Siebert Financial Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Siebert operates a retail discount brokerage and investment advisory business. Results are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.089 million | $2.223 million | $8.157 million | $7.183 million |
| Net income (loss) | $1.001 million | ($1.140 million) | $1.425 million | ($2.369 million) |
| Net margin | 32.4% | (51.3%) | 17.5% | (33.0%) |
| Basic and diluted EPS | $0.05 | ($0.05) | $0.06 | ($0.11) |
Revenue drivers: Q3 revenue rose 38.9%, primarily as margin interest, marketing and distribution fees more than doubled to $1.850 million, attributed to higher interest rates, margin interest and money-market 12b-1 fees. Nine-month revenue increased 13.6%, with the same category up 66.6% to $4.477 million. Commissions and fees were nearly flat in Q3 but down 6.4% for the nine months, which management attributed primarily to lower retail trading volume. Nine-month trading profits fell 30.9%; investment banking and interest/dividend income also declined.
Expenses and profitability: Expenses declined 37.9% in Q3 to $2.088 million and 29.5% for the nine months to $6.732 million. Management cited streamlined operations, lower headcount, reduced professional fees, and savings from relocating the call center and office. Lower expenses, together with higher margin-related revenue, supported the swing to profit.
Cash, liquidity and capital
- Cash and cash equivalents were $3.215 million at September 30, up from $2.730 million at December 31, 2016. Total assets were $4.975 million; liabilities were $494,000, consisting of accounts payable and accrued liabilities. No debt balance is reported in the presented balance sheet.
- Nine-month operating cash flow was positive $835,000, compared with negative $3.040 million in 2016. Investing cash flow was negative $350,000, principally from equipment and leasehold purchases. Cash increased by $485,000 during the period.
- Regulatory net capital was approximately $3.864 million, $3.614 million above the $250,000 minimum. Management said cash and working capital were sufficient for operations.
- The control entity made an $803,000 net payment to satisfy certain Company obligations, recorded as a capital contribution. The filing reports 22,085,126 common shares outstanding as of November 8, 2017.
Changes, outlook and risks
- Retail trades were 50,025 in Q3 versus 54,636 a year earlier; average commission per trade declined to $20.35 from $22.29. For the nine months, trades were 155,043 versus 156,649 and average commission was $20.63 versus $24.00.
- Retail customer margin debit balances were $250.0 million, compared with $247.6 million a year earlier; customer net worth was $7.5 billion versus $6.9 billion. These are customer-account metrics, not Company balance-sheet assets.
- Nine-month results included approximately $342,000 of nonrecurring costs, mainly call-center relocation and staff reductions; none were reported for Q3. A former employee’s $825,000 FINRA arbitration claim was settled in February 2017, with payment made by the control entity.
- The Company reported approximately $23.799 million of remaining net operating loss carryforwards, fully reserved, and said a December 2016 change in control limits annual utilization to $895,000. It recognized no tax benefit for reported income or loss because of a full valuation allowance.
- No quantified earnings or revenue guidance is provided. Management cautioned that brokerage results are sensitive to market conditions, trading volumes and prices, interest rates, demand, competition, system failures, trading errors, customer nonpayment, expenses and regulatory capital requirements. The filing reports no material change to the risk factors in its 2016 Form 10-K.
- Customer transactions are cleared through an unaffiliated broker; the Company may bear losses if customers fail to meet obligations. No material unsettled-transaction losses were reported. Ordinary-course claims remain, which management said would not significantly affect financial position. The Company incurred $125,000 in professional fees for a potential affiliate transaction, to be deferred until consummation; completion is not assured.
Key facts for investors to verify
- Whether higher margin interest and distribution-fee revenue can persist, and how sensitive it is to interest rates and customer balances.
- Whether expense reductions and profitability are sustainable, given lower commission revenue and trading activity.
- The nature and status of the potential affiliate transaction and any further support or obligation from the control entity.
- Regulatory capital headroom, NOL utilization restrictions and valuation allowance assumptions, and developments in legal or customer-related contingencies.