Siebert Financial Corp. — Q3 2019 Form 10-Q
Business and period: Siebert is a U.S. financial-services company focused on retail brokerage and asset management, with advisory, insurance and technology subsidiaries. This unaudited report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $7.144 million | $7.884 million | $20.634 million | $23.549 million |
| Total expenses | $5.717 million | $5.800 million | $16.445 million | $17.423 million |
| Income before taxes | $1.457 million | $2.084 million | $4.273 million | $6.126 million |
| Net income | $1.104 million | $3.119 million | $3.102 million | $6.611 million |
| Diluted EPS | $0.04 | $0.11 | $0.11 | $0.24 |
- Revenue declined 9% in Q3 and 12% for the nine-month period. Commissions and fees fell 18% in both periods; principal transactions fell 23% in Q3 and 30% year to date. Margin interest, marketing and distribution fees rose 8% and 7%, respectively. Advisory fees increased 53% in Q3 and 85% year to date.
- Net income declined 65% in Q3 and 53% year to date. The 2018 comparisons benefited from a partial release of the valuation allowance on historical net operating losses; weaker market-related commission and principal-transaction revenue also contributed to the declines.
- Calculated net margin was approximately 15.5% for Q3 2019 versus 39.6% in Q3 2018, and 15.0% for the first nine months of 2019 versus 28.1% in 2018. These calculations use reported net income divided by revenue.
- Nine-month operating cash flow was $4.382 million, versus $4.526 million in 2018. Investing activities used $7.380 million, including a $3.665 million investment in StockCross, a $2.0 million escrow deposit for the Weeden Prime transaction, and purchases of equipment and software. Cash declined by $2.998 million to $4.231 million.
Financial position and liquidity
- At September 30, 2019, assets were $23.993 million, liabilities $3.717 million, and stockholders’ equity $20.276 million. Cash was $4.231 million, down from $7.229 million at year-end 2018; the company described cash as about 18% of assets, versus 40% at year-end.
- The company reported $2.817 million of lease liabilities and $2.501 million of lease right-of-use assets following adoption of the lease accounting standard in January 2019. No other conventional debt balance is identified in the filing.
- Broker-dealer subsidiary MSCO had net capital of approximately $5.7 million, $5.4 million above its $250,000 minimum requirement. The filing states cash is unrestricted and available for working capital, while noting regulatory limits on transfers from MSCO.
Material developments, outlook and risks
- Siebert acquired approximately 15% of StockCross in January 2019 and recorded $84,000 of equity-method earnings for the first nine months. It had a binding letter of intent to acquire the remaining 85%, pending regulatory approval.
- Under an agreement dated September 27, 2019, Siebert agreed to acquire Weeden Prime, a prime-brokerage firm, subject to regulatory approval. The $2.0 million escrow deposit is intended to form part of the purchase price if the transaction closes.
- Management gave no quantified earnings or revenue guidance. It said results depend on market conditions, volatility, interest rates, competition and regulatory trends; lower market activity may hurt profitability because some expenses are relatively fixed. Management also cited price competition, counterparty and customer credit exposure, clearing risks, systems and cybersecurity risks, and reliance on external service providers.
- Ordinary-course legal claims were described as without merit or not expected to have a significant financial effect. The company disclosed uncertainty around self-insured employee health claims, including that ultimate settlements may differ significantly from reserves; the recorded accrual was $48,000. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Regulatory approval, closing terms, financing and integration plans for the StockCross and Weeden Prime transactions.
- Whether cash and regulatory net capital remain adequate as acquisition spending and lease commitments continue; MSCO’s net capital declined from approximately $8.9 million at year-end 2018 to $5.7 million.
- Whether brokerage activity, commission rates and principal-transaction revenue recover, and whether advisory growth can offset continued market or pricing pressure.
- The effect of tax attributes and valuation-allowance changes on future reported tax expense, given the unusually favorable tax comparison in 2018.