NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands, except share
data)
NOTE 1—ORGANIZATION, BUSINESS
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
B. Riley Financial,
Inc. and its subsidiaries (collectively the “Company”) provide investment banking and financial services to corporate,
institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory services to a wide
range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional
services firms throughout the United States, Australia, Canada, and Europe and with the acquisition of United Online, Inc. (“UOL”)
on July 1, 2016, provide consumer Internet access and related subscription services.
The Company operates
in four operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities
lending, restructuring, research, sales and trading and wealth management services to corporate, institutional and high net worth
clients; (ii) Auction and Liquidation, through which the Company provides auction and liquidation services to help clients dispose
of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual
property and real property; (iii) Valuation and Appraisal, through which the Company provides valuation and appraisal services
to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs
and (iv) Principal Investments - United Online, through which the Company provides consumer Internet access and related subscription
services.
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 50% member interest, appointment of two of the three executive officers and significant
influence over the funding of operations, and (b) GA Retail Investments, L.P. which is controlled by the Company as a result of
its ownership of a 50% partnership interest, appointment of executive officers and significant influence over the operations. The
condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting
guidelines and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion
of the Company’s management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for the periods presented have been included. These condensed consolidated
financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements
and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed
with the Securities and Exchange Commission (“SEC”) on March 10, 2017. The results of operations for the six months
ended June 30, 2017 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future
periods.
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, reserves for accounts receivable and slow moving goods held for sale or auction, the carrying value of intangible
assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share-based arrangements,
fair value of contingent consideration in business combination’s and accounting for income tax valuation allowances. Estimates
are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances.
Due to the inherent uncertainty involved with estimates, actual results may differ.
Revenues
are recognized in accordance with the accounting guidance when persuasive evidence of an arrangement exists, the related services
have been provided, the fee is fixed or determinable, and collection is reasonably assured.
Revenues
in the Capital Markets segment are primarily comprised of (i) fees earned from corporate finance, investment banking, restructuring
and wealth management services; (ii) revenues from sales and trading activities; and (iii) interest income from securities lending
activities.
Fees
earned from corporate finance and investment banking services are derived from debt, equity and convertible securities offerings
in which the Company acted as an underwriter or placement agent and from financial advisory services rendered in connection with
client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. Fees from underwriting activities
are recognized in earnings when the services related to the underwriting transaction are completed under the terms of the engagement
and when the income was determined and is not subject to any other contingencies.
Fees
earned from wealth management services consist primarily of investment management fees that are recognized over the period the
services are provided. Investment management fees are primarily comprised of fees for investment management services and are generally
based on the dollar amount of the assets being managed.
Revenues
from sales and trading include (i) commissions resulting from equity securities transactions executed as agent or principal and
are recorded on a trade date basis, (ii) related net trading gains and losses from market making activities and from the
commitment of capital to facilitate customer orders, (iii) fees paid for equity research; and (iv) principal transactions
which include realized and unrealized gains and losses and interest and dividend income resulting from our principal investments
in equity and other securities for the Company’s account.
Revenues
from securities lending activities consist of interest income from equity and fixed income securities that are borrowed from one
party and loaned to another. The Company maintains relationships with a broad group of banks and broker-dealers to facilitate
the sourcing, borrowing and lending of equity and fixed income securities in a “matched book” to limit the Company’s
exposure to fluctuations in the market value or securities borrowed and securities loaned.
Revenues
in the Auction and Liquidation segment are comprised of (i) commissions and fees earned on the sale of goods at auctions and liquidations;
(ii) revenues from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods
being sold at auction or liquidation; (iii) revenue from the sale of goods that are purchased by the Company for sale at auction
or liquidation sales events; (iv) fees earned from real estate services and the origination of loans; (v) revenues from financing
activities is recorded over the lives of related loans receivable using the interest method; and (vi) revenues from contractual
reimbursable expenses incurred in connection with auction and liquidation contracts.
Commission
and fees earned on the sale of goods at auction and liquidation sales are recognized when evidence of an arrangement exists, the
sales price has been determined, title has passed to the buyer and the buyer has assumed the risks of ownership, and collection
is reasonably assured. The commission and fees earned for these services are included in revenues in the accompanying condensed
consolidated statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs
which totaled $10,509 and $1,825 for the three months ended June 30, 2017 and 2016, respectively, and $21,119 and $4,843 for the
six months ended June 30, 2017 and 2016, respectively.
Revenues
earned from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold
at auction or liquidation are recognized based on proceeds received. The Company records proceeds received from these types of
engagements first as a reduction of contractual reimbursable expenses, second as a recovery of its guarantee and thereafter as
revenue, subject to such revenue meeting the criteria of having been fixed or determinable. Contractual reimbursable expenses
and amounts advanced to customers for minimum guarantees are initially recorded as advances against customer contracts in the
accompanying condensed consolidated balance sheets. If, during the auction or liquidation sale, the Company determines that the
proceeds from the sale will not meet the minimum guaranteed recovery value as defined in the auction or liquidation services contract,
the Company accrues a loss on the contract in the period that the loss becomes known.
The
Company also evaluates revenue from auction and liquidation contracts in accordance with the accounting guidance to determine
whether to report Auction and Liquidation segment revenue on a gross or net basis. The Company has determined that it acts as
an agent in a substantial majority of its auction and liquidation services contracts and therefore reports the auction and liquidation
revenues on a net basis.
Revenues
from the sale of goods are recorded gross and are recognized in the period in which the sale of goods held for sale or auction
are completed, title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the
transaction. These revenues are primarily the result of the Company acquiring title to merchandise with the intent of selling
the items at auction or for augmenting liquidation sales. For liquidation contracts where we take title to retail goods, our net
sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional
allowances and are recorded net of sales or value added tax.
Revenues
in the Valuation and Appraisal segment are primarily comprised of fees for valuation and appraisal services. Revenues are recognized
upon the delivery of the completed services to the related customers and collection of the fee is reasonably assured. Revenues
in the Valuation and Appraisal segment also include contractual reimbursable costs which totaled $662 and $707 for the three months
ended June 30, 2017 and 2016, respectively, and $1,327 and $1,386 for the six months ended June 30, 2017 and 2016, respectively.
Revenues
in the Principal Investments - United Online segment are primarily comprised of services revenues, which are derived primarily
from fees charged to pay accounts; advertising and other revenues; and products revenues, which are derived primarily from the
sale mobile broadband service devices, including the related shipping and handling fees.
Service
revenues are derived primarily from fees charged to pay accounts and are recognized in the period in which fees are fixed or determinable
and the related services are provided to the customer. The Company’s pay accounts generally pay in advance for their services
by credit card, PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance
payments from pay accounts are recorded in the condensed consolidated balance sheets as deferred revenue. In circumstances where
payment is not received in advance, revenues are only recognized if collectability is reasonably assured.
Advertising
revenues consist primarily of amounts from the Company’s Internet search partner that are generated as a result of users
utilizing the partner’s Internet search services and amounts generated from display advertisements. The Company recognizes
such advertising revenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the
related performance criteria are met. In determining whether an arrangement exists, the Company ensures that a written contract
is in place, such as a standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria
have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment
terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided
performance data to the contractual performance obligation and to internal or third-party performance data in circumstances where
that data is available.
|
(d)
|
Direct Cost of Services
|
Direct
cost of services relate to service and fee revenues. The costs consist of employee compensation and related payroll benefits,
travel expenses, the cost of consultants assigned to revenue-generating activities and direct expenses billable to clients in
the Valuation and Appraisal segment. Direct costs of services include participation in profits under collaborative arrangements
in which the Company is a majority participant. Direct costs of services also include the cost of consultants and other direct
expenses related to auction and liquidation contracts pursuant to commission and fee based arrangements in the Auction and Liquidation
segment. Direct cost of services in the Principal Investments - United Online segment include cost of telecommunications and data
center costs, personnel and overhead-related costs associated with operating the Company’s networks and data centers, depreciation
of network computers and equipment, third party advertising sales commissions, license fees, costs related to providing customer
support, costs related to customer billing and processing of customer credit cards and associated bank fees. Direct cost of services
does not include an allocation of the Company’s overhead costs.
|
(e)
|
Interest Expense - Securities Lending Activities
|
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.
|
(f)
|
Concentration of Risk
|
Revenues
from one liquidation service contract to a retailer represented 7.1% of total revenues during the three months ended June 30,
2017 and 9.3% of total revenues during the six months ended June 30, 2017. Revenues in the Capital Markets, Auction and Liquidation,
Valuation and Appraisal and Principal Investments - United Online 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 liquidation 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.
The
Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled
$862 and $761 for the three months ended June 30, 2017 and 2016, respectively, and $1,043 and $886 for the six months ended June
30, 2017 and 2016, respectively. Advertising expense is included as a component of selling, general and administrative expenses
in the accompanying condensed consolidated statements of operations.
|
(h)
|
Share-Based Compensation
|
The
Company’s share-based payment awards principally consist of grants of restricted stock and restricted stock units. 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. The fair value of the liability-classified award will be subsequently remeasured at each reporting
date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation
cost over that period.
