BRC Group Holdings, Inc 10-Q for FY2021 Q3
BRC Group Holdings, Inc. (RILY)
About this 10-Q
BRC Group Holdings, Inc filed this 10-Q on November 9, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $381.52M
- up 68.6% from $226.25M a year earlier
- Net income
- $50.55M
- up 4.5% from net income of $48.38M a year earlier
- Diluted EPS
- $1.69
- down 3.4% from $1.75 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 | ||
| 6.00% Senior Notes due 2028 | RILYT | Nasdaq Global Market | ||
| 5.50% Senior Notes due 2026 | RILYK | Nasdaq Global Market | ||
| 5.25% Senior Notes due 2028 | RILYZ | 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 | ☐ | Smaller reporting company | |
| Emerging growth 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 November 1, 2021, there were
B. Riley Financial, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 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)
| September 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 | ||||||||
| 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 | ||||||||
| Revolving credit facility | ||||||||
| Term loans, net | ||||||||
| Senior notes payable, net | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Redeemable noncontrolling interests in equity of subsidiaries | ||||||||
| 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 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 | ||||||||||||||||
| Restructuring charge | — | — | ||||||||||||||
| 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 and other | ||||||||||||||||
| Income (loss) from equity investments | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income | ||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | ( | ) | ||||||||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | $ | $ | $ | ||||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic income per common share | $ | $ | $ | $ | ||||||||||||
| Diluted income 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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in cumulative translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive (loss) income, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive income | ||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | ( | ) | ||||||||||||||
| Comprehensive income 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 September 30, 2021 and 2020 (Revised - See Note 19)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, July 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| 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 | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Warrants exercised | — | |||||||||||||||||||||||||||||||||||
| 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, September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| Balance, July 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 income | — | — | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | ||||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
4
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
(Dollars in thousands, except share data)
Nine Months Ended September 30, 2021 and 2020 (Revised - See Note 19)
| 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 | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Common stock repurchased and retired | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Warrants exercised | — | |||||||||||||||||||||||||||||||||||
| Share based payments | — | — | ||||||||||||||||||||||||||||||||||
| Dividends on common stock ($ | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||||||
| Remeasurement of B. Riley Principal 150 and 250 Merger Corporations subsidiary temporary equity | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | ||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interests | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 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 income (loss) | — | — | ( | ) | ||||||||||||||||||||||||||||||||
| Remeasurement of B. Riley Principal Merger II Corporation subsidiary temporary equity | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance, September 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)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | (Revised - See Note 19) | |||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income 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) loss 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 | ( | ) | ( | ) | ||||
| ( | ) | |||||||
| Purchases of property, equipment and other | ( | ) | ( | ) | ||||
| Proceeds from sale of property, equipment and intangible assets | ||||||||
| Funds received from trust account of subsidiary | — | |||||||
| Investment of subsidiaries initial public offering proceeds into trust account | ( | ) | ( | ) | ||||
| Acquisition of other business | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from revolving line of credit, net | ||||||||
| 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 for debt issuance and offering 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 | ||||||||
| Redemption of subsidiary temporary equity and distributions | — | ( | ) | |||||
| Proceeds from initial public offering of subsidiaries | ||||||||
| 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, operations management consulting, 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 third 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.
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
7
Revision of Prior Period Financial Statements
In connection with the preparation of the Company’s condensed consolidated financial statements for the three months ended September 30, 2021, the Company identified an error that was not material related to the consolidation of certain Variable Interest Entities (“VIE’s) which primarily resulted in a gross up of the balance sheet to reflect funds held in trust within prepaid expenses and other assets and the recording of temporary equity. In accordance with SAB No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated the error and determined that the related impact did not, either individually or in the aggregate, materially misstate previously issued consolidated financial statements. A summary of revisions to certain previously reported financial information presented herein is included in Note 19.
(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.
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 $
8
(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 September 30, 2021,
restricted cash included $
(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 is 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 expense on property and equipment was $
9
(l) Loans Receivable
Under ASC “Topic 326: Financial Instruments – Credit Losses” (“ASC 326”), 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. As of September 30, 2021, the Company has outstanding limited guarantee arrangements with respect to Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 14. 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. As of September 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 and other investments owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.
As of September 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:
| September 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 | ||||||||
| $ | $ | |||||||
10
(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 September 30, 2021 and December 31, 2020, investments in nonpublic
entities valued using a measurement alternative of $
Funds held in trust represents U.S. treasury bills that were purchased with funds raised through the initial public offerings of B. Riley Principal 150 Merger Corporation (“BRPM 150”) and B. Riley Principal 250 Merger Corporation (“BRPM 250”), consolidated special purpose acquisition corporations (“SPACs”). The funds raised are held in trust accounts that are restricted for use and may only be used for purposes of completing an initial business combination or redemption of the class A public common shares of the SPAC’s as set forth in their respective trust agreements. The funds held in trust are included within Level 1 of the fair value hierarchy and included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.
The Company has warrant liabilities related to warrants of the SPAC’s
that are held by investors in BRPM 150 and BRPM 250. The warrants are accounted for as liabilities in accordance with ASC “Topic
815: Derivatives and Hedging,” and are measured at fair value at inception and on a recurring basis using quoted prices in over-the-counter
markets. Warrant liabilities are included in accrued expenses and other liabilities in the accompanying condensed consolidated balance
sheets with changes in fair value that amounted to $
11
The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.
| Financial Assets and Liabilities
Measured at Fair Value on a Recurring Basis at September 30, 2021 Using | ||||||||||||||||
| Fair value at September 30, 2021 | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Funds held in trust account | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| Warrant liabilities | ||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | ||||||||||||
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2020 Using | ||||||||||||||||
| Fair value at December 31 2020 | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (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 | $ | $ | $ | $ | ||||||||||||
12
As of September 30, 2021 and
December 31, 2020, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $
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 September 30, 2021:
| Fair value at | ||||||||||||||||
| September 30, | Valuation | Unobservable | Weighted | |||||||||||||
| 2021 | Technique | Input | Range | Average | ||||||||||||
| Assets: | ||||||||||||||||
| Equity securities | $ | |||||||||||||||
| x | ||||||||||||||||
| x | ||||||||||||||||
| $ | ||||||||||||||||
| Loans receivable at fair value | ||||||||||||||||
| Total level 3 assets measured at fair value | $ | |||||||||||||||
| Liabilities: | ||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ | x | ||||||||||||||
The changes in Level 3 fair value hierarchy during the nine months ended September 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 | |||||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Equity securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Loans receivable at fair value | ( | ) | ||||||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ( | ) | ||||||||||||||||||||||
| Warrant liabilities | ( | ) | ||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Equity securities | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Loans receivable at fair value | ( | ) | ||||||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | ( | ) | ||||||||||||||||||||||
Under ASC 326, 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 nine months ended September 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.
Changes in the Level 3 fair value hierarchy during the nine months ended September 30, 2021 included the fair value of warrant liabilities associated with BRPM 150 and BRPM 250. The value of these warrants transferred from Level 3 to Level 1 of the fair value hierarchy when the public warrants started trading in the over-the-counter markets after the initial public offering.
As of September 30, 2021
and December 31, 2020, the senior notes payable had a carrying amount of $
13
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.
The following table sets forth the assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of September 30, 2021. This investment was measured due to an observable price change during the nine months ended September 30, 2021.
| Fair Value Measurement Using | ||||||||||||||||
| Total | Quoted
prices in active markets for identical assets (Level 1) | Other
observable inputs (Level 2) | Significant
unobservable inputs (Level 3) | |||||||||||||
| As of September 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 nine months ended September 30, 2021 and 2020, except for the impact of the intangible impairment charge in 2020 as described in Note 7 – 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 September 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 gains (losses)
were $
As
disclosed in Note 2(u) below, the Company has consolidated two VIE’s, BRPM 150 and BRPM 250, which have outstanding warrants that
settle in their respective class A shares of common stock. These warrants have been recorded as a liability since the warrants contain
a provision to be settled in cash in the event of a qualifying cash tender offer, which is outside the control of the Company, for either
BRPM 150 or BRPM 250. The outstanding warrants are considered derivative instruments with the warrant liability measured at fair value
at each reporting date, with changes in fair value reported in other income in the condensed consolidated statement of operations. As
of September 30, 2021, the warrant liability totaled $
(p) Redeemable Noncontrolling Interests in Equity of Subsidiaries
The Company records redeemable noncontrolling interests in equity of
subsidiaries to reflect the economic interests of the class A ordinary shareholders in BRPM 150 and BRPM 250 sponsored Special Purpose
Acquisition Corporations (“SPACs"). These interests are presented as redeemable noncontrolling interests in equity of subsidiaries
within the condensed consolidated balance sheet, outside of the permanent equity section. The class A ordinary shareholders of BRPM 150
and BRPM 250 have redemption rights that are considered to be outside of the Company’s control. As of September 30, 2021, the carrying
amount of the redeemable noncontrolling interest in equity of subsidiaries was recorded at its redemption value of $
14
(q) Equity Investment
As of September 30, 2021
and December 31, 2020, equity investments of $
bebe stores, inc.
