Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
Numbers are rounded for presentation purposes. See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Basis of Presentation
Organization
Overview
Siebert Financial Corp., a New York corporation, incorporated in 1934, is a holding company that conducts the following lines of business through its wholly-owned subsidiaries and VIE:
•
Muriel Siebert & Co., Inc. (“MSCO”) provides retail brokerage services. MSCO is a Delaware corporation and broker-dealer registered with the Securities and Exchange Commission (“SEC”) under the Exchange Act and the Commodity Exchange Act of 1936, and member of the Financial Industry Regulatory Authority (“FINRA”), the New York Stock Exchange (“NYSE”), the Securities Investor Protection Corporation (“SIPC”), and the National Futures Association (“NFA”).
•
Siebert AdvisorNXT, Inc. (“SNXT”) provides investment advisory services. SNXT is a New York corporation registered with the SEC as a Registered Investment Advisor (“RIA”) under the Investment Advisers Act of 1940.
•
Park Wilshire Companies, Inc. (“PW”) provides insurance services. PW is a Texas corporation and licensed insurance agency.
•
Siebert Technologies, LLC (“STCH”) provides technology development. STCH is a Nevada limited liability company.
•
RISE Financial Services, LLC (“RISE”) provides prime brokerage services. RISE is a Delaware limited liability company and a broker-dealer registered with the SEC and NFA.
•
StockCross Digital Solutions, Ltd. (“STXD”) is an inactive subsidiary headquartered in Bermuda.
For purposes of this Report on Form 10-Q, the terms “Siebert,” “Company,” “we,” “us,” and “our” refer to Siebert Financial Corp., MSCO, SNXT, PW, STCH, RISE, and STXD collectively, unless the context otherwise requires.
The Company is headquartered in New York, NY, with primary operations in New Jersey, Florida, and California. The Company has 14 branch offices throughout the U.S. and clients around the world. The Company’s SEC filings are available through the Company’s website at www.siebert.com, where investors can obtain copies of the Company’s public filings free of charge. The Company’s common stock, par value $.01 per share, trades on the Nasdaq Capital Market under the symbol “SIEB.”
The Company primarily operates in the securities brokerage and asset management industry and has no other reportable segments. All of the Company's revenues for the three and nine months ended September 30, 2022 and 2021 were derived from its operations in the U.S.
As of September 30, 2022, the Company is comprised of a single operating segment based on the factors related to management’s decision-making framework as well as management evaluating performance and allocating resources based on assessments of the Company from a consolidated perspective.
Termination of Agreement with Technology Partner
On April 21, 2020, the Company entered into a Master Services Agreement (“MSA”), with a technology partner. Refer to Note 5 – Prepaid Service Contract in the Company’s 2021 Form 10-K for further detail.
The Company entered into a Consulting Services Agreement (“CSA”) in February 2022 with the technology partner, whereby the Company would provide certain consulting services over an 18-month period. The consulting fee income was being recognized on a straight-line basis over the service period. The Company recorded $867,000 and $1,170,000 for the three and nine months ended September 30, 2022 related to this agreement in the line item “Other income” on the statements of operations.
On September 26, 2022, the Company and the technology partner mutually agreed to terminate the services being provided under both the MSA and the CSA. Per the terms of the respective termination agreements, neither the Company nor the technology partner will have any further obligations to provide future services. As part of the termination, the technology partner returned 193,906 shares of the Company’s common stock previously issued and agreed to pay the Company a total of $950,000.
As of September 30, 2022, the Company has a receivable of $475,000 in the line item “Other receivables” on the statements of financial condition which is expected to be paid in December 2022. As a result of the termination, the Company wrote off the remaining balance of the prepaid service contract of $532,000 and the expense is included in “Technology and Communications” on the statements of operations for the three and nine months ended September 30, 2022. The payment of $950,000 is included in the line item “Other income” on the statements of operations for the three and nine months ended September 30, 2022.
Transaction with Hedge Connection
On January 21, 2022, RISE entered into an agreement with Hedge Connection, Inc. (“Hedge Connection”), a Florida corporation and a woman-owned fintech company founded by Lisa Vioni that provides capital introduction software solutions for the prime brokerage industry. The Company accounts for Hedge Connection under the equity method of accounting. Refer to Note 8 – Equity Method Investments in Related Parties, for additional detail.
Change in Membership Interests of RISE
During the first quarter of 2022, RISE issued and Siebert sold membership interests in RISE to certain employees, directors, and affiliates of RISE and Siebert.
From January 1, 2022 through March 30, 2022, RISE issued 8.3% of RISE’s total issued and outstanding membership interests in exchange for a net increase in assets of $1,000,000. Siebert sold membership interests representing 2% of RISE’s total issued and outstanding membership interests to two Siebert employees. Through March 30, 2022, Siebert continued to hold a majority ownership interest in RISE.
On March 31, 2022, Siebert exchanged $2,880,000 in aggregate of notes payable to Gloria E. Gebbia for 24% ownership interest in RISE. As a result of the aforementioned transactions, Siebert’s direct ownership percentage in RISE declined from 76% as of December 31, 2021 to approximately 44% as of March 31, 2022, and remained unchanged as of September 30, 2022.
