NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share data)
NOTE
1—ORGANIZATION AND NATURE OF BUSINESS OPERATIONS
B.
Riley Financial, Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial
services to corporate, institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory
services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors
and professional services firms throughout the United States, Australia, Canada, and Europe and with the acquisitions of United
Online, Inc. (“UOL”) on July 1, 2016 and magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018, provide
consumer Internet access and cloud communication services.
The
Company operates in four operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate
finance, securities lending, restructuring, consulting, research, sales and trading and wealth management services to corporate,
institutional and high net worth clients; (ii) Auction and Liquidation, through which the Company provides auction and liquidation
services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures,
machinery and equipment, intellectual property and real property; (iii) Valuation and Appraisal, through which the Company provides
valuation and appraisal services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures
and other business needs; and (iv) Principal Investments — United Online and magicJack, through which the Company provides
consumer Internet access and related subscription services from United Online and cloud communication services primarily through
the magicJack devices.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Principles of Consolidation and Basis of Presentation
The
condensed consolidated financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned
subsidiaries. The condensed consolidated financial statements also include the accounts of (a) Great American Global Partners,
LLC which is controlled by the Company as a result of its ownership of a 50% member interest, appointment of two of the three
executive officers and significant influence over the funding of operations, and (b) GA Retail Investments, L.P. which is controlled
by the Company as a result of its ownership of a 50% partnership interest, appointment of executive officers and significant influence
over the operations. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant
to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to
such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting of only normal and recurring
adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented
have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction
with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2018, filed with the SEC on March 6, 2019. The results of operations for the nine months
ended September 30, 2019 are not necessarily indicative of the operating results to be expected for the full fiscal year or any
future periods.
(b)
Use of Estimates
The
preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements
and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items
such as valuation of securities, allowance for doubtful accounts, the fair value of intangible assets and goodwill, the fair value
of mandatorily redeemable noncontrolling interests, fair value of share based arrangements 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
On
January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts
with Customers using the modified retrospective method and the impact was determined to be immaterial on our condensed consolidated
financial statements. The new revenue standard was applied prospectively in the Company’s condensed consolidated financial
statements from January 1, 2018 forward and reported financial information for historical comparable periods was revised and will
continue to be reported under the accounting standards in effect during those historical periods.
Revenues
are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that
reflects the consideration the Company expects to be entitled to in exchange for the goods or services.
There
have been no material changes to the Company’s revenue recognition accounting policy set forth in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018. See Note 12 for information on revenue from contracts with customers.
(d)
Direct Cost of Services
Direct
cost of services relates 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 and magicJack segment include cost of telecommunications
and data center costs, personnel and overhead-related costs associated with operating the Company’s networks, servers and
data centers, sales commissions associated with multi-year service plans, depreciation of network computers and equipment, amortization
expense, 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 and Loan Participations Sold
Interest
expense from securities lending activities is included in operating expenses related to operations in the Capital Markets segment.
Interest expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the
Company and totaled $9,721 and $6,425 for the three months ended September 30, 2019 and 2018, respectively, and $22,027 and $16,317
for the nine months ended September 30, 2019 and 2018, respectively. Loan participations sold as of September 30, 3019
totaled $28,872. Interest expense from loan participations sold totaled $552 for both the three and nine months ended September 30,
2019.
(f)
Concentration of Risk
Revenues
in the Capital Markets, Valuation and Appraisal and Principal Investments — United Online and magicJack segments are currently
primarily generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United
States, Australia, Canada and Europe.
The
Company’s activities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers
and secured creditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors.
The Company seeks to control its credit risk and potential risk concentration through risk management activities that limit the
Company’s exposure to losses on any one specific liquidation services contract or concentration within any one specific
industry. To mitigate the exposure to losses on any one specific liquidations services contract, the Company sometimes conducts
operations with third parties through collaborative arrangements.
The
Company maintains cash in various federally insured banking institutions. The account balances at each institution periodically
exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a
concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses
in such accounts. The Company also has substantial cash balances from proceeds received from auctions and liquidation engagements
that are distributed to parties in accordance with the collaborative arrangements.
(g)
Advertising Expenses
The
Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled
$437 and $371 for the three months ended September 30, 2019 and 2018, respectively, and $1,383 and $1,656 for the nine months
ended September 30, 2019 and 2018, respectively. Advertising expense is included as a component of selling, general and administrative
expenses in the accompanying condensed consolidated statements of income.
(h)
Share-Based Compensation
The
Company’s share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs
associated with the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based
payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation
cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed
consolidated statements of income 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.
In
June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees
to purchase common stock through payroll deductions at a price that is 85% of the market value of the common stock on the last
day of the offering period. In accordance with the provisions of ASC 718, Compensation — Stock Compensation (“ASC
718”), the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. For
the three and nine months ended September 30, 2019, the Company recognized compensation expense of $68 and $263, respectively,
related to the Purchase Plan. At September 30, 2019, there were 625,055 shares reserved for issuance under the Purchase Plan.
(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 condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on
the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit
carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax
assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax
asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis,
including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances.
If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The
Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been
met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues
interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component
of income tax expense.
(j)
Cash and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(k)
Restricted Cash
As
of September 30, 2019, restricted cash balance is $471 related to one of the Company’s telecommunication suppliers. As of
December 31, 2018, restricted cash balance of $838 included $469 cash collateral for one of the Company’s telecommunication
suppliers and $369 certificate of deposits collateral for certain letters of credit.
(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 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 deposits 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 and magicJack 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 and changes in the allowance for doubtful accounts for the three and nine months ended September 30, 2019 and 2018 are
included in Note 6.
(o)
Leases
The
Company determines if an arrangement is, or contains, a lease at the inception date. Operating leases are included in right-of-use
assets, with the related liabilities included in operating lease liabilities in the condensed consolidated balance sheet.
Operating
lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation
to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement
date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate
in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments,
utilities, and maintenance costs are expensed as incurred and not included in determining the present value. Our lease terms include
options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized
on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components which are accounted
for as a single lease component. See Note 8 for additional information on leases.
(p)
Property and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated
useful lives of the assets. Property and equipment held under finance leases are amortized on a straight-line basis over the shorter
of the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $1,163
and $1,005 for the three months ended September 30, 2019 and 2018, respectively, and $4,186 and $3,369 for the nine months ended
September 30, 2019 and 2018, respectively.
(q)
Loans Receivable
Loans
receivable are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs,
unamortized deferred fees and costs on originated loans, and for purchased loans, net of any unamortized premiums or discounts.
Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over
the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology.
At September 30, 2019 and December 31, 2018, loans receivable had a carrying value of $295,898 and $38,794, respectively,
with various maturity dates through June 2022.
(r)
Securities and Other Investments Owned and Securities Sold Not Yet Purchased
Securities
owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities
sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and
thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities
are reflected currently in the results of operations.
As
of September 30, 2019 and December 31, 2018, the Company’s securities and other investments owned and securities sold not
yet purchased at fair value consisted of the following securities:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Securities and other
investments owned:
|
|
|
|
|
|
|
Common
and preferred stocks and warrants
|
|
$
|
244,556
|
|
|
$
|
193,459
|
|
Corporate
bonds
|
|
|
21,580
|
|
|
|
18,825
|
|
Fixed
income securities
|
|
|
4,816
|
|
|
|
3,825
|
|
Loans
receivable at fair value
|
|
|
35,511
|
|
|
|
33,731
|
|
Partnership
interests and other
|
|
|
20,153
|
|
|
|
23,737
|
|
|
|
$
|
326,616
|
|
|
$
|
273,577
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased:
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
6,684
|
|
|
$
|
11,130
|
|
Corporate
bonds
|
|
|
18,630
|
|
|
|
16,338
|
|
Fixed
income securities
|
|
|
3,778
|
|
|
|
10,155
|
|
|
|
$
|
29,092
|
|
|
$
|
37,623
|
|
(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 valued at fair value 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 also invests in priority investment funds and the underlying securities
held by these funds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption
of amounts invested by the Company. The Company’s partnership and investment fund interests are valued based on the Company’s
proportionate share of the net assets of the partnerships and funds; the value for these investments are derived from the most
recent statements received from the general partner or fund administrator. These partnership and investment fund interests are
valued at net asset value (“NAV”) in accordance with ASC “Topic 820: Fair Value Measurements.”
