BRC Group Holdings, Inc 10-Q for FY2021 Q2
BRC Group Holdings, Inc. (RILY)
About this 10-Q
BRC Group Holdings, Inc filed this 10-Q on August 2, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $336.77M
- up 26.4% from $266.47M a year earlier
- Net income
- $75.1M
- down 9.0% from net income of $82.53M a year earlier
- Diluted EPS
- $2.58
- down 16.0% from $3.07 a year earlier
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly
period ended
Or
For the transition period from to
Commission File
Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| |
| |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Depositary Shares, each representing a 1/1000th fractional interest in a 6.875% share of Series A Cumulative Perpetual Preferred Stock | RILYP | Nasdaq Global Market | ||
| Depositary Shares, each representing a 1/1000th fractional interest in a 7.375% share of Series B Cumulative Perpetual Preferred Stock | RILYL | Nasdaq Global Market | ||
| 6.50% Senior Notes due 2026 | RILYN | Nasdaq Global Market | ||
| 6.375% Senior Notes due 2025 | RILYM | Nasdaq Global Market | ||
| 6.75% Senior Notes due 2024 | RILYO | Nasdaq Global Market | ||
| 7.375% Senior Notes due 2023 | RILYH | Nasdaq Global Market | ||
| 6.875% Senior Notes due 2023 | RILYI | Nasdaq Global Market | ||
| 6.00% Senior Notes due 2028 | RILYT | Nasdaq Global Market | ||
| 5.50% Senior Notes due 2026 | RILYK | Nasdaq Global Market |
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer ☐ | Non-accelerated filer ☐ | ||
| Emerging growth company | Smaller reporting company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No
As of July 26, 2021, there were
B. Riley Financial, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2021
Table of Contents
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Due from clearing brokers | ||||||||
| Securities and other investments owned, at fair value | ||||||||
| Securities borrowed | ||||||||
| Accounts receivable, net | ||||||||
| Due from related parties | ||||||||
| Advances against customer contracts | ||||||||
| Loans receivable, at fair value (includes $ | ||||||||
| Prepaid expenses and other assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Deferred tax assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity | ||||||||
| Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other liabilities | ||||||||
| Deferred revenue | ||||||||
| Deferred tax liabilities, net | ||||||||
| Due to related parties and partners | ||||||||
| Due to clearing brokers | ||||||||
| Securities sold not yet purchased | ||||||||
| Securities loaned | ||||||||
| Mandatorily redeemable noncontrolling interests | ||||||||
| Operating lease liabilities | ||||||||
| Notes payable | ||||||||
| Loan participations sold | ||||||||
| Term loans, net | ||||||||
| Senior notes payable, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| B. Riley Financial, Inc. equity: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total B. Riley Financial, Inc. stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | $ | $ | $ | ||||||||||||
| Trading income (losses) and fair value adjustments on loans | ( | ) | ||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||
| Sale of goods | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Impairment of tradenames | ||||||||||||||||
| Interest expense - Securities lending and loan participations sold | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Gain on extinguishment of loans | ||||||||||||||||
| (Loss) income from equity investments | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| (Provision) benefit for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Net (loss) income attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) attributable to B. Riley Financial, Inc. | $ | $ | $ | $ | ( | ) | ||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | $ | ( | ) | ||||||||||
| Basic income (loss) per common share | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted income (loss) per common share | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average basic common shares outstanding | ||||||||||||||||
| Weighted average diluted common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in cumulative translation adjustment | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income (loss) | ( | ) | ||||||||||||||
| Comprehensive (loss) income attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) attributable to B. Riley Financial, Inc. | $ | $ | $ | $ | ( | ) | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
(Dollars in thousands, except share data)
Three Months Ended June 30, 2021 and 2020
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, April 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Preferred stock issued | — | |||||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock and other, net of shares withheld for employer taxes | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Share based payments | — | — | ||||||||||||||||||||||||||||||||||
| Dividends on common stock ($ | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Balance, April 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock and other, net of shares withheld for employer taxes | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Common stock repurchased and retired | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Share based payments | — | — | ||||||||||||||||||||||||||||||||||
| Dividends on common stock ($ | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity (Continued)
(Unaudited)
(Dollars in thousands, except share data)
Six months ended June 30, 2021 and 2020
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Common stock issued, net of offering costs | — | |||||||||||||||||||||||||||||||||||
| Preferred stock issued | — | |||||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock and other, net of shares withheld for employer taxes | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Share based payments | — | — | ||||||||||||||||||||||||||||||||||
| Dividends on common stock ($ | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | ||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Preferred stock issued | — | |||||||||||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock and other, net of shares withheld for employer taxes | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Common stock repurchased and retired | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Share based payments | — | — | ||||||||||||||||||||||||||||||||||
| Dividends on common stock ($ | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Provision for doubtful accounts | ||||||||
| Share-based compensation | ||||||||
| Fair value adjustments, non-cash | ( | ) | ||||||
| Non-cash interest and other | ( | ) | ( | ) | ||||
| Effect of foreign currency on operations | ( | ) | ( | ) | ||||
| (Income) loss from equity investments | ( | ) | ||||||
| Dividends from equity investments | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Impairment of intangibles and gain on disposal of fixed assets | ||||||||
| Gain on extinguishment of loans | ( | ) | ||||||
| Loss (gain) on extinguishment of debt | ( | ) | ||||||
| Gain on equity investment | ( | ) | ||||||
| Income allocated for mandatorily redeemable noncontrolling interests | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Due from clearing brokers | ( | ) | ( | ) | ||||
| Securities and other investments owned | ( | ) | ||||||
| Securities borrowed | ( | ) | ||||||
| Accounts receivable and advances against customer contracts | ||||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Accounts payable, accrued expenses and other liabilities | ( | ) | ||||||
| Amounts due to/from related parties and partners | ||||||||
| Securities sold, not yet purchased | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Securities loaned | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of loans receivable | ( | ) | ( | ) | ||||
| Repayments of loans receivable | ||||||||
| Sale of loan receivable to related party | ||||||||
| Proceeds from loan participations sold | ||||||||
| Repayment of loan participations sold | ( | ) | ( | ) | ||||
| Acquisition of business, net of $ | ( | ) | ( | ) | ||||
| Purchases of property, equipment and other | ( | ) | ( | ) | ||||
| Proceeds from sale of property, equipment and intangible assets | ||||||||
| Purchase of equity investments | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of asset based credit facility | ( | ) | ||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of term loan | ( | ) | ( | ) | ||||
| Proceeds from term loan | ||||||||
| Proceeds from issuance of senior notes | ||||||||
| Redemption of senior notes | ( | ) | ( | ) | ||||
| Payment of debt issuance costs | ( | ) | ( | ) | ||||
| Payment for contingent consideration | ( | ) | ||||||
| Payment of employment taxes on vesting of restricted stock | ( | ) | ( | ) | ||||
| Common dividends paid | ( | ) | ( | ) | ||||
| Preferred dividends paid | ( | ) | ( | ) | ||||
| Repurchase of common stock | ( | ) | ||||||
| Distribution to noncontrolling interests | ( | ) | ( | ) | ||||
| Contribution from noncontrolling interests | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from issuance of preferred stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase in cash, cash equivalents and restricted cash | ||||||||
| Effect of foreign currency on cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Net increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
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, financial consulting, 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 also has a majority ownership interest in BR Brands Holding, LLC (“BR Brands” or “Brands”), which provides licensing of trademarks.
On February 25, 2021, the Company completed the acquisition of all
of the outstanding shares of National Holdings Corporation (“National”) not already owned by the Company. The total cash consideration
for the approximately
The Company operates in six operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities lending, restructuring, research, sales and trading services to corporate and institutional clients; (ii) Wealth Management, through which the Company provides wealth management and tax services to corporate, institutional and high net worth clients; (iii) 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; (iv) Financial Consulting, through which the Company provides bankruptcy, financial advisory, forensic accounting, real estate consulting and valuation and appraisal services; (v) 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 (vi) Brands, which is focused on generating revenue through the licensing of trademarks.
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. During the second quarter of 2021, the full impact of the COVID-19 outbreak continues to evolve. As the U.S. economy recovers, aided by additional stimulus packages and positive momentum in the domestic vaccine rollout, countries across the world continue to manage repeated waves of the pandemic, including variant strains of COVID-19, amid uneven progress toward vaccination. 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 and the success of vaccines in slowing or halting the pandemic. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, the Company’s results of operations, financial position and cash flows may be materially adversely affected.
7
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 (a) Great American Global Partners, LLC which is controlled by the Company
as a result of its ownership of a
(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 loans 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, sales returns and allowances and contingencies. 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.
(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 $
(d) Concentration of Risk
Revenues in the Capital Markets, Financial Consulting, Wealth Management, Brands 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.
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.
8
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 $
(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.
In June 2018, the Company adopted the 2018 Employee Stock Purchase
Plan (“Purchase Plan”) which allows eligible employees to purchase common stock through payroll deductions at a price that
is
(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, 2021, restricted cash included $
9
(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 $
(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 receivables 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 consolidated financial statements.
Loans receivable, at fair value totaled $
The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending clients. At June 30, 2021, the Company has outstanding limited guarantee arrangements with respect to Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 13. 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, 2021, the Company has not recorded any provision for credit losses on the B&W guarantees since the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure.
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 statements 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.
10
As of June 30, 2021 and December 31, 2020, 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, | |||||||
| 2021 | 2020 | |||||||
| Securities and other investments owned: | ||||||||
| Equity securities | $ | $ | ||||||
| Corporate bonds | ||||||||
| Other fixed income securities | ||||||||
| Partnership interests and other | ||||||||
| $ | $ | |||||||
| Securities sold not yet purchased: | ||||||||
| Equity securities | $ | $ | ||||||
| Corporate bonds | ||||||||
| Other fixed income securities | ||||||||
| $ | $ | |||||||
(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 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 is 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.”
Securities and other investments
owned also include investments in nonpublic entities that do not have a readily determinable fair value and do not report NAV per share.
These investments are accounted for using a measurement alternative under which they are measured at cost and adjusted for observable
price changes and impairments. Observable price changes result from, among other things, equity transactions for the same issuer executed
during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. For
these transactions to be considered observable price changes of the same issuer, we evaluate whether these transactions have similar rights
and obligations, including voting rights, distribution preferences, conversion rights, and other factors, to the investments we hold.
Any investments adjusted to their fair value by applying the measurement alternative are disclosed as nonrecurring fair value measurements,
including the level in the fair value hierarchy that was used. As of June 30, 2021 and December 31, 2020, investments in nonpublic entities
valued using a measurement alternative of $
11
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, 2021 and December 31, 2020.
| Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||
| on a Recurring Basis at June 30, 2021 Using | ||||||||||||||||
| Quoted prices in | Other | Significant | ||||||||||||||
| Fair value at | active markets for | observable | unobservable | |||||||||||||
| June 30, | identical assets | inputs | inputs | |||||||||||||
| 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Other fixed income securities | ||||||||||||||||
| Total securities and other investments owned | ||||||||||||||||
| Loans receivable, at fair value | ||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Other fixed income securities | ||||||||||||||||
| Total securities sold not yet purchased | ||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | ||||||||||||
| Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||
| on a Recurring Basis at December 31, 2020 Using | ||||||||||||||||
| Quoted prices in | Other | Significant | ||||||||||||||
| Fair value at | active markets for | observable | unobservable | |||||||||||||
| December 31 | identical assets | inputs | inputs | |||||||||||||
| 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Other fixed income securities | ||||||||||||||||
| Total securities and other investments owned | ||||||||||||||||
| Loans receivable, at fair value | ||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Corporate bonds | ||||||||||||||||
| Other fixed income securities | ||||||||||||||||
| Total securities sold not yet purchased | ||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | ||||||||||||
As of June 30, 2021 and December
31, 2020, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $
12
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, 2021:
| Fair value at | ||||||||||||
| June 30, | Weighted | |||||||||||
| 2021 | Valuation Technique | Unobservable Input | Range | Average | ||||||||
| Assets: | ||||||||||||
| Equity securities | ||||||||||||
| Loans receivable at fair value | ||||||||||||
| Total level 3 assets measured at fair value | $ | |||||||||||
| Liabilities: | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ | | ||||||||||
The changes in Level 3 fair value hierarchy during the six months ended June 30, 2021 and 2020 are as follows:
| Level 3 | Level 3 Changes During the Period | Level 3 | ||||||||||||||||||||||
| Balance at | Fair | Relating to | Purchases, | Transfer in | Balance at | |||||||||||||||||||
| Beginning of | Value | Undistributed | Sales and | and/or out | End of | |||||||||||||||||||
| Year | Adjustments | Earnings | Settlements | of Level 3 | Period | |||||||||||||||||||
| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Loans receivable at fair value | ( | ) | ||||||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ( | ) | ||||||||||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||
| Equity securities | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||
| Loans receivable at fair value | ( | ) | ||||||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ( | ) | ||||||||||||||||||||||
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, 2021 and 2020 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, 2021 and December 31, 2020, the senior notes payable
had a carrying amount of $
The investments in nonpublic entities that do not report NAV are measured at cost, adjusted for observable price changes and impairments, with changes recognized in trading income (losses) and fair value adjustments on loans on the condensed consolidated statements of operations. These investments are evaluated on a nonrecurring basis based on the observable price changes in orderly transactions for the identical or similar investment of the same issuer. Further adjustments are not made until another observable transaction occurs. Therefore, the determination of fair values of these investments in nonpublic entities that do not report NAV does not involve significant estimates and assumptions or subjective and complex judgments. Investments in nonpublic entities that do not report NAV are subject to a qualitative assessment for indicators of impairment. If indicators of impairment are present, the Company is required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
13
The following table sets forth the assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of June 30, 2021. This investment was measured due to an observable price change during the three months ended June 30, 2021.
| Fair Value Measurement Using | ||||||||||||||||
| Quoted prices in | Other | Significant | ||||||||||||||
| active markets for | observable | unobservable | ||||||||||||||
| identical assets | inputs | inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| As of June 30, 2021 | ||||||||||||||||
| Investments in nonpublic entities that do not report NAV | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Investments in nonpublic entities that do not report NAV | $ | $ | $ | $ | ||||||||||||
During the six months ended June 30, 2021 and 2020, except for the impact of the intangible impairment charge in 2020 as described in Note 6 - Goodwill and Intangible Assets, there were no additional assets or liabilities measured at fair value on a non-recurring basis.
