Siebert Financial Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company provides brokerage, prime brokerage, investment advisory, insurance and technology services. It filed late under SEC COVID-19 relief, citing pandemic-related operational disruption and a slower quarterly close.
Financial results and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $14.801 million | $10.278 million |
| Operating expenses | $13.290 million | $8.657 million |
| Income before taxes | $1.511 million | $1.621 million |
| Net income | $976,000 | $1.224 million |
| Diluted EPS | $0.03 | $0.04 |
| Operating cash flow | $3.390 million | $(7.702) million |
Revenue increased 44%, while net income fell 20%. Calculated net margin was approximately 6.6%, down from 11.9%; pretax margin was approximately 10.2%, versus 15.8%. Higher expenses—including compensation, clearing, technology and communications—outpaced revenue growth. The effective tax rate rose to 35% from 24%.
Revenue growth reflected higher commissions and fees ($5.583 million, up 146%), principal transactions ($3.203 million, up 69%) and interest income ($1.331 million, up 13%). Margin interest, marketing and distribution fees declined 7% to $3.294 million. Management attributed the commission increase largely to WP institutional trading; principal transaction growth to market conditions; and margin-fee pressure partly to lower interest rates.
At March 31, total assets were $393.734 million, liabilities $359.623 million and stockholders’ equity $34.111 million. Assets and liabilities each fell about 27%–29% from December 31, primarily as securities-borrowed and securities-loaned balances declined. Cash and cash equivalents were $5.220 million; cash and securities segregated for regulatory purposes were $227.581 million. Combined cash and segregated balances were $232.801 million. The segregated funds are not unrestricted corporate cash.
Related-party notes payable were $8.0 million, all due in 2020. Lease liabilities totaled $3.845 million. Operating cash flow was positive, but was substantially affected by movements in customer and securities financing balances. Cash-flow figures should be considered in light of these brokerage-related working-capital movements.
Material changes and transactions
- The company acquired the remaining 85% of StockCross effective January 1, 2020, issuing approximately 3.3 million shares; StockCross merged into MSCO. The acquisition added self-clearing, custody, market-making, securities-lending and equity stock-plan activities. Financial statements present Siebert and StockCross on a combined, common-control basis for all periods, so year-over-year comparisons include StockCross in both periods.
- WP, acquired in December 2019, contributed its first full quarter under Siebert ownership in Q1 2020. Management reported approximately $3.7 million of WP revenue and cited increased institutional activity during market volatility. WP acquisition effects also limit comparability with Q1 2019.
- Retail trades rose to 120,495 from 79,354, while average commission per retail trade declined to $15.46 from $18.90. Retail customer net worth was $10.6 billion, down from $12.3 billion, primarily reflecting market declines; retail accounts increased to 108,163 from 103,641.
- MSCO reported net capital of $23.7 million, $21.7 million above its $2.0 million requirement. WP reported $4.4 million of net capital, $4.1 million above its $250,000 minimum. MSCO’s customer reserve account held $227.4 million, $16.6 million above the requirement at March 31; after April 1 adjustments, excess was $1.6 million.
Outlook, risks and unusual items
- Management said COVID-19’s Q1 impact was relatively minor but expected a more pronounced effect in future periods; duration and ultimate financial impact were uncertain. Nearly all employees shifted to remote work, some retail branches temporarily closed, and business travel was restricted. Management said operations had largely continued without material disruption to date.
- Federal Reserve rate cuts totaling 150 basis points to near zero may pressure margin interest, marketing and distribution fees and interest income. Management also identified possible effects from customer activity, market valuations, volatility and investor behavior.
- Management cited salary reductions for higher-level employees and review of compensation, vendor arrangements and office leases as cost measures. It did not provide numerical earnings or revenue guidance.
- In April, MSCO signed a three-year InvestCloud services agreement, with a stated annual license fee of $600,000 and a service fee of $1.0 million. InvestCloud acquired 193,906 restricted shares for $1.4 million and agreed to provide research and development services of equal value, credited against fees. Management targeted launch of the upgraded platform by the end of Q1 2021.
- Other risks include market and interest-rate exposure, client or counterparty defaults, margin collateral shortfalls, technology and cybersecurity issues, regulation, integration and execution risks, and related-party financing. Ordinary-course legal matters were described as not expected to have a significant financial effect; indemnification exposures could not be estimated, but management considered material payments unlikely.
Important facts for investors to verify
- How much revenue and profit WP and StockCross contribute, and whether post-acquisition growth can offset the associated expense base.
- The company’s ability to renew, repay or otherwise address the $8.0 million of related-party notes maturing in 2020.
- COVID-19’s subsequent effects on trading, customer assets, interest-sensitive revenue, liquidity and operating costs.
- The amount of regulatory cash that is restricted, including the effect of post-quarter reserve-account adjustments and changing customer balances.
- The full economic cost, fee schedule, share issuance and implementation progress of the InvestCloud agreement.
- Whether any later developments changed the risks, outlook or financial condition described in this delayed Q1 filing.