At
September 30, 2021 and December 31, 2020, the Company had a
National Holdings Corporation
As
of December 31, 2020, the Company owned approximately
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, the largest ownership interest being a 40% ownership interest in Lingo Management, LLC (“Lingo”) which was acquired in November 2020. The equity ownership in these other investments was accounted for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed consolidated balance sheets.
(r) Loan Participations Sold
As of September 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” (“ASC 860”). Under ASC 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 September 30, 2021,
there were no outstanding loan participations. As of December 31, 2020, the Company had entered into participation agreements for a total
of $
(s) Supplemental Non-cash Disclosures
During the nine months ended
September 30, 2021, non-cash investing activities included: the repayment of a loan receivable in full in the amount of $
(t) Reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation. Such reclassifications consist of including advances against customer contracts in prepaid expenses and other assets on the condensed consolidated balance sheets. Certain amounts reported in the Capital Markets segment for the three and nine months ended September 30, 2020 have been reclassified and reported in the Financial Consulting and Wealth Management segments for the three and nine months ended September 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.
15
(u) Variable Interest Entities
The Company holds interests in various entities that meet the characteristics of a VIE but are not consolidated as the Company is not the primary beneficiary. Interests in these entities are generally in the form of equity interests, loans receivable, or fee arrangements.
In 2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. The Partnership is a 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.
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.
The
Company earns fees from the Funds in the form of placement agent fees and carried interest. For placement agent fees, the Company receives
a cash fee of generally
Placement
agent fees attributable to such arrangements for the quarter ended September 30, 2021 were $
The carrying value of the Company’s investments in the VIEs that were not consolidated is shown below.
| September 30, 2021 | ||||
| Partnership investments | $ | |||
| Equity investment | ||||
| Due from related party | ||||
| Loans receivable, at fair value | ||||
| Maximum exposure to loss | $ | |||
16
B. Riley Principal 150 and 250 Merger Corporations
During the nine months ended
September 30, 2021, the Company along with BRPM 150 and BRPM 250, both newly formed special purpose acquisition companies incorporated
as Delaware corporations, consummated the initial public offerings of
In connection with the completion of the initial public offerings of BRPM 150 and BRPM 250, the Company invested in the private placement units of BRPM 150 and BRPM 250. Both BRPM 150 and BRPM 250 are determined to be VIE’s because each of the entities do not have enough equity at risk to finance their activities without additional subordinated financial support. The Company has determined that the class A shareholders of BRPM 150 and BRPM 250 do not have substantive rights as shareholders of BRPM 150 and BRPM 250 since these equity interests are determined to be temporary equity. As such, the Company has determined that it is the primary beneficiary of BRPM 150 and BRPM 250 as it has the right to receive benefits or the obligation to absorb losses of each of the entities, as well as the power to direct a majority of the activities that significantly impact BRPM 150 and BRPM 250’s economic performance. Since the Company is determined to be the primary beneficiary, BRPM 150 and BRPM 250 are consolidated into the Company’s financial statements.
(v) 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, and 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.
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.
17
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.
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205). This update amends certain SEC paragraphs from the Codification in response to the issuance of SEC Final Rule Nos. 33-10786, Amendments to Financial Disclosures About Acquired and Disposed Businesses, which modified the significance test and improved disclosure requirements for acquired businesses and pro forma financial information. The amendments in this update are applicable for public business entities for fiscal periods beginning after December 31, 2020. Early adoption is permitted. The Company adopted the SEC Final Rule effective January 1, 2021, and the ASU was adopted immediately. 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 nine months ended September 30, 2021. The Company recorded restructuring charges of
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Restructuring charge | ||||||||||||||||
| Cash paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-cash items | ( | ) | ( | ) | ||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
18
The following tables summarize the restructuring activities by reportable segment during the three and nine months ended September 30, 2020:
| Capital | Financial | Auction and | ||||||||||||||
| Markets | Consulting | Liquidation | Total | |||||||||||||
| Restructuring charges for the three months ended September 30, 2020: | ||||||||||||||||
| Impairment of intangibles | $ | $ | $ | $ | ||||||||||||
| Total restructuring charge | $ | $ | $ | $ | ||||||||||||
| Restructuring charges for the nine months ended September 30, 2020: | ||||||||||||||||
| Impairment of intangibles | $ | $ | $ | $ | ||||||||||||
| Total restructuring charge | $ | $ | $ | $ | ||||||||||||
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 September 30, 2021 and December 31, 2020:
| Gross amounts recognized | Gross amounts offset in the consolidated balance sheets (1) | Net amounts included in the consolidated balance sheets | Amounts not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default(2) | Net amounts | ||||||||||||||||
| As of September 30, 2021 | ||||||||||||||||||||
| Securities borrowed | $ | $ | $ | $ | $ | |||||||||||||||
| Securities loaned | $ | $ | $ | $ | $ | |||||||||||||||
| As of December 31, 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:
| September 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.
19
Additions and changes to the allowance for doubtful accounts consist of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Add: Additions to reserve | ||||||||||||||||
| Less: Write-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Recovery | — | |||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
NOTE 6 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Funds held in trust account | $ | $ | ||||||
| Equity investments | ||||||||
| Prepaid expenses | ||||||||
| Other receivables | ||||||||
| Other assets | ||||||||
| Prepaid expenses and other assets | $ | $ | ||||||
NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $
The changes in the carrying amount of goodwill for the nine months ended September 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 businesses | ||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Intangible assets consisted of the following:
| As of September 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
20
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 $
NOTE 8 — NOTES PAYABLE
Asset Based Credit Facility
On April 21, 2017, the Company
amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo
Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $
We are in compliance with all financial covenants in the asset based credit facility at September 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 full amount of the Company’s
PPP loans and accrued interest were forgiven in the amount of $
Other Notes Payable
Notes payable include notes
payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at the prime rate
plus
Also included in notes payable
at December 31, 2020, was a $
21
NOTE 9 — TERM LOANS AND REVOLVING CREDIT FACILITY
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
As
of September 30, 2021, the outstanding balance on the Term Loan Facility was $
The
Company had an outstanding balance of $
The Company is in compliance with all financial covenants in the Nomura Credit Agreement at September 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 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.
22
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)
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 $
Principal outstanding under
the Amended BRPAC Credit Agreement is due in quarterly installments commencing on March 31, 2021. Quarterly installments on December
31, 2021 are in the amount of $
As of September 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 as of September 30, 2021.
23
NOTE 10 — SENIOR NOTES PAYABLE
Senior notes payable, net, are comprised of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| $ | $ | |||||||
| — | ||||||||
| — | ||||||||
| — | ||||||||
| Less: Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| $ | $ | |||||||
During the nine months ended
September 30, 2021, the Company issued $
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
July 26, 2021, the Company redeemed, in full, $
On August 4, 2021, the Company
issued $
24
On
September 4, 2021, the Company redeemed, in full, $
On October 22, 2021, the Company redeemed, in full, $
As of September 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 August 11, 2021 (the “August 2021 Sales Agreement Prospectus”) superseding the prospectus
filed with the SEC on April 6, 2021 (the “April 2021 Sales Agreement Prospectus”) and 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 $
25
NOTE 11 — REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers by reportable segment for the three and nine months ended September 30, 2021 and 2020 is as follows:
| Principal | ||||||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||||||
| Capital | Wealth | Auction and | Financial | United Online | ||||||||||||||||||||||||
| Markets | Management | Liquidation | Consulting | and magicJack | Brands | |||||||||||||||||||||||
| Segment | Segment | Segment | Segment | Segment | Segment | Total | ||||||||||||||||||||||
| Revenues for the three months ended September 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 $ |
| Revenues for the three months ended September 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 $ |
26
| Principal | ||||||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||||||
| Capital | Wealth | Auction and | Financial | United Online | ||||||||||||||||||||||||
| Markets | Management | Liquidation | Consulting | and magicJack | Brands | |||||||||||||||||||||||
| Segment | Segment | Segment | Segment | Segment | Segment | Total | ||||||||||||||||||||||
| Revenues for the nine months ended September 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 $ |
| Revenues for the nine months ended September 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 $ |
27
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
September 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.
28
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 as of September 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 as of September 30, 2021.
NOTE 12 — INCOME TAXES
The
Company’s effective income tax rate was a provision of
As
of September 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 September 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.
29
NOTE 13 — EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Remeasurements to the carrying value of the redeemable noncontrolling interests in equity of subsidiaries are not deemed to be a dividend (see Note 2 (p)). According to ASC “Topic 480: Distinguishing Liabilities from Equity,” there is no impact on earnings per share in the computation of basic and diluted earnings per share to common shareholders for changes in the carrying value of the redeemable noncontrolling interests in equity, when such changes in carrying value which in substance approximates fair value.
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | $ | $ | $ | ||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income applicable to common shareholders | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Effect of dilutive potential common shares: | ||||||||||||||||
| Restricted stock units and warrants | ||||||||||||||||
| Diluted | ||||||||||||||||
| Basic income per common share | $ | $ | $ | $ | ||||||||||||
| Diluted income per common share | $ | $ | $ | $ | ||||||||||||
NOTE 14 — COMMITMENTS AND CONTINGENCIES
(a) Legal Matters
The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from the Company’s securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding the Company’s business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial position or results of operations.
