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.
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, robo-advisory technology development, and prime
brokerage 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.
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 in U.S. government securities 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 its U.S.
government securities portfolio and setting risk parameters for securities
owned, at fair value.
RISE
Arrangements with GSCO and JonesTrading
On August 30, 2021, GSCO notified RISE that its clearing arrangement with RISE
will be terminated. Due to the termination of RISE's clearing arrangement with
GSCO, substantially all the revenue producing customers of RISE have
transitioned to other prime service providers. Revenue and pre-tax income from
customers that have transitioned to other prime service providers was
approximately $5.0 million and $1.0 million, respectively, for the three months
ended March 31, 2021.
On October 7, 2021, RISE signed an agreement with JonesTrading to transfer
certain customers of RISE to JonesTrading. In exchange, JonesTrading agreed to
pay RISE a percentage of the net revenue produced by those clients less any
related expenses. For the three months ended March 31, 2022, this agreement
resulted in pre-tax income of $39,000, and 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.
Relaunch of RISE
RISE relaunched its business as a woman-owned and operated prime brokerage with
a specific emphasis on aligning the mission-driven initiatives with the
technological needs of institutional customers. Cynthia DiBartolo was appointed
as the new CEO of RISE, and Gloria E. Gebbia, one of Siebert's and RISE's
directors, was appointed as the Chief Impact Officer of RISE.
As part of this new strategic direction, on January 21, 2022, RISE entered into
an agreement with Hedge Connection, a woman-owned fintech company founded by
Lisa Vioni that provides capital introduction software solutions for the prime
brokerage industry. Hedge Connection's powerful platform, branded as "FUEL,"
allows hedge fund managers to connect with a global pool of institutional
investors and retain control over how their information is shared while helping
allocators to streamline due diligence. FUEL serves as a fintech differentiator
and provides RISE with a technology solution to efficiently scale a
comprehensive capital introduction program for clients. FUEL also serves as a
complementary revenue stream for RISE, and Ms. Vioni serves as a key partner in
growing the business.
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While we believe our expertise and industry relationships will enable us to
execute our new strategic direction, our business plan for RISE is new and
untested, and it is uncertain whether our efforts will attract the prime
brokerage customers and revenue necessary to compete in a new market for prime
customers. Any failure to adapt to these evolving trends may reduce our revenue
or operating margins and could have a material adverse effect on our business,
results of operations and financial condition.
Change in Membership Interests of RISE
During the three months ended March 31, 2022, RISE issued and Siebert sold
membership interests in RISE to certain employees, directors, and affiliates of
RISE and Siebert. As a result of these transactions, Siebert's ownership
percentage in RISE declined from 76% as of December 31, 2021 to approximately
44% as of March 31, 2022. As RISE continues to grow and the operations of the
entity change, management will assess whether RISE remains a VIE and whether
Siebert remains the primary beneficiary on an on-going basis. Refer to Note 1 -
Organization and Basis of Presentation for additional detail.
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 and Institutional Customer Net Worth
As of
March 31, December 31,
2022 2021
Retail and institutional customer net worth
(in billions) $ 16.3 $ 17.3
Client Account Metrics - Retail Customers
As of
March 31, December 31,
2022 2021
Retail customer net worth (in billions) $ 16.1 $ 16.8
Retail customer margin debit balances (in billions) $ 0.5 $ 0.5
Retail customer credit balances (in billions) $ 0.8 $ 0.8
Retail customer money market fund value (in billions) $ 0.7 $ 0.8
Retail customer accounts
116,369 115,380
•
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 Account Metrics - Institutional Customers
As of
March 31, 2022 December 31, 2021
Institutional customer net worth (in billions) $ 0.2 $ 0.5
•
Institutional customer net worth represents the total value of securities and
cash in the institutional customer accounts after deducting margin debits and
short positions
Client Activity Metrics - Retail Customers
Three Months Ended
March 31,
2022 2021
Total retail trades 109,952 142,875
•
Total retail trades represents retail trades that generate commissions
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Statements of Operations and Financial Condition
Statements of Operations for the Three Months Ended March 31, 2022 and 2021
Revenue
Commissions and fees for the three months ended March 31, 2022 were $2,340,000
and decreased by $4,668,000 from the corresponding period in the prior year,
primarily due to a loss in institutional customers due to the termination of
GSCO's clearing agreement with RISE as well as market conditions during the
first quarter of 2022.
