NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands, except share
data)
NOTE 1 — ORGANIZATION AND
NATURE OF BUSINESS OPERATIONS
B. Riley Financial,
Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate,
institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory services to a wide
range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional
services firms throughout the United States, Australia, Canada, and Europe and consumer Internet access and cloud communication
services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”) and
magicJack VocalTec Ltd. (“magicJack”). The Company acquired a majority ownership interest in BR Brand Holding, LLC
(“BR Brand” or “Brands”) on October 28, 2019, which provides licensing of trademarks.
The Company operates
in five operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities
lending, restructuring, consulting, research, sales and trading and wealth management services to corporate, institutional and
high net worth clients; (ii) Auction and Liquidation, through which the Company provides auction and liquidation services to help
clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment,
intellectual property and real property; (iii) Valuation and Appraisal, through which the Company provides valuation and appraisal
services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business
needs; (iv) Principal Investments - United Online and magicJack, through which the Company provides consumer Internet access and
related subscription services from United Online and cloud communication services primarily through the magicJack devices; and
(v) Brands, which is focused on generating revenue through the licensing of trademarks.
NOTE 2 — SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
(a) Principles
of Consolidation and Basis of Presentation
The condensed consolidated
financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries. The
condensed consolidated financial statements also include the accounts of Great American Global Partners, LLC which is controlled
by the Company as a result of its ownership of a 50% member interest, appointment of two of the three executive officers and significant
influence over the funding of operations. The condensed consolidated financial statements have been prepared by the Company, without
audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed
or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting
of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations
for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should
be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020. The results of operations
for the six months ended June 30, 2020 are not necessarily indicative of the operating results to be expected for the full fiscal
year or any future periods.
(b) Use of
Estimates
The preparation of
the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and
reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items such
as valuation of securities and loan receivables, allowance for doubtful accounts, the fair value of intangible assets and goodwill,
the fair value of mandatorily redeemable noncontrolling interests, fair value of share based arrangements, accounting for income
tax valuation allowances, recovery of contract assets and sales returns and allowances. Estimates are based on historical experience,
where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty
involved with estimates, actual results may differ.
On January 30, 2020,
the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the
“COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase
in exposure globally. The full impact of the COVID-19 outbreak continues to evolve. The impact of the COVID-19 outbreak on the
Company’s results of operations, financial position and cash flows will depend on future developments, including the duration
and spread of the outbreak and related advisories and restrictions. These developments and the impact of the COVID-19 outbreak
on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or
the overall economy are impacted for an extended period, the Company’s results of operations, financial position and cash
flows may be materially adversely affected.
(c) Interest
Expense — Securities Lending Activities and Loan Participations Sold
Interest expense
from securities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interest
expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Company
and totaled $10,802 and $5,502 for the three months ended June 30, 2020 and 2019, respectively, and $18,723 and $12,306 for the
six months ended June 30, 2020 and 2019, respectively. Loan participations sold as of June 30, 2020 totaled $14,109. Interest
expense from loan participations sold totaled $419 for the three months ended June 30, 2020,
and $971 for the six months ended June 30, 2020.
(d) Concentration
of Risk
Revenues in the Capital
Markets, Valuation and Appraisal and Principal Investments — United Online and magicJack segments are currently primarily
generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States,
Australia, Canada and Europe. Revenues in the Brands segment are primarily generated in the United States and Canada.
The Company’s
activities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers and secured
creditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors. The Company
seeks to control its credit risk and potential risk concentration through risk management activities that limit the Company’s
exposure to losses on any one specific liquidation services contract or concentration within any one specific industry. To mitigate
the exposure to losses on any one specific liquidations services contract, the Company sometimes conducts operations with third
parties through collaborative arrangements.
The Company maintains
cash in various federally insured banking institutions. The account balances at each institution periodically exceed the Federal
Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of credit
risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. The
Company also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributed
to parties in accordance with the collaborative arrangements.
(e)
Advertising Expenses
The Company expenses
advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $864 and $584
for the three months ended June 30, 2020 and 2019, respectively, and $1,704 and $946 for the six months ended June 30, 2020 and
2019, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations.
(f)
Share-Based Compensation
The Company’s
share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated with
the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awards
are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grant
of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed consolidated statements
of operations over the requisite service or performance period the award is expected to vest.
(g) Income Taxes
The Company recognizes
deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed
consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between
the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result
in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards
is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized
in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical
and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than
not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company recognizes
tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s
measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized
tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
(h) Cash and
Cash Equivalents
The Company considers
all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(i) Restricted
Cash
As of June 30, 2020
and December 31, 2019, restricted cash balance of $471 related to one of the Company’s telecommunication suppliers.
(j)
Securities Borrowed and Securities Loaned
Securities borrowed
and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate
the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities
loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities
borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities
borrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional
collateral obtained, or excess collateral recalled, when deemed appropriate.
The Company accounts
for securities lending transactions in accordance with ASC “Topic 210: Balance Sheet,” which requires companies to
report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and
these items are presented on a gross basis in the condensed consolidated balance sheets.
(k)
Property and Equipment
Property and equipment
are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives
of the assets. Property and equipment held under finance leases are amortized on a straight-line basis over the shorter of the
lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $899 and
$1,487 for the three months ended June 30, 2020 and 2019, respectively, and
$1,831 and $3,023 for the six months ended June 30, 2020 and 2019, respectively.
(l)
Loans Receivable
The Company
adopted the new credit loss standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the
Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at
amortized cost. Under the fair value option, loans receivable are measured at each reporting period based upon their exit
value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the condensed
consolidated statements of operations. These loans are no longer subject to evaluation for impairment through an allowance
for loan loss as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to
the condensed consolidated financial statements.
Loans receivable,
at fair value totaled $325,517 and $43,338 at June 30, 2020 and December 31, 2019, respectively. The loans have various maturities
through December 2024. As of June 30, 2020 and December 31, 2019, the historical cost of loans receivable accounted for under
the fair value option was $336,732 and $32,578, respectively, which included principal balances of $341,723 and $32,691 and unamortized
costs, origination fees, premiums and discounts, totaling $4,991 and $113, respectively. During the three and six months ended
June 30, 2020, the Company recorded unrealized losses of $4,049 and $21,975, respectively on the loans receivable, at fair value,
which is included in trading income (losses) and fair value adjustments on loans on the condensed consolidated statement of operations.
Prior to the adoption
of the new credit loss standard effective January 1, 2020, at December 31, 2019 loans receivable, at historical cost totaled
$225,848. Loans receivable, at cost are reported at their outstanding principal balances of $232,118 net of $6,270 of unearned
income, and loan origination costs which includes unamortized deferred fees and costs on originated loans, and for purchased loans,
net of any unamortized premiums or discounts.
The Company may
periodically provide limited guarantees to third parties for loans that are made to investment banking and lending
customers. At June 30, 2020, the Company has provided limited guarantees with respect to the Franchise Group, Inc.
(collectively with all of its affiliates, “FRG”) as further described in Note 14(b) and Babcock & Wilcox
Enterprises, Inc. (“B&W”) as further described in Note 17. In accordance with the new credit loss
standard, the Company evaluates the need to record an allowance for credit losses for these loan guarantees since they have
off-balance sheet credit exposures. At June 30, 2020, the Company has not recorded any provision for credit losses on
the FRG and B&W guarantees since the underlying guaranteed loans are senior to most of the outstanding debt of FRG and
B&W and the Company believes that there is sufficient collateral to protect the Company from any credit loss
exposure. The maximum amount of credit exposure related to these limited guarantees is approximately $255,000.
Interest income on
loans receivable is recognized based on the stated interest rate of the loan on the unpaid principal balance plus the amortization
of any costs, origination fees, premiums and discounts and is included in interest income - loans and securities lending on the
condensed consolidated statement of operations. Loan origination fees and certain direct origination costs are deferred and recognized
as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to
interest income using a level yield methodology.
(m) Securities
and Other Investments Owned and Securities Sold Not Yet Purchased
Securities owned
consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities
sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and
thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities
are reflected currently in the results of operations.
As of June 30, 2020
and December 31, 2019, the Company’s securities and other investments owned and securities sold not yet purchased at fair
value consisted of the following securities:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Securities and other investments owned:
|
|
|
|
|
|
|
Equity securities
|
|
$
|
341,515
|
|
|
$
|
353,162
|
|
Corporate bonds
|
|
|
5,375
|
|
|
|
19,020
|
|
Other fixed income securities
|
|
|
2,768
|
|
|
|
8,414
|
|
Partnership interests and other
|
|
|
49,386
|
|
|
|
27,617
|
|
|
|
$
|
399,044
|
|
|
$
|
408,213
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,181
|
|
|
$
|
5,360
|
|
Corporate bonds
|
|
|
5,272
|
|
|
|
33,436
|
|
Other fixed income securities
|
|
|
351
|
|
|
|
3,024
|
|
|
|
$
|
9,804
|
|
|
$
|
41,820
|
|
(n)
Fair Value Measurements
The Company’s
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that
the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the
absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quoted
prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets.
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are
observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within
which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’s
securities and other investments owned and securities sold and not yet purchased are comprised of common and preferred stocks
and warrants, corporate bonds, and investments in partnerships. Investments in common stocks that are based on quoted prices in
active markets are included in Level 1 of the fair value hierarchy. The Company also holds loans receivable valued at fair value,
nonpublic common and preferred stocks and warrants for which there is little or no public market and fair value is determined
by management on a consistent basis. For investments where little or no public market exists, management’s determination
of fair value is based on the best available information which may incorporate management’s own assumptions and involves
a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent
sales prices of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value
hierarchy. Investments in partnership interests include investments in private equity partnerships that primarily invest in equity
securities, bonds, and direct lending funds. The Company also invests in priority investment funds and the underlying securities
held by these funds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption
of amounts invested by the Company. The Company’s partnership and investment fund interests are valued based on the Company’s
proportionate share of the net assets of the partnerships and funds; the value for these investments are derived from the most
recent statements received from the general partner or fund administrator. These partnership and investment fund interests are
valued at net asset value (“NAV”) in accordance with ASC “Topic 820: Fair Value Measurements.”
The fair value of
mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references
to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.