30
On
January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”) and National Securities
Corporation (“NSC”), 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., 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 $
NSC is a respondent in several Financial Industry Regulatory Authority 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 $
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 $
(c) Other Commitments
On
June 19, 2020, the Company participated in a loan facility agreement to provide a total loan commitment up to
In the normal course of business, the Company enters into commitments to its clients in connection with capital raising transactions, such as firm commitment underwritings and equity lines of credit. These commitments require the Company to purchase securities at a specified price. Securities underwriting exposes the Company to market and credit risk, primarily in the event that, for any reason, securities purchased by the Company cannot be distributed at the anticipated price.
NOTE 15 — 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 $
31
(b) Employee Stock Purchase Plan
In
connection with the Company’s Purchase Plan, share based compensation was $
(c) Common Stock
Since
October 30, 2018, the Company’s Board of Directors has authorized annual share repurchase programs of up to $
On January 15, 2021, the Company issued
(d) Preferred Stock
During
the nine months ended September 30, 2021, the Company issued
During
the nine months ended September 30, 2021, the Company issued
NOTE 16 — 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
September 30, 2021, BRS had net capital of $
NOTE 17 — RELATED PARTY TRANSACTIONS
As
of September 30, 2021, amounts due from related parties of $
32
For the three and nine months
ended September 30, 2021, the Company recorded interest expense of $
In
June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P. (“Whitehawk”),
a limited partnership controlled by Mr. J. Ahn, who is the brother of Phil Ahn, the Company’s Chief Financial Officer and Chief
Operating Officer. Whitehawk has agreed to provide investment advisory services for GACP I and GACP II. During the three and nine
months ended September 30, 2021, management fees paid for investment advisory services by Whitehawk was $
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:
Babcock and Wilcox
The
Company had a last-out term loan receivable due from B&W that is included in loans receivable, at fair value with a fair value of
$
During
the three and nine months ended September 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 14 – Commitments and Contingencies.
33
Maven
The
Company has loans receivable due from the Maven, Inc. that are included in loans receivable, at fair value of $
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 had a loan receivable due from bebe stores, Inc. included in loans receivable, at fair value with a fair value of $
Charah Solutions, Inc.
On
August 25, 2021 the Company extended a $
Other
As
of September 30, 2021, the Company has loans receivable due from other related parties in the amount of $
The
Company often provides consulting or investment banking services to raise capital for companies in which the Company has significant
influence through equity ownership, representation on the board of directors (or similar governing body), or both. During the three and
nine months ended September 30, 2021, the Company earned $
NOTE 18 — 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.
34
The following is a summary of certain financial data for each of the Company’s reportable segments:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Capital Markets segment: | ||||||||||||||||
| Revenues - Services and fees | $ | $ | $ | $ | ||||||||||||
| Trading income (loss) and fair value adjustments on loans | ( | ) | ||||||||||||||
| Interest income - Loans and securities lending | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Restructuring charge | ( | ) | ( | ) | ||||||||||||
| 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 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 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Restructuring charge | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization | ( | ) | ( | ) | ||||||||||||
| Segment income | ||||||||||||||||
| Financial Consulting segment: | ||||||||||||||||
| Revenues - Services and fees | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Restructuring charge | ( | ) | ( | ) | ||||||||||||
| 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 | ||||||||||||||||
| 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 and other | ||||||||||||||||
| Income (loss) on equity investments | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income | ||||||||||||||||
| Net income (loss) income attributable to noncontrolling interests | ( | ) | ||||||||||||||
| Net income attributable to B. Riley Financial, Inc. | ||||||||||||||||
| Preferred stock dividends | ||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
35
The following table presents revenues by geographical area:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 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 - Sale of goods | $ | $ | $ | $ | ||||||||||||
| Revenues - Interest income - Loans and securities lending: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Total Revenues: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Australia | ||||||||||||||||
| Europe | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
As
of September 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.
36
NOTE 19 — REVISION OF PRIOR PERIOD FINANCIALS
As disclosed in Note 2(a), during the three months ended September 30, 2021, the Company identified misstatements related to the consolidation of certain VIE’s, which primarily resulted in a gross up of the balance sheet to reflect funds held in trust within prepaid expenses and other assets and the recording of temporary equity. Although the Company concluded that these misstatements were not material, either individually or in aggregate, to its current or previously issued consolidated financial statements, the Company has elected to revise its previously issued consolidated financial statements to correct for these misstatements.
The revision to the accompanying unaudited condensed consolidated statements of equity and consolidated statements of cash flows are as follows:
| Three Months Ended September 30, 2020 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustments | As Revised | ||||||||||
| Statements of Equity | ||||||||||||
| Retained Earnings (Deficit), July 1, 2020 | $ | $ | ( | ) | $ | ( | ) | |||||
| Total Equity, July 1, 2020 | $ | $ | ( | ) | $ | |||||||
| Retained Earnings (Deficit), September 30, 2020 | $ | $ | ( | ) | $ | |||||||
| Total Equity, September 30, 2020 | $ | $ | ( | ) | $ | |||||||
| Nine Months Ended September 30, 2020 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustments | As Revised | ||||||||||
| Statements of Equity | ||||||||||||
| Remeasurement of B. Riley Principal Merger II | ||||||||||||
| Corporation subsidiary temporary equity | $ | $ | ( | ) | $ | ( | ) | |||||
| Retained Earnings (Deficit), September 30, 2020 | $ | $ | ( | ) | $ | |||||||
| Total Equity, September 30, 2020 | $ | $ | ( | ) | $ | |||||||
| Nine Months Ended September 30, 2020 | ||||||||||||
| As Previously | ||||||||||||
| Reported | Adjustments | As Revised | ||||||||||
| Statement of Cash Flows | ||||||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of equity investments | $ | ( | ) | $ | $ | |||||||
| Funds received from trust account of subsidiary | $ | $ | $ | |||||||||
| Investment of subsidiaries initial public offering proceeds into trust account | $ | $ | ( | ) | $ | ( | ) | |||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Cash flows from financing activities: | ||||||||||||
| Payment for debt issuance and offering costs | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Redemption of subsidiary temporary equity and distributions | $ | $ | ( | ) | $ | ( | ) | |||||
| Proceeds from initial public offering of subsidiaries | $ | $ | $ | |||||||||
| Net cash provided by financing activities | $ | $ | $ | |||||||||
37
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. |
| ● | 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. |
38
| ● | 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. |
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.
39
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, operations management consulting, 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 July 26, 2021, we redeemed, in full, $122.8 million aggregate principal amount of our 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 under the ticker symbol “RILYG,” were delisted from NASDAQ.
On August 4, 2021, we issued $316.3 million of senior notes due in August 2028 (“5.25% 2028 Notes”). Interest on the 5.25% 2028 Notes is payable quarterly at 5.25%. The 5.25% 2028 Notes are unsecured and due and payable in full on August 31, 2028. In connection with the issuance of the 5.25% 2028 Notes, the Company received net proceeds of $308.7 million (after underwriting commissions, fees, and other issuance costs of $7.6 million). The 5.25% 2028 Notes bear interest at the rate of 5.25% per annum.
40
On September 4, 2021, we redeemed, in full, $137.5 million aggregate principal amount of our 7.375% Senior Notes due 2023 (“7.375% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101.5% of the aggregate principal amount, plus accrued and unpaid interest up to, but excluding, the redemption date. The total redemption payment included approximately $1.0 million in accrued interest and $2.1 million in premium. In connection with the full redemption, the 7.375% 2023 Notes under the ticker symbol “RILYH,” were delisted from NASDAQ.
On October 22, 2021, we redeemed, in full, $115.7 million aggregate principal amount of our 6.875% Senior Notes due 2023 (the “6.875% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101.0% of the aggregate principal amount, plus accrued and unpaid interest, up to, but excluding, the redemption date. The total redemption payment included approximately $1.8 million in accrued interest and $1.2 million in premium. In connection with the full redemption, the 6.875% 2023 Notes under the ticker symbol “RILYI,” 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 third 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.
