PART
I
This
Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements regarding our business, financial
condition, results of operations and prospects. Words such as “expect,” “anticipate,” “intend,”
“plan,” “believe,” “seek,” “may,” “will,” “predict,” “potential,”
“continue,” “estimate” and similar expressions are generally intended to identify forward-looking statements,
but are not exclusive means of identifying forward-looking statements in this Annual Report. You should not place undue reliance
on such forward-looking statements, which are based on the information currently available to us and speak only as of the date
on which this Annual Report was filed with the Securities and Exchange Commission (the “SEC”). Because these forward-looking
statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results, events
or developments to differ materially from those expressed or implied by these forward-looking statements, including our plans,
objectives, expectations and intentions and other factors discussed in “Part I—Item 1A. Risk Factors” contained
in this Annual Report. Risk factors that could cause actual results to differ from those contained in the forward-looking statements
include but are not limited to risks related to: volatility in our revenues and results of operations; changing conditions in
the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; the short term nature
of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements;
competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence
on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction
and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary
investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an
inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully
compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities as necessary; failure
to comply with the terms of our credit agreements; our ability to meet future capital requirements; our ability to realize the
benefits of our completed and proposed acquisitions, including our ability to achieve anticipated opportunities and operating
cost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frame
expected by management or at all; the possibility that our proposed acquisition of magicJack VocalTec Ltd. (“magicJack”)
does not close when expected or at all; our ability to promptly and effectively integrate our business with that of magicJack
if such transaction closes; the reaction to the magicJack acquisition of our and magicJack’s customers, employees and counterparties;
and the diversion of management time on acquisition-related issues. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Except
as otherwise required by the context, references in this Annual Report to “the Company,” “B. Riley,”
“B. Riley Financial,” “we,” “us” or “our” refer to the combined business of B.
Riley Financial, Inc. and all of its subsidiaries.
Item
1. BUSINESS
General
B.
Riley Financial, Inc. (NASDAQ: RILY) and its subsidiaries provide collaborative financial services and solutions through several
operating subsidiaries including:
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B.
Riley FBR, Inc. (“B. Riley FBR”) is a leading, full service investment bank
providing financial advisory, corporate finance, research, securities lending and sales
& trading services to corporate, institutional and high net worth individual clients.
B. Riley FBR was formed in November 2017 through the merger of B. Riley & Co, LLC
(“BRC”) and FBR Capital Markets & Co.; the name of the combined broker
dealer was subsequently changed to B. Riley FBR, Inc. FBR Capital Markets & Co. was acquired by B. Riley Financial in
June 2017.
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Wunderlich
Securities, Inc., acquired by B. Riley Financial in
July 2017, provides comprehensive wealth management
and brokerage services to individuals and families, corporations and non-profit organizations,
including qualified retirement plans, trusts, foundations and endowments.
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B.
Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”)
registered investment advisor, which includes:
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B.
Riley Asset Management, an advisor to certain private funds and to institutional and
high net worth investors;
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B.
Riley Wealth Management, a multi-family office practice and wealth management firm focused
on the needs of ultra-high net worth individuals and families; and
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Great
American Capital Partners, LLC (“GACP”), the general partner of a private
fund, GACP I, L.P. a direct lending fund that provides senior secured loans and second
lien secured loan facilities to middle market public and private U.S. companies;
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Great
American Group, LLC, a leading provider of asset disposition and auction solutions to
a wide range of retail and industrial clients;
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Great
American Group Advisory and Valuation Services, LLC, a leading provider of appraisal
and valuation services for asset based lenders, private equity firms and corporate clients.
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We
also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics.
On July 1, 2016, we acquired United Online, Inc. (“UOL”) as part of our principal investment strategy.
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UOL
is a communications company that offers consumer subscription services and products,
consisting of Internet access services and devices under the NetZero and Juno brands
primarily sold in the United States.
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We
are headquartered in Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston,
Memphis, and Metro Washington D.C.
For
financial reporting purposes we classify our businesses into four operating segments: (i) capital markets, (ii) auction and liquidation,
(iii) valuation and appraisal and (iv) principal investments - United Online.
Capital
Markets Segment
. Our capital markets segment provides a full array of investment banking, corporate finance, research, securities
lending, wealth management, sales and trading services to corporate, institutional and high net worth clients. Our corporate finance
and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private
companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities
as a principal for our account, including investments in funds managed by our subsidiaries. Our capital markets segment also includes
our asset management businesses that manage various private and public funds for institutional and individual investors.
Auction
and Liquidation Segment.
Our auction and liquidation segment utilizes our significant industry experience, a scalable network
of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients,
logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services
across North American as well as parts of Europe, Asia and Australia. Our auction and liquidation segment operates through two
main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets
disposition division operates through limited liability companies that are controlled by us.
Valuation
and Appraisal Segment.
Our valuation and appraisal segment provides valuation and appraisal services to financial institutions,
lenders, private equity firms and other providers of capital. These services primarily include the valuation of assets (i) for
purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii)
in connection with potential business combinations. Our valuation and appraisal segment operates through limited liability companies
that are majority owned by us.
Principal
Investments - United Online Segment.
Our principal investments - United Online segment consists of businesses which have been
acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, a company that offers
consumer subscription services consisting of Internet access under the NetZero and Juno brands. Internet access includes paid
dial-up, mobile broadband and DSL subscription services. We also offer email, Internet security, web hosting services, and other
services.
Recent
Developments
On
February 17, 2017, we entered into an Agreement and Plan of Merger (the “FBR Merger Agreement”) with FBR & Co.
(“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 “FBR Merger”). On May 1, 2017, the Company and FBR filed a registration
statement for the planned FBR Merger. The shareholders 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
FBR 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 our common stock. The total acquisition consideration for FBR was estimated to be $73.5 million,
which includes the issuance of approximately 4,831,633 shares of our common stock with an estimated fair value of $71.0 million
(based on the closing price of our common stock on June 1, 2017) and restricted stock awards with a fair value of $2.5 million
attributable to the service period prior to June 1, 2017. We believe that the acquisition of FBR will allow us 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 us.
On
May 17, 2017, we entered into a Merger Agreement with Wunderlich Investment Company, Inc., a Delaware corporation (“Wunderlich”),
and a Wunderlich 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. We 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 our common stock in
certain future registered offerings of shares of our common stock. In connection with the acquisition Wunderlich on July 3, 2017,
the total consideration of $65.1 million included $29.7 million of cash and the issuance of approximately 1,974,812 shares of
the Company’s common stock with an estimated fair value of $31.5 million and 821,816 newly issued common stock warrants
with an estimated fair value of $3.9 million.
On
November 9, 2017, the Company entered into an Agreement and Plan of Merger with B. R. Acquisition Ltd., an Israeli corporation
and wholly-owned subsidiary of the Company (“Merger Sub”), and magicJack VocalTec Ltd., an Israeli corporation (“magicJack”),
pursuant to which Merger Sub will merge with and into magicJack, with magicJack continuing as the surviving corporation and as
an indirect subsidiary of the Company. Subject to the terms and conditions of the Agreement and Plan of Merger, each outstanding
share of magicJack will be converted into the right to receive $8.71 in cash without interest, representing approximately $143.5
million in aggregate merger consideration. The closing of the transaction is subject to the receipt of certain regulatory approvals,
the approval of the magicJack shareholder’s and the satisfaction of other closing conditions. It is anticipated that the
acquisition of magicJack will close in the first half of 2018.
During
the year ended December 31, 2017, we implemented costs savings measures taking into account the planned synergies as a result
of the acquisitions of FBR and Wunderlich which included a reduction in force for some of the corporate executives of FBR and
Wunderlich and a restructuring to integrate FBR and Wunderlich’s operations with our operations. These initiatives resulted
in restructuring charges of $11.7 million during the year ended December 31, 2017. Restructuring charges included $3.3 million
related to severance and accelerated vesting of restricted stock awards to former corporate executives of FBR and Wunderlich and
$5.0 million of severance, accelerated vesting of stock awards to employees and $3.4 million of lease loss accruals for the planned
consolidation of office space related to operations in the Capital Markets segment.
B.
Riley FBR
Investment
Banking and Corporate Finance
B.
Riley FBR’s investment banking professionals provide equity and debt capital raising, merger and acquisition, financial
advisory and restructuring advisory services to both private and publicly traded companies. Those services include: follow-on
public offerings, debt and equity private placements, debt refinancings, corporate debt and equity security repurchases, and buy-side
and sell-side representation, divestitures/carveouts, leveraged buyouts, management buyouts, strategic alternatives reviews, fairness
opinions, valuations, return-of-capital advisory, hostile/activist advisory, and options trading programs.
Sales,
Trading and Corporate Services
Our
sales and trading professionals distribute B. Riley proprietary research products to our institutional investor clients and high
net worth individuals. B. Riley FBR sales and trading also sells the securities of companies in which B. Riley FBR acts as an
underwriter and executes equity trades on behalf of clients. We maintain active trading relationships with substantially all major
institutional money managers. Our equity and fixed income traders make markets in approximately 150 securities. B. Riley FBR also
conducts securities lending activities which involves the borrowing and lending of equity and fixed income securities. Our corporate
services include retail orders, block trades, Rule 144 transactions, cashless exercise of options, and corporate equity repurchase
programs.
Equity
Research
Our
equity research is focused on fundamentals-based research. Our research focuses on an in-depth analysis of earnings, cash flow
trends, balance sheet strength, industry outlook, and strength of management that involves extensive meetings with key management,
competitors, channel partners and customers. We provide research on all sizes of firms; however, our research primarily focuses
on small and mid-cap stocks that are under-followed by Wall Street. Our analysts regularly communicate their findings through
Research Updates and daily Morning Notes.
Our
research department includes research analysts maintaining coverage on a variety of companies in a variety of industry sectors.
Our research department annually organizes non-deal road shows for issuers in our targeted industries. To provide our institutional
clients access to management teams of companies in our coverage universe and others, our research department has held 18 consecutive
annual institutional investor conferences.
Capital
Management
We
provide investment management services under our subsidiary, B. Riley Capital Management, LLC, an SEC registered investment advisor.
The registered investment advisor manages one mutual fund and certain other private investment funds, including a fund of funds.
All of the funds managed typically invest in both public and private equity and debt. Investors in the various funds include institutional,
high net worth, and individual investors. GACP is the general partner of GACP I, L.P., a direct lending fund that provides senior
secured loans and second lien secured loan facilities to middle market public and private U.S. companies.
Proprietary
Trading
We
engage in trading activities for strategic investment purposes (i.e. proprietary trading) utilizing the firm’s capital.
Proprietary trading activities include investments in public and private stock and debt securities. In 2010, the federal government
passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank significantly restructures
and intensifies regulation in the financial services industry and includes a section referred to as the “Volcker Rule”.
The Volcker Rule provides for a limitation on proprietary trading and investments by certain bank holding companies. We are not
a bank holding company and, as a result, the limitations applicable to bank holding companies regarding proprietary trading and
investment in the Volcker Rule do not apply to us.
The
business described above for B. Riley FBR is reported in our capital markets segment for financial reporting purposes.
Wunderlich
Securities
Wealth
Management
Wunderlich
provides comprehensive wealth management and brokerage services to individuals and families, corporations and non-profit organizations,
including qualified retirement plans, trusts, foundations and endowments. Our financial advisors provide a broad range of investments
and services to our clients, including financial planning services. Established in 1996 and headquartered in Memphis, Tennessee,
Wunderlich became a wholly-owned subsidiary of B. Riley Financial, Inc., in July 2017 and its operations are included in our capital
markets segment.
Great
American Group
Retail
Store Liquidations and Wholesale and Industrial Liquidations
We
enable our clients to quickly and efficiently dispose of under-performing assets and generate cash from excess inventory by conducting
or assisting in retail store closings, going out of business sales, bankruptcy sales and fixture sales. Financial institution
and other capital providers rely on us to maximize recovery rates in distressed asset sales and in retail bankruptcy situations.
Additionally, healthy, mature retailers utilize our proven inventory management and strategic disposition solutions, relying on
our extensive network of retail professionals, to close unproductive stores and dispose of surplus inventory and fixtures as existing
stores are updated.
We
often conduct large retail liquidations that entail significant capital requirements through collaborative arrangements with other
liquidators. By entering into an agreement with one or more collaborators, we are able to bid on larger engagements that we could
not conduct on our own due to the significant capital outlay involved, number of independent contractors required or financial
risk associated with the particular engagement. We act as the lead partner in many of the collaborative arrangements that we enter
into, meaning that we have primary responsibility for the due diligence, contract negotiation and execution of the engagement.
We
design and implement customized disposition programs for our clients seeking to convert excess wholesale and industrial inventory
and operational assets into capital. We dispose of a wide array of assets including, among others, equipment related to transportation,
heavy mobile construction, energy exploration and services, metal fabrication, food processing, semiconductor fabrication, and
distribution services. We manage projects of all sizes and scopes across a variety of asset categories. We believe that our databases
of information regarding potential buyers that we have collected from past transactions and engagements, our nationwide name recognition
and experience with alternative distribution channels allow us to provide superior wholesale and industrial disposition services.
Great
American Group provides the foregoing services to clients on a guarantee, fee or outright purchase basis.
Guarantee
.
When providing services on a guarantee
basis, we guarantee the client a specific recovery often expressed as a percentage of retail inventory value or wholesale inventory
cost or, in the case of machinery or equipment, a set dollar amount. This guarantee is often required to be supported by a letter
of credit, a cash deposit or a combination thereof. Cash deposits are typically funded in part with available cash together with
short term borrowings under our credit facilities. Often when we provide auction or liquidation services on a guarantee basis,
we do so through a collaborative arrangement with other service providers. In this situation, each collaborator agrees to provide
a certain percentage of the guaranteed amount to the client through a combination of letters of credit, cash and financing. If
we are engaged individually, we receive 100% of the net profit, less debt financing fees, sale related expenses (if any) and any
share of the profits due to the client as a result of any profit sharing arrangement entered into based on a pre-negotiated formula.
If the engagement was conducted through a collaborative arrangement, the profits or losses are divided among us and our partner
or partners as set forth in the agreement governing the collaborative arrangement. If the net sales proceeds after expenses are
less than the guarantee, we, together with our partners if the engagement was conducted through a collaborative arrangement, are
responsible for the shortfall and will recognize a loss on the engagement.
Fee.
When we provide services on a fee basis, clients pay a pre-negotiated flat fee for the services provided, a percentage of
asset sales generated or a combination of both.
Outright
Purchase.
When providing services on an outright purchase basis, we purchase the assets from the client and typically sell
them at auction, orderly liquidation, through a third-party broker or, less frequently, as augmented inventory in conjunction
with another liquidation that we are conducting. In an outright purchase, we take, together with any collaboration partners, title
to the assets and absorb the profit or loss associated with the asset disposition.
The
retail store liquidations and wholesale and industrial asset dispositions business of Great American Group described above is
reported in our auction and liquidation segment for financial reporting purposes.
Valuation
and Appraisal
Our
valuation and appraisal teams provide independent appraisals to financial institutions, lenders, private equity firms and other
providers of capital for estimated liquidation values of assets. These teams include experts specializing in particular industry
niches and asset classes. We provide valuation and appraisal services across five general categories:
Consumer
and Retail Inventory.
Representative types of appraisals and valuations include inventory of specialty apparel retailers,
department stores, jewelry retailers, sporting goods retailers, mass and discount merchants, home furnishing retailers and footwear
retailers.
Wholesale
and Industrial Inventory.
Representative types of appraisals and valuations include inventory held by manufacturers or distributors
of automotive parts, chemicals, food and beverage products, wine and spirits, building and construction products, industrial products,
metals, paper and packaging.
Machinery
and Equipment.
Representative types of asset appraisals and valuations include a broad range of equipment utilized in manufacturing,
construction, transportation and healthcare.
Intangible
Assets.
Representative types of asset appraisals and valuations include intellectual property, goodwill, brands, logos, trademarks
and customer lists.
We
provide valuation and appraisal services on a pre-negotiated flat fee basis.
The
valuation and appraisal services business of Great American Group described above is reported in our valuation and appraisal segment
for financial reporting purposes.
Principal
Investments - United Online
We
acquired UOL on July 1, 2016 as part of our principal investment strategy. UOL’s primary pay service is Internet access,
offered under the NetZero and Juno brands. Internet access includes dial-up service, mobile broadband and DSL.
Internet
Access
Our
Internet access services consist of dial-up, mobile broadband and, to a much lesser extent, DSL services. Our dial-up Internet
access services are provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic
pay dial-up Internet access services include accelerated dial-up Internet access and an email account. Our Internet access services
are also bundled with additional benefits, including antivirus software and enhanced email storage, although we also offer each
of these features and certain other value-added features as stand-alone pay services. We offer mobile broadband devices for sale
in connection with our mobile broadband services. We also generate revenues from the resale of telecommunications to third parties.
Over the past several years revenues from paid subscription services have declined year over year as a result of a decline in
the number of paid subscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable
to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL.
Management expects revenues in the principal investments - United Online segment to continue to decline year over year.
Advertising
and other revenue
Advertising
and other revenues are primarily derived from various advertising, marketing and media-related initiatives. The majority of our
advertising and other revenues include advertising revenues from search placements, display advertisements and online market research
associated with our Internet access and email services.
Customers
We
serve retail, corporate, capital provider and individual customers across our services lines. The services provided to these customers
were under short-term liquidation contracts that generally do not exceed a period of six months. There were no recurring revenues
from year-to-year in connection with the services we performed under these contracts.
B.
Riley FBR
We
are engaged by corporate customers, including publicly held and privately owned companies, to provide investment banking, corporate
finance,
restructuring advisory,
research
and sales and trading services. We also provide corporate finance, research, wealth management, and sales and trading services
to high net worth individuals. We maintain client relationships with companies in the consumer goods, consumer services, defense,
industrials and technology industries.
Wunderlich
We
act as financial wealth management advisors to individuals, families, small businesses, non-profit organizations, and qualified
retirement plans. Our investment services are primarily comprised of asset management services to meet the financial plans, financial
goals and needs of our customers. We service our customers through a network of 25 branch offices located in 16 states primarily
located in the Mid-west and Southern section of the United States.
Great
American Group
Our
retail auction and liquidation clients include financially healthy retailers as well as distressed retailers, bankruptcy professionals,
financial institution workout groups and a wide range of professional service providers. Some retail segments in which we specialize
include apparel, arts and crafts, department stores, discount stores, drug / health and beauty, electronics, footwear, grocery
stores, hardware / home improvement, home goods and linens, jewelry, office / party supplies, specialty stores, and sporting goods.
We also provide wholesale and industrial auction services and customized disposition programs to a wide range of clients.
We
are engaged by financial institutions, lenders, private equity firms and other capital providers, as well as professional service
providers, to provide valuation and advisory services. We have extensive experience in the appraisal and valuation of retail and
consumer inventories, wholesale and industrial inventories, machinery and equipment, intellectual property and real estate. We
maintain ongoing client relationships with major asset based lenders including Bank of America, JPMorgan Chase, and Wells Fargo.
United
Online
Our
Internet access services are available to customers, which are primarily comprised of individuals, in more than 12,000 cities
across the U.S. and Canada. Generally, our Internet access customers also subscribe to value-added features that include antivirus
software and enhanced email storage. Our advertising customers primarily include business customers that market products and services
over the Internet.
Competition
B.
Riley FBR and Wunderlich
We
face intense competition for our capital markets services. Since the mid-1990s, there has been substantial consolidation among
U.S. and global financial institutions. In particular, a number of large commercial banks, insurance companies and other diversified
financial services firms have merged with other financial institutions or have established or acquired broker-dealers. During
2008, the failure or near-collapse of a number of very large financial institutions led to the acquisition of several of the most
sizeable U.S. investment banking firms, consolidating the financial industry to an even greater extent. Currently, our competitors
are other investment banks, bank holding companies, brokerage firms, merchant banks and financial advisory firms. Our focus on
our target industries also subjects us to direct competition from a number of specialty securities firms and smaller investment
banking boutiques that specialize in providing services to these industries.
The
industry trend toward consolidation has significantly increased the capital base and geographic reach of many of our competitors.
Our larger and better-capitalized competitors may be better able than we are to respond to changes in the investment banking industry,
to recruit and retain skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share
generally. Many of these firms have the ability to offer a wider range of products than we do, including loans, deposit-taking
and insurance, in addition to brokerage, asset management and investment banking services, all of which may enhance their competitive
position relative to us. These firms also have the ability to support investment banking and securities products with commercial
banking, insurance and other financial services revenues in an effort to gain market share, which could result in downward pricing
pressure in our businesses. In particular, the trend in the equity underwriting business toward multiple book runners and co-managers
has increased the competitive pressure in the investment banking industry and has placed downward pressure on average transaction
fees.
As
we seek to expand our asset management business, we face competition in the pursuit of investors for our investment funds, in
the identification and completion of investments in attractive portfolio companies or securities, and in the recruitment and retention
of skilled asset management professionals.
Great
American Group
We
also face intense competition for our auction and liquidation and valuation and appraisal services. While some
competitors are unique to specific service offerings, some competitors cross multiple service offerings. A number of
companies provide services or products to the auction and liquidation and valuation and appraisal markets, and existing and
potential clients can, or will be able to, choose from a variety of qualified service providers. Some of our competitors may
even be able to offer discounts or other preferred pricing arrangements. In a cost-sensitive environment, such arrangements
may prevent us from acquiring new clients or new engagements with existing clients. Some of our competitors may be able to
negotiate secure alliances with clients and affiliates on more favorable terms, devote greater resources to marketing and
promotional campaigns or to the development of technology systems than us. In addition, new technologies and the expansion of
existing technologies with respect to the online auction business may increase the competitive pressures on us. We must also
compete for the services of skilled professionals. There can be no assurance that we will be able to compete successfully
against current or future competitors, and competitive pressures we face could harm our business, operating results and
financial condition.
We
face competition for our retail services from traditional liquidators as well as Internet-based liquidators such as overstock.com
and eBay. Our wholesale and industrial services competitors include traditional auctioneers and fixed site auction houses that
may specialize in particular industries or geographic regions as well as other large, prestigious or well-recognized auctioneers.
We also face competition and pricing pressure from the internal remarketing groups of our clients and potential clients and from
companies that may choose to liquidate or auction assets and/or excess inventory without assistance from service providers like
us. We face competition for our valuation and appraisal services from large accounting, consulting and other professional service
firms as well as other valuation, appraisal and advisory firms.
United
Online
The
U.S. market for Internet and broadband services is highly competitive. We compete with numerous providers of broadband services,
as well as other dial-up Internet access providers. Our principal competitors for broadband services include, among others, local
exchange carriers, wireless and satellite service providers, cable service providers, and broadband resellers. These competitors
include established providers such as AT&T, Verizon, Sprint and T-Mobile. Our principal dial-up Internet access competitors
include established online service and content providers, such as AOL and MSN, and independent national Internet service providers,
such as EarthLink. We believe the primary competitive factors in the Internet access industry are speed, price, coverage area,
ease of use, scope of services, quality of service, and features. Our dial-up Internet access services do not compete favorably
with broadband services with respect to certain of these factors, including, but not limited to, speed.
Regulation
We
are subject to federal and state consumer protection laws, including regulations prohibiting unfair and deceptive trade practices.
In addition, numerous states and municipalities regulate the conduct of auctions and the liability of auctioneers. We and/or our
auctioneers are licensed or bonded in the following states where we conduct, or have conducted, retail, wholesale or industrial
asset auctions: California, Florida, Georgia, Illinois, Massachusetts, Ohio, South Carolina, Texas, Virginia and Washington. In
addition, we are licensed or obtain permits in cities and/or counties where we conduct auctions, as required. If we conduct an
auction in a state where we are not licensed or where reciprocity laws do not exist, we will work with an auctioneer of record
in such state.
As
a participant in the financial services industry, we are subject to complex and extensive regulation of most aspects of our business
by U.S. federal and state regulatory agencies, self-regulatory organizations and securities exchanges. The laws, rules and regulations
comprising the regulatory framework are constantly changing, as are the interpretation and enforcement of existing laws, rules
and regulations. The effect of any such changes cannot be predicted and may direct the manner of our operations and affect our
profitability.
B.