The
Company recorded a restructuring charge in the amount of $6,588 during the six months ended June 30, 2017. In June 2017, the Company
implemented costs savings measures taking into account the planned synergies as a result of the acquisition of FBR & Co. (“FBR”),
as more fully described in Note 3, which included a reduction in force for some of the corporate executives of FBR and a restructuring
to integrate FBR’s operations with the Company’s operations in the Capital Market’s segment. These initiatives
resulted in a restructuring charge of $6,105 in the second quarter of 2017. The restructuring charge included $1,298 related to
severance and $884 related to the accelerated vesting of restricted stock awards to former corporate executives of FBR and $1,994
of severance and $540 related to accelerated vesting of stock awards to employees and $1,389 of lease loss accruals and impairments
for the planned consolidation of office space related to operations in the Capital Markets segment. Of the $6,105 of restructuring
charges, $3,923 related to the Capital Markets segment and $2,182 related to corporate overhead. The restructuring charge in 2017
also included employee termination costs of $109 and $483 in the second quarter and the six months ended 2017, respectively, related
to a reduction in personnel in the principal investments – United Online segment of our operations.
The following tables summarize the restructuring
charge:
Accrued restructuring charge at December 31, 2016
|
|
$
|
694
|
|
Restructuring charge
|
|
|
6,588
|
|
Cash paid
|
|
|
(1,788
|
)
|
Non-cash items
|
|
|
(2,207
|
)
|
Accrued restructuring charge at June 30, 2017
|
|
$
|
3,287
|
|
|
|
Three
Months Ended June 30, 2017
|
|
|
|
Capital
Markets
|
|
|
Principal
Investments – United Online
|
|
|
Corporate
|
|
|
Total
|
|
Restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee termination costs
|
|
$
|
2,534
|
|
|
$
|
109
|
|
|
$
|
2,182
|
|
|
$
|
4,825
|
|
Facility closure and consolidation charge
|
|
|
1,389
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,389
|
|
Total restructuring charge
|
|
$
|
3,923
|
|
|
$
|
109
|
|
|
$
|
2,182
|
|
|
$
|
6,214
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Capital Markets
|
|
|
Principal Investments – United Online
|
|
|
Corporate
|
|
|
Total
|
|
Restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee termination costs
|
|
$
|
2,534
|
|
|
$
|
483
|
|
|
$
|
2,182
|
|
|
$
|
5,199
|
|
Facility closure and consolidation charge
|
|
|
1,389
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,389
|
|
Total restructuring charge
|
|
$
|
3,923
|
|
|
$
|
483
|
|
|
$
|
2,182
|
|
|
$
|
6,588
|
|
There was no restructuring charge for the three and six months
ended June 30, 2016.
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.
|
(k)
|
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.
As
of June 30, 2017, restricted cash balance of $5,632 included $5,144 of cash collateral related to certain retail liquidation engagements
and $488 cash segregated in a special bank account for the benefit of customers related to our broker dealer subsidiary and collateral
for one of our telecommunication supplier. As of December 31, 2016, restricted cash balance of $3,294 included $1,440 of cash
collateral related to a retail liquidation engagement in Australia, $1,320 of cash collateral for foreign exchange contracts and
$534 cash segregated in a special bank account for the benefit of customers related to our broker dealer subsidiary and collateral
for one of our telecommunication suppliers.
|
(m)
|
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 Accounting Standards Update (“ASU”) 2013-01,
“Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” requiring
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.
|
(n)
|
D
ue
from/to Brokers, Dealers, and Clearing Organizations
|
The Company
clears all of its proprietary and customer transactions through other broker-dealers on a fully disclosed basis. The amount receivable
from or payable to the clearing brokers represents the net of proceeds from unsettled securities sold, the Company’s clearing
deposit and amounts receivable for commissions less amounts payable for unsettled securities purchased by the Company and amounts
payable for clearing costs and other settlement charges. This amount also includes the cash collateral received for securities
loaned less cash collateral for securities borrowed. Any amounts payable would be fully collateralized by all of the securities
owned by the Company and held on deposit at the clearing broker.
Accounts
receivable represents amounts due from the Company’s auction and liquidation, valuation and appraisal, capital markets and
principal investments - United Online customers. The Company maintains an allowance for doubtful accounts for estimated losses
inherent in its accounts receivable portfolio. In establishing the required allowance, management utilizes a specific customer
identification methodology. Management also considers historical losses adjusted for current market conditions and the customers’
financial condition and the current receivables aging and current payment patterns. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance sheet credit exposure related to its customers. Bad debt expense and changes in the allowance for doubtful
accounts for the three and six months ended June 30, 2017 and 2016 are included in Note 5.
|
(p)
|
Advances Against Customer Contracts
|
Advances
against customer contracts represent advances of contractually reimbursable expenses incurred prior to, and during the term of
the auction and liquidation services contract. These advances are charged to expense in the period that revenue is recognized
under the contract.
|
(q)
|
Property and Equipment
|
Property
and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated
useful lives of the assets. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter
of the lease term or estimated useful life of the asset. Depreciation and amortization expense was $696 and $84 for the three
months ended June 30, 2017 and 2016, respectively, and $1,214 and $175 for the six months ended June 30, 2017 and 2016, respectively.
|
(r)
|
Securities Owned and Securities Sold Not Yet
Purchased
|
Securities
owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities
sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and
thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these
securities are reflected currently in the results of operations.
As
of June 30, 2017 and December 31, 2016, the Company’s securities owned and securities sold not yet purchased at fair value
consisted of the following securities:
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Securities and other investments owned
|
|
|
|
|
|
|
|
|
Common stocks and warrants
|
|
$
|
20,771
|
|
|
$
|
2,084
|
|
Corporate bonds
|
|
|
1,620
|
|
|
|
1,025
|
|
Loan receivable
|
|
|
29,108
|
|
|
|
—
|
|
Partnership interests
|
|
|
26,705
|
|
|
|
13,470
|
|
|
|
$
|
78,204
|
|
|
$
|
16,579
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
2,594
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
932
|
|
|
|
846
|
|
|
|
$
|
3,526
|
|
|
$
|
846
|
|
|
(s)
|
Fair Value Measurements
|
The
Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment
and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter
markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose
inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used
to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy
within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The
Company’s securities and other investments owned and securities sold and not yet purchased are comprised of common stocks
and warrants, corporate bonds, loans receivable and investments in partnerships. Investments in common stocks are based on quoted
prices in active markets which are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic common 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’s partnership interests are valued based on the Company’s proportionate share of the net assets of the
partnership which is derived from the most recent statements received from the general partner which are included in Level 2 of
the fair value hierarchy. The Company also invests in proprietary investment funds that are valued at net asset value (“NAV”)
determined by the fund administrator. The underlying securities held by these investment companies are primarily corporate and
asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. As a practical
expedient, the Company relies on the NAV of these investments as their fair value. The NAVs that have been provided by the fund
administrators are derived from the fair values of the underlying investments as of the reporting date. In accordance with ASU
2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent),” (“ASU 2015-07”), these investment funds are not categorized within the fair
value hierarchy.
The
fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash,
references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation
models.
The
following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring
basis as of June 30, 2017 and December 31, 2016.
|
|
Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis at June 30, 2017, Using
|
|
|
|
Fair value at
June 30,
2017
|
|
|
Quoted prices in active markets identical assets (Level 1)
|
|
|
Other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and warrants
|
|
$
|
20,771
|
|
|
$
|
11,008
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
Corporate bonds
|
|
|
1,620
|
|
|
|
—
|
|
|
|
1,620
|
|
|
|
—
|
|
Loan receivable
|
|
|
29,108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,108
|
|
Partnership interests
|
|
|
21,726
|
|
|
|
4,660
|
|
|
|
44
|
|
|
|
17,022
|
|
Total assets measured at fair value
|
|
$
|
73,225
|
|
|
$
|
15,668
|
|
|
$
|
1,664
|
|
|
$
|
55,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
2,594
|
|
|
$
|
2,594
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate bonds
|
|
|
932
|
|
|
|
—
|
|
|
|
932
|
|
|
|
—
|
|
Total securities sold not yet purchased
|
|
|
3,526
|
|
|
|
2,594
|
|
|
|
932
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
9,641
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,641
|
|
Total liabilities measured at fair value
|
|
$
|
13,167
|
|
|
$
|
2,594
|
|
|
$
|
932
|
|
|
$
|
9,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis at December 31, 2016, Using
|
|
|
|
Fair value at December 31,
2016
|
|
|
Quoted prices in active markets identical assets
(Level 1)
|
|
|
Other
observable
inputs
(Level 2)
|
|
|
Significant unobservable inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
2,084
|
|
|
$
|
1,785
|
|
|
$
|
—
|
|
|
$
|
299
|
|
Corporate bonds
|
|
|
1,025
|
|
|
|
—
|
|
|
|
865
|
|
|
|
160
|
|
Partnership interests
|
|
|
13,470
|
|
|
|
—
|
|
|
|
44
|
|
|
|
13,426
|
|
Total assets measured at fair value
|
|
$
|
16,579
|
|
|
$
|
1,785
|
|
|
$
|
909
|
|
|
$
|
13,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
846
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
3,214
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
1,242
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,242
|
|
Total liabilities measured at fair value
|
|
$
|
5,302
|
|
|
$
|
—
|
|
|
$
|
846
|
|
|
$
|
4,456
|
|
As
of June 30, 2017, securities and other investments owned included $4,979 of investment funds valued at NAV per share. As such,
total securities and other investments owned of $78,204 in the condensed consolidated balance sheets at June 30, 2017 included
investments in investment funds of $4,979 and securities and other investments owned in the amount of $73,225 as outlined in the
fair value table above.
