Siebert Financial Corp. — Q3 2018 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2018, compared with the same 2017 periods. Siebert operates retail discount brokerage, investment advisory, insurance, and robo-advisory technology businesses. Comparisons are affected by the earlier acquisition of retail broker-dealer assets from affiliate StockCross.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $7.884 million, up 155% from $3.089 million | $23.549 million, up 189% from $8.157 million |
| Expenses | $5.800 million, up 178% | $17.423 million, up 159% |
| Income before income taxes | $2.084 million, versus $1.001 million | $6.126 million, versus $1.425 million |
| Income tax benefit | $1.035 million | $485,000 |
| Net income | $3.119 million, up 212%; diluted EPS $0.11 versus $0.05 | $6.611 million, up 364%; diluted EPS $0.24 versus $0.06 |
| Operating cash flow | Not separately presented for the quarter | $4.526 million, versus $835,000 |
Revenue growth reflected the StockCross retail assets and higher interest-bearing earnings. In the quarter, principal transactions were $2.634 million, commissions and fees $2.465 million, and margin interest, marketing and distribution fees $2.731 million. Expenses rose largely with added personnel and office-space needs associated with the acquired assets. The filing does not report a separate gross margin.
At September 30, 2018, total assets were $13.493 million, including cash and equivalents of $7.341 million (54% of assets), versus $6.025 million and $3.765 million, respectively, at December 31, 2017. Total liabilities were $1.669 million; the balance sheet presents no borrowing or debt balance. Stockholders’ equity was $11.824 million. Nine-month investing cash outflow was $950,000, including $678,000 for software and $272,000 for equipment and leasehold improvements.
Broker-dealer subsidiary MSCO reported regulatory net capital of $9.701 million, $9.451 million above its $250,000 minimum. Management stated cash and working capital were sufficient for operations. The filing does not provide a conventional consolidated debt measure.
Material changes and unusual items
- Retail activity expanded: Q3 retail trades rose to 82,120 from 50,025, average commission per trade increased to $23.43 from $20.35, and customer accounts with positions reached 39,247 versus 27,020 a year earlier.
- StockCross-attributed revenue was $2.916 million in Q3 and $8.694 million for the first nine months. The acquisition’s impact makes year-over-year growth less comparable.
- On August 21, 2018, Siebert acquired KCAT, a related-party robo-technology company, for approximately $690,000 and recorded the transaction as an asset acquisition. Acquired software of $678,000 is expected to be amortized over three years beginning when commercial launch is estimated in Q2 2019.
- A $1.393 million deferred tax asset was recognized after management partially reversed its valuation allowance, creating a tax benefit that materially increased reported net income. The asset is based on net operating loss carryforwards; utilization of certain carryforwards is limited to approximately $900,000 annually.
- 2017 nine-month results included $342,000 of non-recurring costs, primarily call-center relocation and staff reductions; 2018 had no reported non-recurring charges for the comparable period.
Outlook, risks and contingencies
No financial earnings or revenue guidance is provided. Management reported that the Robo Platform had launched client onboarding and that further work on connectivity, automated trading, rebalancing, and back-office processing was underway. Most of these features were anticipated to become fully operational during Q2 2019; customer-acquisition efforts were planned after full operation.
Results are sensitive to securities-market activity, interest rates, demand for brokerage services, competition, and relatively fixed operating costs. Other disclosed risks include technology or telephone-system failures, trading errors, customer nonpayment, regulatory capital requirements, and cash deposits that may exceed FDIC insurance limits. The company noted customer-settlement exposure through clearing brokers, but reported no material losses on unsettled customer transactions in either nine-month period. Ordinary-course legal claims were described as not expected to have a significant financial effect.
Management said previously reported material weaknesses in internal control had been remedied by September 30, 2018, citing additional accounting expertise, outside SEC-reporting support, and enhanced review and documentation procedures. It concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth and profitability is attributable to the StockCross assets, and how sustainable is the resulting performance?
- Whether the $1.393 million deferred tax asset is realizable; its recognition depends on estimates of future taxable income and could be revised.
- Progress, launch timing, remaining development costs, and customer adoption of the Robo Platform.
- Terms, governance, and ongoing financial effects of the related-party KCAT purchase and StockCross arrangements.
- The company disclosed that approximately 25.5% of outstanding shares were held by the public and stated an active Nasdaq market may not continue.