The
fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash,
references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation
models.
The
following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring
basis as of September 30, 2019 and December 31, 2018.
|
|
Financial
Assets and Liabilities Measured at Fair Value
|
|
|
|
on
a Recurring Basis at September 30, 2019 Using
|
|
|
|
|
|
|
Quoted
prices in
|
|
|
|
|
|
|
|
|
|
Fair
value at
|
|
|
active
markets for identical
|
|
|
Other
observable
|
|
|
Significant
unobservable
|
|
|
|
September 30,
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2019
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
and preferred stocks and warrants
|
|
$
|
244,556
|
|
|
$
|
193,625
|
|
|
$
|
—
|
|
|
$
|
50,931
|
|
Corporate
bonds
|
|
|
21,580
|
|
|
|
—
|
|
|
|
21,580
|
|
|
|
—
|
|
Fixed
income securities
|
|
|
4,816
|
|
|
|
—
|
|
|
|
4,816
|
|
|
|
—
|
|
Loans
receivable at fair value
|
|
|
35,511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,511
|
|
Total
|
|
|
306,463
|
|
|
$
|
193,625
|
|
|
$
|
26,396
|
|
|
$
|
86,442
|
|
Investment
funds valued at net asset value (1)
|
|
|
20,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets measured at fair value
|
|
$
|
326,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
6,684
|
|
|
$
|
6,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate
bonds
|
|
|
18,630
|
|
|
|
—
|
|
|
|
18,630
|
|
|
|
—
|
|
Fixed
income securities
|
|
|
3,778
|
|
|
|
—
|
|
|
|
3,778
|
|
|
|
—
|
|
Total
securities sold not yet purchased
|
|
|
29,092
|
|
|
|
6,684
|
|
|
|
22,408
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,395
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,395
|
|
Total
liabilities measured at fair value
|
|
$
|
33,487
|
|
|
$
|
6,684
|
|
|
$
|
22,408
|
|
|
$
|
4,395
|
|
|
|
Financial
Assets and Liabilities Measured at Fair Value
|
|
|
|
on
a Recurring Basis at December 31, 2018 Using
|
|
|
|
|
|
|
Quoted
prices in
|
|
|
|
|
|
|
|
|
|
Fair
value at
|
|
|
active
markets for identical
|
|
|
Other
observable
|
|
|
Significant
unobservable
|
|
|
|
December 31
|
|
|
assets
|
|
|
inputs
|
|
|
inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
and other investments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
and preferred stocks and warrants
|
|
$
|
193,459
|
|
|
$
|
168,882
|
|
|
$
|
—
|
|
|
$
|
24,577
|
|
Corporate
bonds
|
|
|
18,825
|
|
|
|
—
|
|
|
|
18,825
|
|
|
|
—
|
|
Fixed
income securities
|
|
|
3,825
|
|
|
|
—
|
|
|
|
3,825
|
|
|
|
—
|
|
Loans
receivable at fair value
|
|
|
33,731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,731
|
|
Total
|
|
|
249,840
|
|
|
$
|
168,882
|
|
|
$
|
22,650
|
|
|
$
|
58,308
|
|
Investment
funds valued at net asset value(1)
|
|
|
23,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets measured at fair value
|
|
$
|
273,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks
|
|
$
|
11,130
|
|
|
$
|
11,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate
bonds
|
|
|
16,338
|
|
|
|
—
|
|
|
|
16,338
|
|
|
|
—
|
|
Fixed
income securities
|
|
|
10,155
|
|
|
|
—
|
|
|
|
10,155
|
|
|
|
—
|
|
Total
securities sold not yet purchased
|
|
|
37,623
|
|
|
|
11,130
|
|
|
|
26,493
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,633
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,633
|
|
Total
liabilities measured at fair value
|
|
$
|
42,256
|
|
|
$
|
11,130
|
|
|
$
|
26,493
|
|
|
$
|
4,633
|
|
|
(1)
|
Certain
investments that are measured at fair value using the net asset value per share (or its
equivalent) practical expedient have not been classified in the fair value hierarchy
in accordance with ASC “Topic 820 Fair Value Measurements.” The fair value
amounts presented in the tables above for investment funds valued at net asset value
are intended to permit reconciliation of the fair value hierarchy to the amounts presented
in the condensed consolidated balance sheets.
|
As
of September 30, 2019 and December 31, 2018, financial assets measured and reported at fair value on a recurring basis and
classified within Level 3 were $86,442 and $58,308, respectively, or 4.1% and 3.0%, respectively, of the Company’s total
assets. In determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance
and market factors to estimate the value, including where applicable, over-the-counter market trading activity.
The
following table summarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities
by category of investment and valuation technique as of September 30, 2019:
|
|
Fair
value at
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
Weighted
|
|
|
|
2019
|
|
|
Technique
|
|
Input
|
|
Range
|
|
Average
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
and preferred stocks and warrants
|
|
$
|
50,931
|
|
|
Market
approach
|
|
Over-the-counter
trading activity
|
|
$8.00/share
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
Market price of related security
|
|
$4.79/share
|
|
$
|
4.79
|
|
|
|
|
|
|
|
|
|
Recent transaction
|
|
$210.02/share
|
|
$
|
210.02
|
|
|
|
|
|
|
|
|
|
Multiple of EBITDA
|
|
10.1x
|
|
|
10.1
|
x
|
|
|
|
|
|
|
Yield analysis
|
|
Cost of capital
|
|
13.2%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
Option pricing model
|
|
Annualized volatility
|
|
50% - 100%
|
|
|
68
|
%
|
Loans
receivable at fair value
|
|
|
35,511
|
|
|
Discounted cash flow
|
|
Market interest rate
|
|
15.1% -15.3%
|
|
|
15.3
|
%
|
|
|
|
|
|
|
Market
approach
|
|
Market price of
related security
|
|
$2,100.21/share
|
|
$
|
2,100.21
|
|
Total
level 3 assets measured at fair value
|
|
$
|
86,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
$
|
4,395
|
|
|
Market approach
|
|
Operating income multiple
|
|
6.0x
|
|
|
6.0
|
x
|
The
changes in Level 3 fair value hierarchy during the nine months ended September 30, 2019 and 2018 are as follows:
|
|
Level
3
|
|
|
Level
3 Changes During the Period
|
|
|
Level
3
|
|
|
|
Balance
at
|
|
|
Fair
|
|
|
Relating
to
|
|
|
Purchases,
|
|
|
Transfer in
|
|
|
Balance
at
|
|
|
|
Beginning of
|
|
|
Value
|
|
|
Undistributed
|
|
|
Sales
and
|
|
|
and/or
out
|
|
|
End
of
|
|
|
|
Year
|
|
|
Adjustments
|
|
|
Earnings
|
|
|
Settlements
|
|
|
of
Level 3
|
|
|
Period
|
|
Nine
Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
and preferred stocks and warrants
|
|
$
|
24,577
|
|
|
$
|
715
|
|
|
$
|
1,424
|
|
|
$
|
24,215
|
|
|
$
|
—
|
|
|
$
|
50,931
|
|
Loans
receivable at fair value
|
|
|
33,731
|
|
|
|
11,648
|
|
|
|
1,621
|
|
|
|
(11,489
|
)
|
|
|
—
|
|
|
|
35,511
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,633
|
|
|
|
—
|
|
|
|
(238
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,395
|
|
Nine
Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks and warrants
|
|
$
|
28,346
|
|
|
$
|
(3,247
|
)
|
|
$
|
578
|
|
|
$
|
4,250
|
|
|
$
|
(20,970
|
)
|
|
$
|
8,957
|
|
Loans
receivable at fair value
|
|
|
33,713
|
|
|
|
(11
|
)
|
|
|
100
|
|
|
|
2,785
|
|
|
|
—
|
|
|
|
36,587
|
|
Partnership
interests and other
|
|
|
26,104
|
|
|
|
1,411
|
|
|
|
(2,735
|
)
|
|
|
28,044
|
|
|
|
—
|
|
|
|
52,824
|
|
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003
|
|
|
4,478
|
|
|
|
—
|
|
|
|
(69
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,409
|
|
The
amount reported in the table above for the nine months ended September 30, 2019 and 2018 includes the amount of undistributed
earnings attributable to the noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported
in the condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts
payable and accrued expenses and other liabilities approximate fair value based on the short-term maturity of these instruments.