As
of June 30, 2017 and December 31, 2016, financial assets measured and reported at fair value on a recurring basis and classified
within Level 3 were $55,893 and $13,885, respectively, or 4.2% and 5.2%, respectively, of the Company’s total assets. In
determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance and market
factors to estimate the value, including where applicable, over-the-counter market trading activity.
The
changes in Level 3 fair value hierarchy during the six months ended June 30, 2017 and 2016 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
|
|
|
|
Period
|
|
|
Adjustments
|
|
|
Earnings
|
|
|
Settlements
|
|
|
of Level 3
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks and warrants
|
|
$
|
299
|
|
|
$
|
(667
|
)
|
|
$
|
—
|
|
|
$
|
10,131
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
Corporate bonds
|
|
|
160
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(160
|
)
|
|
|
—
|
|
Loan receivable
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
29,208
|
|
|
|
—
|
|
|
|
29,108
|
|
Partnership interests
|
|
|
13,426
|
|
|
|
2,697
|
|
|
|
—
|
|
|
|
899
|
|
|
|
—
|
|
|
|
17,022
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
3,214
|
|
|
|
6,250
|
|
|
|
(272
|
)
|
|
|
—
|
|
|
|
449
|
|
|
|
9,641
|
|
Contingent consideration
|
|
|
1,242
|
|
|
|
8
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
290
|
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
243
|
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
569
|
|
|
|
—
|
|
|
|
569
|
|
Partnership interests
|
|
|
1,766
|
|
|
|
123
|
|
|
|
418
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,307
|
|
Mandatorily redeemable noncontrolling interests issued after November 5, 2003
|
|
|
2,330
|
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,111
|
|
Contingent consideration
|
|
|
2,391
|
|
|
|
55
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
1,196
|
|
The
fair value adjustment for contingent consideration of $8 and $55 represents imputed interest for the six months ended
June 30, 2017 and 2016, respectively. The Company had a triggering event in the second quarter of 2017 for the
mandatorily redeemable noncontrolling interests that resulted in a fair value adjustment of $6,050 of the total fair value
adjustment of $6,250. In connection with this event, the Company received proceeds of $6,000 from key man life insurance.
These amounts have been recorded in the condensed consolidated statements of operations in Selling, general and
administrative expenses in the corporate segment. The amount reported in the table above also for the six months ended June
30, 2017 and 2016 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, restricted cash, accounts receivable, accounts payable,
accrued payroll and related, accrued value added tax, income taxes payable and accrued expenses and other current liabilities approximate
fair value based on the short-term maturity of these instruments.
The carrying
amount of the senior notes payable approximates fair value because the contractual interest rates or effective yields of such instruments
are consistent with current market rates of interest for instruments of comparable credit risk.
During
the six months ended June 30, 2017 and 2016, there were no assets or liabilities measured at fair value on a non-recurring basis.
|
(t)
|
Contingent Consideration
|
In
connection with the acquisition of MK Capital Advisors
, LLC (“MK Capital”)
on
February 2, 2015, the purchase agreement required the payment of contingent consideration to the former members of MK Capital
in the form of future cash payments of $1,250 and issuance of 166,667 shares of common stock on the first anniversary date of
the closing (February 2, 2016) and a final cash payment of $1,250 and issuance of 166,666 shares of common stock on the second
anniversary date of the closing (February 2, 2017). The contingent cash consideration was classified as a liability in the condensed
balance sheets in accordance with ASC 805, “Business Combination” (“ASC 805”). The fair value of the contingent
cash consideration was discounted at 8.0%. The balance of the contingent consideration liability in the condensed consolidated
consolidated balance sheets was $1,242 (discount of $8) at December 31, 2016. Imputed interest expense totaled $24 for the three
months ended June 30, 2016 and $8 and $55 for the six months ended June 30, 2017 and 2016, respectively. The fair value of the
contingent stock consideration was classified as equity in accordance with ASC 805.
The
contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK
Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the
first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second
anniversary periods and the contingent cash consideration and contingent stock consideration for the first anniversary period
was paid and issued on February 2, 2016 and for the second anniversary period was paid and issued on February 2, 2017. Upon the
payment of the contingent stock consideration on February 2, 2017, the Company recorded a deferred tax benefit and an increase
to additional paid-in capital in the amount of $1,151 in accordance with ASC 805.
|
(u)
|
Derivative and Foreign Currency Translation
|
The
Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts,
for certain auction and liquidation engagements with operations outside the United States. During the six months ended June
30, 2017, the Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of
$25,000 Australian dollars that was settled on January 31, 2017. The Company did not use any derivative contracts
during the six months ended June 30, 2016. The forward exchange contract was entered into to improve the predictability
of cash flows related to a retail store liquidation engagement that was completed in December 2016. The net loss from
forward exchange contracts was $0 and $70 during the three and six months ended June 30, 2017, respectively, and $39 during
the three and six months ended June 30, 2016. This amount is reported as a component of selling, general and
administrative expenses in the condensed consolidated statements of operations.
The Company
transacts business in various foreign currencies. In countries where the functional currency of the underlying operations has been
determined to be the local country’s currency, revenues and expenses of operations outside the United States are translated into
United States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated
into United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included
in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying condensed consolidated balance
sheets. Transaction losses were $131 and $35 during the three months ended June 30, 2017 and 2016, respectively and $530 and $142
during the six months ended June 30, 2017 and 2016, respectively. These amounts are included in selling, general and administrative
expenses in our condensed consolidated statements of operations.
|
(v)
|
Recent Accounting Pronouncements
|
In
February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02:
Leases (Topic
842) (“ASU 2016-02”)
. The amendments in this update require lessees, among other things, to recognize lease
assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative
guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for
the Company in fiscal year 2019, but early application is permitted. The Company is currently evaluating the impact of this update
on the consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. Under this guidance
revenue is recognized at the time when goods or services are transferred to customers in an amount that reflects the
consideration to which the entity expects to receive in exchange for those goods or services. This standard sets forth a
five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended
to eliminate numerous industry-specific pieces of revenue recognition guidance. In March, April, May and December
2016, the FASB issued amendments to the new guidance relating to reporting revenue on a gross versus net basis, identifying
performance obligations and licensing arrangements and other narrow scope improvements. This standard is effective in the
first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to
adoption. The Company believes the adoption of this standard may impact engagements that contain performance-based
arrangements in which a success or completion fee is earned when and if certain predefined outcomes occur and engagements and
contracts where services are provided under fixed-fees arrangements that have multiple performance obligations. The Company
has not completed an assessment and has not yet determined whether the impact of the adoption of this standard on the
consolidated financial statements will be material. The Company will adopt this standard on January 1, 2018 but have not
concluded on a transition approach. The Company expects to complete the assessment process, including selecting a transition
method for adoption during third quarter of 2017.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (ASU 2016-15)
, which clarifies how companies present and classify certain cash receipts and cash payments
in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019, but early application
is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial
condition and results of operations.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill
Impairment
. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2
of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the
amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The
revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers for its annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet adopted
this update and currently evaluating the effect this new standard will have on its financial condition and results of operations.
NOTE 3— ACQUISITIONS
Acquisition of FBR & Co.
On
February 17, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FBR, pursuant
to which FBR was to merge with and into the Company (or a subsidiary of the Company), with the Company (or its subsidiary) as the
surviving corporation (the “Merger”). On May 1, 2017, the Company and FBR filed a registration statement for the planned
Merger.
The stockholders of the Company and FBR approved the acquisition
on June 1, 2017, customary closing conditions were satisfied and the acquisition was completed on June 1, 2017.
Subject
to the terms and conditions of the Merger Agreement, each outstanding share of FBR common stock (“FBR Common Stock”)
was converted into the right to receive 0.671 of a share of the Company’s common stock as summarized below.
The Company
believes that the acquisition of FBR will allow the Company to benefit from investment banking,
corporate
finance, securities lending, research, and sales and trading
services
provided by FBR and planned synergies from the elimination of duplicate corporate overhead and management functions with the Company.
The acquisition of FBR is accounted for using the purchase method of accounting.