The change in membership interest on March 31, 2022 required Siebert to reassess its interest in RISE in accordance with Accounting Standards Codification (“ASC”) Topic 810 – Consolidation. As of March 31, 2022, Siebert determined that RISE is a VIE as the equity holders lack the characteristics of a controlling financial interest. Siebert holds a variable interest in RISE and is the primary beneficiary of RISE since it holds both the power to direct the activities of RISE that most significantly impact RISE’s economic performance, as well as the obligation to absorb losses and right to receive the returns from RISE that would be significant to RISE. Accordingly, Siebert consolidates RISE as a VIE. As of September 30, 2022, there have been no changes to this conclusion. Refer to Note 3 – Consolidation of Variable Interest Entity for further information.
The Company entered into several arrangements in the fourth quarter of 2022 that will impact its ownership interests of RISE, Tigress, and Hedge Connection and as well as various arrangements with these entities. Refer to Note 20 – Subsequent Events for further detail.
Basis of Presentation
The accompanying condensed consolidated financial statements (“financial statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements.
In the opinion of management, the financial statements contain all adjustments (consisting of normal recurring entries) necessary to fairly present such interim results. Interim results are not necessarily indicative of the results of operations which may be expected for a full year or any subsequent period. These financial statements should be read in conjunction with the financial statements and notes thereto in the Company’s 2021 Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of Siebert and its consolidated subsidiaries, each of which is a wholly-owned subsidiary, as well as the 44% investment in a VIE for which the Company has determined it is the primary beneficiary. Upon consolidation, all intercompany balances and transactions are eliminated.
For consolidated subsidiaries that are not wholly-owned, the third-party holdings of equity interests are referred to as noncontrolling interests. The net income or loss attributable to noncontrolling interests for such subsidiaries is presented as net income or loss attributable to noncontrolling interests in the statements of operations. The portion of total equity that is attributable to noncontrolling interests for such subsidiaries is presented as noncontrolling interests in the statements of financial condition.
For investments in entities in which the Company does not have a controlling financial interest but has significant influence over its operating and financial decisions, the Company applies the equity method of accounting with net income and losses recorded within earnings of equity method investments in related parties. The U.S. dollar is the functional currency of the Company and numbers are rounded for presentation purposes.
Significant Accounting Policies
The Company’s significant accounting policies are included in Note 2 – Summary of Significant Accounting Policies in the Company’s 2021 Form 10-K. Other than the below, there have been no material changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2022.
Variable Interest Entities
The Company evaluates whether an entity is a VIE and determines if the primary beneficiary status is appropriate on a quarterly basis. The Company consolidates a VIE for which it is the primary beneficiary. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including factors such as the power to direct the activities of the VIE that most significantly impact its economic performance, the obligation to absorb the losses and/or the right to receive the expected returns of the VIE. Through this evaluation, the Company determined that RISE is a VIE and the Company is the primary beneficiary, primarily due to the Company having the power to direct the activities of RISE that most significantly impact its economic performance. Additionally, the Company may be obligated to fund RISE’s operations at an amount that is disproportional to its ownership percentage.
Share-Based Compensation
The Company grants share-based compensation, which is described in the Employee Benefit Plan section of Note 18 – Commitments, Contingencies, and Other. The Company accounts for share-based compensation in accordance with ASC Topic 718, “Compensation-Stock Compensation,” which establishes accounting for share-based compensation to employees for services. Under the provisions of ASC 718-10-35, share-based compensation cost is measured at the grant date, based on the fair value of the award on that date and is expensed at the grant date (for the portion that vests immediately) or ratably over the related vesting periods.
2. New Accounting Standards
The Company did not adopt any new accounting standards during the three and nine months ended September 30, 2022. In addition, the Company has evaluated other recently issued accounting standards and does not believe that any of these standards will have a material impact on the Company’s financial statements and related disclosures as of September 30, 2022.
3. Consolidation of Variable Interest Entity
As of September 30, 2022, the Company owned approximately 44% of RISE. RISE was deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial interest. The major factor that led to the conclusion that the Company is the primary beneficiary of this VIE is that the Company has the power to direct the activities of RISE that most significantly impact its economic performance, as well as the potential obligation to fund operations and absorb losses in amount that is disproportional to the Company’s ownership percentage.
As of September 30, 2022, RISE reported assets of $2.9 million and liabilities of $0.3 million. There are no restrictions on the consolidated VIE’s assets.
