Siebert Financial Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. Siebert is a holding company operating a retail discount brokerage through Muriel Siebert & Co. (MSCO) and an investment advisory business through AdvisorNXT.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $13.110 million | $9.812 million |
| Net income (loss) | $2.157 million | ($5.578 million) |
| Net income (loss) per share, basic and diluted | $0.10 | ($0.25) |
| Net cash from (used in) operations | $1.452 million | ($3.261 million) |
| Cash and cash equivalents at year-end | $3.765 million | $2.730 million |
| Total assets / liabilities / equity at year-end | $6.025 million / $0.813 million / $5.212 million | $3.816 million / $1.563 million / $2.253 million |
Revenue rose 33.6%. Commission and fee income increased 37.8% to $11.433 million, and trading gains rose 78.0% to $1.639 million. Interest and dividend income fell 96.6% to $19,000. The company reported total expenses of $10.8 million, down 29.9%; prior-year costs included $2.206 million related to the change in control and an $825,000 arbitration settlement loss. FY2017 net margin was approximately 16.5% (calculated from reported net income and revenue); the filing does not provide a stated margin measure.
Fourth-quarter revenue was $4.953 million and net income was $732,000, versus $3.049 million revenue and a $3.209 million net loss in fourth-quarter 2016. The prior-year quarter included change-in-control and arbitration costs. FY2017 comparisons are also affected by the StockCross asset acquisition, which became effective November 30, 2017; the acquired operations were included prospectively.
MSCO reported regulatory net capital of $4.439 million, $4.189 million above its $250,000 minimum. The filing reports no material funded debt; it does report $975,000 in future operating-lease payments. Cash and cash equivalents were $3.765 million, and management classified $3.8 million, or 62% of assets, as highly liquid. No cash dividends were paid in 2017.
Material changes and unusual items
- MSCO acquired certain retail broker-dealer assets from affiliate StockCross on November 30, 2017, issuing 5,072,062 restricted shares valued at approximately $19.984 million. Under common-control accounting, the acquired assets and liabilities were recorded at historical cost; the filing says the acquired assets had nil book value, and the difference was recorded as an equity distribution. Shares are subject to a two-year lock-up.
- StockCross-related activity from November 30 through year-end generated $1.617 million of revenue and $1.334 million of expense; $283,000 was receivable from StockCross at year-end. The company also reported $127,000 payable to StockCross.
- Retail trades declined to 221,282 from 229,720, and average commission per trade declined to $19.87 from $20.27. Retail accounts with positions rose to 43,540 from 28,430; margin debit balances increased to $333 million from $214 million.
- Cash flow from operations turned positive. Cash increased by $1.035 million during 2017, compared with a $6.690 million decrease in 2016.
- Year-end shares outstanding increased to 27,157,188 from 22,085,126, principally reflecting the shares issued for the StockCross assets.
Outlook, risks and contingencies
Management is pursuing cost reductions, new products and business opportunities. It expects the February 2018 exclusive advertising agreement with Overstock/tZERO and Speedroute to attract brokerage accounts; new accounts began during the first quarter of 2018. The agreement offers trades at $1.99 for Overstock Club O Gold members and $2.99 for other customers, with revenue shared with Speedroute. AdvisorNXT’s robo-advice platform was in beta testing, with marketing begun in the first quarter of 2018; licensing and related fees payable to an affiliate had not been determined.
After year-end, the company reached an agreement in principle to acquire Park Wilshire Companies for approximately the cash in its accounts, estimated at $111,000, with no liabilities reported. Management intends to develop insurance activities, particularly fixed annuities; no insurance commissions or fees had yet been earned.
MSCO’s National Financial Services clearing contract had expired, and the company said it was operating with NFS and StockCross on a month-to-month basis while seeking a new NFS agreement. Management expected potential economic benefits from a new contract but gave no assurance it would be finalized. Principal risks include securities-market and trading-volume fluctuations, intense price competition, customer and counterparty credit exposure, technology and cybersecurity disruptions, regulatory and net-capital requirements, and dependence on key personnel. Management described ordinary-course legal claims as not expected to materially affect financial position.
Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 because of material weaknesses: insufficient qualified accounting and financial-reporting personnel, and failure to use a disclosure checklist. A remediation plan was being developed, including added expertise and checklists; management expected remediation by no later than the second quarter of 2018. The company also had $23.3 million in federal and $16.5 million in state net operating loss carryforwards, subject to annual use limitations following the ownership change; deferred tax assets were fully offset by a valuation allowance.
Most important facts for investors to verify
- Whether the accounting, revenue contribution and expected benefits of the StockCross related-party asset acquisition are sustained and appropriately reflected in subsequent periods.
- Whether the company remediated the disclosed material weaknesses on schedule, and whether later filings report effective controls.
- Whether MSCO secured a new NFS clearing agreement and how month-to-month clearing arrangements affect costs and continuity.
- Whether the Overstock advertising agreement and AdvisorNXT robo platform generate material customer growth and revenue after associated costs and affiliate fees.
- Whether the reported cash and regulatory capital remain available to support operations, given broker-dealer restrictions, leases and other commitments.