Siebert Financial Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Siebert provides retail brokerage, investment advisory, insurance and robo-advisory services, primarily in the U.S. Results are sensitive to market activity, volatility, interest rates and competition.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $6.429 million | $8.177 million | Down 21% |
| Total expenses | $5.093 million | $6.071 million | Down 16% |
| Income before tax and equity-method earnings | $1.336 million | $2.106 million | Down 37% |
| Net income | $1.006 million | $1.693 million | Down 41% |
| Diluted EPS | $0.04 | $0.06 | Down |
| Operating cash flow | $1.067 million | $1.665 million | Down |
Revenue fell mainly because of lower customer activity amid first-quarter market volatility. Commissions and fees declined 30% to $1.864 million and principal transactions declined 45% to $1.610 million. Margin interest, marketing and distribution fees rose 9% to $2.772 million; management attributed the decline in this combined category versus the prior year to higher interest rates. Advisory fees increased to $168,000 from $16,000, reflecting expansion of the advisory business, including robo-advisory.
Expense reductions partly offset weaker revenue: employee compensation and benefits fell 23% to $2.835 million, and clearing and execution fees fell 27% to $654,000. Professional fees declined 17% to $502,000, partly due to lower one-time legal fees. Depreciation and amortization rose to $175,000 from $24,000. Approximate net margin was 15.6%, compared with 20.7% in Q1 2018; pretax income before equity-method earnings was approximately 20.8% of revenue versus 25.7%.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $3.767 million at March 31, 2019, down from $7.229 million at year-end 2018. Operating activities provided $1.067 million; investing activities used $4.529 million, including $3.665 million invested in StockCross and $864,000 for equipment, leasehold improvements and software.
- Total assets were $21.549 million and total liabilities were $3.369 million. Stockholders’ equity was $18.180 million. The filing lists no conventional borrowings; lease liabilities were $2.530 million.
- Under the new lease standard, the company recognized $2.257 million of right-of-use assets and $2.530 million of lease liabilities. Operating lease payments remaining were $3.291 million, before reconciliation items; a Miami office lease commencing April 1 carries an approximately $480,000 commitment.
- Broker-dealer subsidiary MSCO reported net capital of approximately $5.1 million, $4.8 million above its $250,000 minimum. Cash represented approximately 17% of total assets, versus 40% at December 31, 2018.
Material developments, outlook and risks
- In January, Siebert bought approximately 15% of related-party StockCross for about $3.665 million. The equity-method investment had a March 31 carrying value of $3.704 million and contributed $39,000 to Q1 earnings. StockCross is also a clearing broker and has other business relationships with Siebert.
- The company began Miami retail operations in connection with a new office lease. It also reported development of its New Jersey office and increased software and leasehold-improvement assets.
- Management provided no specific financial guidance. It cautioned that earnings vary with market activity and that fixed costs can weigh on results when activity declines. Identified risks include market and interest-rate changes, liquidity and counterparty exposures, systems and cybersecurity risks, regulation, competition, reliance on service providers, and acquisition integration and synergy execution.
- Ordinary-course legal claims were described as without merit or not expected to materially affect the financial statements. The company reported no material unsettled-customer-transaction losses and recorded no liability for certain indemnifications it considers unlikely to require material payments. It noted uncertainty in self-insurance claim estimates.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing reports no material changes to the prior annual report’s risk factors, but highlights that only about 26.3% of shares were held by the public and an active trading market is not assured.
Key facts for investors to verify
- Whether customer activity and trading-related revenue recover after the year-over-year declines, and how much lower revenue is offset by variable-cost reductions.
- The impact of the StockCross investment and related-party clearing, receivables and other transactions; assess the investment’s valuation and impairment exposure.
- Cash needs and liquidity after the investment, office expansion and lease commitments, alongside MSCO’s regulatory capital requirements.
- Future advisory-business growth, including robo-advisory, and the economics of Miami operations and technology investment.
- Trading liquidity of the shares given the limited public float, as well as developments in legal claims, self-insurance reserves and other contingencies.