The
assets and liabilities of FBR, both tangible and intangible, were recorded at their estimated fair values as of the June 1, 2017
acquisition date for FBR. The application of the purchase method of accounting resulted in goodwill of $14,528 which represents
expected overhead synergies and acquired workforce. Acquisition related costs, such as legal, accounting, valuation and other professional
fees related to the acquisition of FBR, were charged against earnings in the amount of approximately $1,389 and included in selling,
general and administrative expenses in the condensed consolidated statement of operations for the six months ended June 30, 2017.
The preliminary purchase accounting for the acquisition has been accounted for as a stock purchase with all of the recognized goodwill
is expected to be non-deductible for tax purposes.
The
preliminary purchase price allocation was as follows:
Consideration paid by B. Riley:
|
|
|
|
Number of FBR Common Shares outstanding at June 1, 2017
|
|
|
7,099,511
|
|
Stock merger exchange ratio
|
|
|
0.671
|
|
Number of B. Riley common shares
|
|
|
4,763,772
|
|
Number of B. Riley common shares to be issued from acceleration of vesting for outstanding FBR stock options, restricted stock and RSU awards
|
|
|
67,861
|
|
Total number of B. Riley common shares to be issued
|
|
|
4,831,633
|
|
Closing market price of B. Riley common shares on December 31, 2016
|
|
$
|
14.70
|
|
Total value of B. Riley common shares
|
|
|
71,025
|
|
Fair value of RSU’s attributable to service period prior to June 1, 2017
(a)
|
|
|
2,446
|
|
Total consideration
|
|
$
|
73,471
|
|
|
(a)
|
Outstanding FBR restricted stock awards at June 1, 2017,
the date of the acquisition, were adjusted in accordance with the Merger Agreement with the right to receive 0.671 shares of the
Company’s common stock for each outstanding FBR stock award unit. The fair value of the FBR restricted stock awards at June
1, 2017 was determined based on the closing price of the Company’s common stock of $14.70 on June 1, 2017. The fair value
of the FBR restricted stock awards were apportioned as purchase consideration based on service provided to FBR as of June 1, 2017
with the remaining fair value of the FBR restricted stock awards to be recognized prospectively over the restricted stock and FBR
restricted stock awards remaining vesting period.
|
Tangible assets acquired and assumed:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,738
|
|
Securities owned
|
|
|
11,188
|
|
Securities borrowed
|
|
|
861,197
|
|
Accounts receivable
|
|
|
4,341
|
|
Due from clearing broker
|
|
|
29,169
|
|
Prepaid expenses and other assets
|
|
|
5,486
|
|
Property and equipment
|
|
|
8,663
|
|
Deferred taxes
|
|
|
14,514
|
|
Accounts payable
|
|
|
(1,524
|
)
|
Accrued payroll and related expenses
|
|
|
(7,182
|
)
|
Accrued expenses and other liabilities
|
|
|
(22,411
|
)
|
Securities loaned
|
|
|
(867,626
|
)
|
Customer relationships
|
|
|
5,600
|
|
Tradename and other intangibles
|
|
|
1,790
|
|
Goodwill
|
|
|
14,528
|
|
Total
|
|
$
|
73,471
|
|
The
revenue and earnings (loss) of FBR included in our condensed consolidated financial statements for the period from June 1, 2017
(the date of acquisition) through June 30, 2017 were $11,287 and $(8,956), respectively. The loss from FBR of $(8,956) includes
transaction costs of $3,551 related to an employment agreement with the former Chief Executive Officer of FBR and a restructuring
charge in the amount of $6,105 related primarily to severance costs and lease loss accruals for the planned consolidation of office
space related to operations in the Capital Markets segment.
Acquisition of Rights to Manage Dialectic
Hedge Funds
On
April 13, 2017, the Company entered into an Asset Purchase and Assignment Agreement with Dialectic Capital Management, L.P., Dialectic
Capital, LLC and John Fichthorn (collectively “Dialectic”), pursuant to which Dialectic assigned and transferred the
rights to manage certain hedge funds to the Company (the “Dialectic Acquisition”). In addition to obtaining the rights
to manage certain hedge funds previously managed by Dialectic, the Company hired the employees that were previously employed by
the management company that managed the Dialectic hedge funds and assumed Dialectic’s office lease. In connection with the
Dialectic Acquisition, the Company paid the Dialectic parties $700 in cash consideration and 158,484 shares of common stock which
has a fair value of approximately $1,952 for total purchase consideration of $2,652. The Dialectic Acquisition expands the Company’s
assets under management in the Capital Markets segment and the Company believes such acquisition will allow the Company to benefit
from planned synergies from the elimination of duplicate administrative functions of the Company. The acquisition of Dialectic
is accounted for using the purchase method of accounting
.
The
assets acquired from Dialectic were recorded at fair value as of April 13, 2017, the acquisition date of Dialectic. The application
of the purchase method of accounting resulted in preliminary purchase allocation of $2,552 to goodwill, which
represents
expected overhead synergies and acquired workforce,
and $100 to other intangible assets - customer relationship for total
acquisition consideration of $2,652. There were tangible assets or liabilities acquired in connection with Dialectic. The preliminary
purchase
accounting for the acquisition has been accounted for as an asset purchase with all of the recognized goodwill and other intangible
assets expected to be deductible for tax purposes.
The
revenue and earnings (loss) of Dialectic included in our condensed consolidated financial statements for the period from April
13, 2017 (the date of acquisition) through June 30, 2017 were $401 and $(154), respectively.
Acquisition of UOL
On
May 4, 2016, the Company entered into a definitive agreement and plan of merger to acquire all of the outstanding common stock
of UOL, a provider of consumer Internet access and related subscription services, for $11.00 per share, or approximately $169,354
in aggregate merger consideration plus an additional $1,352 of cash consideration paid to settle the legal matter as more fully
described in Note 11. The shareholders of UOL approved the acquisition on June 29, 2016 and customary closing conditions were
satisfied and the acquisition was completed on July 1, 2016. The acquisition of UOL allows the Company to benefit from the expected
cash flows of UOL due in part to planned synergies from the elimination of duplicate overhead functions with the Company. The
acquisition of UOL is accounted for using the purchase method of accounting.
The
assets and liabilities of UOL, both tangible and intangible, were recorded at their estimated fair values as of the July 1, 2016
acquisition date for UOL. The application of the purchase method of accounting resulted in goodwill of $14,375 which represents
expected overhead synergies and acquired workforce. The revenue and earnings of UOL included in our condensed consolidated financial
statements for the three months ended June 30, 2017 were $13,015 and $5,074, respectively, and $26,397 and $9,276 respectively,
for the six months ended June 30, 2017.
Pro Forma
Financial Information
The
unaudited financial information in the table below summarizes the combined results of operations of the Company, FBR and UOL,
as though the acquisitions had occurred as of January 1, of the respective periods presented. The pro forma financial information
presented includes the effects of adjustments related to the amortization charges from the acquired intangible assets and the
elimination of certain activities excluded from the transaction and transaction related costs. The pro forma financial information
as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would
have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to
be a projection of future results.
|
|
Pro Forma (Unaudited)
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
84,634
|
|
|
$
|
64,377
|
|
|
$
|
173,853
|
|
|
$
|
126,105
|
|
Net (loss) income attributable to B. Riley Financial, Inc.
|
|
$
|
(2,473
|
)
|
|
$
|
(6,416
|
)
|
|
$
|
12,860
|
|
|
$
|
(15,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
0.53
|
|
|
$
|
(0.62
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
0.52
|
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
24,256,020
|
|
|
|
22,766,887
|
|
|
|
24,135,371
|
|
|
|
25,142,864
|
|
Weighted average diluted shares outstanding
|
|
|
24,256,020
|
|
|
|
22,766,887
|
|
|
|
24,808,897
|
|
|
|
25,142,864
|
|
NOTE 4— SECURITIES LENDING
As a result of the
acquisition of FBR, the Company has an active securities borrowed and loaned business in which it borrows securities from one party
and lends them to another.
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 following table
presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of June 30,
2017:
|
|
Gross amounts
recognized
|
|
|
Gross amounts
offset in the
consolidated
balance sheets
(1)
|
|
|
Net amounts
included in the
consolidated
balance sheets
|
|
|
Amounts not
offset in the
consolidated balance
sheets but eligible
for offsetting
upon counterparty
default
(2)
|
|
|
Net amounts
|
|
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities borrowed
|
|
$
|
909,331
|
|
|
$
|
—
|
|
|
$
|
909,331
|
|
|
$
|
909,331
|
|
|
$
|
—
|
|
Securities loaned
|
|
$
|
911,991
|
|
|
$
|
—
|
|
|
$
|
911,991
|
|
|
$
|
911,991
|
|
|
$
|
—
|
|
|
(1)
|
Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent
an event of default has occurred.
|
|
(2)
|
Includes the amount of cash collateral held/posted.
|
NOTE 5— ACCOUNTS RECEIVABLE
The components of accounts receivable, net, include
the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Accounts receivable
|
|
$
|
13,847
|
|
|
$
|
16,610
|
|
Investment banking fees, commissions and other receivables
|
|
|
4,882
|
|
|
|
576
|
|
Unbilled receivables
|
|
|
1,189
|
|
|
|
2,058
|
|
Total accounts receivable
|
|
|
19,918
|
|
|
|
19,244
|
|
Allowance for doubtful accounts
|
|
|
(599
|
)
|
|
|
(255
|
)
|
Accounts receivable, net
|
|
$
|
19,319
|
|
|
$
|
18,989
|
|
Additions and changes to the allowance for doubtful
accounts consist of the following:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
556
|
|
|
$
|
69
|
|
|
$
|
255
|
|
|
$
|
89
|
|
Add: Additions to reserve
|
|
|
379
|
|
|
|
55
|
|
|
|
704
|
|
|
|
60
|
|
Less: Write-offs
|
|
|
(144
|
)
|
|
|
(34
|
)
|
|
|
(168
|
)
|
|
|
(34
|
)
|
Less: Recoveries
|
|
|
(192
|
)
|
|
|
(4
|
)
|
|
|
(192
|
)
|
|
|
(29
|
)
|
Balance, end of period
|
|
$
|
599
|
|
|
$
|
86
|
|
|
$
|
599
|
|
|
$
|
86
|
|
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.
