Business context and reporting period
Siebert Financial Corp. filed this Form 10-K for the fiscal year ended December 31, 2018. The company operates a retail discount brokerage, an investment adviser, an insurance agency and a robo-advisory technology business. Its results are primarily tied to brokerage activity, market conditions and interest rates.
During 2018, Siebert acquired Park Wilshire Companies (PWC) and, from an affiliate, KCA Technologies (KCAT). The StockCross retail assets acquired in late 2017 contributed for a much fuller year in 2018 than in 2017, so the annual comparison reflects both growth and a change in business mix.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $30.036 million | $13.110 million |
| Income before taxes | $7.360 million | $2.310 million |
| Income tax benefit (expense) | $4.602 million benefit | $153,000 expense |
| Net income | $11.962 million | $2.157 million |
| Diluted earnings per share | $0.44 | $0.10 |
| Operating cash flow | $4.866 million | $1.452 million |
| Cash and cash equivalents at year-end | $7.229 million | $3.765 million |
| Total assets at year-end | $18.177 million | $6.025 million |
| Total liabilities at year-end | $1.003 million | $813,000 |
| Stockholders’ equity at year-end | $17.174 million | $5.212 million |
- Revenue increased 129%; pretax income increased 219%. Pretax margin rose to about 24.5% from about 17.6%. Net income included a substantial deferred-tax benefit; excluding that benefit, reported net income would not represent recurring operating earnings.
- Revenue comprised $10.928 million of margin interest, marketing and distribution fees; $9.504 million of commissions and fees; $9.020 million of principal transactions; $478,000 of advisory fees; and $106,000 of interest.
- Expenses were $22.676 million, up 110%, led by employee compensation and benefits of $13.817 million and clearing and execution costs of $2.852 million.
- Operating cash flow was $4.866 million; investing cash outflow was $1.402 million, including $1.125 million for software. Net cash increased by $3.464 million. The $5.576 million deferred-tax valuation allowance reversal was noncash.
- No debt balance is reported in the presented statement of financial condition. The company reported $2.961 million of future minimum operating-lease payments. Cash was approximately 40% of total assets at year-end.
- Broker-dealer MSCO had regulatory net capital of approximately $8.9 million, $8.7 million above its $250,000 minimum.
Unaudited fourth-quarter results: 2018 revenue was $6.487 million and net income was $5.351 million, versus $4.953 million and $733,000, respectively, in fourth-quarter 2017.
Material changes versus the prior comparable period
- StockCross retail assets contributed approximately $10.1 million of 2018 revenue versus $1.6 million in 2017. The company attributed higher trading-related revenue and margin interest to acquired accounts and activity; rising interest rates also supported margin revenue.
- Retail trades increased to 336,409 from 221,282, while average commission per trade declined to $19.59 from $19.87. Retail customer accounts rose to 74,895 from 72,912.
- PWC contributed close to $1 million of 2018 revenue and approximately $30 million in assets under management. AdvisorNXT began a preliminary robo-adviser rollout to select customers.
- Total assets grew substantially, in part because Siebert recognized $5.576 million of deferred tax assets after removing a valuation allowance. The balance-sheet increase therefore was not solely from operating growth.
Outlook, management commentary, risks and unusual items
- Management anticipated a full robo-adviser launch by mid-2019; the service was still in beta testing. The filing provides no quantified earnings or revenue guidance.
- Siebert said it would continue pursuing integration efficiencies and economies of scale from acquisitions. It also cautioned that markets, trading volumes, interest rates, competition, regulation and relatively fixed costs can cause significant earnings volatility.
- The $4.602 million income-tax benefit chiefly reflected reversal of the valuation allowance on deferred tax assets. Management based the decision on recent profitability and expected future taxable income; realization remains dependent on future results and applicable tax limitations.
- In January 2019, the company terminated its advertising relationship with Overstock.com and purchased approximately 15% of StockCross’s outstanding shares for about $3.97 per share. These are subsequent events, not 2018 operating results.
- Key exposures include cybersecurity and systems interruptions, customer or counterparty defaults, dependence on clearing and other service providers, extensive regulatory and net-capital requirements, acquisition integration, and related-party relationships. The company reported no material unsettled-customer-transaction losses in 2018 or 2017 and described ordinary-course legal matters as not expected to have a significant financial effect.
- Auditors issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end 2018, following remediation measures for weaknesses disclosed in 2017.
Important facts investors should verify
- How much of 2018’s earnings growth is sustainable operating performance versus the one-time deferred-tax valuation allowance reversal?
- Whether the acquired StockCross accounts and customer activity continue to generate revenue and margins after associated compensation, clearing, technology and integration costs.
- Progress, launch timing, customer uptake and economics of the robo-adviser, and the contribution of PWC’s insurance business.
- Recoverability of deferred tax assets, including the effects of federal Section 382 limits and state and local net operating losses.
- Collection and terms of the $1.0 million related-party receivable and the company’s other material affiliate transactions.
- Effects of the Overstock relationship termination, the StockCross share purchase, and new lease accounting adopted in 2019.