The following tables
present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of June
30, 2020 and December 31, 2019.
|
|
Financial Assets and Liabilities Measured at Fair Value
|
|
|
|
on
a Recurring Basis at June 30, 2020 Using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
Fair value at
|
|
|
active markets for
|
|
|
Other
observable
|
|
|
Significant
unobservable
|
|
|
|
June 30,
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2020
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
341,515
|
|
|
$
|
233,726
|
|
|
$
|
—
|
|
|
$
|
107,789
|
|
Corporate bonds
|
|
|
5,375
|
|
|
|
—
|
|
|
|
5,375
|
|
|
|
—
|
|
Other fixed income securities
|
|
|
2,768
|
|
|
|
—
|
|
|
|
2,768
|
|
|
|
—
|
|
Investment funds valued at net asset value (1)
|
|
|
49,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities and other investments owned
|
|
|
399,044
|
|
|
|
233,726
|
|
|
|
8,143
|
|
|
|
107,789
|
|
Loans receivable, at fair value
|
|
|
325,517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
325,517
|
|
Total assets measured at fair value
|
|
$
|
724,561
|
|
|
$
|
233,726
|
|
|
$
|
8,143
|
|
|
$
|
433,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
4,181
|
|
|
$
|
4,181
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
5,272
|
|
|
|
—
|
|
|
|
5,272
|
|
|
|
—
|
|
Other fixed income securities
|
|
|
351
|
|
|
|
—
|
|
|
|
351
|
|
|
|
—
|
|
Total securities sold not yet purchased
|
|
|
9,804
|
|
|
|
4,181
|
|
|
|
5,623
|
|
|
|
—
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,351
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,351
|
|
Total liabilities measured at fair value
|
|
$
|
14,155
|
|
|
$
|
4,181
|
|
|
$
|
5,623
|
|
|
$
|
4,351
|
|
|
|
Financial Assets and Liabilities Measured at Fair Value
|
|
|
|
on a Recurring Basis at December 31, 2019 Using
|
|
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
Fair value at
|
|
|
active markets for
|
|
|
Other
observable
|
|
|
Significant
unobservable
|
|
|
|
December 31
|
|
|
identical assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2019
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
353,162
|
|
|
$
|
243,911
|
|
|
$
|
—
|
|
|
$
|
109,251
|
|
Corporate bonds
|
|
|
19,020
|
|
|
|
—
|
|
|
|
19,020
|
|
|
|
—
|
|
Other fixed income securities
|
|
|
8,414
|
|
|
|
—
|
|
|
|
8,414
|
|
|
|
—
|
|
Investment funds valued at net asset value(1)
|
|
|
27,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities and other investments owned
|
|
|
408,213
|
|
|
|
243,911
|
|
|
|
27,434
|
|
|
|
109,251
|
|
Loans receivable, at fair value
|
|
|
43,338
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,338
|
|
Total assets measured at fair value
|
|
$
|
451,551
|
|
|
$
|
243,911
|
|
|
$
|
27,434
|
|
|
$
|
152,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
5,360
|
|
|
$
|
5,360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
33,436
|
|
|
|
—
|
|
|
|
33,436
|
|
|
|
—
|
|
Other fixed income securities
|
|
|
3,024
|
|
|
|
—
|
|
|
|
3,024
|
|
|
|
—
|
|
Total securities sold not yet purchased
|
|
|
41,820
|
|
|
|
5,360
|
|
|
|
36,460
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,616
|
|
Total liabilities measured at fair value
|
|
$
|
46,436
|
|
|
$
|
5,360
|
|
|
$
|
36,460
|
|
|
$
|
4,616
|
|
|
(1)
|
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy in accordance with ASC “Topic 820 Fair Value Measurements.” The fair value amounts presented in the tables above for investment funds valued at net asset value are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.
|
As
of June 30, 2020 and December 31, 2019, financial assets measured
and reported at fair value on a recurring basis and classified within Level 3 were $433,306 and $152,589, respectively, or 19%
and 6.6%, respectively, of the Company’s total assets. In determining the fair value for these Level 3 financial assets,
the Company analyzes various financial, performance and market factors to estimate the value, including where applicable, over-the-counter
market trading activity.
The following table
summarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities by category
of investment and valuation technique as of June 30, 2020:
|
|
Fair value at
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
2020
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Average
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
107,789
|
|
|
Market approach
|
|
Multiple of revenue
|
|
2.8x - 6.1x
|
|
4.6x
|
|
|
|
|
|
|
|
|
Multiple of EBITDA
|
|
6.3x - 11.09x
|
|
6.5x
|
|
|
|
|
|
|
|
|
Multiple of PV-10
|
|
.29x
|
|
.29x
|
|
|
|
|
|
|
|
|
Market price of related security
|
|
$0.53 - $2.28/share
|
|
$1.02
|
|
|
|
|
|
|
Discounted cash flow
|
|
Market interest rate
|
|
107.0%
|
|
107.0%
|
|
|
|
|
|
|
Option pricing model
|
|
Annualized volatility
|
|
123.0%
|
|
123%
|
Loans receivable at fair value
|
|
|
325,517
|
|
|
Discounted cash flow
|
|
Market interest rate
|
|
8.3%-18.4%
|
|
15.1%
|
|
|
|
|
|
|
Market approach
|
|
Market price of related security
|
|
$0.53/share
|
|
$0.53
|
Total level 3 assets measured at fair value
|
|
$
|
433,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
$
|
4,351
|
|
|
Market approach
|
|
Operating income multiple
|
|
6.0x
|
|
6.0x
|
The changes in Level
3 fair value hierarchy during the six months ended June 30, 2020 and 2019 are as follows:
|
|
Level 3
|
|
|
Level 3 Changes During the Period
|
|
|
Level 3
|
|
|
|
Balance at Beginning of Year
|
|
|
Fair Value Adjustments
|
|
|
Relating to Undistributed Earnings
|
|
|
Purchases, Sales and Settlements
|
|
|
Transfer in and/or out of Level 3
|
|
|
Balance at
End of
Period
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
109,251
|
|
|
$
|
(2,462
|
)
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
107,789
|
|
Loans receivable at fair value
|
|
|
43,338
|
|
|
|
(21,974
|
)
|
|
|
2,462
|
|
|
|
75,843
|
|
|
|
225,848
|
|
|
|
325,517
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,616
|
|
|
|
—
|
|
|
|
(265
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,351
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
24,577
|
|
|
$
|
5,267
|
|
|
$
|
1,360
|
|
|
$
|
1,451
|
|
|
$
|
—
|
|
|
$
|
32,655
|
|
Loans receivable at fair value
|
|
|
33,731
|
|
|
|
8,619
|
|
|
|
475
|
|
|
|
(978
|
)
|
|
|
—
|
|
|
|
41,847
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,633
|
|
|
|
—
|
|
|
|
(409
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,224
|
|
The Company adopted
ASU 2016-13 and its amendment ASU 2019-05 effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the
Company elected the irrevocable fair value option for all outstanding loans receivable that were measured at amortized cost as
of December 31, 2019. The loans receivable, at fair value are included in transfers into level 3 fair value assets in the
above table.
The amount reported
in the table above for the six months ended June 30, 2020 and 2019 includes the amount of undistributed earnings attributable
to the noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported in the condensed consolidated
financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses
and other liabilities approximate fair value based on the short-term maturity of these instruments.
As of June 30, 2020,
the senior notes payable had a carrying amount of $854,037 and fair value of $772,721. The carrying amount of the term loan approximates
fair value because the effective yield of such instrument is consistent with current market rates of interest for instruments
of comparable credit risk.
During the six
months ended June 30, 2020 and 2019, except for the impact of the intangible impairment charge as described in Note 7-
Goodwill and Other Intangible Assets, there were no assets or liabilities measured at fair value on a non-recurring basis.
The fair value of the indefinite-lived intangible assets was determined based on a discounted cash flow model using a rate of
13.8%. The indefinite-lived intangible assets are level 3 assets in the fair value hierarchy.
(o) Foreign
Currency Translation
The Company transacts
business in various foreign currencies. In countries where the functional currency of the underlying operations has been determined
to be the local country’s currency, revenues and expenses of operations outside the United States are translated into United
States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated
into United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included
in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying condensed consolidated
balance sheets. Transaction gains (loss) were ($438) and ($139) during the three months ended June 30, 2020 and 2019, respectively
and $510 and ($325) during the six months ended June 30, 2020 and 2019, respectively. These amounts are included in selling, general
and administrative expenses in the Company’s condensed consolidated statements of operations.
(p)
Common Stock Warrants
The Company issued
821,816 warrants to purchase common stock of the Company (the “Wunderlich Warrants”) in connection with the acquisition
of Wunderlich Securities, Inc. (“Wunderlich”) on July 3, 2017. The Wunderlich Warrants entitle the holders of the
warrants to acquire shares of the Company’s common stock from the Company at an exercise price of $17.50 per share, subject
to, among other matters, the proper completion of an exercise notice and payment. The exercise price and the number of shares
of Company common stock issuable upon exercise are subject to customary anti-dilution and adjustment provisions, which include
stock splits, subdivisions or reclassifications of the Company’s common stock. On May 16, 2019, the Company repurchased
638,311 warrants for $2,777 ($4.35 per warrant). On June 11, 2020, 167,352 warrants held in escrow from the acquisition of Wunderlich
were cancelled in accordance with the terms of the escrow instructions. The Wunderlich Warrants expire on July 3, 2022. As
of June 30, 2020, Wunderlich Warrants to purchase 16,153 shares of common stock were outstanding.
On October 28, 2019,
the Company issued 200,000 warrants to purchase common stock of the Company (the “BR Brands Warrants”) in connection
with the acquisition of a majority ownership interest in BR Brand Holdings LLC. The BR Brand Warrants
entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at an exercise price
of $26.24 per share. One-third of the BR Brand Warrants immediately vested and became exercisable upon issuance, and the remaining
two-thirds of warrants will vest and become exercisable following the first and/or second anniversaries of the closing, subject
to BR Brand’s (or another related joint venture with Bluestar Alliance LLC) satisfaction of specified financial performance
targets. The BR Brand warrants expire three years after the last vesting event occurs.
(q) Equity
Investment
bebe stores, inc.
At June 30, 2020,
the Company had a 30.5% ownership interest in bebe stores, inc. (“bebe”). The equity ownership in bebe is accounted
for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed consolidated balance
sheets.
National Holdings
Corporation
In 2018, the Company
entered into an agreement to acquire shares of National Holdings Corporation (“National Holdings”), a Nasdaq-listed
issuer, from Fortress Biotech, Inc. for an aggregate purchase price totaling approximately $22.9 million. The transaction was
completed in two tranches. In the first tranche, which was completed in the fourth quarter of 2018, the Company acquired shares
representing 24% of the total outstanding shares of National Holdings. The second tranche was completed in the first quarter of
2019. As of June 30, 2020, the Company owned 6,159,550 shares of National Holdings’ common stock, representing 45.7% of
National Holdings’ outstanding shares. The carrying value for the National Holdings investment is included in prepaid expenses
and other assets in the condensed consolidated balance sheets. The equity ownership in National Holdings is accounted for under
the equity method of accounting.