NOTE 6— GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $67,335 and $48,903 at June 30, 2017 and December 31, 2016, respectively. Goodwill at June 30, 2017 is comprised of $45,920
in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment and
$15,727 in the Principal Investments - United Online segment. Goodwill in the Capital Markets segment increased by $14,528 from
the acquisition of FBR and $2,552 from the acquisition of Dialectic. Goodwill in the Principal Investments - United Online segment
increased by $1,352 from the resolution of acquisition related
legal matter as more fully described in Note 11.
Goodwill
at December 31, 2016 is comprised of $28,840 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713
in the Valuation and Appraisal segment and $14,375 in the Principal Investments - United Online segment.
Intangible assets consisted
of the following:
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangibles
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangibles
|
|
|
|
Useful Life
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
4 to 13 Years
|
|
$
|
43,000
|
|
|
$
|
5,515
|
|
|
$
|
37,485
|
|
|
$
|
37,300
|
|
|
$
|
3,100
|
|
|
$
|
34,200
|
|
Domain names
|
|
7 Years
|
|
|
807
|
|
|
|
115
|
|
|
|
692
|
|
|
|
1,419
|
|
|
|
101
|
|
|
|
1,318
|
|
Advertising relationships
|
|
8 Years
|
|
|
100
|
|
|
|
12
|
|
|
|
88
|
|
|
|
100
|
|
|
|
6
|
|
|
|
94
|
|
Internally developed
software and other intangibles
|
|
0.5 to 4 Years
|
|
|
3,373
|
|
|
|
1,042
|
|
|
|
2,331
|
|
|
|
3,333
|
|
|
|
550
|
|
|
|
2,783
|
|
Trademarks
|
|
8 to 9 Years
|
|
|
2,850
|
|
|
|
153
|
|
|
|
2,697
|
|
|
|
1,100
|
|
|
|
69
|
|
|
|
1,031
|
|
Total
|
|
|
|
|
50,130
|
|
|
|
6,837
|
|
|
|
43,293
|
|
|
|
43,252
|
|
|
|
3,826
|
|
|
|
39,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
|
|
1,740
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
1,740
|
|
|
|
—
|
|
|
|
1,740
|
|
Total
intangible assets
|
|
|
|
$
|
51,870
|
|
|
$
|
6,837
|
|
|
$
|
45,033
|
|
|
$
|
44,992
|
|
|
$
|
3,826
|
|
|
$
|
41,166
|
|
Amortization expense
was $1,554 and $111 for the three months ended June 30, 2017 and 2016, respectively, and $3,076 and $223 for the six months ended
June 30, 2017 and 2016, respectively. At June 30, 2017, estimated future amortization expense is $3,359, $6,476, $6,371, $5,989
and $5,607 for the years ended December 31, 2017 (remaining six months), 2018, 2019, 2020 and 2021, respectively. The estimated
future amortization expense after December 31, 2021 is $15,491.
NOTE 7— CREDIT FACILITIES
Credit facilities
consist of the following arrangements:
(a) $200,000
Asset Based Credit Facility
On April
21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit
facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from
$100,000 to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility from July 15,
2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK
Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing
of transactions in the United Kingdom. Such facility allows the Company to borrow up to 50 million British Pounds. Any borrowings
on the UK Credit Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement is cross
collateralized and integrated in certain respects with the Credit Agreement. Cash advances and the issuance of letters of credit
under the credit facility are made at the lender’s discretion. The letters of credit issued under this facility are furnished
by the lender to third parties for the principal purpose of securing minimum guarantees under liquidation services contracts more
fully described in Note 2(c). All outstanding loans, letters of credit, and interest are due on the expiration date which is generally
within 180 days of funding. The credit facility is secured by the proceeds received for services rendered in connection with liquidation
service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation
related to such contract. The Company paid Wells Fargo Bank a closing fee in the amount of $500 in connection with the April 2017
amendment to the Credit Agreement. The interest rate for each revolving credit advance under the Credit Agreement is, subject to
certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage
such advance represents of the related transaction for which such advance is provided. The credit facility also provides for success
fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation engagements funded under the Credit Agreement
as set forth therein. Interest expense totaled $668 and $251 (including amortization of deferred loan fees of $24) for the three
months ended June 30, 2017 and 2016, respectively, and $695 and $274 (including amortization of deferred loan fees of $47) for
the six months ended June 30, 2017 and 2016, respectively. The outstanding balance of this credit facility was $20,237 at June
30, 2017. There was no outstanding balance at December 31, 2016.
The Credit
Agreement governing the credit facility contains certain covenants, including covenants that limit or restrict the Company’s
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. Upon the occurrence of an event of default under the Credit Agreement, the
lender may cease making loans, terminate the Credit Agreement and declare all amounts outstanding under the Credit Agreement to
be immediately due and payable. The Credit Agreement specifies a number of events of default (some of which are subject to applicable
grace or cure periods), including, among other things, nonpayment defaults, covenant defaults, cross-defaults to other material
indebtedness, bankruptcy and insolvency defaults, and material judgment defaults.
(b) $20,000
UOL Line of Credit
On April
13, 2017, UOL, in the capacity as borrower, entered into a credit agreement (the “UOL Credit Agreement”) with the Banc
of California, N.A. in the capacity as agent and lender. The UOL Credit Agreement provides for a revolving credit facility under
which UOL may borrow (or request the issuance of letters of credit) up to $20,000 which amount is reduced by $1,500 commencing
on June 30, 2017 and on the last day of each calendar quarter thereafter. The final maturity date is April 13, 2020. The
proceeds of the UOL Credit Agreement can be used (a) for working capital and general corporate purposes and/or (b) to pay dividends
or permitted tax distributions to its parent company, subject to the terms of the UOL Credit Agreement. Borrowings under the UOL
Credit Agreement will bear interest at a rate equal to (a) (i) the base rate (the greater of the federal funds rate plus one half
of one percent (0.5%), or the prime rate) for U.S. dollar loans or (ii) at UOL’s option, the LIBOR Rate for Eurodollar loans,
plus (b) the applicable margin rate, which ranges from two percent (2%) to three and one-half percent (3.5%) per annum, based upon
UOL’s ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for
the preceding four (4) fiscal quarters. Interest payments are to be made each one, three or six months for Eurodollar loans, and
quarterly for U.S. dollar loans.
UOL paid
a commitment fee equal to 1.00% of the aggregate commitments upon the closing of the UOL Credit Agreement. The UOL Credit Agreement
also provides for an unused line fee payable quarterly, in arrears, in an amount equal to: (a) 0.50% per annum times the amount
of the unused revolving commitment that is less than or equal to the amount of the cash maintained in accounts with the agent (as
depositary bank); plus (b) 1.00% per annum times the amount of the unused revolving commitment that is greater than the amount
of the cash maintained in accounts with the agent (as depositary bank). Any amounts outstanding under the UOL Credit Facility are
due at maturity. There was no outstanding balance under the UOL Credit Agreement at June 30, 2017.
Each of
UOL’s U.S. subsidiaries is a guarantor of all obligations under the UOL Credit Agreement and are parties to the UOL Credit
Agreement in such capacity (collectively, the “Secured Guarantors”). In addition, the Company and B. Riley Principal
Investments, LLC, the parent corporation of UOL and a subsidiary of the Company, are guarantors of the obligations under the UOL
Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares of outstanding capital stock of UOL are
pledged as collateral. The obligations under the UOL Credit Agreement are secured by first-priority liens on, and a first-priority
security interest in, substantially all of the assets of UOL and the Secured Guarantors, including a pledge of (a) 100% of the
equity interests of the Secured Guarantors and (b) 65% of the equity interests in United Online Software Development (India)
Private Limited, a private limited company organized under the laws of India. Such security interests are evidenced by pledge,
security and other related agreements.
The UOL
Credit Agreement contains certain negative covenants, including those limiting UOL’s and its 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 UOL Credit Agreement requires UOL and its subsidiaries
to maintain certain financial ratios.