Riley FBR and Wunderlich, our broker-dealer subsidiaries, are subject to regulations governing every aspect of the securities
business, including the execution of securities transactions; capital requirements; record-keeping and reporting procedures; relationships
with customers, including the handling of cash and margin accounts; the experience of and training requirements for certain employees;
and business interactions with firms that are not members of regulatory bodies.
B.
Riley FBR and Wunderlich are registered as securities broker-dealers with the SEC and are members of FINRA. FINRA is a self-regulatory
body composed of members such as our broker-dealer subsidiary that have agreed to abide by the rules and regulations of FINRA.
FINRA may expel, fine and otherwise discipline member firms and their employees. B. Riley FBR and Wunderlich are licensed as broker-dealers
in 50 states in the U.S., requiring us to comply with the laws, rules and regulations of each such state. Each state may revoke
the license to conduct securities business, fine and otherwise discipline broker-dealers and their employees. We are also registered
with NASDAQ and must comply with its applicable rules.
B.
Riley FBR and Wunderlich are also subject to the SEC’s Uniform Net Capital Rule, Rule 15c3-1, which may limit our ability
to make withdrawals of capital from our broker-dealer subsidiaries. The Uniform Net Capital Rule sets the minimum level of net
capital a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. In addition, B. Riley
FBR and Wunderlich are subject to certain notification requirements related to withdrawals of excess net capital.
We
are also subject to the USA PATRIOT Act of 2001 (the Patriot Act), which imposes obligations regarding the prevention and detection
of money-laundering activities, including the establishment of customer due diligence and customer verification, and other compliance
policies and procedures. The conduct of research analysts is also the subject of rule-making by the SEC, FINRA and the federal
government through the Sarbanes-Oxley Act. These regulations require certain disclosures by, and restrict the activities of, research
analysts and broker-dealers, among others. Failure to comply with these requirements may result in monetary, regulatory and, in
the case of the USA Patriot Act, criminal penalties.
Our
asset management subsidiaries, B. Riley Capital Management, LLC and Wunderlich are SEC-registered investment advisers, and accordingly
subject to regulation by the SEC. Requirements under the Investment Advisors Act of 1940 include record-keeping, advertising and
operating requirements, and prohibitions on fraudulent activities.
Various
regulators, including the SEC, FINRA and state securities regulators and attorneys general, are conducting both targeted and industry-wide
investigations of certain practices relating to the financial services industry, including marketing, sales practices, valuation
practices, asset managers, and market and compensation arrangements. These investigations, which have been highly publicized,
have involved mutual fund companies, broker-dealers, hedge funds, investors and others.
In
addition, the SEC staff has conducted studies with respect to soft dollar practices in the brokerage and asset management industries
and proposed interpretive guidance regarding the scope of permitted brokerage and research services in connection with soft dollar
practices
In
July 2010, Congress enacted Dodd-Frank. Dodd-Frank institutes a wide range of reforms that will impact financial services firms
and requires significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional
legislative or regulatory action. Many of the provisions of Dodd-Frank are subject to further rulemaking procedures and studies
and will take effect over several years. As a result, we cannot assess the impact of these new legislative and regulatory changes
on our business at the present time.
UOL
is subject to a number of international, federal, state, and local laws and regulations, including, without limitation, those
relating to taxation, bulk email or “spam,” advertising, user privacy and data protection, consumer protection, antitrust,
export, and unclaimed property. In addition, proposed laws and regulations relating to some or all of the foregoing, as well as
to other areas affecting our businesses, are continuously debated and considered for adoption in the U.S. and other countries,
and such laws and regulations could be adopted in the future. For additional information, see “Risk Factors,” which
appears in Item 1A of this Annual Report on Form 10-K.
Employees
As
of December 31, 2017, we had 833 full time employees. We are not a party to any collective bargaining agreements. We have never
experienced a work stoppage or strike and believe that relations with our employees are good.
Acquisition
of MK Capital
On
February 2, 2015, we completed the purchase of all of the membership interests of
MK
Capital Advisors, LLC (“MK Capital”)
, a wealth management business with operations primarily
in New York, pursuant to a purchase agreement we entered into with MK Capital on January 2, 2015. The aggregate purchase price
for the acquisition, including contingent consideration paid in February 2016 and February 2017 upon the satisfaction of certain
conditions, was $5.0 million in cash and 666,666 shares of our common stock. We subsequently changed the name of MK Capital to
B. Riley Wealth Management.
Acquisition
of FBR
On
June 1, 2017, we acquired all of the outstanding common stock of
FBR
,
a mid-sized investment bank with operations primarily in Washington D.C and New York, pursuant to the FBR Merger Agreement
dated February 17, 2017. The aggregate purchase price for the acquisition was $73.5 million in a stock transaction through
the issuance of 4,831,633 shares of our common stock. The acquisition of FBR is accounted for using the purchase method of
accounting. 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. Upon completion of the
acquisition, we integrated and merged the investment banking operations of BRC with and into FBR and changed the name of FBR
to B. Riley FBR in the fourth quarter of 2017. In connection with the acquisition and integration of these operations we
recorded a restructuring charge of $9.7 million during the year ended December 31, 2017.
Acquisition
of Wunderlich
On
May 17, 2017, the Company entered into a Merger Agreement (the “Wunderlich Merger Agreement”) with Wunderlich, a Delaware
Corporation. Pursuant to the Wunderlich Merger Agreement, customary closing conditions were satisfied and the acquisition was
completed on July 3, 2017. In connection with the Wunderlich acquisition on July 3, 2017, the total consideration of $65,118 paid
to Wunderlich shareholders was comprised of (a) cash in the amount of $29,737; (b) 1,974,812 newly issued shares of the Company’s
common stock at closing which were valued at $31,495 for accounting purposes determined based on the closing market price of the
Company’s shares of common stock on the acquisition date on July 3, 2017; and (c) 821,816 newly issued common stock warrants
with an estimated fair value of $3,886. The common stock and common stock warrants issued includes 387,365 common shares and 167,352
common stock warrants that are held in escrow and subject to forfeiture to indemnify the Company for certain representations and
warranties in connection with the acquisition. The Company believes that the acquisition of Wunderlich will allow the Company
to benefit from wealth management, investment banking, corporate finance, and sales and trading services provided by Wunderlich.
The acquisition of Wunderlich is accounted for using the purchase method of accounting. The Company also entered into a registration
rights agreement with certain shareholders of Wunderlich (the “Registration Rights Agreement”) on July 3, 2017 for
the shares issued in connection with the Wunderlich Merger Agreement. The Registration Rights Agreement provides the Wunderlich
shareholders 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
of Wunderlich we recorded a restructuring charge of $1.5 million during the year ended December 31, 2017.
Other
We
were incorporated in Delaware in May 2009 as a subsidiary of Alternative Asset Management Acquisition
Corp. (“AAMAC”). On July 31, 2009, we closed a transaction pursuant to which (i) the members of Great American
Group, LLC contributed to us all of their membership interests in Great American Group, LLC, and (ii) AAMAC merged with and
into our wholly-owned subsidiary. As a result of such transactions, Great American Group, LLC and AAMAC became our
wholly-owned subsidiaries. Following the acquisition of B. Riley and Co. Inc. in June 2014, we changed our name from
Great American Group, Inc. to B. Riley Financial, Inc. in November 2014.
Available
Information
We
maintain a website at
www.brileyfin.com
. We file reports with the SEC, and make available, free of charge, on or through
our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information
statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. The information on our website is not a part of, or incorporated in, this Annual Report.
Item
1A. RISK FACTORS
Given
the nature of our operations and services we provide, a wide range of factors could materially affect our operations and profitability.
Changes in competitive, market and economic conditions also affect our operations. The risks and uncertainties described below
are not the only risks and uncertainties facing us. Additional risks and uncertainties not presently known or that are currently
considered to be immaterial may also materially and adversely affect our business operations or stock price. If any of the following
risks or uncertainties occurs, our business, financial condition or operating results could materially suffer.
Our
revenues and results of operations are volatile and difficult to predict.
Our
revenues and results of operations fluctuate significantly from quarter to quarter, due to a number of factors. These factors
include, but are not limited to, the following:
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Our
ability to attract new clients and obtain additional business from our existing client
base;
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The
number, size and timing of mergers and acquisition transactions, capital raising transactions
and other strategic advisory services where we act as an adviser on our auction and liquidation
and investment banking engagements;
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The
extent to which we acquire assets for resale, or guarantee a minimum return thereon,
and our ability to resell those assets at favorable prices;
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Variability
in the mix of revenues from the auction and liquidation and valuation and appraisal businesses;
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The
rate of decline we experience from our dial-up and DSL Internet access pay accounts in
our UOL business as customers continue to migrate to broadband access which provides
faster Internet connection and download speeds offered by our competitors;
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The
rate of growth of new service areas;
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The
types of fees we charge clients, or other financial arrangements we enter into with clients;
and
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Changes
in general economic and market conditions.
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We
have limited or no control over some of the factors set forth above and, as a result, may be unable to forecast our revenues accurately.
For example, our investment banking revenues are typically earned upon the successful completion of a transaction, the timing
of which is uncertain and beyond our control. A client’s acquisition transaction may be delayed or terminated because of
a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder
approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the business
of a client or a counterparty. If the parties fail to complete a transaction on which we are advising or an offering in which
we are participating, we will earn little or no revenue from the contemplated transaction.
We
rely on projections of revenues in developing our operating plans for the future and will base our expectations regarding expenses
on these projections and plans. If we inaccurately forecast revenues and/or earnings, or fail to accurately project expenses,
we may be unable to adjust our spending in a timely manner to compensate for these inaccuracies and, as a result, may suffer operating
losses and such losses could have a negative impact on our financial condition and results of operations. If, for any reason,
we fail to meet company, investor or analyst projections of revenue, growth or earnings, the market price of the common stock
could decline and you may lose all or part of your investment.
Conditions
in the financial markets and general economic conditions have impacted and may continue to impact our ability to generate business
and revenues, which may cause significant fluctuations in our stock price.
Our
business has in the past, and may in the future, be materially affected by conditions in the financial market and general economic
conditions, such as the level and volatility of interest rates, investor sentiment, the availability and the cost of credit, the
U.S. mortgage market, the U.S. real estate market, volatile energy prices, consumer confidence, unemployment, and geopolitical
issues. Further, certain aspects of our business are cyclical in nature and changes in the current economic environment may require
us to adjust our sales and marketing practices and react to different business opportunities and modes of competition. If we are
not successful in reacting to changing economic conditions, we may lose business opportunities which could harm our financial
condition. For example, we are more likely to conduct auctions and liquidations in connection with insolvencies and store closures
during periods of economic downturn relative to periods of economic expansion. Conversely, during an economic downturn, financial
institutions that provide asset-based loans typically reduce the number of loans made, which reduces their need for our valuation
and appraisal services.
In
addition, weakness or disruption in equity markets and diminished trading volume of securities could adversely impact our sales
and trading business in the future. Any industry-wide declines in the size and number of underwritings and mergers and acquisitions
transactions could also have an adverse effect on our investment banking revenues. Reductions in the trading prices for equity
securities tend to reduce the transaction value of investment banking transactions, such as underwriting and mergers and acquisitions
transactions, which in turn may reduce the fees we earn from these transactions. Market conditions may also affect the level and
volatility of securities prices and the liquidity and value of investments in our funds and proprietary inventory, and we may
not be able to manage our business’s exposure to these market conditions. In addition to these factors, deterioration in
the financial markets or economic conditions could materially affect our investment banking business in other ways, including
the following:
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Our
opportunity to act as underwriter or placement agent could be adversely affected by a
reduction in the number and size of capital raising transactions or by competing government
sources of equity.
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The
number and size of mergers and acquisitions transactions or other strategic advisory
services where we act as adviser could be adversely affected by continued uncertainties
in valuations related to asset quality and creditworthiness, volatility in the equity
markets, and diminished access to financing.
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Market
volatility could lead to a decline in the volume of transactions that we execute for
our customers and, therefore, to a decline in the revenue we receive from commissions
and spreads.
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We
may experience losses in securities trading activities, or as a result of write-downs
in the value of securities that we own, as a result of deteriorations in the businesses
or creditworthiness of the issuers of such securities.
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We
may experience losses or write downs in the realizable value of our proprietary investments
due to the inability of companies we invest in to repay their borrowings.
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Our
access to liquidity and the capital markets could be limited, preventing us from making
proprietary investments and restricting our sales and trading businesses.
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We
may incur unexpected costs or losses as a result of the bankruptcy or other failure of
companies for which we have performed investment banking services to honor ongoing obligations
such as indemnification or expense reimbursement agreements.
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Sudden
sharp declines in market values of securities can result in illiquid markets and the
failure of counterparties to perform their obligations, which could make it difficult
for us to sell securities, hedge securities positions, and invest funds under management.
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As
an introducing broker to clearing firms, we are responsible to the clearing firm and
could be held liable for the defaults of our customers, including losses incurred as
the result of a customer’s failure to meet a margin call. When we allow customers
to purchase securities on margin, we are subject to risks inherent in extending credit.
This risk increases when a market is rapidly declining and the value of the collateral
held falls below the amount of a customer’s indebtedness. If a customer’s
account is liquidated as the result of a margin call, we are liable to our clearing firm
for any deficiency.
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Competition
in our investment banking, sales, and trading businesses could intensify as a result
of the increasing pressures on financial services companies and larger firms competing
for transactions and business that historically would have been too small for them to
consider.
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Market
volatility could result in lower prices for securities, which may result in reduced management
fees calculated as a percentage of assets under management.
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Market
declines could increase claims and litigation, including arbitration claims from customers.
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Our
industry could face increased regulation as a result of legislative or regulatory initiatives.
Compliance with such regulation may increase our costs and limit our ability to pursue
business opportunities.
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Government
intervention may not succeed in improving the financial and credit markets and may have
negative consequences for our business.
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It
is difficult to predict how long current financial market and economic conditions will continue, whether they will deteriorate
and if they do, which of our business lines will be adversely affected. If one or more of the foregoing risks occurs, our revenues
are likely to decline and, if we were unable to reduce expenses at the same pace, our profit margins could erode.
We
focus principally on specific sectors of the economy in our investment banking operations, and deterioration in the business environment
in these sectors or a decline in the market for securities of companies within these sectors could harm our business.
We
focus principally on five target industries in our investment banking operations: consumer goods, consumer services, defense,
industrials and technology. Volatility in the business environment in these industries or in the market for securities of companies
within these industries could adversely affect our financial results and the market value of our common stock. The business environment
for companies in some of these industries has been subject to high levels of volatility in recent years, and our financial results
have consequently been subject to significant variations from year to year. The market for securities in each of our target industries
may also be subject to industry-specific risks. For example, we have research, investment banking and principal investments focused
in the areas of defense. This sector has been subject to U.S. Department of Defense budget cuts as well as by disruptions in the
financial markets and downturns in the general economy. The consumer goods and services sectors are subject to consumer spending
trends, which have been volatile, to mall traffic trends, which have been down, to the availability of credit, and to broader
trends such as the rise of Internet retailers. Emerging markets have driven the growth of certain consumer companies but emerging
market economies are fragile, subject to wide swings in GDP, and subject to changes in foreign currencies. The technology industry
has been volatile, driven by evolving technology trends, by technological obsolescence, by enterprise spending, and by changes
in the capital spending trends of major corporations and government agencies around the world.
Our
investment banking operations focus on various sectors of the economy, and we also depend significantly on private company transactions
for sources of revenues and potential business opportunities. Most of these private company clients are initially funded and controlled
by private equity firms. To the extent that the pace of these private company transactions slows or the average transaction size
declines due to a decrease in private equity financings, difficult market conditions in our target industries or other factors,
our business and results of operations may be harmed.
Underwriting
and other corporate finance transactions, strategic advisory engagements and related sales and trading activities in our target
industries represent a significant portion of our investment banking business. This concentration of activity in our target industries
exposes us to the risk of declines in revenues in the event of downturns in these industries.
Our
corporate finance and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.
Our
investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific corporate
finance, merger and acquisition transactions (often as an advisor in company sale transactions) and other strategic advisory services,
rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements
with these clients may not recur, we must seek new engagements when our current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity
in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from new or
existing clients, our business, results of operations and financial condition could be adversely affected.
The
asset management business is intensely competitive.
Over
the past several years, the size and number of asset management funds, including hedge funds and mutual funds, has continued to
increase. If this trend continues, it is possible that it will become increasingly difficult for our funds to raise capital. More
significantly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual
investors leads to a reduction in the size and duration of pricing inefficiencies. Many alternative investment strategies seek
to exploit these inefficiencies and, in certain industries, this drives prices for investments higher, in either case increasing
the difficulty of achieving targeted returns. In addition, if interest rates were to rise or there were to be a prolonged bull
market in equities, the attractiveness of our funds relative to investments in other investment products could decrease. Competition
is based on a variety of factors, including:
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investment
performance;
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investor
perception of the drive, focus and alignment of interest of an investment manager;
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quality
of service provided to and duration of relationship with investors;
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business
reputation; and
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level
of fees and expenses charged for services.
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We
compete in the asset management business with a large number of investment management firms, private equity fund sponsors, hedge
fund sponsors and other financial institutions. A number of factors serve to increase our competitive risks, as follows:
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investors
may develop concerns that we will allow a fund to grow to the detriment of its performance;
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some
of our competitors have greater capital, lower targeted returns or greater sector or
investment strategy specific expertise than we do, which creates competitive disadvantages
with respect to investment opportunities;
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some
of our competitors may perceive risk differently than we do which could allow them either
to outbid us for investments in particular sectors or, generally, to consider a wider
variety of investments;
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there
are relatively few barriers to entry impeding new asset management firms, and the successful
efforts of new entrants into our various lines of business, including former “star”
portfolio managers at large diversified financial institutions as well as such institutions
themselves, will continue to result in increased competition; and
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other
industry participants in the asset management business continuously seek to recruit our
best and brightest investment professionals away from us.
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These
and other factors could reduce our earnings and revenues and adversely affect our business. In addition, if we are forced to compete
with other alternative asset managers on the basis of price, we may not be able to maintain our current base management and incentive
fee structures. We have historically competed primarily on the performance of our funds, and not on the level of our fees relative
to those of our competitors. However, there is a risk that fees in the alternative investment management industry will decline,
without regard to the historical performance of a manager, including our managers. Fee reductions on our existing or future funds,
without corresponding decreases in our cost structure, would adversely affect our revenues and distributable earnings.
Poor
investment performance may decrease assets under management and reduce revenues from and the profitability of our asset management
business.
Revenues
from our asset management business are primarily derived from asset management fees. Asset management fees are generally comprised
of management and incentive fees. Management fees are typically based on assets under management, and incentive fees are earned
on a quarterly or annual basis only if the return on our managed accounts exceeds a certain threshold return, or “highwater
mark,” for each investor. We will not earn incentive fee income during a particular period, even when a fund had positive
returns in that period, if we do not generate cumulative performance that surpasses a highwater mark. If a fund experiences losses,
we will not earn incentive fees with regard to investors in that fund until its returns exceed the relevant highwater mark.
In
addition, investment performance is one of the most important factors in retaining existing investors and competing for new asset
management business. Investment performance may be poor as a result of the current or future difficult market or economic conditions,
including changes in interest rates or inflation, terrorism or political uncertainty, our investment style, the particular investments
that we make, and other factors. Poor investment performance may result in a decline in our revenues and income by causing (i)
the net asset value of the assets under our management to decrease, which would result in lower management fees to us, (ii) lower
investment returns, resulting in a reduction of incentive fee income to us, and (iii) investor redemptions, which would result
in lower fees to us because we would have fewer assets under management.
To
the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability
of our asset management business will likely be reduced and our ability to grow existing funds and raise new funds in the future
will likely be impaired.
The
historical returns of our funds may not be indicative of the future results of our funds.
The
historical returns of our funds should not be considered indicative of the future results that should be expected from such funds
or from any future funds we may raise. Our rates of returns reflect unrealized gains, as of the applicable measurement date, which
may never be realized due to changes in market and other conditions not in our control that may adversely affect the ultimate
value realized from the investments in a fund. The returns of our funds may have also benefited from investment opportunities
and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will
be able to avail themselves of profitable investment opportunities. Furthermore, the historical and potential future returns of
the funds we manage also may not necessarily bear any relationship to potential returns on our common stock.
Our
asset management clients may generally redeem their investments, which could reduce our asset management fee revenues.
Our
asset management fund agreements generally permit investors to redeem their investments with us after an initial “lockup”
period during which redemptions are restricted or penalized. However, any such restrictions may be waived by us. Thereafter, redemptions
are permitted at specified intervals. If the return on the assets under our management does not meet investors’ expectations,
investors may elect to redeem their investments and invest their assets elsewhere, including with our competitors. Our management
fee revenues correlate directly to the amount of assets under our management; therefore, redemptions may cause our fee revenues
to decrease. Investors may decide to reallocate their capital away from us and to other asset managers for a number of reasons,
including poor relative investment performance, changes in prevailing interest rates which make other investments more attractive,
changes in investor perception regarding our focus or alignment of interest, dissatisfaction with changes in or a broadening of
a fund’s investment strategy, changes in our reputation, and departures or changes in responsibilities of key investment
professionals. For these and other reasons, the pace of redemptions and corresponding reduction in our assets under management
could accelerate. In the future, redemptions could require us to liquidate assets under unfavorable circumstances, which would
further harm our reputation and results of operations.
We
are subject to risks in using custodians.
Our
asset management subsidiary and its managed funds depend on the services of custodians to settle and report securities transactions.
In the event of the insolvency of a custodian, our funds might not be able to recover equivalent assets in whole or in part as
they will rank among the custodian’s unsecured creditors in relation to assets which the custodian borrows, lends or otherwise
uses. In addition, cash held by our funds with the custodian will not be segregated from the custodian’s own cash, and the
funds will therefore rank as unsecured creditors in relation thereto.
We
may suffer losses if our reputation is harmed.
Our
ability to attract and retain customers and employees may be diminished to the extent our reputation is damaged. If we fail, or
are perceived to fail, to address various issues that may give rise to reputational risk, we could harm our business prospects.
These issues include, but are not limited to, appropriately dealing with market dynamics, potential conflicts of interest, legal
and regulatory requirements, ethical issues, customer privacy, record-keeping, sales and trading practices, and the proper identification
of the legal, reputational, credit, liquidity and market risks inherent in our products and services. Failure to appropriately
address these issues could give rise to loss of existing or future business, financial loss, and legal or regulatory liability,
including complaints, claims and enforcement proceedings against us, which could, in turn, subject us to fines, judgments and
other penalties. In addition, our capital markets operations depend to a large extent on our relationships with our clients and
reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not
satisfied with our services, it may be more damaging in our business than in other businesses.
Our
capital markets operations are highly dependent on communications, information and other systems and third parties, and any systems
failures could significantly disrupt our capital markets business.
Our
data and transaction processing, custody, financial, accounting and other technology and operating systems are essential to our
capital markets operations. A system malfunction (due to hardware failure, capacity overload, security incident, data corruption,
etc.) or mistake made relating to the processing of transactions could result in financial loss, liability to clients, regulatory
intervention, reputational damage and constraints on our ability to grow. We outsource a substantial portion of our critical data
processing activities, including trade processing and back office data processing. We also contract with third parties for market
data and other services. In the event that any of these service providers fails to adequately perform such services or the relationship
between that service provider and us is terminated, we may experience a significant disruption in our operations, including our
ability to timely and accurately process transactions or maintain complete and accurate records of those transactions.
Adapting
or developing our technology systems to meet new regulatory requirements, client needs, expansion and industry demands also is
critical for our business. Introduction of new technologies present new challenges on a regular basis. We have an ongoing need
to upgrade and improve our various technology systems, including our data and transaction processing, financial, accounting, risk
management and trading systems. This need could present operational issues or require significant capital spending. It also may
require us to make additional investments in technology systems and may require us to reevaluate the current value and/or expected
useful lives of our technology systems, which could negatively impact our results of operations.
Secure
processing, storage and transmission of confidential and other information in our internal and outsourced computer systems and
networks also is critically important to our business. We take protective measures and endeavor to modify them as circumstances
warrant. However, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other
malicious code, inadvertent, erroneous or intercepted transmission of information (including by e-mail), and other events that
could have an information security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’
or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems
and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third
parties’ operations. We may be required to expend significant additional resources to modify our protective measures or
to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that
are either not insured against or not fully covered through any insurance maintained by us.