As of June 30, 2020,
the carrying values of the Company’s investments in bebe and National Holdings exceeded their fair values based on their
quoted market prices. In light of these facts, the Company evaluated its investments in bebe and National Holdings for impairment.
The Company utilized no bright- line tests in such evaluations. Based on the available facts and information regarding the operating
results of both entities, the Company’s ability and intent to hold the investments until recovery, the relative amount of
the declines, and the length of time that the fair values were less than the carrying values, the Company concluded that recognition
of impairment losses in earnings was not required. However, the Company will continue to monitor these investments and it is possible
that impairment losses will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.
(r) Loan Participations
Sold
As of June 30, 2020,
the Company has sold investments (“Loan Participations Sold”) to third parties (“Participants”) that are
accounted for as secured borrowings under ASC Topic 860, Transfers and Servicing. Under ASC Topic 860, a partial loan transfer
does not qualify for sale accounting in order for sale treatment to be allowed. A participation or other partial loan transfer
that meets the definition of a participating interest is classified as loan receivable and the portion transferred is recorded
as a secured borrowing under loan participations sold in the condensed consolidated balance sheet. The Participants are entitled
to payments made by the borrower of the related loan equal to the current Loan Participations Sold outstanding at the interest
rates for the respective investment. In the event that the borrower defaults, the Participants have rights to payments from such
borrower, but do not have recourse to the Company. The terms of the Loan Participations Sold are commensurate with the terms of
the related loan.
As of June 30, 2020,
the Company had entered into participation agreements for a total of $14,109. In addition, the interest income and interest expense
related to the Loan Participations Sold resulted in interest income and interest expense which is presented gross on the condensed
consolidated statement of operations.
(s) Supplemental
Non-cash Disclosures
During the six months
ended June 30, 2020, non-cash investing activities included $4,633 non-cash conversion of an equity method investment and $6,170
conversion of a loan receivable to shares of stock.
(t) Reclassifications
As of December 31,
2019, loans receivable recorded at fair value of $43,338 were previously included in securities and other investments owned, at
fair value. These loans receivable amounts have been reclassified and reported in loans receivable, at fair value to conform to
the 2020 presentation. During the three and six months ended June 30, 2019, trading income and fair value adjustments on loans
of $5,595 and $31,462, respectively were previously included in services and fees income in the capital markets segment. These
trading income and fair value adjustments on loans amounts have been reclassified and reported in trading income and fair value
adjustments on loans to conform to the 2020 presentation. During the three and six months ended June 30, 2019, interest income
earned on loans of $16,961 and $28,381, respectively were previously included in services and fees income in the capital markets
segment. These interest income amounts have been reclassified and reported in interest income – loans and securities lending
to conform to the 2020 presentation. During the three and six months ended June 30, 2019, expenses of $4,569 and $8,990, respectively,
were previously included in direct cost of services in the valuation and appraisal segment. These expenses have been reclassified
and reported in selling, general and administrative expenses to conform to the 2020 presentation.
(u)
Variable Interest Entity
In 2018, the operations
of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. The Company’s
investment in the Partnership is a variable interest entity (“VIE”) since the unaffiliated limited partners do not
have substantive kick- out or participating rights to remove the Company’s subsidiary that is the general partner managing
the Partnership. The Company has determined that it is not the primary beneficiary due to the fact that its fee arrangements are
considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in the Partnership
that are considered to be more than insignificant. The Company determines whether it is the primary beneficiary of a VIE at the
time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company
is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or
indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not
readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.
The carrying value
of the Company’s investments in the VIE that was not consolidated is shown below.
|
|
June 30,
2020
|
|
Partnership investments
|
|
$
|
20,352
|
|
Due from related party
|
|
|
15
|
|
Maximum exposure to loss
|
|
$
|
20,367
|
|
(v) Recent
Accounting Standards
Not yet
adopted
In
December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update
(“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies
the accounting for income taxes by removing certain exceptions for recognizing deferred taxes on investments, performing
intra-period allocations, and calculating income taxes in interim periods. The ASU also adds guidance to reduce the
complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a
consolidated group. The revised guidance will be applied prospectively and is effective for SEC filers for annual periods or
interim periods with fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual
periods for which financial statements have not been issued. The Company has not yet adopted this update and is currently
evaluating the effect this new standard will have on its financial condition and results of operations.
Recently adopted
In June 2016, the
FASB issued ASU 2016-13, Financial Instruments − Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASC 326”). This standard requires an allowance to be recorded for all expected credit losses for certain financial
assets. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial
instruments. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments − Credit Losses (Topic 326); Targeted Transition
Relief,” which allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments
that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible
for the fair value option under ASC 825-10. ASU 2016-13 and ASU 2019-05 are effective for public companies for interim and annual
period beginning December 15, 2019.
The Company
adopted the new credit losses standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the
Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at
amortized cost. Under the fair value option, loans receivable are now measured at each reporting period based upon their exit
value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the consolidated
statements of operations. These loans are no longer subject to evaluation for impairment through an allowance for loan loss
as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to the condensed
consolidated financial statements.
NOTE 3 — ACQUISITIONS
Membership
Interest Purchase Agreement with BR Brand Acquisition LLC
On October 11,
2019, the Company and B. Riley Brand Management LLC, an indirect wholly-owned subsidiary of the Company (the “B. Riley
Member”), entered into a Membership Interest Purchase Agreement (the “MIPA”) with BR Brand Acquisition
LLC (the “BR Brand Member”) and BR Brand, pursuant to which the B. Riley Member acquired a majority of the equity
interest in BR Brand. The closing of the transactions in accordance with the MIPA (the “Closing”) occurred on October
28, 2019.
The B. Riley Member
completed the Closing of a majority of the equity interest in BR Brand pursuant to the terms of the MIPA in exchange for (i) aggregate
consideration of $116,500 in cash and (ii) warrant consideration of $990 from the issuance by the Company to Bluestar Alliance
LLC (“Bluestar”), an affiliate of the BR Brand Member, of a warrant to purchase up to 200,000 shares of the Company’s
common stock at an exercise price per share equal to $26.24. One-third of the shares of common stock issuable under the warrant
immediately vested and became exercisable upon issuance at the Closing, and the remaining two-thirds of such shares of common
stock will vest and become exercisable following the first and/or second anniversaries of the Closing, subject to BR Brand’s
(or another related joint venture with Bluestar) satisfaction of specified financial performance targets. The fair value of the
non-controlling interest in the amount of $29,373 was determined based on the relative fair value of the net assets acquired.
The Company incurred $570 of transaction costs in connection with the acquisition.
In connection with
the Closing, (i) the BR Brand Member has caused the transfer of certain trademarks, domain names, license agreements and related
assets from existing brand owners to BR Brand and (ii) the Company, Bluestar and certain of their affiliates (including the B.
Riley Member and the BR Brand Member) entered into an amended and restated operating agreement for BR Brand and certain other
commercial agreements.
The Company evaluated
the transaction under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 805, Business Combinations, and Accounting Standards Update (“ASU”) 2017-01, Business Combinations: Clarifying
the Definition of a Business. Based on this evaluation, the Company has determined that the acquisition did not meet the definition
of a business and, therefore, has accounted for the transaction as an acquisition of assets. The fair value of the assets acquired,
including transaction costs, have been reflected in the accompanying financial statements as follows:
Consideration paid by B. Riley:
|
|
|
|
Cash acquisition consideration
|
|
$
|
116,500
|
|
Transaction costs
|
|
|
570
|
|
Total cash consideration
|
|
|
117,070
|
|
Warrant consideration
|
|
|
990
|
|
Total consideration
|
|
$
|
118,060
|
|
Tangible assets acquired and assumed:
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,160
|
|
Accounts receivable
|
|
|
1,751
|
|
Deferred revenue
|
|
|
(1,332
|
)
|
Tradename
|
|
|
136,176
|
|
Customer list
|
|
|
8,678
|
|
Non-controlling interest
|
|
|
(29,373
|
)
|
Total
|
|
$
|
118,060
|
|
NOTE 4 — RESTRUCTURING
CHARGE
The Company did not
record any restructuring charges for the three and six months ended June 30, 2020. The Company recorded restructuring charges
in the amount of $1,552 and $1,699 for the three and six months ended June 30, 2019, respectively.
The restructuring
charges during the three and six months ended June 30, 2019 were primarily related to severance costs for magicJack employees
from a reduction in workforce in the Principal Investments – United Online and magicJack segment.
The following tables
summarize the changes in accrued restructuring charge during the three and six months ended June 30, 2020 and 2019:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
1,284
|
|
|
|
3,384
|
|
|
|
1,600
|
|
|
|
3,855
|
|
Restructuring charge
|
|
|
—
|
|
|
|
1,552
|
|
|
|
—
|
|
|
|
1,699
|
|
Cash paid
|
|
|
(315
|
)
|
|
|
(2,411
|
)
|
|
|
(631
|
)
|
|
|
(3,047
|
)
|
Non-cash items
|
|
|
10
|
|
|
|
117
|
|
|
|
10
|
|
|
|
135
|
|
Balance, end of period
|
|
$
|
979
|
|
|
$
|
2,642
|
|
|
$
|
979
|
|
|
$
|
2,642
|
|
The following tables
summarize the restructuring activities by reportable segment during the three and six months ended June 30, 2019:
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Capital Markets
|
|
|
Principal Investments - United Online and magicJack
|
|
|
Total
|
|
|
Capital Markets
|
|
|
Principal Investments - United Online and magicJack
|
|
|
Total
|
|
Restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee termination costs
|
|
$
|
—
|
|
|
$
|
1,418
|
|
|
$
|
1,418
|
|
|
$
|
—
|
|
|
$
|
1,594
|
|
|
$
|
1,594
|
|
Facility closure and consolidation charge (recovery)
|
|
|
25
|
|
|
|
109
|
|
|
|
134
|
|
|
|
(4
|
)
|
|
|
109
|
|
|
|
105
|
|
Total restructuring charge
|
|
$
|
25
|
|
|
$
|
1,527
|
|
|
$
|
1,552
|
|
|
$
|
(4
|
)
|
|
$
|
1,703
|
|
|
$
|
1,699
|
|
NOTE 5 — SECURITIES
LENDING
The following table
presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of June
30, 2020 and December 31, 2019:
|
|
Gross amounts recognized
|
|
|
Gross amounts offset in the consolidated balance sheets(1)
|
|
|
Net amounts included in the consolidated balance sheets
|
|
|
Amounts not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default(2)
|
|
|
Net amounts
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities borrowed
|
|
$
|
786,363
|
|
|
$
|
—
|
|
|
$
|
786,363
|
|
|
$
|
786,363
|
|
|
$
|
—
|
|
Securities loaned
|
|
$
|
779,013
|
|
|
$
|
—
|
|
|
$
|
779,013
|
|
|
$
|
779,013
|
|
|
$
|
—
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities borrowed
|
|
$
|
814,331
|
|
|
$
|
—
|
|
|
$
|
814,331
|
|
|
$
|
814,331
|
|
|
$
|
—
|
|
Securities loaned
|
|
$
|
810,495
|
|
|
$
|
—
|
|
|
$
|
810,495
|
|
|
$
|
810,495
|
|
|
$
|
—
|
|
|
(1)
|
Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
|
|
(2)
|
Includes the amount of cash collateral held/posted.
