Business context and reporting period
Siebert Financial Corp. is a brokerage and investment-banking company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the same periods in 2012. The company cited Hurricane Sandy-related disruption to finance and accounting personnel when relying on SEC filing relief.
Financial results and liquidity
Amounts are in U.S. dollars. No debt is listed on the September 30, 2013 balance sheet; reported liabilities consist of accounts payable and accrued liabilities.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $3.666 million | $4.073 million | $12.210 million | $16.251 million |
| Total expenses | $6.052 million | $5.196 million | $16.247 million | $16.987 million |
| Income (loss) before taxes | $(1.644) million | $(0.878) million | $(4.366) million | $0.194 million |
| Net income (loss) | $(1.644) million | $(0.912) million | $(4.366) million | $0.160 million |
| Basic and diluted EPS | $(0.07) | $(0.04) | $(0.20) | $0.01 |
Q3 revenue declined 10.0%, while expenses rose 16.5%; the resulting net loss widened year over year. Nine-month revenue fell 24.9%, and the company moved from modest prior-year income to a $4.366 million net loss. The filing does not present a defined operating-margin measure.
At September 30, total assets were $30.817 million, including $18.388 million cash and cash equivalents and $1.532 million restricted cash equivalents. Stockholders’ equity was $26.655 million. Cash declined $514,000 from year-end 2012. Nine-month operating cash flow was positive $40,000; investing cash outflow was $535,000 and financing cash outflow was $19,000.
Siebert reported regulatory net capital of approximately $14.554 million, $14.304 million above its $250,000 minimum. Management described assets as highly liquid and reported $18.4 million, or 60% of total assets, as highly liquid. The company’s 49%-owned affiliate SBS had a $380,000 nine-month net loss; the company’s recognized share was a $186,000 loss. Its 33.33%-owned SBSFPC had a $430,000 net loss, of which the company’s share was $143,000.
Material changes and management commentary
- For the first nine months, commissions and fees fell 25.6%, investment-banking revenue fell 24.7%, and trading profits fell 21.1%. Management attributed the declines to lower average commissions, reduced trading volume, fewer underwriting issues, and the prior-year contribution of a large retail options customer.
- Q3 commissions and fees increased 6.6%, alongside higher retail trade volume, but investment-banking revenue declined 47.0% and trading profits declined 28.2%.
- Professional fees increased 51.6% for the nine-month period, primarily due to legal costs for an unresolved dispute with a former employee. Management said it believes the claim is without merit and that defense costs may continue to affect results.
- Retail trades were 80,693 in Q3, up from 71,177, but 256,069 for nine months, slightly below the prior-year 260,396. Average commission per retail trade was $23.56 for nine months versus $28.19. Retail customer accounts with positions fell to 38,160 from 42,185.
- Management said market conditions had improved but revenue had not, and that intense competition and market activity affect profitability. It provided no specific financial guidance or forecast.
Risks, contingencies, and unusual items
- The company recorded no tax benefit on 2013 losses because it fully reserved the related deferred tax asset, citing cumulative losses and uncertainty of realization.
- Possible additional exposure remains from the Lehman Brothers securities class action; the company had paid $1 million in a prior-year settlement but could not determine any further liability.
- The company extended its New York office lease through 2017, adding $1.487 million of obligations, and extended its fully disclosed clearing agreement through July 2017.
- Siebert is obligated under a secured demand-note arrangement to lend SBS up to $1.2 million, collateralized by $1.532 million of restricted cash equivalents; the facility expires August 31, 2014 and bears 4% interest.
- Following the City of Detroit bankruptcy filing, SBSFPC unwound and assigned derivative contracts with carrying values of $123.063 million to a financial institution. SBSFPC reported no gain or loss from the transfer and no continuing rights or obligations; it had recorded a $241,000 write-down earlier in 2013.
- The company reported no material losses on unsettled customer transactions and no material changes to the risk factors in its 2012 Form 10-K.
Important facts for investors to verify
- Whether brokerage and investment-banking revenue recover, given nine-month declines and weaker average commissions.
- The duration and total cost of the former-employee dispute, and whether any further Lehman-related liability arises.
- The performance, liquidity, and distribution capacity of SBS and SBSFPC, including SBS undistributed earnings of $7.126 million that may not be immediately available.
- Cash use and liquidity after the lease extension and continued operating losses, as well as the effect of regulatory capital requirements.
- The basis for eventual realization of deferred tax assets, which remain fully reserved.