4. Receivables From, Payables To, and Deposits With Broker-Dealers and Clearing Organizations
Amounts receivable from, payables to, and deposits with broker-dealers and clearing organizations consisted of the following as of the periods indicated:
|
|
|
As of
September 30, 2022 |
|
|
As of
December 31, 2021 |
|
|
Receivables from and deposits with broker-dealers and clearing organizations |
|
|
|
|
|
|
|
DTCC / OCC / NSCC(1) |
|
$ |
6,381,000 |
|
|
$ |
10,968,000 |
|
|
Goldman Sachs & Co. LLC ("GSCO") |
|
|
30,000 |
|
|
|
335,000 |
|
|
Pershing Capital |
|
|
1,027,000 |
|
|
|
1,193,000 |
|
|
National Financial Services, LLC (“NFS”) |
|
|
1,721,000 |
|
|
|
974,000 |
|
|
Securities fail-to-deliver |
|
|
192,000 |
|
|
|
174,000 |
|
|
Globalshares |
|
|
16,000 |
|
|
|
55,000 |
|
|
Other receivables |
|
|
74,000 |
|
|
|
27,000 |
|
|
Total Receivables from and deposits with broker-dealers and clearing organizations |
|
$ |
9,441,000 |
|
|
$ |
13,726,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Payables to broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
|
Securities fail-to-receive |
|
$ |
412,000 |
|
|
$ |
254,000 |
|
|
Payables to broker-dealers |
|
|
30,000 |
|
|
|
— |
|
|
Total Payables to broker-dealers and clearing organizations |
|
$ |
442,000 |
|
|
$ |
254,000 |
|
|
(1) |
Depository Trust & Clearing Corporation is referred to as (“DTCC”), Options Clearing Corporation is referred to as (“OCC”), and National Securities Clearing Corporation is referred to as (“NSCC”). |
Under the DTCC shareholders’ agreement, MSCO is required to participate in the DTCC common stock mandatory purchase. As of September 30, 2022 and December 31, 2021, MSCO had shares of DTCC common stock valued at approximately $1,054,000 and $905,000, respectively, which are included within the line item “Deposits with broker-dealers and clearing organizations” on the statements of financial condition.
In September 2022, MSCO and RISE entered into a clearing agreement whereby RISE would introduce clients to MSCO. As part of the agreement, RISE deposited a clearing fund escrow deposit of $50,000 to MSCO. The resulting asset of RISE and liability of MSCO is eliminated in consolidation.
5. Fair Value Measurements
Overview
ASC 820 defines fair value, establishes a framework for measuring fair value as well as a hierarchy of fair value inputs. Refer to the below as well as Note 6 – Fair Value Measurements in the Company’s 2021 Form 10-K for further information regarding fair value hierarchy, valuation techniques and other items related to fair value measurements.
Municipal securities: Municipal securities are valued using recently executed transactions, market price quotations (when observable), bond spreads from independent external parties such as vendors and brokers, adjusted for any basis difference between cash and derivative instruments. The spread data used is for the same maturity as the bond. Municipal securities are generally categorized in level 2 of the fair value hierarchy.
Unit investment trusts (“UITs”): Units of UITs are carried at redemption value, which represents fair value. Units of UITs are categorized as level 2.
Fair Value Hierarchy Tables
The following tables present the Company's fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of the periods presented.
|
|
|
As of September 30, 2022 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated for regulatory purposes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities* |
|
$ |
140,197,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
140,197,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities** |
|
$ |
2,823,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,823,000 |
|
|
Certificates of deposit |
|
|
— |
|
|
|
92,000 |
|
|
|
— |
|
|
|
92,000 |
|
|
Municipal securities |
|
|
— |
|
|
|
174,000 |
|
|
|
— |
|
|
|
174,000 |
|
|
Corporate bonds |
|
|
— |
|
|
|
106,000 |
|
|
|
— |
|
|
|
106,000 |
|
|
Equity securities |
|
|
96,000 |
|
|
|
177,000 |
|
|
|
— |
|
|
|
273,000 |
|
|
Total Securities owned, at fair value |
|
$ |
2,919,000 |
|
|
$ |
549,000 |
|
|
$ |
— |
|
|
$ |
3,468,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
4,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,000 |
|
|
Unit investment trust |
|
|
— |
|
|
|
7,000 |
|
|
|
— |
|
|
|
7,000 |
|
|
Total Securities sold, not yet purchased, at fair value |
|
$ |
4,000 |
|
|
$ |
7,000 |
|
|
$ |
— |
|
|
$ |
11,000 |
|
|
|
|
As of December 31, 2021 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities** |
|
$ |
2,966,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,966,000 |
|
|
Certificates of deposit |
|
|
— |
|
|
|
91,000 |
|
|
|
— |
|
|
|
91,000 |
|
|
Corporate bonds |
|
|
— |
|
|
|
12,000 |
|
|
|
— |
|
|
|
12,000 |
|
|
Equity securities |
|
|
489,000 |
|
|
|
433,000 |
|
|
|
— |
|
|
|
922,000 |
|
|
Total Securities owned, at fair value |
|
$ |
3,455,000 |
|
|
$ |
536,000 |
|
|
$ |
— |
|
|
$ |
3,991,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
— |
|
|
$ |
24,000 |
|
|
$ |
— |
|
|
$ |
24,000 |
|
|
Total Securities sold, not yet purchased, at fair value |
|
$ |
— |
|
|
$ |
24,000 |
|
|
$ |
— |
|
|
$ |
24,000 |
|
*As of September 30, 2022, the Company had U.S. government securities with market values of approximately $24.6 million, $9.8million, $9.7 million, $62.2 million, $23.9 million, and $9.7 million with corresponding maturity dates of March 23, 2023, May 18, 2023, August 31, 2023, December 31, 2023, January 31, 2024, and May 31, 2024, respectively as well as approximately $0.3 million of interest. As of December 31, 2021, the Company did not have any U.S. government securities classified as cash and securities segregated for regulatory purposes.
**As of September 30, 2022, the Company had U.S. government securities with market values of approximately $24,000, $5,000 and $2.8 million with corresponding maturity dates of June 30, 2024, September 30, 2024, and August 15, 2024, respectively. As of December 31, 2021, the U.S. government securities had a maturity date of August 15, 2024.