The
carrying amount of the senior notes payable and term loan approximate 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 nine months ended September 30, 2019 and 2018, 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. The Company did not use any derivative contracts
during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, the Company’s use of derivatives
consisted of the purchase of forward exchange contracts (a) in the amount of $54,406 Canadian dollars, that were settled during
the first and second quarter of 2018 and (b) $1,500 Euro’s that settled in March 2018.
The net loss from
forward exchange contracts was $91 during the nine months ended September 30, 2018. This amount is reported as a component of selling,
general and administrative expenses in the condensed 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 period-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 condensed consolidated balance sheets. Transaction gains (loss) were $446 and
($51) during the three months ended September 30, 2019 and 2018, respectively, and $121 and $843 during the nine months
ended September 30, 2019 and 2018, respectively. These amounts are included in selling, general and administrative
expenses in the Company’s condensed consolidated statements of income.
(u)
Common Stock Warrants
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. As of December 31, 2018, warrants to purchase 821,816 shares of
common stock were outstanding. On May 16, 2019, the Company repurchased 638,311 warrants for $2,777 ($4.35 per warrant) which
is included in common stock warrants repurchased in the condensed consolidated statements of equity. As of September 30, 2019,
warrants to purchase 183,505 shares of common stock were outstanding.
(v)
Equity Investment
bebe
stores, inc.
At
September 30, 2019, the Company had a 30.5% ownership interest in bebe stores, inc. (“bebe”). The equity ownership
in bebe is accounted for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed
consolidated balance sheets.
National
Holdings Corporation
On
November 14, 2018, the Company entered into an agreement to acquire shares of National Holdings Corporation (“National Holdings”),
a Nasdaq-listed issuer, from Fortress Biotech, Inc. for an aggregate purchase price totaling approximately $22.9 million. The
transaction was completed in two tranches. In the first tranche, which was completed in the fourth quarter of 2018, the Company
acquired shares representing 24% of the total outstanding shares of National Holdings. The second tranche was completed in the
first quarter of 2019. As of September 30, 2019, the Company had purchased 6,159,550 shares of National Holdings’ common
stock, representing 48.8% of National Holdings’ outstanding shares, at $3.25 per share. The carrying value for the National
Holdings investment is included in prepaid expenses and other assets in the condensed consolidated balance sheets. The equity
ownership in National Holdings is accounted for under the equity method of accounting.
(w)
Loan Participations Sold
As
of September 30, 2019, the Company has sold investments (“Loan Participations Sold”) to third parties (“Participants”)
that are accounted for as secured borrowings under ASC Topic 860, Transfers and Servicing. Under ASC Topic 860, a partial loan
transfer does not qualify for sale accounting in order for sale treatment to be allowed. A participation or other partial loan
transfer that meets the definition of a participating interest is classified as loan receivable and the portion transferred is
recorded as a secured borrowing under loan participations sold in the condensed consolidated balance sheet. The Participants are
entitled to payments made by the borrower of the related loan equal to the current Loan Participations Sold outstanding at the
interest rates for the respective investment. In the event that the borrower defaults, the Participants have rights to payments
from such borrower, but do not have recourse to the Company. The terms of the Loan Participations Sold are commensurate with the
terms of the related loan.
As
of September 30, 2019, the Company had entered into participation agreements for a total of $28,872. In addition, the interest
income and interest expense related to the Loan Participations Sold resulted in interest income and interest expense which is
presented gross on the condensed consolidated statement of income.
(x) Reclassifications
and Supplemental Non-cash Disclosures
During the three
and nine months ended September 30, 2018, interest income earned on loans of $831 and $2,570, respectively, was previously
included in services and fees income in the capital markets segment. These amounts have been reclassified and reported in
interest income – loans and securities lending to conform to the 2019 presentation.
During the nine months
ended September 30, 2018, non-cash investing activities included the conversion of a loan receivable in the amount of $16,867 and
accrued interest receivable of $51 into an equity investment that totaled $16,918. During the nine months ended September 30,
2019, non-cash investing activities included the conversion of a loan receivable in the amount of $7,574 into securities and other
investments owned.
(y)
Variable Interest Entity
In
2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations.
The Company’s investment in the Partnership is a variable interest entity (“VIE”) since the unaffiliated limited
partners do not have substantive kick- out or participating rights to remove the Company’s subsidiary that is the general
partner managing the Partnership. The Company has determined that it is not the primary beneficiary due to the fact that its fee
arrangements are considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in
the Partnership that are considered to be more than insignificant. The Company determines whether it is the primary beneficiary
of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether
the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the
Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if
it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.
The
carrying value of the Company’s investments in the VIE that was not consolidated is shown below.
|
|
September 30,
2019
|
|
Partnership investments
|
|
$
|
12,074
|
|
Due from related party
|
|
|
1,209
|
|
Maximum exposure to loss
|
|
$
|
13,283
|
|
(z)
Recent Accounting Pronouncements
Not
yet adopted
In
January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard requires an allowance
to be recorded for all expected credit losses for certain financial assets. The new standard introduces an approach, based on
expected losses, to estimate credit losses on certain types of financial instruments. ASU 2016-13 is effective for public companies
for interim and annual period beginning December 15, 2019. Entities are required to apply the standard’s provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
The Company has not yet adopted this update and is currently evaluating the effect this new standard will have on its financial
condition and results of operations.
Recently
adopted
In
February 2016, FASB issued ASU. 2016-02: Leases (Topic 842) which requires a lessee to recognize a right-of-use (ROU) asset and
lease liability on the balance sheet for all leases with a contract term longer than 12 months and provide enhanced disclosures.
The Company adopted the new standard effective January 1, 2019 using the modified retrospective method. The Company elected the
‘package of practical expedients,’ which permits the Company not to reassess under the new standard the Company’s
prior conclusions about lease identification, lease classification and initial direct costs. Upon adoption of ASC 842 on January
1, 2019, the Company recognized $67,519 operating lease liabilities with corresponding operating lease right-of-use assets. See
Note 8 to the accompanying financial statements for additional information on leases.
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 Reform Act. 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 Reform Act is recognized. The accounting update is effective for the fiscal year beginning
after December 15, 2018. The adoption of this standard did not have a material impact to the Company’s financial condition
and results of operations.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments (“ASU 2016-15”), which clarifies how companies present and classify certain cash receipts and cash payments
in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019. The adoption of this
standard did not have a material impact to the Company’s financial condition and results of operations.
On
January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers using the modified retrospective method
and the impact was determined to be immaterial on the Company’s consolidated financial statements. The new revenue standard
was applied prospectively in the Company’s 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. See Note 12 to the financial statements for additional information on the adoption
of this standard.
In
August 2018, the FASB issued ASU No. 2018-13: Fair Value Measurement (Topic 820) (“ASU 2018-13”). The amendments in
this update change the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures.
The Company early adopted ASU 2018-13 in the third quarter of 2018 and the adoption did not have a material impact on our consolidated
financial statements.
In
March 2018, the FASB issued ASU 2018-05: Income Taxes (Topic 740) — Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118. The amendments in this update provide guidance on when to record and disclose provisional amounts for certain
income tax effects of the Tax Reform Act. The amendments also require any provisional amounts or subsequent adjustments to be
included in net income from continuing operations. This ASU also discusses required disclosures that an entity must make with
regard to the Tax Reform Act. This ASU is effective immediately as new information is available to adjust provisional amounts
that were previously recorded. The Company has adopted this standard and will continue to evaluate indicators that may give rise
to a change in the Company’s tax provision as a result of the Tax Reform Act. See Note 13 to the accompanying financial
statements for additional information on the Tax Reform Act.