41
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Condensed Consolidated Statements of Operations
(Dollars in thousands)
| Three Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 301,497 | $ | 144,823 | $ | 156,674 | 108.2 | % | ||||||||
| Trading income and fair value adjustments on loans | 18,197 | 31,753 | (13,556 | ) | (42.7 | )% | ||||||||||
| Interest income - Loans and securities lending | 26,869 | 26,026 | 843 | 3.2 | % | |||||||||||
| Sale of goods | 34,959 | 23,651 | 11,308 | 47.8 | % | |||||||||||
| Total revenues | 381,522 | 226,253 | 155,269 | 68.6 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 18,019 | 23,264 | (5,245 | ) | (22.5 | )% | ||||||||||
| Cost of goods sold | 12,442 | 9,813 | 2,629 | 26.8 | % | |||||||||||
| Selling, general and administrative expenses | 244,218 | 97,143 | 147,075 | 151.4 | % | |||||||||||
| Restructuring charge | — | 1,557 | (1,557 | ) | (100.0 | )% | ||||||||||
| Interest expense - Securities lending and loan participations sold | 10,097 | 10,975 | (878 | ) | (8.0 | )% | ||||||||||
| Total operating expenses | 284,776 | 142,752 | 142,024 | 99.5 | % | |||||||||||
| Operating income | 96,746 | 83,501 | 13,245 | 15.9 | % | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 70 | 67 | 3 | 4.5 | % | |||||||||||
| Gain on extinguishment of loans and other | 1,758 | — | 1,758 | 100.0 | % | |||||||||||
| Income from equity investments | 1,149 | 409 | 740 | 180.9 | % | |||||||||||
| Interest expense | (25,372 | ) | (16,374 | ) | (8,998 | ) | 55.0 | % | ||||||||
| Income before income taxes | 74,351 | 67,603 | 6,748 | 10.0 | % | |||||||||||
| Provision for income taxes | (22,693 | ) | (18,711 | ) | (3,982 | ) | 21.3 | % | ||||||||
| Net income | 51,658 | 48,892 | 2,766 | 5.7 | % | |||||||||||
| Net income attributable to noncontrolling interests | 1,108 | 513 | 595 | 116.0 | % | |||||||||||
| Net income attributable to B. Riley Financial, Inc. | 50,550 | 48,379 | 2,171 | 4.5 | % | |||||||||||
| Preferred stock dividends | 1,929 | 1,088 | 841 | 77.3 | % | |||||||||||
| Net income available to common shareholders | $ | 48,621 | $ | 47,291 | $ | 1,330 | 2.8 | % | ||||||||
42
Revenues
The table below and the discussion that follows are based on how we analyze our business.
| Three Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 134,849 | $ | 55,815 | $ | 79,034 | 141.6 | % | ||||||||
| Wealth Management segment | 117,572 | 17,289 | 100,283 | n/m | ||||||||||||
| Auction and Liquidation segment | 2,745 | 21,473 | (18,728 | ) | -87.2 | % | ||||||||||
| Financial Consulting segment | 21,291 | 25,583 | (4,292 | ) | -16.8 | % | ||||||||||
| Principal Investments - United Online and magicJack segment | 18,669 | 20,663 | (1,994 | ) | -9.7 | % | ||||||||||
| Brands segment | 6,372 | 4,000 | 2,372 | 59.3 | % | |||||||||||
| Subtotal | 301,498 | 144,823 | 156,675 | 108.2 | % | |||||||||||
| Revenues - Sale of goods: | ||||||||||||||||
| Auction and Liquidation segment | 34,327 | 22,712 | 11,615 | 51.1 | % | |||||||||||
| Principal Investments - United Online and magicJack segment | 631 | 939 | (308 | ) | -32.8 | % | ||||||||||
| Subtotal | 34,958 | 23,651 | 11,307 | 47.8 | % | |||||||||||
| Trading income and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | 16,935 | 31,399 | (14,464 | ) | -46.1 | % | ||||||||||
| Wealth Management segment | 1,262 | 354 | 908 | n/m | ||||||||||||
| Subtotal | 18,197 | 31,753 | (13,556 | ) | -42.7 | % | ||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 26,869 | 26,026 | 843 | 3.2 | % | |||||||||||
| Total revenues | $ | 381,522 | $ | 226,253 | $ | 155,269 | 68.6 | % | ||||||||
n/m - Not applicable or not meaningful.
Total revenues increased approximately $155.3 million to $381.5 million during the three months ended September 30, 2021 from $226.3 million during the three months ended September 30, 2020. The increase in revenues during the three months ended September 30, 2021 was primarily due to an increase in revenue from services and fees of $156.7 million, revenue from sale of goods of $11.3 million, and interest income from loans and securities lending of $0.8 million, offset by a decrease in revenue from trading income and fair value adjustments on loans of $13.6 million. The increase in revenue from services and fees in the three months ended September 30, 2021 consisted of increases in revenue of $79.0 million in the Capital Markets segment, $100.3 million in the Wealth Management segment, and $2.4 million in the Brands segment, offset by decreases in revenues of $18.7 million in the Auction and Liquidation segment, $4.3 million in the Financial Consulting segment, and $2.0 million in the Principal Investments — United Online and magicJack segment.
Revenues from services and fees in the Capital Markets segment increased $79.0 million, to $134.8 million during the three months ended September 30, 2021 from $55.8 million during the three months ended September 30, 2020. The increase in revenues was primarily due to increases in revenue of $82.4 million from corporate finance, consulting, and investment banking fees, $3.6 million from the acquisition of National in the first quarter of 2021, $1.2 million of asset management fees, and $1.8 million of commissions, partially offset by a decrease of $8.8 million in dividends.
Revenues from services and fees in the Wealth Management segment increased $100.3 million, to $117.6 million during the three months ended September 30, 2021 from $17.3 million during the three months ended September 30, 2020. The increase in revenues was primarily due to increases in revenue of $94.1 million from the acquisition of National and $6.0 million from wealth and asset management fees.
Revenues from services and fees in the Auction and Liquidation segment decreased $18.7 million, to $2.7 million during the three months ended September 30, 2021 from $21.5 million during the three months ended September 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 decreased $4.3 million, to $21.3 million during the three months ended September 30, 2021 from $25.6 million during the three months ended September 30, 2020. The decrease in revenues was primarily due to a decrease in revenue of $3.8 million due to a large real estate consulting engagement in 2020 and a decrease of $0.7 million in appraisal engagement fees, partially offset by an increase of $0.2 million due to a newly formed operations management group during fiscal year 2021.
43
Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased $2.0 million to $18.7 million during the three months ended September 30, 2021 from $20.7 million during the three months ended September 30, 2020. The decrease in revenues was primarily due to decreases of $1.6 million in subscription services and $0.7 million in advertising, licensing, and other. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.
Revenues from services and fees in the Brands segment increased $2.4 million to $6.4 million during the three months ended September 30, 2021 from $4.0 million during the three months ended September 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 $13.6 million to $18.2 million during the three months ended September 30, 2021 compared to $31.8 million for the three months ended September 30, 2020. This decrease was primarily due to a decrease of $14.5 million in the Capital Markets segment, partially offset by an increase of $0.9 million in the Wealth Management segment. The gain of $18.2 million for the three months ended September 30, 2021 was primarily due to realized and unrealized amounts earned on investments made in our proprietary trading accounts of $20.9 million partially offset by an unrealized loss on our loans receivable, at fair value of $1.2 million.
Interest income – loans and securities lending increased $0.9 million, to $26.9 million during the three months ended September 30, 2021 from $26.0 million during the three months ended September 30, 2020. Interest income from securities lending was $13.0 million and $13.3 million during the three months ended September 30, 2021 and 2020, respectively. Interest income from loans was $13.9 million and $12.7 million during the three months ended September 30, 2021 and 2020, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods increased $11.3 million, to $35.0 million during the three months ended September 30, 2021 from $23.7 million during the three months ended September 30, 2020. Revenues from sale of goods were primarily attributable to $34.3 million from sales of retail goods related to retail liquidation engagements in Europe, partially offset by a decrease of $22.8 million from sales of retail goods related to multiple liquidation engagements that ended in 2020. Cost of goods sold for the three months ended September 30, 2021 was $12.4 million, resulting in a gross margin of 64.5%.
Operating Expenses
Direct Cost of Services
Direct cost of services decreased $5.2 million, to $18.0 million during the three months ended September 30, 2021 from $23.3 million during the three months ended September 30, 2020. The decrease was primarily due to a decrease of $4.8 million in the Auction and Liquidation segment and $0.5 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 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 September 30, 2021 as compared to the three months ended September 30, 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the three months ended September 30, 2021 and 2020 were comprised of the following:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 80,666 | 32.9 | % | $ | 41,593 | 42.7 | % | $ | 39,073 | 93.9 | % | ||||||||||||
| Wealth Management segment | 112,250 | 46.0 | % | 16,863 | 17.4 | % | 95,387 | n/m | ||||||||||||||||
| Auction and Liquidation segment | 5,153 | 2.1 | % | 4,626 | 4.8 | % | 527 | 11.4 | % | |||||||||||||||
| Financial Consulting segment | 18,522 | 7.6 | % | 17,835 | 18.4 | % | 687 | 3.9 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 7,954 | 3.3 | % | 7,576 | 7.8 | % | 378 | 5.0 | % | |||||||||||||||
| Brands segment | 1,686 | 0.7 | % | 1,708 | 1.8 | % | (22 | ) | (1.3 | )% | ||||||||||||||
| Corporate and Other segment | 17,987 | 7.4 | % | 6,942 | 7.1 | % | 11,045 | 159.1 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 244,218 | 100.0 | % | $ | 97,143 | 100.0 | % | $ | 147,075 | 151.4 | % | ||||||||||||
n/m - Not applicable or not meaningful.
Total selling, general and administrative expenses increased approximately $147.1 million to $244.2 million during the three months ended September 30, 2021 from $97.1 million for the three months ended September 30, 2020. The increase was primarily due to increases of $39.1 million in the Capital Markets segment, $95.4 million in the Wealth Management segment, $0.5 million in the Auction and Liquidation segment, $0.7 million in the Financial Consulting segment, $0.4 million in the Principal Investments — United Online and magicJack segment, and $11.0 million in the Corporate and Other segment.