|
NOTE 6 — ACCOUNTS RECEIVABLE
The components of
accounts receivable, net, include the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable
|
|
$
|
36,942
|
|
|
$
|
36,385
|
|
Investment banking fees, commissions and other receivables
|
|
|
4,879
|
|
|
|
8,043
|
|
Unbilled receivables
|
|
|
4,165
|
|
|
|
3,710
|
|
Total accounts receivable
|
|
|
45,986
|
|
|
|
48,138
|
|
Allowance for doubtful accounts
|
|
|
(2,760
|
)
|
|
|
(1,514
|
)
|
Accounts receivable, net
|
|
$
|
43,226
|
|
|
$
|
46,624
|
|
Additions and changes to the
allowance for doubtful accounts consist of the following:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance, beginning of period
|
|
$
|
2,238
|
|
|
$
|
766
|
|
|
$
|
1,514
|
|
|
$
|
696
|
|
Add: Additions to reserve
|
|
|
940
|
|
|
|
834
|
|
|
|
2,081
|
|
|
|
1,067
|
|
Less: Write-offs
|
|
|
(418
|
)
|
|
|
(219
|
)
|
|
|
(835
|
)
|
|
|
(382
|
)
|
Less: Recovery
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
(21
|
)
|
Balance, end of period
|
|
$
|
2,760
|
|
|
$
|
1,360
|
|
|
$
|
2,760
|
|
|
$
|
1,360
|
|
NOTE 7 — GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill was $227,046
at June 30, 2020 and $223,697 at December 31, 2019. The increase in goodwill of $3,349 is due to the acquisition of a business
consulting firm in the second quarter of 2020.
Intangible assets
consisted of the following:
|
|
|
|
As of June 30, 2020
|
|
|
As of December 31, 2019
|
|
|
|
Useful Life
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Intangibles Net
|
|
|
Gross Carrying Value
|
|
|
Accumulated Amortization
|
|
|
Intangibles Net
|
|
Amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
2 to 16 Years
|
|
$
|
99,008
|
|
|
$
|
33,788
|
|
|
$
|
65,220
|
|
|
$
|
99,008
|
|
|
$
|
27,269
|
|
|
$
|
71,739
|
|
Domain names
|
|
7 Years
|
|
|
235
|
|
|
|
132
|
|
|
|
103
|
|
|
|
233
|
|
|
|
117
|
|
|
|
116
|
|
Advertising relationships
|
|
8 Years
|
|
|
100
|
|
|
|
50
|
|
|
|
50
|
|
|
|
100
|
|
|
|
44
|
|
|
|
56
|
|
Internally developed software and other intangibles
|
|
0.5 to 5 Years
|
|
|
11,775
|
|
|
|
6,068
|
|
|
|
5,707
|
|
|
|
11,765
|
|
|
|
4,843
|
|
|
|
6,922
|
|
Trademarks
|
|
7 to 10 Years
|
|
|
4,600
|
|
|
|
1,605
|
|
|
|
2,995
|
|
|
|
4,600
|
|
|
|
1,324
|
|
|
|
3,276
|
|
Total
|
|
|
|
|
115,718
|
|
|
|
41,643
|
|
|
|
74,075
|
|
|
|
115,706
|
|
|
|
33,597
|
|
|
|
82,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
|
|
125,916
|
|
|
|
—
|
|
|
|
125,916
|
|
|
|
138,416
|
|
|
|
—
|
|
|
|
138,416
|
|
Total intangible assets
|
|
|
|
$
|
241,634
|
|
|
$
|
41,643
|
|
|
$
|
199,991
|
|
|
$
|
254,122
|
|
|
$
|
33,597
|
|
|
$
|
220,525
|
|
Amortization expense
was $4,024 and $3,344 for the three months ended June 30, 2020 and 2019, respectively and $8,048 and $6,721 for the six months
ended June 30, 2020 and 2019, respectively. At June 30, 2020, estimated future amortization expense was $7,669, $15,225, $14,564,
$12,574 and $8,487 for the years ended December 31, 2020 (remaining six months), 2021, 2022, 2023 and 2024, respectively.
The estimated future amortization expense after December 31, 2024 was $15,556.
In the first
quarter of 2020, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment, the Company made a qualitative assessment of the impact of the COVID-19 outbreak on goodwill and other
intangible assets. The Company determined that the COVID-19 outbreak was a triggering event for testing the indefinite-lived
tradenames in the Brands segment and made a determination that the indefinite-lived tradenames in the Brands segment were
impaired and the Company recognized an impairment charge of $4,000. As a result of the continuing impact and duration of the
COVID-19 outbreak on the operations of the Brands segment, the Company determined that there was another triggering event for
testing the indefinite-lived tradenames in the Brands segment and made a determination that the indefinite-lived tradenames
in the Brands segment were impaired and the Company recognized an additional impairment charge of $8,500 in the second
quarter of 2020. The Company will continue to monitor the impacts of the
COVID-19 outbreak in future quarters. Changes in our forecasts could cause the book values of indefinite-lived tradenames to
exceed fair values which may result in additional impairment charges in future periods.
NOTE 8 — NOTES
PAYABLE
Asset Based Credit
Facility
On April 21, 2017,
the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility
with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $100,000
to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to
April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK Credit
Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions
in the United Kingdom. Such facility allows the Company to borrow up to 50 million British Pounds. Any borrowings on the UK Credit
Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement is cross collateralized
and integrated in certain respects with the Credit Agreement. Cash advances and the issuance of letters of credit under the credit
facility are made at the lender’s discretion. The letters of credit issued under this facility are furnished by the lender
to third parties for the principal purpose of securing minimum guarantees under liquidation services contracts. All outstanding loans, letters of credit, and interest are due on the expiration date which is generally within
180 days of funding. The credit facility is secured by the proceeds received for services rendered in connection with liquidation
service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation
related to such contract. The Company paid Wells Fargo Bank a closing fee in the amount of $500 in connection with the April 2017
amendment to the Credit Agreement. The interest rate for each revolving credit advance under the Credit Agreement is, subject
to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage
such advance represents of the related transaction for which such advance is provided. The credit facility also provides for success
fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation engagements funded under the Credit
Agreement as set forth therein. Interest expense totaled $143 and $104 for the three months ended June 30, 2020 and 2019, respectively
and $420 and $586 for the six months ended June 30, 2020 and 2019, respectively. There was no outstanding balance
on this credit facility at June 30, 2020. The outstanding balance on this credit facility was $37,096 at December 31, 2019. At
June 30, 2020, there were no open letters of credit outstanding.
We are in compliance
with all financial covenants in the asset based credit facility at June 30, 2020.
Other Notes Payable
Notes payable include
notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at the
prime rate plus 2.0% (6.75% at June 30, 2020) payable annually, maturing January 31, 2022. At June 30, 2020 and December 31,
2019, the outstanding balance for the notes payable was $714 and $1,071, respectively. Interest expense was $48 and $22 for the
three months ended June 30, 2020 and 2019, respectively and $63 and $45 for the six months ended June 30, 2020 and 2019, respectively.
NOTE 9 — TERM LOAN
On December 19,
2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation,
Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the
capacity as borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with the Banc of
California, N.A. in the capacity as agent (the “Agent”) and lender and with the other lenders party thereto (the
“Closing Date Lenders”). Certain of the Borrowers’ U.S. subsidiaries are guarantors of all obligations
under the BRPAC Credit Agreement and are parties to the BRPAC Credit Agreement in such capacity (collectively, the
“Secured Guarantors”; and together with the Borrowers, the “Credit Parties”). In addition, the
Company and B. Riley Principal Investments, LLC (“BRPI”), the parent corporation of BRPAC and a subsidiary of the Company, are
guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone guaranty agreements pursuant to which
the shares outstanding membership interests of BRPAC are pledged as collateral.
The obligations under
the BRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in, substantially all
of the assets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties, (b) 65% of
the equity interests in United Online Software Development (India) Private Limited, a private limited company organized under
the laws of India; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the laws
of Israel. Such security interests are evidenced by pledge, security and other related agreements.
The BRPAC Credit
Agreement contains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’ ability
to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions
with related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires the Credit Parties
to maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and warranties, affirmative
covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and cross
defaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts
due under the outstanding BRPAC Credit Agreement.
Under the BRPAC Credit
Agreement, the Company borrowed $80,000 due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, the Company
may request additional optional term loans in an aggregate principal amount of up to $10,000 at any time prior to the first anniversary
of the agreement date (the “Option Loan”) with a final maturity date of December 19, 2023. On February 1, 2019, the
Credit Parties, the Closing Date Lenders, the Agent and City National Bank, as a new lender (the “New Lender”), entered
into the First Amendment to the Credit Agreement and Joinder (the “First Amendment”) pursuant to which, among other
things, (i) New Lender became a party to the BRPAC Credit Agreement, (ii) the New Lender extended to Borrowers the Option Loan
in the amount of $10,000, (iii) the aggregate outstanding principal amount of the term loans was increased from $80,000 to $90,000;
and (iv) the amortization schedule under the BRPAC was amended as set forth in the First Amendment. Additionally, in connection
with the Option Loan, the Borrowers executed a term note in favor of New Lender dated February 1, 2019 in the amount of $10,000.
Borrowings under the BRPAC Credit Agreement bear interest at a rate equal to (a) the LIBOR rate for Eurodollar loans, plus (b)
the applicable margin rate, which ranges from two and one-half percent (2.5%) to three percent (3.0%) per annum, based upon the
Borrowers’ ratio of consolidated funded indebtedness to adjusted earnings before interest, taxes, depreciation, and amortization
(EBITDA) for the preceding four fiscal quarters or other applicable period. At June 30, 2020 interest rate on the BRPAC Credit
Agreement was at 2.93%. Interest payments are to be made each one, three or six months. Amounts outstanding under the BRPAC Credit
Agreement are due in quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at maturity.