On
January 1, 2018, the Company adopted ASU 2016-18 — Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”)
using the retrospective method which requires adjustment to prior periods in the statement of cash flows. ASU 2016-18 clarifies
how restricted cash should be presented on the statement of cash flows and requires companies to include restricted cash with
cash and cash equivalents when reconciling the beginning of period and end of period totals on the statement of cash flows. Restricted
cash previously classified under investing activities is now included in the reconciliation of beginning and ending cash on the
statement of cash flows. The adoption of ASU 2016-18 did not have a material impact on the Company’s financial condition
and results of operations.
NOTE
3— ACQUISITIONS
Acquisition
of magicJack VocalTec Ltd
On
November 9, 2017, the Company entered into an Agreement and Plan of Merger (the “magicJack Merger Agreement”) 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 would merge with and into magicJack,
with magicJack continuing as the surviving corporation and as an indirect subsidiary of the Company. Pursuant to the magicJack
Merger Agreement, customary closing conditions were satisfied, and the acquisition was completed on November 14, 2018. Subject
to the terms and conditions of the Agreement and Plan of Merger, each outstanding share of magicJack converted into the right
to receive $8.71 in cash without interest, representing approximately $143,115 in aggregate merger consideration.
The
assets and liabilities of magicJack, both tangible and intangible, were recorded at their estimated fair values as of the November
14, 2018, acquisition date for magicJack. The application of the purchase method of accounting resulted in goodwill of $106,539
which represents the benefits from synergies with the Company’s existing business and acquired workforce. The 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 magicJack shares outstanding at November 14, 2018
|
|
|
16,248,299
|
|
Cash
merger consideration per share
|
|
$
|
8.71
|
|
Total
cash consideration for magicJack common shares
|
|
|
141,523
|
|
Cash
consideration for magicJack stock options and accelerated vesting of restricted stock awards
|
|
|
1,592
|
|
Total
consideration
|
|
$
|
143,115
|
|
Tangible
assets acquired and assumed:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
53,875
|
|
Restricted
cash
|
|
|
369
|
|
Accounts
receivable
|
|
|
3,103
|
|
Inventory
|
|
|
2,033
|
|
Prepaid
expenses and other assets
|
|
|
4,961
|
|
Property
and equipment
|
|
|
2,922
|
|
Deferred
taxes
|
|
|
16,769
|
|
Accounts
payable
|
|
|
(2,313
|
)
|
Contract
liabilities
|
|
|
(66,489
|
)
|
Accrued
payroll and related expenses
|
|
|
(1,989
|
)
|
Accrued
expenses and other liabilities
|
|
|
(21,315
|
)
|
Developed
technology
|
|
|
6,400
|
|
Tradename
|
|
|
1,750
|
|
Customer
list
|
|
|
34,500
|
|
Process-know-how
|
|
|
2,000
|
|
Goodwill
|
|
|
106,539
|
|
Total
|
|
$
|
143,115
|
|
Pro
Forma Financial Information
The
unaudited pro-forma financial information in the table below summarizes the combined results of operations of the Company and
magicJack as though the acquisitions had occurred as of January 1, 2018. The pro-forma financial information presented includes
the effects of adjustments related to the amortization charges from the acquired intangible assets and the elimination of certain
activities excluded from the transaction and transaction related costs. The pro forma financial information as presented below
is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved
if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of
future results.
|
|
Pro
Forma (Unaudited)
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2018
|
|
Revenues
|
|
$
|
118,372
|
|
|
$
|
378,126
|
|
Net
income attributable to B. Riley Financial, Inc.
|
|
$
|
5,985
|
|
|
$
|
31,025
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.23
|
|
|
$
|
1.20
|
|
Diluted
earnings per share
|
|
$
|
0.22
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic shares outstanding
|
|
|
25,968,997
|
|
|
|
25,856,339
|
|
Weighted
average diluted shares outstanding
|
|
|
26,854,261
|
|
|
|
26,776,133
|
|
NOTE
4— RESTRUCTURING CHARGE
The
Company recorded no restructuring charges for the three months ended September 30, 2019. The Company recorded restructuring charges
in the amount $428 for the three months ended September 30, 2018 and $1,699 and $2,247 for the nine months ended September 30,
2019 and 2018, respectively.
The
restructuring charges during the nine months ended September 30, 2019 were primarily related to severance costs for magicJack
employees from a reduction in workforce and lease termination costs in the Principal Investments – United Online and magicJack
segment.
The
restructuring charges during the three and nine months ended September 30, 2018 were primarily related to the planned consolidation
of office space related to operations in the Capital Markets segment.
The
following tables summarize the changes in accrued restructuring charge during three and nine months ended September 30, 2019
and 2018:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
2,642
|
|
|
$
|
1,827
|
|
|
$
|
3,855
|
|
|
$
|
2,600
|
|
Restructuring charge
|
|
|
—
|
|
|
|
428
|
|
|
|
1,699
|
|
|
|
2,247
|
|
Cash paid
|
|
|
(779
|
)
|
|
|
(504
|
)
|
|
|
(3,827
|
)
|
|
|
(2,954
|
)
|
Non-cash
items
|
|
|
60
|
|
|
|
(1
|
)
|
|
|
196
|
|
|
|
(143
|
)
|
Balance, end of
period
|
|
$
|
1,923
|
|
|
$
|
1,750
|
|
|
$
|
1,923
|
|
|
$
|
1,750
|
|
The
following tables summarize the restructuring activities by reportable segment during the three and nine months ended September
30, 2019 and 2018:
|
|
Three
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments -
|
|
|
|
|
|
|
|
|
|
|
|
Investments -
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
Capital
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
magicJack
|
|
|
Corporate
|
|
|
Total
|
|
|
Markets
|
|
|
magicJack
|
|
|
Corporate
|
|
|
Total
|
|
Restructuring
charge (recovery):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
76
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76
|
|
Facility
closure and consolidation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
352
|
|
|
|
—
|
|
|
|
—
|
|
|
|
352
|
|
Total
restructuring charge
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
428
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments -
|
|
|
|
|
|
|
|
|
|
|
|
Investments -
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
Capital
|
|
|
United
Online and
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
magicJack
|
|
|
Corporate
|
|
|
Total
|
|
|
Markets
|
|
|
magicJack
|
|
|
Corporate
|
|
|
Total
|
|
Restructuring
charge (recovery):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination costs
|
|
$
|
—
|
|
|
$
|
1,594
|
|
|
$
|
—
|
|
|
$
|
1,594
|
|
|
|
729
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
729
|
|
Facility
closure and consolidation
|
|
|
(4
|
)
|
|
|
109
|
|
|
|
—
|
|
|
|
105
|
|
|
|
1,728
|
|
|
|
—
|
|
|
|
(210
|
)
|
|
|
1,518
|
|
Total
restructuring charge
|
|
$
|
(4
|
)
|
|
$
|
1,703
|
|
|
$
|
—
|
|
|
$
|
1,699
|
|
|
|
2,457
|
|
|
$
|
—
|
|
|
$
|
(210
|
)
|
|
$
|
2,247
|
|
NOTE
5— SECURITIES LENDING
The
following table presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount
as of September 30, 2019 and December 31, 2018:
|
|
Gross
amounts recognized
|
|
|
Gross
amounts offset in the consolidated balance sheets(1)
|
|
|
Net
amounts included in the consolidated balance sheets
|
|
|
Amounts
not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default(2)
|
|
|
Net
amounts
|
|
As of September 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
borrowed
|
|
$
|
720,207
|
|
|
$
|
—
|
|
|
$
|
720,207
|
|
|
$
|
720,207
|
|
|
$
|
—
|
|
Securities
loaned
|
|
$
|
714,947
|
|
|
$
|
—
|
|
|
$
|
714,947
|
|
|
$
|
714,947
|
|
|
$
|
—
|
|
As of December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
borrowed
|
|
$
|
931,346
|
|
|
$
|
—
|
|
|
$
|
931,346
|
|
|
$
|
931,346
|
|
|
$
|
—
|
|
Securities
loaned
|
|
$
|
930,522
|
|
|
$
|
—
|
|
|
$
|
930,522
|
|
|
$
|
930,522
|
|
|
$
|
—
|
|
|
(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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts
receivable
|
|
$
|
29,198
|
|
|
$
|
12,594
|
|
Investment
banking fees, commissions and other receivables
|
|
|
14,961
|
|
|
|
26,581
|
|
Unbilled
receivables
|
|
|
4,721
|
|
|
|
3,644
|
|
Total
accounts receivable
|
|
|
48,880
|
|
|
|
42,819
|
|
Allowance
for doubtful accounts
|
|
|
(1,461
|
)
|
|
|
(696
|
)
|
Accounts
receivable, net
|
|
$
|
47,419
|
|
|
$
|
42,123
|
|
Additions
and changes to the allowance for doubtful accounts consist of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Balance,
beginning of period
|
|
$
|
1,360
|
|
|
$
|
796
|
|
|
$
|
696
|
|
|
$
|
800
|
|
Add: Additions
to reserve
|
|
|
615
|
|
|
|
192
|
|
|
|
1,681
|
|
|
|
840
|
|
Less: Write-offs
|
|
|
(376
|
)
|
|
|
(164
|
)
|
|
|
(759
|
)
|
|
|
(816
|
)
|
Less:
Recovery
|
|
|
(138
|
)
|
|
|
—
|
|
|
|
(157
|
)
|
|
|
—
|
|
Balance,
end of period
|
|
$
|
1,461
|
|
|
$
|
824
|
|
|
$
|
1,461
|
|
|
$
|
824
|
|
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— GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
was $220,562 and $223,368 at September 30, 2019 and December 31, 2018, respectively. During the nine months ended September 30,
2019, goodwill decreased by $2,806. The decrease in goodwill included a decrease of $3,213 as a result the allocation of goodwill
related to the sale of a division of magicJack offset by an increase in goodwill of $407 from magicJack’s purchase price
allocation adjustments during the nine months ended September 30, 2019. At September 30, 2019, goodwill was comprised of $95,820
in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment,
and $119,054 in the Principal Investments – United Online and magicJack segment. At December 31, 2018, goodwill was comprised
of $95,820 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal
segment, and $121,860 in the Principal Investments – United Online and magicJack segment.