A
disruption in the infrastructure that supports our business due to fire, natural disaster, health emergency (for example, a disease
pandemic), power or communication failure, act of terrorism or war may affect our ability to service and interact with our clients.
If we are not able to implement contingency plans effectively, any such disruption could harm our results of operations.
The
growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates
may adversely affect this business and may increase competition.
The
continued growth of electronic trading and the introduction of new technologies is changing our market-making business and presenting
new challenges. Securities, futures and options transactions are increasingly occurring electronically, through alternative trading
systems. It appears that the trend toward alternative trading systems will continue to accelerate. This acceleration could further
increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal,
which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our
market-making business and with our algorithmic trading platform, and we may experience continued competitive pressures in these
and other areas. Significant resources have been invested in the development of our electronic trading systems, which includes
our at-the-market business, but there is no assurance that the revenues generated by these systems will yield an adequate return on the
investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically
manual trading markets.
Pricing
and other competitive pressures may impair the revenues of our sales and trading business.
We
derive a significant portion of our revenues for our investment banking operations from our sales and trading business. There
has been intense price competition and trading volume reduction in this business in recent years. In particular, the ability to
execute trades electronically and through alternative trading systems has increased the downward pressure on per share trading
commissions and spreads. We expect these trends toward alternative trading systems and downward pricing pressure in the business
to continue. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors
seek to obtain market share by competing on the basis of price or by using their own capital to facilitate client trading activities.
In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary
products and services to clients in order to win their trading business. These larger competitors may also be better able to respond
to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions,
to fund internal growth and to compete for market share generally. As we are committed to maintaining and improving our comprehensive
research coverage in our target sectors to support our sales and trading business, we may be required to make substantial investments
in our research capabilities to remain competitive. If we are unable to compete effectively in these areas, the revenues of our
sales and trading business may decline, and our business, results of operations and financial condition may be harmed.
Some
of our large institutional sales and trading clients in terms of brokerage revenues have entered into arrangements with us and
other investment banking firms under which they separate payments for research products or services from trading commissions for
sales and trading services, and pay for research directly in cash, instead of compensating the research providers through trading
commissions (referred to as “soft dollar” practices). In addition, we have entered into certain commission sharing
arrangements in which institutional clients execute trades with a limited number of brokers and instruct those brokers to allocate
a portion of the commission directly to us or other broker-dealers for research or to an independent research provider. If more
of such arrangements are reached between our clients and us, or if similar practices are adopted by more firms in the investment
banking industry, it may further increase the competitive pressures on trading commissions and spreads and reduce the value our
clients place on high quality research. Conversely, if we are unable to make similar arrangements with other investment managers
that insist on separating trading commissions from research products, volumes and trading commissions in our sales and trading
business also would likely decrease.
Larger
and more frequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.
Certain
financial services firms make larger and more frequent commitments of capital in many of their activities. For example, in order
to win business, some investment banks increasingly commit to purchase large blocks of stock from publicly traded issuers or significant
stockholders, instead of the more traditional marketed underwriting process in which marketing is typically completed before an
investment bank commits to purchase securities for resale. We may participate in this activity and, as a result, we may be subject
to increased risk. Conversely, if we do not have sufficient regulatory capital to so participate, our business may suffer. Furthermore,
we may suffer losses as a result of the positions taken in these transactions even when economic and market conditions are generally
favorable for others in the industry.
We
may increasingly commit our own capital as part of our trading business to facilitate client sales and trading activities. The
number and size of these transactions may adversely affect our results of operations in a given period. We may also incur significant
losses from our sales and trading activities due to market fluctuations and volatility in our results of operations. To the extent
that we own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets
could result in losses. Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of
those markets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions
by acquiring assets in a rising market.
We
have made and may make principal investments in relatively high-risk, illiquid assets that often have significantly leveraged
capital structures, and we may fail to realize any profits from these activities for a considerable period of time or lose some
or all of the principal amount we invest in these activities.
We
may purchase equity securities and, to a lesser extent, debt securities, in venture capital, seed and other high risk financings
of early-stage, pre-public or “mezzanine stage”, distressed situations and turnaround companies, as well as funds
or other collective investment vehicles. We risk the loss of capital we have invested in these activities.
We
may use our capital, including on a leveraged basis in proprietary investments in both private company and public company securities
that may be illiquid and volatile. The equity securities of a privately-held entity in which we make a proprietary investment
are likely to be restricted as to resale and may otherwise be highly illiquid. In the case of fund or similar investments, our
investments may be illiquid until such investment vehicles are liquidated. We expect that there will be restrictions on our ability
to resell the securities of any such company that we acquire for a period of at least six months after we acquire those securities.
Thereafter, a public market sale may be subject to volume limitations or dependent upon securing a registration statement for
an initial and potentially secondary public offering of the securities. We may make principal investments that are significant
relative to the overall capitalization of the investee company and resales of significant amounts of these securities might be
subject to significant limitations and adversely affect the market and the sales price for the securities in which we invest.
In addition, our principal investments may involve entities or businesses with capital structures that have significant leverage.
The large amount of borrowing in the leveraged capital structure increases the risk of losses due to factors such as rising interest
rates, downturns in the economy or deteriorations in the condition of the investment or its industry. In the event of defaults
under borrowings, the assets being financed would be at risk of foreclosure, and we could lose our entire investment.
Even
if we make an appropriate investment decision based on the intrinsic value of an enterprise, we cannot assure you that general
market conditions will not cause the market value of our investments to decline. For example, an increase in interest rates, a
general decline in the stock markets, or other market and industry conditions adverse to companies of the type in which we invest
and intend to invest could result in a decline in the value of our investments or a total loss of our investment.
In
addition, some of these investments are, or may in the future be, in industries or sectors which are unstable, in distress or
undergoing some uncertainty. Further, the companies in which we invest may rely on new or developing technologies or
novel business models, or concentrate on markets which are or may be disproportionately impacted by pressures in the
financial services and/or mortgage and real estate sectors, have not yet developed and which may never develop sufficiently
to support successful operations, or their existing business operations may deteriorate or may not expand or perform as
projected. Such investments may be subject to rapid changes in value caused by sudden company-specific or industry-wide
developments. Contributing capital to these investments is risky, and we may lose some or all of the principal amount of our
investments. There are no regularly quoted market prices for a number of the investments that we make. The value of our
investments is determined using fair value methodologies described in valuation policies, which may consider, among other
things, the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third
parties for the investment and the trading price of recent sales of securities (in the case of publicly-traded securities),
restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individual
investments are based on estimates and assumptions specific to the particular investments. Therefore, the value of our
investments does not necessarily reflect the prices that would actually be obtained by us when such investments are sold.
Realizations, if any, at values significantly lower than the values at which investments have been reflected on our balance
sheet would result in loses of potential incentive income and principal investments.
We
may experience write downs of our investments and other losses related to the valuation of our investments and volatile and illiquid
market conditions.
In
our proprietary investment activities, our concentrated holdings, illiquidity and market volatility may make it difficult to value
certain of our investment securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes
in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities,
the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower
than their current fair value. Any of these factors could require us to take write downs in the value of our investment and securities
portfolio, which may have an adverse effect on our results of operations in future periods.
Our
underwriting and market-making activities may place our capital at risk.
We
may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased
as an underwriter at the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability
for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. Further,
even though underwriting agreements with issuing companies typically include a right to indemnification in favor of the underwriter
for these offerings to cover potential liability from any material misstatements or omissions, indemnification may be unavailable
or insufficient in certain circumstances, for example if the issuing company has become insolvent. As a market maker, we may own
large positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result
in greater losses than would be the case if our holdings were more diversified.
Our
businesses, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third
parties who owe us money, securities or other assets or whose securities or obligations we hold.
The
amount and duration of our credit exposures have been increasing over the past year, as have the breadth and size of the entities
to which we have credit exposures. We are exposed to the risk that third parties that owe us money, securities or other assets
will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity,
operational failure or other reasons. Declines in the market value of securities can result in the failure of buyers and sellers
of securities to fulfill their settlement obligations, and in the failure of our clients to fulfill their credit obligations.
During market downturns, counterparties to us in securities transactions may be less likely to complete transactions. In addition,
particularly during market downturns, we may face additional expenses defending or pursuing claims or litigation related to counterparty
or client defaults.
Our
businesses may be adversely affected by the disruptions in the credit markets, including reduced access to credit and liquidity
and higher costs of obtaining credit.
In
the event existing internal and external financial resources do not satisfy our needs, we would have to seek additional outside
financing. The availability of outside financing will depend on a variety of factors, such as our financial condition and results
of operations, the availability of acceptable collateral, market conditions, the general availability of credit, the volume of
trading activities, and the overall availability of credit to the financial services industry.
Widening
credit spreads, as well as significant declines in the availability of credit, could adversely affect our ability to borrow on
an unsecured basis. Disruptions in the credit markets could make it more difficult and more expensive to obtain funding for our
businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may
require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability,
particularly in our businesses that involve investing and taking principal positions.
Liquidity,
or ready access to funds, is essential to financial services firms, including ours. Failures of financial institutions have often
been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our sales and trading business,
and perceived liquidity issues may affect the willingness of our clients and counterparties to engage in sales and trading transactions
with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption
or an operational problem that affects our sales and trading clients, third parties or us. Further, our ability to sell assets
may be impaired if other market participants are seeking to sell similar assets at the same time.
Our
clients engaging us with respect to mergers and acquisitions often rely on access to the secured and unsecured credit markets
to finance their transactions. The lack of available credit and the increased cost of credit could adversely affect the size,
volume and timing of our clients’ merger and acquisition transactions—particularly large transactions—and adversely
affect our investment banking business and revenues.
We
have experienced losses and may not maintain profitability.
Our
profitability in each reporting period is impacted by the number and size of retail liquidation and capital markets engagements
we perform on a quarterly or annual basis. It is possible that we will experience losses with respect to our current
operations as we continue to expand our operations. In addition, we expect that our operating expenses will increase to the extent
that we grow our business. We may not be able to generate sufficient revenues to maintain profitability.
Because
of their significant stock ownership, some of our existing stockholders will be able to exert control over us and our significant
corporate decisions.
Our
executive officers, directors and their affiliates own or control, in the aggregate, approximately 23.4% of our outstanding common
stock as of December 31, 2017. In particular, our Chairman and Chief Executive Officer, Bryant R. Riley, owns or controls, in
the aggregate, 4,262,561 shares of our common stock or 16.0% of our outstanding common stock as of December 31, 2017. These stockholders
are able to exercise influence over matters requiring stockholder approval, such as the election of directors and the approval
of significant corporate transactions, including transactions involving an actual or potential change of control of the company
or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration of ownership
may harm the market price of our common stock by, among other things:
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delaying,
deferring, or preventing a change in control of our company;
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impeding
a merger, consolidation, takeover, or other business combination involving our company;
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causing
us to enter into transactions or agreements that are not in the best interests of all
stockholders; or
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discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control
of our company.
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We
may incur losses as a result of “guarantee” based engagements that we enter into in connection with our auction and
liquidation solutions business.
In
many instances, in order to secure an engagement, we are required to bid for that engagement by guaranteeing to the client a minimum
amount that such client will receive from the sale of inventory or assets. Our bid is based on a variety of factors, including:
our experience, expertise, perceived value added by engagement, valuation of the inventory or assets and the prices we believe
potential buyers would be willing to pay for such inventory or assets. An inaccurate estimate of any of the above or inaccurate
valuation of the assets or inventory could result in us submitting a bid that exceeds the realizable proceeds from any engagement.
If the liquidation proceeds, net of direct operating expenses, are less than the amount we guaranteed in our bid, we will incur
a loss. Therefore, in the event that the proceeds, net of direct operating expenses, from an engagement are less than the bid,
the value of the assets or inventory decline in value prior to the disposition or liquidation, or the assets are overvalued for
any reason, we may suffer a loss and our financial condition and results of operations could be adversely affected.
Losses
due to any auction or liquidation engagement may cause us to become unable to make payments due to our creditors and may cause
us to default on our debt obligations.
We
have three engagement structures for our auction and liquidation services: (i) a “fee” based structure under which
we are compensated for our role in an engagement on a commission basis, (ii) purchase on an outright basis (and take title to)
the assets or inventory of the client, and (iii) “guarantee” to the client that a certain amount will be realized
by the client upon the sale of the assets or inventory based on contractually defined terms in the auction or liquidation contract.
We bear the risk of loss under the purchase and guarantee structures of auction and liquidation contracts. If the amount realized
from the sale or disposition of assets, net of direct operating expenses, does not equal or exceed the purchase price (in purchase
transaction), we will recognize a loss on the engagement, or should the amount realized, net of direct operating expenses, not
equal or exceed the “guarantee,” we are still required to pay the guaranteed amount to the client.
We
could incur losses in connection with outright purchase transactions in which we engage as part of our auction and liquidation
solutions business.
When
we conduct an asset disposition or liquidation on an outright purchase basis, we purchase from the client the assets or inventory
to be sold or liquidated and therefore, we hold title to any assets or inventory that we are not able to sell. In other situations,
we may acquire assets from our clients if we believe that we can identify a potential buyer and sell the assets at a premium to
the price paid. We store these unsold or acquired assets and inventory until they can be sold or, alternatively, transported to
the site of a liquidation of comparable assets or inventory that we are conducting. If we are forced to sell these assets for
less than we paid, or are required to transport and store assets multiple times, the related expenses could have a material adverse
effect on our results of operations.
We
depend on financial institutions as primary clients for our valuation and appraisal business. Consequently, the loss of any financial
institutions as clients may have an adverse impact on our business.
A
majority of the revenue from our valuation and appraisal business is derived from engagements by financial institutions. As a
result, any loss of financial institutions as clients of our valuation and advisory services, whether due to changing preferences
in service providers, failures of financial institutions or mergers and consolidations within the finance industry, could significantly
reduce the number of existing, repeat and potential clients, thereby adversely affecting our revenues. In addition, any larger
financial institutions that result from mergers or consolidations in the financial services industry could have greater leverage
in negotiating terms of engagements with us, or could decide to internally perform some or all of the valuation and appraisal
services which we currently provide to one of the constituent institutions involved in the merger or consolidation or which we
could provide in the future. Any of these developments could have a material adverse effect on our valuation and appraisal business.
We
may face liability or harm to our reputation as a result of a claim that we provided an inaccurate appraisal or valuation and
our insurance coverage may not be sufficient to cover the liability.
We
could face liability in connection with a claim by a client that we provided an inaccurate appraisal or valuation on which the
client relied. Any claim of this type, whether with or without merit, could result in costly litigation, which could divert management’s
attention and company resources and harm our reputation. Furthermore, if we are found to be liable, we may be required to pay
damages. While our appraisals and valuations are typically provided only for the benefit of our clients, if a third party relies
on an appraisal or valuation and suffers harm as a result, we may become subject to a legal claim, even if the claim is without
merit. We carry insurance for liability resulting from errors or omissions in connection with our appraisals and valuations; however,
the coverage may not be sufficient if we are found to be liable in connection with a claim by a client or third party.
We
could be forced to mark down the value of certain assets acquired in connection with outright purchase transactions.
In
most instances, inventory is reported on the balance sheet at its historical cost; however, according to U.S. Generally Accepted
Accounting Principles, inventory whose historical cost exceeds its market value should be valued conservatively, which dictates
a lower value should apply. Accordingly, should the replacement cost (due to technological obsolescence or otherwise), or the
net realizable value of any inventory we hold be less than the cost paid to acquire such inventory (purchase price), we will be
required to “mark down” the value of such inventory held. If the value of any inventory held on our balance sheet
is required to be written down, such write down could have a material adverse effect on our financial position and results of
operations.
We
operate in highly competitive industries. Some of our competitors may have certain competitive advantages, which may cause us
to be unable to effectively compete with or gain market share from our competitors.
We
face competition with respect to all of our service areas. The level of competition depends on the particular service area and,
in the case of our asset and liquidation services, the category of assets being liquidated or appraised. We compete with other
companies and investment banks to help clients with their corporate finance and capital needs. In addition, we compete with companies
and online services in the bidding for assets and inventory to be liquidated. The demand for online solutions continues to grow
and our online competitors include other e-commerce providers, auction websites such as eBay, as well as government agencies and
traditional liquidators and auctioneers that have created websites to further enhance their product offerings and more efficiently
liquidate assets. We expect the market to become even more competitive as the demand for such services continues to increase and
traditional and online liquidators and auctioneers continue to develop online and offline services for disposition, redeployment
and remarketing of wholesale surplus and salvage assets. In addition, manufacturers, retailers and government agencies may decide
to create their own websites to sell their own surplus assets and inventory and those of third parties.
We
also compete with other providers of valuation and advisory services. Competitive pressures within the valuation and appraisal
services market, including a decrease in the number of engagements and/or a decrease in the fees which can be charged for these
services, could affect revenues from our valuation and appraisal services as well as our ability to engage new or repeat clients.
We believe that given the relatively low barriers to entry in the valuation and appraisal services market, this market may become
more competitive as the demand for such services increases.
Some
of our competitors may be able to devote greater financial resources to marketing and promotional campaigns, secure merchandise
from sellers on more favorable terms, adopt more aggressive pricing or inventory availability policies and devote more resources
to website and systems development than we are able to do. Any inability on our part to effectively compete could have a material
adverse effect on our financial condition, growth potential and results of operations.
We
compete with specialized investment banks to provide financial and investment banking services to small and middle-market companies.
Middle-market investment banks provide access to capital and strategic advice to small and middle-market companies in our target
industries. We compete with those investment banks on the basis of a number of factors, including client relationships, reputation,
the abilities of our professionals, transaction execution, innovation, price, market focus and the relative quality of our products
and services. We have experienced intense competition over obtaining advisory mandates in recent years, and we may experience
pricing pressures in our investment banking business in the future as some of our competitors seek to obtain increased market
share by reducing fees. Competition in the middle-market may further intensify if larger Wall Street investment banks expand their
focus to this sector of the market. Increased competition could reduce our market share from investment banking services and our
ability to generate fees at historical levels.
We
also face increased competition due to a trend toward consolidation. In recent years, there has been substantial consolidation
and convergence among companies in the financial services industry. This trend was amplified in connection with the unprecedented
disruption and volatility in the financial markets during the past several years, and, as a result, a number of financial services
companies have merged, been acquired or have fundamentally changed their respective business models. Many of these firms may have
the ability to support investment banking, including financial advisory services, with commercial banking, insurance and other
financial services in an effort to gain market share, which could result in pricing pressure in our businesses.
UOL
competes with numerous providers of broadband, mobile broadband and DSL services, as well as other dial-up Internet access providers,
many of whom are large and have significantly more financial and marketing resources. The principal competitors for UOL’s
mobile broadband and DSL services include, among others, local exchange carriers, wireless and satellite service providers, and
cable service providers.
If
we are unable to attract and retain qualified personnel, we may not be able to compete successfully in our industry.
Our
future success depends to a significant degree upon the continued contributions of senior management and the ability to attract
and retain other highly qualified management personnel. We face competition for management from other companies and organizations;
therefore, we may not be able to retain our existing personnel or fill new positions or vacancies created by expansion or turnover
at existing compensation levels. Although we have entered into employment agreements with key members of the senior management
team, there can be no assurances such key individuals will remain with us. The loss of any of our executive officers or other
key management personnel would disrupt our operations and divert the time and attention of our remaining officers and management
personnel which could have an adverse effect on our results of operations and potential for growth.
We
also face competition for highly skilled employees with experience in our industry, which requires a unique knowledge base. We
may be unable to recruit or retain other existing technical, sales and client support personnel that are critical to our ability
to execute our business plan.
We
frequently use borrowings under credit facilities in connection with our guaranty engagements, in which we guarantee a minimum
recovery to the client, and outright purchase transactions.
In
engagements where we operate on a guaranty or purchase basis, we are typically required to make an upfront payment to the client.
If the upfront payment is less than 100% of the guarantee or the purchase price in a “purchase” transaction, we may
be required to make successive cash payments until the guarantee is met or we may issue a letter of credit in favor of the client.
Depending on the size and structure of the engagement, we may borrow under our credit facilities and may be required to issue
a letter of credit in favor of the client for these additional amounts. If we lose any availability under our credit facilities,
are unable to borrow under credit facilities and/or issue letters of credit in favor of clients, or borrow under credit facilities
and/or issue letters of credit on commercially reasonable terms, we may be unable to pursue large liquidation and disposition
engagements, engage in multiple concurrent engagements, pursue new engagements or expand our operations. We are required to obtain
approval from the lenders under our existing credit facilities prior to making any borrowings thereunder in connection with a
particular engagement. Any inability to borrow under our credit facilities, or enter into one or more other credit facilities
on commercially reasonable terms may have a material adverse effect on our financial condition, results of operations and growth.
Defaults
under our credit agreements could have an adverse impact on our ability to finance potential engagements.
The
terms of our credit agreements contain a number of events of default. Should we default under any of our credit agreements in
the future, lenders may take any or all remedial actions set forth in such credit agreement, including, but not limited to, accelerating
payment and/or charging us a default rate of interest on all outstanding amounts, refusing to make any further advances or issue
letters of credit, or terminating the line of credit. As a result of our reliance on lines of credit and letters of credit, any
default under a credit agreement, or remedial actions pursued by lenders following any default under a credit agreement, may require
us to immediately repay all outstanding amounts, which may preclude us from pursuing new liquidation and disposition engagements
and may increase our cost of capital, each of which may have a material adverse effect on our financial condition and results
of operations.
If
we cannot meet our future capital requirements, we may be unable to develop and enhance our services, take advantage of business
opportunities and respond to competitive pressures.
We
may need to raise additional funds in the future to grow our business internally, invest in new businesses, expand through acquisitions,
enhance our current services or respond to changes in our target markets. If we raise additional capital through the sale of equity
or equity derivative securities, the issuance of these securities could result in dilution to our existing stockholders. If additional
funds are raised through the issuance of debt securities, the terms of that debt could impose additional restrictions on our operations
or harm our financial condition. Additional financing may be unavailable on acceptable terms.
We
are subject to net capital and other regulatory capital requirements; failure to comply with these rules would significantly harm
our business.
BRC,
our broker-dealer subsidiary, is subject to the net capital requirements of the SEC, FINRA, and various self-regulatory organizations
of which it is a member. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and
also mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital
may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension
or expulsion by FINRA and other regulatory bodies, and ultimately may require its liquidation. Failure to comply with the net
capital rules could have material and adverse consequences, such as:
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limiting
our operations that require intensive use of capital, such as underwriting or trading
activities; or
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restricting
us from withdrawing capital from our subsidiaries, when our broker-dealer subsidiary
has more than the minimum amount of required capital. This, in turn, could limit our
ability to implement our business and growth strategies, pay interest on and repay the
principal of our debt and/or repurchase our shares.
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In
addition, a change in the net capital rules or the imposition of new rules affecting the scope, coverage, calculation, or amount
of net capital requirements, or a significant operating loss or any large charge against net capital, could have similar adverse
effects.
Furthermore,
BRC is subject to laws that authorize regulatory bodies to block or reduce the flow of funds from it to B. Riley Financial, Inc.
As a holding company, B. Riley Financial, Inc. depends on dividends, distributions and other payments from its subsidiaries to
fund dividend payments, if any, and to fund all payments on its obligations, including debt obligations. As a result, regulatory
actions could impede access to funds that B. Riley Financial, Inc. needs to make payments on obligations, including debt obligations,
or dividend payments. In addition, because B. Riley Financial, Inc. holds equity interests in the firm’s subsidiaries, its
rights as an equity holder to the assets of these subsidiaries may not materialize, if at all, until the claims of the creditors
of these subsidiaries are first satisfied.
We
may incur losses as a result of ineffective risk management processes and strategies.
We
seek to monitor and control our risk exposure through operational and compliance reporting systems, internal controls, management
review processes and other mechanisms. Our investing and trading processes seek to balance our ability to profit from investment
and trading positions with our exposure to potential losses. While we employ limits and other risk mitigation techniques, those
techniques and the judgments that accompany their application cannot anticipate economic and financial outcomes or the specifics
and timing of such outcomes. Thus, we may, in the course of our investment and trading activities, incur losses, which may be
significant.
