Business context and reporting period
Siebert Financial Corp. (Nasdaq: SIEB) filed this Form 10-K for the fiscal year ended December 31, 2022, with 2021 as the comparable year. It provides brokerage, securities finance and market-making, investment advisory, insurance, and technology services. The company reports one operating segment.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $50.1 million | $67.5 million |
| Operating income | $0.4 million | $6.6 million |
| Net income (loss) available to common stockholders | $(2.0) million; $(0.06) per share | $5.1 million; $0.16 per share |
| Operating cash flow | $(24.6) million | $5.5 million |
| Cash and cash equivalents | $23.7 million | $3.8 million |
| Total assets | $728.0 million | $1,404.2 million |
| Total liabilities | $678.1 million | $1,353.7 million |
Revenue fell approximately 26%; operating margin was about 0.9%, compared with 9.7% in 2021. Net loss available to common stockholders was about 4.0% of revenue, versus a 7.5% net profit margin in 2021. Assets and liabilities declined substantially, largely reflecting lower securities-borrowed and securities-loaned balances and other customer-related balances. These brokerage balances should not be read as conventional corporate liquidity.
At year-end, cash and securities segregated for regulatory purposes totaled $276.2 million, including $135.2 million in cash and $141.0 million in U.S. government securities. Combined with cash and cash equivalents, these balances totaled $299.8 million, down from $330.6 million. The segregated funds are subject to customer-protection requirements.
Long-term debt was approximately $7.0 million: a $4.4 million mortgage and a $2.7 million bank loan. The company also had an undrawn $25 million overnight credit line. It reported compliance with debt covenants and sufficient net capital at both MSCO and RISE. Operating cash outflow chiefly reflected changes in customer receivables and payables; investing cash outflow was $1.8 million and financing cash outflow was $4.3 million.
Material changes versus 2021
- Commissions and fees dropped to $7.5 million from $18.3 million, primarily following the loss of institutional RISE customers and market conditions. Retail trades declined to 375,000 from 473,000, while retail accounts rose to 122,394 from 115,380.
- Interest, marketing and distribution fees increased to $17.2 million from $12.9 million, mainly as higher rates lifted margin interest and interest on cash and Treasuries.
- Principal transactions revenue declined to $3.7 million from $15.6 million. It included an approximately $3.9 million unrealized loss on U.S. government securities as yields rose; management said it intends to hold the securities to maturity, with maturities no later than August 2024.
- Stock borrow/loan revenue increased to $14.5 million from $11.9 million, attributed to business growth and expanded locate and lending relationships.
- The Tigress and Hedge Connection restructuring and unwind produced approximately $4.7 million in one-time losses, including a $4.0 million impairment of the Tigress investment.
- RISE’s former clearing arrangement with Goldman Sachs was terminated; substantially all revenue-producing RISE customers transitioned to other prime providers. Siebert was also winding down clearing relationships with Goldman Sachs and Pershing, with full termination anticipated by the end of the first quarter of 2023.
Outlook, commentary, and risks
The filing gives no quantitative earnings or revenue guidance. Management said available cash, credit lines, capital-market access, and operating cash flows should meet current liquidity needs for the foreseeable future. A replacement retail trading platform was in development, with launch expected in the second quarter of 2023. Management was assessing RISE’s future strategy after the restructuring and customer losses.
Key risks include exposure to securities-market activity and interest rates, intense brokerage competition and fee pressure, regulatory and net-capital requirements, customer and counterparty credit risk, dependence on third-party clearing and technology providers, cybersecurity and systems disruptions, and the ability to execute the new platform and RISE strategy. The company also disclosed a FINRA investigation into pre-acquisition StockCross unit investment trust transactions. Management could not assess the investigation’s likely outcome or potential restitution or sanctions, which could be material. The NFS clearing contract runs through July 2025 and provides for early termination fees, including $7.25 million before August 1, 2023; management said it did not expect early termination.
The independent auditor issued an unqualified opinion on the financial statements and identified the Tigress investment impairment measurement as a critical audit matter. The auditor was not engaged to, and expressed no opinion on, internal control over financial reporting; management concluded its controls were effective.
Important facts for investors to verify
- Whether revenue and profitability can recover after the loss of RISE institutional customers and lower trading activity.
- How much of reported cash is genuinely available to the parent after broker-dealer reserve, collateral, and regulatory capital requirements.
- Whether the government-security unrealized loss reverses as management expects when the securities mature, and whether further rate increases create additional losses.
- Progress, cost, and timing of the new retail platform, and RISE’s strategic direction and ability to generate replacement revenue.
- Developments in the FINRA UIT investigation and any potential restitution or sanctions.
- Any future use of the shelf registration or at-the-market offering, which could dilute existing shareholders; no shares were sold under the at-the-market agreement in 2022.