Siebert Financial Corp. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2020; it is not a standalone fourth-quarter report. Siebert provides retail and prime brokerage, investment advisory, insurance, and related technology services. The company completed its acquisition and merger of StockCross into MSCO effective January 1, 2020. Because the businesses were under common control, the statements present Siebert and StockCross on a combined basis for all periods shown. WPS, acquired in December 2019, contributed a full year of results in 2020.
Financial performance and position
| Metric | FY2020 | FY2019 comparable |
|---|---|---|
| Revenue | $54.9 million | $42.8 million |
| Income before tax | $3.2 million | $4.3 million |
| Net income | $3.0 million | $3.2 million |
| Diluted earnings per share | $0.10 | $0.11 |
| Operating cash flow | $96.7 million | $24.4 million |
Revenue and margins. Revenue increased approximately 28% from the $42.8 million combined 2019 comparison. Net income declined approximately 8%; pretax margin was about 5.8%, versus 10.0% in 2019. Commissions and fees rose to $20.2 million, while margin interest, marketing and distribution fees fell to $10.2 million from $14.7 million. Principal transactions increased to $11.9 million and stock borrow/loan revenue to $4.0 million. Management cited the StockCross and WPS businesses and favorable trading conditions as contributors to revenue growth; near-zero interest rates reduced interest-related revenue.
Cash flow and liquidity. Operating cash flow was positive $96.7 million, substantially affected by large movements in securities borrowed and securities loaned, customer payables, and other brokerage balances; it should not be read as a simple measure of recurring earnings or freely available cash. Cash and cash equivalents were $3.6 million at year-end, down from $4.7 million. An additional $324.9 million was cash and securities segregated for regulatory purposes, not ordinary unrestricted cash. Management said liquidity was sufficient for expected needs and obligations.
Balance sheet and debt. Total assets were $1.373 billion, liabilities $1.335 billion, and stockholders’ equity $38.0 million. The large brokerage-related assets and liabilities include securities borrowed/loaned and customer balances. Debt included $4.7 million outstanding under East West Bank’s term loan and $5.2 million of related-party notes payable; the company also reported lease liabilities of approximately $2.6 million. It had $5.0 million remaining available under the East West facility and reported no outstanding balances on its overnight borrowing lines. MSCO reported $27.5 million of net capital, approximately $25.2 million above its requirement; WPS reported approximately $3.9 million, about $3.7 million above its minimum.
Material changes versus the prior comparable period
- StockCross was merged into MSCO at the start of 2020, adding self-clearing, market making, securities lending, and equity stock-plan services. The acquisition increased both operating scale and the balance-sheet presentation of brokerage assets and liabilities.
- Commissions and fees increased by $10.4 million, primarily including $9.2 million of WPS commissions and fees. Employee compensation rose by $8.5 million, reflecting WPS costs and higher activity-related payouts.
- Margin interest, marketing and distribution fees declined by $4.5 million, primarily following Federal Reserve rate cuts. Conversely, market volatility supported retail commissions and principal transactions and WPS institutional revenues.
- WPS revenue increased approximately 15%, and management reported approximately $1.3 million of WPS operating income in 2020, compared with an operating loss of approximately $1.0 million in 2019.
- Assets and liabilities increased substantially, largely due to securities borrowed and securities loaned, as well as customer and clearing balances—not solely conventional borrowing.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no specific numerical earnings or revenue guidance. Management did not expect short-term rates to return to early-2020 levels during 2021 and said this could continue to pressure interest-related revenues. Planned initiatives included a 2021 Robo-Advisor/mobile upgrade, expanded U.S. correspondent clearing, and Euroclear offerings. Office transitions and vendor negotiations were expected to reduce costs, with office-transition benefits anticipated beginning in the second quarter of 2021.
- COVID-19: Remote work and temporary branch closures did not materially disrupt operations, according to management. The pandemic’s eventual effects remained uncertain; risks include changing investor activity, lower rates, market disruption, and staff availability. The company reduced senior employee compensation, conducted workforce reductions in some areas, and pursued cost savings.
- Growth and investments: In January 2021, Siebert acquired a 5% interest in OpenHand for $2.231 million, paid with $850,000 cash and restricted shares, and received an option to acquire another 7.5% for approximately $4.5 million. OpenHand is intended to support zero-commission brokerage services.
- Contingency: A California regulator proposed a consent order seeking approximately $900,000 concerning pre-acquisition StockCross activities. Management did not expect a material financial-statement impact. Other ordinary-course legal matters were described as not expected to be significant.
- Tax and accounting judgments: The company recorded a $1.105 million uncertain tax position, primarily relating to amended 2017–2019 returns. Net deferred tax assets were $4.857 million; the auditor identified their valuation allowance as a critical audit matter. The StockCross common-control accounting and change in reporting entity was also a critical audit matter.
- Other risks: Key risks include extensive securities regulation and net-capital requirements, market and interest-rate sensitivity, customer/counterparty credit exposure, cybersecurity and system disruptions, competition including zero-commission brokers, acquisition integration, and concentrated voting control. The filing also reports extreme post-year-end share-price volatility, which management said was not explained by material changes in the company’s financial condition or results.
- Audit and controls: The auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the company was not required to obtain an auditor opinion on internal controls.
Important facts for investors to verify
- Reconcile the revenue comparison: the audited statements and management discussion report 2019 combined revenue of $42.777 million, while the selected financial data table in the filing displays $47.777 million.
- Review the composition and liquidity of the $96.7 million operating cash flow, particularly the impact of securities-borrowed/loaned and customer-payable movements.
- Assess the sustainability of earnings given lower interest-related revenue, higher compensation and technology costs, and dependence on market activity and securities-finance revenues.
- Confirm the maturity, repayment, and related-party terms of $5.2 million in notes payable, alongside the East West Bank loan, its covenants, and the remaining borrowing availability.
- Track the proposed California consent order, the $1.105 million uncertain tax position, deferred-tax-asset recoverability, and any later developments in these matters.
- Evaluate execution, costs, and returns for OpenHand, InvestCloud, new clearing services, Euroclear, and the planned Robo-Advisor/mobile upgrade.
- Consider the regulatory restrictions on customer-reserve cash, concentrated family voting control, thin public float, and volatility when assessing available liquidity and share-price risk.