In
addition, we are investing our own capital in our funds and funds of funds as well as principal investing activities, and limitations
on our ability to withdraw some or all of our investments in these funds or liquidate our investment positions, whether for legal,
reputational, illiquidity or other reasons, may make it more difficult for us to control the risk exposures relating to these
investments.
Our
risk management policies and procedures may leave us exposed to unidentified or unanticipated risks.
Our
risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments
or against all types of risk. We seek to manage, monitor and control our operational, legal and regulatory risk through operational
and compliance reporting systems, internal controls, management review processes and other mechanisms; however, there can be no
assurance that our procedures will be fully effective. Further, our risk management methods may not effectively predict future
risk exposures, which could be significantly greater than the historical measures indicate. In addition, some of our risk management
methods are based on an evaluation of information regarding markets, clients and other matters that are based on assumptions that
may no longer be accurate. A failure to adequately manage our growth, or to effectively manage our risk, could materially and
adversely affect our business and financial condition.
We
are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These
parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract
or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances.
As an introducing broker, we could be held responsible for the defaults or misconduct of our customers. These may present credit
concerns, and default risks may arise from events or circumstances that are difficult to detect, foresee or reasonably guard against.
In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults
by other institutions, which in turn could adversely affect us. If any of the variety of instruments, processes and strategies
we utilize to manage our exposure to various types of risk are not effective, we may incur losses.
Our
common stock price may fluctuate substantially, and your investment could suffer a decline in value.
The
market price of our common stock may be volatile and could fluctuate substantially due to many factors, including, among other
things:
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actual
or anticipated fluctuations in our results of operations;
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announcements
of significant contracts and transactions by us or our competitors;
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sale
of common stock or other securities in the future;
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the
trading volume of our common stock;
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changes
in our pricing policies or the pricing policies of our competitors; and
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general
economic conditions
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In
addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. These broad market factors may materially harm the market price
of our common stock, regardless of our operating performance.
There
is a limited market for our common shares and the trading price of our common shares is subject to volatility.
Our
common shares began trading on the over-the-counter bulletin board in August 2009, and we obtained approval to list and
trade our shares on The NASDAQ Stock Market LLC’s NASDAQ Capital Market on July 16, 2015. On November 16, 2016, we
began trading our shares on the NASDAQ Stock Market LLC’s NASDAQ Global Market. Trading of our common stock has in the
past been highly volatile with low trading volume and an active trading market for shares of our common stock may not
develop. In such case, selling shares of our common stock may be difficult because the limited trading market for our shares
could result in lower prices and larger spreads in the bid and ask prices of our shares, as well as lower trading volume.
Further, the market price of shares of our common stock could continue to fluctuate substantially. Additionally, if we are
not able to maintain our listing on NASDAQ, then our common stock will again be quoted for trading on an
over-the-counter quotation system and may be subject to more significant fluctuations in stock price and trading
volume and large bid and ask price spreads.
Our
amended and restated certificate of incorporation authorizes our board of directors to issue new series of preferred stock that
may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.
Our
amended and restated certificate of incorporation provides that our board of directors will be authorized to issue from time to
time, without further stockholder approval, up to 1,000,000 shares of preferred stock in one or more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including
the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series.
Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights.
We may issue additional preferred stock in ways which may delay, defer or prevent a change of control of our company without further
action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting
power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation
of class or series voting rights.
Anti-takeover
provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market
price of our stock.
Our
amended and restated certificate of incorporation and our bylaws, as amended, contain provisions that could delay or prevent a
change of control of our company or changes in our board of directors that our stockholders might consider favorable. We are also
governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations
with stockholders owning 15% or more of our outstanding voting stock. The foregoing and other provisions in our amended and restated
certificate of incorporation, our bylaws, as amended, and Delaware law could make it more difficult for stockholders or potential
acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors,
including delaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving our company.
Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation
of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.
Our
ability to use net loss carryovers to reduce our taxable income may be limited.
As
a result of the common stock offering that was completed on June 5, 2014, the Company had a more than 50% ownership shift in
accordance with Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the
Company may be 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 a result of the acquisition of UOL on July 1, 2016, the historical net operating
losses of UOL are limited to offset income we generate post acquisition. As of December 31, 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 carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its
deferred tax assets and has not provided an allowance. However, to the extent that the Company is unable to utilize such net
operating loss, it may have a material adverse effect on our financial condition and results of operations.
Financial
services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability
and reputational harm resulting from adverse regulatory actions.
Firms
in the financial services industry have been operating in a difficult regulatory environment which we expect will become even
more stringent in light of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced
increased scrutiny from a variety of regulators, including the SEC, the NYSE, FINRA and state attorneys general. Penalties and
fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement
environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial
services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in
the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services,
including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right
to carry on particular businesses. For example, a failure to comply with the obligations imposed by the Exchange Act on broker-dealers
and the Investment Advisers Act of 1940 on investment advisers, including record-keeping, advertising and operating requirements,
disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, could result in investigations,
sanctions and reputational damage. We also may be adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other U.S. or foreign governmental regulatory authorities or FINRA or other self-regulatory organizations
that supervise the financial markets. Substantial legal liability or significant regulatory action against us could have adverse
financial effects on us or cause reputational harm to us, which could harm our business prospects.
In
addition, financial services firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal
and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls
and procedures to address or limit actual or perceived conflicts and regularly review and update our policies, controls and procedures.
However, appropriately addressing conflicts of interest is complex and difficult and our reputation could be damaged if we fail,
or appear to fail, to appropriately address conflicts of interest. Our policies and procedures to address or limit actual or perceived
conflicts may also result in increased costs and additional operational personnel. Failure to adhere to these policies and procedures
may result in regulatory sanctions or litigation against us. For example, the research operations of investment banks have been
and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equity
research analysts and investment banking professionals at securities firms. Several securities firms in the U.S. reached a global
settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve
investigations into the alleged conflicts of interest of research analysts, which resulted in rules that have imposed additional
costs and limitations on the conduct of our business.
Asset
management businesses have experienced a number of highly publicized regulatory inquiries which have resulted in increased scrutiny
within the industry and new rules and regulations for mutual funds, investment advisors and broker-dealers. We are registered
as an investment advisor with the SEC and the regulatory scrutiny and rulemaking initiatives may result in an increase in operational
and compliance costs or the assessment of significant fines or penalties against our asset management business, and may otherwise
limit our ability to engage in certain activities. In addition, the SEC staff has conducted studies with respect to soft dollar
practices in the brokerage and asset management industries and proposed interpretive guidance regarding the scope of permitted
brokerage and research services in connection with soft dollar practices. The SEC staff has indicated that it is considering additional
rulemaking in this and other areas, and we cannot predict the effect that additional rulemaking may have on our asset management
or brokerage business or whether it will be adverse to us. In addition, Congress is currently considering imposing new requirements
on entities that securitize assets, which could affect our credit activities. It is impossible to determine the extent of the
impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance
with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct
business.
Financial
reforms and related regulations may negatively affect our business activities, financial position and profitability.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) instituted a wide range of reforms
that have impacted and will continue to impact financial services firms and continues to require significant rule-making. In
addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. The
legislation and regulation of financial institutions, both domestically and internationally, include calls to increase
capital and liquidity requirements; limit the size and types of the activities permitted; and increase taxes on some
institutions. FINRA’s oversight over broker-dealers and investment advisors may be expanded, and new regulations on
having investment banking and securities analyst functions in the same firm may be created. Many of the provisions of the
Dodd-Frank Act remain subject to further rule making procedures and studies and will continue to take effect over several
years. As a result, we cannot assess the full impact of all of these legislative and regulatory changes on our business at
the present time. However, these legislative and regulatory changes could affect our revenue, limit our ability to pursue
business opportunities, impact the value of assets that we hold, require us to change certain of our business practices,
impose additional costs on us, or otherwise adversely affect our businesses. If we do not comply with current or future
legislation and regulations that apply to our operations, we may be subject to fines, penalties or material restrictions on
our businesses in the jurisdiction where the violation occurred. Accordingly, such legislation or regulation could have an
adverse effect on our business, results of operations, cash flows or financial condition.
Our
failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.
As
we have expanded the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to
our and our funds’ and clients’ investment and other activities. Certain of our funds have overlapping investment
objectives, including funds which have different fee structures, and potential conflicts may arise with respect to our decisions
regarding how to allocate investment opportunities among ourselves and those funds. For example, a decision to acquire material
non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential
conflict of interest when it results in our having to restrict the ability of the Company or other funds to take any action.
In
addition, there may be conflicts of interest regarding investment decisions for funds in which our officers, directors and employees,
who have made and may continue to make significant personal investments in a variety of funds, are personally invested. Similarly,
conflicts of interest may exist or develop regarding decisions about the allocation of specific investment opportunities between
the Company and the funds.
We
also have potential conflicts of interest with our investment banking and institutional clients including situations where our
services to a particular client or our own proprietary or fund investments or interests conflict or are perceived to conflict
with a client. It is possible that potential or perceived conflicts could give rise to investor or client dissatisfaction or litigation
or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation
could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest.
Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation,
which would materially adversely affect our business in a number of ways, including as a result of redemptions by our investors
from our hedge funds, an inability to raise additional funds and a reluctance of counterparties to do business with us.
Our
exposure to legal liability is significant, and could lead to substantial damages.
We
face significant legal risks in our businesses. These risks include potential liability under securities laws and regulations
in connection with our capital markets, asset management and other businesses. The volume and amount of damages claimed in litigation,
arbitrations, regulatory enforcement actions and other adversarial proceedings against financial services firms have increased
in recent years. We also are subject to claims from disputes with our employees and our former employees under various circumstances.
Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown
for significant periods of time, making the amount of legal reserves related to these legal liabilities difficult to determine
and subject to future revision. Legal or regulatory matters involving our directors, officers or employees in their individual
capacities also may create exposure for us because we may be obligated or may choose to indemnify the affected individuals against
liabilities and expenses they incur in connection with such matters to the extent permitted under applicable law. In addition,
like other financial services companies, we may face the possibility of employee fraud or misconduct. The precautions we take
to prevent and detect this activity may not be effective in all cases and there can be no assurance that we will be able to deter
or prevent fraud or misconduct. Exposures from and expenses incurred related to any of the foregoing actions or proceedings could
have a negative impact on our results of operations and financial condition. In addition, future results of operations could be
adversely affected if reserves relating to these legal liabilities are required to be increased or legal proceedings are resolved
in excess of established reserves.
Misconduct
by our employees or by the employees of our business partners could harm us and is difficult to detect and prevent.
There
have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry
in recent years, and we run the risk that employee misconduct could occur at our firm. For example, misconduct could involve the
improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or
financial harm. It is not always possible to deter misconduct and the precautions we take to detect and prevent this activity
may not be effective in all cases. Our ability to detect and prevent misconduct by entities with which we do business may be even
more limited. We may suffer reputational harm for any misconduct by our employees or those entities with which we do business.
We
may not pay dividends regularly or at all in the future.
From
time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. Our
Board of Directors may reduce or discontinue dividends at any time for any reason it deems relevant and there can be no assurances
that we will continue to generate sufficient cash to pay dividends, or that we will continue to pay dividends with the cash that
we do generate. The determination regarding the payment of dividends is subject to the discretion of our Board of Directors, and
there can be no assurances that we will continue to generate sufficient cash to pay dividends, or that we will pay dividends in
future periods.
Security
breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and
reputation to suffer
.
In
the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business
information and that of our customers, clients and business partners, and personally identifiable information of our employees,
in our servers and on our networks. The secure processing, maintenance and transmission of this information is critical to our
operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable
to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our
networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or
other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal
information, and regulatory penalties. In addition, such a breach could disrupt our operations and the services we provide to
our clients, damage our reputation, and cause a loss of confidence in our services, which could adversely affect our business
and our financial condition.
We
may enter into new lines of business, make strategic investments or acquisitions or enter into joint ventures, each of which may
result in additional risks and uncertainties for our business.
We
may enter into new lines of business, make future strategic investments or acquisitions and enter into joint ventures. As we have
in the past, and subject to market conditions, we may grow our business by increasing assets under management in existing investment
strategies, pursue new investment strategies, which may be similar or complementary to our existing strategies or be wholly new
initiatives, or enter into strategic relationships, or joint ventures. In addition, opportunities may arise to acquire or invest
in other businesses that are related or unrelated to our current businesses.
To
the extent we make strategic investments or acquisitions, enter into strategic relationships or joint ventures or enter into new
lines of business, we will face numerous risks and uncertainties, including risks associated with the required investment of capital
and other resources and with combining or integrating operational and management systems and controls and managing potential conflicts.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which
we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues,
or produces investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will
be adversely affected, and our reputation and business may be harmed. In the case of joint ventures, we are subject to additional
risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to,
systems, controls and personnel that are not under our control.
Our
results of operations after the acquisitions of FBR and Wunderlich may be affected by factors different from those that affected
our independent results of our operations.
Our
business and the business of each of FBR and Wunderlich differ in certain respects and, accordingly, the results of operations
of the combined company and the market price of the combined company’s common shares may be affected by factors different
from those that affected our independent results of operations.
The
combined company may fail to realize the anticipated benefits of our acquisitions of FBR and Wunderlich.
The
success of the acquisitions of FBR and Wunderlich will depend on, among other things, the combined company’s ability to
combine the businesses of us, FBR and Wunderlich. If the combined company is not able to successfully achieve this objective,
the anticipated benefits of each merger may not be realized fully, or at all, or may take longer to realize than expected.
Prior
to the consummation of acquisitions, we and each of FBR and Wunderlich operated independently. It is possible that the integration
process or other factors could result in the loss or departure of key employees, the disruption of the ongoing business of us,
FBR or Wunderlich, or inconsistencies in standards, controls, procedures and policies. It is also possible that clients, customers
and counterparties of us, FBR or Wunderlich could choose to discontinue their relationships with the combined company because
they prefer doing business with an independent company or for any other reason, which would adversely affect the future performance
of the combined company. These transition matters could have an adverse effect on us for an undetermined amount of time after
the consummation of the acquisitions of FBR and Wunderlich.
We
may experience difficulties in realizing the expected benefits of the acquisition of UOL.
Our
ability to achieve the benefits we anticipate from the acquisition of UOL will depend in large part upon whether we are able
to achieve expected cost savings, manage UOL’s business and execute our strategy in an efficient and effective
manner. Because our business and the business of UOL differ, we may not be able to manage UOL’s business smoothly
or successfully and the process of achieving expected cost savings may take longer than expected. If we are unable to manage
the operations of UOL’s business successfully, we may be unable to realize the cost savings and other anticipated
benefits we expect to achieve as a result of the UOL acquisition. As a result, our business and results of operations could
be adversely affected and the market price of our common stock could be negatively impacted.
UOL
competes against large companies, many of whom have significantly more financial and marketing resources, and our business will
suffer if we are unable to compete successfully.
UOL
competes with numerous providers of broadband, mobile broadband and DSL services, as well as other dial-up Internet access providers,
many of whom are large and have significantly more financial and marketing resources. The principal competitors for UOL’s
mobile broadband and DSL services include, among others, local exchange carriers, wireless and satellite service providers, and
cable service providers. These competitors include established providers such as AT&T, Verizon, Sprint, and T-Mobile. UOL’s
principal dial-up Internet access competitors include established online service and content providers, such as AOL and MSN, and
independent national Internet service providers, such as EarthLink and its PeoplePC subsidiary. Dial-up Internet access services
do not compete favorably with broadband services with respect to connection speed and do not have a significant, if any, price
advantage over certain broadband services. In addition, there are a number of mobile virtual network operators, some of which
focus on pricing as their main selling point. Certain portions of the U.S., primarily rural areas, currently have limited or no
access to broadband services. However, the U.S. government has indicated its intention to facilitate the provision of broadband
services to such areas. Such expansion of the availability of broadband services will increase the competition for Internet access
subscribers in such areas and will likely adversely affect the UOL business. In addition to competition from broadband, mobile
broadband, and DSL providers, competition among dial-up Internet access service providers is intense and neither UOL’s pricing
nor the features of UOL’s services provides us with a significant competitive advantage, if any, over certain of UOL’s
dial-up Internet access competitors. We expect that competition, particularly with respect to price, for broadband, mobile broadband,
and DSL services, as well as dial-up Internet access services, will continue and may materially and adversely impact our business,
financial condition, results of operations, and cash flows.
Dial-up
and DSL pay accounts may decline faster than expected and adversely impact our business.
A
significant portion of UOL’s revenues and profits come from dial-up Internet and DSL access services and related services
and advertising revenues. UOL’s dial-up and DSL Internet access pay accounts and revenues have been declining and are expected
to continue to decline due to the continued maturation of the market for dial-up and DSL Internet access, competitive pressures
in the industry and limited sales efforts. Consumers continue to migrate to broadband access, primarily due to the faster connection
and download speeds provided by broadband access. Advanced applications such as online gaming, music downloads and videos require
greater bandwidth for optimal performance, which adds to the demand for broadband access. The pricing for basic broadband services
has been declining as well, making it a more viable option for consumers. In addition, the popularity of accessing the Internet
through tablets and mobile devices has been growing and may accelerate the migration of consumers away from dial-up Internet access.
The number of dial-up Internet access pay accounts has been adversely impacted by both a decrease in the number of new pay accounts
signing up for UOL’s services, as well as the impact of subscribers canceling their accounts, which we refer to as “churn.”
Churn has increased from time to time and may increase in the future. If we experience a higher than expected level of churn,
it will make it more difficult for us to increase or maintain the number of pay accounts, which could adversely affect our business,
financial condition, results of operations, and cash flows.
We
expect UOL’s dial-up and DSL Internet access pay accounts to continue to decline. As a result, related services revenues
and the profitability of this segment may decline. The rate of decline in these revenues may continue to accelerate.
We
may not be able to consistently make a high level of expense reductions in the future. Continued declines in revenues relating
to the UOL business, particularly if such declines accelerate, will materially and adversely impact the profitability of this
business.
Failure
to maintain or grow advertising revenues from UOL, including as a result of failing to increase or maintain the number of subscribers
for UOL’s services, could have a negative impact on advertising profitability.
Advertising
revenues are a key component of revenues and profitability from UOL. UOL’s services currently generate advertising revenues
from search placements, display advertisements and online market research associated with Internet access and email services.
Factors that have caused, or may cause in the future, UOL’s advertising revenues to fluctuate include, without limitation,
changes in the number of visitors to UOL’s websites, active accounts or consumers purchasing our services and products,
the effect of, changes to, or terminations of key advertising relationships, changes to UOL’s websites and advertising inventory,
changes in applicable laws, regulations or business practices, including those related to behavioral or targeted advertising,
user privacy, and taxation, changes in business models, changes in the online advertising market, changes in the economy, advertisers’
budgeting and buying patterns, competition, and changes in usage of UOL’s services. Decreases in UOL’s advertising
revenues are likely to adversely impact our profitability. Further, our successful operation and management of UOL, including
the ability to generate advertising revenues for UOL’s services, will depend in part upon our ability to increase or maintain
the number of subscribers for UOL’s services. A decline in the number of subscribers using UOL’s services could result
in decreased advertising revenues, and decreases in advertising revenues would adversely impact our profitability. The failure
to increase or maintain the number of subscribers for UOL’s services could have a material adverse effect on advertising
revenues and our profitability.
Interruption
or failure of the network, information systems or other technologies essential to the UOL business could impair our ability to
provide services relating to the UOL business, which could damage our reputation and harm our operating results.
Our
successful operation of the UOL business depends on our ability to provide reliable service. Many of UOL’s products are
supported by data centers. UOL’s network, data centers, central offices and those of UOL’s third-party service providers
are vulnerable to damage or interruption from fires, earthquakes, hurricanes, tornados, floods and other natural disasters, terrorist
attacks, power loss, capacity limitations, telecommunications failures, software and hardware defects or malfunctions, break ins,
sabotage and vandalism, human error and other disruptions that are beyond our control. Some of the systems serving the UOL business
are not fully redundant, and our disaster recovery or business continuity planning may not be adequate. The UOL business could
also experience interruptions due to cable damage, theft of equipment, power outages, inclement weather and service failures of
third-party service providers. The occurrence of any disruption or system failure or other significant disruption to business
continuity may result in a loss of business, increase expenses, damage to reputation for providing reliable service, subject us
to additional regulatory scrutiny or expose us to litigation and possible financial losses, any of which could adversely affect
our business, results of operations and cash flows.
We
may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit
our ability to use certain technologies in the future.
From
time to time third parties have alleged that UOL infringes on their intellectual property rights, including patent rights. We
may be unaware of filed patent applications and of issued patents that could be related to the products and services we acquired
in the UOL acquisition. These claims are often made by patent holding companies that are not operating companies. The alleging
parties generally seek royalty payments for prior use as well as future royalty streams. Defending against disputes, litigation
or other legal proceedings, whether or not meritorious, may involve significant expense and diversion of management’s attention
and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions. Both the
costs of defending lawsuits and any settlements or judgments against us could adversely affect our results of operations and cash
flows.
If
there are events or circumstances affecting the reliability or security of the Internet, access to the websites related to the
UOL business and/or the ability to safeguard confidential information could be impaired causing a negative effect on the financial
results of our business operations.
Our
website infrastructure and the website infrastructure of UOL may be vulnerable to computer viruses, hacking or similar disruptive
problems caused by customers, other Internet users, other connected Internet sites, and the interconnecting telecommunications
networks. Such problems caused by third-parties could lead to interruptions, delays or cessation of service to the customers of
the UOL products and services. Inappropriate use of the Internet by third-parties could also potentially jeopardize the security
of confidential information stored in our computer system, which may deter individuals from becoming customers. There can be no
assurance that any such measures would not be circumvented in future. Dealing with problems caused by computer viruses or other
inappropriate uses or security breaches may require interruptions, delays or cessation of service to customers, which could have
a material adverse effect on our business, financial condition and results of operations.
The
UOL business processes, stores and uses personal information and other data, which subjects us to governmental regulation and
other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our
business.
The
UOL business receives, stores and processes personal information and other customer data, and UOL enables customers to share their
personal information with each other and with third parties. There are numerous federal, state and local laws around the world
regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other customer
data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict
with other rules. We will generally comply with industry standards and are and will be subject to the terms of privacy policies
and privacy-related obligations to third parties. We will strive to comply with all applicable laws, policies, legal obligations
and industry codes of conduct relating to privacy and data protection, to the extent possible. However, it is possible that these
obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict
with other rules or UOL’s practices. Any failure or perceived failure to comply with UOL’s privacy policies, privacy-related
obligations to customers or other third parties, or privacy-related legal obligations, or any compromise of security that results
in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmental
enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause customers
to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as
customers, vendors or developers, violate applicable laws or policies, such violations may also put our customers’ information
at risk and could in turn have an adverse effect on our business.
Our
marketing efforts for UOL’s business may not be successful or may become more expensive, either of which could increase
our costs and adversely impact our business, financial condition, results of operations, and cash flows.
We
rely on relationships for our UOL business with a wide variety of third parties, including Internet search providers such as Google,
social networking platforms such as Facebook, Internet advertising networks, co-registration partners, retailers, distributors,
television advertising agencies, and direct marketers, to source new members and to promote or distribute our services and products.
In addition, in connection with the launch of new services or products for our UOL business, we may spend a significant amount
of resources on marketing. With any of our brands, services, and products, if our marketing activities are inefficient or unsuccessful,
if important third-party relationships or marketing strategies, such as Internet search engine marketing and search engine optimization,
become more expensive or unavailable, or are suspended, modified, or terminated, for any reason, if there is an increase in the
proportion of consumers visiting our websites or purchasing our services and products by way of marketing channels with higher
marketing costs as compared to channels that have lower or no associated marketing costs, or if our marketing efforts do not result
in our services and products being prominently ranked in Internet search listings, our business, financial condition, results
of operations, and cash flows could be materially and adversely impacted.
Our
UOL business is dependent on the availability of telecommunications services and compatibility with third-party systems and products.
