Siebert Financial Corp. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company operates retail brokerage and investment-advisory businesses; its 49% affiliate interest in Siebert Brandford Shank Financial, LLC (SBSF) is accounted for under the equity method. Interim financial statements are unaudited.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2.046 million | $3.705 million | $4.614 million | $7.423 million |
| Expenses | $3.498 million | $9.450 million | $6.912 million | $13.866 million |
| Income (loss) from equity investee | $1.045 million | $(0.332) million | $0.357 million | $0.394 million |
| Net loss | $(0.407) million | $(6.077) million | $(1.941) million | $(6.049) million |
| Loss per share, basic and diluted | $(0.02) | $(0.28) | $(0.09) | $(0.27) |
Net loss margins, calculated as net loss divided by revenue, were approximately 19.9% in Q2 2015 and 42.1% for the six-month period; corresponding 2014 margins were approximately 164.0% and 81.5%. The filing does not present a separate operating or gross margin.
- Revenue drivers: Q2 revenue fell 44.8% year over year; six-month revenue fell 37.8%. Commissions and fees declined 27.3% in Q2 and 23.5% for six months. Investment-banking revenue fell 98.5% and 98.3%, respectively, largely following the 2014 sale of the capital-markets business. Trading profits also declined, reflecting lower trading volume, particularly in debt markets.
- Cash flow and liquidity: Six-month operating cash use was $2.182 million, versus $1.511 million in 2014; investing cash use was $17,000. Cash and cash equivalents declined $2.199 million to $4.550 million. An additional $1.532 million was restricted as collateral for the SBS facility. Management described $4.6 million, or 24.6% of assets, as highly liquid.
- Balance sheet: Total assets were $18.524 million, down from $20.728 million at December 31, 2014. Accounts payable and accrued liabilities were $1.913 million; the balance sheet reports no debt. Stockholders’ equity was $16.611 million, including retained earnings of $1.649 million.
- Regulatory capital: Siebert reported net capital of approximately $3.472 million, $3.222 million above its $250,000 minimum requirement.
Material changes and unusual items
- Expenses decreased 63.0% in Q2 and 50.2% for the first six months, partly because 2014 included a $4.3 million charge for a former-employee arbitration settlement. The settlement was paid in July 2014 and all claims were released.
- Lower compensation, clearing, professional, communications, and other costs also reflected reduced headcount, the capital-markets business sale, and closure of the commission-recapture business in September 2014.
- Retail activity weakened: Q2 commission-generating trades were 59,852 versus 67,102; six-month trades were 128,394 versus 147,884. Retail accounts with positions declined to 32,038 from 34,360 year over year.
- The company sold substantially all capital-markets assets to SBSF for a stated $3.0 million purchase price, payable in annual installments beginning in 2016 based on a share of the transferred business’s income, with a final settlement provision in 2021. The receivable was carried at $1.971 million net of discount. The company recognized $58,000 of related interest income in Q2 and $114,000 for six months.
- SBSF reported six-month net income of $495,000, compared with $810,000 in 2014. The company’s share of undistributed SBSF earnings was $7.6 million; the filing cautions that these earnings may not be immediately distributable.
Outlook, risks, and contingencies
Management said market conditions improved during the first half of 2015, but company revenue did not. It cited intense brokerage competition and noted that lower market activity can hurt profitability because some expenses remain relatively fixed. No quantified forward guidance was provided. Risk factors include market and interest-rate changes, securities trading volumes and prices, brokerage competition and pricing, demand for investment-banking services, systems failures, trading errors, customer nonpayment, and regulatory capital requirements. Management reported no material change from the risks in its 2014 Form 10-K.
Siebert had a commitment to lend SBS up to $1.2 million on a subordinated basis, collateralized by $1.532 million of restricted cash equivalents. The facility bore 4% interest and was due August 31, 2015. Routine claims and customer-settlement exposures were described as not expected to have a material adverse effect; no material unsettled-customer losses were reported.
Investor verification priorities
- Confirm whether the SBS secured demand note was repaid or renewed when it came due on August 31, 2015.
- Assess the collectability and timing of the capital-markets sale receivable, including the income-based installment terms and assumptions underlying its valuation.
- Determine whether SBSF can distribute earnings to Siebert and how affiliate performance affects reported results and cash availability.
- Track retail trading activity, commissions, investment-banking revenue, and expense levels after the capital-markets sale.
- Review subsequent filings for liquidity changes, regulatory-capital headroom, and developments in legal or customer-related contingencies.