Intangible
assets consisted of the following:
|
|
|
|
As
of September 30, 2019
|
|
|
As
of December 31, 2018
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangibles
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangibles
|
|
|
|
Useful
Life
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
|
Value
|
|
|
Amortization
|
|
|
Net
|
|
Amortizable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
4
to 16 Years
|
|
$
|
90,330
|
|
|
$
|
24,217
|
|
|
$
|
66,113
|
|
|
$
|
92,330
|
|
|
$
|
16,608
|
|
|
$
|
75,722
|
|
Domain
names
|
|
7
Years
|
|
|
233
|
|
|
|
108
|
|
|
|
125
|
|
|
|
237
|
|
|
|
85
|
|
|
|
152
|
|
Advertising
relationships
|
|
8
Years
|
|
|
100
|
|
|
|
41
|
|
|
|
59
|
|
|
|
100
|
|
|
|
31
|
|
|
|
69
|
|
Internally
developed software and other intangibles
|
|
0.5
to 5 Years
|
|
|
11,765
|
|
|
|
4,230
|
|
|
|
7,535
|
|
|
|
11,773
|
|
|
|
2,436
|
|
|
|
9,337
|
|
Trademarks
|
|
7
to 10 Years
|
|
|
4,600
|
|
|
|
1,184
|
|
|
|
3,416
|
|
|
|
4,600
|
|
|
|
762
|
|
|
|
3,838
|
|
Total
|
|
|
|
|
107,028
|
|
|
|
29,780
|
|
|
|
77,248
|
|
|
|
109,040
|
|
|
|
19,922
|
|
|
|
89,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortizable
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
|
|
2,240
|
|
|
|
—
|
|
|
|
2,240
|
|
|
|
2,240
|
|
|
|
—
|
|
|
|
2,240
|
|
Total
intangible assets
|
|
|
|
$
|
109,268
|
|
|
$
|
29,780
|
|
|
$
|
79,488
|
|
|
$
|
111,280
|
|
|
$
|
19,922
|
|
|
$
|
91,358
|
|
Amortization
expense was $3,310 and $2,093 for the three months ended September 30, 2019 and 2018, respectively, and $10,031 and $6,399 for
the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019, estimated future amortization expense
is $3,309, $12,856, $12,473, $12,453, and $12,209 for the years ended December 31, 2019 (remaining three months), 2020, 2021,
2022 and 2023, respectively. The estimated future amortization expense after December 31, 2023 is $23,948.
NOTE
8— LEASING ARRANGEMENTS
The
Company’s operating lease assets primarily represent the lease of office space where the Company conducts its operations
with the weighted average lease term of 8.0 years. The operating leases have lease terms ranging from one month to twelve years.
The weighted average discount rate used to calculate the present value of lease payments was 5.58% at September 30, 2019. For
the three and nine months ended September 30, 2019, total operating lease expense was $3,337 and $9,632, respectively. Of the
$3,337 and $9,632 operating lease expense for the three and nine months ended September 30, 2019, respectively, $337 and $915
were attributable to variable lease expenses. Operating lease expense is included in selling, general and administrative expenses
in the condensed consolidated statements of income.
For
the nine months ended September 30, 2019, cash payments against operating lease liabilities totaled $9,580 and non-cash transactions
totaled $2,801 to recognize operating lease right-of-use assets and operating lease liabilities. Cash flows from operating leases
are classified as net cash flows from operating activities in the accompanying condensed consolidated statements of cash flows.
As
of September 30, 2019, maturities of operating lease liabilities were as follows:
|
|
Operating
|
|
|
|
Leases
|
|
Year
ending December 31:
|
|
|
|
2019
(remaining three months)
|
|
$
|
3,357
|
|
2020
|
|
|
12,580
|
|
2021
|
|
|
10,699
|
|
2022
|
|
|
9,823
|
|
2023
|
|
|
9,127
|
|
Thereafter
|
|
|
33,478
|
|
Total
lease payments
|
|
|
79,064
|
|
Less:
imputed interest
|
|
|
(15,247
|
)
|
Total
operating lease liability
|
|
$
|
63,817
|
|
At
September 30, 2019, the Company did not have any significant leases executed but not yet commenced.
NOTE
9— ASSET BASED CREDIT FACILITY
On
April 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset
based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing
limit from $100,000 to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility
from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement
(a “UK Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for
the financing of transactions in the United Kingdom. Such facility allows the Company to borrow up to 50 million British Pounds.
Any borrowings on the UK Credit Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement
is cross collateralized and integrated in certain respects with the Credit Agreement. Cash advances and the issuance of letters
of credit under the credit facility are made at the lender’s discretion. The letters of credit issued under this facility
are furnished by the lender to third parties for the principal purpose of securing minimum guarantees under liquidation services
contracts more fully described in Note 2(c). All outstanding loans, letters of credit, and interest are due on the expiration
date which is generally within 180 days of funding. The credit facility is secured by the proceeds received for services rendered
in connection with liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the
assets that are sold at liquidation related to such contract. The Company paid Wells Fargo Bank a closing fee in the amount of
$500 in connection with the April 2017 amendment to the Credit Agreement. The interest rate for each revolving credit advance
under the Credit Agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending
on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided.
The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation
engagements funded under the Credit Agreement as set forth therein. Interest expense totaled $240 and $809 for the three months
ended September 30, 2019 and 2018, respectively, and $826 and $4,138 for the nine months ended September 30, 2019 and 2018, respectively.
There was no outstanding balance on this credit facility at September 30, 2019 and December 31, 2018. At September 30, 2019, there
were no open letters of credit outstanding.
We
are in compliance with all financial covenants in the asset based credit facility at September 30, 2019.
NOTE
10 — TERM LOAN
On
December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation,
Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacity
as borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with the Banc of California, N.A. in
the capacity as agent (the “Agent”) and lender and with the other lenders party thereto (the “Closing Date Lenders”).
Certain of the Borrowers’ U.S. subsidiaries are guarantors of all obligations under the BRPAC Credit Agreement and are parties
to the BRPAC Credit Agreement in such capacity (collectively, the “Secured Guarantors”; and together with the Borrowers,
the “Credit Parties”). In addition, the Company and B. Riley Principal Investments, LLC, the parent corporation of
BRPAC and a subsidiary of the Company, are guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone
guaranty agreements pursuant to which the shares outstanding membership interests of BRPAC are pledged as collateral.