(o) Derivative and Foreign Currency Translation
The Company periodically uses derivative instruments, which primarily
consist of the purchase of forward exchange contracts, for certain loans receivable and Auction and Liquidation engagements with operations
outside the United States. As of June 30, 2021 and December 31, 2020, forward exchange contracts in the amount of
The forward exchange contracts
were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and a loan receivable.
The net gain from forward exchange contracts was $
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 losses were $
(p) Equity Investment
At June 30, 2021 and December 31, 2020, equity investments of $
bebe stores, inc.
At June 30, 2021 and December 31, 2020, the Company had a
As of June 30, 2021, the carrying value of the Company’s equity investment in bebe exceeded the fair value based on the quoted market prices. In consideration of these facts, the Company evaluated its investment for impairment. The Company did not utilize bright-line tests in the evaluation. Based on the available facts and information regarding the operating results of bebe, 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 the investment and it is possible that impairment losses will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.
National Holdings Corporation
As of December 31, 2020, the Company owned approximately
14
Other Equity Investments
The Company has other equity investments over which the Company exercises
significant influence but which do not meet the requirements for consolidation, including B. Riley Principal 150 Merger Corp., B. Riley
Principal 250 Merger Corp., and
(q) Loan Participations Sold
As of June 30, 2021, 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 sheets. 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, 2021 and December
31, 2020, the Company had entered into participation agreements for a total of $
(r) Supplemental Non-cash Disclosures
During the six months ended
June 30, 2021, non-cash investing activities included the repayment of a loan receivable in full in the amount of $
(s) Reclassifications
Certain amounts reported in the Capital Markets segment for the three and six months ended June 30, 2020 have been reclassified and reported in the Financial Consulting and Wealth Management segments for the three and six months ended June 30, 2020 as a result of the organizational changes that created the new Financial Consulting segment in the fourth quarter of 2020 and Wealth Management segment in the first quarter of 2021.
For the six months ended
June 30, 2020, $
(t) Variable Interest Entities
In 2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. 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.
In November 2020, the Company invested in Lingo Management, LLC (“Lingo”), a joint venture with an unaffiliated third party. On March 10, 2021, the Company also extended a promissory note to Lingo Communications, LLC (a wholly owned subsidiary of Lingo). Lingo is a VIE because the entity does not have enough equity at risk to finance its activities without additional subordinated financial support. The Company has determined that it is not the primary beneficiary because it does not have the power to direct the activities of the VIE that most significantly impact the entity’s financial performance. The Company’s variable interests in Lingo include loans receivable, at fair value and an equity investment accounted for under the equity method of accounting.
15
The Company, through its newly acquired subsidiary, National, has entered into agreements to provide investment banking and advisory services to numerous investment funds (the “Funds”) that are considered variable interest entities under the accounting guidance. These Funds are established primarily to make and manage investments in equity or convertible debt securities of privately held companies that the Company, as investment advisor to the Funds, believes possess innovative or disruptive technologies and present opportunities for an initial public offering (“IPO”) or other similar liquidity event within approximately one to five years from the date of investment. The Funds intend to hold the investments until an IPO or other similar liquidity event and then to make distributions to its investors when contractually permitted, estimated at approximately six months following such IPO or liquidity event.
Placement agent fees
attributable to such arrangements from acquisition date through June 30, 2021 were $
The carrying value of the Company’s investments in the VIEs that were not consolidated is shown below.
| June 30, 2021 | ||||
| Partnership investments | $ | |||
| Equity Investment | ||||
| Due from related party | ||||
| Loans receivable, at fair value | ||||
| Maximum exposure to loss | $ | |||
(u) Recent Accounting Standards
Not yet adopted
In March 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently assessing the potential impacts the adoption of ASU 2020-04 may have on its consolidated results of operations, cash flows, financial position or disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This Update addresses issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. In addition to eliminating certain accounting models, the ASU also provides guidance to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. Additionally, the ASU amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, and to amend the related EPS guidance. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial condition and results of operations.
16
Recently 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 adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The Update is intended to clarify the Codification and make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. The Company adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The Update contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the Amendments arose because the Board provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option was only included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). These amendments are not expected to change current practice but are intended to improve the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is included in the Disclosure Section of the Codification, thus reducing the likelihood that the disclosure requirement would be missed. The Board does not anticipate that the amendments will result in any changes to current GAAP. The amendments in the Update are effective for annual periods beginning after December 15, 2020, for public business entities. Early application of the amendments is permitted for public business entities for any annual or interim period for which financial statements have not been issued. The amendments in the Update should be applied retrospectively. The Company adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.
NOTE 3—RESTRUCTURING CHARGE
The Company did not record any restructuring charges for the three and six months ended June 30, 2021 and 2020. The following tables summarize the changes in accrued restructuring charge during the three and six months ended June 30, 2021 and 2020:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Cash paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-cash items | ||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
17
NOTE 4— 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, 2021 and December 31, 2020:
| Amounts not | ||||||||||||||||||||
| offset in the | ||||||||||||||||||||
| consolidated balance | ||||||||||||||||||||
| Gross amounts | Net amounts | sheets but eligible | ||||||||||||||||||
| offset in the | included in the | for offsetting | ||||||||||||||||||
| Gross amounts | consolidated | consolidated | upon counterparty | |||||||||||||||||
| recognized | balance sheets (1) | balance sheets | default(2) | Net amounts | ||||||||||||||||
| As of June 30, 2021 | ||||||||||||||||||||
| Securities borrowed | $ | $ | $ | $ | $ | |||||||||||||||
| Securities loaned | $ | $ | $ | $ | $ | |||||||||||||||
| As of June 30, 2020 | ||||||||||||||||||||
| Securities borrowed | $ | $ | $ | $ | $ | |||||||||||||||
| Securities loaned | $ | $ | $ | $ | $ | |||||||||||||||
| (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 5— ACCOUNTS RECEIVABLE
The components of accounts receivable, net, include the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accounts receivable | $ | $ | ||||||
| Investment banking fees, commissions and other receivables | ||||||||
| Unbilled receivables | ||||||||
| Total accounts receivable | ||||||||
| Allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
Unbilled receivables represent the amount of contractual reimbursable costs and fees for services performed in connection with fee and service based auction and liquidation contracts.
Additions and changes to the allowance for doubtful accounts consist of the following:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Add: Additions to reserve | ||||||||||||||||
| Less: Write-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Recovery | ||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
18
NOTE 6— GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $
The changes in the carrying amount of goodwill for the six months ended June 30, 2021 were as follows:
| Principal | ||||||||||||||||||||||||
| Investments- | ||||||||||||||||||||||||
| Capital | Wealth | Auction and | Financial | United Online | ||||||||||||||||||||
| Markets | Management | Liquidation | Consulting | and magicJack | ||||||||||||||||||||
| Segment | Segment | Segment | Segment | Segment | Total | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Goodwill acquired during the period: | ||||||||||||||||||||||||
| Acquisition of business | ||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Intangible assets consisted of the following:
| As of June 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||||
| Carrying | Accumulated | Intangibles | Carrying | Accumulated | Intangibles | |||||||||||||||||||||
| Useful Life | Value | Amortization | Net | Value | Amortization | Net | ||||||||||||||||||||
| Amortizable assets: | ||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Domain names | ||||||||||||||||||||||||||
| Advertising relationships | ||||||||||||||||||||||||||
| Internally developed software and other intangibles | ||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Non-amortizable assets: | ||||||||||||||||||||||||||
| Tradenames | ||||||||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Amortization expense was
$
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. In the three months ended March
31, 2020, the Company recognized an impairment charge of $
19
NOTE 7— 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 $
We are in compliance with all financial covenants in the asset based credit facility at June 30, 2021.
Paycheck Protection Program
On April 10, 2020, NSC (a
subsidiary of National) entered into a Promissory Note (the “NSC Note”) with Axos Bank as the lender (the “Lender”),
pursuant to which the Lender agreed to make a loan to NSC under the Paycheck Protection Program (the “NSC Loan”) offered by
the U.S. Small Business Administration (the “SBA”) pursuant to the Coronavirus Aid, Relief, and Economic Security (“CARES”)
Act to qualified small businesses (the “PPP”) in a principal amount of $
The interest rate on each
PPP Note is a fixed rate of
According to the terms of
the PPP, all or a portion of loans under the PPP may be forgiven if certain conditions set forth in the CARES Act and the rules of the
SBA are met. In order to be forgiven, the proceeds of each PPP Loan are to be used to pay for payroll costs, continuation of group health
care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation;
rent; utilities; and interest on certain other outstanding debt; however,
Each PPP Note includes events
of default, the occurrence and continuation of which would provide the Lender with the right to exercise remedies against NSC or WEC,
as applicable, including the right to declare the entire unpaid principal balance under the applicable PPP Note and all accrued unpaid
interest immediately due. Upon completion of the acquisition of National, in accordance with the provisions of the Small Business Administration
regarding changes of ownership of an entity that has received PPP funds, the Company was required to place $
In June 2021, the full amount
of the Company’s PPP loans and accrued interest were forgiven in the amount of $
20
Other Notes Payable
Notes payable include notes
payable to a clearing organization for one of the Company’s broker dealers.
Also included in notes payable
at December 31, 2020, was a $
NOTE 8 — TERM LOANS
Nomura Credit Agreement
On June
23, 2021, the Company, and its wholly owned subsidiaries, BR Financial Holdings, LLC (the “Primary Guarantor”), and
BR Advisory & Investments, LLC (the “Borrower”) entered into a credit agreement (the “Credit Agreement”)
with Nomura Corporate Funding Americas, LLC, as administrative agent, and Wells Fargo Bank, N.A., as collateral agent, for a four-year
$
Eurodollar
loans under the Credit Facilities will accrue interest at the Eurodollar Rate plus an applicable margin of
Subject to certain eligibility requirements, the assets of certain subsidiaries of the Company that hold credit assets, private equity assets, and public equity assets are placed into a borrowing base, which serves to limit the borrowings under the Credit Facilities. If borrowings under the facilities exceed the borrowing base, the Company is obligated to prepay the loans in an aggregate amount equal to such excess. The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
The Credit Agreement contains certain affirmative and negative covenants
customary for financings of this type that, among other things, limit the Company’s, the Primary Guarantor’s, the Borrower’s,
and the Borrower’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain
fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions,
to prepay certain indebtedness and to pay dividends or to make other distributions or redemptions/repurchases in respect of their respective
equity interests. In addition, the Credit Agreement contains a financial covenant that requires the Company to maintain Operating EBITDA
of at least $
Commencing on September 30, 2022, the Term Loan Facility will amortize
in equal quarterly installments of
At June 30, 2021, the outstanding balance on the credit facility’s
term loan was $
The
Company had not made any borrowings under the Revolving Credit Facility at June 30, 2021. The unused commitment fee on the revolving facility
for the three and six months ended June 30, 2021 was $
The Company is in compliance with all financial covenants in the Nomura Credit Agreement at June 30, 2021.
21
BRPAC Credit Agreement
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, 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 $
On December 31, 2020, the
Borrowers, the Secured Guarantors, the Agent and the Lenders, entered into the Second Amendment to Credit Agreement (the “Second
Amendment”) pursuant to which, among other things, (i) the Lenders agreed to make a new $
22
As of June 30, 2021 and December 31,
2020, the outstanding balance on the term loan was $
The Company is in compliance with all financial covenants in the BRPAC Credit Agreement at June 30, 2021.
NOTE 9—SENIOR NOTES PAYABLE
Senior notes payable, net, are comprised of the following:
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| $ | $ | |||||||
| Less: Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| $ | $ | |||||||
During the six months ended
June 30, 2021, the Company issued $
23
On January 25, 2021, the Company issued $
On March 29, 2021, the Company issued $
On March 31, 2021, the Company
exercised its option for early redemption at par $
On
June 24, 2021, the Company announced it will redeem all of the issued and outstanding
On July 26, 2021, the Company redeemed, in full, $
At June 30, 2021 and December
31, 2020, the total senior notes outstanding was $
Sales Agreement Prospectus
to Issue Up to $
The most recent sales agreement
prospectus was filed by us with the SEC on April 6, 2021 (the “April 2021 Sales Agreement Prospectus”) supplementing the prospectus
filed with the SEC on January 28, 2021 (the “January 2021 Sales Agreement Prospectus”). This program provides for the sale
by the Company of up to $
24
NOTE 10—REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers by reportable segment for the three and six months ended June 30, 2021 and 2020 is as follows:
| Principal | ||||||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||||||
| Capital | Wealth | Auction and | Financial | United Online and | ||||||||||||||||||||||||
| Markets | Management | Liquidation | Consulting | magicJack | Brands | |||||||||||||||||||||||
| Segment | Segment | Segment | Segment | Segment | Segment | Total | ||||||||||||||||||||||
| Revenues for the three months ended June 30, 2021 | ||||||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Wealth and asset management fees | ||||||||||||||||||||||||||||
| Commissions, fees and reimbursed expenses | ||||||||||||||||||||||||||||
| Subscription services | ||||||||||||||||||||||||||||
| Service contract revenues | ||||||||||||||||||||||||||||
| Advertising, licensing and other (1) | ||||||||||||||||||||||||||||
| Total revenues from contracts with customers | ||||||||||||||||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||||||||||||||
| Trading gains on investments | ( | ) | ||||||||||||||||||||||||||
| Fair value adjustment on loans | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| (1) | Includes sale of goods of $11,743 in Auction and Liquidation and $714 in Principal Investments - United Online and magicJack. |
| Revenues for the three months ended June 30, 2020 | ||||||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Wealth and asset management fees | ||||||||||||||||||||||||||||
| Commissions, fees and reimbursed expenses | ||||||||||||||||||||||||||||
| Subscription services | ||||||||||||||||||||||||||||
| Service contract revenues | ||||||||||||||||||||||||||||
| Advertising, licensing and other (1) | ||||||||||||||||||||||||||||
| Total revenues from contracts with customers | ||||||||||||||||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||||||||||||||
| Trading gains on investments | ||||||||||||||||||||||||||||
| Fair value adjustment on loans | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| (1) | Includes sale of goods of $1,045 in Auction and Liquidation and $775 in Principal Investments - United Online and magicJack. |
25
| Principal | ||||||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||||||
| Capital | Wealth | Auction and | Financial | United Online | ||||||||||||||||||||||||
| Markets | Management | Liquidation | Consulting | magicJack | Brands | |||||||||||||||||||||||
| Segment | Segment | Segment | Segment | Segment | Segment | Total | ||||||||||||||||||||||
| Revenues for the six months ended June 30, 2021 | ||||||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Wealth and asset management fees | ||||||||||||||||||||||||||||
| Commissions, fees and reimbursed expenses | ||||||||||||||||||||||||||||
| Subscription services | ||||||||||||||||||||||||||||
| Service contract revenues | ||||||||||||||||||||||||||||
| Advertising, licensing and other (1) | ||||||||||||||||||||||||||||
| Total revenues from contracts with customers | ||||||||||||||||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||||||||||||||
| Trading gains on investments | ||||||||||||||||||||||||||||
| Fair value adjustment on loans | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| (1) | Includes sale of goods of $17,835 in Auction and Liquidation and $1,450 in Principal Investments - United Online and magicJack. |
| Revenues for the six months ended June 30, 2020 | ||||||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Wealth and asset management fees | ||||||||||||||||||||||||||||
| Commissions, fees and reimbursed expenses | ||||||||||||||||||||||||||||
| Subscription services | ||||||||||||||||||||||||||||
| Service contract revenues | ||||||||||||||||||||||||||||
| Advertising, licensing and other (1) | ||||||||||||||||||||||||||||
| Total revenues from contracts with customers | ||||||||||||||||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||||||||||||||
| Trading losses on investments | ( | ) | ( | ) | ||||||||||||||||||||||||
| Fair value adjustment on loans | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| (1) | Includes sale of goods of $1,044 in Auction and Liquidation and $1,780 in Principal Investments - United Online and magicJack. |
26
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 obligation(s) are satisfied. Receivables related to revenues from contracts with customers totaled $
During the three months ended
June 30, 2021 and 2020, the Company recognized revenue of $
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 $
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, 2021. 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, 2021.
