SIEBERT FINANCIAL CORP quarterly report, Q3 FY2023

Siebert Financial Corp. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. The filing was dated November 14, 2023. Siebert is a U.S. financial services company operating in brokerage, investment advisory, insurance and technology; it reports one operating segment.

Financial performance

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Revenue	$18.05 million	$14.34 million	$51.81 million	$36.37 million
Operating income (loss)	$4.27 million	$1.59 million	$13.25 million	$(0.52) million
Net income available to common stockholders	$2.76 million	$1.05 million	$8.66 million	$0.79 million
Basic and diluted earnings per share	$0.07	$0.03	$0.24	$0.02

• Revenue increased 26% in Q3 and 42% for the nine-month period year over year. Higher interest, marketing and distribution fees and stronger principal-trading results drove most of the increase. Nine-month commissions were slightly lower; market-making and other income also declined.
• Operating margins, calculated from reported revenue and operating income, were approximately 23.7% in Q3 2023 versus 11.1% in Q3 2022, and 25.6% for the first nine months of 2023 versus a 1.4% operating loss margin in 2022. Higher revenue more than offset increased employee compensation and other expenses.
• Interest, marketing and distribution fees rose to $7.19 million in Q3 and $21.58 million for nine months, primarily from higher rates, margin interest and interest on government securities and bank deposits. Principal transactions and proprietary trading were $3.75 million in Q3 and $9.21 million year to date, including reversals of prior-period unrealized losses on U.S. government securities.
• Reported nine-month net income includes $1.04 million of investment impairment charges: $850,000 related to a retail-platform investment and approximately $185,000 related to Tigress. The company exited its Tigress investment in July in exchange for repurchasing one million of its shares; no gain or loss was recorded on that exchange.

Financial position, cash flow and liquidity

• At September 30, 2023, total assets were $771.15 million, total liabilities $699.58 million and total equity $71.57 million. Assets rose $43.10 million from year-end 2022, while liabilities increased $21.45 million.
• Cash and cash equivalents were $4.93 million, down from $23.67 million at December 31, 2022. Cash and securities segregated for regulatory purposes were $237.38 million. The combined balance of cash and regulatory-segregated cash and securities was $242.31 million, down $57.53 million from year-end; regulatory balances are not equivalent to unrestricted cash.
• For the first nine months, operating cash flow was negative $68.96 million, investing cash flow negative $1.63 million, and financing cash flow positive $13.06 million. Management attributed operating cash use principally to movements in customer and non-customer receivables and payables and securities borrowed and loaned; it cautioned that these balances fluctuate with customer activity.
• Long-term debt included a $4.33 million East West Bank mortgage, secured by the Miami office building, at 3.6% interest as of September 30. The company repaid a separate East West Bank loan with an approximately $2.7 million balance during Q2. It reported compliance with debt covenants and had an unused BMO Harris overnight credit line of up to $25 million.
• MSCO reported regulatory net capital of $54.1 million, $52.3 million above its $1.8 million requirement. RISE reported approximately $1.2 million of net capital, $1.0 million above its $250,000 minimum. MSCO’s customer reserve account had $26.1 million excess at September 30, reduced to $2.0 million after October 2 adjustments.
• Management stated that available cash, credit facilities, capital-market access and operating cash flows should meet current liquidity needs for the foreseeable future. This assessment includes the company’s stated liquidity position and should be considered alongside the decline in combined cash and regulatory-segregated balances and the variability of brokerage-related cash flows.

Material changes and significant developments

• Q3 revenue growth reflected higher interest-related revenue and a $2.48 million year-over-year improvement in the unrealized result on the U.S. government securities portfolio. For the nine months, that portfolio’s unrealized result improved by $6.75 million from 2022. The company reported an aggregate unrealized loss of approximately $1.3 million at September 30, 2023 and intends to hold the securities to maturity, no later than April 2025.
• Employee compensation and benefits increased to $8.72 million in Q3, up $1.43 million year over year, primarily due to higher commission payouts and incentive compensation. Nine-month compensation rose $2.02 million to $23.77 million.
• On May 18, 2023, Kakaopay completed its first investment tranche, receiving 8,075,607 shares at $2.15 per share for 19.9% on a fully diluted basis. Siebert reported approximately $15.4 million of net capital from the transaction. The proposed second tranche would issue an additional 25,756,470 shares at $2.35 per share and give Kakaopay approximately 51% ownership, subject to closing conditions.
• After the quarter, Siebert said developments involving Kakaopay and its parent had, in its view, created a material adverse effect. On November 11, 2023, Siebert notified Kakaopay that its closing conditions would not be satisfied and said Kakaopay had indicated it would not meet conditions needed to prepare the proxy statement. Kakaopay disputed Siebert’s statements in a November 12 response. Siebert was evaluating its contractual rights and possible termination; the second tranche had not closed as of the filing.
• Retail customer accounts increased to 128,727 from 122,394 at year-end 2022, and reported retail customer net worth rose to $14.6 billion from $13.5 billion. Retail customer credit balances declined to $0.5 billion from $0.6 billion.

Outlook, risks and contingencies

• No numerical earnings or revenue guidance was provided. Management said RISE’s future strategic direction is under assessment; its business plan is untested and may not attract the customers and revenue needed to compete. Income from a JonesTrading arrangement is not expected to offset the reduction in income from transitioned RISE customers.
• Key risks identified include market and interest-rate changes, liquidity and credit risks, regulatory and net-capital requirements, systems and cybersecurity risks, reliance on service providers, competition, legal matters, and uncertainty over the Kakaopay second tranche. Brokerage results may be affected by customer activity while many operating expenses remain relatively fixed.
• The NFS clearing agreement runs through July 2025. Early termination fees are $4.5 million before August 1, 2024 and $3.25 million before August 1, 2025; the company said it considers material payment unlikely and recorded no contingent liability for these fees.
• Other disclosed commitments include approximately $3.74 million of remaining operating lease payments, a technology-vendor project budget of approximately $1.15 million, and estimated $500,000 build-out costs for the new New York office. The New York lease has an approximately $2.1 million total commitment.
• Management considered ordinary-course legal matters without merit or not material as of the filing, but noted that the Kakaopay dispute may result in additional legal expenses of uncertain amount. The company also disclosed a $1.596 million uncertain tax position. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether the Kakaopay second tranche is terminated, renegotiated or completed, and the impact on ownership, governance, funding and legal costs.
• How much of reported earnings and future results depends on interest rates and the reversal or maturity of unrealized losses in government securities.
• Whether operating cash flow improves as customer balances and securities-borrowing and lending activity change; distinguish unrestricted cash from regulatory-segregated assets.
• Progress, costs and revenue potential of the new RISE strategy, correspondent clearing, securities lending and technology initiatives.
• Future investment impairments, regulatory-capital headroom, clearing-agreement obligations and execution of lease and office-build-out commitments.