44
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by $39.1 million to $80.7 million during the three months ended September 30, 2021 from $41.6 million during the three months ended September 30, 2020. The increase was primarily due to increases of $34.0 million in payroll and related expenses, $5.3 million in investment banking deal expenses, $3.4 million from the acquisition of National, $0.6 million in legal expenses, $0.5 million in other expenses, $0.2 million in business development activities, and $0.2 million in occupancy costs, partially offset by a decrease of $5.3 million in consulting expenses.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment increased by $95.4 million to $112.3 million during the three months ended September 30, 2021 from $16.9 million during the three months ended September 30, 2020. The increase was primarily due to increases of $90.3 million from the acquisition of National, $4.8 million in payroll and related expenses, and $0.3 million in software and equipment expenses.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment increased $0.5 million to $5.1 million during the three months ended September 30, 2021 from $4.6 million during the three months ended September 30, 2020.
Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $0.7 million to $18.5 million during the three months ended September 30, 2021 from $17.8 million during the three months ended September 30, 2020. The increase was primarily due to increases of $0.4 million in other expenses and $0.3 million in legal 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 $8.0 million for the three months ended September 30, 2021 from $7.6 million for the three months ended September 30, 2020. The increase was primarily due to $0.7 million in transaction costs, partially offset by a decrease of $0.4 million in payroll and related expenses.
Brands
Selling, general and administrative expenses in the Brands segment remained flat at $1.7 million during the three months ended September 30, 2021 and 2020.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment increased approximately $11.0 million to $18.0 million during the three months ended September 30, 2021 from $6.9 million for the three months ended September 30, 2020. The increase was primarily due to increases of $6.2 million in payroll and related expenses, $4.0 million in gain from extinguishment of debt as further discussed below, and $2.0 million in professional fees, partially offset by decreases of $0.4 million in legal expenses, $0.4 million in other expenses, and $0.2 million in foreign currency fluctuations.
During the three months ended September 30, 2021, we repurchased 10,409,895 senior notes with an aggregate face value of $260.2 million at par, resulting in a loss net of expenses, premiums paid, and original issue discount of $4.0 million. The total redemption payments included approximately $3.1 million in accrued interest. During the three months ended September 30, 2020, we did not repurchase any of our senior notes.
Other Income (Expense). Other income included interest income of $0.1 million during both the three months ended September 30, 2021 and 2020. Gain on extinguishment of loans and other in the amount of $1.8 million during the three months ended September 30, 2021 was primarily due to the change in fair value of warrant liabilities. Interest expense was $25.4 million during the three months ended September 30, 2021 compared to $16.4 million during the three months ended September 30, 2020. The increase in interest expense during the three months ended September 30, 2021 was primarily due to increases in interest expense of $5.8 million from the issuance of senior notes, $2.7 million from the Nomura term loan entered into in Q2 2021, and $0.5 million from the Nomura revolving credit facility entered into in Q2 2021. Other income in the three months ended September 30, 2021 included income from equity investments of $0.6 million compared to $0.4 million in the prior year.
45
Income Before Income Taxes. Income before income taxes was $74.4 million during the three months ended September 30, 2021 compared to $67.6 million during the three months ended September 30, 2020. The increase was primarily due to increases in revenue of $155.2 million, gain on extinguishment of loans and other of $1.8 million, and income from equity investments of $0.7 million, partially offset by increases in operating expenses of approximately $142.0 million and interest expense of $9.0 million, as discussed above.
Provision for Income Taxes. Provision for income taxes was $22.7 million during the three months ended September 30, 2021 compared to $18.7 million during the three months ended September 30, 2020. The effective income tax rate was 30.5% for the three months ended September 30, 2021 as compared to 27.7% for the three months ended September 30, 2020.
Net Income Attributable to Noncontrolling Interests. 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 $1.1 million during the three months ended September 30, 2021 compared to $0.5 million during the three months ended September 30, 2020.
Net Income Attributable to the Company. Net income attributable to the Company was $50.6 million during the three months ended September 30, 2021 compared to $48.4 million for the three months ended September 30, 2020. The increase in net income attributable to the Company was primarily due to increases in operating income of $13.2 million, gain on extinguishment of loans and other of $1.8 million, and income from equity investments of $0.7 million, partially offset by increases in interest expense of $9.0 million, provision for income taxes of $4.0 million, and net income attributable to noncontrolling interests of $0.6 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 July 8, 2021, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 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 July 8, 2021, the Company declared a cash dividend of $0.4609375 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021.
Net Income Available to Common Shareholders. Net income available to common shareholders was $48.6 million for the three months ended September 30, 2021 compared to $47.3 million for the three months ended September 30, 2020. The increase in net income available to common shareholders was primarily due to increases in operating income of $13.2 million, gain on extinguishment of loans and other of $1.8 million, and income from equity investments of $0.7 million, partially offset by increases in interest expense of $9.0 million, provision for income taxes of $4.0 million, preferred stock dividends of $0.8 million, and net income attributable to noncontrolling interests of $0.6 million.
46
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Condensed Consolidated Statements of Operations
(Dollars in thousands)
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 857,109 | $ | 429,799 | $ | 427,310 | 99.4 | % | ||||||||
| Trading income (losses) and fair value adjustments on loans | 317,818 | (36,142 | ) | 353,960 | n/m | |||||||||||
| Interest income - Loans and securities lending | 89,280 | 72,383 | 16,897 | 23.3 | % | |||||||||||
| Sale of goods | 54,244 | 26,475 | 27,769 | 104.9 | % | |||||||||||
| Total revenues | 1,318,451 | 492,515 | 825,936 | 167.7 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 41,435 | 51,201 | (9,766 | ) | (19.1 | )% | ||||||||||
| Cost of goods sold | 21,394 | 11,442 | 9,952 | 87.0 | % | |||||||||||
| Selling, general and administrative expenses | 635,484 | 291,449 | 344,035 | 118.0 | % | |||||||||||
| Rectructuring charge | — | 1,557 | (1,557 | ) | (100.0 | )% | ||||||||||
| Impairment of tradenames | — | 12,500 | (12,500 | ) | (100.0 | )% | ||||||||||
| Interest expense - Securities lending and loan participations sold | 40,269 | 30,669 | 9,600 | 31.3 | % | |||||||||||
| Total operating expenses | 738,582 | 398,818 | 339,764 | 85.2 | % | |||||||||||
| Operating income | 579,869 | 93,697 | 486,172 | n/m | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 175 | 537 | (362 | ) | (67.4 | )% | ||||||||||
| Gain on extinguishment of loans and other | 8,267 | — | 8,267 | 100.0 | % | |||||||||||
| Income (loss) on equity investments | 1,172 | (145 | ) | 1,317 | n/m | |||||||||||
| Interest expense | (66,014 | ) | (48,537 | ) | (17,477 | ) | 36.0 | % | ||||||||
| Income before income taxes | 523,469 | 45,552 | 477,917 | n/m | ||||||||||||
| Provision for income taxes | (140,113 | ) | (13,380 | ) | (126,733 | ) | n/m | |||||||||
| Net income | 383,356 | 32,172 | 351,184 | n/m | ||||||||||||
| Net income (loss) attributable to noncontrolling interests | 2,474 | (1,382 | ) | 3,856 | n/m | |||||||||||
| Net income attributable to B. Riley Financial, Inc. | 380,882 | 33,554 | 347,328 | n/m | ||||||||||||
| Preferred stock dividends | 5,467 | 3,230 | 2,237 | 69.3 | % | |||||||||||
| Net income available to common shareholders | $ | 375,415 | $ | 30,324 | $ | 345,091 | n/m | |||||||||
n/m - Not applicable or not meaningful.
47
Revenues
The table below and the discussion that follows are based on how we analyze our business.
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2021 | 2020 | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 431,825 | $ | 189,779 | $ | 242,046 | 127.5 | % | ||||||||
| Wealth Management segment | 270,558 | 51,494 | 219,064 | n/m | ||||||||||||
| Auction and Liquidation segment | 15,637 | 49,340 | (33,703 | ) | (68.3 | )% | ||||||||||
| Financial Consulting segment | 66,435 | 65,142 | 1,293 | 2.0 | % | |||||||||||
| Principal Investments - United Online and magicJack segment | 57,394 | 63,037 | (5,643 | ) | (9.0 | )% | ||||||||||
| Brands segment | 15,261 | 11,007 | 4,254 | 38.6 | % | |||||||||||
| Subtotal | 857,110 | 429,799 | 427,311 | 99.4 | % | |||||||||||
| Revenues - Sale of goods | ||||||||||||||||
| Auction and Liquidation segment | 52,162 | 23,757 | 28,405 | 119.6 | % | |||||||||||
| Principal Investments - United Online and magicJack segment | 2,081 | 2,718 | (637 | ) | (23.4 | )% | ||||||||||
| Subtotal | 54,243 | 26,475 | 27,768 | 104.9 | % | |||||||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | 311,335 | (36,536 | ) | 347,871 | n/m | |||||||||||
| Wealth Management segment | 6,483 | 394 | 6,089 | n/m | ||||||||||||
| Subtotal | 317,818 | (36,142 | ) | 353,960 | n/m | |||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 89,280 | 72,383 | 16,897 | 23.3 | % | |||||||||||
| Total revenues | $ | 1,318,451 | $ | 492,515 | $ | 825,936 | 167.7 | % | ||||||||
n/m - Not applicable or not meaningful.