The
obligations under the BRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in,
substantially all of the assets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties,
(b) 65% of the equity interests in United Online Software Development (India) Private Limited, a private limited company organized
under the laws of India; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the
laws of Israel. Such security interests are evidenced by pledge, security and other related agreements.
The
BRPAC Credit Agreement contains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’
ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage
in transactions with related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires
the Credit Parties to maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and
warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties,
covenant defaults and cross defaults. If an event of default occurs, the agent would be entitled to take various actions, including
the acceleration of amounts due under the outstanding BRPAC Credit Agreement.
Under the BRPAC Credit
Agreement, the Company borrowed $80,000 due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, the Company
may request additional optional term loans in an aggregate principal amount of up to $10,000 at any time prior to the first anniversary
of the agreement date (the “Option Loan”) with a final maturity date of December 19, 2023. On February 1, 2019, the
Credit Parties, the Closing Date Lenders, the Agent and City National Bank, as a new lender (the “New Lender”), entered
into the First Amendment to the Credit Agreement and Joinder (the “First Amendment”) pursuant to which, among other
things, (i) New Lender became a party to the BRPAC Credit Agreement, (ii) the New Lender extended to Borrowers the Option Loan
in the amount of $10,000, (iii) the aggregate outstanding principal amount of the term loans was increased from $80,000 to $90,000;
and (iv) the amortization schedule under the BRPAC was amended as set forth in the First Amendment. Additionally, in connection
with the Option Loan, the Borrowers executed a term note in favor of New Lender dated February 1, 2019 in the amount of $10,000.
Borrowings under the BRPAC Credit Agreement bear interest at a rate equal to (a) the LIBOR rate for Eurodollar loans, plus (b)
the applicable margin rate, which ranges from two and one-half percent (2.5%) to three percent (3.0%) per annum, based upon the
Borrowers’ ratio of consolidated funded indebtedness to adjusted earnings before interest, taxes, depreciation, and amortization
(EBITDA) for the preceding four fiscal quarters or other applicable period. At September 30, 2019 interest rate on the BRPAC Credit
Agreement was at 5.05%. Interest payments are to be made each one, three or nine months. Amounts outstanding under the BRPAC Credit
Agreement are due in quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at maturity.
For the $80,000 loan, quarterly installments from September 30, 2019 to December 31, 2022 are in the amount of $4,244 per quarter
and from March 31, 2023 to December 31, 2023 are $2,122 per quarter. For the $10,000 loan, quarterly installments from September
30, 2019 to December 31, 2022 are $566 per quarter and from March 31, 2023 to December 31, 2023 are $265 per quarter. As of September 30,
2019 and December 31, 2018, the outstanding balance on the term loan was $71,393 (net of unamortized debt issuance costs of $683)
and $79,166 (net of unamortized debt issuance costs of $834), respectively. Interest expense on the term loan during the three
and nine months ended September 30, 2019 was $1,118 (including amortization of deferred debt issuance costs of $87) and $3,653
(including amortization of deferred debt issuance costs of $268), respectively.
We
are in compliance with all financial covenants in the BRPAC Credit Agreement at September 30, 2019.
NOTE
11—NOTES PAYABLE
Senior
Notes Payable
Senior
notes payable, net, is comprised of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
7.50% Senior notes due October
31, 2021
|
|
$
|
52,154
|
|
|
$
|
46,407
|
|
7.50% Senior notes due May 31, 2027
|
|
|
110,028
|
|
|
|
108,792
|
|
7.25% Senior notes due December 31, 2027
|
|
|
112,429
|
|
|
|
100,441
|
|
7.375% Senior notes due May 31, 2023
|
|
|
116,800
|
|
|
|
111,528
|
|
6.875% Senior notes due September 30, 2023
|
|
|
105,254
|
|
|
|
100,050
|
|
6.75% Senior notes due May 31, 2024
|
|
|
100,050
|
|
|
|
—
|
|
6.50% Senior notes
due September 30, 2026
|
|
|
115,000
|
|
|
|
—
|
|
|
|
|
711,715
|
|
|
|
467,218
|
|
Less:
Unamortized debt issuance costs
|
|
|
(10,437
|
)
|
|
|
(7,464
|
)
|
|
|
$
|
701,278
|
|
|
$
|
459,754
|
|
During
the nine months ended September 30, 2019, the Company issued $29,447 of senior notes due with maturities dates ranging from October
2021 to December 2027 pursuant to At the Market Issuance Sales Agreements with B. Riley FBR, Inc. which governs the program of
at-the-market sales of the Company’s senior notes. A series of prospectus supplements were filed by the Company with the
SEC which allowed the Company to sell these senior notes.
On
May 7, 2019, the Company issued $100,050 senior notes due in May 2024 (“6.75% 2024 Notes”) pursuant to the prospectus
supplement dated May 2, 2019. Interest on the 6.75% 2024 Notes is payable quarterly at 6.75%. The 6.75% 2024 Notes are unsecured
and due and payable in full on May 31, 2024. In connection with the issuance of the 6.75% 2024 Notes, the Company received net
proceeds of $98,137 (after underwriting commissions, fees and other issuance costs of $1,913).
On
September 23, 2019, the Company issued $115,000 senior notes due in September 2026 (“6.50% 2026 Notes”) pursuant to
the prospectus supplement dated September 18, 2019. Interest on the 6.50% 2026 Notes is payable quarterly at 6.50%. The 6.50%
2026 Notes are unsecured and due and payable in full on September 30, 2026. In connection with the issuance of the 6.50% 2026
Notes, the Company received net proceeds of $112,673 (after underwriting commissions, fees and other issuance costs of $2,327).
At
September 30, 2019 and December 31, 2018, the total senior notes outstanding was $701,278 (net of unamortized debt issue costs
of $10,437) and $459,754 (net of unamortized debt issue costs of $7,464) with a weighted average interest rate of 7.08% and 7.28%,
respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $11,255
and $7,248 for the three months ended September 30, 2019 and 2018, respectively, and $30,181 and $16,628 for the nine months ended
September 30, 2019 and 2018, respectively.
Sales
Agreement Prospectus to Issue Up to $100,000 of Senior Notes and Common Stock
On
September 23, 2019, the Company entered into a new At Market Issuance Sales Agreement (the “September 2019 Sales Agreement”)
with B. Riley FBR, Inc. governing a program of at-the-market sales of certain of the Company’s senior notes and common stock.
The most recent sales agreement prospectus was filed by the Company with the SEC on September 23, 2019 and became effective
on September 30, 2019 (the “Sales Agreement Prospectus”). The Sales Agreement Prospectus allows the Company to sell
up to $100,000 of certain of the Company’s senior notes and common stock, pursuant to an effective Registration Statement
on Form S-3. As of September 30, 2019, the Company had $100,000 remaining availability under the September 2019 Sales Agreement.