Refer to the below as well as Note 6 – Fair Value Measurements in the Company’s 2021 Form 10-K for further information regarding financial instruments not carried at fair value on the statements of financial condition as of September 30, 2022 and December 31, 2021.
Short-term financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents as well as cash and securities segregated for regulatory purposes, are recorded at amounts that approximate the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. The Company had no cash equivalents for regulatory purposes as of September 30, 2022 and December 31, 2021. Securities segregated for regulatory purposes consist solely of U.S. government securities and are included in the fair value hierarchy table above. Cash and cash equivalents and cash and securities segregated for regulatory purposes are classified as level 1.
6. Property, Office Facilities, and Equipment, Net
Property, office facilities, and equipment consisted of the following as of the periods indicated:
|
|
As of
September 30, 2022 |
|
As of
December 31, 2021 |
|
Property |
$ |
6,815,000 |
|
|
$ |
6,815,000 |
|
|
Office facilities |
|
2,522,000 |
|
|
|
1,608,000 |
|
|
Equipment |
|
555,000 |
|
|
|
413,000 |
|
|
Total Property, office facilities, and equipment |
|
9,892,000 |
|
|
|
8,836,000 |
|
|
Less accumulated depreciation |
|
(1,670,000 |
) |
|
|
(1,373,000 |
) |
|
Total Property, office facilities, and equipment, net |
$ |
8,222,000 |
|
|
$ |
7,463,000 |
|
Total depreciation expense for property, office facilities, and equipment was $102,000 and $98,000 for the three months ended September 30, 2022 and 2021, respectively. Total depreciation expense for property, office facilities, and equipment was $298,000 and $312,000 for the nine months ended September 30, 2022 and 2021, respectively.
Miami Office Building
On December 30, 2021, the Company purchased an office building located at 653 Collins Ave, Miami Beach, FL (“Miami office building”). The Miami office building contains approximately 12,000 square feet of office space and will serve as a primary operating center of the Company.
As of September 30, 2022, no depreciation expense has been recorded for the Miami office building. Depreciation expense will commence when the build out of the Miami office building is completed and placed in service, which is expected to occur in the first quarter of 2023. The Company invested $296,000 and $892,000 in the three and nine months ended September 30, 2022, respectively, to build out the Miami office building.
7. Leases
As of September 30, 2022, the Company rents office space under operating leases expiring in 2023 through 2027, and the Company has no financing leases. The leases call for base rent plus escalations as well as other operating expenses. The following table represents the Company’s lease right-of-use assets and lease liabilities on the statements of financial condition. The Company elected not to include short-term leases (i.e., leases with initial terms of less than twelve months), or equipment leases (deemed immaterial) on the statements of financial condition.
As of September 30, 2022, the Company does not believe that any of the renewal options under the existing leases are reasonably certain to be exercised; however, the Company will continue to assess and monitor the lease renewal options on an ongoing basis.
|
|
|
As of
September 30, 2022 |
|
|
As of
December 31,
2021 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets |
|
$ |
2,348,000 |
|
|
$ |
|
2,662,000 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Lease liabilities |
|
$ |
2,545,000 |
|
|
$ |
|
2,933,000 |
|
The calculated amounts of the lease right-of-use assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company leases some miscellaneous office equipment, but they are immaterial and therefore the Company records the costs associated with this office equipment on the statements of operations rather than capitalizing them as lease right-of-use assets. The Company determined a discount rate of 5.0% would approximate the Company’s cost to obtain financing given its size, growth, and risk profile.
|
Lease Term and Discount Rate |
|
As of
September 30, 2022 |
|
|
As of
December 31, 2021 |
|
|
Weighted average remaining lease term – operating leases
(in years) |
|
|
2.9 |
|
|
|
2.9 |
|
|
Weighted average discount rate – operating leases |
|
|
5.0 |
% |
|
|
5.0 |
% |
The following table represents lease costs and other lease information. The Company has elected the practical expedient to not separate lease and non-lease components, and as such, the variable lease cost primarily represents variable payments such as common area maintenance and utilities which are usually determined by the leased square footage in proportion to the overall office building.
|
|
|
Three Months Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
Operating lease cost |
|
$ |
283,000 |
|
|
$ |
377,000 |
|
|
$ |
1,008,000 |
|
|
$ |
1,274,000 |
|
|
Short-term lease cost |
|
|
151,000 |
|
|
|
24,000 |
|
|
|
228,000 |
|
|
|
68,000 |
|
|
Variable lease cost |
|
|
128,000 |
|
|
|
40,000 |
|
|
|
255,000 |
|
|
|
139,000 |
|
|
Total Rent and occupancy |
|
$ |
562,000 |
|
|
$ |
441,000 |
|
|
$ |
1,491,000 |
|
|
$ |
1,481,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
299,000 |
|
|
$ |
374,000 |
|
|
$ |
1,074,000 |
|
|
$ |
1,268,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease right-of-use assets obtained in exchange for new lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
152,000 |
|
|
$ |
91,000 |
|
|
$ |
754,000 |
|
|
$ |
1,966,000 |
|
Lease Commitments
Future annual minimum payments for operating leases with initial terms of greater than one year as of September 30, 2022 were as follows:
|
Year |
|
Amount |
|
|
2022 |
|
$ |
288,000 |
|
|
2023 |
|
|
1,128,000 |
|
|
2024 |
|
|
588,000 |
|
|
2025 |
|
|
450,000 |
|
|
2026 |
|
|
234,000 |
|
|
2027 |
|
|
48,000 |
|
|
Remaining balance of lease payments |
|
|
2,736,000 |
|
|
Less: difference between undiscounted cash flows and discounted cash flows |
|
|
191,000 |
|
|
Lease liabilities |
|
$ |
2,545,000 |
|
8. Equity Method Investments in Related Parties
Transaction with Tigress
On November 16, 2021, the Company entered into an agreement with Tigress Holdings, LLC, (“Tigress”), a Delaware limited liability company. Refer to Note 10 – Equity Method Investment in Related Party in the Company’s 2021 Form 10-K for further information regarding the material terms of this agreement and the corresponding accounting treatment.