27
NOTE 11— INCOME TAXES
The Company’s effective
income tax rate was a provision of
As of June 30, 2021, the
Company had federal net operating loss carryforwards of $
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, 2021, 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 $
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, 2017 to 2020.
NOTE 12— 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. 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
Basic and diluted earnings per share were calculated as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income (loss) attributable to B. Riley Financial, Inc. | $ | $ | $ | $ | ( | ) | ||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) applicable to common shareholders | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Effect of dilutive potential common shares: | ||||||||||||||||
| Restricted stock units and warrants | ||||||||||||||||
| Diluted | ||||||||||||||||
| Basic income (loss) per common share | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted income (loss) per common share | $ | $ | $ | $ | ( | ) | ||||||||||
28
NOTE 13 — 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 January 5, 2017, complaints
filed in November 2015 and May 2016 naming MLV & Co. (“MLV”) and National Securities Corporation, each an indirect
broker-dealer subsidiary of the Company, as defendants 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 Consolidated Complaint,
styled Gaynor v. Miller et al., is pending in the Circuit Court for Morgan County, 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
$
On July 3, 2019, a lawsuit was filed against National Securities Corporation, (“NSC”) National Asset Management, Inc., National, National’s current board members and certain former board members, certain officers of National, John Does 1–10, and the National as a nominal defendant, in the United States District Court for the Southern District of New York, captioned Kay Johnson v. National Securities Corporation, et al., Case No. 1:19-cv-06197-LTS. The complaint presents three purported derivative causes of action on behalf of the Company, and five causes of action by the plaintiff directly. As part of the derivative claims, the complaint generally alleges that certain of the individual defendants failed to establish and maintain adequate internal controls to ensure that the Board acted in accordance with its fiduciary duties to prevent and uncover alleged legal and regulatory misconduct and wrongdoing on the part of a National officer. As part of its claims brought directly by the plaintiff, the complaint generally alleges that certain individual and corporate defendants wrongfully terminated the employment of the plaintiff in violation of the Dodd-Frank Act and applicable common law, or conspired to do so. The complaint further alleges that certain corporate defendants violated the Equal Pay Act with regards to the plaintiff’s compensation. The complaint seeks monetary damages in favor of the Company, an order directing the Company’s board members to take actions to enhance the Company’s governance, compensatory and punitive damages in favor of the plaintiff, and attorneys’ fees and costs. On February 2, 2020, the plaintiff filed an amended complaint presenting additional causes of action. The Company has notified its insurer of the lawsuit and believes it has valid defenses to the asserted claims of the complaint. On March 18, 2020, the defendants filed a motion to dismiss the amended complaint. The plaintiff filed an opposition to the defendants’ motion to dismiss on April 15, 2020, and the defendants filed a reply in further support of the motion to dismiss on May 6, 2020. On August 20, 2020, the parties entered into mediation with a private mediator in an attempt to settle the action and, on January 15, 2021, as a result of the mediation, a settlement was reached. In March 2021, a settlement agreement and release was executed by the parties and all claims have been dismissed.
The New York Department of
Financial Services (the “Department”) completed its investigation of NSC’s compliance with the Department’s Cybersecurity
Requirements for Financial Services Companies (the “Regulations”). The Regulations establish standards for the cybersecurity
programs of entities the Department licenses or otherwise regulates, including NSC. On April 14, 2021, NSC paid the Department a fine
of $
NSC is a respondent in several Financial Industry Regulatory Authority (“FINRA”) arbitration proceedings filed by investors alleging claims in connection with equity investments in GPB Capital Holdings, LLC (“GPB”) involving matters prior to the Company’s acquisition of National on February 25, 2021. Some of these arbitration claims, among other things, also allege that NSC failed to supervise certain registered representatives. NSC is evaluating each arbitration claim on its own merits. GPB and its affiliates have been the subject of various civil claims and fraud investigations over the past few years and, in February 2021, the U.S. Department of Justice indicted certain individuals affiliated with GPB for material misrepresentations and omissions under the federal securities laws with respect to funds managed by GPB. At the present time, the Company continues to vigorously defend these actions and is not able to determine the ultimate resolution of these matters. Adverse judgments in these matters in the aggregate could materially and adversely affect the Company and its financial condition.
(b) Babcock & Wilcox Commitments and Guarantees
On June 30, 2021, the Company agreed to guaranty (the “B. Riley
Guaranty”) up to $
29
On August 10, 2020, the Company entered into a project specific indemnity
rider (the “Indemnity Rider”) in favor of Berkley Insurance Company and/or Berkley Regional Insurance Company (collectively,
“Berkley”) to a general agreement of indemnity made by B&W in favor of Berkley (the “Indemnity Agreement”).
Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkley in connection with a default by B&W under the Indemnity Agreement
relating to a $
On May 14, 2020, the Company
entered into an agreement to provide B&W future commitments to loan B&W up to $
(c) Other Commitments
On June 19, 2020, the Company
participated in a loan facility agreement to provide a total loan commitment up to
At June 30, 2021, the Company had an outstanding commitment to purchase
a loan pursuant to an assignment agreement with a client in the amount of $
NOTE 14— SHARE-BASED PAYMENTS
(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 $
(b) Employee Stock Purchase Plan
In
connection with the Company’s Purchase Plan, share based compensation was $
30
(c) Common Stock
On
October 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $
On
January 15, 2021, the Company issued
(d) Preferred Stock
During
the six months ended June 30, 2021, the Company issued
During
the six months ended June 30, 2021, the Company issued
NOTE 15— NET CAPITAL REQUIREMENTS
B. Riley Securities (“BRS”),
B. Riley Wealth Management (“BRWM”), and National Securities Corporation (“NSC”), the Company’s broker-dealer
subsidiaries, are registered with the SEC as broker-dealers and members of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
The Company’s broker-dealer subsidiaries are subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance
of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1.
As such, they are subject to the minimum net capital requirements promulgated by the SEC. As of June 30, 2021, BRS had net capital of
$
NOTE 16— RELATED PARTY TRANSACTIONS
At June 30, 2021, amounts
due from related parties of $
31
At June 30, 2021, 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 $
In June 2020,
The Company periodically participates in loans and financing arrangements for which the Company has an equity ownership and representation on the board of directors (or similar governing 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:
BRPM 150
On
February 23, 2021, the Company earned $
BRPM 250
During the three months ended
June 30, 2021, the Company earned $
Sonim
On June 30, 2021, the Company and EF Hutton, division of Benchmark
Investments, LLC (the “Sales Agents”), as sales agents, entered into an At Market Issuance Sales Agreement (the “Sonim
Sales Agreement”) with Sonim Technologies, Inc. (“Sonim”) to sell shares of Sonim’s common stock, $
32
Babcock and Wilcox
The Company had a last-out term loan receivable due from B&W that
was included in loans receivable, at fair value with a fair value of $
On January 31, 2020, the Company provided B&W with an additional
$
On February 12, 2021, B&W issued the Company an aggregate $
During the three and six months ended June 30, 2021, the Company earned
$
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. The agreement was extended through December 31, 2023. Under this agreement, fees for services provided
are $
The Company is also a party to an Indemnity Rider with B&W, and the B. Riley Guaranty, each as disclosed above in Note 13 – Commitments and Contingencies.
Maven
The Company has loans receivable
due from the Maven, Inc. (“Maven”) that are included in loans receivable, at fair value of $
On October 28, 2020, in connection
with a capital raise by Maven, the Company converted $
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Lingo
The Company has a loan receivable due from Lingo Management LLC (“Lingo”)
included in loans receivable, at fair value with a fair value of $
bebe
The Company has a loan receivable due from bebe stores, Inc. included
in loans receivable, at fair value with a fair value of $
Other
The Company has loans receivable due from Dash Holding Company, Inc.
with a fair value of $
During the six months ended
June 30, 2021, the Company earned $
NOTE 17— BUSINESS SEGMENTS
The Company’s business is classified into the Capital Markets segment, Wealth Management segment, Auction and Liquidation segment, Financial Consulting 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.
As a result of the National acquisition, the Company realigned its segment reporting structure in the first quarter of 2021 to reflect organizational management changes for its wealth management business. Under the new structure, the wealth management business previously reported in the Capital Markets segment are now reported in the Wealth Management segment. Under the new structure, there is a new segment for Wealth Management. In conjunction with the new reporting structure, the Company recast its segment presentation for all periods presented.
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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, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Capital Markets segment: | ||||||||||||||||
| Revenues - Services and fees | $ | $ | $ | $ | ||||||||||||
| Trading income and fair value adjustments on loans | ( | ) | ||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense - Securities lending and loan participations sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Segment income | ||||||||||||||||
| Wealth Management segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Trading income and fair value adjustments on loans | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Segment (loss) income | ( | ) | ||||||||||||||
| Auction and Liquidation segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Revenues - Sale of goods | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Direct cost of services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ||||||||||||||
| Segment income | ||||||||||||||||
| Financial Consulting segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Segment income | ||||||||||||||||
| Principal Investments - United Online and magicJack segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Revenues - Sale of goods | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Direct cost of services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cost of goods sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Segment income | ||||||||||||||||
| Brands segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Trading loss and fair value adjustments on loans | ( | ) | ||||||||||||||
| Total revenues | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment of tradenames | ( | ) | ( | ) | ||||||||||||
| Segment income (loss) | ( | ) | ( | ) | ||||||||||||
| Consolidated operating income from reportable segments | ||||||||||||||||
| Corporate and other expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Gain on extinguishment of loans | ||||||||||||||||
| (Loss) income on equity investments | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| (Provision) benefit for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Net (loss) income attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) attributable to B. Riley Financial, Inc. | ( | ) | ||||||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | $ | ( | ) | ||||||||||
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The following table presents revenues by geographical area:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Australia | ||||||||||||||||
| Europe | ||||||||||||||||
| Total Revenues - Services and fees | $ | $ | $ | $ | ||||||||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||||||
| North America | $ | $ | $ | $ | ( |
) | ||||||||||
| Revenues - Sale of goods | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Total Revenues - Services and fees | $ | $ | $ | $ | ||||||||||||
| Revenues - Interest income - Loans and securities lending: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Total Revenues: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Australia | ||||||||||||||||
| Europe | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
As of June 30, 2021 and December
31, 2020 long-lived assets, which consist of property and equipment and other assets, of $
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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “seek,” “likely,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the caption “Risk Factors.”
Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; the unpredictable and ongoing impact of the COVID-19 pandemic; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; our exposure to credit risk; the short term nature of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities or at-the-market offering as necessary; failure to comply with the terms of our credit agreements or senior notes; our ability to meet future capital requirements; our ability to realize the benefits of our completed acquisitions, including our ability to achieve anticipated opportunities and operating cost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frame expected by management or at all; the diversion of management time on acquisition- related issues; the failure of our brand investment portfolio licensees to pay us royalties; and the intense competition to which our brand investment portfolio is subject. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Except as otherwise required by the context, references in this Quarterly Report to the “Company,” “B. Riley,” “B. Riley Financial,” “we,” “us” or “our” refer to the combined business of B. Riley Financial, Inc. and all of its subsidiaries.