NOTE 8—NOTES PAYABLE
(a) $28,750
Senior Notes Payable due October 31, 2021
On November 2, 2016,
the Company issued $28,750 of Senior Notes Payable (“2021 Notes”) due in 2021, interest payable quarterly at 7.5%
commencing January 31, 2017. The 2021 Notes are unsecured and due and payable in full on October 31, 2021. In connection with
the issuance of the 2021 Notes, the Company received net proceeds of $27,664 (after underwriting commissions, fees and other issuance
costs of $1,086). The outstanding balance of the 2021 Notes was $27,808 (net of unamortized debt issue costs of $942) and $27,700
(net of unamortized debt issue costs of $1,050) at June 30, 2017 and December 31, 2016, respectively. In connection with the offering
of 2021 Notes, certain members of management and the Board of Directors of the Company purchased $2,731 or 9.5% of the 2021 Notes
offered by the Company. Interest expense on the 2021 Notes totaled $593 and $1,186 for the three and six months ended June
30, 2017, respectively.
(b) $60,375
Senior Notes Payable due May 31, 2027
On May 31, 2017, the
Company issued $60,375 of Senior Notes Payable (“2027 Notes”) due in 2027, interest payable quarterly at 7.5% commencing
July 31, 2017. The 2027 Notes are unsecured and due and payable in full on May 31, 2027. In connection with the issuance of the
2027 Notes, the Company received net proceeds of $58,239 (after underwriting commissions, fees and other issuance costs of $2,136).
The outstanding balance of the 2027 Notes was $58,257 (net of unamortized debt issue costs of $2,118) at June 30, 2017. Interest
expense on the 2027 Notes totaled $403 for the three and six months ended June 30, 2017.
(c) At Market
Issuance Sales Agreement to Issue Up to Aggregate of $39,625 of 2021 Notes or 2027 Notes
On June 28, 2017,
the Company entered into an At The Market Issuance Sales Agreement (the “Sales Agreement”) and filed a prospectus supplement,
pursuant to which the Company may sell from time to time, at the Company’s option up to an aggregate of $39,625 of 2021 Notes
or 2027 Notes. The Notes sold pursuant to the Sales Agreement will be issued pursuant to a prospectus dated March 29, 2017, as
supplemented by a prospectus supplement dated June 28, 2017, in each case filed with the Securities and Exchange Commission pursuant
to the Company’s effective Registration Statement on Form S-3 (File No. 333-216763), which was declared effective by the
SEC on March 29, 2017. The Notes will be issued pursuant to the Indenture, dated as of November 2, 2016, as supplemented by a First
Supplemental Indenture, dated as of November 2, 2016 and the Second Supplemental Indenture, dated as of May 31, 2017, each between
the Company and U.S. Bank, National Association, as trustee. Future sales of the 2021 Notes and 2027 Notes pursuant to the Sales
Agreement will depend on a variety of factors including, but not limited to, market conditions, the trading price of the notes
and the Company’s capital needs. There can be no assurance that the Company will be successful in consummating future sales
based on prevailing market conditions or in the quantities or at the prices that the Company may deem appropriate.
(d) Australian
Dollar $80,000 Note Payable
In
August 2016, the Company formed GA Retail Investments, L.P., a Delaware limited partnership, (the “Partnership”) which
required the Company to contribute $15,350. The Partnership borrowed $80,000 Australian dollars from a third party investor in
connection with its formation and the $80,000 Australian dollars was exchanged for a 50% special limited partnership interest in
the Partnership. The Partnership was formed to provide funding for the retail liquidation engagement the Company entered into to
liquidate the Masters Home Improvement stores. The $80,000 Australian dollar participating note payable was non-interest bearing,
shares in 50% of the all of the profits and losses of the Partnership and was subject to repayment upon the completion of the going-out-of-business
sale of Masters Home Improvement stores as defined in the partnership agreement. Although the terms of the participating note payable
included the issuance of a 50% equity interest in the Partnership, sharing in all profits and losses of the Partnership, and no
repayment until certain events occur, in accordance with ASC 480 Distinguishing Liabilities From Equity, this financial instrument
was classified as a participating note payable. The $80,000 Australian dollar participating note payable was repaid in December
2016 upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement.
At June 30, 2017 and December 31, 2016, $393 and $10,037, respectively, were payable in accordance with the participating note
payable share of profits and is included in due to related parties and partners in the condensed consolidated balance sheets.
NOTE 9— INCOME TAXES
The Company’s
effective income tax rate was a benefit of 58.9% and an expense of 7.0% for the six months ended June 30, 2017 and 2016, respectively.
During the six months ended June 30, 2017, the Company elected to treat the acquisition of UOL as a taxable business combination
for income tax purposes in accordance with Internal Revenue Code Section 338(g) (“IRS Code Section 338(g)”). This resulted
in the Company foregoing the income tax attributes of UOL that existed at the acquisition date which included net operating loss
carryforwards, capital loss carryforwards and foreign tax credits. The income tax election in accordance with IRS Code Section
338(g) provides the Company with a tax step-up in the basis of the intangible assets and goodwill acquired for tax purposes. In
accordance with ASC 740, the impact of the election in accordance with IRS Code Section 338(g) on deferred income taxes resulted
in the recording of a tax benefit in the amount of $8,389 during the six months ended June 30, 2017. The effective income tax rate
for the six months ended June 30, 2016 was lower than the statutory federal and state income tax rate due to the tax differential
on net income attributable to noncontrolling interests.
As of June 30, 2017,
the Company had federal net operating loss carry forwards of approximately $35,200 and state net operating loss carry forwards
of $39,400. The Company’s federal net operating loss carry forwards will expire in the tax year ending December 31,
2035, the state net operating loss carry forwards will expire in 2034, and the foreign tax credit carry forwards will expire in
2023.
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 and tax credit carry forwards are
evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward
period, and other circumstances. As a result of the common stock offering by the Company that was completed on June 5, 2014, the
Company had a more than 50% ownership shift in accordance with Internal Revenue Code Section 382. Accordingly, the Company is
limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual
taxable income. As of June 30, 2017, the Company believes that the net operating loss that existed as of the more than 50% ownership
shift will be utilized in future tax periods before the loss carry forwards 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 an allowance.
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 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, 2013 to 2016.
NOTE 10— EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period.
Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after
giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 66,000
common shares that are held in escrow and subject to forfeiture as a result of the failure to achieve certain performance targets
specified in connection with the transaction with Alternative Asset Management Acquisition Corp. in 2009 (the “Acquisition”). The
66,000 common shares issued to the former members of Great American Group, LLC are subject to forfeiture upon the final settlement
of claims for goods held for sale in connection with the Acquisition. Dilutive common shares outstanding includes contingently
issuable shares that are currently in escrow and subject to release if the conditions for the final settlement of claims for goods
held for sale in connection with the Acquisition was satisfied at the end of the respective periods.
Basic
and diluted earnings per share was calculated as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income (loss) attributable to B. Riley Financial, Inc.
|
|
$
|
3,280
|
|
|
$
|
(101
|
)
|
|
$
|
17,301
|
|
|
$
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,216,829
|
|
|
|
17,935,254
|
|
|
|
20,311,231
|
|
|
|
17,212,716
|
|
Effect of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units and non-vested shares
|
|
|
857,459
|
|
|
|
—
|
|
|
|
628,759
|
|
|
|
289,705
|
|
Contingently issuable shares
|
|
|
44,767
|
|
|
|
—
|
|
|
|
44,767
|
|
|
|
44,652
|
|
Diluted
|
|
|
22,119,055
|
|
|
|
17,935,254
|
|
|
|
20,984,757
|
|
|
|
17,547,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.85
|
|
|
$
|
0.01
|
|
Diluted income (loss) per share
|
|
$
|
0.15
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.82
|
|
|
$
|
0.01
|
|
NOTE 11— COMMITMENTS AND CONTINGENCIES
Legal
Matters
The
Company is subject to certain legal and other claims that arise in the ordinary course of its business. 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.
In
January 2015, Great American Group, LLC (“Great American Group”) was served with a lawsuit that seeks to assert claims of breach of contract and other matters in connection
with auction services provided to a debtor. The proceeding in the United States Bankruptcy Court for the District of Delaware
(“Bankruptcy Court”) is pending in the bankruptcy case of the debtor and its affiliates (the “Debtor”).
In the lawsuit, a former landlord of the Debtor generally alleges that Great American Group and a joint venture partner were responsible
for contamination while performing services in connection with the auction of certain assets of the Debtor and is seeking approximately
$10,000 in damages. In January 2017, the parties filed a proposed scheduling order with the Bankruptcy Court. Discovery
in the action is currently proceeding. Great American Group is vigorously defending this lawsuit. This lawsuit is ongoing, and the financial
impact to the Company, if any, cannot be estimated.
On
July 5, 2016, Quadre Investments LP (“Quadre”) filed a petition with the Delaware Court of Chancery (the “Court”)
seeking a determination of fair value for 943,769 shares of common stock of UOL in connection with the acquisition of UOL by the
Company. Such transaction gave rise to appraisal rights pursuant to Section 262 of the General Corporation Law of the State of
Delaware. As a result, Quadre petitioned the Court to receive fair value as determined by the Court. On June 30, 2017, the parties
settled the action and the petition was dismissed. As discussed in Note 3, the settlement of this action resulted in an increased
in goodwill.
