Siebert Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Siebert operates discount brokerage, investment advisory, insurance and robo-advisory businesses. Results are primarily affected by securities-market activity and interest rates.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $7.061 million | $7.488 million | $13.490 million | $15.665 million |
| Income before tax | $1.441 million | $1.936 million | $2.816 million | $4.042 million |
| Net income | $992,000 | $1.799 million | $1.998 million | $3.492 million |
| Diluted EPS | $0.04 | $0.07 | $0.07 | $0.13 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $2.303 million | $3.030 million |
Q2 revenue declined 6% year over year and net income declined 45%. For the first half, revenue fell 14% and net income fell 43%. The company attributed lower commissions and principal-transaction revenue mainly to market volatility and weaker demand for retail products. Margin interest, marketing and distribution fees increased 4% in Q2 and 6% in the first half; advisory fees rose 40% and 111%, respectively.
Expenses were $5.635 million in Q2, up 1%; first-half expenses were $10.728 million, down 8%. Lower employee compensation and clearing costs were partly offset by higher office-related general and administrative costs and depreciation and amortization. Net margin and other margin measures are not stated in the filing.
Financial position and liquidity
- At June 30, 2019, cash and cash equivalents were $4.667 million, down from $7.229 million at December 31, 2018. Total assets were $22.704 million; liabilities were $3.532 million; stockholders’ equity was $19.172 million.
- Cash declined by $2.562 million in the first half. Operating activities provided $2.303 million, while investing activities used $4.865 million, including $3.665 million for the StockCross investment, $588,000 for equipment and leasehold improvements, and $612,000 for software.
- The company reported no borrowings in the presented balance sheet. Lease liabilities were $2.895 million, with corresponding right-of-use assets of $2.589 million following adoption of the lease accounting standard. Remaining undiscounted operating lease payments were $3.168 million.
- Broker-dealer subsidiary MSCO had net capital of approximately $7.0 million, $6.8 million above its $250,000 minimum requirement.
- Retail customer accounts numbered 75,745 versus 74,052 a year earlier. Q2 retail trades were 135,570 versus 84,271; average commission per retail trade declined to $18.95 from $22.02.
Material changes, outlook and risks
- In January, Siebert acquired approximately 15% of StockCross for about $3.665 million and recorded it as an equity-method investment. The investment’s carrying value was $3.720 million at quarter-end; Siebert recorded $54,000 of first-half equity-method earnings.
- On July 19, 2019, the company signed a binding letter of intent to acquire the remaining 85% of StockCross, subject to regulatory approval. As of the filing, transaction terms were not finalized and no acquisition expenses had been incurred.
- The effective income-tax rate rose to 31% in Q2 from 7%, and to 29% for the first half from 14%, primarily because of deferred tax expense associated with a decrease in deferred tax assets. No specific earnings or revenue guidance is provided.
- Management cautions that results are sensitive to market conditions, trading activity and interest rates; lower activity may pressure profitability while certain costs remain relatively fixed. Other disclosed risks include counterparty and customer credit risk, clearing exposure, systems and cybersecurity risks, competition, regulation, and potential integration or synergy challenges related to StockCross.
- Ordinary-course legal matters were described as not expected to have a significant financial effect. The company also disclosed self-insured employee health claims, with a $62,000 accrual, and stated that actual claims could differ from estimates. Certain indemnification exposures cannot be quantified; management considered material payments unlikely.
Investor verification points
- Confirm the final terms, regulatory status, financing and integration implications of the proposed StockCross acquisition.
- Track whether declining commissions and principal-transaction revenue continue, and whether advisory and margin-related growth can offset that pressure.
- Assess liquidity after the StockCross investment: cash fell to $4.667 million, while lease obligations and planned acquisition needs may affect resources.
- Review the impact of deferred tax expense on reported earnings and the carrying value and recoverability of deferred tax assets.
- Reconcile a filing inconsistency: the financial statements report first-half net income of $1.998 million, while MD&A states $1.988 million in one passage. The statements also report $1.998 million; verify the intended MD&A figure.