Siebert Financial Corp. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The unaudited statements cover Siebert Financial Corp. and subsidiaries. Its business is retail discount brokerage, with investment-advisory services through a subsidiary. The former affiliate investment was sold in November 2015 and is presented as discontinued operations in the comparative results.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2.223 million | $2.536 million | $7.183 million | $7.264 million |
| Expenses | $3.363 million | $3.245 million | $9.552 million | $10.157 million |
| Loss from continuing operations | $1.140 million | $709,000 | $2.369 million | $2.801 million |
| Net loss | $1.140 million | $728,000 | $2.369 million | $2.669 million |
| Basic and diluted loss per share | $0.05 | $0.03 | $0.11 | $0.12 |
- Q3 revenue fell 12.3% year over year, chiefly as commissions and fees declined 15.4% with lower retail trading volume. Nine-month revenue was down 1.1%.
- Q3 expenses rose 3.6%; professional fees increased $382,000, primarily from employee-arbitration and acquisition legal fees. Nine-month expenses fell 6.0%, including lower compensation and clearing costs, partly offset by higher professional fees.
- Approximate loss from continuing operations as a share of revenue was 51% in Q3 2016 versus 28% in Q3 2015, and 33% for nine-month 2016 versus 40% for nine-month 2015.
- Q3 commissions and fees were $1.940 million; trading profits $131,000; investment-banking revenue $11,000; and interest and dividends $141,000. For nine months, the respective amounts were $6.206 million, $521,000, $34,000, and $422,000.
- At September 30, cash and cash equivalents were $6.836 million, down from $9.420 million at year-end 2015. Total assets were $14.764 million; stockholders’ equity was $13.314 million; accounts payable and accrued liabilities were $1.450 million. The balance sheet reports no borrowings.
- Operating cash outflow was $3.040 million for the first nine months, versus $760,000 in 2015. Investing activities provided $456,000, mainly from collecting a former-affiliate receivable; cash decreased $2.584 million.
- Broker-dealer regulatory net capital was approximately $2.169 million, $1.919 million above the $250,000 minimum. Management described assets as highly liquid; cash and cash equivalents represented 46.3% of total assets.
Material changes, outlook and risks
- Retail trades declined to 54,636 in Q3 from 63,160, and to 156,649 for nine months from 191,554. Average commission per trade was nearly unchanged in Q3 ($21.95 versus $21.90) and higher for nine months ($23.00 versus $20.72). Customer accounts with positions declined to 29,493 from 31,481 year over year.
- The company attributed increased interest and dividend revenue primarily to accrued interest on former-affiliate-related receivables and the prior sale of its affiliate interest. The SCSF junior note is secured, subordinated, bears 8% interest compounded monthly, and matures November 9, 2020; collection remains subject to the note’s terms and obligor creditworthiness.
- On September 1, 2016, the company agreed to a transaction with Kennedy Cabot Acquisition, LLC and the Siebert Estate. The Estate, which held approximately 87.4% of shares, agreed to sell its stake; the buyer agreed to offer $1.20 per share to other shareholders. The offer and Estate sale were subject to conditions including FINRA approval and tender of the Foundation’s approximately 2.6% stake. The filing expected closing in Q4 2016; this 10-Q does not establish that closing occurred.
- A $0.20-per-share special dividend, totaling approximately $4.418 million, was declared October 3 and paid October 24, 2016. Eligible minority shareholders tendering shares could receive $1.40 per share including the dividend. The Estate’s transaction price was reduced by the dividend; the agreement also provides for transfer of specified receivables and the junior note, director fees, and other transaction-related payments.
- Management said market activity, securities volumes and prices, interest rates, brokerage demand, competition, trading methods, systems failures, expenses, customer nonpayment and regulatory capital requirements could affect results. It gave no quantitative operating guidance and cautioned that interim results are not necessarily indicative of full-year results.
- A FINRA arbitration brought by a current employee alleges retaliation under the Dodd-Frank Act. Management considers it without merit and not expected to significantly affect financial position. The company also disclosed ordinary-course claims it considers immaterial. No material changes to the 2015 Form 10-K risk factors were reported.
- No income-tax benefit was recorded for the 2016 nine-month loss; the company cited a valuation allowance against deferred tax assets due to cumulative losses. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed acquisition and tender offer closed, and the final consideration, conditions and treatment of shares and the special dividend.
- Collections and valuation of the deferred capital-markets purchase-price receivable and $4 million junior note, including the note’s subordination and maturity exposure.
- Whether retail trading activity and commission revenue stabilize, and whether professional and transaction-related costs decline after the proposed deal.
- Cash burn, regulatory net-capital headroom, and any effect of the dividend or transaction on liquidity and capital requirements.
- Subsequent developments in the employee arbitration and other contingencies.