In
May 2014, Waterford Township Police & Fire Retirement System et al. v. Regional Management Corp et al., filed a complaint
in the Southern District of New York (the “Court”), against underwriters alleging violations under sections 11 and
12 of the Securities Act of 1933, as amended (the “Securities Act”). FBR Capital Markets & Co. (“FBRCM”),
a broker-dealer subsidiary of ours, was a co-manager of 2 offerings. On January 30, 2017, the Court denied the plaintiffs’
motion to file a first amended complaint, which would have revived claims previously dismissed by the Court on March 30, 2016.
On March 1
,
2017, the plaintiffs filed a notice of appeal and the plaintiff’s opening brief was due on June 21, 2017.
Defendant’s opposition motion is due by September 12, 2017. Regional Management continues to indemnify all of the underwriters,
including FBRCM, pursuant to the operative underwriting agreement.
On
January
5,
2017, the complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer
subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with
the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint,
styled
Gaynor v. Miller et al.,
is pending in the United States District Court for the Eastern District of Tennessee, and,
like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters
for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with
six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August
21, 2014) with an alleged aggregate offering price of approximately $151,000. The plaintiffs seek unspecified compensatory damages
and reimbursement of certain costs and expenses. Although MLV is contractually entitled to be indemnified by Miller in connection
with this lawsuit, Miller filed for bankruptcy in October 2015 and this likely will decrease or eliminate the value of the indemnity
that MLV receives from Miller. Briefing on the defendants’ motions to dismiss has been filed with the court.
In
April 2017, two purported shareholders of FBR filed a putative class action against FBR and the members of its board of directors
that challenged the disclosures made in connection with the merger of FBR with the Company, styled Michael Rubin v. FBR &
Co., et al., Case No. 1:17-cv-00410-LMB-MSN and Kim v. FBR & Co., et al. Case No.1:17-cv-004440LMB-IDD. The complaints alleged
that the registration statement filed in connection with the Merger failed to disclose certain allegedly material information
in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Ru1e 14a-9 promulgated thereunder.
On July 12, 2017, per stipulation, the complaints were dismissed - with prejudice as to the named plaintiffs only, without prejudice
as to the class. The Company expects the plaintiffs to seek the payment of mootness fee in the near future.
In February 2017, certain former employees filed an arbitration
claim with FINRA against Wunderlich Securities, Inc. (“WSI”) alleging misrepresentations in the recruitment of claimants
to join WSI. Claimants also allege that WSI failed to support their mortgage trading business resulting in the loss of opportunities
during their employment with WSI. Claimants are seeking $10 million in damages. WSI has counterclaimed alleging that claimants
mispresented their process for doing business, particularly their capital needs, resulting in substantial losses to WSI. WSI believes
the claims are meritless and intends to vigorously defend the action. A hearing has been scheduled for March, 2018.
In July 2017, an arbitration claim was filed with FINRA by Dominick & Dickerman LLC and Michael Campbell against WSI
and Gary Wunderlich with respect to the acquisition by Wunderlich Investment Company, Inc. (“WIC”) (the parent corporation
of WSI) of certain assets of Dominick & Dominick LLC in 2015. The Claimants allege that respondents overvalued
WIC so that the purchase price paid to the Claimants in shares of WIC stock was artificially inflated. The Statement of Claim
includes claims for common law fraud, negligent misrepresentation, and breach of contract. Claimants are seeking damages of approximately
$8 million plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend
the action.
NOTE 12— SHARE-BASED PAYMENTS
(a)
Amended and Restated 2009 Stock Incentive Plan
During
the six months ended June 30, 2017, the Company granted restricted stock units representing 467,025 shares of common stock with
a total fair value of $7,416 to certain employees of the Company under the Company’s Amended and Restated 2009 Stock Incentive
Plan (the “Plan”). During the year ended December 31, 2016, the Company granted restricted stock units representing
544,605 shares of common stock with a total fair value of $5,301 to certain employees and directors of the Company under the Plan.
Share-based compensation expense for such restricted stock units was $1,305 and $2,212 for the three and six months ended June
30, 2017, respectively. Share-based compensation expense for such restricted stock units was $560 and $997 for the three and six
months ended June 30, 2016, respectively.
The
restricted stock units generally vest over a period of one to three years based on continued service. In determining the fair
value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends
based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the
risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period. As of June 30, 2017, the
expected remaining unrecognized share-based compensation expense of $10,365 will be expensed over a weighted average period of
2.4 years.
A
summary of equity incentive award activity under the Plan for the six months ended June 30, 2017 was as follows:
|
|
Shares
|
|
|
Weighted
Average
Fair Value
|
|
Nonvested at December 31, 2016
|
|
|
680,135
|
|
|
$
|
9.74
|
|
Granted
|
|
|
467,025
|
|
|
|
15.88
|
|
Vested
|
|
|
(172,431
|
)
|
|
|
10.50
|
|
Forfeited
|
|
|
(29,724
|
)
|
|
|
10.49
|
|
Nonvested at June 30, 2017
|
|
|
945,005
|
|
|
$
|
12.61
|
|
The
per-share weighted average grant-date fair value of restricted stock units was $15.88 during the six months ended June 30, 2017.
There were 172,431 restricted stock units with a fair value of $1,810 that vested during the six months ended June 30, 2017 under
the Plan.
|
(b)
|
Amended and Restated FBR & Co. 2006 Long-Term Stock
Incentive Plan
|
In
connection with the acquisition of FBR on June 1, 2017, the equity awards previously granted or available for issuance under the
FBR & Co. 2006 Long-Term Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan. On June 13,
2017, the Company granted restricted stock units representing 475,819 shares of common stock with a total grant date fair value
of $7,375. Share-based compensation expense was $120 for the three and six months ended June 30, 2017 in connection with the June
13, 2017 restricted stock award. In connection with the restructuring discussed in Note 2(i), the Company recorded share-based
compensation expense of $1,424
related to the accelerated vesting of restricted stock awards. Of the $1,424, $884 related
to former corporate executives of FBR and $540 related to employees in the Capital Markets segment.
As
of June 30, 2017, the expected remaining unrecognized share-based compensation expense of $9,965 will be expensed over a weighted
average period of 2.6 years.
A
summary of equity incentive award activity for the period from June 1, 2017, the date of the acquisition of FBR, through June
30, 2017 was as follows:
|
|
Shares
|
|
|
Weighted
Average
Fair Value
|
|
Nonvested at June 1, 2017, acquisition date of FBR resulting from the exchange of previously existing FBR awards
|
|
|
530,661
|
|
|
$
|
14.70
|
|
Granted
|
|
|
475,819
|
|
|
|
15.50
|
|
Vested
|
|
|
(22,136
|
)
|
|
|
14.70
|
|
Forfeited
|
|
|
(10,952
|
)
|
|
|
14.70
|
|
Nonvested at June 30, 2017
|
|
|
973,392
|
|
|
$
|
15.09
|
|
NOTE 13— NET CAPITAL REQUIREMENTS
B. Riley & Co.,
LLC (“BRC”), FBRCM and MLV, the Company’s broker-dealer subsidiaries, are registered with the SEC as broker-dealers
and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). As such, they are subject to the minimum
net capital requirements promulgated by the SEC. As of June 30, 2017, BRC had net capital of $9,082, which was $8,740 in excess
of its required net capital of $342, FBRCM had net capital of $37,755, which was $36,755 in excess of its required net capital
of $1,000, and MLV had net capital of $411, which was $311 in excess of its required net capital of $100.
NOTE 14— RELATED PARTY TRANSACTIONS
At June 30, 2017,
amounts due from related parties include $4,080 from GACP I, L.P. for management fees, incentive fees and other operating expenses
and $2,685 from CA Global Partners, LLC (“CA Global”). At December 31, 2016, amounts due from related parties include
$2,050 from GACP I, L.P. for management fees, incentive fees and other operating expenses and $959 from CA Global Partners, LLC
(“CA Global”). Great American Capital Partners, LLC, a subsidiary of the Company, is the general partner of GACP I,
L.P. CA Global is one of the members of Great American Global Partners, LLC (“GA Global Ptrs”). The amounts receivable
and payable from CA Global are comprised of amounts due to and due from CA Global in connection with certain auctions of wholesale
and industrial machinery and equipment that they were managed by CA Global on behalf of GA Global Ptrs.
In connection with
the offering of $28,750 of 2021 Notes as more fully described in Note 8, certain members of management and the Board of Directors
of the Company purchased $2,731 or 9.5% of the Senior Notes offered by the Company.
NOTE 15— BUSINESS SEGMENTS
The Company’s
operating segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance
internally. The Company has several operating subsidiaries through which it delivers specific services. The Company provides investment
banking, corporate finance, securities lending, restructuring, research, sales and trading and wealth management services to corporate,
institutional and high net worth clients. The Company also 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 and valuation and appraisal services to clients with independent appraisals in connection with asset
based loans, acquisitions, divestitures and other business needs. As a result of the acquisition of UOL on July 1, 2016, the Company
provides consumer services and products over the Internet.