Overview
General
B. Riley Financial, Inc. (NASDAQ: RILY) and its subsidiaries provide collaborative financial services and solutions through several operating subsidiaries including:
| ● | B. Riley Securities, Inc. (“B. Riley Securities”) is a leading, full service investment bank providing financial advisory, corporate finance, research, securities lending and sales and trading services to corporate, institutional and high net worth individual clients. B. Riley Securities, (fka B. Riley FBR) was formed in November 2017 through the merger of B. Riley & Co, LLC and FBR Capital Markets & Co., which the Company acquired in June 2017. |
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| ● | B. Riley Wealth Management, Inc. (“B. Riley Wealth Management”) provides comprehensive wealth management and brokerage services to individuals and families, corporations and non-profit organizations, including qualified retirement plans, trusts, foundations and endowments. B. Riley Wealth Management was formerly Wunderlich Securities, Inc., which the Company acquired on July 3, 2017 and whose name was changed in June 2018. | |
| ● | National Holdings Corporation (“National”) provides wealth management, brokerage, insurance, tax preparation and advisory services. On February 25, 2021, the Company completed a tender offer to acquire all of the outstanding shares of National not already owned by the Company. The merger expands the Company’s investment banking, wealth management and financial planning offerings. | |
| ● | B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registered investment advisor, which includes: | |
| ○ | B. Riley Asset Management, an advisor to certain private funds and to institutional and high net worth investors; | |
| ○ | Great American Capital Partners, LLC (“GACP”), the general partner of two private funds, GACP I, L.P. and GACP II, L.P., both direct lending funds managed by WhiteHawk Capital Partners, L.P. pursuant to an investment advisory services agreement, that provide senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies. | |
| ● | B. Riley Advisory Services provides expert witness, bankruptcy, financial advisory, forensic accounting, valuation and appraisal, and operations management services. | |
| ● | B. Riley Retail Solutions, LLC (fka Great American Group, LLC), a leading provider of asset disposition and auction solutions to a wide range of retail and industrial clients. | |
| ● | B. Riley Real Estate works with real estate owners and tenants through all stages of the real estate life cycle. Our real estate advisors advise companies, financial institutions, investors, family offices and individuals on real estate projects worldwide. A core focus of B. Riley real estate is the restructuring of lease obligations in both distressed and non-distressed situations, both inside and outside of the bankruptcy process, on behalf of corporate tenants. | |
| ● | B. Riley Principal Investments identifies attractive investment opportunities and aims to deliver financial and operational improvement to its portfolio companies. Our team concentrates on opportunities presented by distressed companies or divisions that exhibit challenging market dynamics. Representative transactions include recapitalization, direct equity investment, debt investment, active minority investment and buyouts. B. Riley Principal Investments seeks to control or influence the operations of our investments to deliver financial and operational improvements that will maximize free cash flow, and therefore, shareholder returns. As part of our principal investment strategy, we acquired United Online, Inc. (“UOL” or “United Online”) on July 1, 2016, magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018 and on November 30, 2020 we acquired a 40% equity interest in with Lingo Management, LLC (“Lingo”), with the ability to acquire an additional 40% equity interest therein. | |
| ○ | UOL is a communications company that offers consumer subscription services and products, consisting of Internet access services and devices under the NetZero and Juno brands primarily sold in the United States. | |
| ○ | magicJack is a Voice over IP (“VoIP”) cloud-based technology and services communications provider. | |
| ○ | Lingo is a global cloud/UC and managed service provider. | |
| ● | BR Brand Holding, LLC (“BR Brands”), in which the Company owns a majority interest, provides licensing of certain brand trademarks. BR Brands owns the assets and intellectual property related to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore as well as investments in the Hurley and Justice brands with Bluestar Alliance LLC (“Bluestar”), a brand management company. |
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We are headquartered in Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston, Atlanta, Dallas, Memphis, Metro Washington D.C., West Palm Beach, and Boca Raton.
During the fourth quarter of 2020, the Company realigned its segment reporting structure to reflect organizational management changes. Under the new structure, the valuation and appraisal businesses are reported in the Financial Consulting segment and our bankruptcy, financial advisory, forensic accounting, and real estate consulting businesses that were previously reported in the Capital Markets segment are now reported as part of the Financial Consulting segment. In conjunction with the new reporting structure, the Company recast its segment presentation for all periods presented. During the first quarter of 2021, in connection with the acquisition of National on February 25, 2021, the Company further realigned its segment reporting structure to reflect organizational management changes in the Company’s wealth management business and created a new Wealth Management segment that was previously reported as part of the Capital Markets segment in 2020. In conjunction with the new reporting structures, the Company recast its segment presentation for all periods presented.
For financial reporting purposes we classify our businesses into six operating segments: (i) Capital Markets, (ii) Wealth Management, (iii) Auction and Liquidation, (iv) Financial Consulting, (v) Principal Investments – United Online and magicJack and (vi) Brands.
Capital Markets Segment. Our Capital Markets segment provides a full array of investment banking, corporate finance, consulting, financial advisory, research, securities lending and sales and trading services to corporate, institutional and individual clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our Capital Markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors.
Wealth Management Segment. Our Wealth Management segment provides wealth management and tax services to corporate, and high net worth clients. We offer comprehensive wealth management services for corporate businesses that include investment strategies, executive services, retirement plans, lending & liquidity resources, and settlement solutions. Our wealth management services for individual client services provide investment management, education planning, retirement planning, risk management, trust coordination, lending & liquidity solutions, legacy planning, and wealth transfer. In addition, we supply market insights to provide unbiased guidance to make important financial decisions. Wealth management resources include market views from our highly regarded Chief Investment Strategist and Capital Markets segment’s research.
Auction and Liquidation Segment. Our Auction and Liquidation segment utilizes our significant industry experience, a scalable network of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North America as well as parts of Europe, Asia and Australia. Our Auction and Liquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions division operates through limited liability companies that are controlled by us.
Financial Consulting Segment. Our Financial Consulting segment provides services to law firms, corporations, financial institutions, lenders, and private equity firms. These services primarily include bankruptcy, financial advisory, forensic accounting, litigation support, real estate consulting and valuation and appraisal services. Our Financial Consulting segment operates through limited liability companies that are wholly owned or majority owned by us.
Principal Investments - United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, through which we provide consumer Internet access, and magicJack, through which we provide VoIP communication and related product and subscription services.
Brands Segment. Our Brands segment consists of our brand investment portfolio that is focused on generating revenue through the licensing of trademarks and is held by BR Brands.
Recent Developments
On June 23, 2021, we and our wholly owned subsidiaries, BR Financial Holdings, LLC, a Delaware limited liability company (the “Primary Guarantor”), and BR Advisory & Investments, LLC, a Delaware limited liability company (the “Borrower”), entered into a credit agreement (the “Credit Agreement”) by and among us, Primary Guarantor, the Borrower, the lenders party thereto, Nomura Corporate Funding Americas, LLC, as administrative agent and Wells Fargo Bank, N.A., as collateral agent, providing for a four-year $200.0 million secured term loan credit facility (the “Term Loan Facility”) and a four-year $80.0 million secured revolving loan credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Credit Facilities”). The Credit Facilities will mature on June 23, 2025, subject to acceleration or prepayment. On the closing date, the Borrower borrowed the full $200.0 million under the Term Loan Facility. The Revolving Credit Facility is available for borrowing from time to time prior to the final maturity of the Revolving Credit Facility. Subsequent to June 30, 2021, we borrowed the full $80.0 million that was available under the Revolving Credit Facility.
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On July 26, 2021, we redeemed, in full, $122.8 million aggregate principal amount of its 7.25% Senior Notes due 2027 (“7.25% 2027 Notes”) pursuant to the third supplemental indenture dated December 31, 2017. The total redemption payment included approximately $2.1 million in accrued interest. In connection with the full redemption, the 7.25% 2027 Notes were delisted from NASDAQ.
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. During the second quarter of 2021, the full impact of the COVID-19 outbreak continues to evolve. As the U.S. economy recovers, aided by additional stimulus packages and positive momentum in the domestic vaccine rollout, countries across the world continue to manage repeated waves of the pandemic, including variant strains of COVID-19, amid uneven progress toward vaccination. The impact of the COVID-19 outbreak on our 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 and the success of vaccines in slowing or halting the pandemic. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, our results of operations, financial position and cash flows may be materially adversely affected.
Results of Operations
The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Condensed Consolidated Statements of Operations
(Dollars in thousands)
| Three Months Ended | ||||||||||||||||
| June 30, | June 30, | Change | ||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 266,143 | $ | 125,595 | $ | 140,548 | 111.9 | % | ||||||||
| Trading income and fair value adjustments on loans | 32,679 | 114,547 | (81,868 | ) | (71.5 | %) | ||||||||||
| Interest income - Loans and securities lending | 25,491 | 24,506 | 985 | 4.0 | % | |||||||||||
| Sale of goods | 12,457 | 1,820 | 10,637 | n/m | ||||||||||||
| Total revenues | 336,770 | 266,468 | 70,302 | 26.4 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 12,094 | 7,985 | 4,109 | 51.5 | % | |||||||||||
| Cost of goods sold | 3,626 | 860 | 2,766 | n/m | ||||||||||||
| Selling, general and administrative expenses | 199,922 | 106,562 | 93,360 | 87.6 | % | |||||||||||
| Impairment of tradenames | — | 8,500 | (8,500 | ) | (100.0 | %) | ||||||||||
| Interest expense - Securities lending and loan participations sold | 10,983 | 11,221 | (238 | ) | (2.1 | %) | ||||||||||
| Total operating expenses | 226,625 | 135,128 | 91,497 | 67.7 | % | |||||||||||
| Operating income | 110,145 | 131,340 | (21,195 | ) | (16.1 | %) | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 56 | 224 | (168 | ) | (75.0 | %) | ||||||||||
| Gain on extinguishment of loans | 6,509 | — | 6,509 | 100.0 | % | |||||||||||
| Loss from equity investments | (852 | ) | (318 | ) | (534 | ) | 167.9 | % | ||||||||
| Interest expense | (20,856 | ) | (16,509 | ) | (4,347 | ) | 26.3 | % | ||||||||
| Income before income taxes | 95,002 | 114,737 | (19,735 | ) | (17.2 | %) | ||||||||||
| Provision for income taxes | (19,902 | ) | (32,208 | ) | 12,306 | (38.2 | %) | |||||||||
| Net income | 75,100 | 82,529 | (7,429 | ) | (9.0 | %) | ||||||||||
| Net loss attributable to noncontrolling interests | (576 | ) | (1,311 | ) | 735 | (56.1 | %) | |||||||||
| Net income attributable to B. Riley Financial, Inc. | 75,676 | 83,840 | (8,164 | ) | (9.7 | %) | ||||||||||
| Preferred stock dividends | 1,789 | 1,087 | 702 | 64.6 | % | |||||||||||
| Net income available to common shareholders | $ | 73,887 | $ | 82,753 | $ | (8,866 | ) | (10.7 | %) | |||||||
| n/m | - Not applicable or not meaningful. |
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Revenues
The table below and the discussion that follows are based on how we analyze our business.
| Three Months Ended | ||||||||||||||||
| June 30, | June 30, | Change | ||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 125,997 | $ | 60,364 | $ | 65,633 | 108.7 | % | ||||||||
| Wealth Management segment | 87,444 | 15,318 | 72,126 | n/m | ||||||||||||
| Auction and Liquidation segment | 5,534 | 7,206 | (1,672 | ) | -23.2 | % | ||||||||||
| Financial Consulting segment | 23,735 | 18,845 | 4,890 | 25.9 | % | |||||||||||
| Principal Investments - United Online and magicJack segment | 18,932 | 20,656 | (1,724 | ) | -8.3 | % | ||||||||||
| Brands segment | 4,501 | 3,206 | 1,295 | 40.4 | % | |||||||||||
| Subtotal | 266,143 | 125,595 | 140,548 | 111.9 | % | |||||||||||
| Revenues - Sale of goods: | ||||||||||||||||
| Auction and Liquidation segment | 11,743 | 1,045 | 10,698 | n/m | ||||||||||||
| Principal Investments - United Online and magicJack segment | 714 | 775 | (61 | ) | -7.9 | % | ||||||||||
| Subtotal | 12,457 | 1,820 | 10,637 | n/m | ||||||||||||
| Trading income (loss) and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | 29,897 | 114,080 | (84,183 | ) | -73.8 | % | ||||||||||
| Wealth Management segment | 2,865 | 467 | 2,398 | n/m | ||||||||||||
| Brands segment | (83 | ) | — | (83 | ) | 100.0 | % | |||||||||
| Subtotal | 32,679 | 114,547 | (81,868 | ) | -71.5 | % | ||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 25,491 | 24,506 | 985 | 4.0 | % | |||||||||||
| Total revenues | $ | 336,770 | $ | 266,468 | $ | 70,302 | 26.4 | % | ||||||||
| n/m | - Not applicable or not meaningful. |
Total revenues increased approximately $70.3 million to $336.8 million during the three months ended June 30, 2021 from $266.5 million during the three months ended June 30, 2020. The increase in revenues during the three months ended June 30, 2021 was primarily due to an increase in revenue from services and fees of $140.5 million, revenue from sale of goods of $10.6 million, and interest income from loans and securities lending of $1.0 million, offset by a decrease in revenue from trading income and fair value adjustments on loans of $81.9 million. The increase in revenue from services and fees in the three months ended June 30, 2021 consisted of increases in revenue of $65.6 million in the Capital Markets segment, $72.1 million in the Wealth Management segment, $4.9 million in the Financial Consulting segment, and $1.3 million in the Brands segment, offset by decreases in revenues of $1.7 million in both the Auction and Liquidation segment and the Principal Investments — United Online and magicJack segment.
Revenues from services and fees in the Capital Markets segment increased $65.6 million, to $126.0 million during the three months ended June 30, 2021 from $60.4 million during the three months ended June 30, 2020. The increase in revenues was primarily due to increases in revenue of $64.4 million from corporate finance, consulting and investment banking fees and $4.3 million from the acquisition of National in the first quarter of 2021, partially offset by decreases in asset management fees of $1.6 million and commissions of $1.5 million.
Revenues from services and fees in the Wealth Management segment increased $72.1 million, to $87.4 million during the three months ended June 30, 2021 from $15.3 million during the three months ended June 30, 2020. The increase in revenues was primarily due to increases in revenue of $63.7 million from the acquisition of National and $8.4 million from wealth and asset management fees.
Revenues from services and fees in the Auction and Liquidation segment decreased $1.7 million, to $5.5 million during the three months ended June 30, 2021 from $7.2 million during the three months ended June 30, 2020. The decrease in revenues was primarily due to fewer large retail fee liquidation engagements.
Revenues from services and fees in the Financial Consulting segment increased $4.9 million, to $23.7 million during the three months ended June 30, 2021 from $18.8 million during the three months ended June 30, 2020. The increase in revenues was primarily due to an increase in revenue of $3.8 million in advisory services, $0.7 million in real estate engagement fees where we provide lease modification services for corporate tenants, and $0.4 million due to a newly formed operations management group during fiscal year 2021.
Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased $1.7 million to $18.9 million during the three months ended June 30, 2021 from $20.7 million during the three months ended June 30, 2020. The decrease in revenues was primarily due to decreases in subscription services of $1.0 million and in advertising licensing and other of $0.8 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.
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Revenues from services and fees in the Brands segment increased $1.3 million to $4.5 million during the three months ended June 30, 2021 from $3.2 million during the three months ended June 30, 2020. The primary source of revenue included in this segment is the licensing of trademarks.
Trading income and fair value adjustments on loans decreased $81.9 million to $32.7 million during the three months ended June 30, 2021 compared to $114.5 million for the three months ended June 30, 2020. The $81.9 million decrease for the three months ended June 30, 2021 was primarily due to a decrease of $84.2 million in the Capital Markets segment partially offset by an increase of $2.4 million in the Wealth Management segment. The gain of $32.7 million for the three months ended June 30, 2021 included realized and unrealized amounts earned on investments made in our proprietary trading accounts of $33.4 million partially offset by an unrealized loss on our loans receivable, at fair value of $0.7 million.
Interest income – loans and securities lending increased $1.0 million, to $25.5 million during the three months ended June 30, 2021 from $24.5 million during the three months ended June 30, 2020. Interest income from securities lending was $13.9 million and $13.5 million during the three months ended June 30, 2021 and 2020, respectively. Interest income from loans was $11.6 million and $11.0 million during the three months ended June 30, 2021 and 2020, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods increased $10.6 million, to $12.5 million during the three months ended June 30, 2021 from $1.8 million during the three months ended June 30, 2020. Revenues from sale of goods were primarily attributable to $11.7 million of sales of retail goods related to a retail liquidation engagement in Europe and $0.7 million of sales of magicJack devices that were sold in connection with VoIP services. Cost of goods sold for the three months ended June 30, 2021 was $3.6 million, resulting in a gross margin of 70.9%.
Operating Expenses
Direct Cost of Services
Direct cost of services increased $4.1 million, to $12.1 million during the three months ended June 30, 2021 from $8.0 million during the three months ended June 30, 2020. Direct costs of services increased by $4.3 million in the Auction and Liquidation segment and decreased by $0.2 million in the Principal Investments — United Online and magicJack segment. The increase in direct costs in the Auction and Liquidation segment was primarily due to a retail liquidation engagement in Europe where we purchased inventory for resale using the existing stores of the client. As part of the retail liquidation engagement, we incurred costs related to the store operations which primarily related to expenses for occupancy, payroll and other store operating costs. The decrease in direct costs in the Principal Investments — United Online and magicJack segment was primarily due to a corresponding decrease in revenues from subscription based customers for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the three months ended June 30, 2021 and 2020 were comprised of the following:
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 65,720 | 33.0 | % | $ | 57,218 | 53.6 | % | $ | 8,502 | 14.9 | % | ||||||||||||
| Wealth Management segment | 91,042 | 45.5 | % | 15,753 | 14.8 | % | 75,289 | n/m | ||||||||||||||||
| Auction and Liquidation segment | 3,077 | 1.5 | % | 2,729 | 2.6 | % | 348 | 12.8 | % | |||||||||||||||
| Financial Consulting segment | 19,560 | 9.8 | % | 15,341 | 14.4 | % | 4,219 | 27.5 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 7,296 | 3.6 | % | 6,900 | 6.5 | % | 396 | 5.7 | % | |||||||||||||||
| Brands segment | 1,405 | 0.7 | % | 1,024 | 1.0 | % | 381 | 37.2 | % | |||||||||||||||
| Corporate and Other segment | 11,822 | 5.9 | % | 7,597 | 7.1 | % | 4,225 | 55.6 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 199,922 | 100.0 | % | $ | 106,562 | 100.0 | % | $ | 93,360 | 87.6 | % | ||||||||||||
Total selling, general and administrative expenses increased approximately $93.4 million to $199.9 million during the three months ended June 30, 2021 from $106.6 million for the three months ended June 30, 2020. The increase of approximately $93.4 million in selling, general and administrative expenses was due to increases of $8.5 million in the Capital Markets segment, $75.3 million in the Wealth Management segment, $0.3 million in the Auction and Liquidation segment, $4.2 million in the Financial Consulting segment, $0.4 million in the Principal Investments — United Online and magicJack segment, $0.4 million in the Brands segment, and $4.2 million in the Corporate and Other segment.
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Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by $8.5 million to $65.7 million during the three months ended June 30, 2021 from $57.2 million during the three months ended June 30, 2020. The increase was primarily due to increases of $17.7 million in payroll and related expenses, $1.5 million from the acquisition of National, and $2.0 million in investment banking deal expenses, partially offset by a decrease of $12.6 million in consulting expenses.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment increased by $75.3 million to $91.0 million during the three months ended June 30, 2021 from $15.8 million during the three months ended June 30, 2020. The increase was primarily due to increases of $69.6 million from the acquisition of National, $6.1 million in payroll and related expenses, $0.2 million in software and equipment expenses, $0.1 million in office expenses, and $0.1 million in travel and entertainment expenses, partially offset by decreases of $0.3 million in legal expenses, $0.3 million in occupancy expenses, and $0.3 million in other expenses.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment increased $0.3 million to $3.1 million during the three months ended June 30, 2021 from $2.7 million during the three months ended June 30, 2020.
Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $4.2 million to $19.6 million during the three months ended June 30, 2021 from $15.3 million during the three months ended June 30, 2020. The increase was primarily due to increases of $3.1 million in payroll and related expenses, $0.3 million in other expenses, $0.3 million in travel and entertainment expenses, $0.2 million in legal expenses, and $0.2 million in outside contractor expenses.
Principal Investments — United Online and magicJack
Selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment increased $0.4 million to $7.3 million for the three months ended June 30, 2021 from $6.9 million for the three months ended June 30, 2020. The increase was primarily due to a $1.0 million legal settlement accrual release in the three months ended June 30, 2020, partially offset by decreases of $0.3 million in depreciation and amortization expenses, $0.2 million in payroll and related expenses, and $0.2 million in business promotion and marketing expenses.
Brands
Selling, general and administrative expenses in the Brands segment increased by $0.4 million to $1.4 million during the three months ended June 30, 2021 from $1.0 million during the three months ended June 30, 2020. The increase was primarily due to increases of $0.2 million in payroll and related expenses and $0.2 million in other expenses.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment increased approximately $4.2 million to $11.8 million during the three months ended June 30, 2021 from $7.6 million for the three months ended June 30, 2020. The increase was primarily due to increases of $2.9 million in payroll and related expenses, $0.5 million in gain from currency exchange, $0.4 million in software and equipment expense, $0.2 million in transaction costs, and $0.2 million in other expenses.
Impairment of tradenames. Due to the impact of the COVID-19 outbreak on economic activity and market volatility, we tested our intangible assets as of June 30, 2020 and made the determination that the indefinite-lived tradenames in the Brands segment were impaired. In the three months ended June 30, 2020, the Company recognized impairment of $8.5 million on the indefinite-lived tradenames. There was no impairment in the three months ended June 30, 2021.
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Other Income (Expense). Other income included interest income of less than $0.1 million during the three months ended June 30, 2021 and $0.2 million during the three months ended June 30, 2020. Gain on extinguishment of loans in the amount of $6.5 million during the three months ended June 30, 2021 was due to National PPP loans that were forgiven by the SBA. Interest expense was $20.9 million during the three months ended June 30, 2021 compared to $16.5 million during the three months ended June 30, 2020. The increase in interest expense during the three months ended June 30, 2021 was primarily due to an increase in interest expense of $4.3 million from the issuance of senior notes. Other income in the three months ended June 30, 2021 included a loss on equity investments of $0.9 million compared to a loss of $0.3 million in the prior year.
Income Before Income Taxes. Income before income taxes was $95.0 million during the three months ended June 30, 2021 compared to $114.7 million during the three months ended June 30, 2020. The decrease in income before income taxes was primarily due to an increase in operating expenses of approximately $91.5 million, interest expense of $4.3 million, loss from equity investments of $0.5 million, and a decrease in interest income of $0.2 million, partially offset by an increase in revenue of $70.3 million and gain on extinguishment of loans of $6.5 million, as discussed above.
Provision for Income Taxes. Provision for income taxes was $19.9 million during the three months ended June 30, 2021 compared to $32.2 million during the three months ended June 30, 2020. The effective income tax rate was 20.9% for the three months ended June 30, 2021 as compared to 28.1% for the three months ended June 30, 2020.
Net Loss Attributable to Noncontrolling Interest. Net loss attributable to noncontrolling interests represents the proportionate share of net loss generated by membership interests of partnerships that we do not own. The net loss attributable to noncontrolling interests was $0.6 million during the three months ended June 30, 2021 compared to net loss of $1.3 million during the three months ended June 30, 2020.
Net Income Attributable to the Company. Net income attributable to the Company for the three months ended June 30, 2021 was $75.7 million, a decrease from $83.8 million for the three months ended June 30, 2020. The decrease in net income attributable to the Company during the three months ended June 30, 2021 as compared to the same period in 2020 was primarily due to a decrease in operating income of $21.2 million, and increase in loss from equity investments of $0.5 million, an increase in interest expense of $4.3 million, and a decrease in interest income of $0.2 million, partially offset by a decrease in provision for income taxes of $12.3 million and a gain on extinguishment of loans of $6.5 million.
Preferred Stock Dividends. On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, (trading under NASDAQ symbol “RILYP”), par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends are payable quarterly in arrears, on or about the last day of January, April, July and October. On April 5, 2021, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2020.
On September 4, 2020, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B Cumulative Perpetual Preferred Stock (trading under the NASDAQ symbol “RILYL”), par value $0.0001 per share. Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends are payable quarterly in arrears, on or about the last day of January, April, July and October. On April 5, 2021, the Company declared a cash dividend of $0.4609375 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021.
Net Income Available to Common Shareholders. Net income available to common shareholders for the three months ended June 30, 2021 was $73.9 million, a decrease from $82.8 million for the three months ended June 30, 2020. The decrease in net income available to common shareholders during the three months ended June 30, 2021 as compared to the same period in 2020 was primarily due to a decrease in operating income of $21.2 million, an increase in interest expense of $4.3 million, an increase in preferred stock dividends of $0.7 million, an increase in loss from equity investments of $0.5 million, and a decrease in interest income of $0.2 million, partially offset by a decrease in provision for income taxes of $12.3 million, gain on extinguishment of loans of $6.5 million and a decrease in loss attributable to noncontrolling interest of $0.7 million.
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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Condensed Consolidated Statements of Operations
(Dollars in thousands)
| Six Months Ended | ||||||||||||||||
| June 30, | June 30, | Change | ||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 555,612 | $ | 284,976 | $ | 270,636 | 95.0 | % | ||||||||
| Trading income (losses) and fair value adjustments on loans | 299,621 | (67,895 | ) | 367,516 | n/m | |||||||||||
| Interest income - Loans and securities lending | 62,411 | 46,357 | 16,054 | 34.6 | % | |||||||||||
| Sale of goods | 19,285 | 2,824 | 16,461 | n/m | ||||||||||||
| Total revenues | 936,929 | 266,262 | 670,667 | n/m | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 23,416 | 27,937 | (4,521 | ) | (16.2 | %) | ||||||||||
| Cost of goods sold | 8,952 | 1,629 | 7,323 | n/m | ||||||||||||
| Selling, general and administrative expenses | 391,266 | 194,306 | 196,960 | 101.4 | % | |||||||||||
| Impairment of tradenames | — | 12,500 | (12,500 | ) | (100.0 | %) | ||||||||||
| Interest expense - Securities lending and loan participations sold | 30,172 | 19,694 | 10,478 | 53.2 | % | |||||||||||
| Total operating expenses | 453,806 | 256,066 | 197,740 | 77.2 | % | |||||||||||
| Operating income | 483,123 | 10,196 | 472,927 | n/m | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 105 | 470 | (365 | ) | (77.7 | %) | ||||||||||
| Gain on extinguishment of loans | 6,509 | — | 6,509 | 100.0 | % | |||||||||||
| Income (loss) on equity investments | 23 | (554 | ) | 577 | n/m | |||||||||||
| Interest expense | (40,642 | ) | (32,163 | ) | (8,479 | ) | 26.4 | % | ||||||||
| Income (loss) before income taxes | 449,118 | (22,051 | ) | 471,169 | n/m | |||||||||||
| (Provision) benefit for income taxes | (117,420 | ) | 5,331 | (122,751 | ) | n/m | ||||||||||
| Net income (loss) | 331,698 | (16,720 | ) | 348,418 | n/m | |||||||||||
| Net income (loss) attributable to noncontrolling interests | 1,366 | (1,895 | ) | 3,261 | (172.1 | %) | ||||||||||
| Net income (loss) attributable to B. Riley Financial, Inc. | 330,332 | (14,825 | ) | 345,157 | n/m | |||||||||||
| Preferred stock dividends | 3,538 | 2,142 | 1,396 | 65.2 | % | |||||||||||
| Net income (loss) available to common shareholders | $ | 326,794 | $ | (16,967 | ) | $ | 343,761 | n/m | ||||||||
| n/m | - Not applicable or not meaningful. |
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Revenues
The table below and the discussion that follows are based on how we analyze our business.
| Six Months Ended | ||||||||||||||||
| June 30, | June 30, | Change | ||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 296,976 | $ | 133,964 | $ | 163,012 | 121.7 | % | ||||||||
| Wealth Management segment | 152,986 | 34,205 | 118,781 | n/m | ||||||||||||
| Auction and Liquidation segment | 12,892 | 27,867 | (14,975 | ) | (53.7 | %) | ||||||||||
| Financial Consulting segment | 45,144 | 39,559 | 5,585 | 14.1 | % | |||||||||||
| Principal Investments - United Online and magicJack segment | 38,725 | 42,374 | (3,649 | ) | (8.6 | %) | ||||||||||
| Brands | 8,889 | 7,007 | 1,882 | 26.9 | % | |||||||||||
| Subtotal | 555,612 | 284,976 | 270,636 | 95.0 | % | |||||||||||
| Revenues - Sale of goods | ||||||||||||||||
| Auction and Liquidation segment | 17,835 | 1,045 | 16,790 | n/m | ||||||||||||
| Principal Investments - United Online and magicJack segment | 1,450 | 1,779 | (329 | ) | n/m | |||||||||||
| Subtotal | 19,285 | 2,824 | 16,461 | n/m | ||||||||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | 294,400 | (67,935 | ) | 362,335 | n/m | |||||||||||
| Wealth Management segment | 5,221 | 40 | 5,181 | n/m | ||||||||||||
| Subtotal | 299,621 | (67,895 | ) | 367,516 | n/m | |||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 62,411 | 46,357 | 16,054 | 34.6 | % | |||||||||||
| Total revenues | $ | 936,929 | $ | 266,262 | $ | 670,667 | n/m | |||||||||
| n/m | - Not applicable or not meaningful. |
Total revenues increased approximately $670.7 million to $936.9 million during the six months ended June 30, 2021 from $266.3 million during the six months ended June 30, 2020. The increase in revenues during the six months ended June 30, 2021 was primarily due to trading gains and gains from fair value adjustment on loans that amounted to $299.6 million and in the prior year period ended June 30, 2020 trading losses and losses on fair value adjustments on loans amounted to $67.9 million and was reported as a reduction in revenue in 2020. The increase in revenue from services and fees of $270.6 million in the six months ended June 30, 2021 was primarily due to increases in revenue of $163.0 million in the Capital Markets segment, $118.8 million in the Wealth Management segment, $5.6 million in the Financial Consulting segment and $1.9 million in the Brands segment; partially offset by decreases in revenues of $15.0 million in the Auction and Liquidation segment and $3.6 million in the Principal Investments — United Online and magicJack segment.
