Siebert Financial Corp. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. Siebert operates a retail discount brokerage, investment advisory business, and insurance agency. Management attributed much of the period’s growth to retail broker-dealer assets acquired from StockCross, an affiliate. Financial statements are unaudited.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $7.488 million | $2.689 million | $15.665 million | $5.068 million |
| Expenses | $5.552 million | $2.324 million | $11.623 million | $4.644 million |
| Income before taxes | $1.936 million | $365,000 | $4.042 million | $424,000 |
| Net income | $1.799 million | $365,000 | $3.492 million | $424,000 |
| Diluted EPS | $0.07 | $0.02 | $0.13 | $0.02 |
| Net margin | About 24.0% | About 13.6% | About 22.3% | About 8.4% |
Revenue increased 178% in Q2 and 209% in the first half year over year; net income increased 393% and 724%, respectively. Principal transactions contributed $2.263 million of Q2 revenue and $5.204 million for the first half, compared with $98,000 and $206,000 in the respective 2017 periods. Margin interest, marketing and distribution fees were $2.687 million in Q2 and $5.222 million in the first half; commissions and fees were $2.512 million and $5.186 million.
Cash flow and balance sheet. First-half cash from operating activities was $3.030 million, versus cash used of $198,000 in the prior-year period. Capital spending was $109,000; cash increased $2.921 million to $6.686 million. At June 30, total assets were $10.310 million, liabilities $1.605 million, and stockholders’ equity $8.705 million. Cash represented 65% of assets. The filing reports no debt balance. MSCO had regulatory net capital of $7.672 million, $7.422 million above its $250,000 minimum requirement.
Retail activity increased: Q2 retail trades were 84,271 versus 50,769, and first-half trades were 180,490 versus 110,139. Average commission per retail trade was $22.02 in Q2 versus $19.56; first-half average was $22.62 versus $19.80.
Changes, outlook, and risks
- Drivers and costs: Management linked revenue growth to the StockCross asset acquisition and, for margin interest and related fees, rising interest rates. Expenses also rose substantially, particularly compensation, clearing, occupancy, and general and administrative costs, reflecting added personnel, offices, and activity. Prior-year expenses included non-recurring relocation and staff-reduction charges of $110,000 in Q2 and $342,000 for the first half.
- Taxes and accounting: The effective tax rate was 7% for Q2 and 14% for the first half. Federal and state net operating loss carryforwards were $22.881 million and $16.058 million, respectively, subject to approximately $900,000 annual utilization limits under Section 382. A valuation allowance fully offsets deferred tax assets. Adoption of ASC 606 had no material impact and required no opening-equity adjustment.
- Liquidity, commitments, and contingencies: Management stated that cash and working capital were sufficient for operations. The company disclosed customer unsettled-transaction exposure, with no material losses reported for either six-month period. Additional operating lease minimum payments total $2.213 million for 2019 and thereafter. Management considered ordinary-course claims and complaints immaterial or without merit.
- Controls and market risks: Management said disclosure controls were effective, but the company was still developing a remediation plan for material weaknesses in internal control identified in its 2017 Form 10-K. Risks include market and trading activity, interest-rate changes, competition, system failures, customer nonpayment, and regulatory capital requirements. The company also cautioned that an active public market for its stock may not continue; approximately 23.8% of outstanding shares were held by the public.
- Guidance: The filing provides no specific financial guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts to verify
- How much of the revenue and earnings improvement is attributable to acquired StockCross assets, and how sustainable are principal transaction revenues?
- Whether higher staffing, occupancy, and clearing expenses translate into continued growth in profitability and margins.
- MSCO’s excess regulatory capital, customer transaction exposure, and the company’s cash and working-capital position.
- Progress and timing of remediation for the previously identified internal-control material weaknesses.
- Use and realizability of tax-loss carryforwards, lease commitments, and the limited public float/liquidity of the shares.