Siebert Financial Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited consolidated results for a U.S.-focused financial services company spanning retail brokerage, investment advisory, insurance and technology. The company reports one operating segment.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $20.456 million | $16.170 million | Up 26.5% |
| Operating expenses | $15.354 million | $11.857 million | Up 29.5% |
| Operating income | $5.102 million | $4.313 million | Up 18.3% |
| Net income | $3.687 million | $3.215 million | Up 14.7% |
| Net income available to common stockholders | $3.688 million | $3.196 million | Up 15.4% |
| Basic and diluted EPS | $0.09 | $0.10 | Down |
| Operating margin | 24.9% | 26.7% | Down |
Revenue increased across most lines. Interest, marketing and distribution fees rose $1.790 million, primarily with higher interest income on government securities and cash deposits. Principal transactions and proprietary trading increased $706,000, reflecting higher gains on primarily riskless principal transactions, partly offset by lower gains on government securities. Stock borrow/loan revenue rose $656,000, and commissions and fees rose $453,000.
Employee compensation and benefits increased $3.409 million, mainly due to higher commission payouts, executive and incentive compensation, and technology personnel. Expenses grew faster than revenue, reducing operating margin. Net income rose, but EPS declined as weighted-average shares increased to 39.77 million from 32.51 million, following the prior-year Kakaopay share issuance.
Financial position, liquidity and cash flow
- At March 31, total assets were $742.303 million, down $59.497 million from year-end 2023; total liabilities were $667.472 million, down $63.619 million. The filing attributes the asset decline mainly to lower cash and securities segregated for regulatory purposes, and the liability decline mainly to lower customer payables and securities loaned.
- Cash and cash equivalents were $2.856 million, compared with $5.735 million at December 31, 2023. Cash and securities segregated for regulatory purposes totaled $218.173 million; these balances are subject to regulatory restrictions and should not be treated as unrestricted cash.
- Operating cash flow was negative $62.041 million, versus negative $39.014 million in Q1 2023. Management attributes the period-over-period increase in cash used mainly to changes in customer receivables and securities borrowed and loaned. Investing cash flow was negative $1.761 million; financing cash flow was positive $4.779 million, including $4.8 million drawn on the bank line.
- Current assets were $713.022 million and current liabilities $658.866 million. This includes substantial brokerage-related balances; the headline current ratio does not by itself indicate freely available liquidity.
- Debt at quarter-end included a $4.8 million short-term BMO Harris borrowing and approximately $4.292 million outstanding on the East West Bank mortgage. The company reported compliance with debt covenants. The mortgage carries a 3.6% rate and is secured by the Miami office building.
- MSCO reported $61.0 million of regulatory net capital, approximately $59.3 million above its $1.7 million requirement. Its customer-protection reserve exceeded the requirement by $26.7 million before subsequent April adjustments; after those adjustments, the excess was $2.7 million. RISE had approximately $1.3 million of regulatory net capital, about $1.0 million above its minimum.
Material changes, outlook and risks
- Retail customer accounts rose to 155,499 from 153,727 at year-end; retail customer net worth increased to $16.6 billion from $15.9 billion. Margin debit balances were reported at $0.4 billion versus $0.3 billion.
- The company is developing a new retail platform, expected to be placed in service in Q3 2024. It had capitalized $1.793 million of platform development costs by March 31. It also acquired a mobile trading app from J2 Financial for $385,000, paid with $35,000 cash and 200,000 restricted shares valued at approximately $350,000.
- Cash requirements disclosed for leases, the Kakaopay fee, mortgage principal, technology vendors and leasehold improvements totaled $13.619 million. The Kakaopay settlement fee is $5 million payable in quarterly installments; the cash-requirements schedule lists $4.5 million. The filing provides no earnings or revenue guidance. Management says available cash, credit lines, capital-market access and operating cash flows are expected to meet current liquidity needs for the foreseeable future.
- The company lost timely-filer eligibility for Form S-3 after filing its 2023 Form 10-K late. It regained Nasdaq listing compliance after filing the 10-K on May 10, 2024, but suspended its shelf registration and cannot access its at-the-market offering program as of this report.
- On May 13, 2024, Baker Tilly agreed to resign after completing its review of the Q1 financial statements. The company was selecting a replacement auditor and cautioned that it could not assure timely reviews of subsequent periods; reporting delays could adversely affect the business.
- Management concluded disclosure controls and procedures were ineffective due to previously disclosed material weaknesses in internal control. Remediation work is underway, with completion expected before year-end 2024, subject to effective operation and testing of the controls.
- The company cites exposure to market and interest-rate conditions, client and counterparty credit risk, regulatory and net-capital requirements, technology and cybersecurity risks, competition, and reliance on service providers. It reported no expected material impact from ordinary-course legal claims. It had a $1.405 million uncertain tax position and reported no material losses on unsettled customer transactions.
Important facts for investors to verify
- Replacement auditor appointment and completion of reviews for future quarterly filings.
- Remediation and testing of internal-control weaknesses, and the cause and effects of the delayed 2023 Form 10-K.
- Unrestricted liquidity versus segregated regulatory funds, and the extent to which negative operating cash flow reflects customer and securities-borrowing activity.
- Progress, remaining costs and launch timing for the retail platform, and the expected financial impact of the investment.
- Timing and funding of the Kakaopay settlement installments, alongside restricted access to Form S-3 and the ATM program.
- Compensation growth, share-count changes and their effects on margins and per-share earnings.