Our
UOL business substantially depends on the availability, capacity, affordability, reliability, and security of our telecommunications
networks. Only a limited number of telecommunications providers offer the network and data services we currently require for our
UOL business, and we purchase most of our telecommunications services from a few providers. Some of our telecommunications services
are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, some telecommunications
providers may cease to offer network services for certain less populated areas, which would reduce the number of providers from
which we may purchase services and may entirely eliminate our ability to purchase services for certain areas. Currently, our mobile
broadband service of our UOL business is entirely dependent upon services acquired from one service provider, and the devices
required by the provider can be used for only such provider’s service. If we are unable to maintain, renew or obtain a new
agreement with the telecommunications provider on acceptable terms, or the provider discontinues its services, our business, financial
condition, results of operations, and cash flows could be materially and adversely affected. Sprint, which owns Clearwire, ceased
using WiMAX technology on the Clearwire network. This affected our mobile broadband subscribers for our UOL business that utilized
the Clearwire network.
Our
dial-up Internet access services of our UOL business also rely on their compatibility with other third-party systems, products
and features, including operating systems. Incompatibility with third-party systems and products could adversely affect our ability
to deliver our services or a user’s ability to access our services and could also adversely impact the distribution channels
for our services. Our dial-up Internet access services are dependent on dial-up modems and an increasing number of computer manufacturers,
including certain manufacturers with whom we have distribution relationships, do not pre-load their new computers with dial-up
modems, requiring the user to separately acquire a modem to access our services. We cannot assure you that, as the dial-up Internet
access market declines and new technologies emerge, we will be able to continue to effectively distribute and deliver our services.
Government
regulations could adversely affect our business or force us to change our business practices .
The
services that are provided by UOL are subject to varying degrees of international, federal, state and local laws and regulation,
including, without limitation, those relating to taxation, bulk email or “spam,” advertising (including, without limitation,
targeted or behavioral advertising), user privacy and data protection, consumer protection, antitrust, export, and unclaimed property
. Compliance with such laws and regulations, which in many instances are unclear or unsettled, is complex. New laws and regulations,
such as those being considered or recently enacted by certain states, the federal government, or international authorities related
to automatic-renewal practices, spam, user privacy, targeted or behavioral advertising, and taxation, could impact our revenues
or certain of our business practices or those of our advertisers.
UOL
resells broadband Internet access services offered by other parties pursuant to wholesale agreements with those providers. In
an order released in March 2015, the Federal Communications Commission (the “FCC”) classified retail broadband Internet
access services as telecommunications services subject to regulation under Title II of the Communications Act. That ruling is
subject to a pending appeal. The classification of retail broadband Internet access services as telecommunications services means
that providers of these services are subject to the general requirement that their charges, practices and classifications for
telecommunications services be “just and reasonable,” and that they refrain from engaging in any “unjust or
unreasonable discrimination” with respect to their charges, practices or classifications. However, the FCC has not determined
what, if any, regulations will apply to wholesale broadband Internet access services, and it is uncertain whether it will adopt
requirements that will be favorable or unfavorable to us. It is also possible that the classification of retail broadband Internet
access services will be overturned on appeal, that Congress will adopt legislation reversing that decision, or that a future FCC
will reverse that decision.
Broadband
Internet access is also currently classified as an “information service.” While current policy exempts broadband Internet
access services (but not all broadband services) from contributing to the Universal Service Fund (“USF”), Congress
and the FCC may consider expanding the USF contribution base to include broadband Internet access services. If broadband Internet
access providers become subject to USF contribution obligations, they would likely impose a USF surcharge on end users. Such a
surcharge will raise the effective cost of our broadband services to UOL’s customers, which could adversely affect customer
satisfaction and have an adverse impact on our revenues and profitability.
Failure
to make proper payments for federal USF contributions, FCC regulatory fees or other amounts mandated by federal and state regulations;
failure to maintain proper state tariffs and certifications; failure to comply with federal, state or local laws and regulations;
failure to obtain and maintain required licenses, franchises and permits; imposition of burdensome license, franchise or permit
requirements for us to operate in public rights-of-way; and imposition of new burdensome or adverse regulatory requirements could
limit the types of services we provide or the terms on which we provide these services.
We
cannot predict the outcome of any ongoing legislative initiatives or administrative or judicial proceedings or their potential
impact upon the communications and information technology industries generally or upon the UOL business specifically. Any changes
in the laws and regulations applicable to UOL, the enactment of any additional laws or regulations, or the failure to comply with,
or increased enforcement activity by regulators of, such laws and regulations, could significantly impact our services and products,
our costs, or the manner in which we or our advertisers conduct business, all of which could adversely impact our business, financial
condition, results of operations, and cash flows and cause our business to suffer.
The
FCC and some states require us to obtain prior approval of certain major merger and acquisition transactions, such as the acquisition
of control of another telecommunications carrier. Delays in obtaining such approvals could affect our ability to close proposed
transactions in a timely manner, and could increase our costs and increase the risk of non-consummation of some transactions.
We
manage debt investments that involve significant risks and potential additional liabilities.
GACP
I., L.P., a direct lending fund of which our wholly owned subsidiary GACP is the general partner, may invest in secured debt issued
by companies that have or may incur additional debt that is senior to the secured debt owned by the fund. In the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of any such company, the owners of senior secured debt
(i.e.,
the
owners of first priority liens) generally will be entitled to receive proceeds from any realization of the secured collateral
until they have been reimbursed. At such time, the owners of junior secured debt (including, in certain circumstances, the fund)
will be entitled to receive proceeds from the realization of the collateral securing such debt. There can be no assurances that
the proceeds, if any, from the sale of such collateral would be sufficient to satisfy the loan obligations secured by subordinate
debt instruments. To the extent that the fund owns secured debt that is junior to other secured debt, the fund may lose the value
of its entire investment in such secured debt.
In
addition, the fund may invest in loans that are secured by a second lien on assets. Second lien loans have been a developed market
for a relatively short period of time, and there is limited historical data on the performance of second lien loans in adverse
economic circumstances. In addition, second lien loan products are subject to intercreditor arrangements with the holders of first
lien indebtedness, pursuant to which the second lien holders have waived many of the rights of a secured creditor, and some rights
of unsecured creditors, including rights in bankruptcy, which can materially affect recoveries. While there is broad market acceptance
of some second lien intercreditor terms, no clear market standard has developed for certain other material intercreditor terms
for second lien loan products. This variation in key intercreditor terms may result in dissimilar recoveries across otherwise
similarly situated second lien loans in insolvency or distressed situations. While uncertainty of recovery in an insolvency or
distressed situation is inherent in all debt instruments, second lien loan products carry more risks than certain other debt products.
Our
level of indebtedness, and restrictions under such indebtedness, could adversely affect our operations and liquidity
In
December 2017, we completed an offering of 7.25% Senior Notes due 2027 with an aggregate principal amount of $80.5 million.
In May 2017, we completed an offering of 7.50% Senior Notes due 2027 with an aggregate principal amount of $60.4 million. In
November 2016 we completed an offering of 7.50% Senior Notes due 2021 with an aggregate principal amount of $28.8 million. In
2017, we also entered into an At Market Issuance Sales Agreement with B. Riley FBR to sell additional 7.50% Senior Notes due
2027 and 7.50% Senior Notes due 2021, under which agreement we sold $32.1 million in aggregate principal amount of 7.50%
Senior Notes due 2027 and $6.5 million in aggregate principal amount of 7.50% Senior Notes due 2021 as of December 31, 2017.
On December 18, 2017, we entered into an At Market Issuance Sales Agreement with B. Riley FBR to issue up to an additional
aggregate principal amount of $19.0 million of additional 7.25% Senior Notes due 2027, 7.50% Senior Notes due 2027 and 7.50%
Senior Notes due 2021. The terms of such indebtedness contain various restrictions and covenants regarding the operation of
our business, including, but not limited to, restrictions on our ability to merge or consolidate with or into any other
entity. In April 2017, we amended our Credit Agreement with Wells Fargo Bank (the “Wells Fargo Credit Agreement”)
to increase our retail liquidation line of credit from $100 million to $200 million and we also entered into a credit
agreement with the Banc of California that provides for a revolving credit facility under which UOL may borrow (or request
the issuance of letters of credit) up to $20 million. We may also secure additional debt financing in the future in addition
to our current debt. Our level of indebtedness generally could adversely affect our operations and liquidity, by, among other
things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic and
industry conditions because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use
a larger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund
working capital, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage
of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to
changes in market or industry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund
working capital, capital expenditures, acquisitions and other general corporate purposes as and when needed, which could
force us to suspend, delay or curtail business prospects, strategies or operations. We may not be able to generate sufficient
cash flow to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to
pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to
delay or curtail our operations. If we are unable to service our indebtedness, we will be forced to adopt an alternative
strategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our
indebtedness or seeking additional equity capital. These alternative strategies may not be affected on satisfactory terms, if
at all, and they may not yield sufficient funds to make required payments on our indebtedness. If, for any reason, we are
unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing
our debt, which could allow our creditors at that time to declare certain outstanding indebtedness to be due and payable or
exercise other available remedies, which may in turn trigger cross acceleration or cross default rights in other agreements.
If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new
financing were then available, it may not be on terms that are acceptable to us.
Risks
Related to the Acquisition of magicJack
Our
results of operations after the acquisition of magicJack may be affected by factors different from those currently affecting the
results of our operations.
Our
business and the business of magicJack differ in certain respects and, accordingly, the results of operations of the combined
company and the market price of the combined company’s common shares may be affected by factors different from those currently
affecting our independent results of operations.
Regulatory
approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot
be met.
Before
the transactions contemplated by the Agreement and Plan of Merger with magicJack, including the magicJack Merger, may be completed,
various approvals must be obtained from governmental authorities, including the expiration of the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. These authorities may impose conditions on the granting
of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying
completion of the magicJack Merger or of imposing additional costs or limitations on the combined company following the magicJack
Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, and may contain conditions
on the completion of the magicJack Merger that are not anticipated or cannot be met. If the consummation of the magicJack Merger
is delayed, including by a delay in receipt of necessary governmental approvals, the business, financial condition and results
of operations of each company may also be materially adversely affected.
The
magicJack Merger is subject to certain closing conditions that, if not satisfied or waived, will result in such magicJack Merger
not being completed, which may cause the prices of our common shares to decline.
The
magicJack Merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approval
of each party’s shareholders of certain merger-related proposals. If any condition to the magicJack Merger is not satisfied
or waived, to the extent permitted by law, such merger will not be completed. In addition, magicJack may terminate the Agreement
and Plan of Merger under certain circumstances even if such agreement is approved by its shareholders. If we and magicJack do
not complete the magicJack Merger, the trading price of our common shares may decline. In addition, we would not realize any of
the expected benefits of having completed such merger. If the magicJack Merger is not completed, additional risks could materialize,
which could materially and adversely affect our business, financial condition and results.
We
and magicJack will be subject to business uncertainties and contractual restrictions while the magicJack Merger is pending.
Uncertainty
about the effect of the magicJack Merger on employees, customers and vendors may have an adverse influence on the business, financial
condition and results of operations of magicJack and us. These uncertainties may impair magicJack’s or our ability to attract,
retain and motivate key personnel pending the consummation of the magicJack Merger, as such personnel may experience uncertainty
about their future roles following the consummation of such merger. Additionally, these uncertainties could cause self-regulatory
organizations, customers, clearing brokers, suppliers, vendors and others who deal with magicJack or us to seek to change existing
business relationships with magicJack, us or the combined company or fail to extend an existing relationship with magicJack, us
or the combined company.
In
addition, the Agreement and Plan of Merger restricts magicJack and us, as applicable, from taking certain actions without the
other’s party’s consent while such merger is pending. These restrictions could have a material adverse effect on magicJack’s
or our business, financial condition and results of operations.
The
combined company may fail to realize the anticipated benefits of the magicJack Merger.
The
success of the magicJack Merger will depend on, among other things, the combined company’s ability to combine the businesses
of us and magicJack. If the combined company is not able to successfully achieve this objective, the anticipated benefits of the
magicJack Merger may not be realized fully, or at all, or may take longer to realize than expected.
We and magicJack have operated
and, until the consummation of the magicJack Merger, will continue to operate independently. It is possible that the integration
process or other factors could result in the loss or departure of key employees, the disruption of our or magicJack’s ongoing
business, or inconsistencies in standards, controls, procedures and policies. It is also possible that clients, customers and
counterparties of us or magicJack could choose to discontinue their relationships with the combined company because they prefer
doing business with an independent company or for any other reason, which would adversely affect the future performance of the
combined company. These transition matters could have an adverse effect on each of us and magicJack during the pre-merger period
and for an undetermined amount of time after the consummation of the magicJack Merger.
Item
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. PROPERTIES
Our
headquarters are located in Woodland Hills, California in a leased facility. The following table sets forth the location and use
of each of our properties, all of which are leased as of December 31, 2017.
Location
|
|
Use
|
Woodland
Hills, California
|
|
Headquarters;
Accounting, Information Technology and Human Resources offices; Appraisal, Auction and Liquidation and United Online offices
|
Atlanta,
Georgia
|
|
Appraisal,
Capital Markets offices
|
Chicago,
Illinois
|
|
Appraisal,
Capital Markets offices
|
Dallas,
Texas
|
|
Appraisal,
Auction & Liquidation, Capital Markets
|
Jupiter,
Florida
|
|
Appraisal
offices
|
Milwaukee,
Wisconsin
|
|
Appraisal
offices
|
Needham,
Massachusetts
|
|
Appraisal
offices
|
Winston-Salem,
North Carolina
|
|
Appraisal
offices
|
New
York, New York
|
|
Appraisal,
Capital Markets, Wealth Management, and Legal offices
|
Toledo,
Ohio
|
|
Appraisal
offices
|
Sydney,
Australia
|
|
Auction
& Liquidation offices
|
Arlington,
Virginia
|
|
Capital
Markets offices
|
Baltimore,
Maryland
|
|
Capital
Markets offices
|
Basel,
Switzerland
|
|
Capital
Markets offices
|
Beachwood,
Ohio
|
|
Capital
Markets offices
|
Birmingham,
Michigan
|
|
Capital
Markets offices
|
Boston,
Massachusetts
|
|
Capital
Markets offices
|
Brighton,
Michigan
|
|
Capital
Markets offices
|
Charlotte,
North Carolina
|
|
Capital
Markets offices
|
Coral
Gables, Florida
|
|
Capital
Markets offices
|
Costa
Mesa, California
|
|
Capital
Markets offices
|
Dubuque,
Iowa
|
|
Capital
Markets offices
|
East
Lansing, Michigan
|
|
Capital
Markets offices
|
Fort
Lauderdale, Florida
|
|
Capital
Markets offices
|
Franklin,
Tennessee
|
|
Capital
Markets offices
|
Great
Neck, New York
|
|
Capital
Markets offices
|
Houston,
Texas
|
|
Capital
Markets offices
|
Lafayette,
Louisiana
|
|
Capital
Markets offices
|
Los
Angeles, California
|
|
Capital
Markets offices
|
Memphis,
Tennessee
|
|
Capital
Markets offices
|
Mobile,
Alabama
|
|
Capital
Markets offices
|
Nashville,
Tennessee
|
|
Capital
Markets offices
|
Newport
Beach, CA
|
|
Capital
Markets offices
|
Norwalk,
Connecticut
|
|
Capital
Markets, Wealth Management offices
|
Palatine,
Illinois
|
|
Capital
Markets offices
|
Parsippany,
New Jersey
|
|
Capital
Markets offices
|
Plymouth,
Michigan
|
|
Capital
Markets offices
|
Richmond,
Virginia
|
|
Capital
Markets offices
|
Rye
Brook, New York
|
|
Capital
Markets offices
|
San
Francisco, California
|
|
Capital
Markets offices
|
St.
Charles, Illinois
|
|
Capital
Markets offices
|
St.
Louis, Missouri
|
|
Capital
Markets offices
|
Tulsa,
Oklahoma
|
|
Capital
Markets offices
|
Wilton,
Connecticut
|
|
Capital
Markets offices
|
Munich,
Germany
|
|
Retail
offices
|
Hyderabad,
India
|
|
United
Online offices
|
We
believe that our existing facilities are suitable and adequate for the business conducted therein, appropriately used and have
sufficient capacity for their intended purpose.
Item
3. LEGAL PROCEEDINGS
The
Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company
and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business
activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial
compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations,
and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments,
settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against our company,
the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation
and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding
this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial
position or results of operations.
In
2012, Gladden v. Cumberland Trust, WSI, et al. filed a complaint in Circuit Court, Hamblen County, TN at Morristown, Case No.
12-CV-119. This complaint alleges the improper distribution and misappropriation of trust funds. The plaintiff seeks damages of
no less than $3.9 million, an accounting, and among other things, punitive damages. In October 2017, the Tennessee Supreme Court
remanded the case to the Tennessee State Trial Court for determination of which claims are subject to arbitration and which are
not. At the present time, the financial impact to the Company, if any, cannot be estimated.
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 $10.0 million in damages. In December 2017, the parties settled
the matter and the financial impact to the Company was not material .
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”). B. Riley FBR, Inc.
(“B. Riley FBR”) (formerly, 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 an opening brief on June 21, 2017. Defendant’s opposition motion was filed on
September 12, 2017. Appellants filed their reply brief on October 17, 2017 and oral argument was held on November 17, 2017.
On January 26, 2018, the Appellate court issued its order affirming the court’s order dismissing the plantiff’s
case and denying leave to amend. Regional Management continues to indemnify all of the underwriters, including FBRCM, pursuant
to the operative underwriting agreement.
On
January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary
of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings
of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor
v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor
complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material
misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February
13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged
aggregate offering price of approximately $151.0 million. The plaintiffs seek unspecified compensatory damages and reimbursement
of certain costs and expenses. In August 2017, the Court granted Defendant’s Motion to Dismiss on Section 12 claims and
found that the plaintiffs had not sufficiently alleged a corrective disclosure prior to August 6, 2015, when an SEC civil action
was announced. Defendants’ answer was filed on September 25, 2017. 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.
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 $10.0
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
March 2017, United Online, Inc. received a letter from PeopleConnect, Inc. (formerly, Classmates, Inc.) (“Classmates”)
regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of
four California counties (“California DAs”). These entities suggest that Classmates may be in violation of California
codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices. Classmates asserts that these
claims are indemnifiable claims under the purchase agreement between United Online, Inc. and the buyer of Classmates. A tolling
agreement with the California DAs has been signed and informal discovery and production is in process. At the present time, the
financial impact to the Company, if any, cannot be estimated.
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 $8.0
million plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend the action.
In
September 2017, a statement of claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting
of the now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum”). Claimants are seeking $37.0 million
in actual damages, plus $75.0 million in punitive damages and attorney’s fees. On October 24, 2017, we joined in a motion
with the other underwriters requesting that the claim be dismissed on the grounds that it is improper under FINRA Rules 12204
and 122205 which prohibit class actions and derivative claims, respectively. On December 1, 2017, the claims were dismissed by
FINRA.
Item
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO 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.
On
November 9, 2017, the Company entered into an Agreement and Plan of Merger with B. R. Acquisition Ltd., an Israeli corporation
and wholly-owned subsidiary of the Company (“Merger Sub”), and magicJack VocalTec Ltd., an Israeli corporation (“magicJack”),
pursuant to which Merger Sub will merge with and into magicJack, with magicJack continuing as the surviving corporation and as
an indirect subsidiary of the Company. Subject to the terms and conditions of the Agreement and Plan of Merger, each outstanding
share of magicJack will be converted into the right to receive $8.71 in cash without interest, representing approximately $143,500
in aggregate merger consideration. The closing of the transaction is subject to the receipt of certain regulatory approvals, the
approval of the magicJack shareholder’s and the satisfaction of other closing conditions. It is anticipated that the acquisition
of magicJack will close in the first half of 2018.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Principles of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries.
The 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.
All intercompany accounts and transactions have been eliminated upon consolidation. 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.
The
accounting guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest
or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether
an enterprise is the primary beneficiary of a VIE; to eliminate the solely quantitative approach previously required for determining
the primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any
changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting
rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s
economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent
information about an enterprise’s involvement in a VIE.
(b)
Use of Estimates
The
preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United
States of American (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the 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, 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.
(c)
Revenue Recognition
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
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 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.
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 consolidated
statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs.
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 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.
Fees
earned from the origination of loans where the Company provides capital advisory services are recognized in the period earned,
if the fee is fixed and determinable and collection is reasonably assured.
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 of 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 consolidated balance sheet 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.
In
the normal course of business, the Company will enter into collaborative arrangements with other merchandise liquidators to collaboratively
execute auction and liquidation contracts. The Company’s collaborative arrangements specifically include contractual agreements
with other liquidation agents in which the Company and such other liquidation agents actively participate in the performance of
the liquidation services and are exposed to the risks and rewards of the liquidation engagement. The Company’s participation
in collaborative arrangements including its rights and obligations under each collaborative arrangement can vary. Revenues from
collaborative arrangements are recorded net based on the proceeds received from the liquidation engagement. Amounts paid to participants
in the collaborative arrangements are reported separately as direct costs of revenues. Revenue from collaborative arrangements
in which the Company is not the majority participant is recorded net based on the Company’s share of proceeds received.
There were no revenues and direct cost of services subject to collaborative arrangements during the year ended December 31, 2017,
2016 and 2015.
(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 13.5% of total revenues during the year ended December 31, 2016.
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.
(g)
Advertising Expense
The
Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled
$1,312, $1,456 and $519 for the years ended December 31, 2017, 2016 and 2015, respectively. Advertising expense is included as
a component of selling, general and administrative expenses in the accompanying consolidated statements of income.
(h)
Share-Based Compensation
The
Company’s share based payment awards principally consist of grants of restricted stock and restricted stock units. Share
based payment awards also includes grants of membership interests in the Company’s majority owned subsidiaries. The grants
of membership interests consist of percentage interests in the Company’s majority owned subsidiaries as determined at the
date of grant. 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 consolidated statement 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.
(i)
Income Taxes
The
Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the 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.
The
Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate
tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that
were previously tax deferred, provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and
creates new taxes on certain foreign sourced earnings. As of the completion of these financial statements and related disclosures,
we have not completed our accounting for the tax effects of the Tax Act; however, as described below, we have made a reasonable
estimate of such effects and recorded a provisional tax expense of $13,052, which is included as a component of income tax expense
in the fourth quarter of 2017. This provisional tax expense incorporates assumptions made based upon the Company’s current
interpretation of the Tax Act, and may change as we receive additional clarification and implementation guidance and as the interpretation
of the Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for
the effects of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be
reported as a component of income tax expense from continuing operations in the reporting period in which any such adjustments
are determined. See Note 13 for additional information.
(j)
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
(k)
Restricted Cash
As
of December 31, 2017, restricted cash of $19,711 included $19,197 of cash collateral related to certain retail liquidation engagements
and $514 cash segregated in a special bank accounts for the benefit of customers related to our broker dealer subsidiary and collateral
for one of our telecommunication suppliers. As of December 31, 2016, restricted cash 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 accounts for the benefit of customers related to our broker dealer subsidiary and collateral for
one of our telecommunication suppliers.
(l) 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 Codification (“ASC”)
“Topic 210: Balance Sheet,”
which requires companies to report disclosures of offsetting assets and liabilities.
The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed
consolidated balance sheets.
(m) Due
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.
(n)
Accounts Receivable
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. The Company’s bad debt expense totaled $1,066,
$710 and $718 for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included as a component of
selling, general and administrative expenses in the accompanying consolidated statement of operations.
(o)
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.
(p)
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. Property and equipment under capital leases were stated at the present
value of minimum lease payments.
(q)
Securities Owned and Securities Sold Not Yet Purchased
Securities
owned consists 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 December 31, 2017 and 2016, the Company’s securities owned and securities sold not yet purchased at fair value consisted
of the following:
|
|
December
31,
2017
|
|
|
December
31,
2016
|
|
Securities
and other investments owned:
|
|
|
|
|
|
|
|
|
Common
stocks and warrants
|
|
$
|
67,306
|
|
|
$
|
2,084
|
|
Corporate
bonds
|
|
|
6,539
|
|
|
|
1,025
|
|
Fixed
income securities
|
|
|
2,329
|
|
|
|
—
|
|
Loans
receivable
|
|
|
33,713
|
|
|
|
—
|
|
Partnership
interests and other
|
|
|
35,473
|
|
|
|
13,470
|
|
|
|
$
|
145,360
|
|
|
$
|
16,579
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased:
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
19,145
|
|
|
$
|
—
|
|
Corporate
bonds
|
|
|
1,175
|
|
|
|
846
|
|
Fixed
income securities
|
|
|
699
|
|
|
|
—
|
|
Partnership
interests and other
|
|
|
7,272
|
|
|
|
—
|
|
|
|
$
|
28,291
|
|
|
$
|
846
|
|
(r)
Goodwill and Other Intangible Assets
The
Company accounts for goodwill and intangible assets in accordance with the accounting guidance which requires that goodwill and
other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate
that the fair value of an asset has decreased below its carrying value.