For the three months ended September 30, 2022 and 2021, the loss recognized from the Company’s investment in Tigress was $151,000 and $0, respectively. For the nine months ended September 30, 2022 and 2021, the earnings recognized from the Company’s investment in Tigress was $46,000 and $0, respectively. For the three and nine months ended September 30, 2022, the Company received cash distributions from Tigress of $172,000. The Company did not receive any cash distributions from Tigress in 2021; however, RISE made a distribution of $156,000 to SFC in 2021 in lieu of a corresponding distribution from Tigress.
As of September 30, 2022 and December 31, 2021, the carrying amount of the investment in Tigress was $7,874,000 and $8,156,000, respectively. The Company evaluates its equity method investments for impairment when events or changes indicate the carrying value may not be recoverable. If the impairment is determined to be other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment.
There were no events or circumstances suggesting the carrying amount of the investment may be impaired as of September 30, 2022 and December 31, 2021.
Below is a table showing the summary from the consolidated statements of operations and financial condition for Tigress for the periods indicated (unaudited):
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|
|
2022 |
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue |
|
$ |
1,213,000 |
|
|
$ |
3,816,000 |
|
$ |
6,945,000 |
|
$ |
11,211,000 |
|
Operating income (loss) |
|
$ |
(627,000 |
) |
|
$ |
1,375,000 |
|
$ |
196,000 |
|
$ |
4,027,000 |
|
Net income (loss) |
|
$ |
(627,000 |
) |
|
$ |
1,375,000 |
|
$ |
196,000 |
|
$ |
4,027,000 |
|
|
As of |
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Assets |
$ |
10,127,000 |
|
$ |
10,793,000 |
|
Liabilities |
$ |
5,270,000 |
|
$ |
6,096,000 |
|
Stockholders’ Equity |
$ |
4,857,000 |
|
$ |
4,697,000 |
Transaction with Hedge Connection
On January 21, 2022, RISE entered into an agreement to acquire a minority stake in Hedge Connection, a Florida corporation and a woman-owned fintech company founded by Lisa Vioni that provides capital introduction software solutions for the prime brokerage industry. Refer to Note 25 – Subsequent Events in the Company’s 2021 Form 10-K for additional details.
For the three months ended September 30, 2022 and 2021, the earnings recognized from the Company’s investment in Hedge Connection was $3,000 and $0, respectively. For the nine months ended September 30, 2022 and 2021, the earnings recognized from the Company’s investment in Hedge Connection was $20,000 and $0, respectively. The Company has not received any cash distributions from Hedge Connection for the three and nine months ended September 30, 2022 and 2021.
As of September 30, 2022 and December 31, 2021, the carrying amount of the investment in Hedge Connection was $1,020,000 and $0, respectively. The Company evaluates its equity method investments for impairment when events or changes indicate the carrying value may not be recoverable. If the impairment is determined to be other-than-temporary, the Company will recognize an impairment loss equal to the difference between the expected realizable value and the carrying value of the investment. There were no events or circumstances suggesting the carrying amount of the investment may be impaired as of September 30, 2022.
The Company incurred no expenses from Hedge Connection for licensing and consulting fees for the three months ended September 30, 2022 and 2021. The Company incurred expenses from Hedge Connection for licensing and consulting fees in an aggregate amount of $186,000 and $0 for the nine months ended September 30, 2022 and 2021, respectively.
The Company entered into several arrangements in the fourth quarter of 2022 that will impact its ownership interests of RISE, Tigress, and Hedge Connection and as well as various arrangements with these entities. Refer to Note 20 – Subsequent Events for further detail.
9. Investments, Cost
OpenHand
As of September 30, 2022, the Company maintained a 2% ownership interest in OpenHand Holdings, Inc. (“OpenHand”) and an option to purchase an additional 2% of the outstanding common stock of OpenHand at an exercise price equal to a $42.5 million valuation of OpenHand. The option expires in November 2022 and the Company is currently evaluating whether to exercise the option.
The investment does not have a readily determinable fair value since OpenHand is a private company and its shares are not publicly traded. The Company made an accounting policy election to measure this investment at cost less any impairment adjusted for any changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
As of September 30, 2022, management concluded that the investment in OpenHand is not impaired and that no additional events or changes in circumstances were identified that could have a significant effect on the original valuation of the investment. As of both September 30, 2022 and December 31, 2021, the carrying value of the Company’s investment in OpenHand was $850,000.
As of both September 30, 2022 and December 31, 2021, no value was attributed to the option to purchase an additional 2% of OpenHand because the option is not a derivative and there were no transaction costs associated with this option as of those periods.
