Siebert Financial Corp. — Q2 2014 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2014, compared with the same 2013 periods. Siebert operates a brokerage and investment-banking business and holds equity interests in municipal-underwriting affiliate Siebert, Brandford, Shank & Co. (SBS) and derivatives affiliate SBSFPC.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $3.705 million | $4.278 million | $7.423 million | $8.544 million |
| Total expenses | $9.450 million | $5.254 million | $13.866 million | $10.195 million |
| Equity-investee income (loss) | $(332,000) | $(377,000) | $394,000 | $(1.071) million |
| Net loss | $(6.077) million | $(1.353) million | $(6.049) million | $(2.722) million |
| Loss per share, basic and diluted | $(0.28) | $(0.06) | $(0.27) | $(0.12) |
| Operating cash flow | Not provided by quarter | $(1.511) million | $637,000 |
At June 30, 2014, total assets were $26.598 million, including $13.805 million of cash and cash equivalents, $1.532 million of restricted cash equivalents, and $8.419 million in investments in and advances to affiliates. Accounts payable and accrued liabilities were $7.538 million, up from $2.861 million at year-end 2013; stockholders’ equity was $19.060 million, down from $25.109 million. The filing reports no conventional borrowings. Siebert’s regulatory net capital was approximately $6.693 million, $6.443 million above its $250,000 minimum.
For the six months, cash decreased by $1.619 million to $13.805 million. Operating cash use was $1.511 million; the $4.677 million increase in accounts payable and accrued liabilities partly offset the net loss. The filing states that 52% of total assets were highly liquid. No tax benefit was recognized on losses because deferred tax assets were fully reserved.
Material changes and management commentary
- Revenue fell 13.4% in Q2 and 13.1% for the six months. Commissions and fees declined 9.2% in Q2 and 4.6% year to date; investment banking revenue declined 5.5% and 22.7%; trading profits fell 43.5% and 44.7%, respectively.
- Retail trades declined to 67,102 in Q2 from 84,242, and to 147,884 for the six months from 166,224. Average commission per retail trade also fell. Management attributed weaker revenue to lower retail activity and ticket averages, reduced institutional participation and new-issue activity, and lower debt-market trading volume. Higher customer margin debits supported margin-debit rebates.
- Expenses rose 79.9% in Q2 and 36.0% for the six months, principally reflecting a $4.3 million charge for settlement of a former employee dispute and higher legal fees. Compensation, clearing, communications, and occupancy costs declined, partly offsetting the increases.
- SBS earned $810,000 in the first half versus a $1.941 million loss in 2013, producing Siebert’s $397,000 equity-method income for the period versus a $951,000 loss. SBSFPC was being wound down; Siebert recorded a $3,000 six-month share of its loss.
Outlook, risks, contingencies, and unusual items
The filing provides no numerical guidance or specific forecast. Management said market conditions had improved but Siebert’s revenue had not, and characterized brokerage competition as intense. Results remain exposed to market activity, trading volumes and prices, interest rates, demand for brokerage and underwriting services, competition, technology failures, customer nonpayment, expenses, and regulatory capital requirements. Management cautioned that interim results are not necessarily indicative of full-year results.
In July 2014, Siebert paid $4.3 million to settle a former employee dispute, releasing all claims and counterclaims. The settlement was recorded as a charge and liability in the June 30 statements; the payment occurred after quarter-end. Routine claims were described by management as not expected to have a material adverse effect. Up to $1.2 million of subordinated lending to SBS is authorized under a facility collateralized by $1.532 million of restricted cash equivalents; any amounts loaned bear 4% interest and are repayable August 31, 2015. SBS’s $7.8 million of Siebert-attributable undistributed earnings may not be immediately distributable, depending on available cash, agreements, and regulatory capital compliance. SBSFPC’s prior Detroit-related derivatives were unwound and assigned in 2013, with no continuing rights or obligations reported.
Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2013 Form 10-K.
Important facts for investors to verify
- Confirm the settlement’s cash payment timing and the effect of its $4.3 million charge on reported Q2 and first-half losses.
- Assess whether the declines in retail trades, commissions, investment banking, and debt-market trading persist.
- Review the liquidity and regulatory-capital position, including the sharp increase in accrued liabilities and the restricted cash supporting the SBS facility.
- Evaluate the availability of SBS undistributed earnings and the performance and wind-down status of the affiliates.
- Consider the full valuation allowance on deferred tax assets and the filing’s market, competition, operational, customer-credit, and regulatory risks.