Business context and reporting period
Siebert Financial Corp. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Its primary business is retail discount brokerage; it also operated an investment-advisory subsidiary. The company had sold substantially all of its capital-markets business assets in 2014 but retained a 49% interest in the affiliate, SBSF, until its sale after quarter-end.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.536 million | $3.454 million | $7.264 million | $10.877 million |
| Loss from continuing operations | $709,000 | $1.063 million | $2.801 million | $7.507 million |
| Net loss | $728,000 | $1.456 million | $2.669 million | $7.505 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(760,000) | $(6.928) million |
- Q3 2015 basic and diluted loss per share was $0.03; nine-month loss per share was $0.12.
- At September 30, cash and cash equivalents were $6.027 million, versus $6.749 million at December 31, 2014. Total assets were $18.166 million, liabilities were $2.283 million, and stockholders’ equity was $15.883 million. The filing reports no borrowings on the balance sheet.
- Net cash used in investing activities was $760,000? The filing reports net cash used in operating activities of $760,000 and net cash provided by investing activities of $38,000 for the nine months. Ending cash was $6.027 million.
- Siebert’s regulatory net capital was approximately $4.434 million, $4.184 million above its $250,000 minimum. Working capital was principally held in money-market funds; management considered $6.0 million, or 33.2% of assets, highly liquid.
- Gross margin is not reported. Net loss was approximately 28.7% of revenue in Q3 2015 and 36.7% for the nine months.
Material changes versus prior comparable periods
- Revenue declined 26.6% in Q3 and 33.2% for the nine months. Management attributed the nine-month decline mainly to lower commissions and fees, reduced trading profits, and the 2014 capital-markets business sale, which sharply reduced investment-banking revenue.
- Commissions and fees fell 4.9% in Q3 and 17.9% for the nine months. Investment-banking revenue was $8,000 in Q3 and $27,000 for the nine months, compared with $558,000 and $1.703 million, respectively, in 2014. Nine-month trading profits declined 60.6% to $435,000.
- Expenses fell 28.2% in Q3 and 44.8% for the nine months. The nine-month comparison benefited substantially from the absence of the $4.3 million former-employee arbitration settlement recorded in 2014, as well as lower staffing and other costs after the business sale.
- Retail trades declined to 63,160 in Q3 from 65,595 and to 191,554 for the nine months from 213,444. Average commission per retail trade increased to $21.90 in Q3 from $19.57 and to $20.72 for the nine months from $19.82.
- Operating cash use improved to $760,000 from $6.928 million in the prior-year nine-month period. The company also released $1.532 million of previously restricted cash after a secured demand-note agreement expired.
Outlook, risks, contingencies and unusual items
- The filing gives no quantified earnings or revenue guidance. Management said market volatility and flat retail commissions persisted, and warned that lower market activity can hurt results because some costs are relatively fixed. Competition in brokerage remained intense.
- On November 9, 2015, Siebert sold its 49% SBSF interest for $8.0 million: $4.0 million in cash and a $4.0 million secured junior subordinated note. The note bears 8% interest, compounds monthly, matures November 9, 2020, and ranks behind up to $5.0 million of SBSF senior debt. The company recorded a $564,000 write-down in Q3 discontinued operations to reflect the sale price. The note’s collectability and subordination are material considerations.
- The separate receivable from the 2014 capital-markets asset sale was $2.031 million at September 30, net of unamortized discount. It is payable in annual installments tied to the sold business’s income, with a final settlement provision in 2021; the company recognized $174,000 of interest income on it in the first nine months.
- The 2014 arbitration settlement was paid and all claims and counterclaims were released. Management said ordinary-course claims are not expected to materially affect the company. The filing reports no material unsettled-customer transaction losses.
- Deferred tax assets were fully reserved apart from benefits associated with offsetting continuing-operation losses against discontinued-operation income, due to cumulative losses and uncertainty of realization. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Forward-looking risks include market and interest-rate changes, trading volumes and prices, brokerage competition, technology failures, trading errors, customer nonpayment, expense increases, and regulatory capital requirements. The company reported no material changes to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Whether the $4.0 million SBSF note pays as agreed, considering its junior ranking, collateral, covenants, and 2020 maturity.
- Collections and estimate changes on the $2.031 million capital-markets sale receivable and the timing of income-linked installments.
- Whether brokerage activity, commission revenue, and trading profits stabilize after the reported declines.
- The effect of the SBSF divestiture on future results and liquidity, including the distinction between cash proceeds and the deferred note.
- Ongoing liquidity and regulatory net-capital headroom if operating losses continue.