Siebert Financial Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Siebert provides brokerage, prime brokerage, investment advisory, insurance and related financial services. The statements combine Siebert and StockCross for all periods presented because they were under common control; WP was acquired in December 2019. Accordingly, comparisons include acquired operations and are not purely organic.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $12.619 million | $10.681 million | $27.420 million | $20.959 million |
| Income before tax | $489,000 | $1.699 million | $2.000 million | $3.320 million |
| Net income | $499,000 | $1.079 million | $1.475 million | $2.303 million |
| Basic and diluted EPS | $0.02 | $0.04 | $0.05 | $0.08 |
| Net margin, calculated | 3.9% | 10.1% | 5.4% | 11.0% |
- Q2 revenue rose 18.1% year over year, while net income fell 53.8%. Six-month revenue increased 30.8%, but net income declined 36.0%.
- Revenue drivers were mixed: Q2 commissions and fees increased to $4.887 million from $2.591 million, and principal transactions rose to $2.581 million from $1.921 million. Margin interest, marketing and distribution fees fell to $2.125 million from $3.693 million; interest income declined to $909,000 from $1.186 million.
- Q2 expenses rose to $12.130 million from $8.982 million. Compensation increased by $2.138 million and clearing fees by $613,000, largely reflecting WP operations and higher activity; other general and administrative expense fell by $784,000.
- Six-month operating cash flow was positive $30.544 million, versus negative $18.301 million in 2019. The change was substantially driven by movements in securities borrowed and securities loaned, as well as customer receivables and payables. Investing cash use was $276,000; financing cash flow was zero.
- At June 30, total assets were $536.687 million, liabilities $500.950 million and stockholders’ equity $35.737 million. Cash and cash equivalents were $4.179 million; an additional $255.683 million was segregated for regulatory purposes and should not be treated as unrestricted operating cash. Related-party notes payable totaled $8.0 million, all maturing in 2020; lease liabilities totaled $3.443 million.
- MSCO reported net capital of $24.8 million, $22.9 million above its $1.9 million requirement. WP reported net capital of about $4.0 million, $3.7 million above its $250,000 minimum. MSCO’s customer reserve deposit was $13.4 million above the requirement at June 30; after July 1 adjustments, the excess was $1 million.
- Retail accounts numbered 109,294 versus 104,551 a year earlier; Q2 retail trades were 120,821 versus 74,944. Average commission per retail trade declined to $14.96 from $18.77.
Material developments, outlook and risks
- Management attributed lower margin-related and interest revenue to Federal Reserve rate cuts and said this pressure may continue. Trading volatility supported principal transactions and other activity; management said institutional revenue was consistent with Q1.
- COVID-19 led to remote work for nearly all employees, restricted travel and temporary branch closures. Management reported no material operating disruption to date and said liquidity had not been materially affected, but the pandemic’s ultimate effects remain uncertain. Cost actions included reductions in senior salaries and staffing; management was also reviewing vendor costs and office leases.
- Management believes operating cash flows, cash, related-party borrowing capacity and capital-market access are sufficient for requirements over the next 12 months. No specific earnings or revenue guidance was provided.
- After quarter end, Siebert entered a secured East West Bank facility allowing up to $10 million of term loans over two years; approximately $5 million had been drawn by the end of July. The rate is prime or 3.0% above LIBOR, with a 3.25% floor. Obligations are guaranteed by related parties and secured by specified assets.
- The proposed $7.3 million sale of WP was terminated effective July 24, 2020. Siebert also entered a three-year InvestCloud platform agreement, including $600,000 annual license fees and $1.0 million in upfront professional services. A further $1.1 million of integration services was paid through issuance of 193,906 restricted shares at $5.81 per share.
- Risks include market and interest-rate sensitivity, COVID-19 uncertainty, customer and counterparty credit exposure, clearing and systems risks, cybersecurity, regulation and net-capital requirements. Ordinary-course legal matters were described as not expected to have a significant financial effect. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Net-income inconsistency: The income statement reports Q2 2020 net income of $499,000, while Note 13 states $449,000. Confirm the correct figure; the reported EPS and equity rollforward appear consistent with $499,000.
- Assess how much revenue and expense growth reflects StockCross and WP consolidation versus underlying growth, and whether lower interest-rate revenue persists.
- Review liquidity quality: most reported cash and securities are segregated for regulatory/customer purposes, while $8 million of related-party notes matured in 2020.
- Track the East West Bank draw, collateral and guarantees, and repayment or renewal of the related-party notes.
- Evaluate the cost, implementation and expected benefits of the InvestCloud agreement, including the share issuance and ongoing license commitments.
- Monitor COVID-19 effects, net-capital and reserve cushions, and customer/counterparty exposures as market conditions change.