Interest, marketing and distribution fees for the three months ended March 31,
2022 were $2,362,000 and decreased by $1,097,000 from the corresponding period
in the prior year, primarily due to a loss in institutional customers due to the
termination of GSCO's clearing agreement with RISE.
Principal transactions and proprietary trading for the three months ended March
31, 2022 were a loss of $267,000 and decreased by $4,515,000 from the
corresponding period in the prior year, primarily due to the factors discussed
below.
The decrease in realized and unrealized gain on primarily riskless principal
transactions was primarily due to market conditions. The increase in unrealized
loss on our portfolio of U.S. government securities was due to the following.
From January to February 2022, Siebert invested approximately $100 million in
2-year treasury notes in order to enhance its yield on its excess 15c3-3
deposits. During February and March 2022, there was a substantial increase in
mid-term treasury yields, which created an unrealized loss of approximately $2.2
million on these treasury notes. We intend to hold these securities to maturity
and as such, the unrealized loss of $2.2 million will be returned over the
duration of the treasury notes, at a point no later than the maturity of the
securities, the latest maturity being the beginning of 2024. If the value of
treasury notes continue to decline, we will incur further unrealized losses;
however, we anticipate this loss to be temporary as we intend to hold these
securities to maturity. The portfolio of U.S. government securities represents
less than half of the total value of our cash and securities segregated for
regulatory purposes, and 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 as well as a maturity schedule of our portfolio of U.S.
government securities for the periods presented.
Three Months Ended March 31,
(Year over
2022 2021 Year Decrease)
Principal transactions and proprietary
trading
Realized and unrealized gain on primarily
riskless principal transactions $ 1,919,000 $ 4,254,000 $ (2,335,000 )
Unrealized loss on portfolio of U.S.
government securities (2,186,000 ) (6,000 ) (2,180,000 )
Total Principal transactions and
proprietary trading $ (267,000 ) $ 4,248,000 $ (4,515,000 )
As of
March 31,
2022 December 31, 2021
Market value of U.S. government securities
Maturing 08/31/2023, 1.375% Coupon Rate $ 9,908,000 $ -
Maturing 12/31/2023, 0.75% Coupon Rate 63,363,000 -
Maturing 01/31/2024, 0.875% Coupon Rate 24,384,000 -
Maturing 08/15/2024, 0.375% Coupon Rate 2,860,000 2,966,000
Total Market value of U.S. government securities $ 100,515,000 $ 2,966,000
Market making for the three months ended March 31, 2022 was $764,000 and
decreased by $850,000 from the corresponding period in the prior year, primarily
due to market conditions.
Stock borrow / stock loan for the three months ended March 31, 2022 was
$3,578,000 and increased by $1,731,000 from the corresponding period in the
prior year, primarily due to the growth of the business, expansion of our stock
locate revenues, and additional securities lending and locate counterparty
relationships.
Advisory fees for the three months ended March 31, 2022 were $507,000 and
increased by $151,000 from the corresponding period in the prior year, primarily
due to overall expansion of the advisory business line.
Other income for the three months ended March 31, 2022 was $1,060,000 and
increased by $668,000 from the corresponding period in the prior year primarily
due to an increase in consulting services to institutional partners.
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Operating Expenses
Employee compensation and benefits for the three months ended March 31, 2022
were $7,094,000 and decreased by $2,072,000 from the corresponding period in the
prior year, primarily due to a decrease in commissions payouts from RISE related
to the loss of our institutional customers.