Refer to Note 11 – Investments, Cost in the Company’s 2021 Form 10-K for further information regarding this transaction and the corresponding accounting treatment.
10. Goodwill and Intangible Assets, Net
As of both September 30, 2022 and December 31, 2021, the Company’s carrying amount of goodwill was $1,989,000, all of which came from the Company’s acquisition of RISE. As of September 30, 2022, management concluded that there have been no impairments to the carrying value of the Company’s goodwill and no impairment charges related to goodwill were recognized in the three and nine months ended September 30, 2022 and 2021. Additionally, the Company determined there was not a material risk for future possible impairments to goodwill as of the date of the assessment.
For the three and nine months ended September 30, 2021, the Company recorded a full impairment of its RISE customer relationships intangible asset of $699,000.
11. Long-Term Debt
Mortgage with East West Bank
Overview
On December 30, 2021, the Company purchased the Miami office building for approximately $6.8 million, and the Company entered into a mortgage with East West Bancorp, Inc. (“East West Bank”) for approximately $4 million to finance part of the purchase of the Miami office building as well as $338,000 to finance part of the build out of the Miami office building.
The Company's obligations under the mortgage are secured by a lien on the Miami office building and the term of the loan is ten years. The repayment schedule will utilize a 30-year amortization period, with a balloon on the remaining amount due at the end of ten years. The interest rate is 3.6% for the first 7 years, and thereafter the interest rate shall be at the prime rate as reported by the Wall Street Journal, provided that the minimum interest rate on any term loan will not be less than 3.6%. As part of the agreement, the Company must maintain a debt service coverage ratio of 1.4 to 1. The loan is subject to a prepayment penalty over the first five years which is calculated as a percentage of the principal amount outstanding at the time of prepayment. This percentage is 5% in the first year and decreases by 1% each year thereafter, with the prepayment penalty ending after 5 years. As of September 30, 2022, the Company was in compliance with all of its covenants related to this agreement.
As of September 30, 2022, the Company used its full commitment of $338,000 with East West Bank for the build out of the Miami office building.
Remaining Payments
Future remaining annual minimum principal payments for the mortgage with East West Bank as of September 30, 2022 were as follows:
|
|
|
Amount |
|
|
2023 |
|
$ |
75,000 |
|
|
2024 |
|
|
84,000 |
|
|
2025 |
|
|
88,000 |
|
|
2026 |
|
|
91,000 |
|
|
Thereafter |
|
|
4,048,000 |
|
|
Total |
|
$ |
4,386,000 |
|
The interest expense related to this mortgage was $38,000 and $0 for the three months ended September 30, 2022, and 2021, respectively. The interest expense related to this mortgage was $103,000 and $0 for the nine months ended September 30, 2022, and 2021, respectively. As of September 30, 2022, the interest rate for this mortgage was 3.6%.
Line of Credit with East West Bank
Overview
On July 22, 2020, the Company entered into a loan and security agreement with East West Bank. In accordance with the terms of this agreement, the Company had the ability to borrow term loans in an aggregate principal amount not to exceed $10 million during the two-year period after July 22, 2020. The Company originally borrowed $5.0 million and had an outstanding balance of $2.9 million as of September 30, 2022. The Company’s ability to borrow an additional $5.0 million available on its line of credit with East West Bank expired on July 22, 2022; however, the Company does not believe this will impact its ability to fund its operations.
The Company’s obligations under the agreement are secured by a lien on all of the Company’s cash, dividends, stocks and other monies and property from time to time received or receivable in exchange for the Company’s equity interests in and any other rights to payment from the Company’s subsidiaries; any deposit accounts into which the foregoing is deposited and all substitutions, products, proceeds (cash and non-cash) arising out of any of the foregoing. Each term loan will have a term of four years, beginning when the draw is made. The repayment schedule will utilize a five-year (60 month) amortization period, with a balloon on the remaining amount due at the end of four years.
Term loans made pursuant to the agreement shall bear interest at the prime rate as reported by the Wall Street Journal, provided that the minimum interest rate on any term loan will not be less than 3.25%. In addition to the foregoing, on the date that each term loan is made, the Company shall pay to the lender an origination fee equal to 0.25% of the principal amount of such term loan. Pursuant to the loan agreement, the Company paid all lender expenses in connection with the loan agreement.
This agreement contains certain financial and non-financial covenants. The financial covenants are that the Company must maintain a debt service coverage ratio of 1.35 to 1, an effective tangible net worth of a minimum of $25 million, and MSCO must maintain a net capital ratio that is not less than 10% of aggregate debit items. Certain other non-financial covenants include that the Company must promptly notify East West Bank of the creation or acquisition of any subsidiary that at any time owns assets with a value of $100,000 or greater. As of September 30, 2022, the Company was in compliance with all its covenants related to this agreement.
In addition, the Company’s obligations under the agreement are guaranteed pursuant to a guarantee agreement by and among, John J. Gebbia and Gloria E. Gebbia, individually, and as a co-trustees of the John and Gloria Living Trust, U/D/T December 8, 1994 (“John and Gloria Gebbia Trust”).