Revenues from services and fees in the Capital Markets segment increased $163.0 million, to $297.0 million during the six months ended June 30, 2021 from $134.0 million during the six months ended June 30, 2020. The increase in revenues was primarily due to increases in revenue of $140.8 million from corporate finance, consulting and investment banking fees, $19.1 million from the acquisition of National in the first quarter of 2021, and other income of $4.0 million; partially offset by decreases of $0.4 million in commissions and $0.4 million in wealth and asset management fees.
Revenues from services and fees in the Wealth Management segment increased $118.8 million, to $153.0 million during the six months ended June 30, 2021 from $34.2 million during the six months ended June 30, 2020. The increase in revenues was primarily due to increases in revenue of $106.6 million from the acquisition of National and $12.0 million from wealth and asset management fees.
Revenues from services and fees in the Auction and Liquidation segment decreased $15.0 million, to $12.9 million during the six months ended June 30, 2021 from $27.9 million during the six months ended June 30, 2020. The decrease in revenues was primarily due to fewer large retail fee liquidation engagements.
Revenues from services and fees in the Financial Consulting segment increased $5.6 million, to $45.1 million during the six months ended June 30, 2021 from $39.6 million during the six months ended June 30, 2020. The increase in revenues was primarily due to an increase in revenue of $2.5 million from advisory services, $2.4 million in real estate engagement fees where we provide lease modification services for corporate tenants, and $0.6 million due to a newly formed operations management group during fiscal year 2021.
Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased $3.6 million to $38.7 million during the six months ended June 30, 2021 from $42.4 million during the six months ended June 30, 2020. The decrease in revenues was primarily due to decreases in subscription services of $2.6 million and in advertising licensing and other of $1.1 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.
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Revenues from services and fees in the Brands segment increased $1.9 million to $8.9 million during the six months ended June 30, 2021 from $7.0 million during the six months ended June 30, 2020. The primary source of revenue included in this segment is the licensing of trademarks.
Trading income and fair value adjustments on loans consisted of gains in the amount of $299.6 million during the six months ended June 30, 2021 compared to trading losses and losses on fair value adjustments on loans in the amount of $67.9 million for the six months ended June 30, 2020. The $367.5 million increase in gain for the six months ended June 30, 2021 was primarily due to increases of $362.3 million in the Capital Markets segment and $5.2 million in the Wealth Management segment. The gain of $299.6 million for the six months ended June 30, 2021 included realized and unrealized amounts earned on investments made in our proprietary trading accounts of $289.6 million and unrealized amounts on our loans receivable, at fair value of $10.0 million.
Interest income – loans and securities lending increased $16.1 million, to $62.4 million during the six months ended June 30, 2021 from $46.4 million during the six months ended June 30, 2020. Interest income from securities lending was $36.8 million and $23.6 million during the six months ended June 30, 2021 and 2020, respectively. Interest income from loans was $25.6 million and $22.7 million during the six months ended June 30, 2021 and 2020, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods increased $16.5 million, to $19.3 million during the six months ended June 30, 2021 from $2.8 million during the six months ended June 30, 2020. Revenues from sale of goods were primarily attributable to $17.8 million of sales of retail goods related to a retail liquidation engagement in Europe and $1.5 million of sales of magicJack devices that were sold in connection with VoIP services. Cost of goods sold for the six months ended June 30, 2021 was $9.0 million, resulting in a gross margin of 53.6%.
Operating Expenses
Direct Cost of Services
Direct cost of services decreased $4.5 million, to $23.4 million during the six months ended June 30, 2021 from $27.9 million during the six months ended June 30, 2020. Direct cost of services decreased by $3.9 million in the Auction and Liquidation segment and $0.6 million in the Principal Investments — United Online and magicJack segment. The decrease in direct costs in the Auction and Liquidation segment was primarily due to a decrease in the number of retail fee type engagements performed during the six months ended June 30, 2021, partially offset by an increase of $4.7 million of direct costs incurred on a retail liquidation engagement in Europe in the second quarter of 2021, where we purchased inventory for resale and as part of the retail liquidation engagement we incurred costs related to the store operations which primarily related to expenses for occupancy, payroll and other store operating costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the six months ended June 30, 2021 and 2020 were comprised of the following:
| Six Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, 2021 | June 30, 2020 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 152,625 | 39.0 | % | $ | 86,115 | 44.3 | % | $ | 66,510 | 77.2 | % | ||||||||||||
| Wealth Management segment | 154,913 | 39.6 | % | 33,784 | 17.4 | % | 121,129 | n/m | ||||||||||||||||
| Auction and Liquidation segment | 4,566 | 1.2 | % | 4,256 | 2.2 | % | 310 | 7.3 | % | |||||||||||||||
| Financial Consulting segment | 37,647 | 9.6 | % | 31,137 | 16.0 | % | 6,510 | 20.9 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 14,700 | 3.8 | % | 15,242 | 7.8 | % | (542 | ) | (3.6 | %) | ||||||||||||||
| Brands segment | 2,795 | 0.7 | % | 2,642 | 1.4 | % | 153 | 5.8 | % | |||||||||||||||
| Corporate and Other segment | 24,020 | 6.1 | % | 21,130 | 10.9 | % | 2,890 | 13.7 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 391,266 | 100.0 | % | $ | 194,306 | 100.0 | % | $ | 196,960 | 101.4 | % | ||||||||||||
Total selling, general and administrative expenses increased approximately $197.0 million to $391.3 million during the six months ended June 30, 2021 from $194.3 million for the six months ended June 30, 2020. The increase of approximately $197.0 million in selling, general and administrative expenses was due to increases of $66.5 million in the Capital Markets segment, $121.1 million in the Wealth Management segment, $0.3 million in the Auction and Liquidation segment, $6.5 million in the Financial Consulting segment, $0.2 million in the Brands segment, and $2.9 million in the Corporate and Other segment, partially offset by a decrease of $0.5 million in the Principal Investments — United Online and magicJack segment.
47
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by $66.5 million to $152.6 million during the six months ended June 30, 2021 from $86.1 million during the six months ended June 30, 2020. The increase was primarily due to increases of $44.2 million in payroll and related expenses, $13.2 million from the acquisition of National, $6.9 million in consulting expenses, $2.6 million in investment banking deal expenses, and $0.4 million in clearing charges, partially offset by a decrease of $0.9 million in legal expenses.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment increased by $121.1 million to $154.9 million during the six months ended June 30, 2021 from $33.8 million during the six months ended June 30, 2020. The increase was primarily due to increases of $113.0 million from the acquisition of National and $9.3 million in payroll and related expenses, partially offset by decreases of $0.7 million in legal expenses and $0.5 million in clearing charges.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment increased by $0.3 million to $4.6 million during the six months ended June 30, 2021 from $4.3 million during the six months ended June 30, 2020. The increase was primarily due to an increase of $1.2 million in business development expenses; partially offset by decreases of $0.5 million in payroll and related expenses, and $0.5 million in foreign currency exchange.
Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $6.5 million to $37.6 million during the six months ended June 30, 2021 from $31.1 million during the six months ended June 30, 2020. The increase was primarily due to increases of $5.3 million in payroll and related expenses, $0.6 million in legal expenses, $0.3 million in outside contractor expenses, and $0.3 million in other expenses.
Principal Investments — United Online and magicJack
Selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment decreased $0.5 million to $14.7 million for the six months ended June 30, 2021 from $15.2 million for the six months ended June 30, 2020. The decrease was primarily due to decreases of $0.6 million in payroll and related expenses, $0.6 million in depreciation and amortization expenses, and $0.1 million in communications expenses, partially offset by an increase primarily due to a $0.8 million legal settlement accrual release in the six months ended June 30, 2020.
Brands
Selling, general and administrative expenses in the Brands segment increased by $0.2 million to $2.8 million during the six months ended June 30, 2021 from $2.6 million during the six months ended June 30, 2020. The increase was primarily due to an increase of $0.2 million in management fees paid.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment increased approximately $2.9 million to $24.0 million during the six months ended June 30, 2021 from $21.1 million for the six months ended June 30, 2020. The increase was primarily due to increases of $9.2 million in payroll and related expenses, $2.5 million in extinguishment of debt as further discussed below, and $0.5 million in computer software expenses, partially offset by a decrease of $9.1 million primarily due to recording a pre-acquisition litigation claim related to one of our acquired subsidiaries in the six months ended June 30, 2021.
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During the six months ended June 30, 2021, we repurchased 5,126,228 senior notes with an aggregate face value of $128.2 million at par, resulting in a loss net of expenses and original issue discount of $0.9 million. The total redemption payment included approximately $1.6 million in accrued interest. During the six months ended June 30, 2020, we repurchased 137,710 senior notes with an aggregate face value of $3.4 million for $1.8 million resulting in a gain net of expenses and original issue discount of $1.6 million. As part of the repurchase, the Company paid $0.03 million in interest accrued through the date of each respective repurchase.
Impairment of tradenames. Due to the impact of the COVID-19 outbreak on economic activity and market volatility, we tested our intangible assets as of March 31, 2020 and June 30, 2020 and made the determination that the indefinite-lived tradenames in the Brands segment were impaired. In the six months ended June 30, 2020, the Company recognized impairments of $12.5 million on the indefinite-lived tradenames. There was no impairment in the six months ended June 30, 2021.
Other Income (Expense). Other income included interest income of $0.1 million during the six months ended June 30, 2021 and $0.5 million during the six months ended June 30, 2020. Gain on extinguishment of loans in the amount of $6.5 million during the six months ended June 30, 2021 was due to National PPP loans that were forgiven by the SBA. Interest expense was $40.6 million during the six months ended June 30, 2021 compared to $32.2 million during the six months ended June 30, 2020. The increase in interest expense during the six months ended June 30, 2021 was primarily due to an increase in interest expense of $8.6 million from the issuance of senior notes, partially offset by a decrease in interest expense of $0.2 million on our asset based credit facility. Other income in the six months ended June 30, 2021 included a gain on equity investments of $0.02 million compared to a loss of $0.6 million in the prior year period.
Income (Loss) Before Income Taxes. Income before income taxes was $449.1 million during the six months ended June 30, 2021 compared to loss before income taxes of $22.1 million during the six months ended June 30, 2020. The increase of $471.2 million in income before income taxes was primarily due to an increase in revenues of approximately $670.7 million, a gain on extinguishment of loans of $6.5 million, and a gain from equity investments of $0.6 million, partially offset by increases in operating expenses of $197.7 million, interest expense of $8.5 million, and a decrease in interest income of $0.4 million.
(Provision) Benefit for Income Taxes. Provision for income taxes was $117.4 million during the six months ended June 30, 2021 compared to benefit for income taxes of $5.3 million during the six months ended June 30, 2020. The effective income tax rate was a provision of 26.1% for the six months ended June 30, 2021 as compared to a benefit of 24.2% for the six months ended June 30, 2020.
Net Income (Loss) Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interests represents the proportionate share of net income generated by membership interests of partnerships that we do not own. The net income attributable to noncontrolling interests was $1.4 million during the six months ended June 30, 2021 compared to net loss of $1.9 million during the six months ended June 30, 2020.
Net Income (Loss) Attributable to the Company. Net income attributable to the Company for the six months ended June 30, 2021 was $330.3 million, an increase from net loss attributable to the Company of $14.8 million for the six months ended June 30, 2020. The increase of $345.2 million in net income attributable to the Company during the six months ended June 30, 2021 as compared to the same period in 2020 was primarily due to an increase in operating income of $472.9 million, an increase in gain on extinguishment of loans of $6.5 million, and an increase in gain from equity investments of $0.6 million, partially offset by an increase in provision for income taxes of $122.8 million, an increase in interest expense of $8.5 million, an increase in net income attributable to noncontrolling interests of $3.3 million, and a decrease in interest income of $0.4 million.
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Preferred Stock Dividends. On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, (trading under NASDAQ symbol “RILYP”), par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends are payable quarterly in arrears, on or about the last day of January, April, July and October. On January 11, 2021, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021.
On September 4, 2020, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B Cumulative Perpetual Preferred Stock (trading under the NASDAQ symbol “RILYL”), par value $0.0001 per share. Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends are payable quarterly in arrears, on or about the last day of January, April, July and October. On January 11, 2021, the Company declared a cash dividend of $0.4609375 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend representing $0.4609375 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021.