For the $80,000 loan, quarterly installments from June 30, 2020 to December 31, 2022 are in the amount of $4,244 per quarter and
from March 31, 2023 to December 31, 2023 are $2,122 per quarter. For the $10,000 loan, quarterly installments from June 30, 2020
to December 31, 2022 are $566 per quarter and from March 31, 2023 to December 31, 2023 are $265 per quarter. As of June 30, 2020
and December 31, 2019, the outstanding balance on the term loan was $57,195 (net of unamortized debt issuance costs of $452) and
$66,666 (net of unamortized debt issuance costs of $600), respectively. Interest expense on the term loan during the three months
ended June 30, 2020 and 2019 was $586 (including amortization of deferred debt issuance costs of $72) and $1,257 (including amortization
of deferred debt issuance costs of $93), respectively. Interest expense on the term loan during the six months ended June 30,
2020 and 2019 was $1,415 (including amortization of deferred debt issuance costs of $148) and $2,535 (including amortization of
deferred debt issuance costs of $181), respectively.
We are in compliance
with all financial covenants in the BRPAC Credit Agreement at June 30, 2020.
NOTE 10 — SENIOR NOTES
PAYABLE
Senior notes payable,
net, are comprised of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
7.50% Senior notes due May 31, 2027
|
|
$
|
125,536
|
|
|
$
|
117,954
|
|
7.25% Senior notes due December 31, 2027
|
|
|
122,545
|
|
|
|
120,126
|
|
7.375% Senior notes due May 31, 2023
|
|
|
127,358
|
|
|
|
122,140
|
|
6.875% Senior notes due September 30, 2023
|
|
|
113,109
|
|
|
|
105,952
|
|
6.75% Senior notes due May 31, 2024
|
|
|
110,476
|
|
|
|
106,589
|
|
6.50% Senior notes due September 30, 2026
|
|
|
134,657
|
|
|
|
124,226
|
|
6.375% Senior notes due February 28, 2025
|
|
|
130,942
|
|
|
|
—
|
|
|
|
|
864,623
|
|
|
|
696,987
|
|
Less: Unamortized debt issuance costs
|
|
|
(10,586
|
)
|
|
|
(8,875
|
)
|
|
|
$
|
854,037
|
|
|
$
|
688,112
|
|
During the six months
ended June 30, 2020, the Company issued $38,828 of senior notes with maturity dates ranging from May 2023 to December 2027
pursuant to At the Market Issuance Sales Agreements with B. Riley FBR, Inc. which governs the program of at-the-market sales of
the Company’s senior notes.
On February 12, 2020,
the Company issued $132,250 of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus
supplement dated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 6.375%. The 6.375% 2025 Notes are
unsecured and due and payable in full on February 28, 2025. In connection with the issuance of the 6.375% 2025 Notes, the Company
received net proceeds of $129,213 (after underwriting commissions, fees and other issuance costs of $3,037).
During March 2020,
the Company repurchased bonds with an aggregate face value of $3,443 for $1,829 resulting in a gain net of expenses and original
issue discount of $1,556 during the six months ended June 30, 2020. As part of the repurchase, the Company paid $30 in interest
accrued through the date of each respective repurchase.
At June 30, 2020
and December 31, 2019, the total senior notes outstanding was $854,037 (net of unamortized debt issue costs of $10,586) and $688,112
(net of unamortized debt issue costs of $8,875) with a weighted average interest rate of 6.94% and 7.05%, respectively. Interest
on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $15,588 and $10,071 for the three months
ended June 30, 2020 and 2019, respectively and $29,980 and $18,926 for the six months ended June 30, 2020 and 2019, respectively.
Sales Agreement
Prospectus to Issue Up to $150,000 of Senior Notes
On February 14,
2020, the Company entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”)
with B. Riley FBR, Inc. governing a program of at-the-market sales of certain of the Company’s senior notes. This
program provides for the sale by the Company of up to $150,000 of certain of the
Company’s senior notes. As of June 30, 2020, the Company
had $148,415 remaining availability under the February 2020 Sales Agreement.
NOTE 11 — REVENUE FROM
CONTRACTS WITH CUSTOMERS
Revenue from contracts
with customers by reportable segment for the three and six months ended June 30, 2020 and 2019 is as follows:
|
|
Three
Months Ended June 30, 2020
|
|
|
|
Reportable
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Auction
and
|
|
|
Valuation
and
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Liquidation
|
|
|
Appraisal
|
|
|
magicJack
|
|
|
Brands
|
|
|
Total
|
|
Revenues
from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
finance, consulting and investment banking fees
|
|
$
|
49,653
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,653
|
|
Wealth
and asset management fees
|
|
|
18,701
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,701
|
|
Commissions,
fees and reimbursed expenses
|
|
|
12,785
|
|
|
|
2,596
|
|
|
|
7,668
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,049
|
|
Subscription
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,287
|
|
|
|
—
|
|
|
|
18,287
|
|
Service
contract revenues
|
|
|
—
|
|
|
|
4,610
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,610
|
|
Advertising,
licensing and other
|
|
|
—
|
|
|
|
1,045
|
|
|
|
—
|
|
|
|
3,145
|
|
|
|
3,206
|
|
|
|
7,396
|
|
Total
revenues from contracts with customers
|
|
|
81,139
|
|
|
|
8,251
|
|
|
|
7,668
|
|
|
|
21,432
|
|
|
|
3,206
|
|
|
|
121,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
sources of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income - Loans and securities lending
|
|
|
24,506
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,506
|
|
Trading
gains on investments
|
|
|
118,596
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
118,596
|
|
Fair
value adjustment on loans
|
|
|
(4,049
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,049
|
)
|
Other
|
|
|
5,719
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,719
|
|
Total
revenues
|
|
$
|
225,911
|
|
|
$
|
8,251
|
|
|
$
|
7,668
|
|
|
$
|
21,432
|
|
|
$
|
3,206
|
|
|
$
|
266,468
|
|
|
|
Three
Months Ended June 30, 2019
|
|
|
|
Reportable
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments-
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Auction
and
|
|
|
Valuation
and
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Liquidation
|
|
|
Appraisal
|
|
|
magicJack
|
|
|
Brands
|
|
|
Total
|
|
Revenues from contracts
with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance, consulting
and investment banking fees
|
|
$
|
39,597
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,597
|
|
Wealth and asset management fees
|
|
|
18,509
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,509
|
|
Commissions, fees and reimbursed expenses
|
|
|
10,376
|
|
|
|
27,466
|
|
|
|
9,742
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,584
|
|
Subscription services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,071
|
|
|
|
—
|
|
|
|
21,071
|
|
Service contract revenues
|
|
|
—
|
|
|
|
6,274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,274
|
|
Advertising,
licensing and other
|
|
|
—
|
|
|
|
1,176
|
|
|
|
—
|
|
|
|
4,707
|
|
|
|
—
|
|
|
|
5,883
|
|
Total
revenues from contracts with customers
|
|
|
68,482
|
|
|
|
34,916
|
|
|
|
9,742
|
|
|
|
25,778
|
|
|
|
—
|
|
|
|
138,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - Loans and securities
lending
|
|
|
16,961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,961
|
|
Trading losses on investments
|
|
|
(93
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(93
|
)
|
Fair value adjustment on loans
|
|
|
5,688
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,688
|
|
Other
|
|
|
3,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,210
|
|
Total revenues
|
|
$
|
94,248
|
|
|
$
|
34,916
|
|
|
$
|
9,742
|
|
|
$
|
25,778
|
|
|
$
|
—
|
|
|
$
|
164,684
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
Reportable Segment
|
|
|
|
Capital Markets
|
|
|
Auction and Liquidation
|
|
|
Valuation and Appraisal
|
|
|
Principal Investments -
United Online and magicJack
|
|
|
Brands
|
|
|
Total
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance, consulting and investment banking fees
|
|
$
|
117,034
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117,034
|
|
Wealth and asset management fees
|
|
|
39,022
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,022
|
|
Commissions, fees and reimbursed expenses
|
|
|
27,255
|
|
|
|
18,774
|
|
|
|
16,457
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,486
|
|
Subscription services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,120
|
|
|
|
—
|
|
|
|
37,120
|
|
Service contract revenues
|
|
|
—
|
|
|
|
9,093
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,093
|
|
Advertising, licensing and other
|
|
|
—
|
|
|
|
1,045
|
|
|
|
—
|
|
|
|
7,034
|
|
|
|
7,007
|
|
|
|
15,086
|
|
Total revenues from contracts with customers
|
|
|
183,311
|
|
|
|
28,912
|
|
|
|
16,457
|
|
|
|
44,154
|
|
|
|
7,007
|
|
|
|
279,841
|
|
Other sources of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - Loans and securities lending
|
|
|
46,357
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,357
|
|
Trading losses on investments
|
|
|
(45,920
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45,920
|
)
|
Fair value adjustment on loans
|
|
|
(21,975
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,975
|
)
|
Other
|
|
|
7,959
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,959
|
|
Total revenues
|
|
$
|
169,732
|
|
|
$
|
28,912
|
|
|
$
|
16,457
|
|
|
$
|
44,154
|
|
|
$
|
7,007
|
|
|
$
|
266,262
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
Reportable Segment
|
|
|
|
Capital Markets
|
|
|
Auction and Liquidation
|
|
|
Valuation and Appraisal
|
|
|
Principal Investments -
United Online and magicJack
|
|
|
Brands
|
|
|
Total
|
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate finance, consulting and investment banking fees
|
|
$
|
57,433
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,433
|
|
Wealth and asset management fees
|
|
|
36,044
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,044
|
|
Commissions, fees and reimbursed expenses
|
|
|
21,273
|
|
|
|
35,099
|
|
|
|
18,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74,697
|
|
Subscription services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,469
|
|
|
|
—
|
|
|
|
43,469
|
|
Service contract revenues
|
|
|
—
|
|
|
|
19,350
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,350
|
|
Advertising, licensing and other
|
|
|
—
|
|
|
|
1,176
|
|
|
|
—
|
|
|
|
9,844
|
|
|
|
—
|
|
|
|
11,020
|
|
Total revenues from contracts with customers
|
|
|
114,750
|
|
|
|
55,625
|
|
|
|
18,325
|
|
|
|
53,313
|
|
|
|
—
|
|
|
|
242,013
|
|
Other sources of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income - Loans and securities lending
|
|
|
28,381
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,381
|
|
Trading gains on investments
|
|
|
25,822
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,822
|
|
Fair value adjustment on loans
|
|
|
5,639
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,639
|
|
Other
|
|
|
4,957
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,957
|
|
Total revenues
|
|
$
|
179,549
|
|
|
$
|
55,625
|
|
|
$
|
18,325
|
|
|
$
|
53,313
|
|
|
$
|
—
|
|
|
$
|
306,812
|
|
Contract Balances
The timing of the
Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes
the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Receivables
related to revenues from contracts with customers totaled $43,226 and $46,624 at June 30, 2020 and December 31, 2019, respectively.