Remaining Payments
Future remaining annual minimum principal payments for the line of credit with East West Bank as of September 30, 2022 were as follows:
|
|
|
Amount |
|
|
2022 |
|
$ |
250,000 |
|
|
2023 |
|
|
998,000 |
|
|
2024 |
|
|
1,661,000 |
|
|
Total |
|
$ |
2,909,000 |
|
The interest expense related to the line of credit was $39,000 and $34,000 for the three months ended September 30, 2022 and 2021, respectively. The interest expense related to the line of credit was $99,000 and $107,000 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the interest rate for this line of credit was 6.3%.
12. Notes Payable - Related Party
As of September 30, 2022, the Company had various notes payable to Gloria E. Gebbia and Hedge Connection, the details of which are presented below:
|
Description |
Issuance Date |
|
|
Face Amount |
|
|
Unpaid Principal Amount |
|
0.00% due July 20, 2022* |
January 21, 2022 |
|
$ |
600,000 |
|
$ |
250,000 |
|
4.00% due November 30, 2022*** |
November 30, 2020 |
|
|
3,000,000 |
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
Total Notes payable – related party |
|
|
$ |
3,600,000 |
|
$ |
3,250,000 |
As of December 31, 2021, the Company had various notes payable to Gloria E. Gebbia, the details of which are presented below:
|
Description |
Issuance Date |
|
|
Face Amount |
|
|
Unpaid Principal Amount |
|
4.00% due December 30, 2022** |
December 30, 2021 |
|
$ |
2,000,000 |
|
$ |
2,000,000 |
|
4.00% due June 30, 2022** |
December 31, 2021 |
|
|
2,000,000 |
|
|
2,000,000 |
|
4.00% due November 30, 2022*** |
November 30, 2020 |
|
|
3,000,000 |
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
Total Notes payable – related party |
|
|
$ |
7,000,000 |
|
$ |
7,000,000 |
*On January 21, 2022, the Company entered into a $600,000 note payable to Hedge Connection. During the nine months ended September 30, 2022, the Company paid $350,000 of this note payable. See Note 20 – Subsequent Events for further detail.
**On March 31, 2022, $2,880,000 in aggregate of notes payable to Gloria E. Gebbia was exchanged for 24% ownership interest in RISE. During the nine months ended September 30, 2022, the Company paid the remainder of these notes payable.
***This note payable is subordinated to MSCO and is subordinated to the claims of general creditors, approved by FINRA, and is included in MSCO’s calculation of net capital and the capital requirements under FINRA and SEC regulations. On August 17, 2021, this note payable was renewed with a maturity of November 30, 2022.
The Company’s interest expense for these notes payable for the three months ended September 30, 2022 and 2021 was $30,000 and $52,000, respectively. The Company’s interest expense for these notes payable for the nine months ended September 30, 2022 and 2021 was $131,000 and $156,000, respectively.
13. Deferred Contract Incentive
Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of the arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025.
As part of this agreement, the Company received a one-time business development credit of $3 million from NFS which was recorded in the line item “Deferred contract incentive” on the statements of financial condition. This credit will be recognized as contra expense over the term of the agreement in the line item “Clearing fees, including execution costs” on the statements of operations. For the three months ended September 30, 2022 and 2021, the Company recognized $196,000 and $0 in contra expense, respectively. For the nine months ended September 30, 2022 and 2021, the Company recognized $621,000 and $0 in contra expense, respectively. As of September 30, 2022 and December 31, 2021, the balance of the deferred contract incentive was $2.1 million and $2.7 million, respectively.
14. Revenue Recognition
Overview of Revenue
The primary sources of revenue for the Company are as follows:
Commissions and Fees
The Company earns commission revenue for executing trades for clients in individual equities, options, insurance products, futures, fixed income securities, as well as certain third-party mutual funds and ETFs. Commission revenue associated with combined trade execution and clearing services, as well as trade execution services on a standalone basis, is recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.
Principal Transactions and Proprietary Trading
Principal transactions and proprietary trading primarily represent two business lines. The first business line is riskless transactions in which the Company, after executing a solicited order, buys or sells securities as principal and at the same time buys or sells the securities with a markup or markdown to satisfy the order. The second business line is entering into transactions where proprietary U.S. government securities and other securities are traded by the Company.
Principal transactions and proprietary trading are recognized at a point in time on the trade date when the performance obligation is satisfied. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the customer.
During the nine months ended September 30, 2022, the Company invested in a portfolio of U.S. government securities, which is primarily within the line item “Cash and securities segregated for regulatory purposes” on the statements of financial condition. The following table represents detail related to principal transactions and proprietary trading. Refer to the year-over-year comparisons within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Report for additional detail.
|
|
|
Three Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
(Year over
Year Decrease) |
|
|
Principal transactions and proprietary trading |
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gain on primarily riskless principal transactions |
|
$ |
2,339,000 |
|
$ |
3,931,000 |
|
$ |
(1,592,000) |
|
|
Unrealized loss on portfolio of U.S. government securities |
|
|
(1,386,000) |
|
|
(7,000) |
|
|
(1,379,000) |
|
|
Total Principal transactions and proprietary trading |
|
$ |
953,000 |
|
$ |
3,924,000 |
|
$ |
(2,971,000) |
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
2021 |
|
(Year over
Year Decrease) |
|
|
Principal transactions and proprietary trading |
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gain on primarily riskless principal transactions |
|
$ |
5,956,000 |
|
$ |
12,300,000 |
|
$ |
(6,344,000) |
|
|
Unrealized loss on portfolio of U.S. government securities |
|
|
(4,189,000) |
|
|
(21,000) |
|
|
(4,168,000) |
|
|
Total Principal transactions and proprietary trading |
|
$ |
1,767,000 |
|
$ |
12,279,000 |
|
$ |
(10,512,000) |
|
Market Making
Market making revenue is generated from the buying and selling of securities. Market making transactions are recorded on a trade-date basis as the securities transactions occur. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty. Securities owned are recorded at fair market value at the end of the reporting period.