Net Income (Loss) Available to Common Shareholders. Net income available to common shareholders for the six months ended June 30, 2021 was $326.8 million, an increase from net loss available to common shareholders of $17.0 million for the six months ended June 30, 2020. The increase of $343.8 million in net income available to common shareholders during the six months ended June 30, 2021 as compared to the same period in 2020 was primarily due to increases in operating income of $472.9 million, gain on extinguishment of loans of $6.5 million, and a gain from equity investments of $0.6 million, partially offset by an increase in provision for income taxes of $122.8 million, an increase in interest expense of $8.5 million, an increase in income attributable to noncontrolling interest of $3.3 million, an increase in preferred stock dividends of $1.4 million, and a decrease in interest income of $0.4 million.
Liquidity and Capital Resources
Our operations are funded through a combination of existing cash on hand, cash generated from operations, borrowings under our senior notes payable, term loans and credit facilities, and special purposes financing arrangements.
During the six months ended June 30, 2021 and 2020, we generated net income of $331.7 million and net loss of $16.7 million, respectively. Our cash flows and profitability are impacted by capital market engagements performed on a quarterly and annual basis and amounts realized from the sale of our investments in marketable securities.
As of June 30, 2021, we had $297.4 million of unrestricted cash and cash equivalents, $1.3 million of restricted cash, $1,278.8 million of securities and other investments owned at fair value, $270.3 million of loans receivable, and $1,475.0 million of borrowings outstanding. The borrowings outstanding of $1,475.0 million at June 30, 2021 included senior notes at amortized cost of $1,213.1 million, $257.1 million in term loans borrowed pursuant to the BRPAC and Nomura Credit Agreements, $4.4 million of loan participations sold, and $0.4 million of notes payable. We believe that our current cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility, funds available under the BRPAC and Nomura term loans, funds available under the Nomura revolving credit facility, and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.
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From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On July 29, 2021, we declared a regular dividend of $0.50 per share and special dividend of $1.50 per share that will be paid on or about August 26, 2021 to stockholders of record as of August 13, 2021. On May 3, 2021, we declared a regular dividend of $0.50 per share and special dividend of $2.50 per share that was paid on May 28, 2021 to stockholders of record as of May 17, 2021. On February 25, 2021, the Board of Directors announced an increase to the regular quarterly dividend from $0.375 per share to $0.50 per share. During the year ended December 31, 2020, we paid cash dividends on our common stock of $38.8 million. While it is the Board’s current intention to make regular dividend payments of $0.50 per share 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 or repurchases of 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.
A summary of dividend activity for the six months ended June 30, 2021 and the year ended December 31, 2020 was as follows:
| Regular | Special | Total | ||||||||||||||
| Stockholder | Dividend | Dividend | Dividend | |||||||||||||
| Date Declared | Date Paid | Record Date | Amount | Amount | Amount | |||||||||||
| May 3, 2021 | May 28, 2021 | May 17, 2021 | $ | 0.500 | $ | 2.500 | $ | 3.000 | ||||||||
| February 25, 2021 | March 24, 2021 | March 10, 2021 | 0.500 | 3.000 | 3.500 | |||||||||||
| October 28, 2020 | November 24, 2020 | November 10, 2020 | 0.375 | 0.000 | 0.375 | |||||||||||
| July 30, 2020 | August 28, 2020 | August 14, 2020 | 0.300 | 0.050 | 0.350 | |||||||||||
| May 8, 2020 | June 10, 2020 | June 1, 2020 | 0.250 | 0.000 | 0.250 | |||||||||||
| March 3, 2020 | March 31, 2020 | March 17, 2020 | 0.250 | 0.100 | 0.350 | |||||||||||
Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25 thousand liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. As of June 30, 2021, dividends in arrears in respect of the Depositary Shares were $0.8 million. On January 11, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021. On July 8, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or about August 2, 2021 to holders of record as of the close of business on July 21, 2021.
Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25 thousand liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. As of June 30, 2021, dividends in arrears in respect of the Depositary Shares were $0.5 million. On January 11, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021. On July 8, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which will be paid on or about August 2, 2021 to holders of record as of the close of business on July 21, 2021.
Our principal sources of liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds available under revolving credit facilities and special purpose financing arrangements.
Cash Flow Summary
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| (Dollars in thousands) | ||||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (147,901 | ) | $ | 14,229 | |||
| Investing activities | (13,722 | ) | (83,354 | ) | ||||
| Financing activities | 356,051 | 71,815 | ||||||
| Effect of foreign currency on cash | (534 | ) | (705 | ) | ||||
| Net increase in cash, cash equivalents and restricted cash | $ | 193,894 | $ | 1,985 | ||||
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Cash used in operating activities was $147.9 million during the six months ended June 30, 2021 compared to cash provided of $14.2 million during the six months ended June 30, 2020. Cash used in operating activities for the six months ended June 30, 2021 consisted of the positive impact of net income of $331.7 million and noncash items of $50.2 million, offset by the negative impact of changes in operating assets and liabilities of $529.8 million. The positive cash flow impact from noncash items of $50.2 million included deferred income taxes of $51.2 million, share-based compensation of $14.1 million, depreciation and amortization of $12.9 million, loss on extinguishment of debt of $0.9 million, provision for doubtful accounts of $0.8 million, dividends from equity investments of $0.6 million, and income allocated for mandatorily redeemable noncontrolling interests of $0.3 million, partially offset by fair value adjustments of $10.0 million, other noncash interest and other of $9.1 million, gain on extinguishment of loans of $6.5 million, gain on equity investment of $3.5 million, and effect of foreign currency on operations of $1.5 million.
Cash used in investing activities was $13.7 million during the six months ended June 30, 2021 compared to cash used in investing activities of $83.4 million for the six months ended June 30, 2020. During the six months ended June 30, 2021, cash used in investing activities consisted of cash used in purchases of loans receivable of $87.3 million, repayments of loan participations sold of $10.8 million, cash used for purchases of equity investments of $10.5 million, cash used in the National acquisition of $0.4 million, and purchases of property and equipment of $0.3 million, partially offset by cash received from loans receivable repayment of $95.5 million. During the six months ended June 30, 2020, cash used in investing activities consisted of cash used for the purchase of loans receivable of $152.2 million, repayments of loan participations sold of $0.9 million, cash used for equity investments of $6.5 million, and cash used for acquisition of other businesses of $1.5 million, offset by cash received from loans receivable repayment of $74.5 million, sale of a loan receivable to a related party of $1.8 million and loan participations sold of $2.4 million.
Cash provided by financing activities was $356.1 million during the six months ended June 30, 2021 compared to cash provided by financing activities of $71.8 million during the six months ended June 30, 2020. During the six months ended June 30, 2021, cash provided by financing activities primarily consisted of $475.7 million proceeds from issuance of senior notes, $200.0 million proceeds from the Nomura term loan, $64.7 million net proceeds from offerings of common stock, $10.6 million contributions from noncontrolling interests, and $8.3 million net proceeds from offerings of preferred stock, partially offset by $181.3 million used to pay dividends on our common shares, $128.2 million used to repurchase our senior notes, $37.6 million used to repay our notes payable, $15.7 million used to pay debt issuance costs, $14.8 million in distributions to noncontrolling interests, $11.5 million used for repayment on our BRPAC term loan, $10.4 million used to pay employment taxes on vesting of restricted stock, and $3.5 million used to pay dividends on our preferred shares. During the six months ended June 30, 2020, cash provided by financing activities primarily consisted of $171.1 million proceeds from issuance of senior notes and $4.6 million proceeds from offerings of preferred stock, offset by $37.1 million used to repay our asset based credit facility, $27.8 million used to repurchase our common stock, $17.5 million used to pay dividends on our common shares, $9.6 million used for repayment on our BRPAC term loan, $2.8 million used to pay debt issuance costs, $2.7 million used for payment of employment taxes on vesting of restricted stock, $2.1 million in distributions to noncontrolling interests, $2.1 million used to pay dividends on our preferred shares, $1.8 million used to repurchase our senior notes, and $0.4 million used to repay our other notes payable.
Credit Agreements
Nomura Credit Agreement
On June 23, 2021, the Company, the Primary Guarantor and the Borrower entered into the Credit Agreement with Nomura Corporate Funding Americas, LLC, as administrative agent, and Wells Fargo Bank, N.A., as collateral agent, providing for a four-year $200.0 million secured Term Loan Facility and a four-year $80.0 million secured Revolving Credit Facility. The Credit Facilities will mature on June 23, 2025, subject to acceleration or prepayment.
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Eurodollar loans under the Credit Facilities will accrue interest at the Eurodollar Rate plus an applicable margin of 4.50%. Base rate loans will accrue interest at the Base Rate plus an applicable margin of 3.50%. In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, the Company is required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by the average utilization of the Revolving Credit Facility for the immediately preceding fiscal quarter.
Subject to certain eligibility requirements, the assets of certain subsidiaries of the Company that hold credit assets, private equity assets, and public equity assets are placed into a borrowing base, which serves to limit the borrowings under the Credit Facilities. If borrowings under the Credit Facilities exceed the borrowing base, the Company is obligated to prepay the loans in an aggregate amount equal to such excess. The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company’s, the Primary Guarantor’s, the Borrower’s, and the Borrower’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends or to make other distributions or redemptions/repurchases in respect of their respective equity interests. In addition, the Credit Agreement contains a financial covenant that requires the Company to maintain Operating EBITDA of at least $115.0 million and the Primary Guarantor to maintain net asset value of at least $900.0 million. The Credit Agreement contains customary events of default, including with respect to a failure to make payments under the credit facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events.
Commencing on September 30, 2022, the Term Loan Facility will amortize in equal quarterly installments of 1.25% of the aggregate principal amount of the term loan as of the closing date with the remaining balance due at final maturity. Quarterly installments from September 30, 2022 to March 31, 2025 are in the amount of $2.5 million per quarter.
At June 30, 2021, the outstanding balance on the credit facility’s term loan was $194.2 million (net of unamortized debt issuance costs of $5.8 million). Interest on the term loan for the three and six months ended June 30, 2021 was $0.2 million (including amortization of deferred debt issuance costs of $0.03 million). The interest rate on the term loan at June 30, 2021 was 4.64%.
We had not made any borrowings under the Revolving Credit Facility at June 30, 2021. The unused commitment fee on the revolving facility for the three and six months ended June 30, 2021 was $0.03 million (including amortization of deferred financing costs of $0.01 million). The interest rate on the Revolving Credit Facility at June 30, 2021 was 4.65%. Subsequent to June 30, 2021, we drew down the full $80.0 million of the Revolving Credit Facility.
We are in compliance with all financial covenants in the Nomura Credit Agreement at June 30, 2021.
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Wells Fargo Credit Agreement
On April 21, 2017, we amended the asset based credit facility agreement (as amended, the “Credit Agreement”) with Wells Fargo Bank to increase the maximum borrowing limit from $100.0 million to $200.0 million. 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 a separate credit agreement (a “UK Credit Agreement”) dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom with borrowings up to 50.0 million British Pounds. Any borrowing on the UK Credit Agreement reduces the availability of the asset based $200.0 million credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. The Credit Agreement continues to include the addition of our Canadian subsidiary, from the October 5, 2016 amendment to the Credit Agreement, to facilitate borrowings to fund retail liquidation transactions in Canada. From time to time, we utilize this credit facility to fund costs and expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue letters of credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets, we are permitted to borrow up to $200.0 million under the credit facility, less the aggregate principal amount borrowed under the UK Credit Agreement (if in effect). Borrowings under the credit facility are only made at the discretion of the lender and are generally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related 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 is secured by the proceeds received for services rendered in connection with the 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, if any. 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 liquidation engagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowings on an engagement-by-engagement basis. The Credit Agreement contains certain covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. There was no outstanding balance on this credit facility at June 30, 2021 and December 31, 2020. At June 30, 2021, 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, 2021.
BRPAC Credit Agreement
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 of borrowers, entered into a credit agreement with Banc of California, N.A. in the capacity as agent and lender and with the other lenders party thereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, we borrowed $80.0 million due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregate principal amount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019, the Borrowers entered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in which the new lender extended to Borrowers the additional $10.0 million.
On December 31, 2020, the Borrowers, the Secured Guarantors, the Agent and the Lenders, entered into the Second Amendment to Credit Agreement (the “Second Amendment”) pursuant to which, among other things, (i) the Lenders agreed to make a new $75.0 million term loan to the Borrowers, the proceeds of which the Borrowers’ will use to repay the outstanding principal amount of the existing Terms Loans and Optional Loans and for other general corporate purposes, (ii) the Borrowers were permitted to make a one-time Permitted Distribution (as defined in the Second Amendment) in the amount of $30.0 million on the date of the Second Amendment, (iii) the maturity date of the new Term Loans is five (5) years from the date of the Second Amendment, (iv) the interest rate margin was increased by 25 basis points as set forth in the Second Amendment, (v) the Borrowers agreed to make mandatory prepayments of the Term Loans from a portion of the Consolidated Excess Cash Flow (as defined in the Credit Agreement), (vi) the maximum Consolidated Total Funded Debt Ratio (as defined in the Credit Agreement) was increased as set forth in the Second Amendment and (vii) the Company and B. Riley Principal Investments, LLC entered into a reaffirmation of their guarantees of the Borrowers’ obligations under the Credit Agreement. Additionally, the Borrowers paid a commitment fee and an arrangement fee, each based on a percentage of the aggregate commitments, in each case upon the closing of the Second Amendment, as further discussed in Note 8 to the accompanying financial statements. The borrowings under the amended BRPAC Credit Agreement bear interest equal to the LIBOR plus a margin of 2.75% to 3.25% depending on the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC Credit Agreement. At June 30, 2021, the interest rate on the BRPAC Credit Agreement was 3.36%.
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Amounts outstanding under the Amended BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2021. Quarterly installments from September 30, 2021 to December 31, 2021 are in the amount of $4.8 million per quarter, from March 31, 2022 to December 31, 2022 are in the amount of $4.3 million per quarter, from March 31, 2023 to December 31, 2023 are in the amount of $3.8 million per quarter, from March 31, 2024 to December 31, 2024 are in the amount of $3.3 million per quarter, and from March 31, 2025 to December 31, 2025 are in the amount of $2.8 million per quarter.
