Siebert Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Siebert provides retail brokerage, investment advisory, insurance and technology services; it reports one consolidated operating segment. Comparisons below are with the corresponding 2022 periods unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $17.592 million | $11.723 million | $33.762 million | $22.031 million |
| Operating income (loss) | $4.659 million | $(0.531) million | $8.972 million | $(2.105) million |
| Net income (loss) | $2.728 million | $0.510 million | $5.943 million | $(0.581) million |
| Net income (loss) available to common stockholders | $2.703 million | $0.711 million | $5.899 million | $(0.261) million |
| Basic and diluted earnings (loss) per share | $0.07 | $0.02 | $0.17 | $(0.01) |
- Revenue mix and changes: Q2 interest, marketing and distribution fees rose to $7.416 million from $3.151 million, principally from higher interest rates, margin interest and interest on U.S. government securities. Principal transactions and proprietary trading increased to $2.654 million from $1.081 million. Stock borrow/loan revenue rose to $4.513 million from $4.148 million. For the six months, revenue growth was driven mainly by interest fees and principal transactions; commissions declined to $3.853 million from $4.193 million.
- Expenses and margins: Q2 total expenses were $12.933 million versus $12.254 million; higher employee compensation was partly offset by lower technology and clearing costs. Operating margin, calculated as operating income divided by revenue, was approximately 26.5% versus negative 4.5% in Q2 2022; the six-month margin was approximately 26.6% versus negative 9.6%.
- Unusual items and taxes: The company recorded $1.035 million of investment impairment in the first half, including approximately $850,000 for a retail-platform investment and $185,000 for Tigress. Q2 tax expense was $969,000; the six-month effective tax rate was 26%.
- Cash flow: Operating cash flow was negative $49.561 million for the six months, compared with negative $3.322 million in 2022, substantially reflecting changes in securities borrowed and loaned and customer balances. Investing cash outflow was $1.154 million, largely for the Miami office build-out and software. Financing cash inflow was $13.080 million, including the Kakaopay share issuance, partly offset by debt repayment. Cash and cash equivalents plus regulatory-segregated cash and securities ended at $262.203 million, down from $299.838 million at year-end 2022; regulatory-segregated assets are not equivalent to freely available cash.
- Balance sheet and debt: Total assets were $1.065 billion and total liabilities $993.731 million at June 30, 2023. Assets and liabilities increased primarily with securities-borrowed and securities-loaned balances. Long-term debt was approximately $4.353 million, consisting principally of a Miami property mortgage; the separate $2.7 million East West Bank loan was repaid in Q2. The company reported $7.628 million of cash and cash equivalents, a $25 million undrawn overnight credit line, and compliance with debt covenants.
- Regulatory capital: MSCO reported $45.8 million of net capital, $44.2 million above its $1.6 million requirement. RISE reported approximately $1.3 million, $1.1 million above its $250,000 requirement. These regulatory resources and customer-protection reserves are subject to regulatory requirements.
Material developments and outlook
- Kakaopay financing and governance: The first tranche closed May 18, issuing 8,075,607 shares for approximately $17.4 million gross proceeds; net proceeds were approximately $15.4 million. A second tranche would issue 25,756,470 additional shares for approximately $60.5 million and bring Kakaopay to approximately 51% ownership. It remained conditional on regulatory, shareholder, business-performance and other approvals; there is no assurance it will close. If completed, Kakaopay would have the right to appoint four of seven directors. Management expects to use the capital to support initiatives including correspondent clearing, securities lending and corporate services.
- Operations and strategy: Retail customer accounts rose to 126,143 from 122,394 at year-end 2022; Q2 retail trades increased to 192,976 from 91,389. The company launched a new retail trading platform in June. Management said RISE’s future strategic direction is under review and that its business plan is untested, with uncertain ability to attract customers and revenue.
- Market and portfolio risks: Results are sensitive to market activity, interest rates, competition and regulation. Management intends to hold its U.S. government securities to maturity, with latest disclosed maturity in April 2025; it reported an aggregate unrealized portfolio loss of approximately $2.4 million at June 30. Further price declines could produce additional unrealized losses. Customer margin loans were approximately $350.3 million.
- Commitments and contingencies: The NFS clearing agreement runs through July 2025 and has early termination fees of $3.25–$7.25 million depending on timing; management said early termination was unlikely and recorded no liability. A technology-vendor agreement totals approximately $1.2 million over two years. The company disclosed ordinary-course legal matters it considered immaterial and a $1.596 million uncertain tax position.
- Subsequent events: On July 7, the company signed a New York office lease with approximately $2.114 million total commitment. On July 10, it agreed to repurchase one million shares from Tigress’s CEO in exchange for its 17% Tigress interest; the filing describes an approximately $185,000 noncash Q2 expense. Management stated it believed available cash, credit facilities, capital-market access and operating cash flows would meet foreseeable liquidity needs.
Key facts for investors to verify
- Whether the Kakaopay second tranche’s closing conditions are satisfied, and its final proceeds, dilution and governance effects.
- How much of reported liquidity is freely available after regulatory segregation and operating requirements.
- Whether securities-lending activity and customer balances drive further large working-capital cash-flow swings.
- Performance of the new trading platform and RISE’s ability to attract customers under its new strategic direction.
- Realization of the securities portfolio’s disclosed unrealized loss, and the carrying value and disposition of the impaired investments.
- Costs and obligations under the new office lease, technology and Broadridge contracts, and the NFS early-termination provisions.