidated financial statements and we anticipate the amendments will require significant changes to our expense disclosures. 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. - 35 -