Clearing fees, including execution costs for the three months ended March 31,
2022 were $494,000 and decreased by $1,359,000 from the corresponding period in
the prior year, primarily due to a decrease in our institutional clearing costs.
Technology and communications expenses for the three months ended March 31, 2022
were $1,182,000 and decreased by $59,000 from the corresponding period in the
prior year, primarily due to a decrease in licensing fees, partially offset by
an increase in other technology expenses.
Other general and administrative expenses for the three months ended March 31,
2022 were $932,000 and increased by $162,000 from the corresponding period in
the prior year, primarily due to an increase in exchange and regulatory fees
related to trading activities as well as travel and entertainment expenses,
partially offset by lower office expenses.
Data processing expenses for the three months ended March 31, 2022 were $516,000
and decreased by $281,000 from the corresponding period in the prior year,
primarily due to a reduction in market data analytics and service bureau costs.
Rent and occupancy expenses for the three months ended March 31, 2022 were
$473,000 and decreased by $97,000 from the corresponding period in the prior
year, primarily due to a decrease in rent related to our transition out of
legacy office space into more cost-efficient locations.
Professional fees for the three months ended March 31, 2022 were $696,000 and
increased by $81,000 from the corresponding period in the prior year, primarily
due to the increase in consulting services for various marketing initiatives.
Depreciation and amortization expenses for the three months ended March 31, 2022
were $259,000 and decreased by $133,000 from the corresponding period in the
prior year, primarily due to write-offs and the completion of the useful lives
of assets within RISE and STCH in 2021.
Referral fees for the three months ended March 31, 2022 were $0 and decreased by
$407,000 from the corresponding period in the prior year, primarily due to the
transition of our institutional clients related to the termination of our
clearing arrangement with GSCO.
Interest expense for the three months ended March 31, 2022 was $124,000 and
increased by $21,000 from the corresponding period in the prior year, primarily
due to the interest on the mortgage with East West Bank in 2022.
Advertising and promotion expense for the three months ended March 31, 2022 was
$113,000 and increased by $113,000 from the corresponding period in the prior
year, primarily due to an increase in promotional costs for various marketing
initiatives.
Benefit From Income Taxes
The benefit from income taxes for the three months ended March 31, 2022 was
($282,000) and decreased by $1,017,000 from the corresponding period in the
prior year. The change from the corresponding period in the prior year is
primarily due to lower pre-tax earnings in the first quarter of 2022. Refer to
Note 16 - Income Taxes for additional detail.
Net 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 loss attributable to noncontrolling interests for
the three months ended March 31, 2022 was $119,000, and increased by $119,000
from the corresponding period in the prior year.
Statements of Financial Condition as of March 31, 2022 and December 31, 2021
Assets
Assets as of March 31, 2022 were $1,127,836,000 and decreased by $276,399,000
from December 31, 2021, primarily due to a decrease in securities borrowed and
cash and securities segregated for regulatory purposes.
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Liabilities
Liabilities as of March 31, 2022 were $1,065,372,000 and decreased by
$278,010,000 from December 31, 2021, primarily due to a decrease in securities
loaned and payables to customers.
Liquidity and Capital Resources
Overview
The indicators of our liquidity are cash and cash equivalents. Our cash and cash
equivalents are unrestricted and are used to fund our working capital needs. Our
cash and cash equivalents as of March 31, 2022 and December 31, 2021 were $7.7
million and $3.8 million, respectively. We believe that our operating cash
flows, cash and cash equivalents, borrowing capacity, and overall access to
capital markets are sufficient to fund our operating, investing and financing
requirements for the foreseeable future.
