Siebert Financial Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Siebert provides retail brokerage, investment advisory, insurance, and technology services. It reports one operating segment. Comparisons are with Q1 2022 unless noted.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior period |
|---|---|---|
| Total revenue | $16.17 million | $10.34 million; up $5.83 million (about 56%) |
| Operating income (loss) | $4.31 million | $(1.54) million |
| Net income (loss) available to common stockholders | $3.20 million; $0.10 per share | $(0.97) million; $(0.03) per share |
| Operating margin | About 26.7% | Negative; about (14.9%) |
| Operating cash flow | $(39.01) million | $(44.09) million |
| Cash and cash equivalents | $3.93 million | $23.67 million at December 31, 2022 |
| Cash and securities segregated for regulatory purposes | $255.62 million | $276.17 million at December 31, 2022 |
| Total assets / liabilities | $772.69 million / $719.55 million | $728.05 million / $678.13 million at December 31, 2022 |
| Long-term debt, including current portion | About $6.8 million | About $7.0 million at December 31, 2022 |
Revenue improvement was led by interest, marketing and distribution fees, up $4.61 million to $6.97 million, and principal transactions and proprietary trading, which improved to $2.80 million from a $0.27 million loss. The latter included a $1.00 million unrealized gain on U.S. government securities, versus a $2.19 million unrealized loss a year earlier. Commissions fell $0.44 million to $1.90 million; retail trades declined to 82,221 from 109,952. Expenses were broadly flat at $11.86 million.
The operating cash outflow primarily reflected movements in customer and non-customer payables and securities borrowing/lending balances. Investing outflows were $1.02 million, including Miami office build-out and software development; financing outflows were $0.26 million. Cash-flow changes are affected by customer assets and liabilities and may not indicate underlying operating trends.
Material developments and outlook
- Management said liquidity, available credit, access to capital markets, and operating cash flows should meet foreseeable needs. This is management’s assessment, not formal earnings guidance.
- At March 31, MSCO had $33.2 million of net capital, $31.8 million above its $1.4 million requirement. Its customer reserve deposits exceeded the requirement by $22.2 million at quarter-end; after April 3 activity, the excess was $3.2 million. RISE had $1.3 million of net capital, $1.0 million above its $0.25 million minimum.
- Debt consists primarily of a $4.37 million Miami property mortgage at 3.6% and a $2.41 million East West Bank loan at 8%. The company reported covenant compliance. It also had an undrawn BMO Harris overnight credit line of up to $25 million.
- The company expected to launch its new retail trading platform in Q2 2023. It had capitalized $0.63 million in development costs by March 31; amortization was to begin when the platform entered service. Miami office build-out was completed and the building placed in service in April.
- RISE’s former institutional brokerage customers had transitioned to other providers. Management was evaluating RISE’s strategic direction and cautioned that its business plan was untested and might not attract sufficient customers or revenue. Related JonesTrading payments generated $54,000 of pre-tax income in Q1, which management did not expect to offset the loss of transitioned customer business.
- After quarter-end, Siebert agreed to issue shares to KakaoPay for approximately $17.4 million in a first tranche representing 19.9% ownership. A second tranche of approximately $60.5 million for a further 31.1% is subject to shareholder and regulatory approval; completion would give KakaoPay 51% ownership. The company said proceeds are intended primarily to expand securities lending, corporate services, order-flow opportunities, and correspondent clearing. Closing conditions remain material uncertainties.
Risks, contingencies, and unusual items
- FINRA is investigating pre-acquisition StockCross unit investment trust transactions. Management could not assess the investigation’s duration or outcome; sanctions or customer restitution could be material.
- Ending the NFS clearing agreement early could trigger termination fees of $7.25 million before August 1, 2023, $4.5 million before August 1, 2024, or $3.25 million before August 1, 2025. The company said early termination was unlikely and recorded no liability.
- The company reported a $1.60 million uncertain tax position. It also faces market, interest-rate, liquidity, credit, regulatory, operational, and technology risks. Management intends to hold its government securities to maturity, but further rate-related unrealized losses could occur before maturity.
- A March 31 technology-vendor agreement provides for approximately $1.2 million of development work over two years. The company also had an at-the-market share-sale facility, but made no sales under it in Q1.
Investor verification points
- Confirm KakaoPay tranche closing status, required approvals, dilution, proceeds, and intended deployment of capital.
- Review the composition and availability of reported cash, distinguishing unrestricted cash from regulatory-segregated funds, and monitor operating cash flow.
- Track the interest-rate impact on securities gains or losses and the timing of maturities in the government-securities portfolio.
- Assess the new trading platform’s launch, costs, adoption, and the strategic direction and performance of RISE.
- Monitor the FINRA investigation, NFS contract obligations, debt covenant compliance, and regulatory capital and reserve requirements.