Stock Borrow / Stock Loan
The Company borrows securities on behalf of retail clients to facilitate short trading, loans excess margin and fully-paid securities from client accounts, facilitates borrow and loan contracts for broker-dealer counterparties, and provides stock locate services to broker-dealer counterparties. The Company recognizes self-clearing revenues net of operating expenses related to stock borrow / stock loan. Stock borrow / stock loan also includes any revenues generated from the Company’s fully paid lending programs on a self-clearing or introducing basis. The Company does not utilize stock borrow / stock loan activities for the purpose of financing transactions.
The performance obligation is satisfied on the contract date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to / from the counterparty.
For the three months ended September 30, 2022, stock borrow / stock loan revenue was $4,183,000 ($9,921,000 gross revenue less $5,738,000 expenses). For the three months ended September 30, 2021, stock borrow / stock loan revenue was $3,465,000 ($7,754,000 gross revenue minus $4,289,000 expenses).
For the nine months ended September 30, 2022, stock borrow / stock loan revenue was $11,909,000 ($26,222,000 gross revenue less $14,313,000 expenses). For the nine months ended September 30, 2021, stock borrow / stock loan revenue was $7,552,000 ($19,605,000 gross revenue minus $12,053,000 expenses).
Advisory Fees
The Company earns advisory fees associated with managing client assets. The performance obligation related to this revenue stream is satisfied over time; however, the advisory fees are variable as they are charged as a percentage of the client’s total asset value, which is determined at the end of the quarter.
Interest, Marketing and Distribution Fees
The Company earns interest from clients’ accounts, net of payments to clients’ accounts, and on the Company’s bank balances. Interest income also includes interest payouts from introducing relationships related to short interest, net of charges.
The Company also earns margin interest which is the net interest charged to customers for holding financed margin positions. Marketing and distribution fees consist of 12b-1 fees which are trailing payments from money market funds. Interest, marketing and distribution fees are recorded as earned.
Other Income
Other income represents fees generated from consulting services to technology providers, corporate services client fees, payment for order flow, and transactional fees generated from client accounts. Transactional fees are recorded concurrently with the related activity. Other income is recorded as earned.
Categorization of Revenue
The following table presents the Company’s major revenue categories and when each category is recognized:
|
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|
|
|
|
Revenue Category |
2022 |
2021 |
2022 |
|
2021 |
|
Timing of Recognition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Execution and Clearing Services |
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and fees |
$ |
1,750,000 |
$ |
4,019,000 |
$ |
5,943,000 |
|
$ |
15,352,000 |
|
Recorded on trade date |
|
Principal transactions and proprietary trading |
|
953,000 |
|
3,924,000 |
|
1,767,000 |
|
|
12,279,000 |
|
Recorded on trade date |
|
Market making |
|
723,000 |
|
1,514,000 |
|
2,022,000 |
|
|
4,886,000 |
|
Recorded on trade date |
|
Stock borrow / stock loan |
|
4,183,000 |
|
3,465,000 |
|
11,909,000 |
|
|
7,552,000 |
|
Recorded as earned |
|
Advisory fees |
|
437,000 |
|
441,000 |
|
1,420,000 |
|
|
1,200,000 |
|
Recorded as earned |
|
Total Trading Execution and Clearing Services |
|
8,046,000 |
|
13,363,000 |
|
23,061,000 |
|
|
41,269,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, marketing and distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
1,387,000 |
|
1,014,000 |
|
2,195,000 |
|
|
3,331,000 |
|
Recorded as earned |
|
Margin interest |
|
3,169,000 |
|
2,251,000 |
|
7,336,000 |
|
|
6,698,000 |
|
Recorded as earned |
|
12b-1 fees |
|
648,000 |
|
170,000 |
|
1,186,000 |
|
|
488,000 |
|
Recorded as earned |
|
Total Interest, marketing and distribution fees |
|
5,204,000 |
|
3,435,000 |
|
10,717,000 |
|
|
10,517,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
1,086,000 |
|
253,000 |
|
2,589,000 |
|
|
982,000 |
|
Recorded as earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
$ |
14,336,000 |
$ |
17,051,000 |
$ |
36,367,000 |
|
$ |
52,768,000 |
|
|
The following table presents each revenue category and its related performance obligation:
|
Revenue Stream |
Performance Obligation |
|
Commissions and fees, Principal transactions and proprietary trading, Market making, Stock borrow / stock loan, Advisory fees |
Provide financial services to customers and counterparties |
|
Interest, marketing and distribution fees, Other income |
n / a |
Other Items
For the periods presented, there were no costs capitalized related to obtaining or fulfilling a contract with a customer, and thus the Company has no balances for contract assets or contract liabilities. The Company concludes that its revenue streams have the same underlying economic factors, and as such, no disaggregation of revenue is required.
15. Income Taxes
The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2022, the Company has concluded that its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain state net operating losses.
On March 11, 2021, the American Rescue Plan Act of