Goodwill
includes the excess of the purchase price over the fair value of net assets acquired in a business combination. ASC requires that
goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment). Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities
to reporting units, assigning goodwill to reporting units, and determining the fair value. The Company operates four reporting
units, which are the same as its reporting segments described in Note 20. Significant judgment is required to estimate the fair
value of reporting units which includes estimating future cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment.
When
testing goodwill for impairment, the Company may assess qualitative factors for some or all of our reporting units to determine
whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is
less than its carrying amount, including goodwill. Alternatively, the Company may bypass this qualitative assessment for some
or all of our reporting units and perform a detailed quantitative test of impairment (step 1). If the Company performs the detailed
quantitative impairment test and the carrying amount of the reporting unit exceeds its fair value, the Company would perform an
analysis (step 2) to measure such impairment. Based on the Company’s qualitative assessments during 2017, the Company concluded
that a positive assertion can be made from the qualitative assessment that it is more likely than not that the fair value of the
reporting units exceeded their carrying values and no impairments were identified.
The
Company reviews the carrying value of its amortizable intangibles and other long-lived assets for impairment at least annually
or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that
the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds
its fair market value. No impairment was deemed to exist as of December 31, 2017.
(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 and preferred
stocks and warrants, corporate bonds, loans receivable and investments in partnerships. Investments in common stocks that are
based on quoted prices in active markets are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic
common and preferred stocks and warrants for which there is little or no public market and fair value is determined by management
on a consistent basis. For investments where little or no public market exists, management’s determination of fair value
is based on the best available information which may incorporate management’s own assumptions and involves a significant
degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices
of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments
in partnership interests include investments in private equity partnerships that primarily invest in equity securities, bonds,
and direct lending funds. The Company’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 certain 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 ASC
“Topic 820: Fair Value Measurements,”
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 December 31, 2017 and 2016.
|
|
Financial
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2017, Using
|
|
|
|
Fair
value at December 31,
2017
|
|
|
Quoted prices 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
|
|
$
|
67,306
|
|
|
$
|
38,960
|
|
|
$
|
—
|
|
|
$
|
28,346
|
|
Corporate
bonds
|
|
|
6,539
|
|
|
|
—
|
|
|
|
6,539
|
|
|
|
—
|
|
Fixed
income securities
|
|
|
2,329
|
|
|
|
—
|
|
|
|
2,329
|
|
|
|
—
|
|
Loans
receivable
|
|
|
33,713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,713
|
|
Partnership
interests and other
|
|
|
31,883
|
|
|
|
686
|
|
|
|
5,093
|
|
|
|
26,104
|
|
Total
assets measured at fair value
|
|
$
|
141,770
|
|
|
$
|
39,646
|
|
|
$
|
13,961
|
|
|
$
|
88,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
19,145
|
|
|
$
|
19,145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate
bonds
|
|
|
1,175
|
|
|
|
—
|
|
|
|
1,175
|
|
|
|
|
|
Fixed
income securities
|
|
|
699
|
|
|
|
—
|
|
|
|
699
|
|
|
|
—
|
|
Partnership
interests and other
|
|
|
7,272
|
|
|
|
7,272
|
|
|
|
—
|
|
|
|
—
|
|
Total
securities sold not yet purchased
|
|
|
28,291
|
|
|
|
26,417
|
|
|
|
1,874
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,478
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,478
|
|
Total
liabilities measured at fair value
|
|
$
|
32,769
|
|
|
$
|
26,417
|
|
|
$
|
1,874
|
|
|
$
|
4,478
|
|
|
|
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 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 December 31, 2017, securities and other investments owned included $3,590 of investment funds valued at NAV per share as a
practical expedient. As such, total securities and other investments owned of $145,360 in the consolidated balance sheets at December
31, 2017 included investments in investment funds of $3,590 and securities and other investments owned in the amount of $141,770
as outlined in the fair value table above.
As
of December 31, 2017 and December 31, 2016, financial assets measured and reported at fair value on a recurring basis and classified
within Level 3 were $88,163 and $13,885, respectively, or 6.4% 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 year ended December 31, 2017 and 2016 is as follows:
|
|
Level
3
|
|
|
Level
3 Changes During the Year
|
|
|
|
|
|
|
Balance
at Beginning of Year
|
|
|
Fair
Value Adjustments
|
|
|
Relating
to Undistribute Earnings
|
|
|
Purchases,
Sales
and Settlements
|
|
|
Transfer
in and/or out of Level 3
|
|
|
Level
3
Balance
at
End of Year
|
|
Year
Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks and warrants
|
|
$
|
299
|
|
|
$
|
3,028
|
|
|
$
|
3,419
|
|
|
$
|
21,600
|
|
|
$
|
—
|
|
|
$
|
28,346
|
|
Corporate
bonds
|
|
|
160
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(160
|
)
|
|
|
—
|
|
Loans
receivable
|
|
|
—
|
|
|
|
1,447
|
|
|
|
—
|
|
|
|
32,266
|
|
|
|
—
|
|
|
|
33,713
|
|
Partnership
interests and other
|
|
|
13,426
|
|
|
|
3,465
|
|
|
|
—
|
|
|
|
9,213
|
|
|
|
—
|
|
|
|
26,104
|
|
Mandatorily
redeemable
noncontrolling
interests issued
after
November 5, 2003
|
|
|
3,214
|
|
|
|
9,000
|
|
|
|
(8,542
|
)
|
|
|
—
|
|
|
|
806
|
|
|
|
4,478
|
|
Contingent
consideration
|
|
|
1,242
|
|
|
|
8
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
299
|
|
Corporate
bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
160
|
|
|
|
—
|
|
|
|
160
|
|
Partnership
interests
|
|
|
1,766
|
|
|
|
2,294
|
|
|
|
1,366
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
13,426
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
2,330
|
|
|
|
800
|
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,214
|
|
Contingent
consideration
|
|
|
2,391
|
|
|
|
101
|
|
|
|
—
|
|
|
|
(1,250
|
)
|
|
|
—
|
|
|
|
1,242
|
|
The
fair value adjustment for contingent consideration of $8 and $101 represents imputed interest for the years ended December 31,
2017 and 2016, respectively. The Company had a triggering event in 2017 for the mandatorily redeemable noncontrolling interests
that resulted in a fair value adjustment of $7,850 of the total fair value adjustment of $9,000 for the year ended December 31,
2017. In connection with this event, the Company received proceeds of $6,000 from key man life insurance. These amounts have been
recorded in the consolidated statements of income in Selling, general and administrative expenses in the corporate segment. The
amount reported in the table above also for the years ended December 31, 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 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 years ended December 31, 2017, 2016 and 2015, there were no assets or liabilities measured at fair value on a non-recurring
basis.
(t)
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 year ended December 31, 2017, the Company’s
use of derivative consisted of the purchase of forward exchange contracts (a) in the amount of $8,000 Australian dollars that
was settled on March 31, 2017; (b) in the amount of $27,100 Canadian dollars, of which $20,703 remained open at December 31, 2017
and will settle in 2018, and (b) $1,500 Euro’s that will settle in 2018. During the year ended December 31, 2016, the Company’s
use of derivatives consisted of the purchase of forward exchange contracts (a) in the amount of $10,200 Canadian dollars that
was settled at various periods prior to August 31, 2016, (b) 5,600 Euro’s that was settled on December 30, 2016 and (c)
$20,000 Australian dollars that was settled on December 30, 2016 and another $25,000 Australian dollars that was settled on January
31, 2017.
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 gain from forward exchange contracts was $31 and $13 during the years ended December
31, 2017 and 2015, respectively. The net loss from forward exchange contracts was $117 during the years ended December 31, 2016.
This amount is reported as a component of Selling, general and administrative expenses in the consolidated statements of income.
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 year-end exchange rates. The effects of foreign currency translation adjustments
are included in stockholders’ equity as a component of accumulated other comprehensive income in the accompanying consolidated
balance sheets. Transaction losses were $786, $848 and $271 during the years ended December 31, 2017, 2016 and 2015, respectively.
These amounts are included in selling, general and administrative expenses in our consolidated statements of income.
(u) Common
Stock Warrants
The
Company issued 821,816 warrants to purchase common stock of the Company in connection with the acquisition of Wunderlich on July
3, 2017. The common stock warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from
the Company at a price of $17.50 per share (the “Exercise Price”), subject to, among other matters, the proper completion
of an exercise notice and payment. The Exercise Price and the number of shares of Company common stock issuable upon exercise
are subject to customary anti-dilution and adjustment provisions, which include stock splits, subdivisions or reclassifications
of the Company’s common stock. The common stock warrants expire on July 3, 2022.
(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
February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income
that provides for the reclassification from accumulated
other comprehensive income to retained earnings for stranded effects resulting from the Tax Cuts and Jobs Act of 2017. The accounting
update is effective for the fiscal year beginning after December 15, 2018 and early adoption is permitted. The accounting update
should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the
U.S. federal corporate income tax rate in the Tax Act of 2017 is recognized. We are currently evaluating the impact of the accounting
update, but the adoption is not expected to have a material impact on our consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, S
tatement 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.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
which has subsequently been
amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model
for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. The guidance includes a five-step framework that requires an entity to: (i) identify
the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction
price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue
when the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of ASU 2014-09 to annual
reporting periods beginning after December 15, 2017. Early adoption will be permitted as of annual reporting periods beginning
after December 15, 2016, including interim reporting periods within those annual periods. A full retrospective or modified retrospective
approach is required. In addition, the new guidance will require enhanced disclosures, including revenue recognition policies
to identify performance obligations to customers and significant judgments in measurement and recognition.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the consolidated
financial statements. Accordingly, the new revenue standard will be applied prospectively in our consolidated financial statements
from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will
continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
anticipates that its current methods of recognizing revenues will not be significantly impacted by the new guidance. In addition,
there may be certain situations where advisory fees are deferred and not recognized, dependent upon performance obligations and
other situations that will result in the acceleration of the recognition of revenue on retail liquidation engagements that contain
performance-based arrangements if certain predefined outcomes occur. The scope of the accounting update does not apply to revenue
associated with financial instruments, and as a result, will not have an impact on the elements of our consolidated statements
of operations most closely associated with our secured lending business and proprietary trading income which includes interest
income, proprietary trading income and interest expense. The adoption of the accounting update will not have a material impact
on the Company’s consolidated financial statements.
NOTE
3— ACQUISITIONS
Acquisition
of Wunderlich Investment Company, Inc.
On
May 17, 2017, the Company entered into a Merger Agreement (the “Wunderlich Merger Agreement”) with Wunderlich, a Delaware
Corporation. Pursuant to the Wunderlich Merger Agreement, customary closing conditions were satisfied and the acquisition was
completed on July 3, 2017. In connection with the Wunderlich acquisition on July 3, 2017, the total consideration of $65,118 paid
to Wunderlich shareholders was comprised of (a) cash in the amount of $29,737; (b) 1,974,812 newly issued shares of the Company’s
common stock at closing which were valued at $31,495 for accounting purposes determined based on the closing market price of the
Company’s shares of common stock on the acquisition date on July 3, 2017, less a 13.0% discount for lack of marketability
as the shares issued are subject to certain escrow provisions and restrictions that limit their trade or transfer; and (c) 821,816
newly issued common stock warrants with an estimated fair value of $3,886. The common stock and common stock warrants issued includes
387,365 common shares and 167,352 common stock warrants that are held in escrow and subject to forfeiture to indemnify the Company
for certain representations and warranties in connection with the acquisition. The Company believes that the acquisition of Wunderlich
will allow the Company to benefit from wealth management, investment banking, corporate finance, and sales and trading services
provided by Wunderlich. The acquisition of Wunderlich is accounted for using the purchase method of accounting. The Company also
entered into a registration rights agreement with certain shareholders of Wunderlich (the “Registration Rights Agreement”)
on July 3, 2017 for the shares issued in connection with the Wunderlich Merger Agreement. The Registration Rights Agreement provides
the Wunderlich shareholders 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.
The
assets and liabilities of Wunderlich, both tangible and intangible, were recorded at their estimated fair values as of the July
3, 2017, acquisition date for Wunderlich. The application of the purchase method of accounting resulted in goodwill of $34,638
which represents the benefits from synergies with our existing business and acquired workforce. Acquisition related costs, such
as legal, accounting, valuation and other professional fees related to the acquisition of Wunderlich, were charged against earnings
in the amount of $48 and included in selling, general and administrative expenses in the consolidated statements of income for
the year ended December 31, 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:
|
|
|
|
Cash
paid
|
|
$
|
29,737
|
|
Fair
value of 1,974,812 B. Riley common shares issued
|
|
|
31,495
|
|
Fair
value of 821,816 B. Riley common stock warrants issued
|
|
|
3,886
|
|
Total
consideration
|
|
$
|
65,118
|
|
Tangible assets acquired and assumed:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,259
|
|
Securities
owned
|
|
|
1,413
|
|
Accounts
receivable
|
|
|
3,193
|
|
Due
from clearing broker
|
|
|
15,133
|
|
Prepaid
expenses and other assets
|
|
|
10,103
|
|
Property
and equipment
|
|
|
2,315
|
|
Deferred
taxes
|
|
|
7,568
|
|
Accounts
payable
|
|
|
(1,718
|
)
|
Accrued
payroll and related expenses
|
|
|
(6,387
|
)
|
Accrued
expenses and other liabilities
|
|
|
(9,773
|
)
|
Securities
sold, not yet purchased
|
|
|
(1,707
|
)
|
Notes
payable
|
|
|
(10,579
|
)
|
Customer
relationships
|
|
|
15,320
|
|
Trademarks
|
|
|
1,340
|
|
Goodwill
|
|
|
34,638
|
|
Total
|
|
$
|
65,118
|
|
The
revenue and loss of Wunderlich included in our consolidated financial statements for the period from July 3, 2017 (the date of
acquisition) through December 31, 2017 were $41,491 and $2,283, respectively. The loss from Wunderlich of $2,283 includes a restructuring
charge in the amount of $1,471 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 FBR & Co.
On
February 17, 2017, the Company entered into an Agreement and Plan of Merger (the “FBR 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 FBR 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 $11,336 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 $1,485 and included
in selling, general and administrative expenses in the consolidated statements of income for the year ended December 31, 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 FBR 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.
|
The
preliminary assets acquired and assumed was as follows:
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
|
|
|
17,706
|
|
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
|
|
|
11,336
|
|
Total
|
|
$
|
73,471
|
|
The
revenue and loss of FBR included in our consolidated financial statements for the period from June 1, 2017 (the date of acquisition)
through December 31, 2017 were $85,111 and $2,099, respectively. The loss from FBR of $2,099 includes transaction costs of $3,551
related to an employment agreement with the former Chief Executive Officer of FBR and restructuring charges in the amount of $9,669
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 $2,542 to goodwill, which represents expected
overhead synergies and acquired workforce, and $110 to other intangible assets - customer relationship for total acquisition consideration
of $2,652. There were no tangible assets or liabilities acquired in connection with Dialectic. Acquisition related costs, such
as legal, accounting, valuation and other professional fees related to the acquisition of Dialectic, were charged against earnings
in the amount of $72 and included in selling, general and administrative expenses in the consolidated statements of income for
the year ended December 31, 2017. 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 loss of Dialectic included in our consolidated statements of income for the period from April 13, 2017 (the date of
acquisition) through December 31, 2017 were $909 and $793, respectively.
Acquisition
of United Online, Inc.
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 12. 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. Acquisition
related costs, such as legal, accounting, valuation and other professional fees related to the acquisition of UOL, were charged
against earnings in the amount of $674 and included in selling, general and administrative expenses in the consolidated statements
of income for the year ended December 31, 2017. 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 consolidated statements of
income for the year ended December 31, 2017 were $51,743 and $19,503, respectively. The revenue and earnings of UOL included in
the consolidated statements of income for the period from July 1, 2016 (the date of acquisition) through December 31, 2016 were
$31,521 and $5,716, respectively.
The
preliminary purchase price allocation was as follows:
Total
consideration
|
|
$
|
169,354
|
|
|
|
|
|
|
Tangible
assets acquired and assumed:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
125,542
|
|
Restricted
cash
|
|
|
482
|
|
Accounts
receivables
|
|
|
3,850
|
|
Inventory
|
|
|
624
|
|
Property
and equipment
|
|
|
5,536
|
|
Prepaid
expenses and other assets
|
|
|
5,876
|
|
Accounts
payable
|
|
|
(4,874
|
)
|
Accrued
expenses and other liabilities
|
|
|
(8,886
|
)
|
Deferred
revenue
|
|
|
(2,900
|
)
|
Deferred
tax liabilities
|
|
|
(6,824
|
)
|
Other
liabilities
|
|
|
(3,180
|
)
|
Customer
relationships
|
|
|
33,700
|
|
Advertising
relationships
|
|
|
100
|
|
Trade
name and trademarks
|
|
|
1,100
|
|
Domain
names
|
|
|
1,500
|
|
Internally
developed software
|
|
|
3,333
|
|
Goodwill
|
|
|
14,375
|
|
|
|
$
|
169,354
|
|
Acquisition
of MK Capital
On
January 2, 2015 the Company entered into a purchase agreement to acquire all of the equity interests of MK Capital Advisors, LLC
(“MK Capital”), a wealth management business with operations primarily in New York. On February 2, 2015, the closing
conditions were satisfied and the Company completed the purchase of MK Capital for a total purchase price of $9,386. The purchase
price is comprised of a cash payment in the amount of $2,500 and 333,333 newly issued shares of the Company’s common stock
at closing which were valued at $2,687 for accounting purposes determined based on the closing market price of the Company’s
shares of common stock on the acquisition date on February 2, 2015, less a 19.4% discount for lack of marketability as the shares
issued are subject to certain restrictions that limit their trade or transfer. The purchase agreement also requires the payment
of contingent consideration in the form of future cash payments with a fair value of $2,229 and the issuance of common stock with
a fair value of $1,970. The contingent cash consideration of $2,229 was recorded based on the payment of the contingent cash consideration
of $1,250 on the first anniversary date of the closing (February 2, 2016) and a final cash payment of $1,250 on the second anniversary
date of the closing (February 2, 2017) to the former members of MK Capital discounted at 8.0% per annum (initial discount of $271).
In accordance with ASC 805, “Business Combination” (“ASC 805"), the contingent consideration liability
has been classified as a liability on the acquisition date. Imputed interest expense totaled $8 and $101 for the year ended December
31, 2017 and 2016, respectively. At December 31, 2016, the balance of the contingent consideration liability was $1,242 (discount
of $8 at December 31, 2016) and has been recorded as contingent consideration liability in the consolidated balance sheets.
The
fair value of the contingent stock consideration in the amount of $1,970 has been classified as equity in accordance with ASC
805, and is comprised of the issuance of 166,667 shares of common stock on the first anniversary date of the closing (February
2, 2016) and 166,666 shares of common stock on the second anniversary date of the closing (February 2, 2017). The contingent cash
and stock consideration is payable on the first and second anniversary dates of the closing provided that MK Capital generates
a minimum amount of gross revenues as defined in the purchase agreement for the twelve months ending on 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. The MK Capital acquisition has been accounted
for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their
estimated fair values as of the February 2, 2015 acquisition date for MK Capital. The application of the acquisition method of
accounting resulted in goodwill of $6,971 which is deductible for tax purposes. The acquisition of MK Capital allows the Company
to expand into the wealth management business.
In
connection with the issuance of common stock to the members of MK Capital, the Company entered into a registration rights agreement
which allows the selling members of MK Capital to register their shares upon the Company filing a prospectus or registration statement
at any time subsequent to the acquisition of MK Capital. The Company filed a registration statement with the Securities and Exchange
Commission on May 22, 2015 that covers the resale of the common stock issued and potentially issuable in the acquisition of MK
Capital, and such registration statement, as amended, was declared effective on July 2, 2015.
The
purchase price allocation was as follows:
Tangible
assets acquired and assumed:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
49
|
|
Accounts
receivable
|
|
|
8
|
|
Prepaid
expenses and other assets
|
|
|
30
|
|
Property
and equipment
|
|
|
15
|
|
Accounts
payable and accrued liabilities
|
|
|
(87
|
)
|
Customer
relationships
|
|
|
2,400
|
|
Goodwill
|
|
|
6,971
|
|
Total
|
|
$
|
9,386
|
|
Pro
Forma Financial Information
The
unaudited financial information in the table below summarizes the combined results of operations of the Company, Wunderlich, 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)
|
|
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
430,723
|
|
|
$
|
464,587
|
|
Net
income attributable to B. Riley Financial, Inc.
|
|
$
|
5,672
|
|
|
$
|
1,754
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.22
|
|
|
$
|
0.07
|
|
Diluted earnings per
share
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic
shares outstanding
|
|
|
26,150,502
|
|
|
|
24,972,700
|
|
Weighted average diluted
shares outstanding
|
|
|
27,268,888
|
|
|
|
25,257,931
|
|
NOTE
4— RESTRUCTURING CHARGE
The
Company recorded a restructuring charge in the amount of $12,374 during the year ended December 31, 2017. The Company implemented
costs savings measures taking into account the planned synergies as a result of the acquisitions of FBR and Wunderlich, as more
fully described in Note 3, which included a reduction in force for some of the corporate executives of FBR and Wunderlich and
a restructuring to integrate FBR and Wunderlich’s operations with the Company’s existing operations. These initiatives
resulted in a restructuring charge of $11,651 during the year ended December 31, 2017. The restructuring charges during the year
ended December 31, 2017 included $2,400 related to severance and $884 related to the accelerated vesting of restricted stock awards
to former corporate executives of FBR and Wunderlich and $3,241 of severance and $1,710 related to accelerated vesting of stock
awards to employees and $3,416 of lease loss accruals and impairments for the planned consolidation of office space related to
operations of FBR and Wunderlich. Of the $11,651 of restructuring charges related to these initiatives, $7,855 related to the
Capital Markets segment and $3,796 related to corporate overhead. The restructuring charge during the year ended December 31,
2017 also included employee termination costs of $723 related to a reduction in personnel in the principal investments –
United Online segment of our operations.
During
the third quarter of 2016, after completing the acquisition of UOL, the Company initiated cost savings measures which included
a reduction in force for certain corporate and administrative employees of UOL. The reduction in work force resulted in a restructuring
charge of $3,474 for employee termination costs in the Principal Investments - United Online segment during the year ended December
31, 2016. In the third quarter of 2016, the Company also entered into a sublease and consolidated one of the offices of the Company
with the former corporate offices of UOL. The sublease resulted in a restructuring charge of $413 related to office closure costs.