Total revenues increased by $825.9 million to $1,318.5 million during the nine months ended September 30, 2021 from $492.5 million during the nine months ended September 30, 2020. The increase was primarily due to trading income (losses) from fair value adjustment on loans that increased by $354.0 million to income of $317.8 million during the nine months ended September 30, 2021 from a loss of $36.1 million during the nine months ended September 30, 2020. The increase in revenue from services and fees of $427.3 million during the nine months ended September 30, 2021 was primarily due to increases in revenue of $242.0 million in the Capital Markets segment, $219.1 million in the Wealth Management segment, $1.3 million in the Financial Consulting segment and $4.3 million in the Brands segment; partially offset by decreases in revenues of $33.7 million in the Auction and Liquidation segment and $5.6 million in the Principal Investments — United Online and magicJack segment.
Revenues from services and fees in the Capital Markets segment increased $242.0 million, to $431.8 million during the nine months ended September 30, 2021 from $189.8 million during the nine months ended September 30, 2020. The increase in revenues was primarily due to increases of $223.3 million from corporate finance, consulting, and investment banking fees, $22.6 million from the acquisition of National in the first quarter of 2021, $1.4 million in commissions, and $0.7 million in asset management fees, partially offset by decrease of $4.6 million in dividends and $1.4 million in other income.
Revenues from services and fees in the Wealth Management segment increased $219.1 million, to $270.6 million during the nine months ended September 30, 2021 from $51.5 million during the nine months ended September 30, 2020. The increase in revenues was primarily due to increases in revenue of $200.7 million from the acquisition of National and $18.0 million from wealth and asset management fees.
Revenues from services and fees in the Auction and Liquidation segment decreased $33.7 million, to $15.6 million during the nine months ended September 30, 2021 from $49.3 million during the nine months ended September 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 $1.3 million, to $66.4 million during the nine months ended September 30, 2021 from $65.1 million during the nine months ended September 30, 2020. The increase in revenues was primarily due to an increase in revenue of $1.7 million from advisory services, offset by a decrease of $0.5 million in other income.
48
Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased $5.6 million to $57.4 million during the nine months ended September 30, 2021 from $63.0 million during the nine months ended September 30, 2020. The decrease in revenues was primarily due to decreases in subscription services of $4.3 million and in advertising, licensing and other of $2.0 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.
Revenues from services and fees in the Brands segment increased $4.3 million to $15.3 million during the nine months ended September 30, 2021 from $11.0 million during the nine months ended September 30, 2020. The primary source of revenue included in this segment is the licensing of trademarks.
Trading income (losses) and fair value adjustments on loans consisted of income in the amount of $317.8 million during the nine months ended September 30, 2021 compared to losses of $36.1 million for the nine months ended September 30, 2020. This was primarily due to increases of $347.9 million in the Capital Markets segment and $6.1 million in the Wealth Management segment. The gain of $317.8 million for the nine months ended September 30, 2021 included realized and unrealized amounts earned on investments made in our proprietary trading accounts of $309.0 million and unrealized amounts on our loans receivable, at fair value of $8.8 million.
Interest income – loans and securities lending increased $16.9 million, to $89.3 million during the nine months ended September 30, 2021 from $72.4 million during the nine months ended September 30, 2020. Interest income from securities lending was $49.8 million and $36.9 million during the nine months ended September 30, 2021 and 2020, respectively. Interest income from loans was $39.5 million and $35.4 million during the nine months ended September 30, 2021 and 2020, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods increased $27.8 million, to $54.2 million during the nine months ended September 30, 2021 from $26.5 million during the nine months ended September 30, 2020. Revenues from sale of goods were primarily attributable to $46.1 million of sales of retail goods related to retail liquidation engagements in Europe and $6.1 million of sales of retail goods related to a retail liquidation engagement in the U.S., partially offset by decreases of $23.2 million from sales of retail goods related to multiple liquidation engagements that ended in 2020 and $0.6 million in sales of magicJack devices that were sold in connection with VoIP services. Cost of goods sold for the nine months ended September 30, 2021 was $21.4 million, resulting in a gross margin of 60.5%.
Operating Expenses
Direct Cost of Services
Direct cost of services decreased $9.8 million, to $41.4 million during the nine months ended September 30, 2021 from $51.2 million during the nine months ended September 30, 2020. Direct cost of services decreased by $8.7 million in the Auction and Liquidation segment and $1.1 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 nine months ended September 30, 2021, partially offset by an increase of $15.7 million of direct costs incurred on a retail liquidation engagement in Europe, 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 nine months ended September 30, 2021 and 2020 were comprised of the following:
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2021 | September 30, 2020 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 233,291 | 36.8 | % | $ | 127,708 | 43.9 | % | $ | 105,583 | 82.7 | % | ||||||||||||
| Wealth Management segment | 267,163 | 42.0 | % | 50,647 | 17.4 | % | 216,516 | n/m | ||||||||||||||||
| Auction and Liquidation segment | 9,719 | 1.5 | % | 8,882 | 3.0 | % | 837 | 9.4 | % | |||||||||||||||
| Financial Consulting segment | 56,169 | 8.8 | % | 48,972 | 16.8 | % | 7,197 | 14.7 | % | |||||||||||||||
| Principal Investments - United Online and magicJack segment | 22,654 | 3.6 | % | 22,818 | 7.8 | % | (164 | ) | (0.7 | )% | ||||||||||||||
| Brands segment | 4,481 | 0.7 | % | 4,350 | 1.5 | % | 131 | 3.0 | % | |||||||||||||||
| Corporate and Other segment | 42,007 | 6.6 | % | 28,072 | 9.6 | % | 13,935 | 49.6 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 635,484 | 100.0 | % | $ | 291,449 | 100.0 | % | $ | 344,035 | 118.0 | % | ||||||||||||
n/m - Not applicable or not meaningful.
Total selling, general and administrative expenses increased approximately $344.0 million to $635.5 million during the nine months ended September 30, 2021 from $291.4 million for the nine months ended September 30, 2020. The increase of approximately $340.1 million in selling, general and administrative expenses was due to increases of $105.6 million in the Capital Markets segment, $216.5 million in the Wealth Management segment, $0.8 million in the Auction and Liquidation segment, $7.2 million in the Financial Consulting segment, $0.1 million in the Brands segment, and $14.0 million in the Corporate and Other segment, partially offset by a decrease of $0.2 million in the Principal Investments — United Online and magicJack segment.
49
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by $105.6 million to $233.3 million during the nine months ended September 30, 2021 from $127.7 million during the nine months ended September 30, 2020. The increase was primarily due to increases of $78.2 million in payroll and related expenses, $16.6 million from the acquisition of National, $7.9 million in investment banking deal expenses, $1.6 million in consulting expenses, $0.4 million in occupancy expenses, $0.4 million in clearing charges, $0.3 million in other expenses, and $0.1 million in foreign currency fluctuations.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment increased by $216.5 million to $267.1 million during the nine months ended September 30, 2021 from $50.6 million during the nine months ended September 30, 2020. The increase was primarily due to increases of $203.3 million from the acquisition of National and $14.1 million in payroll and related expenses, partially offset by a decrease of $0.9 million in legal expenses.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment increased by $0.8 million to $9.7 million during the nine months ended September 30, 2021 from $8.9 million during the nine months ended September 30, 2020. The increase was primarily due to an increase of $3.6 million in business development expenses; partially offset by decreases of $1.3 million in payroll and related expenses, $1.2 million in foreign currency exchange, and $0.4 million in outside contractor expenses.
Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $7.2 million to $56.2 million during the nine months ended September 30, 2021 from $49.0 million during the nine months ended September 30, 2020. The increase was primarily due to increases of $5.1 million in payroll and related expenses, $0.9 million in legal expenses, and $0.7 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 $0.2 million to $22.7 million for the nine months ended September 30, 2021 from $22.8 million for the nine months ended September 30, 2020.
Brands
Selling, general and administrative expenses in the Brands segment increased by $0.1 million to $4.5 million during the nine months ended September 30, 2021 from $4.4 million during the nine months ended September 30, 2020.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment increased approximately $14.0 million to $42.0 million during the nine months ended September 30, 2021 from $28.1 million for the nine months ended September 30, 2020. The increase was primarily due to increases of $15.4 million in payroll and related expenses, $6.4 million in extinguishment of debt as further discussed below, and $2.0 million in professional fees, partially offset by a decrease of $9.1 million in legal settlement accrual, primarily due to recording a pre-acquisition litigation claim related to one of our acquired subsidiaries, and a decrease of $0.5 million in legal expenses.