The Company had no significant impairments related to these receivables during the three and six months ended June 30, 2020. The
Company’s deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment
banking advisory engagements, asset management agreements, Valuation and Appraisal engagements and subscription services where
the performance obligation has not yet been satisfied. Deferred revenue at June 30, 2020 and December 31, 2019 was $71,017 and
$67,121, respectively. During the three months ended June 30, 2020 and 2019, the Company recognized revenue of $10,087 and $11,932
that was recorded as deferred revenue at the beginning of the respective year. During the six months ended June 30, 2020 and 2019,
the Company recognized revenue of $24,074 and $25,166 that was recorded as deferred revenue at the beginning of the respective
year.
Contract
Costs
Contract costs include:
(1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the
revenue is recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction and Liquidation
services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where
the revenue is recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack
contracts which are recognized ratably over the contract term and third party support costs for magicJack and related equipment
purchased by customers which are recognized ratably over the service period.
The capitalized costs
to fulfill a contract were $410 and $450 at June 30, 2020 and December 31, 2019, respectively, and are recorded in prepaid expenses
and other assets in the condensed consolidated balance sheets. For the three months ended June 30, 2020 and 2019, the Company
recognized expenses of $70 and $430 related to capitalized costs to fulfill a contract, respectively. For the six months ended
June 30, 2020 and 2019, the Company recognized expenses of $142 and $1,031 related to capitalized costs to fulfill a contract,
respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the three
and six months ended June 30, 2020 and 2019.
Remaining
Performance Obligations and Revenue Recognized from Past Performance
The Company does
not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration
of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations
with an original expected duration exceeding one year was not material at June 30, 2020. Corporate finance and investment banking
fees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated with
certain distribution services are also excluded as the fees are considered variable and not included in the transaction price
at June 30, 2020.
NOTE 12 — INCOME TAXES
The Company’s
effective income tax rate was a benefit of 24.2% and provision of 29.0% for the six months ended June 30, 2020 and 2019, respectively.
As of June 30, 2020,
the Company had federal net operating loss carryforwards of $53,932 and state net operating loss carryforwards of $64,088. The
Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2032 through
December 31, 2037. The state net operating loss carryforwards will expire in the tax years commencing in December 31, 2029.
The Company establishes
a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards are evaluated
on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period,
and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with Internal
Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in future
taxable years depending on the Company’s actual taxable income. As of June 30, 2020, the Company believes that the existing
net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not
that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided a valuation allowance.
The Company does not believe that it is more likely than not that the Company will be able to utilize the benefits related to
capital loss carryforwards and has provided a valuation allowance in the amount of $61,945 against these deferred tax assets.
The Company files
income tax returns in the U.S., various state and local jurisdictions, and certain other foreign jurisdictions. The Company is
currently under audit by certain federal, state and local, and foreign tax authorities. The audits are in varying stages of completion.
The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax
authorities. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances,
including progress of tax audits, case law developments and closing of statutes of limitations. Such adjustments are reflected
in the provision for income taxes, as appropriate. The Company is currently open to audit under the statute of limitations by
the Internal Revenue Service for the calendar years ended December 31, 2016 to 2019.
NOTE 13 — EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares
outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares
outstanding exclude 387,365 common shares in 2019 that were held in escrow and subject to forfeiture. The 387,365 common
shares held in escrow were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations and
warranties and related claims pursuant to a related acquisition agreement. Securities that could potentially
dilute basic net income per share in the future that were not included in the computation of diluted net income per share
were 1,365,738 and 1,104,198 for the three months ended June
30, 2020 and 2019, respectively and 1,592,958 and 1,528,533 for
the six months ended June 30, 2020 and 2019, respectively, because to do so would have been anti-dilutive.
Basic
and diluted earnings per share were calculated as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss) attributable to B. Riley Financial, Inc.
|
|
$
|
83,840
|
|
|
$
|
22,157
|
|
|
$
|
(14,825
|
)
|
|
$
|
30,180
|
|
Preferred stock dividends
|
|
|
(1,087
|
)
|
|
|
—
|
|
|
|
(2,142
|
)
|
|
|
—
|
|
Net income (loss) applicable to common shareholders
|
|
$
|
82,753
|
|
|
$
|
22,157
|
|
|
$
|
(16,967
|
)
|
|
$
|
30,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,627,085
|
|
|
|
26,278,352
|
|
|
|
25,827,849
|
|
|
|
26,247,952
|
|
Effect of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and warrants
|
|
|
1,365,738
|
|
|
|
543,442
|
|
|
|
—
|
|
|
|
448,191
|
|
Contingently issuable shares
|
|
|
—
|
|
|
|
74,779
|
|
|
|
—
|
|
|
|
74,779
|
|
Diluted
|
|
|
26,992,823
|
|
|
|
26,896,573
|
|
|
|
25,827,849
|
|
|
|
26,770,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
3.23
|
|
|
$
|
0.84
|
|
|
$
|
(0.66
|
)
|
|
$
|
1.15
|
|
Diluted income (loss) per common share
|
|
$
|
3.07
|
|
|
$
|
0.82
|
|
|
$
|
(0.66
|
)
|
|
$
|
1.13
|
|
NOTE
14 — COMMITMENTS AND CONTINGENCIES
(a)
Legal Matters
The
Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company
and its subsidiaries are named in and subject to various proceedings and claims arising primarily from the Company’s securities
business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek
substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews,
investigations, and proceedings by governmental and self-regulatory organizations regarding the Company’s business, which
may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity
of claims against the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting
the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation
or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely
to have a material effect on its financial position or results of operations.
On
August 11, 2017, a putative class action lawsuit titled Freedman v. magicJack VocalTec Ltd. et al., Case 9-17-cv-80940, was
filed against magicJack and its Board of Directors in the United States District Court for the Southern District of Florida
(Case No: 9:17-cv-80940-RLR). In November 2018, the District court granted the Company’s request for dismissal of the
case. However, the plaintiff appealed the ruling and oral arguments for the appeal were held in January 2020. On June 25,
2020, the Appeals court provided its ruling in favor of the Company, upholding the District court’s dismissal of the
case.
On
January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary
of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings
of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor
v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor
complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material
misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February
13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged
aggregate offering price of approximately $151,000. The Court ordered mediation before a federal magistrate took place on August
6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020,
the Company agreed to settle this matter, subject to court approval.
In
July 2017, an arbitration claim was filed with FINRA by Dominick & Dickerman LLC and Michael Campbell against WSI and Gary
Wunderlich with respect to the acquisition by Wunderlich Investment Company, Inc. (“WIC”) (the parent corporation
of WSI) of certain assets of Dominick & Dominick LLC in 2015. The Claimants allege that respondents overvalued WIC so that
the purchase price paid to the Claimants in shares of WIC stock was artificially inflated. On April 7, 2020, the arbitration panel
issued an award against BRWM and Gary Wunderlich holding each party jointly and severally liable for damages, costs and expenses
in an aggregate amount of $11,400. The Company filed a motion to vacate the arbitration award in the U.S. District Court for the
Southern District of New York on May 5, 2020. In June 2020, Dominick & Dickerman LLC settled the matter for
$10,150 in cash. Michael Campbell agreed that the award shall be vacated as to him.
In
December 2015, magicJack received a Letter of Inquiry (the “2015 LOI”) from the Enforcement Bureau (the “Bureau”)
of the Federal Communications Commission (“FCC”) in which the Bureau indicated that it was investigating whether the
Company is subject to the FCC’s rules applicable to interconnected VoIP providers. magicJack believes that it is not an
interconnected VoIP provider under current regulations and is not subject to the FCC rules. Previously, magicJack received similar
letters of inquiry in 2010 and 2013, neither of which resulted in any enforcement action. magicJack responded to the 2015 LOI
in February 2016. The Company participated in discussions with the FCC regarding a potential settlement, and on June 5, 2020,
the Company and the FCC entered into a Consent Decree to settle the FCC’s inquiry. In the Consent Decree, magicJack made
no admission of non-compliance with FCC regulations but did agree to make certain changes to its product offerings and marketing
materials on a go forward basis and to make a cash payment of $5,000 to the FCC.
(b)
Franchise Group Commitment Letter, Loan Participant Guaranty and CIBC Guarantee
Commitment
Letter
On
February 14, 2020, affiliates of FRG entered into
an ABL Credit Agreement (the “Franchise Credit Agreement”), with GACP Finance Co., LLC (“GACP Finance”)
as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided
an asset based credit facility to FRG in an aggregate principal amount of $100,000 In connection with the Franchise Credit Agreement,
the Company entered into a commitment letter, dated as of February 14, 2020 (the “Commitment Letter”), pursuant
to which the Company committed to provide a $100,000 asset based lending facility to FRG, on April 14, 2020 if, on or before such
date, the obligations under the Franchise Credit Agreement are not refinanced in full. On May 1, 2020, the Company extended its
commitment under the Commitment Letter until 30 days prior to the maturity date which is currently set forth in the Franchise
Credit Agreement as September 30, 2020.
The
Loan Participant Guaranty
On
February 14, 2020, FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit
Agreement (the “Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in
an aggregate principal amount of $575,000. On February 19, 2020, the Company entered into a limited guaranty (the “Loan
Participant Guaranty”) to one of the lenders under the Term Loan Credit Agreement (the “Loan Participant”) pursuant
to which the Company guaranteed the payment when due of certain obligations, including principal, interest, and other amounts
payable to the Loan Participant under the Term Loan Credit Agreement in an amount not to exceed $50,000 plus certain expenses
of the Loan Participant and certain protective advances related to such guaranteed obligations (the “Loan Participant Guaranteed
Obligations”). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon
the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant
to the Term Loan Credit Agreement. The Loan Participant Guaranty remains in effect until the date that the Loan Participant Guaranteed
Obligations have been paid in full.
The
Loan Participant Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all
of the Company’s other existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations
are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally
subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
CIBC
Guaranty
On
February 14, 2020, the Company entered into a limited guaranty (the “CIBC Guaranty”) in favor of CIBC Bank USA (“CIBC”),
pursuant to which the Company guaranteed the payment when due of certain obligations, including all principal, interest, and other
amounts that shall be at any time payable by FRG under FRG’s credit agreement with CIBC and the lenders party thereto, dated
as of May 16, 2019, as amended (the “CIBC Credit Agreement”) in an amount not to exceed $125,000 plus certain expenses
of CIBC related to such guaranteed obligations (the “CIBC Guaranteed Obligations”). CIBC may require payment of the
CIBC Guaranteed Obligations by the Company upon the occurrence of either (a) the failure of FRG to pay any principal of any loan
or any reimbursement obligation in respect of any letter of credit disbursement or (b) the failure of FRG to pay any interest
on any loan or on any reimbursement obligation in respect of any letter of credit disbursement within five business days of the
date due, in each case pursuant to the CIBC Credit Agreement. The CIBC Guaranty terminated on June 30,
2020.