The
following table summarizes the changes in accrued restructuring charge during years ended December 31, 2017 and 2016:
Accrued
restructuring charge at December 31, 2015
|
|
$
|
187
|
|
Restructuring
charge
|
|
|
3,887
|
|
Cash
paid
|
|
|
(3,380
|
)
|
Non-cash
items
|
|
|
—
|
|
Accrued
restructuring charge at December 31, 2016
|
|
|
694
|
|
Restructuring
charge
|
|
|
12,374
|
|
Cash
paid
|
|
|
(5,957
|
)
|
Non-cash
items
|
|
|
(4,511
|
)
|
Accrued
restructuring charge at December 31, 2017
|
|
$
|
2,600
|
|
The
following tables summarize the restructuring activities by reportable segment during the years ended December 31, 2017 and 2016:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Capital
Markets
|
|
|
Principal
Investments -
United
Online
|
|
|
Corporate
|
|
|
Total
|
|
|
Capital
Markets
|
|
|
Principal
Investments -
United
Online
|
|
|
Corporate
|
|
|
Total
|
|
Restructuring
charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination costs
|
|
$
|
4,951
|
|
|
$
|
723
|
|
|
$
|
3,284
|
|
|
$
|
8,958
|
|
|
$
|
—
|
|
|
$
|
3,474
|
|
|
$
|
—
|
|
|
$
|
3,474
|
|
Facility
closure and consolidation charge
|
|
|
2,904
|
|
|
|
—
|
|
|
|
512
|
|
|
|
3,416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
413
|
|
|
|
413
|
|
Total
restructuring charge
|
|
$
|
7,855
|
|
|
$
|
723
|
|
|
$
|
3,796
|
|
|
$
|
12,374
|
|
|
$
|
—
|
|
|
$
|
3,474
|
|
|
$
|
413
|
|
|
$
|
3,887
|
|
NOTE
5— 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 December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
not
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
offset
in the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
balance
|
|
|
|
|
|
|
|
|
|
|
Gross
amounts
|
|
|
|
Net
amounts
|
|
|
|
sheets
but eligible
|
|
|
|
|
|
|
|
|
|
|
offset
in the
|
|
|
|
included
in the
|
|
|
|
for
offsetting
|
|
|
|
|
|
|
Gross
amounts
|
|
|
|
consolidated
|
|
|
|
consolidated
|
|
|
|
upon
counterparty
|
|
|
|
|
|
|
recognized
|
|
|
|
balance
sheets
(1)
|
|
|
|
balance
sheets
|
|
|
|
default
(2)
|
|
|
Net
amounts
|
|
As
of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
borrowed
|
|
$
|
807,089
|
|
|
$
|
—
|
|
|
$
|
807,089
|
|
|
$
|
807,089
|
|
|
$
|
—
|
|
Securities
loaned
|
|
$
|
803,371
|
|
|
$
|
—
|
|
|
$
|
803,371
|
|
|
$
|
803,371
|
|
|
$
|
—
|
|
|
(1)
|
Includes
financial instruments subject to enforceable master netting provisions that are permitted
to be offset to the extent an event of default has occurred.
|
|
(2)
|
Includes
the amount of cash collateral held/posted.
|
NOTE
6— ACCOUNTS RECEIVABLE
The
components of accounts receivable net include the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts
receivable
|
|
$
|
15,593
|
|
|
$
|
16,610
|
|
Investment
banking fees, commissions and other receivables
|
|
|
4,199
|
|
|
|
576
|
|
Unbilled
receivables
|
|
|
1,023
|
|
|
|
2,058
|
|
Total
accounts receivable
|
|
|
20,815
|
|
|
|
19,244
|
|
Allowance
for doubtful accounts
|
|
|
(800
|
)
|
|
|
(255
|
)
|
Accounts
receivable, net
|
|
$
|
20,015
|
|
|
$
|
18,989
|
|
Additions
and changes to the allowance for doubtful accounts consist of the following:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Balance,
beginning of year
|
|
$
|
255
|
|
|
$
|
89
|
|
|
$
|
728
|
|
Add: Additions
to reserve
|
|
|
1,066
|
|
|
|
710
|
|
|
|
718
|
|
Less: Write-offs
|
|
|
(311
|
)
|
|
|
(194
|
)
|
|
|
(1,056
|
)
|
Less: Recoveries
|
|
|
(210
|
)
|
|
|
(350
|
)
|
|
|
(301
|
)
|
Balance,
end of year
|
|
$
|
800
|
|
|
$
|
255
|
|
|
$
|
89
|
|
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
7— PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
Estimated
|
|
December
31,
|
|
|
|
Useful
Lives
|
|
2017
|
|
|
2016
|
|
Leasehold
improvements
|
|
Shorter
of the remaining lease term or estimated useful life
|
|
$
|
7,834
|
|
|
$
|
2,325
|
|
Machinery,
equipment and computer software
|
|
3
to 5 years
|
|
|
9,474
|
|
|
|
6,559
|
|
Furniture
and fixtures
|
|
5
years
|
|
|
2,688
|
|
|
|
1,921
|
|
Total
|
|
|
|
|
19,996
|
|
|
|
10,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
(8,019
|
)
|
|
|
(5,020
|
)
|
|
|
|
|
$
|
11,977
|
|
|
$
|
5,785
|
|
Depreciation
expense was $3,718, $1,052 and $417 during the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE
8— GOODWILL AND OTHER INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Capital
|
|
|
Auction
and
|
|
|
Valuation
and
|
|
|
Investments-
|
|
|
|
|
|
|
Markets
|
|
|
Liquidation
|
|
|
Appraisal
|
|
|
United
Online
|
|
|
|
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
Balance
as of December 31, 2015
|
|
$
|
28,840
|
|
|
$
|
1,975
|
|
|
$
|
3,713
|
|
|
$
|
—
|
|
|
$
|
34,528
|
|
Goodwill
acquired during the period:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,375
|
|
|
|
14,375
|
|
United
Online on July 1, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2016
|
|
|
28,840
|
|
|
|
1,975
|
|
|
|
3,713
|
|
|
|
14,375
|
|
|
|
48,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dialectic
on April 13, 2017
|
|
|
2,542
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,542
|
|
FBR
on June 1, 2017
|
|
|
11,336
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,336
|
|
Resolution
of acquisition related legal matter on June 30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,352
|
|
|
|
1,352
|
|
Wunderlich
on July 3, 2017
|
|
|
34,638
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,638
|
|
Balance
as of December 31, 2017
|
|
$
|
77,356
|
|
|
$
|
1,975
|
|
|
$
|
3,713
|
|
|
$
|
15,727
|
|
|
$
|
98,771
|
|
Intangible
assets consisted of the following:
|
|
|
|
December
31, 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 16 Years
|
|
$
|
58,330
|
|
|
$
|
9,100
|
|
|
$
|
49,230
|
|
|
$
|
37,300
|
|
|
$
|
3,100
|
|
|
$
|
34,200
|
|
Domain
names
|
|
7
Years
|
|
|
287
|
|
|
|
61
|
|
|
|
226
|
|
|
|
1,419
|
|
|
|
101
|
|
|
|
1,318
|
|
Advertising
relationships
|
|
8
Years
|
|
|
100
|
|
|
|
19
|
|
|
|
81
|
|
|
|
100
|
|
|
|
6
|
|
|
|
94
|
|
Internally
developed software and other intangibles
|
|
0.5
to 4 Years
|
|
|
3,373
|
|
|
|
1,445
|
|
|
|
1,928
|
|
|
|
3,333
|
|
|
|
550
|
|
|
|
2,783
|
|
Trademarks
|
|
7
to 8 Years
|
|
|
4,190
|
|
|
|
447
|
|
|
|
3,743
|
|
|
|
1,100
|
|
|
|
69
|
|
|
|
1,031
|
|
Total
|
|
|
|
|
66,280
|
|
|
|
11,072
|
|
|
|
55,208
|
|
|
|
43,252
|
|
|
|
3,826
|
|
|
|
39,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
|
|
1,740
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
1,740
|
|
|
|
—
|
|
|
|
1,740
|
|
Total
intangible assets
|
|
|
|
$
|
68,020
|
|
|
$
|
11,072
|
|
|
$
|
56,948
|
|
|
$
|
44,992
|
|
|
$
|
3,826
|
|
|
$
|
41,166
|
|
Amortization
expense was $7,422, $3,254 and $431 for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017,
estimated future amortization expense is $8,497, $8,376, $8,008, $7,617 and $7,592 for the years ended December 31, 2018, 2019,
2020, 2021 and 2022, respectively. The estimated future amortization expense after December 31, 2022 is $15,118.
NOTE
9— LEASING ARRANGEMENTS
The
Company has several noncancellable operating leases that expire at various dates through 2031. Future minimum lease payments under
noncancellable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2017 were:
|
|
|
Operating
|
|
|
|
|
Leases
|
|
Year
Ending December 31:
|
|
|
|
|
|
|
2018
|
|
|
$
|
13,496
|
|
|
2019
|
|
|
|
9,640
|
|
|
2020
|
|
|
|
6,984
|
|
|
2021
|
|
|
|
5,589
|
|
|
2022
|
|
|
|
5,024
|
|
|
Thereafter
|
|
|
|
16,369
|
|
|
Total
minimum lease payments
|
|
|
$
|
57,102
|
|
Rent
expense under all operating leases was $7,599, $3,205 and $2,376 for the years ended December 31, 2017, 2016, and 2015, respectively.
Rent expense is included in Selling, general and administrative expenses in the accompanying consolidated statements of income.
NOTE
10— 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. The Credit Agreement continues to include
the addition of our Canadian subsidiary, from the October 5, 2016 amendment to the Credit Agreement, to facilitate borrowings
to fund retail liquidation transactions in Canada. 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 $1,136 (including amortization of deferred loan fees of $123 and success
fee of $198), $1,113 (including amortization of deferred loan fees of $92 and success fee of $732) and $376 (including amortization
of deferred loan fees of $92 and success fee of $127) for the years ended December 31, 2017, 2016 and 2015, respectively. There
was no outstanding balance of this credit facility at December 31, 2017 and 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
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 December 31, 2017. Interest expense
totaled $292 (including amortization of deferred loan fees of $97) for the year ended December 31, 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
11— NOTES PAYABLE
Senior
notes payable, net, is comprised of the following as of December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
7.50% Senior notes due October 31, 2021
|
|
|
$
|
35,231
|
|
|
$
|
28,750
|
|
7.50% Senior notes due May 31, 2027
|
|
|
|
92,490
|
|
|
|
—
|
|
7.25% Senior notes due December 31, 2027
|
|
|
|
80,500
|
|
|
|
—
|
|
|
|
|
|
208,221
|
|
|
|
28,750
|
|
Less: Unamortized debt issue costs
|
|
|
|
(4,600
|
)
|
|
|
(1,050
|
)
|
|
|
|
$
|
203,621
|
|
|
$
|
27,700
|
|
(a)
$35,231 Senior Notes Payable due October 31, 2021
At
December 31, 2017, the Company had $35,231 of Senior Notes Payable (the “2021 Notes”) due in 2021, interest payable
quarterly at 7.50%. On November 2, 2016, the Company issued $28,750 of the 2021 Notes and during the third and fourth quarter
of 2017, the Company issued an additional $6,481 of the 2021 Notes. 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 $34,238 (after underwriting
commissions, fees and other issuance costs of $993). The outstanding balance of the 2021 Notes was $34,483 (net of unamortized
debt issue costs and premiums of $748) and $27,700 (net of unamortized debt issue costs of $1,050) at December 31, 2017 and 2016,
respectively. In connection with the offering of 2021 Notes on November 2, 2016, 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 $2,537 and $360 for the years ended December 31, 2017 and 2016, respectively.
(b)
$92,490 Senior Notes Payable due May 31, 2027
At
December 31, 2017, the Company had $92,490 of Senior Notes Payable (the “7.50% 2027 Notes”) due in May 2027, interest
payable quarterly at 7.50%. On May 31, 2017, the Company issued $60,375 of the 7.5% 2027 Notes and during the third and fourth
quarter ended 2017, the Company issued an additional $32,115 of the 7.50% 2027 Notes. The 7.50% 2027 Notes are unsecured and due
and payable in full on May 31, 2027. In connection with the issuance of the 7.50% 2027 Notes, the Company received net proceeds
of $90,796 (after underwriting commissions, fees and other issuance costs of $1,694). The outstanding balance of the 7.50% 2027
Notes was $90,904 (net of unamortized debt issue costs of $1,586) at December 31, 2017. Interest expense on the 7.50% 2027 Notes
totaled $3,551 for the year ended December 31, 2017.
(c)
$80,500 Senior Notes Payable due December 31, 2027
At
December 31, 2017, the Company had $80,500 of Senior Notes Payable ("7.25% 2027 Notes”) due in December 2027, interest
payable quarterly at 7.25%. The 7.25% 2027 Notes are unsecured and due and payable in full on December 31, 2027. In connection
with the issuance of the 7.25% 2027 Notes, the Company received net proceeds of $78,223 (after underwriting commissions, fees
and other issuance costs of $2,277). The outstanding balance of the 7.25% 2027 Notes was $78,234 (net of unamortized debt issue
costs of $2,266) at December 31, 2017. Interest expense on the 7.25% 2027 Notes totaled $303 for the year ended December 31, 2017.
(d)
At Market Issuance Sales Agreement to Issue Up to Aggregate of $19,000 of 2021 Notes, 7.50% 2027 Notes or 7.25% 2027 Notes.
On
December 19, 2017, the Company entered into 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 $19,000 of the 2021 Notes, the 7.50% 2027 Notes
and the 7.25% 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, 7.50% 2027 Notes and
7.25% 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. At December 31, 2017, the Company has an additional $19,000
of 2021 Notes, 7.50% 2027 Notes or 7.25% 2027 Notes that may be sold pursuant to the Sales Agreement. 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.
(e)
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 December 31, 2017 and 2016, $1,323 and $10,037, respectively, were payable in accordance with
the participating note payable share of profits and is included in net income attributable to noncontrolling interests and amounts
Due to partners in the consolidated financial statements.
(f)
Other Notes Payable
Other
notes payable include notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable
accrue interest at rates ranging from the prime rate plus 0.25% to 2.0% (4.75% to 6.50% at December 30, 2017) payable annually.
The principal payments on the notes payable are due annually in the amount of $357 on January 31, $214 on September 30, and $121
on October 31. The notes payable mature at various dates from September 30, 2018 through January 31, 2022. At December 31, 2017,
the outstanding balance for the notes payable was $2,243. Interest expense was $71 for the period from July 3, 2017 (the date
of Wunderlich acquisition) through December 31, 2017.
NOTE
12— COMMITMENTS AND CONTINGENCIES
(a)
Letters of Credit –
At
December 31, 2017, there were letters of credit outstanding in the amount of $18,505 related to three retail liquidation engagements.
At December 31, 2016, there was a letter of credit in the amount of $465 which was maintained pursuant to lease arrangements and
contractual obligations.
(b)
Legal Matters
The
Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company
and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business
activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial
compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations,
and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments,
settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against our company,
the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation
and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding
this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial
position or results of operations.
In
2012, Gladden v. Cumberland Trust, WSI, et al. filed a complaint in Circuit Court, Hamblen County, TN at Morristown, Case No.
12-CV-119. This complaint alleges the improper distribution and misappropriation of trust funds. The plaintiff seeks damages of
no less than $3,925, an accounting, and among other things, punitive damages. In October 2017, the Tennessee Supreme Court remanded
the case to the Tennessee State Trial Court for determination of which claims are subject to arbitration and which are not. At
the present time, the financial impact to the Company, if any, cannot be estimated.
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 December 2017, the parties settled
the matter and the financial impact to the Company was not material.
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”). B. Riley FBR, Inc. (“B. Riley FBR”)
(formerly, 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 an opening
brief on June 21, 2017. Defendant’s opposition motion was filed on September 12, 2017. Appellants filed their reply brief
on October 17, 2017 and oral argument was held on November 17, 2017. On January 26, 2018, the Appellate court issued its order affirming the court’s order dismissing the plantiff’s
case and denying leave to amend. Regional Management continues to indemnify all
of the underwriters, including FBRCM, pursuant to the operative underwriting agreement.
On
January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary
of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings
of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor
v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor
complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material
misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February
13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged
aggregate offering price of approximately $151,000. The plaintiffs seek unspecified compensatory damages and reimbursement of
certain costs and expenses. In August 2017, the Court granted Defendant’s Motion to Dismiss on Section 12 claims and found
that the plaintiffs had not sufficiently alleged a corrective disclosure prior to August 6, 2015, when an SEC civil action was
announced. Defendants’ answer was filed on September 25, 2017. 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.
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
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 $10,000
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
March 2017, United Online, Inc. received a letter from PeopleConnect, Inc. (formerly, Classmates, Inc.) (“Classmates”)
regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of
four California counties (“California DAs”). These entities suggest that Classmates may be in violation of California
codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices. Classmates asserts that these
claims are indemnifiable claims under the purchase agreement between United Online, Inc. and the buyer of Classmates. A tolling
agreement with the California DAs has been signed and informal discovery and production is in process. At the present time, the
financial impact to the Company, if any, cannot be estimated.
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 $8,000
plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend the action.
In
September 2017, Frontier State Bank (“Frontier”) filed a lawsuit against Wunderlich Loan Capital Corp., a subsidiary
of WIC (“WLCC”), seeking rescission of the purchase a residential mortgage in the amount of $1,300. Vanguard
Funding, LLC (“Vanguard”) sold the mortgage to WLCC who then assigned its rights to Frontier. Shortly
after closing, Frontier was advised that the mortgage had been previously pledged to another lender. In the lawsuit
against WLCC, it is alleged that WLCC did not deliver the mortgage to Frontier with clear title. WLCC is conducting settlement
discussions with Frontier that are not expected to have a material financial impact on the Company.
In
September 2017, a statement of claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting
of the now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum”). Claimants are seeking $37,000
in actual damages, plus $75,000 in punitive damages and attorney’s fees. On October 24, 2017, we joined in a motion with
the other underwriters requesting that the claim be dismissed on the grounds that it is improper under FINRA Rules 12204 and 122205
which prohibit class actions and derivative claims, respectively. On December 1, 2017, the claims were dismissed by FINRA.
NOTE
13— INCOME TAXES
The
Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies
to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, provides an exemption
from U.S. federal tax for dividends received from foreign subsidiaries, and creates new taxes on certain foreign sourced earnings.
As of the completion of these financial statements and related disclosures, we have not completed our accounting for the tax effects
of the Tax Act; however, we have made a reasonable estimate of such effects and recorded a provisional tax expense of $13,052,
which is included as a component of income tax expense in the fourth quarter of 2017 and is comprised of (a) $12,954 related to
the remeasurement of deferred tax assets and liabilities in the United States and (b) $98 related to the transition tax on foreign
earnings. This provisional tax expense incorporates assumptions made based upon the Company’s current interpretation of
the Tax Act, and may change as we receive additional clarification and implementation guidance and as the interpretation of the
Tax Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects
of the Tax Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be reported as
a component of income tax expense in the reporting period in which any such adjustments are determined.
The
Company’s provision for income taxes consists of the following for the years ended December 31, 2017, 2016 and 2015:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,804
|
|
|
$
|
5,530
|
|
|
$
|
201
|
|
State
|
|
|
1,019
|
|
|
|
1,114
|
|
|
|
99
|
|
Foreign
|
|
|
(975
|
)
|
|
|
4,063
|
|
|
|
779
|
|
Total
current provision
|
|
|
3,848
|
|
|
|
10,707
|
|
|
|
1,079
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
6,889
|
|
|
|
3,015
|
|
|
|
5,166
|
|
State
|
|
|
(1,937
|
)
|
|
|
610
|
|
|
|
1,443
|
|
Foreign
|
|
|
(290
|
)
|
|
|
(11
|
)
|
|
|
—
|
|
Total
deferred
|
|
|
4,662
|
|
|
|
3,614
|
|
|
|
6,609
|
|
Total
provision for income taxes
|
|
$
|
8,510
|
|
|
$
|
14,321
|
|
|
$
|
7,688
|
|
A
reconciliation of the federal statutory rate of 35% to the effective tax rate for income before income taxes is as follows for
the year ended December 31, 2017, 2016 and 2015:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Provision
for income taxes at federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
34.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
5.0
|
|
|
|
2.8
|
|
|
|
4.0
|
|
Transaction
expenses
|
|
|
2.0
|
|
|
|
—
|
|
|
|
—
|
|
Noncontrolling
interest tax differential
|
|
|
(6.6
|
)
|
|
|
(6.2
|
)
|
|
|
—
|
|
Key
man life insurance
|
|
|
(7.9
|
)
|
|
|
—
|
|
|
|
—
|
|
Employee
stock based compensation
|
|
|
(8.7
|
)
|
|
|
—
|
|
|
|
—
|
|
Internal
Revenue Service Section 338(g) - Treatment of acquisition of UOL as a taxable business combination
|
|
|
(44.6
|
)
|
|
|
—
|
|
|
|
—
|
|
U.S.
Tax Cuts and Jobs Act
|
|
|
63.8
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
3.6
|
|
|
|
(1.2
|
)
|
|
|
(1.8
|
)
|
Effective
income tax rate
|
|
|
41.6
|
%
|
|
|
30.4
|
%
|
|
|
36.2
|
%
|
Deferred
income tax assets (liabilities) consisted of the following as of December 31, 2017 and 2016:
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deductible
goodwill and other intangibles
|
|
$
|
4,019
|
|
|
$
|
—
|
|
Accrued
liabilities and other
|
|
|
3,549
|
|
|
|
2,459
|
|
Deferred
revenue
|
|
|
54
|
|
|
|
335
|
|
Mandatorily
redeemable noncontrolling interests
|
|
|
1,109
|
|
|
|
1,173
|
|
Other
|
|
|
312
|
|
|
|
379
|
|
State
taxes
|
|
|
—
|
|
|
|
994
|
|
Share based payments
|
|
|
2,117
|
|
|
|
443
|
|
Foreign
tax and other tax credit carryforwards
|
|
|
290
|
|
|
|
1,855
|
|
Capital
loss carryforward
|
|
|
2,582
|
|
|
|
3,600
|
|
Net
operating loss carryforward
|
|
|
17,900
|
|
|
|
7,711
|
|
Total
deferred tax assets
|
|
|
31,932
|
|
|
|
18,949
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
State
taxes
|
|
|
(46
|
)
|
|
|
—
|
|
Depreciation
|
|
|
(73
|
)
|
|
|
(1,291
|
)
|
Goodwill
and other intangibles
|
|
|
—
|
|
|
|
(4,139
|
)
|
Total
deferred tax liabilities
|
|
|
(119
|
)
|
|
|
(5,430
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
31,813
|
|
|
|
13,519
|
|
Valuation
allowance
|
|
|
(2,582
|
)
|
|
|
(4,900
|
)
|
Net
deferred tax assets
|
|
$
|
29,231
|
|
|
$
|
8,619
|
|
The
Company’s income before income taxes of $20,445 for the year ended December 31, 2017 includes a United States component
of income before income taxes of $19,949 and a foreign component comprised of income before income taxes of $496. As of December
31, 2017, the Company had federal net operating loss carryforwards of $63,445, state net operating loss carryforwards of $76,978.
The Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2029 through
December 31, 2034, the state net operating loss carryforwards will expire in tax years commencing in December 31, 2029 and the
foreign tax credit carryforwards will expire in 2027.
The
Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards
are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward
period, and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with
Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized
in future taxable years depending on the Company’s actual taxable income. As of December 31, 2017, the Company believes
that the existing net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire
and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not
provided a valuation allowance. The Company does not believe that it is more likely than not that the Company will be able to
utilize the benefits related to capital loss carryforwards and has provided a full valuation allowance in the amount of $2,582
against these deferred tax assets.
At
December 31, 2017, the Company had gross unrecognized tax benefits totaling $1,140 all of which would have an impact on the Company’s
effective income tax rate, if recognized. A reconciliation of the amounts of gross unrecognized tax benefits (before federal impact
of state items), excluding interest and penalties, was as follows (in thousands):
|
|
Year
Ended
December 31,
2017
|
|
Beginning balance
|
|
|
|
|
Addition
as a result of the acquisition of UOL
|
|
$
|
1,255
|
|
Additions
for current year tax positions
|
|
|
—
|
|
Additions
for Prior year tax positions
|
|
|
34
|
|
Reductions
for Prior year tax positions
|
|
|
—
|
|
Reductions
due to lapse in statutes of limitations
|
|
|
(149
|
)
|
Ending
balance
|
|
$
|
1,140
|
|
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, 2014 to 2017.
At
December 31, 2017, the Company believes it is reasonably possible that its gross liabilities for unrecognized tax benefits may
decrease by approximately $345 within the next 12 months due to audit settlements and expiration of statute of limitations.
The
Company had accrued $786 for interest and penalties relating to uncertain tax positions at December 31, 2017 all of which was
included in income taxes payable as a component of Accrual expenses and other liabilities in the consolidated balance sheet. The
Company recorded a benefit of $149 for interest and penalty expenses related to uncertain tax positions, which was included in
provision for income taxes, for the year ended December 31, 2017.
NOTE
14— EARNINGS PER SHARE
Basic
earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the year.
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 year. Basic common shares outstanding exclude 453,365
common shares that are held in escrow and subject to forfeiture. The common shares held in escrow includes 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 Alternative Asset Management Acquisition Corp. in 2009 and 387,365 common shares that are subject
to forfeitures upon the final settlement of claims as more fully described in the related escrow instructions. Dilutive common
shares outstanding include contingently issuable shares that are currently in escrow and subject to release if the conditions
for the final settlement of claims in accordance with the escrow instructions were satisfied at the end of the respective years.