The Company’s
business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment and Principal
Investments - United Online segment. These reportable segments are all distinct businesses, each with a different marketing strategy
and management structure.
The
following is a summary of certain financial data for each of the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Capital Markets reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
$
|
21,676
|
|
|
$
|
7,172
|
|
|
$
|
39,399
|
|
|
$
|
12,736
|
|
Interest income - Securities lending
|
|
|
2,218
|
|
|
|
—
|
|
|
|
2,218
|
|
|
|
—
|
|
Total revenues
|
|
|
23,894
|
|
|
|
7,172
|
|
|
|
41,617
|
|
|
|
12,736
|
|
Selling, general, and administrative expenses
|
|
|
(23,067
|
)
|
|
|
(7,669
|
)
|
|
|
(34,036
|
)
|
|
|
(13,843
|
)
|
Restructuring costs
|
|
|
(3,923
|
)
|
|
|
—
|
|
|
|
(3,923
|
)
|
|
|
—
|
|
Interest expense - Securities lending
|
|
|
(1,565
|
)
|
|
|
—
|
|
|
|
(1,565
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(166
|
)
|
|
|
(23
|
)
|
|
|
(293
|
)
|
|
|
(44
|
)
|
Segment (loss) income
|
|
|
(4,827
|
)
|
|
|
(520
|
)
|
|
|
1,800
|
|
|
|
(1,151
|
)
|
Auction and Liquidation reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
21,807
|
|
|
|
5,393
|
|
|
|
35,803
|
|
|
|
12,300
|
|
Revenues - Sale of goods
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Total revenues
|
|
|
21,807
|
|
|
|
5,393
|
|
|
|
35,803
|
|
|
|
12,302
|
|
Direct cost of services
|
|
|
(11,763
|
)
|
|
|
(2,087
|
)
|
|
|
(22,097
|
)
|
|
|
(5,505
|
)
|
Cost of goods sold
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2
|
)
|
Selling, general, and administrative expenses
|
|
|
(2,749
|
)
|
|
|
(1,577
|
)
|
|
|
(4,599
|
)
|
|
|
(2,802
|
)
|
Depreciation and amortization
|
|
|
(5
|
)
|
|
|
(37
|
)
|
|
|
(10
|
)
|
|
|
(78
|
)
|
Segment income
|
|
|
7,290
|
|
|
|
1,692
|
|
|
|
9,097
|
|
|
|
3,915
|
|
Valuation and Appraisal reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
7,960
|
|
|
|
7,696
|
|
|
|
15,756
|
|
|
|
15,169
|
|
Direct cost of services
|
|
|
(3,581
|
)
|
|
|
(3,473
|
)
|
|
|
(7,253
|
)
|
|
|
(6,738
|
)
|
Selling, general, and administrative expenses
|
|
|
(2,062
|
)
|
|
|
(2,124
|
)
|
|
|
(4,142
|
)
|
|
|
(4,243
|
)
|
Depreciation and amortization
|
|
|
(43
|
)
|
|
|
(24
|
)
|
|
|
(87
|
)
|
|
|
(53
|
)
|
Segment income
|
|
|
2,274
|
|
|
|
2,075
|
|
|
|
4,274
|
|
|
|
4,135
|
|
Principal Investments - United Online segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees
|
|
|
12,952
|
|
|
|
—
|
|
|
|
26,255
|
|
|
|
—
|
|
Revenues - Sale of goods
|
|
|
63
|
|
|
|
—
|
|
|
|
142
|
|
|
|
—
|
|
Total revenues
|
|
|
13,015
|
|
|
|
—
|
|
|
|
26,397
|
|
|
|
—
|
|
Direct cost of services
|
|
|
(3,141
|
)
|
|
|
—
|
|
|
|
(6,736
|
)
|
|
|
—
|
|
Cost of goods sold
|
|
|
(130
|
)
|
|
|
—
|
|
|
|
(189
|
)
|
|
|
—
|
|
Selling, general, and administrative expenses
|
|
|
(2,791
|
)
|
|
|
—
|
|
|
|
(6,103
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(1,770
|
)
|
|
|
—
|
|
|
|
(3,610
|
)
|
|
|
—
|
|
Restructuring costs
|
|
|
(109
|
)
|
|
|
—
|
|
|
|
(483
|
)
|
|
|
—
|
|
Segment income
|
|
|
5,074
|
|
|
|
—
|
|
|
|
9,276
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income from reportable segments
|
|
|
9,811
|
|
|
|
3,247
|
|
|
|
24,447
|
|
|
|
6,899
|
|
Corporate and other expenses (including restructuring costs of $2,182 for the three and six months ended June 30, 2017)
|
|
|
(7,251
|
)
|
|
|
(3,067
|
)
|
|
|
(11,176
|
)
|
|
|
(5,054
|
)
|
Interest income
|
|
|
150
|
|
|
|
3
|
|
|
|
282
|
|
|
|
6
|
|
Interest expense
|
|
|
(1,894
|
)
|
|
|
(275
|
)
|
|
|
(2,685
|
)
|
|
|
(407
|
)
|
Income (loss) before income taxes
|
|
|
816
|
|
|
|
(92
|
)
|
|
|
10,868
|
|
|
|
1,444
|
|
Benefit (provision) for income taxes
|
|
|
2,547
|
|
|
|
65
|
|
|
|
6,396
|
|
|
|
(101
|
)
|
Net income (loss)
|
|
|
3,363
|
|
|
|
(27
|
)
|
|
|
17,264
|
|
|
|
1,343
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
83
|
|
|
|
74
|
|
|
|
(37
|
)
|
|
|
1,196
|
|
Net income (loss) attributable to B. Riley Financial, Inc.
|
|
$
|
3,280
|
|
|
$
|
(101
|
)
|
|
$
|
17,301
|
|
|
$
|
147
|
|
The
following table presents revenues by geographical area:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
64,310
|
|
|
$
|
19,600
|
|
|
$
|
115,372
|
|
|
$
|
39,538
|
|
Australia
|
|
|
99
|
|
|
|
—
|
|
|
|
1,039
|
|
|
|
—
|
|
Europe
|
|
|
(14
|
)
|
|
|
661
|
|
|
|
802
|
|
|
|
667
|
|
Total Revenues - Services and fees
|
|
$
|
64,395
|
|
|
$
|
20,261
|
|
|
$
|
117,213
|
|
|
$
|
40,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Sale of goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
142
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Interest income - Securities lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,218
|
|
|
$
|
—
|
|
|
$
|
2,218
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
66,591
|
|
|
$
|
19,600
|
|
|
$
|
117,732
|
|
|
$
|
39,540
|
|
Australia
|
|
|
99
|
|
|
|
—
|
|
|
|
1,039
|
|
|
|
—
|
|
Europe
|
|
|
(14
|
)
|
|
|
661
|
|
|
|
802
|
|
|
|
667
|
|
Total Revenues
|
|
$
|
66,676
|
|
|
$
|
20,261
|
|
|
$
|
119,573
|
|
|
$
|
40,207
|
|
The
following table presents long-lived assets, which consists of property and equipment and other assets, by geographical area:
|
|
As of
|
|
|
As of
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Long-lived Assets - Property and Equipment, net:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,450
|
|
|
$
|
5,785
|
|
Australia
|
|
|
—
|
|
|
|
—
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
13,450
|
|
|
$
|
5,785
|
|
Segment
assets are not reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance
of, the segments and therefore, total segment assets have not been disclosed.
NOTE 16— SUBSEQUENT EVENTS
Acquisition of Wunderlich Securities,
Inc.
On
May 17, 2017, the Company and certain wholly owned subsidiaries of the Company entered into a Merger Agreement with Wunderlich
Investment Company, Inc., a Delaware corporation (“Wunderlich”), and Stephen Bonnema, in his capacity as the Stockholder
Representative (the “Stockholder Representative”), collectively (the “Wunderlich Merger Agreement”).
Pursuant to the Wunderlich Merger Agreement,
customary closing conditions were satisfied
and the acquisition was completed on July 3, 2017.
The Company also entered
into a registration rights agreement with certain shareholders of Wunderlich (the “ Registration Rights Agreement”)
on July 3, 2017. The Registration Rights Agreement provides the Wunderlich shareholder signatories with the right to notice of
and, subject to certain conditions, the right to register shares of the Company’s common stock in certain future registered
offerings of shares of the Company’s common stock. In connection with the acquisition Wunderlich on July 3, 2017, the total
consideration of $72,958 included $36,649 of cash used to retire existing Wunderlich preferred stock and debt and the issuance
of 1,974,812 shares of the Company’s common stock with an estimated fair value of $31,414 and 821,816 newly issued common
stock warrants with an estimated fair value of $4,895. The Company has not completed the preliminary purchase price accounting
since it is in the process of completing its asset and liquidity appraisals related to this acquisition.