(c) Babcock &
Wilcock Commitments and Guarantee
On May 14, 2020, the Company entered into an a agreement to provide Babcock
& Wilcox Enterprises, Inc. (“B&W”) future commitments to loan B&W up to $40,000 at various dates starting
in November 2020 and the Company provided a limited guaranty of B&W’s obligations under B&W’s amended credit
facility as more fully described in Note 17 - Related Party Transactions.
NOTE
15 — SHARE-BASED PAYMENTS AND COMMON STOCK
(a)
Employee Stock Incentive Plans
Share-
based compensation expense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan
(the “Plan”) was $4,109 and $2,860 for the three months ended June 30, 2020 and 2019, respectively and $9,265 and
$5,353 for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020, in connection
with employee stock incentive plans the Company granted 586,916 restricted stock units with a weighted average grant date
fair value of $18.53 per share. The restricted stock units generally vest over a period of one to three years based on continued
service. Performance based restricted stock units generally vest based on both the employee’s continued service and the
Company’s common stock price, as defined in the grant, achieving a set threshold during the three-year period following
the grant. In determining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a)
estimated forfeitures, (b) expected dividends based on historical patterns and the Company’s anticipated dividend payments
over the expected holding period and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected
holding period.
(b)
Employee Stock Purchase Plan
In
connection with the Company’s Purchase Plan, share based compensation was $59 and $74 for the three months ended June 30,
2020 and 2019, respectively and $224 and $195 for the six months ended June 30, 2020 and 2019, respectively. At June 30, 2020,
there were 524,891 shares reserved for issuance under the Purchase Plan.
(c)
Common Stock
During
the six months ended June 30, 2020, the Company repurchased 1,240,581 shares of its common stock for $27,779 which represents
an average price of $22.39 per common share. On July 1, 2020, the Company entered into an agreement to repurchase 900,000
shares of its common stock for $19,800 ($22.00 per common share) from one of its shareholders. In accordance with the
agreement, the Company repurchased 450,000 shares for $9,900 on July 2, 2020 and the remaining 450,000 shares are required to
be repurchased for $9,900 at a mutually agreeable date prior to January 1, 2021. In addition to the repurchases of common
stock, 387,365 shares of the Company’s common stock that were previously held in escrow in connection with the
acquisition of WIC in 2017 were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations
and warranties and related claims pursuant to a related acquisition agreement.
NOTE
16 — NET CAPITAL REQUIREMENTS
B.
Riley FBR and B. Riley Wealth Management (“BRWM”), the Company’s broker-dealer subsidiaries, are registered
with the SEC as broker-dealers and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
The Company’s broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1) which
requires the subsidiaries to maintain minimum net capital and provides that the ratio of aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. As of June 30, 2020, B. Riley FBR had net capital of $99,404, which was $96,325 in excess of its
required net capital of $3,079; and BRWM had net capital of $4,923 which was $4,263 in excess of its required net capital of
$660.
NOTE
17 — RELATED PARTY TRANSACTIONS
At
June 30, 2020, amounts due from related parties of $295 included $32 from GACP I, L.P. (“GACP I”) and $15 from
GACP II, L.P. (“GACP II”) for management fees and other operating expenses, and $248 due from CA Global Partners
(“CA Global”) for operating expenses related to wholesale and industrial liquidation engagements managed by CA
Global on behalf of GA Global Ptrs. At December 31, 2019, amounts due from related parties of $5,832 included $145 from GACP
I and $12 from GACP II for management fees and other operating expenses, $13 due from B. Riley Principal Merger Corp, a
company that consummated its initial public offering on April 11, 2019, for which our wholly owned subsidiary, B. Riley
Principal Sponsor Co. LLC, was the Sponsor, and $3,846 due from John Ahn, who at the time was the President of Great American
Capital Partners, LLC, our indirect wholly owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory
Note related to a Transfer Agreement as further discussed below. During the six months ended June 30, 2020, the Company sold
a portion of a loan receivable to GACP for $1,800. At June 30, 2020, the Company had sold loan participations to BRC Partners
Opportunity Fund, LP (“BRCPOF”), a private equity fund managed by one of its subsidiaries, in the amount of
$14,109, and recorded interest expense of $971 during the six months ended June 30, 2020 related to BRCPOF’s loan
participations. Our executive officers and members of our board of directors have a 72.9% financial interest, which
includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 42.1% in the BRCPOF at June 30, 2020.
At June 30, 2020 and December 31, 2019, the Company had outstanding loan to participations to BRCPOF in the
amount of $14,109 and $12,478, respectively.
On
April 1, 2019, the Company entered into a Transfer Agreement (the “Transfer Agreement”) with GACP II, a fund
managed by GACP, and John Ahn, who is the brother of Phil Ahn, the Company’s Chief Financial Officer and Chief
Operating Officer. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn of 55.56% of the
Company’s limited partnership interest in GACP II (the “Transferred Interest”), which represents a capital
commitment in the aggregate amount of $5,000. In connection with the Transfer Agreement, the Company provided Mr. J. Ahn with
a non-recourse, secured line of credit in an aggregate amount of up to $5,003 pursuant to the terms of a Secured Line of
Credit Promissory Note (the “Note”) dated April 1, 2019, to fund the purchase price of the Transferred Interest.
We also entered into a Security Agreement with Mr. J. Ahn on April 1, 2019, which granted to the Company a security interest
in the Transferred Interest to secure Mr. J. Ahn’s obligations under the Note. The Note is subject to an interest rate
per annum of 7.00%. As of December 31, 2019, the principal and accrued interest on the Note were $3,798 and $48,
respectively. In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital
Partners, L.P., a limited partnership controlled by Mr. J. Ahn, (“Whitehawk”). Whitehawk has agreed to provide
investment advisory services for GACP I and GACP II. In accordance with the terms of the Note, Mr. Ahn surrendered the
Transferred Interest to the Company in exchange for the cancellation of the Note. During the six months ended June 30, 2020,
interest payments received on the Note was $121 and management fees paid for investment advisory services by Whitehawk was
$103.
On
May 22, 2020, the Company earned $3,275 of underwriting fees from the initial public offering of B. Riley Principal Merger
Corp. II, (“BRPM II”), which was formed for the purpose of effecting a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “BRPM II
IPO”). The Company has also agreed to loan BRPM II
up to $300 for operating expenses. The loan is interest free and there were no amounts outstanding at June 30, 2020. BRPM II
entered into a non-binding letter of intent to acquire a privately held company that is not related to the Company (the
“Proposed Acquisition”). The non-binding letter of intent contemplates that the Company would provide a
backstop guarantee to raise $50,000 new equity in a private placement for the Proposed Acquisition.
The Proposed Acquisition is expected to be completed in the fourth quarter of 2020, subject to, among other things, the
negotiation and execution of a definitive agreement between BRPM II and the privately held company.
In addition to
the above, the Company from time to time
participates in loans and financing arrangements in respect of companies in which the Company has an equity ownership and
representation on the board of directors or equivalent body. The Company may also provide consulting services or investment
banking services to raise capital for these companies. These transactions can be summarized as follows:
Sonim
The
Company has a loan receivable due from Sonim Technologies, Inc. (“Sonim”) that is included in loans receivable at
fair value with a fair value of $9,603 at December 31, 2019. Interest is payable at 10.0% per annum with a maturity date of September
1, 2022. The original loan was made in October 2017 in connection with the Company’s initial investment in common stock
and preferred stock that was purchased from Sonim’s existing shareholders. In October 2017, the Company also entered into
a management services agreement with Sonim to provide advisory and consulting services for management fees of up to $200 per year.
The management services agreement was terminated in September 2019.
In June 2020 Sonim repaid $4,000 of
the outstanding loan balance in cash and the remaining principal amount, accrued interest and other amounts outstanding of
$6,170 under the loan converted into shares of common stock of Sonim at the then public offering price of shares
of Sonim’s common stock.
Babcock
and Wilcox
The
Company has a last-out term loan receivable due from B&W that is
included in loans receivable, at fair value with a fair value of $150,812 at June 30, 2020. As of December 31, 2019, the
last-out term loan was included in loans receivable, at cost with a carrying value of $109,147. On January 31, 2020, the
Company provided B&W with an additional $30,000 of last-out term loans pursuant to new amendments to B&W’s
credit agreement. On May 14, 2020, the Company provided B&W with another $30,000 of last-out term loans pursuant to a
further amendment to B&W’s credit agreement which also included future commitments for the Company to loan B&W
$40,000 at various dates starting in November 2020 and a limited guaranty by the Company of B&W’s obligations under
the amended credit facility, (the “Amendment Transactions”). Interest is payable quarterly at the fixed rate of 12.0% per annum in common stock of B&W at
$2.28 per common share through December 31, 2020 and in cash thereafter. All of these loans were made to B&W as part of
various amendments to B&W’s existing credit agreement with other lenders not related to the Company. As part of the Amendment Transactions, the Company entered into
the following agreements: (i) an Amendment and Restatement Agreement, dated as of May 14, 2020, among B&W, Bank of America,
N.A., as Administrative Agent, and the other lenders party thereto, including the Company; (ii) a Fee Letter, dated as of May 14,
2020, among the Company and B&W; (iii) a Fee and Interest Equitization Agreement, dated May 14, 2020, between the Company,
B. Riley FBR, and B&W; (iv) a Termination Agreement, dated as of May 14, 2020, the Company and B&W and acknowledged by
Bank of America, N.A. with respect to the Backstop Commitment Letter; and (v) a Limited Guaranty Agreement, dated as of May 14,
2020, among the Company, B&W and Bank of America, N.A.
In
connection with making the loan to B&W, in April 2019 the Company received warrants to purchase 1,666,667 shares of common
stock of B&W with an exercise price of $0.01 per share. The option to exercise the warrants expires on April 5, 2022.
One
of the Company’s wholly owned subsidiaries entered into a services agreement with B&W that provided for the President
of the Company to serve as the Chief Executive Officer of B&W until November 30, 2020 (the “Executive Consulting Agreement”),
unless terminated by either party with thirty days written notice. Under this agreement, fees for services provided are $750 per
annum, paid monthly. In addition, subject to the achievement of certain performance objectives as determined by B&W’s
compensation committee of the board, a bonus or bonuses may also be earned and payable to the Company.
Maven
The
Company has loans receivable due from theMaven, Inc. (“Maven”) that are included in loans receivable, at fair
value of $71,118 at June 30, 2020. At December 31, 2019, the Company had a loan receivable due from Maven that is included in
loans receivable at fair value of $21,150 and another loan receivable from Maven that is included in loans receivable at
historical cost with a carrying value of $47,933 (which is comprised of the principal balance due in the amount of $49,921,
less original issue discount of $1,988). Interest on these loans is payable at 12.0% to 15.0% per annum with maturity dates
through June 2022.
