Siebert Financial Corp. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results include Siebert Financial Corp. and its wholly owned subsidiaries; equity-method affiliates include Siebert, Brandford, Shank & Co. (SBS) and SBS Financial Products Company (SBSFPC).
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $5.857 million | $3.742 million | $15.858 million | $15.451 million |
| Expenses | $7.421 million | $6.086 million | $19.828 million | $20.263 million |
| Income (loss) from equity investees | $974,000 | $628,000 | $(402,000) | $2.452 million |
| Net loss | $(591,000) | $(3.558 million) | $(4.385 million) | $(3.970 million) |
| Loss per share, basic and diluted | $(0.03) | $(0.16) | $(0.20) | $(0.18) |
Q3 revenue rose 56.5%, led by higher commissions, investment banking and trading. Nine-month revenue increased 2.6%: investment banking and trading gains were largely offset by lower commissions. The nine-month loss widened as equity-investee results swung from income to loss; SBS accounted for most of that change. A $1 million litigation provision was recorded in Q3 and the nine-month period. The filing does not present a consolidated gross-margin measure.
Cash, liquidity and capital
- At September 30, 2011, cash and cash equivalents were $21.819 million, with another $1.532 million in restricted cash equivalents. Total assets were $37.444 million, down from $40.103 million at December 31, 2010.
- Management described $24.2 million, or 65% of assets, as highly liquid. Operating cash flow was $(851,000) for the nine months, versus $(384,000) in the comparable 2010 period. Cash decreased $827,000 to $21.819 million.
- Accounts payable and accrued liabilities were $5.224 million, up from $3.477 million. Stockholders’ equity was $32.220 million, down from $36.626 million. The balance sheet lists no separate debt balance.
- Siebert’s regulatory net capital was approximately $17.894 million, $17.644 million above the $250,000 minimum. The company reports a secured demand-note facility under which it may lend SBS up to $1.2 million; the facility expires August 31, 2012.
Material changes and management commentary
- Q3 retail trades increased to 115,696 from 83,914; average commission per retail trade was $20.15 versus $19.81. For the first nine months, trades were 331,927 versus 298,953, while average commission was $20.86 versus $20.99.
- Q3 commissions and fees increased 25.5% to $3.607 million, reflecting higher retail activity and margin-debit fees. Nine-month commissions and fees fell 16.0% to $11.091 million, partly because 2010 included a $3 million clearing-firm agreement payment.
- Q3 investment banking revenue rose 214.7% to $1.737 million; nine-month revenue rose 152.7% to $3.315 million, reflecting participation in more equity and debt offerings. Nine-month trading profits increased 67.6% to $1.406 million.
- Management attributed weak municipal underwriting conditions to lower industry volumes, municipal fiscal pressures, default concerns and expiration of the Build America Bonds program. SBS reported a nine-month loss of approximately $800,000; Siebert’s share was $392,000.
- Management said working capital was primarily invested in money-market funds and liquidity had not been materially affected by market volatility. It also noted intense brokerage competition and that fixed costs can pressure results during periods of reduced market activity.
Risks, contingencies and outlook
- On November 3, 2011, after the quarter end, Siebert agreed to settle the Lehman-related class action for $1 million, subject to court approval. The amount was accrued at September 30, 2011.
- A former employee’s arbitration proceeding remained unresolved; management considered the claim without merit, but defense costs had affected results and could continue to do so.
- Risks include market and trading-volume fluctuations, demand for brokerage and investment-banking services, competition and pricing pressure, systems failures, trading errors, customer nonpayment, regulatory capital requirements and unsettled customer transactions. Management reported no material losses from unsettled customer transactions in the periods presented.
- A full valuation allowance of approximately $3.826 million was recorded against deferred tax assets at September 30, 2011; consequently, no tax benefit was recorded for the nine-month loss.
- No quantified financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. It reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm court approval and payment timing for the $1 million Lehman settlement.
- Track SBS’s municipal underwriting performance and whether its accumulated undistributed earnings become available to Siebert; the filing says $7.445 million of Siebert’s share was undistributed and may not be immediately distributable.
- Assess whether retail activity and investment-banking gains can offset the nine-month decline in commissions and SBS losses.
- Monitor operating cash use, accrued liabilities and the status of the former employee arbitration.
- Reconcile share-repurchase disclosures: the filing reports 16,161 shares purchased in the first nine months and 9,006 in Q3, with 192,254 shares remaining under the repurchase authorization at September 30.