During the nine months ended September 30, 2021, we repurchased 15,536,123 senior notes with an aggregate face value of $388.4 million at par, resulting in a loss net of expenses, premiums paid and original issue discount of $4.9 million. The total redemption payments included approximately $4.7 million in accrued interest. During the nine months ended September 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.
50
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 nine months ended September 30, 2020, the Company recognized impairments of $12.5 million on the indefinite-lived tradenames. There was no impairment in the nine months ended September 30, 2021.
Other Income (Expense). Other income included interest income of $0.2 million during the nine months ended September 30, 2021 and $0.5 million during the nine months ended September 30, 2020. Gain on extinguishment of loans and other in the amount of $8.3 million during the nine months ended September 30, 2021 was primarily due to $6.5 million in National PPP loans that were forgiven by the SBA and $2.0 million due to the change in fair value of warrant liabilities. Interest expense was $66.0 million during the nine months ended September 30, 2021 compared to $48.5 million during the nine months ended September 30, 2020. The increase in interest expense during the nine months ended September 30, 2021 was primarily due to increases in interest expense of $14.5 million from the issuance of senior notes and $3.0 million from the Nomura term loan, partially offset by a decrease in interest expense of $0.2 million on our asset based credit facility. Other income in the nine months ended September 30, 2021 included income from equity investments of $1.2 million compared to a loss of $0.1 million in the prior year period.
Income Before Income Taxes. Income before income taxes was $523.5 million during the nine months ended September 30, 2021 compared to $45.6 million during the nine months ended September 30, 2020. The increase was primarily due to increases in revenues of approximately $825.9 million, gain on extinguishment of loans and other of $8.3 million, and income from equity investments of $1.3 million, partially offset by increases in operating expenses of $339.8 million, interest expense of $17.5 million, and a decrease in interest income of $0.4 million.
Provision for Income Taxes. Provision for income taxes was $140.1 million during the nine months ended September 30, 2021 compared to $13.4 million during the nine months ended September 30, 2020. The effective income tax rate was a provision of 26.8% for the nine months ended September 30, 2021 as compared to 29.4% for the nine months ended September 30, 2020.
Net Income (Loss) Attributable to Noncontrolling Interests. Net income (loss) attributable to noncontrolling interests represents the proportionate share of net income (loss) generated by membership interests of partnerships that we do not own. The net income attributable to noncontrolling interests was $2.5 million during the nine months ended September 30, 2021 compared to net loss of $1.4 million during the nine months ended September 30, 2020.
Net Income Attributable to the Company. Net income attributable to the Company was $380.9 million for the nine months ended September 30, 2021 compared to $33.6 million for the nine months ended September 30, 2020. The increase was primarily due to increases in operating income of $486.2 million, gain on extinguishment of loans and other of $8.3 million, and income from equity investments of $1.3 million, partially offset by increases in provision for income taxes of $126.7 million, interest expense of $17.5 million, net income attributable to noncontrolling interests of $3.9 million, and a decrease in interest income of $0.4 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 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 July 8, 2021, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 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 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. On July 8, 2021, the Company declared a cash dividend of $0.4609375 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021.
51
Net Income Available to Common Shareholders. Net income available to common shareholders was $375.4 million during the nine months ended September 30, 2021 compared to $30.3 million during the nine months ended September 30, 2020. The increase was primarily due to increases in operating income of $486.2 million, gain on extinguishment of loans and other of $8.3 million, and income from equity investments of $1.3 million, partially offset by increases in provision for income taxes of $126.7 million, interest expense of $17.5 million, income attributable to noncontrolling interests of $3.9 million, preferred stock dividends of $2.2 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 nine months ended September 30, 2021 and 2020, we generated net income of $383.4 million and $32.2 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 September 30, 2021, we had $378.2 million of unrestricted cash and cash equivalents, $0.9 million of restricted cash, $1,352.1 million of securities and other investments owned at fair value, $350.8 million of loans receivable, and $1,696.1 million of borrowings outstanding. The borrowings outstanding of $1,696.1 million as of September 30, 2021 included $1,362.8 million of senior notes at amortized cost, $252.9 million in term loans borrowed pursuant to the BRPAC and Nomura Credit Agreements, $80.0 million of revolving credit under the Nomura Credit Agreement, 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.
From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On October 28, 2021, we declared a regular dividend of $1.00 per share and special dividend of $3.00 per share that will be paid on or about November 23, 2021 to stockholders of record as of November 9, 2021. On July 29, 2021, we declared a regular dividend of $0.50 per share and special dividend of $1.50 per share that was paid on 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 October 28, 2021, the Board of Directors announced an increase to the regular quarterly dividend from $0.50 per share to $1.00 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 nine months ended September 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 | |||||||||||
| July 29, 2021 | August 26, 2021 | August 13, 2021 | $ | 0.500 | $ | 1.500 | $ | 2.000 | ||||||||
| 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 September 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 was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021. On October 6, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or about November 1, 2021 to holders of record as of the close of business on October 21, 2021.
52
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 September 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 was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021. On October 6, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which will be paid on or about November 1, 2021 to holders of record as of the close of business on October 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
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| (Dollars in thousands) | ||||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (166,652 | ) | $ | 87,902 | |||
| Investing activities | (416,662 | ) | (126,065 | ) | ||||
| Financing activities | 859,364 | 104,103 | ||||||
| Effect of foreign currency on cash | (1,755 | ) | 407 | |||||
| Net increase in cash, cash equivalents and restricted cash | $ | 274,295 | $ | 66,347 | ||||
Cash used in operating activities was $166.7 million during the nine months ended September 30, 2021 compared to cash provided of $87.9 million during the nine months ended September 30, 2020. Cash used in operating activities for the nine months ended September 30, 2021 consisted of the positive impact of net income of $383.4 million and noncash items of $40.0 million, offset by the negative impact of changes in operating assets and liabilities of $590.0 million. The positive cash flow impact from noncash items of $40.0 million included deferred income taxes of $28.6 million, share-based compensation of $23.5 million, depreciation and amortization of $19.1 million, loss on extinguishment of debt of $4.9 million, dividends from equity investments of $1.4 million, provision for doubtful accounts of $1.2 million, and income allocated for mandatorily redeemable noncontrolling interests of $0.5 million, partially offset by other noncash interest and other of $15.7 million, fair value adjustments of $10.7 million, gain on extinguishment of loans of $6.5 million, gain on equity investment of $3.5 million, effect of foreign currency on operations of $1.3 million, income from equity investments of $1.2 million, and gain on disposal of fixed assets and other of $0.1 million.
Cash used in investing activities was $416.7 million during the nine months ended September 30, 2021 compared to cash used in investing activities of $126.1 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, cash used in investing activities consisted of cash used in investment of subsidiaries initial public offering proceeds into trust account of $345.0 million, purchases of loans receivable of $186.3 million, repayments of loan participations sold of $15.2 million, cash used for acquisition of businesses of $2.1 million, and purchases of property and equipment of $0.6 million, partially offset by cash received from loans receivable repayment of $132.5 million. During the nine months ended September 30, 2020, cash used in investing activities consisted of cash used for investment of subsidiaries initial public offering proceeds into trust account of $176.8 million, cash used for the purchase of loans receivable of $169.1 million, purchases of property, equipment, and other of $1.5 million, cash used for acquisition of other business of $1.5 million, and repayments of loan participations sold of $1.1 million, partially offset by funds received from trust account of subsidiary of $143.8 million, cash received from loans receivable repayment of $76.0 million, loan participations sold of $2.4 million, and sale of a loan receivable to a related party of $1.8 million.
53
Cash provided by financing activities was $859.4 million during the nine months ended September 30, 2021 compared to cash provided by financing activities of $104.1 million during the nine months ended September 30, 2020. During the nine months ended September 30, 2021, cash provided by financing activities primarily consisted of $890.6 million in proceeds from issuance of senior notes, $345.0 million in proceeds from initial public offering of subsidiaries, $200.0 million in proceeds from the Nomura term loan, $80.0 million in proceeds from Nomura revolving credit line, $64.7 million in net proceeds from offerings of common stock, $14.0 million in net proceeds from offerings of preferred stock, and $12.7 million in contributions from noncontrolling interests, partially offset by $390.5 million used to repurchase our senior notes, $236.6 million used to pay dividends on our common shares, $37.6 million used to repay our notes payable, $31.0 million used to pay debt issuance costs, $16.1 million used for repayment on our BRPAC term loan, $15.7 million in distributions to noncontrolling interests, $10.5 million used to pay employment taxes on vesting of restricted stock, $5.5 million used to pay dividends on our preferred shares, $2.7 million used in the repurchase of common stock, and $1.6 million used to pay for contingent consideration. During the nine months ended September 30, 2020, cash provided by financing activities primarily consisted of $175.0 million proceeds from initial public offering of subsidiaries, $171.4 million proceeds from issuance of senior notes, and $36.0 million proceeds from offerings of preferred stock, partially offset by $143.8 million used in the redemption of subsidiary temporary equity and distributions, $38.3 million used to repurchase our common stock, $37.1 million used to repay our asset based credit facility, $25.8 million used to pay dividends on our common shares, $14.4 million used for repayment on our BRPAC term loan, $7.5 million used to pay debt issuance costs, $3.2 million used to pay dividends on our preferred shares, $3.0 million used for payment of employment taxes on vesting of restricted stock, $3.0 million in distributions to noncontrolling interests, $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.
