Siebert Financial Corp. — 2019 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2019; it does not provide standalone fourth-quarter results. Siebert is a U.S. financial-services holding company with retail brokerage, investment advisory/robo-advisory, insurance, technology and prime brokerage operations. Results include Weeden Prime for December 2019 only.
Financial performance and position
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue | $28.593 million | $30.036 million | Down 5% |
| Income before taxes | $4.725 million | $7.360 million | Down 36%; pretax margin 17% vs. 25% |
| Net income | $3.607 million | $11.962 million | Down 70%; diluted EPS $0.13 vs. $0.44 |
| Operating cash flow | $5.331 million | $4.866 million | Positive in both years |
| Cash and cash equivalents | $3.082 million | $7.229 million | Down $4.147 million; 2019 also had $0.110 million segregated cash |
| Total assets / liabilities | $28.473 million / $7.692 million | $18.177 million / $1.003 million | Assets rose 57%; liabilities rose substantially, including lease liabilities and related-party debt |
Revenue mix: margin interest, marketing and distribution fees were $11.121 million (up 2%); commissions and fees were $8.302 million (down 13%); principal transactions were $8.061 million (down 11%); advisory fees were $0.801 million (up 68%); and interest and other income was $0.308 million. Net margin was approximately 12.6% of revenue.
Operating expenses increased 5% to $23.802 million. Compensation fell 6% to $12.946 million, partly offset by higher occupancy, general and administrative, technology, and depreciation and amortization costs. Investing cash outflow was $9.368 million, largely for acquisitions and technology/equipment purchases; cash, cash equivalents and segregated cash declined by $4.037 million overall.
Year-end debt included a $3.0 million one-year note payable to principal shareholder Gloria E. Gebbia, bearing 4% interest and due December 2, 2020. Lease liabilities were $3.114 million, with $3.350 million of undiscounted operating lease payments remaining. MSCO regulatory net capital was $4.4 million, $4.2 million above its $250,000 minimum; Weeden Prime had $3.9 million, $3.7 million above its stated minimum.
Material changes versus 2018
- Revenue and pretax income declined, reflecting slower markets, lower trading activity, commission-rate competition, and reduced principal-transaction revenue. Lower commissions and clearing costs partly offset the revenue pressure.
- Net income comparisons are affected by tax accounting: 2018 included a $4.602 million tax benefit from reversal of the deferred-tax-asset valuation allowance; 2019 recorded $1.118 million of tax expense. Management continued to conclude deferred tax assets were realizable at year-end 2019.
- Siebert acquired Weeden Prime on December 1, 2019 for approximately $7.125 million, including $3 million financed by the related-party note. Weeden Prime contributed $0.968 million revenue and $0.203 million net income for December; the acquisition added $1.989 million goodwill.
- In January 2019, Siebert acquired about 15% of StockCross; on January 1, 2020, it acquired the remaining 85% in exchange for 3,298,774 Siebert shares, and StockCross merged into MSCO. This post-year-end transaction was not included as a 2019 acquisition of the remaining interest.
- The upgraded robo-advisor launched in mid-2019; management reported approximately 70% year-over-year growth in both robo-advisor revenue and assets under management.
Outlook, risks and unusual items
- Management reported positive operating cash flow, no liquidity issues since the change of ownership, relatively low debt, and no planned large capital expenditures, and believed cash flows would be sufficient to fund operations. No quantified earnings or revenue guidance was provided.
- Management planned a robo-advisor upgrade with an integrated mobile app for mid-2020 and identified potential growth and cost synergies from Weeden Prime and StockCross.
- The filing warned that COVID-19 market volatility and restrictions were expected to adversely affect operations, financial results and strategic plans. Management said it might reduce operating costs, defer spending and postpone acquisitions while effects became clearer.
- Key risks include market volatility and trading levels, zero-commission competition and fee pressure, cybersecurity and systems disruptions, customer/counterparty credit risk, extensive regulation and net-capital constraints, and acquisition integration and synergy risks. Regulation Best Interest and Form CRS compliance was due June 30, 2020 and could add costs.
- Ordinary-course legal claims were considered by management to be without merit or not material. The company disclosed indemnification arrangements whose maximum potential payments could not be estimated, but said material payments were considered unlikely. A New York State tax examination covering 2012–2014 had proposed no adjustment as of year-end 2019.
- Auditors issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to audit internal control effectiveness.
Important facts for investors to verify
- How 2020 COVID-19 impacts affected trading, revenue, cash generation and the cost-reduction measures described in the filing.
- Whether Weeden Prime and the StockCross merger delivered the expected growth, integration benefits and cost synergies, and the effect of the StockCross share issuance on dilution.
- Cash available after acquisitions, upcoming repayment of the $3 million related-party note, lease commitments, and broker-dealer capital restrictions on upstreaming funds.
- Sustainability of deferred tax asset realization, given the $4.981 million year-end balance and the company’s reliance on future taxable income.
- Progress in robo-advisor growth and implementation of new regulatory requirements, alongside continuing commission and principal-transaction revenue pressure.