As of June 30, 2021 and December 31, 2020, the outstanding balance on the term loan was $62.9 million (net of unamortized debt issuance costs of $0.6 million) and $74.2 million (net of unamortized debt issuance costs of $0.8 million), respectively. Interest expense on the term loan during the three months ended June 30, 2021 and 2020, was $0.7 million (including amortization of deferred debt issuance costs of $0.08 million) and $0.6 million (including amortization of deferred debt issuance costs of $0.07 million), respectively. Interest expense on the term loan during the six months ended June 30, 2021 and 2020, was $1.4 million (including amortization of deferred debt issuance costs of $0.2 million) and $1.4 million (including amortization of deferred debt issuance costs of $0.1 million), respectively.
We are in compliance with all financial covenants in the BRPAC Credit Agreement at June 30, 2021.
Senior Note Offerings
During the six months ended June 30, 2021, the Company issued $85.3 million of senior notes due with maturities dates ranging from May 2023 to January 2028 pursuant to At the Market Issuance Sales Agreements with B. Riley Securities, Inc. which governs the program of at-the-market sales of the Company’s senior notes. A series of prospectus supplements were filed by the Company with the SEC which allowed the Company to sell these senior notes.
On January 25, 2021, the Company issued $230.0 million of senior notes due in January 2028 (“6.0% 2028 Notes”). Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028 Notes are unsecured and due and payable in full on January 31, 2028. In connection with the issuance of the 6.0% 2028 Notes, the Company received net proceeds of $225.7 million (after underwriting commissions, fees and other issuance costs of $4.3 million). The Notes bear interest at the rate of 6.0% per annum.
On March 29, 2021, the Company issued $159.5 million of senior notes due in March 2026 (“5.5% 2026 Notes”). Interest on the 5.5% 2026 Notes is payable quarterly at 5.5%. The 5.5% 2026 Notes are unsecured and due and payable in full on March 31, 2026. In connection with the issuance of the 5.5% 2026 Notes, the Company received net proceeds of $156.3 million (after underwriting commissions, fees and other issuance costs of $3.2 million). The Notes bear interest at the rate of 5.5% per annum.
On March 31, 2021, the Company exercised its option for early redemption at par $128.2 million of senior notes due in May 2027 (“7.50% 2027 Notes”) pursuant to the second supplemental indenture dated May 31, 2017. The total redemption payment included $1.6 million in accrued interest.
On June 24, 2021, the Company announced it will redeem all of the issued and outstanding 7.25% Senior Notes due 2027 (the "Notes") on July 26, 2021 (the "Redemption Date"). The Notes have an aggregate principal amount of $122.8 million. The redemption price is equal to 100% of the aggregate principal amount, plus any accrued and unpaid interest up to, but excluding, the Redemption Date. The Notes, which are listed on NASDAQ under the ticker symbol "RILYG," will be delisted and cease trading on the Redemption Date.
At June 30, 2021 and December 31, 2020, the total senior notes outstanding was $1,213.1 million (net of unamortized debt issue costs of $13.9 million) and $870.8 million (net of unamortized debt issue costs of $9.6 million) with a weighted average interest rate of 6.49% and 6.95%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $20.0 million and $15.6 million for the three months ended June 30, 2021 and 2020, respectively and $38.6 million and $30.0 million for the six months ended June 30, 2021 and 2020, respectively.
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The most recent sales agreement prospectus was filed by us with the SEC on April 6, 2021 (the “April 2021 Sales Agreement Prospectus”), supplementing the prospectus filed on January 28, 2021 (the “January 2021 Sales Agreement Prospectus”). This program provides for the sale by the Company of up to $150.0 million of certain of the Company’s senior notes. As of June 30, 2021, the Company had $64.7 million remaining availability under the April 2021 Sales Agreement.
Off Balance Sheet Arrangements
As part of our investment banking and financial services activities, from time to time we enter into guaranties of debt, commitments of other entities, and similar transactions that may be considered off-balance sheet arrangements.
Babcock and Wilcox Commitments
On June 30, 2021, in connection with B&W’s entry into new debt financing with lenders not related to us, we agreed to guaranty (the “B. Riley Guaranty”) up to $110.0 million of obligations that B&W may owe to providers of cash collateral pledged in connection with such debt financing. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of B&W’s obligations under the Reimbursement Agreement. B&W shall pay us $0.9 million per annum in connection with the B. Riley Guaranty. B&W has agreed to reimburse us to the extent the B. Riley Guaranty is called upon.
On August 10, 2020, we entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Company and/or Berkley Regional Insurance Company (collectively, “Berkley”) to a general agreement of indemnity made by B&W in favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, we agreed to indemnify Berkley in connection with a default by B&W under the Indemnity Agreement relating to a $30.0 million payment and performance bond issued by Berkley in connection with a construction project undertaken by B&W. In consideration for providing the Indemnity Rider, B&W paid us $0.6 million on August 26, 2020.
Other Commitments
On June 19, 2020, we participated in a loan facility agreement to provide a total loan commitment up to 33.0 million EUROS to a retailer in Europe. We made an initial funding of 6.6 million EUROS in July 2020. No additional borrowings have been made since the initial funding, leaving unused future commitments available of up to 26.4 million EUROS as of June 30, 2021.
At June 30, 2021, we had an outstanding commitment to purchase a loan pursuant to an assignment agreement with a client in the amount of $77.5 million that was funded on July 2, 2021. Simultaneously with the funding of the loan on July 2, 2021, we received a principal payment on the loan for $27.5 million reducing the loans receivable balance to $50.0 million.
Except as disclosed above, we have no material obligations, assets or liabilities which would be considered off-balance sheet arrangements and do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, established for the purpose of facilitating off-balance sheet arrangements.
Contractual Obligations
On January 25, 2021, we issued $230.0 million of senior notes due in January 2028 (“6.0% 2028 Notes”) pursuant to the prospectus supplement dated February 12, 2020. Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028 Notes are unsecured and due and payable in full on January 31, 2028. In connection with the issuance of the 6.0% 2028 Notes, we received net proceeds of $225.7 million (after underwriting commissions, fees and other issuance costs of $4.3 million). The Notes bear interest at the rate of 6.0% per annum.
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On March 31, 2021, we exercised our option for early redemption at par $128.2 million of senior notes due in May 2027 (“7.50% 2027 Notes”) pursuant to the second supplemental indenture dated May 31, 2017. The total redemption payment included $1.6 million in accrued interest.
On March 29, 2021, we issued $159.5 million of senior notes due in March 2026 (“5.5% 2026 Notes”) pursuant to the prospectus supplement dated January 28, 2021. Interest on the 5.5% 2026 Notes is payable quarterly at 5.5%. The 5.5% 2026 Notes are unsecured and due and payable in full on March 31, 2026. In connection with the issuance of the 5.5% 2026 Notes, we received net proceeds of $156.3 million (after underwriting commissions, fees and other issuance costs of $3.2 million). The Notes bear interest at the rate of 5.5% per annum.
On July 26, 2021, we redeemed, in full, $122.8 million aggregate principal amount of its 7.25% Senior Notes due 2027 (“7.25% 2027 Notes”) pursuant to the third supplemental indenture dated December 31, 2017. The total redemption payment included approximately $2.1 million in accrued interest. In connection with the full redemption, the 7.25% 2027 Notes were delisted from NASDAQ.
As a result of the above, our total senior notes payable (including interest) increased to $1,497.4 million as of June 30, 2021, and comparing June 30, 2021 to December 31, 2020, our senior notes payable due in one year or less increased by $137.1 million, our senior notes payable due in 1-3 years increased by $128.5 million, our senior notes due in 4-5 years increased by $360.4 million while our senior notes due in more than 5 years decreased by $220.3 million. Additionally, our total contractual obligations increased to $1,860.1 million at June 30, 2021 and comparing June 30, 2021 to December 31, 2020, our total payments due in one year or less increased by $102.2 million, our payments due in 1-3 years increased $152.5 million, our payments due in 4-5 years increased by $541.7 million, while our payments due in more than 5 years decreased by $215.1 million.
There were no other material changes to our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Recent Accounting Standards
See Note 2(u) to the accompanying financial statements for recent accounting pronouncements we have not yet adopted and recently adopted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
B. Riley’s primary exposure to market risk consists of risk related to changes in interest rates. B. Riley has not used derivative financial instruments for speculation or trading purposes.
Interest Rate Risk
Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable and credit facilities to fund costs and expenses incurred in connection with our acquisitions and retail liquidation engagements. Borrowings under our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floating rate of interest. We invest in loans receivable that primarily bear interest at floating rates of interest.
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The primary objective of our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing the income that we receive from investments without significantly increasing risk. To achieve these objectives, our investments allow us to maintain a portfolio of cash equivalents, short-term investments through a variety of securities owned that primarily includes common stocks, corporate bonds and investments in partnership interests, and loans receivable. Our cash and cash equivalents through June 30, 2021 included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activities in convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities.
Foreign Currency Risk
The majority of our operating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled $13.3 million for the six months ended June 30, 2021 or 1.4% of our total revenues of $936.9 million during the six months ended June 30, 2021. The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive income (loss). Transaction gains (losses), which were included in our condensed consolidated statements of operations, amounted to a gain of $0.2 million and $0.5 million during the six months ended June 30, 2021 and 2020, respectively. We may be exposed to foreign currency risk; however, our operating results during the six months ended June 30, 2021 included $13.3 million of revenues from our foreign subsidiaries and a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would result in less than $0.1 million increase in our operating income and a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating income of less than $0.1 million for the six months ended June 30, 2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoing evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that as of June 30, 2021 our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on Effectiveness of Controls
Our management, including our Co-Chief Executive Officers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well- designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
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 January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”) and National Securities Corporation, each an indirect broker-dealer subsidiary of the Company, as defendants 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 Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the Circuit Court for Morgan County, 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 $151.0 million. A 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 which is expected in 2021. An accrual for the settlement is included in the accompanying condensed consolidated financial statements.
On July 3, 2019, a lawsuit was filed against National Securities Corporation, (“NSC”) National Asset Management, Inc., National, National’s current board members and certain former board members, certain officers of National, John Does 1–10, and the National as a nominal defendant, in the United States District Court for the Southern District of New York, captioned Kay Johnson v. National Securities Corporation, et al., Case No. 1:19-cv-06197-LTS. The complaint presents three purported derivative causes of action on behalf of the Company, and five causes of action by the plaintiff directly. As part of the derivative claims, the complaint generally alleges that certain of the individual defendants failed to establish and maintain adequate internal controls to ensure that the Board acted in accordance with its fiduciary duties to prevent and uncover alleged legal and regulatory misconduct and wrongdoing on the part of a National officer. As part of its claims brought directly by the plaintiff, the complaint generally alleges that certain individual and corporate defendants wrongfully terminated the employment of the plaintiff in violation of the Dodd-Frank Act and applicable common law, or conspired to do so. The complaint further alleges that certain corporate defendants violated the Equal Pay Act with regards to the plaintiff’s compensation. The complaint seeks monetary damages in favor of the Company, an order directing the Company’s board members to take actions to enhance the Company’s governance, compensatory and punitive damages in favor of the plaintiff, and attorneys’ fees and costs. On February 2, 2020, the plaintiff filed an amended complaint presenting additional causes of action. The Company has notified its insurer of the lawsuit and believes it has valid defenses to the asserted claims of the complaint. On March 18, 2020, the defendants filed a motion to dismiss the amended complaint. The plaintiff filed an opposition to the defendants’ motion to dismiss on April 15, 2020, and the defendants filed a reply in further support of the motion to dismiss on May 6, 2020. On August 20, 2020, the parties entered into mediation with a private mediator in an attempt to settle the action and, on January 15, 2021, as a result of the mediation, a settlement was reached. In March 2021, a settlement agreement and release was executed by the parties and all claims have been dismissed.
The New York Department of Financial Services (the “Department”) completed its investigation of NSC’s compliance with the Department’s Cybersecurity Requirements for Financial Services Companies (the “Regulations”). The Regulations establish standards for the cybersecurity programs of entities the Department licenses or otherwise regulates, including NSC. On April 14, 2021, NSC paid the Department a fine of $3.0 million as a result of the Department’s finding that NSC violated certain of the Regulations.
NSC is a respondent in several Financial Industry Regulatory Authority (“FINRA”) arbitration proceedings filed by investors alleging claims in connection with equity investments in GPB Capital Holdings, LLC (“GPB”) involving matters prior to the Company’s acquisition of National on February 25, 2021. Some of these arbitration claims, among other things, also allege that NSC failed to supervise certain registered representatives. NSC is evaluating each arbitration claim on its own merits. GPB and its affiliates have been the subject of various civil claims and fraud investigations over the past few years, and, in February 2021, the U.S. Department of Justice indicted certain individuals affiliated with GPB for material misrepresentations and omissions under the federal securities laws with respect to funds managed by GPB. At the present time, the Company continues to vigorously defend these actions and is not able to determine the ultimate resolution of these matters. Adverse judgments in these matters in the aggregate could materially and adversely affect the Company and its financial condition.
Item 1A. Risk Factors.
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 4, 2021. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in the Annual Report on Form 10-K for the year ended December 31, 2020, could materially affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. There have been no material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2020.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On July 27, 2021, the Compensation Committee (the “Committee”) of the Company’s Board of Directors approved an annual incentive cash compensation program for the Company’s named executive officers. Rather than continue to establish financial targets pursuant to the Company’s Management Bonus Plan which in preceding years provided annual cash bonuses based upon the achievement of certain annual EBITDA thresholds, the Committee elected, following consultation with its outside compensation advisors, to implement a discretionary bonus program based upon the Company’s performance and the individual executive’s contributions. The Committee has determined that a discretionary annual bonus for the named executive officers enables the Committee (i) to tailor compensation based upon individual performance, (ii) to consider long versus short term goals, (iii) to evaluate the Company’s overall financial performance (or a business unit or subsidiary performance, as the case may be), and (iv) to appraise the attainment of other Company objectives.
Item 6. Exhibits.
The exhibits filed as part of this Quarterly Report are listed in the index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.
Exhibit Index
| * | Filed herewith. |
| ** | Furnished herewith. |
| # | Management contract or compensatory plan or arrangement |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| B. Riley Financial, Inc. | |||
| Date: July 30, 2021 | By: | /s/ PHILLIP J. AHN | |
| Name: | Phillip J. Ahn | ||
| Title: | Chief Financial Officer and Chief Operating Officer (Principal Financial Officer) | ||
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