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.
As of September 30, 2021, the outstanding balance on the Term Loan Facility was $194.6 million (net of unamortized debt issuance costs of $5.4 million). Interest on the term loan for the three and nine months ended September 30, 2021 was $2.7 million (including amortization of deferred debt issuance costs of $0.4 million) and $2.9 million (including amortization of deferred debt issuance costs of $0.4 million), respectively. The interest rate on the term loan as of September 30, 2021 was 4.63%.
54
We had an outstanding balance of $80.0 million under the Revolving Credit Facility as of September 30, 2021. Interest on the revolving facility for the three and nine months ended September 30, 2021 was $0.8 million (including unused commitment fees of $0.06 million and amortization of deferred financing costs of $0.1 million) and $0.8 million (including unused commitment fees of $0.08 million and amortization of deferred financing costs of $0.2 million), respectively. The interest rate on the Revolving Credit Facility as of September 30, 2021 was 4.62%.
We are in compliance with all financial covenants in the Nomura Credit Agreement as of September 30, 2021.
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 as of September 30, 2021 and December 31, 2020. As of September 30, 2021, there were no open letters of credit outstanding.
We are in compliance with all financial covenants in the asset based credit facility as of September 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 9 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. As of September 30, 2021, the interest rate on the BRPAC Credit Agreement was 3.09%.
55
Principal outstanding under the Amended BRPAC Credit Agreement is due in quarterly installments commencing on March 31, 2021. Quarterly installments on December 31, 2021 is in the amount of $4.6 million, from March 31, 2022 to December 31, 2022 are in the amount of $4.1 million per quarter, from March 31, 2023 to December 31, 2023 are in the amount of $3.6 million per quarter, from March 31, 2024 to December 31, 2024 are in the amount of $3.1 million per quarter, from March 31, 2025 to September 30, 2025 are in the amount of $2.8 million per quarter, and the remaining principal balance is due at final maturity on December 31, 2025.
As of September 30, 2021 and December 31, 2020, the outstanding balance on the term loan was $58.4 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 September 30, 2021 and 2020, was $0.5 million (including amortization of deferred debt issuance costs of $0.07 million). Interest expense on the term loan during the nine months ended September 30, 2021, was $1.9 million (including amortization of deferred debt issuance costs of $0.2 million).
We are in compliance with all financial covenants in the BRPAC Credit Agreement as of September 30, 2021.
Senior Note Offerings
During the nine months ended September 30, 2021, the Company issued $183.0 million of senior notes due with maturities dates ranging from May 2023 to August 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 July 26, 2021, the Company redeemed, in full, $122.8 million aggregate principal amount of our 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 under the ticker symbol “RILYG,” were delisted from NASDAQ.
On August 4, 2021, the Company issued $316.3 million of senior notes due in August 2028 (“5.25% 2028 Notes”). Interest on the 5.25% 2028 Notes is payable quarterly at 5.25%. The 5.25% 2028 Notes are unsecured and due and payable in full on August 31, 2028. In connection with the issuance of the 5.25% 2028 Notes, the Company received net proceeds of $308.7 million (after underwriting commissions, fees, and other issuance costs of $7.6 million). The Notes bear interest at the rate of 5.25% per annum.
On September 4, 2021, we redeemed, in full, $137.5 million aggregate principal amount of our 7.375% Senior Notes due 2023 (“7.375% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101.5% of the aggregate principal amount, plus accrued and unpaid interest up to, but excluding, the redemption date. The total redemption payment included approximately $1.0 million in accrued interest and $2.1 million in premium. In connection with the full redemption, the 7.375% 2023 Notes under the ticker symbol “RILYH,” were delisted from NASDAQ.
On October 22, 2021, we redeemed, in full, $115.7 million aggregate principal amount of our 6.875% Senior Notes due 2023 (the “6.875% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, up to, but excluding, the redemption date. The total redemption payment included approximately $1.8 million in accrued interest and $1.2 million in premium. In connection with the full redemption, the 6.875% 2023 Notes under the ticker symbol “RILYI,” were delisted from NASDAQ.
56
As of September 30, 2021 and December 31, 2020, the total senior notes outstanding was $1,363 million (net of unamortized debt issue costs of $17.9 million) and $870.8 million (net of unamortized debt issue costs of $9.6 million) with a weighted average interest rate of 5.96% and 6.95%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $21.5 million and $15.6 million for the three months ended September 30, 2021 and 2020, respectively and $60.0 million and $45.5 million for the nine months ended September 30, 2021 and 2020, respectively.
The most recent sales agreement prospectus was filed by us with the SEC on August 11, 2021 (the “August 2021 Sales Agreement Prospectus”), supplementing the prospectus filed on April 6, 2021 (the “April 2021 Sales Agreement Prospectus”), and 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 $250.0 million of certain of the Company’s senior notes. As of September 30, 2021, the Company had $152.3 million remaining availability under the August 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, we agreed to guaranty (the “B. Riley Guaranty”) up to $110.0 million of obligations that Babcock & Wilcox Enterprises, Inc. (“B&W”) may owe to providers of cash collateral pledged in connection with B&W’s 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 a reimbursement agreement with respect to such cash collateral. B&W will 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 September 30, 2021.
As of September 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.
In the normal course of business, we enter into commitments to our clients in connection with capital raising transactions, such as firm commitment underwritings and equity lines of credit. These commitments require us to purchase securities at a specified price. Securities underwriting exposes us to market and credit risk, primarily in the event that, for any reason, securities purchased by us cannot be distributed at the anticipated price.
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.
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.
57
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 our 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 August 4, 2021, we issued $316.3 million of senior notes due in August 2028 (“5.25% 2028 Notes”) pursuant to a prospectus supplement dated January 28, 2021. Interest on the 5.25% 2028 Notes is payable quarterly at 5.25%. The 5.25% 2028 Notes are unsecured and due and payable in full on August 31, 2028. In connection with the issuance of the 5.25% 2028 Notes, the Company received net proceeds of $308.7 million (after underwriting commissions, fees, and other issuance costs of $7.6 million). The 5.25% 2028 Notes bear interest at the rate of 5.25% per annum.
On September 4, 2021, we redeemed, in full, $137.5 million aggregate principal amount of our 7.375% Senior Notes due 2023 (“7.375% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101.5% of the aggregate principal amount, plus accrued and unpaid interest up to, but excluding, the redemption date. The total redemption payment included approximately $1.0 million in accrued interest and $2.1 million in premium. In connection with the full redemption, the 7.375% 2023 Notes under the ticker symbol “RILYH,” were delisted from NASDAQ.
On October 22, 2021, we redeemed, in full, $115.7 million aggregate principal amount of our 6.875% Senior Notes due 2023 (the “6.875% 2023 Notes”) pursuant to the fifth supplemental indenture dated September 11, 2018. The redemption price was equal to 101.0% of the aggregate principal amount, plus accrued and unpaid interest, up to, but excluding, the redemption date. The total redemption payment included approximately $1.8 million in accrued interest and $1.2 million in premium. In connection with the full redemption, the 6.875% 2023 Notes under the ticker symbol “RILYI,” were delisted from NASDAQ.
As a result of the above, our total senior notes payable (including interest) increased to $1,713.0 million as of September 30, 2021, and comparing September 30, 2021 to December 31, 2020, our senior notes payable due in one year or less increased by $21.4 million, our senior notes payable due in 1-3 years increased by $16.3 million, our senior notes due in 4-5 years increased by $332.3 million while our senior notes due in more than 5 years increased by $251.2 million. Additionally, our total contractual obligations increased to $2,056.8 million as of September 30, 2021 and comparing September 30, 2021 to December 31, 2020, our total payments due in one year or less decreased by $12.2 million, our payments due in 1-3 years increased $37.0 million, our payments due in 4-5 years increased by $500.6 million, and our payments due in more than 5 years increased by $252.6 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 standards we have not yet adopted and recently adopted.
58
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.
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 September 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 $48.8 million for the nine months ended September 30, 2021 or 3.7% of our total revenues of $1,318.5 million during the nine months ended September 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 $0.9 million and $0.4 million during the nine months ended September 30, 2021 and 2020, respectively. We may be exposed to foreign currency risk; however, our operating results during the nine months ended September 30, 2021 included $48.8 million of revenues and $39.0 million of operating expenses from our foreign subsidiaries and a 10% appreciation or depreciation of the U.S. dollar relative to the local currency exchange rates would result in an approximately $0.9 million change in our operating income for the nine months ended September 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 September 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.
59
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., 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.
National Securities Corporation (“NSC”) is a respondent in several Financial Industry Regulatory Authority 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.
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.
None.
60
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 |
61
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: November 9, 2021 | By: | /s/ PHILLIP J. AHN |
| Name: | Phillip J. Ahn | |
| Title: | Chief Financial Officer and Chief Operating Officer | |
| (Principal Financial Officer) | ||
62