Sources of Liquidity and Planned Obligations
As of March 31, 2022, we had a variety of debt instruments and sources of
borrowing capability. As of March 31, 2022, the debt instruments and their
outstanding obligations were as follows: $4.0 million mortgage with East West
Bank, $3.4 million line of credit with East West Bank, and $4.1 in notes payable
to related parties. We have an additional $5.0 million available on our line of
credit with East West Bank and have an available line of credit for short term
overnight demand borrowing of up to $15 million with BMO Harris. Our ability to
borrow incremental amounts for the line of credit with East West Bank is set to
terminate by July 2022; however, we intend to renew this line of credit before
the termination occurs.
As of March 31, 2022, the aggregate future payment obligations related to these
debt instruments are $7.8 million through 2026 and $3.7 million thereafter. The
remaining balance of our lease payments for operating leases with initial terms
of greater than one year was $0.9 million during 2022, and $1.8 million
thereafter.
On December 30, 2021, we acquired the Miami office building and plan on building
out this space so it can be used as one of our primary operating centers for an
estimated $1.4 million, with $338,000 being financed through a commitment with
East West Bank and the remainder being cash.
Shelf Registration Statement
On February 18, 2022, we filed a shelf registration statement on Form S-3 that
was declared effective on March 2, 2022 by the SEC for the potential offering,
issuance and sale by us of up to $100.0 million of our common stock, preferred
stock, warrants to purchase our common stock and/or preferred stock, units
consisting of all or some of these securities and subscription rights to
purchase all or some of these securities. 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.
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.
For the three months ended March 31, 2022 and 2021, MSCO and RISE had sufficient
net capital to meet their respective liquidity and regulatory capital
requirements. Refer to Note 17 - Capital Requirements for additional detail on
our capital requirements.
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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 its
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 months ended March 31, 2022 and
2021. Refer to Note 18 - 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 March 31, 2022 and December 31, 2021, the Company recorded an
uncertain tax position of $2,418,000. This uncertain tax position was related
primarily to the Company's 2017 to 2019 amended tax returns, as the anticipated
tax refunds exceed the amount that meets the more-likely-than-not recognition
threshold.
Related Party Disclosures
During the course of business, we enter into various agreements and transactions
with related parties. Refer to Note 20 - Related Party Disclosures for
additional detail.
Fair Value Measurements
We have securities that are valued using the fair value framework under ASC 820
within our assets and liabilities as of March 31, 2022 and December 31, 2021.
Refer to Note 5 - Fair Value Measurements for additional detail.
Impairment
We have concluded as of March 31, 2022, there has been no impairment to the
carrying value of Siebert's goodwill and tangible assets, and there are no
intangible assets. Refer to Note 11 - Goodwill for additional information.
Segment
We concluded as of March 31, 2022, Siebert 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 Siebert from a consolidated perspective.
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 2021 Form 10-K
as well as in the below section. As of March 31, 2021, there have been no
changes to our critical accounting policies or estimates other than the below.
Variable Interest Entities
We evaluate whether an entity is a VIE and determine if the primary beneficiary
status is appropriate on a quarterly basis. We consolidate a VIE for which we
are the primary beneficiary. When assessing the determination of the primary
beneficiary, we consider 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, we
determined that RISE is a VIE and we are the primary beneficiary, primarily due
to Siebert's power to direct the activities of RISE that most significantly
impact its economic performance. Additionally, Siebert may be obligated to fund
RISE's operations at an amount that is disproportional to its ownership
percentage.
New Accounting Standards
We did not adopt any new accounting standards during the three months ended
March 31, 2022. In addition, we evaluated other recently issued accounting
standards and do not believe that any of these standards will have a material
impact on our financial statements and related disclosures as of March 31, 2022.
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Regulatory Matters
We are party to certain claims, suits and complaints arising in the ordinary
course of business. As of March 31, 2022, we had one pending regulatory matter
related to operations of StockCross prior to our acquisition of StockCross on
January 1, 2020. Refer to Note 19 - Commitments, Contingencies, and Other for
additional detail.
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