Franchise
Group
The
Company has a loan receivable due from Vitamin Shoppe, a subsidiary of FRG, (“Vitamin Shoppe”)
that was included in loans receivable, at fair value with a fair value of $4,951 at December 31, 2019. Interest
was payable at 13.7% per annum with a maturity date of December 16, 2022. The principal balance of $4,697 on the Vitamin
Shoppe loan receivable was repaid in May 2020 and the final interest payment of $31 was paid on June 1, 2020. During the six
months ended June 30, 2020, the Company earned $4,329 of underwriting fees from FRG in connection with FRG’s capital
raising activities.
The
Company is party to a Commitment Letter, Loan Participant Guaranty and was party to the CIBC Guarantee with FRG as disclosed
above in Note 14 – Commitments and Contingencies.
NOTE
18 — BUSINESS SEGMENTS
The
Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal
segment, Principal Investments — United Online and magicJack segment, and Brands segment. These reportable segments are
all distinct businesses, each with a different marketing strategy and management structure.
The
following is a summary of certain financial data for each of the Company’s reportable segments:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Capital Markets segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
$
|
86,858
|
|
|
$
|
71,692
|
|
|
$
|
191,271
|
|
|
$
|
119,706
|
|
Trading income (losses) and fair value adjustments on loans
|
|
|
114,547
|
|
|
|
5,595
|
|
|
|
(67,895
|
)
|
|
|
31,462
|
|
Interest income - Loans and securities lending
|
|
|
24,506
|
|
|
|
16,961
|
|
|
|
46,357
|
|
|
|
28,381
|
|
Total revenues
|
|
|
225,911
|
|
|
|
94,248
|
|
|
|
169,733
|
|
|
|
179,549
|
|
Selling, general and administrative expenses
|
|
|
(81,030
|
)
|
|
|
(63,041
|
)
|
|
|
(135,741
|
)
|
|
|
(126,430
|
)
|
Restructuring (charge) recovery
|
|
|
—
|
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
4
|
|
Interest expense - Securities lending and loan participations sold
|
|
|
(11,221
|
)
|
|
|
(5,502
|
)
|
|
|
(19,694
|
)
|
|
|
(12,306
|
)
|
Depreciation and amortization
|
|
|
(1,091
|
)
|
|
|
(1,287
|
)
|
|
|
(2,196
|
)
|
|
|
(2,563
|
)
|
Segment income
|
|
|
132,569
|
|
|
|
24,393
|
|
|
|
12,102
|
|
|
|
38,254
|
|
Auction and Liquidation segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
7,206
|
|
|
|
33,740
|
|
|
|
27,867
|
|
|
|
54,449
|
|
Revenues - Sale of goods
|
|
|
1,045
|
|
|
|
1,176
|
|
|
|
1,045
|
|
|
|
1,176
|
|
Total revenues
|
|
|
8,251
|
|
|
|
34,916
|
|
|
|
28,912
|
|
|
|
55,625
|
|
Direct cost of services
|
|
|
(3,217
|
)
|
|
|
(12,939
|
)
|
|
|
(18,033
|
)
|
|
|
(19,213
|
)
|
Cost of goods sold
|
|
|
(285
|
)
|
|
|
(852
|
)
|
|
|
(314
|
)
|
|
|
(866
|
)
|
Selling, general and administrative expenses
|
|
|
(2,729
|
)
|
|
|
(3,295
|
)
|
|
|
(4,255
|
)
|
|
|
(6,210
|
)
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
Segment income
|
|
|
2,020
|
|
|
|
17,828
|
|
|
|
6,309
|
|
|
|
29,332
|
|
Valuation and Appraisal segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
7,669
|
|
|
|
9,742
|
|
|
|
16,457
|
|
|
|
18,325
|
|
Selling, general and administrative expenses
|
|
|
(6,144
|
)
|
|
|
(6,974
|
)
|
|
|
(13,011
|
)
|
|
|
(14,161
|
)
|
Depreciation and amortization
|
|
|
(47
|
)
|
|
|
(31
|
)
|
|
|
(88
|
)
|
|
|
(64
|
)
|
Segment income
|
|
|
1,478
|
|
|
|
2,737
|
|
|
|
3,358
|
|
|
|
4,100
|
|
Principal Investments - United Online and magicJack segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
20,656
|
|
|
|
24,794
|
|
|
|
42,374
|
|
|
|
51,384
|
|
Revenues - Sale of goods
|
|
|
775
|
|
|
|
984
|
|
|
|
1,779
|
|
|
|
1,929
|
|
Total revenues
|
|
|
21,431
|
|
|
|
25,778
|
|
|
|
44,153
|
|
|
|
53,313
|
|
Direct cost of services
|
|
|
(4,768
|
)
|
|
|
(6,724
|
)
|
|
|
(9,904
|
)
|
|
|
(14,566
|
)
|
Cost of goods sold
|
|
|
(575
|
)
|
|
|
(953
|
)
|
|
|
(1,315
|
)
|
|
|
(2,058
|
)
|
Selling, general and administrative expenses
|
|
|
(4,049
|
)
|
|
|
(5,495
|
)
|
|
|
(9,512
|
)
|
|
|
(12,515
|
)
|
Depreciation and amortization
|
|
|
(2,851
|
)
|
|
|
(3,300
|
)
|
|
|
(5,730
|
)
|
|
|
(6,763
|
)
|
Restructuring charge
|
|
|
—
|
|
|
|
(1,527
|
)
|
|
|
—
|
|
|
|
(1,703
|
)
|
Segment income
|
|
|
9,188
|
|
|
|
7,779
|
|
|
|
17,692
|
|
|
|
15,708
|
|
Brands segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
3,206
|
|
|
|
—
|
|
|
|
7,007
|
|
|
|
—
|
|
Selling, general and administrative expenses
|
|
|
(309
|
)
|
|
|
—
|
|
|
|
(1,213
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(715
|
)
|
|
|
—
|
|
|
|
(1,429
|
)
|
|
|
—
|
|
Impairment of tradenames
|
|
|
(8,500
|
)
|
|
|
—
|
|
|
|
(12,500
|
)
|
|
|
—
|
|
Segment loss
|
|
|
(6,318
|
)
|
|
|
—
|
|
|
|
(8,135
|
)
|
|
|
—
|
|
Consolidated operating income from reportable segments
|
|
|
138,937
|
|
|
|
52,737
|
|
|
|
31,326
|
|
|
|
87,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other expenses
|
|
|
(7,597
|
)
|
|
|
(8,482
|
)
|
|
|
(21,130
|
)
|
|
|
(18,161
|
)
|
Interest income
|
|
|
224
|
|
|
|
331
|
|
|
|
470
|
|
|
|
968
|
|
Loss on equity investments
|
|
|
(318
|
)
|
|
|
(1,400
|
)
|
|
|
(554
|
)
|
|
|
(5,162
|
)
|
Interest expense
|
|
|
(16,509
|
)
|
|
|
(11,588
|
)
|
|
|
(32,163
|
)
|
|
|
(22,358
|
)
|
Income (Loss) before income taxes
|
|
|
114,737
|
|
|
|
31,598
|
|
|
|
(22,051
|
)
|
|
|
42,681
|
|
(Provision) benefit for income taxes
|
|
|
(32,208
|
)
|
|
|
(9,289
|
)
|
|
|
5,331
|
|
|
|
(12,393
|
)
|
Net income (loss)
|
|
|
82,529
|
|
|
|
22,309
|
|
|
|
(16,720
|
)
|
|
|
30,288
|
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(1,311
|
)
|
|
|
152
|
|
|
|
(1,895
|
)
|
|
|
108
|
|
Net income (loss) attributable to B. Riley Financial, Inc.
|
|
|
83,840
|
|
|
|
22,157
|
|
|
|
(14,825
|
)
|
|
|
30,180
|
|
Preferred stock dividends
|
|
|
1,087
|
|
|
|
—
|
|
|
|
2,142
|
|
|
|
—
|
|
Net income (loss) available to common shareholders
|
|
$
|
82,753
|
|
|
$
|
22,157
|
|
|
$
|
(16,967
|
)
|
|
$
|
30,180
|
|
The
following table presents revenues by geographical area:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
124,039
|
|
|
$
|
139,968
|
|
|
$
|
282,505
|
|
|
$
|
243,788
|
|
Australia
|
|
|
1,038
|
|
|
|
—
|
|
|
|
1,702
|
|
|
|
15
|
|
Europe
|
|
|
518
|
|
|
|
—
|
|
|
|
769
|
|
|
|
61
|
|
Total Revenues - Services and fees
|
|
$
|
125,595
|
|
|
$
|
139,968
|
|
|
$
|
284,976
|
|
|
$
|
243,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading (losses) income and fair value adjustments on loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
114,547
|
|
|
$
|
5,595
|
|
|
$
|
(67,895
|
)
|
|
$
|
31,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Sale of goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,820
|
|
|
$
|
2,160
|
|
|
$
|
2,824
|
|
|
$
|
3,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Interest income - Loans and securities lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
24,506
|
|
|
$
|
16,961
|
|
|
$
|
46,357
|
|
|
$
|
28,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
264,912
|
|
|
$
|
164,684
|
|
|
$
|
263,791
|
|
|
$
|
306,736
|
|
Australia
|
|
|
1,038
|
|
|
|
—
|
|
|
|
1,702
|
|
|
|
15
|
|
Europe
|
|
|
518
|
|
|
|
—
|
|
|
|
769
|
|
|
|
61
|
|
Total Revenues
|
|
$
|
266,468
|
|
|
$
|
164,684
|
|
|
$
|
266,262
|
|
|
$
|
306,812
|
|
During
the six months ended June 30, 2020 and 2019 long-lived assets, which consist of property and equipment and other assets, of $12,287
and $13,997, respectively, were located in North America.
Segment
assets are not reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance
of, the segments and therefore, total segment assets have not been disclosed.
NOTE
19 — SUBSEQUENT EVENTS
From
time to time, the Company may decide to pay dividends which will be dependent upon our financial condition and results of
operations. On July 30, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.25 per
share to $0.30 per share. On July 30, 2020, the Company declared a regular quarterly dividend of $0.30 per share and a
special dividend of $0.05 per share which will be paid on or about August 28, 2020 to stockholders of record as of
August 14, 2020. While it is the Board’s current intention to make regular
dividend payments each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Board
of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and
payment of any future dividends on our common stock will be made at the discretion of our Board of Directors and will be dependent
upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant
by our Board of Directors.