Securities that could potentially dilute basic net income per share in the future that were not included in the computation of
diluted net income per share for the years ended December 31, 2017, 2016 and 2015 were 709,358, 384,825 and 308,699, respectively,
because to do so would have been anti-dilutive.
Basic
and diluted earnings from continuing operations calculated as follows (in thousands, except per share amounts):
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net income attributable
to B. Riley Financial, Inc.
|
|
$
|
11,556
|
|
|
$
|
21,526
|
|
|
$
|
11,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,181,388
|
|
|
|
18,106,621
|
|
|
|
16,221,040
|
|
Effect of dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
units and non-vested shares
|
|
|
901,397
|
|
|
|
198,852
|
|
|
|
—
|
|
Contingently issuable shares
|
|
|
208,119
|
|
|
|
86,379
|
|
|
|
44,875
|
|
Diluted
|
|
|
24,290,904
|
|
|
|
18,391,852
|
|
|
|
16,265,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.50
|
|
|
$
|
1.19
|
|
|
$
|
0.73
|
|
Diluted income per share
|
|
$
|
0.48
|
|
|
$
|
1.17
|
|
|
$
|
0.73
|
|
NOTE
15— LIMITED LIABILITY COMPANY SUBSIDIARIES
(a)
Operating Agreements of Limited Liability Company Subsidiaries
The
Company has certain subsidiaries that are organized as limited liability companies, each of which has its own separate operating
agreement. Generally, each of these subsidiaries is managed by an individual manager who is a member or employee of the subsidiary,
although the manager may not take certain actions unless the majority member of the subsidiary consents to the action. These actions
include, among others, the dissolution of the subsidiary, the disposition of all or a substantial part of the subsidiary’s
assets not in the ordinary course of business, filing for bankruptcy, and the purchase by the subsidiary of one of the members’
ownership interest upon the occurrence of certain events. Certain of the members with a minority ownership interest in the subsidiaries
are entitled to receive guaranteed payments in the form of compensation or draws, in addition to distributions of available cash
from time to time. Distributions of available cash are generally made to each of the members in accordance with their respective
ownership interests in the subsidiary after repayment of any loans made by any members to such subsidiary, and allocations of
profits and losses of the subsidiary are generally made to members in accordance with their respective ownership interests in
the subsidiary. The operating agreements also generally place restrictions on the transfer of the members’ ownership interests
in the subsidiaries and provide the Company or the other members with certain rights of first refusal and drag along and tag along
rights in the event of any proposed sales of the members’ ownership interests.
Generally,
a member of the subsidiary who materially breaches the operating agreement of the subsidiary, which breach has a direct, substantial
and adverse effect on the subsidiary and the other members, or who is convicted of a felony (or a lesser crime of moral turpitude)
involving his management of or involvement in the affairs of the subsidiary, or a material act of dishonesty of the member involving
his management of or involvement in the affairs of the subsidiary, shall forfeit his entire ownership interest in the subsidiary.
(b)
Repurchase Obligations of Membership Interests of Limited Liability Company Subsidiaries
The
operating agreements of the Company’s limited liability company subsidiaries require the Company to repurchase the entire
ownership interest of each the members upon the death of a member, disability of a member as defined in the operating agreement,
or upon declaration by a court of law that a member is mentally unsound or incompetent. Upon the occurrence of one of these events,
the Company is required to repurchase the member’s ownership interest in an amount equal to the fair market value of the
member’s noncontrolling interest in the subsidiary.
The
Company evaluated the classification of all of its limited liability company members’ ownership interests in accordance
with the accounting guidance for financial instruments with characteristics of liabilities and equity. This guidance generally
provides for the classification of members’ ownership interests that are subject to mandatory redemption obligations to
be classified outside of equity. In accordance with this guidance, all members with a minority ownership interest in these subsidiaries
are classified as liabilities and included in mandatorily redeemable noncontrolling interests in the accompanying consolidated
balance sheets. Members of these subsidiaries with a minority ownership interest issued before November 5, 2003 are stated on
a historical cost basis and members of the Company’s subsidiaries with a minority ownership interests issued on or after
November 5, 2003 are stated at fair value at each balance sheet date. The Company deems such repurchase obligations, which are
payable to members who are also employees of these subsidiaries, to be a compensatory benefit. Accordingly, the changes in the
historical cost basis and the changes in the fair value of the respective members’ ownership interests (noncontrolling interests)
are recorded as a component of selling, general and administrative expenses in the accompanying consolidated statements of income.
In
accordance with the operating agreement of one of the Company’s limited liability Company’s, a repurchase event occurred
in the second quarter of 2017 for one of the Members which resulted in the repurchase on the Members minority ownership interest.
The triggering event resulted in a fair value adjustment and purchase of the Members minority interest in the amount of $7,850.
The Company also received proceeds of $6,000 from key man life insurance in connection with this event.
During
the year ended December 31, 2017, the change in fair value of the mandatorily redeemable noncontrolling interests was $9,000,
which was comprised of a fair value adjustments of $1,150 and $7,850 from the triggering event previously discussed above. During
the year ended December 31, 2016, the change in fair value of the mandatorily redeemable noncontrolling interests was $800. There
was no change in the fair value of the mandatorily redeemable noncontrolling interests during the year ended December 31, 2015.
The noncontrolling interests share of net income was $1,799, $2,232 and $2,207 for the years ended December 31, 2017, 2016 and
2015, respectively.
NOTE
16—SHARE BASED PAYMENTS
(a)
Amended and Restated 2009 Stock Incentive Plan
During
the years ended December 31, 2017, 2016 and 2015, the Company granted restricted stock units representing 486,049, 544,605 and
527,372 shares of common stock with a total fair value of $7,732, $5,301 and $5,261 to certain employees and directors of the
Company under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”). Share-based compensation
expense for such restricted stock units was $4,994, $2,768 and $2,043 for the years ended December 31, 2017, 2016 and 2015, respectively.
The total income tax benefit recognized related to the vesting of restricted stock units was $1,249, $1,141 and $804 for the years
ended December 31, 2017, 2016 and 2015, 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 December 31, 2017,
the expected remaining unrecognized share-based compensation expense of $7,901 will be expensed over a weighted average period
of 2.1 years.
A
summary of equity incentive award activity under the Plan for the years ended December 31, 2017, 2016, and 2015 was as follows:
|
|
Shares
|
|
|
Weighted
Average Fair Value
|
|
Nonvested
at January 1, 2015
|
|
|
5,859
|
|
|
$
|
7.68
|
|
Granted
|
|
|
527,372
|
|
|
|
9.98
|
|
Vested
|
|
|
(196,414
|
)
|
|
|
9.92
|
|
Forfeited
|
|
|
(14,086
|
)
|
|
|
9.98
|
|
Nonvested at December
31, 2015
|
|
|
322,731
|
|
|
$
|
9.97
|
|
Granted
|
|
|
544,605
|
|
|
|
9.73
|
|
Vested
|
|
|
(173,147
|
)
|
|
|
10.13
|
|
Forfeited
|
|
|
(14,054
|
)
|
|
|
9.84
|
|
Nonvested at December
31, 2016
|
|
|
680,135
|
|
|
$
|
9.74
|
|
Granted
|
|
|
486,049
|
|
|
|
15.91
|
|
Vested
|
|
|
(344,196
|
)
|
|
|
10.05
|
|
Forfeited
|
|
|
(29,724
|
)
|
|
|
10.49
|
|
Nonvested at December
31, 2017
|
|
|
792,264
|
|
|
$
|
13.30
|
|
The
per-share weighted average grant-date fair value of restricted stock units was $15.91, $9.73 and $9.98 for the years ending December
31, 2017, 2016 and 2015, respectively. The total fair value of shares vested during the years ended December 31, 2017, 2016 and
2015 was $3,459, $1,755 and $1,949, respectively.
(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. During
the year ended December 31, 2017, the Company granted restricted stock units representing 871,317 shares of common stock with
a total grant date fair value of $14,577. Share-based compensation expense was $2,956 for such restricted stock units for the
year ended December 31, 2017. In connection with the restructuring discussed in Note 4, the Company recorded additional
share-based compensation expense of $2,391 related to the accelerated vesting of restricted stock awards. Of the $2,391, $884
related to former corporate executives of FBR and $1,507 related to employees in the Capital Markets segment. The total
income tax benefit recognized related to the vesting of restricted stock units was $1,376 for the year ended December 31,
2017.
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 December 31, 2017,
the expected remaining unrecognized share-based compensation expense of $11,362 will be expensed over a weighted average period
of 2.5 years.
A
summary of equity incentive award activity for the period from June 1, 2017, the date of the acquisition of FBR, through December
31, 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
|
|
|
871,317
|
|
|
|
16.73
|
|
Vested
|
|
|
(200,905
|
)
|
|
|
15.08
|
|
Forfeited
|
|
|
(134,940
|
)
|
|
|
15.79
|
|
Nonvested
at December 31, 2017
|
|
|
1,066,133
|
|
|
$
|
16.15
|
|
The
per-share weighted average grant-date fair value of restricted stock units was $16.73 during the year ended December 31, 2017.
There were 200,905 restricted stock units with a fair value of $3,030 that vested during the year ended December 31, 2017 under
the Plan.
NOTE
17— BENEFIT PLANS AND CAPITAL TRANSACTIONS
|
(a)
|
Amended
and Restated 2009 Stock Incentive Plan
|
In
connection with the consummation of the Acquisition, the Company assumed the AAMAC 2009 Stock Incentive Plan which was approved
by the AAMAC stockholders on July 31, 2009 (as assumed, the “Incentive Plan”). In accordance with Section 13(a) of
the Incentive Plan, in connection with the Company’s assumption of the Incentive Plan, the Company’s board of directors
adjusted the maximum number of shares that may be delivered under the Incentive Plan to 782,200 to account for the two-for-one
exchange ratio of Company common stock for AAMAC common stock in the Acquisition. On August 19, 2009, the Company’s board
of directors approved an amendment and restatement of the Incentive Plan which adjusted the number of shares of stock the Company
reserved for issuance thereunder to 391,100. Effective as of October 7, 2014, the Company’s board of directors approved
an amendment and restatement of the Incentive Plan which, among other things, increased the number of shares of stock the Company
reserved for issuance thereunder to 3,210,133 shares. As of December 31, 2017, the Company has 1,925,178 shares of common stock
available for future grants under the Incentive Plan.
(b)
Employee Benefit Plan
The
Company maintains qualified defined contribution 401(k) plans, which cover substantially all of its U.S. employees. Under the
plans, participants are entitled to make pre-tax contributions up to the annual maximums established by the Internal Revenue Service.
The plan documents permit annual discretionary contributions from the Company. Employer contributions in the amount of $565 and
$53 were made during the years ended December 31, 2017 and 2016, respectively.
(c)
Public Offering of Common Stock
On
May 10, 2016, the Company completed the public offering of 2,420,980 shares of common stock at a price to the public of $9.50
per share. The net proceeds from the offering were $22,759 after deducting underwriting commissions and other offering expenses
of $240.
(d)
Dividends
On
May 4, 2015, our Board of Directors approved a dividend of $0.06 per share, which was paid on or about June 12, 2015 to stockholders
of record on May 22, 2015. On August 10, 2015, our Board of Directors approved a dividend of $0.20 per share, which was paid on
or about September 10, 2015 to stockholders of record on August 25, 2015. On November 9, 2015, our Board of Directors approved
a dividend of $0.06 per share, which was paid on or about December 9, 2015 to stockholders of record on November 24, 2015. On
August 4, 2016, our Board of Directors approved a dividend of $0.03 per share, which was paid on or about September 8, 2016 to
stockholders of record on August 22, 2016. On November 13, 2016, our Board of Directors approved a regular dividend of $0.08 per
share and a special dividend of $0.17 per share, which was paid on or about December 14, 2016 to stockholders of record on November
29, 2016. On February 20, 2017, our Board of Directors approved a regular quarterly dividend of $0.08 per share and a special
dividend of $0.18 per share, which were paid on or about March 13, 2017 to stockholders of record on March 6, 2017. On May 10,
2017, our Board of Directors approved a regular quarterly dividend of $0.08 per share and a special dividend of $0.08 per share,
which were paid on or about May 31, 2017 to stockholders of record on May 23, 2017. On August 7, 2017, our Board of Directors
approved a regular quarterly dividend of $0.08 per share and a special dividend of $0.05 per share, which were paid on or about
August 29, 2017 to stockholders of record on August 21, 2017. On November 8, 2017, our Board of Directors approved a regular quarterly
dividend of $0.08 per share and a special dividend of $0.04 per share, which were paid on or about November 30, 2017 to stockholders
of record on November 22, 2017. On March 7, 2018, our Board of Directors approved a regular quarterly dividend of $0.08 per share
and a special dividend of $0.08 per share, which will be paid on or about April 3, 2018 to stockholders of record on March 20,
2018. While it is the Board’s current intention to make regular dividend payments of $0.08 per share each quarter and special
dividend payments dependent upon exceptional circumstances from time to time, our Board of Directors may reduce or discontinue
the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends or
repurchases of our common stock will be made at the discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board
of Directors.
The
Company’s Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant.
The declaration and payment of any future dividends or repurchases of the Company’s common stock will be made at the discretion
of the Board of Directors and will be dependent upon the Company’s financial condition, results of operations, cash flows,
capital expenditures, and other factors that may be deemed relevant by the Board of Directors.
NOTE
18— NET CAPITAL REQUIREMENTS
B.
Riley & Co., LLC (“BRC”), B. Riley FBR, MLV and Wunderlich Securities, Inc. (“WSI”), the Company’s
broker-dealer subsidiaries, are registered with the SEC as broker-dealers and are members of the Financial Industry Regulatory
Authority, Inc. (“FINRA”). The Company’s broker-dealer subsidiaries are subject to SEC Uniform Net Capital Rule
(Rule 15c3-1) which requires the subsidiaries to maintain minimum net capital and that the ratio of aggregate indebtedness to
net capital, both as defined, shall not exceed 15 to 1. As such, they are subject to the minimum net capital requirements promulgated
by the SEC. As of December 31, 2017, BRC had net capital of $350, which was $100 in excess of its required net capital of $250
(net capital ratio of 3.50 to 1); B. Riley FBR had net capital of $56,462, which was $54,897 in excess of its required net capital
of $1,565 (net capital ratio of 1.02 to 1); and MLV had net capital of $496, which was $396 in excess of its required net capital
of $100 (net capital ratio of 1.25 to 1), and WSI had net capital of $4,292, which was $3,653 in excess of its required net capital
of $640 (net capital ratio of 1.17 to 1).
NOTE
19— RELATED PARTY TRANSACTIONS
At
December 31, 2017, amounts due from related parties include $5,585 from GACP I, L.P., $52 from GACP II, L.P. and $52 from CA Global
Partners, LLC (“CA Global”) for management fees, incentive fees and other operating expenses. 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”). 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 Senior Notes as more fully described in Note 11, 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
20— 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, restructuring, research, wealth management, sales and trading 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:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Capital
Markets reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
$
|
172,695
|
|
|
$
|
39,335
|
|
|
$
|
35,183
|
|
Interest
income - Securities lending
|
|
|
17,028
|
|
|
|
—
|
|
|
|
—
|
|
Total
revenues
|
|
|
189,723
|
|
|
|
39,335
|
|
|
|
35,183
|
|
Selling,
general, and administrative expenses
|
|
|
(150,092
|
)
|
|
|
(32,695
|
)
|
|
|
(30,229
|
)
|
Restructuring
costs
|
|
|
(7,855
|
)
|
|
|
—
|
|
|
|
—
|
|
Interest
expense - Securities lending
|
|
|
(12,051
|
)
|
|
|
—
|
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
(3,794
|
)
|
|
|
(549
|
)
|
|
|
(519
|
)
|
Segment
income
|
|
|
15,931
|
|
|
|
6,091
|
|
|
|
4,435
|
|
Auction
and Liquidation reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
47,376
|
|
|
|
61,891
|
|
|
|
35,633
|
|
Revenues
- Sale of goods
|
|
|
3
|
|
|
|
25,855
|
|
|
|
10,596
|
|
Total
revenues
|
|
|
47,379
|
|
|
|
87,746
|
|
|
|
46,229
|
|
Direct
cost of services
|
|
|
(27,841
|
)
|
|
|
(17,787
|
)
|
|
|
(15,489
|
)
|
Cost
of goods sold
|
|
|
(2
|
)
|
|
|
(14,502
|
)
|
|
|
(3,072
|
)
|
Selling,
general, and administrative expenses
|
|
|
(8,329
|
)
|
|
|
(14,331
|
)
|
|
|
(8,170
|
)
|
Depreciation
and amortization
|
|
|
(21
|
)
|
|
|
(26
|
)
|
|
|
(191
|
)
|
Segment
income
|
|
|
11,186
|
|
|
|
41,100
|
|
|
|
19,307
|
|
Valuation
and Appraisal reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
33,331
|
|
|
|
31,749
|
|
|
|
31,113
|
|
Direct
cost of services
|
|
|
(14,876
|
)
|
|
|
(13,983
|
)
|
|
|
(13,560
|
)
|
Selling,
general, and administrative expenses
|
|
|
(8,561
|
)
|
|
|
(8,778
|
)
|
|
|
(9,101
|
)
|
Depreciation
and amortization
|
|
|
(181
|
)
|
|
|
(107
|
)
|
|
|
(137
|
)
|
Segment
income
|
|
|
9,713
|
|
|
|
8,881
|
|
|
|
8,315
|
|
Principal
Investments - United Online segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
51,439
|
|
|
|
31,260
|
|
|
|
—
|
|
Revenues
- Sale of goods
|
|
|
304
|
|
|
|
261
|
|
|
|
—
|
|
Total
revenues
|
|
|
51,743
|
|
|
|
31,521
|
|
|
|
—
|
|
Direct
cost of services
|
|
|
(12,784
|
)
|
|
|
(9,087
|
)
|
|
|
—
|
|
Cost
of goods sold
|
|
|
(396
|
)
|
|
|
(253
|
)
|
|
|
—
|
|
Selling,
general, and administrative expenses
|
|
|
(11,304
|
)
|
|
|
(5,974
|
)
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
(7,033
|
)
|
|
|
(3,518
|
)
|
|
|
—
|
|
Restructuring
costs
|
|
|
(723
|
)
|
|
|
(3,474
|
)
|
|
|
—
|
|
Segment
income
|
|
|
19,503
|
|
|
|
9,215
|
|
|
|
—
|
|
Consolidated
operating income from reportable segments
|
|
|
56,333
|
|
|
|
65,287
|
|
|
|
32,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other expenses (including restructuring costs of $3,796, $413 and $1,006 for the years ended December 31, 2017, 2016 and
2015, respectively.)
|
|
|
(27,489
|
)
|
|
|
(16,562
|
)
|
|
|
(9,975
|
)
|
Interest
income
|
|
|
420
|
|
|
|
318
|
|
|
|
17
|
|
Loss
from equity investment
|
|
|
(437
|
)
|
|
|
—
|
|
|
|
—
|
|
Interest
expense
|
|
|
(8,382
|
)
|
|
|
(1,996
|
)
|
|
|
(834
|
)
|
Income
before income taxes
|
|
|
20,445
|
|
|
|
47,047
|
|
|
|
21,265
|
|
Provision
for income taxes
|
|
|
(8,510
|
)
|
|
|
(14,321
|
)
|
|
|
(7,688
|
)
|
Net
income
|
|
|
11,935
|
|
|
|
32,726
|
|
|
|
13,577
|
|
Net
income attributable to noncontrolling interests
|
|
|
379
|
|
|
|
11,200
|
|
|
|
1,772
|
|
Net
income attributable to B. Riley Financial, Inc.
|
|
$
|
11,556
|
|
|
$
|
21,526
|
|
|
$
|
11,805
|
|
The
following table presents revenues by geographical area:
|
|
Year
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
Revenues
- Services and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
301,881
|
|
|
$
|
135,428
|
|
|
$
|
77,153
|
|
Australia
|
|
|
940
|
|
|
|
26,487
|
|
|
|
—
|
|
Europe
|
|
|
2,020
|
|
|
|
2,320
|
|
|
|
24,776
|
|
Total
Revenues - Services and fees
|
|
$
|
304,841
|
|
|
$
|
164,235
|
|
|
$
|
101,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Sale of goods
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
307
|
|
|
$
|
323
|
|
|
$
|
907
|
|
Europe
|
|
|
—
|
|
|
|
25,793
|
|
|
|
9,689
|
|
Total
Revenues - Sale of goods
|
|
$
|
307
|
|
|
$
|
26,116
|
|
|
$
|
10,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Interest income - Securities lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
17,028
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
319,216
|
|
|
$
|
135,751
|
|
|
$
|
78,060
|
|
Australia
|
|
|
940
|
|
|
|
26,487
|
|
|
|
—
|
|
Europe
|
|
|
2,020
|
|
|
|
28,113
|
|
|
|
34,465
|
|
Total
Revenues
|
|
$
|
322,176
|
|
|
$
|
190,351
|
|
|
$
|
112,525
|
|
The
following table presents long-lived assets, which consists of property and equipment, net, by geographical area:
|
|
As
of
|
|
|
As
of
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Long-lived Assets - Property and Equipment,
net:
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
11,977
|
|
|
$
|
5,785
|
|
Australia
|
|
|
—
|
|
|
|
—
|
|
Europe
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
11,977
|
|
|
$
|
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
21— SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
Quarter
Ended
|
|
|
|
March
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
Total revenues
|
|
$
|
52,897
|
|
|
$
|
66,676
|
|
|
$
|
92,426
|
|
|
$
|
110,177
|
|
Operating income
|
|
$
|
10,711
|
|
|
$
|
2,560
|
|
|
$
|
1,356
|
|
|
$
|
14,217
|
|
Income (loss) before income taxes
|
|
$
|
10,052
|
|
|
$
|
816
|
|
|
$
|
(1,235
|
)
|
|
$
|
10,812
|
|
Benefit from (provision for) income
taxes
|
|
$
|
3,849
|
|
|
$
|
2,547
|
|
|
$
|
1,357
|
|
|
$
|
(16,263
|
)
|
Net income (loss)
|
|
$
|
13,901
|
|
|
$
|
3,363
|
|
|
$
|
122
|
|
|
$
|
(5,451
|
)
|
Net income (loss) attributable to B.
Riley Financial, Inc.
|
|
$
|
14,021
|
|
|
$
|
3,280
|
|
|
$
|
368
|
|
|
$
|
(6,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.15
|
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
Diluted
|
|
$
|
0.71
|
|
|
$
|
0.15
|
|
|
$
|
0.01
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,181,749
|
|
|
|
21,216,829
|
|
|
|
26,059,490
|
|
|
|
26,150,502
|
|
Diluted
|
|
|
19,626,574
|
|
|
|
22,119,055
|
|
|
|
27,639,862
|
|
|
|
26,150,502
|
|
|
|
Quarter
Ended
|
|
|
|
March
31,
|
|
|
June
30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
|
2016
|
|
Total revenues
|
|
$
|
19,946
|
|
|
$
|
20,261
|
|
|
$
|
56,966
|
|
|
$
|
93,178
|
|
Operating income
|
|
$
|
1,665
|
|
|
$
|
180
|
|
|
$
|
15,422
|
|
|
$
|
31,458
|
|
Income (loss) before income taxes
|
|
$
|
1,536
|
|
|
$
|
(92
|
)
|
|
$
|
14,457
|
|
|
$
|
31,146
|
|
(Provision for) benefit from income
taxes
|
|
$
|
(166
|
)
|
|
$
|
65
|
|
|
$
|
(6,083
|
)
|
|
$
|
(8,137
|
)
|
Net income (loss)
|
|
$
|
1,370
|
|
|
$
|
(27
|
)
|
|
$
|
8,374
|
|
|
$
|
23,009
|
|
Net income (loss) attributable to B.
Riley Financial, Inc.
|
|
$
|
248
|
|
|
$
|
(101
|
)
|
|
$
|
8,939
|
|
|
$
|
12,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.47
|
|
|
$
|
0.65
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.47
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,490,178
|
|
|
|
17,935,254
|
|
|
|
18,977,072
|
|
|
|
19,004,548
|
|
Diluted
|
|
|
16,553,953
|
|
|
|
17,935,254
|
|
|
|
19,208,527
|
|
|
|
19,511,292
|
|