Siebert Financial Corp. — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Figures are unaudited; comparisons are with the corresponding 2013 periods unless otherwise noted. The company operates retail brokerage and capital-markets businesses and holds equity-method interests in affiliates.
Financial performance
| Metric | Three months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $3.454 million, down 5.8% | $10.877 million, down 10.9% | $3.666 million; $12.210 million |
| Net loss | $1.456 million; loss per share $0.07 | $7.505 million; loss per share $0.34 | $1.644 million; $4.366 million; loss per share $0.07 and $0.20, respectively |
| Operating cash flow | Not presented by quarter | Cash used: $6.928 million | Cash provided: $0.040 million |
| Cash and cash equivalents | $8.280 million at Sept. 30, 2014, versus $15.424 million at Dec. 31, 2013; an additional $1.532 million was restricted | $18.388 million at Sept. 30, 2013 | |
| Total assets / stockholders’ equity | $20.319 million / $17.604 million at Sept. 30, 2014 | $27.970 million / $25.109 million at Dec. 31, 2013 | |
| Liabilities | $2.715 million in accounts payable and accrued liabilities; no debt balance is separately reported | $2.861 million at Dec. 31, 2013 |
- Revenue mix: Third-quarter commissions and fees were $2.410 million, investment banking $0.558 million, trading profits $0.472 million, and interest and dividends $0.014 million. For nine months, the respective amounts were $8.027 million, $1.703 million, $1.104 million, and $0.043 million.
- Expenses and margins: Expenses were $4.514 million in Q3, down 25.4%, and $18.380 million for nine months, up 13.1%. The filing does not provide a clear operating-margin or net-margin measure; the company reported net losses in both periods.
- Regulatory capital and liquidity: Siebert reported net capital of approximately $6.142 million, $5.8 million above its $250,000 minimum. Management described assets as highly liquid and identified $8.3 million, or 40.8% of total assets, as highly liquid. Working capital is primarily held in money-market funds.
Material changes and management commentary
- Q3 revenue fell $0.212 million year over year, principally as commission and fee income declined 12.9% with lower retail trading volume. Investment banking revenue rose 20.3% and trading profits rose 12.4% in the quarter.
- Nine-month revenue declined $1.333 million. Commissions and fees fell 7.3%, investment banking revenue fell 12.4%, and trading profits fell 29.3%, reflecting lower average commissions, fewer trades, and fewer capital-markets issues.
- Retail activity weakened: nine-month retail trades fell to 213,444 from 256,069, and average commission per trade declined to $19.82 from $23.56. Retail customer accounts with positions declined to 33,799 from 38,160. Retail customer net worth rose to $7.3 billion from $6.9 billion; margin debits increased to $241.3 million from $198.1 million.
- Nine-month results include a $4.3 million charge for a July 2014 settlement with a former employee; the company paid the settlement and all claims and counterclaims were released. Q3 expenses were lower, including reduced professional fees, while the settlement charge was recorded in the nine-month period.
- Management said market conditions had improved but company revenue had not, and described brokerage competition as intense. It noted that fixed expenses can pressure profitability when market activity declines. No quantitative earnings or revenue guidance is provided.
Risks, contingencies, and unusual items
- On November 4, 2014, after quarter-end, Siebert transferred substantially all assets of its capital-markets business under an agreement providing for a $3.0 million purchase price. Payments are scheduled in annual installments from 2016 through 2020, generally tied to 50% of the transferred business’s net income; any unpaid balance is due March 1, 2021. SBSF assumed post-closing liabilities relating to the transferred business.
- Siebert is obligated under a secured demand-note arrangement to lend SBS up to $1.2 million on a subordinated basis. The obligation is collateralized by $1.532 million of restricted cash equivalents; advances bear 4% interest and are repayable August 31, 2015.
- The company reported no material losses on unsettled customer transactions. It remains exposed to losses if customers or counterparties fail to meet obligations. Management said routine claims and lawsuits were not expected to have a material effect.
- No tax benefit was recognized on losses because deferred tax assets were fully reserved amid recent cumulative losses. Management cited market activity, interest rates, competition, trade volumes, systems failures, trading errors, and regulatory or expense changes among relevant risks.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the timing, collectability, and income-based payment terms of the $3.0 million post-quarter capital-markets asset sale.
- Assess cash consumption and the decline in cash, including the availability and use of restricted cash and the SBS lending commitment.
- Reconcile the nine-month loss and expense trend, including the $4.3 million settlement charge and affiliate results.
- Track retail trade counts, average commissions, and margin debits as indicators of brokerage activity and customer credit exposure.
- Review SBS’s financial condition and the availability of its undistributed earnings; the filing says $7.793 million of Siebert’s share of SBS undistributed earnings may not be immediately distributable.