NOTE
12—REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue
from contracts with customers by reportable segment for the three and nine months ended September 30, 2019 and 2018 is as follows:
|
|
Three
Months Ended September 30, 2019
|
|
|
|
Reportable
Segment
|
|
|
|
Capital
Markets
|
|
|
Auction
and Liquidation
|
|
|
Valuation
and Appraisal
|
|
|
Principal
Investments - United Online and magicJack
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
finance, consulting and investment banking fees
|
|
$
|
37,827
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,827
|
|
Wealth
and asset management fees
|
|
|
18,984
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,984
|
|
Commissions,
fees and reimbursed expenses
|
|
|
9,077
|
|
|
|
4,151
|
|
|
|
10,818
|
|
|
|
—
|
|
|
|
24,046
|
|
Subscription
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,425
|
|
|
|
19,425
|
|
Service
contract revenues
|
|
|
—
|
|
|
|
7,081
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,081
|
|
Advertising
and other
|
|
|
—
|
|
|
|
54
|
|
|
|
—
|
|
|
|
4,438
|
|
|
|
4,492
|
|
Total
revenues from contracts with customers
|
|
|
65,888
|
|
|
|
11,286
|
|
|
|
10,818
|
|
|
|
23,863
|
|
|
|
111,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income - Loans and securities lending
|
|
|
25,766
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,766
|
|
Trading
gain on investments
|
|
|
37,236
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,236
|
|
Other
|
|
|
5,206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,206
|
|
Total
revenues
|
|
$
|
134,096
|
|
|
$
|
11,286
|
|
|
$
|
10,818
|
|
|
$
|
23,863
|
|
|
$
|
180,063
|
|
|
|
Three
Months Ended September 30, 2018
|
|
|
|
Reportable
Segment
|
|
|
|
Capital
Markets
|
|
|
Auction
and Liquidation
|
|
|
Valuation
and Appraisal
|
|
|
Principal
Investments - United Online and magicJack
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
finance, consulting and investment banking fees
|
|
$
|
35,902
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35,902
|
|
Wealth
and asset management fees
|
|
|
19,171
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,171
|
|
Commissions,
fees and reimbursed expenses
|
|
|
10,533
|
|
|
|
2,399
|
|
|
|
9,404
|
|
|
|
—
|
|
|
|
22,336
|
|
Subscription
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,151
|
|
|
|
9,151
|
|
Service
contract revenues
|
|
|
—
|
|
|
|
108
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
Advertising
and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,276
|
|
|
|
2,276
|
|
Total
revenues from contracts with customers
|
|
|
65,606
|
|
|
|
2,507
|
|
|
|
9,404
|
|
|
|
11,427
|
|
|
|
88,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income - Loans and securities lending
|
|
|
9,785
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,785
|
|
Trading
gain on investments
|
|
|
(3,462
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,462
|
)
|
Other
|
|
|
4,414
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,414
|
|
Total
revenues
|
|
$
|
76,343
|
|
|
$
|
2,507
|
|
|
$
|
9,404
|
|
|
$
|
11,427
|
|
|
$
|
99,681
|
|
|
|
Nine
Months Ended September 30, 2019
|
|
|
|
Reportable
Segment
|
|
|
|
Capital
Markets
|
|
|
Auction
and Liquidation
|
|
|
Valuation
and Appraisal
|
|
|
Principal
Investments - United Online and magicJack
|
|
|
Total
|
|
Revenue
from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
finance, consulting and investment banking fees
|
|
$
|
95,260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
95,260
|
|
Wealth
and asset management fees
|
|
|
55,028
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,028
|
|
Commissions,
fees and reimbursed expenses
|
|
|
30,350
|
|
|
|
39,250
|
|
|
|
29,143
|
|
|
|
—
|
|
|
|
98,743
|
|
Subscription
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,894
|
|
|
|
62,894
|
|
Service
contract revenues
|
|
|
—
|
|
|
|
26,431
|
|
|
|
—
|
|
|
|
—
|
|
|
|
26,431
|
|
Advertising
and other
|
|
|
—
|
|
|
|
1,230
|
|
|
|
—
|
|
|
|
14,282
|
|
|
|
15,512
|
|
Total
revenues from contracts with customers
|
|
|
180,638
|
|
|
|
66,911
|
|
|
|
29,143
|
|
|
|
77,176
|
|
|
|
353,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income - Loans and securities lending
|
|
|
54,147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,147
|
|
Trading
gain on investments
|
|
|
64,372
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,372
|
|
Other
|
|
|
14,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,488
|
|
Total
revenues
|
|
$
|
313,645
|
|
|
$
|
66,911
|
|
|
$
|
29,143
|
|
|
$
|
77,176
|
|
|
$
|
486,875
|
|
|
|
Nine
Months Ended September 30, 2018
|
|
|
|
Reportable
Segment
|
|
|
|
Capital
Markets
|
|
|
Auction
and Liquidation
|
|
|
Valuation
and Appraisal
|
|
|
Principal
Investments - United Online and magicJack
|
|
|
Total
|
|
Revenue
from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
finance, consulting and investment banking fees
|
|
$
|
84,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
84,927
|
|
Wealth
and asset management fees
|
|
|
56,928
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,928
|
|
Commissions,
fees and reimbursed expenses
|
|
|
31,546
|
|
|
|
33,212
|
|
|
|
27,383
|
|
|
|
—
|
|
|
|
92,141
|
|
Subscription
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,335
|
|
|
|
27,335
|
|
Service
contract revenues
|
|
|
—
|
|
|
|
11,648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,648
|
|
Advertising
and other
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
6,925
|
|
|
|
6,925
|
|
Total
revenues from contracts with customers
|
|
|
173,401
|
|
|
|
44,860
|
|
|
|
27,383
|
|
|
|
34,260
|
|
|
|
279,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income - Loans and securities lending
|
|
|
25,406
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,406
|
|
Trading
gain on investments
|
|
|
1,449
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,449
|
|
Other
|
|
|
14,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,201
|
|
Total
revenues
|
|
$
|
214,457
|
|
|
$
|
44,860
|
|
|
$
|
27,383
|
|
|
$
|
34,260
|
|
|
$
|
320,960
|
|
Contract
Balances
The timing of the
Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes
the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Receivables
related to revenues from contracts with customers totaled $47,419 and $42,123 at September 30, 2019 and December 31, 2018, respectively.
The Company had no significant impairments related to these receivables during the three and nine months ended September 30, 2019.
The Company’s deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment
banking advisory engagements, asset management agreements, Valuation and Appraisal engagements and subscription services where
the performance obligation has not yet been satisfied. Deferred revenue at September 30, 2019 and December 31, 2018 was $68,385
and $69,066, respectively. During the three and nine months ended September 30, 2019, the Company recognized revenue of $9,166
and $34,331 that was recorded as deferred revenue at the beginning of the respective year. During the three and nine months ended
September 30, 2018, the Company recognized revenue of $5,423 and $9,889 respectively, that was recorded as deferred revenue at
the beginning of the year.
Contract
Costs
Contract
costs include: (1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized
where the revenue is recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction
and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation
where the revenue is recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack
contracts which are recognized ratably over the contract term and third party support costs for magicJack and related equipment
purchased by customers which are recognized ratably over the service period.
The
capitalized costs to fulfill a contract were $1,900 and $2,920 at September 30, 2019 and December 31, 2018, respectively, and
are recorded in prepaid expenses and other assets in the condensed consolidated balance sheets. For the three and nine months
ended September 30, 2019, the Company recognized expenses of $246 and $1,277 related to capitalized costs to fulfill a contract,
respectively. For the three and nine months ended September 30, 2018, the Company recognized expenses of $0 and $602, related
to capitalized costs to fulfill a contract, respectively. There were no significant impairment charges recognized in relation
to these capitalized costs during the nine months ended September 30, 2019 and 2018.
Remaining
Performance Obligations and Revenue Recognized from Past Performance
The
Company does not disclose information about remaining performance obligations pertaining to contracts that have an original expected
duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations
with an original expected duration exceeding one year was not material at September 30, 2019. Corporate finance and investment
banking fees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated
with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price
at September 30, 2019.
NOTE
13— INCOME TAXES
The
Company’s effective income tax rate was a provision of 29.4% and 24.9% for the nine months ended September 30, 2019 and
2018, respectively.
As
of September 30, 2019, the Company had federal net operating loss carryforwards of $60,637 and state net operating loss carryforwards
of $61,930. 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 the tax years commencing in December
31, 2029.
The
Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards
are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward
period, and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with
Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized
in future taxable years depending on the Company’s actual taxable income. As of September 30, 2019, the Company believes
that the existing net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire
and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not
provided a valuation allowance. The Company does not believe that it is more likely than not that the Company will be able to
utilize the benefits related to capital loss carryforwards and has provided a valuation allowance in the amount of $61,127 against
these deferred tax assets.
The
Company files income tax returns in the U.S., various state and local jurisdictions, and certain other foreign jurisdictions.
The Company is currently under audit by certain federal, state and local, and foreign tax authorities. The audits are in varying
stages of completion. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may
be challenged by tax authorities. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing
facts and circumstances, including progress of tax audits, case law developments and closing of statutes of limitations. Such
adjustments are reflected in the provision for income taxes, as appropriate. The Company is currently open to audit under the
statute of limitations by the Internal Revenue Service for the calendar years ended December 31, 2015 to 2018.
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 period.
Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after
giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 387,365
common shares in 2019 and 453,365 common shares in 2018 that are held in escrow and subject to forfeiture. The common shares held
in escrow includes 387,365 common shares that are subject to forfeiture to indemnify the Company for certain representations and
warranties in connection with the acquisition of Wunderlich, and in 2018 excluded 66,000 common shares held in escrow issued to
the former members of Great American Group, LLC that were subject to forfeiture upon the final settlement of claims for goods
held for sale in connection with the transaction with Alternative Asset Management Acquisition Corp. in 2009. In August 2018,
the shares held in escrow issued to the former members of Great American Group, LLC were released and 21,233 of the 66,000 shares
held in escrow were cancelled to satisfy the resolution of escrow claims. The shares that remain in escrow are subject to forfeiture
upon the final settlement of claims as more fully described in the related escrow instructions. Dilutive common shares outstanding
includes contingently issuable shares that are currently in escrow and subject to release if the conditions for the final settlement
of claims 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 were 1,369,674 and 1,925,872 for the three months ended September 30, 2019 and 2018, respectively, and 1,474,104 and 1,838,492
for the nine months ended September 30, 2019 and 2018, respectively, because to do so would have been anti-dilutive.
Basic
and diluted earnings per share were calculated as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net
income attributable to B. Riley Financial, Inc.
|
|
$
|
34,302
|
|
|
$
|
2,814
|
|
|
$
|
64,482
|
|
|
$
|
24,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,556,223
|
|
|
|
25,968,997
|
|
|
|
26,351,839
|
|
|
|
25,856,339
|
|
Effect
of dilutive potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock units and warrants
|
|
|
1,613,993
|
|
|
|
705,557
|
|
|
|
836,791
|
|
|
|
740,087
|
|
Contingently
issuable shares
|
|
|
63,207
|
|
|
|
179,707
|
|
|
|
63,207
|
|
|
|
179,707
|
|
Diluted
|
|
|
28,233,423
|
|
|
|
26,854,261
|
|
|
|
27,251,837
|
|
|
|
26,776,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$
|
1.29
|
|
|
$
|
0.11
|
|
|
$
|
2.45
|
|
|
$
|
0.94
|
|
Diluted
income per share
|
|
$
|
1.21
|
|
|
$
|
0.10
|
|
|
$
|
2.37
|
|
|
$
|
0.91
|
|
NOTE
15 — COMMITMENTS AND CONTINGENCIES
(a)
Letters of Credit
At
September 30, 2019, there were letters of credit outstanding totaling $471 related to the Principal Investments — United
Online and magicJack segment.
(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 the Company’s securities
business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek
substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews,
investigations, and proceedings by governmental and self-regulatory organizations regarding the Company’s business, which
may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity
of claims against the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting
the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation
or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely
to have a material effect on its financial position or results of operations.
On
August 11, 2017, a putative class action lawsuit titled Freedman v. magicJack VocalTec Ltd. et al., Case 9-17-cv-80940, was filed
against magicJack and its Board of Directors in the United States District Court for the Southern District of Florida (Case No:
9:17-cv-80940-RLR). On September 30, 2019, the court determined that oral arguments will be required for this matter. The Company
cannot estimate the amount of potential liability, if any, that could arise from this matter.
In June 2018, Galilee Acquisition
LLC f/k/a Sutton View Acquisition LLC (“GAL”) filed a complaint, served the following month, (case No.:50-2018-CA-007976-XXXX-MB)
in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against magicJack VocalTec Ltd. alleging
a claim for negligent misrepresentation. On April 4, 2019, the plaintiff’s counsel advised the court that it intended to
file an amended complaint, and the court gave the plaintiff 30 days from that date to file such amended complaint. However, the
plaintiff failed to file the amended complaint within the Court appointed time and has filed a request for an extension of time
to file the amended complaint which the court is likely to grant. A case management conference was held in July 2019 in which
the plaintiff submitted the proposed amended complaint. In August 2019, the plaintiff’s counsel filed a motion with the
court seeking to withdraw from the case for “irreconcilable differences” with the plaintiff. On October 29, 2019,
the Court dismissed the case with prejudice.
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. Court ordered mediation before a federal magistrate took place on August 6,
2019, with no resolution.
In
February 2017, certain former employees filed an arbitration claim with FINRA against 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 million in damages. WSI has counterclaimed alleging
that claimants misrepresented their process for doing business, particularly their capital needs, resulting in substantial losses
to WSI. Arbitration hearings were held in April 2019 and all claims were dismissed as of August 15, 2019.
(c)
Tax Contingencies
magicJack
believes that it files all required tax returns and pays all required federal, state and municipal taxes (such as sales, excise,
utility, and ad valorem taxes), fees and surcharges. magicJack is the subject of inquiries and examinations by various states
and municipalities in the normal course of business. In accordance with generally accepted accounting principles, magicJack makes
a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability
can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations,
settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. magicJack believes
any possible claims are without merit and vigorously defends its rights. However, if a government entity were to prevail in any
matter, it could have a material adverse effect on magicJack’s financial condition, results of operation and cash flows.
In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition to the provisions
taken by magicJack.
In
a letter dated April 23, 2018, magicJack received notice that the Internal Revenue Service (the “IRS”) has selected
magicJack’s 2015 United States income tax return for examination. magicJack had an initial meeting with the IRS in June
2018 and has supplied responses for all of the IRS’s document requests to date. In February 2019, the IRS auditor requested
that the Company extend the period to assess tax, as the audit had been delayed due to IRS staffing issues. The Company agreed
to the request. On April 4, 2019, the company received an email from the IRS auditor stating that the audit will be closed with
no adjustments. However, to date, the auditor has not closed the audit nor has the auditor requested any additional information.
magicJack believes that the positions taken in its 2015 return are reasonable and appropriate, however, magicJack cannot be sure
of the ultimate outcome of the examination and cannot estimate the likelihood of liability or the amount of potential assessments,
if any, that could arise from the examination.
Historically,
magicJack considered the requirements to collect sales taxes under the auspices of a 1991 Supreme Court case, Quill Corp. v. North
Dakota, which established the precedent that a physical presence in the respective state is required for an entity to be subject
to a state’s sales and use tax requirements. Accordingly, magicJack had concluded that it did not have nexus for sales tax
in those states in which it had no physical presence (i.e., it had no employees regularly and systematically there and it had
no property there). On June 21, 2018, via South Dakota v. Wayfair, Inc. (No. 17-494) (“Wayfair”) the U.S. Supreme
Court reversed its prior ruling and eliminated the “physical presence” requirement. In consideration of the ruling,
magicJack made the decision to start collecting sales tax on direct sales of its magicJack device and access right renewals in
states that have adopted similar “Economic Nexus” laws. magicJack began registering for, collecting and remitting
sales tax to identified jurisdictions during the third quarter of 2018. The Company will continue to monitor the situation and
add additional states if deemed necessary. Though the South Dakota law is to be applied prospectively, it is not certain if other
states may try to enact laws on a retrospective basis based on the Wayfair ruling, and the Company cannot estimate the likelihood
of liability or the potential amount of assessments that could arise from prior periods if other states tried to apply the ruling
on a retrospective basis.
In
a letter dated September 12, 2019, the Company received notice that the State of California has selected the Company’s 2016
and 2017 California corporate income tax returns for examination. Other than providing responses to a brief auditing scheduling
information questionnaire that was attached to the notice of audit, the Company has not yet received any additional information
document requests. The Company believes that the positions taken in its 2016 and 2017 California corporate income tax returns
are reasonable and appropriate, however, the Company cannot be sure of the ultimate outcome of the examination and cannot estimate
the likelihood of liability or the amount of potential assessments, if any, that could arise from the examination.
NOTE
16— SHARE-BASED PAYMENTS
(a)
Amended and Restated 2009 Stock Incentive Plan
Share-
based compensation expense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan
(the “Plan”) was $3,604 and $1,714 for the three months ended September 30, 2019 and 2018, respectively, and $7,165
and $4,085 for the nine months ended September 30, 2019 and 2018, respectively. Of the 1,857,328 restricted stock units
granted during the nine months ended September 30, 2019, 407,328 restricted stock units were granted to executives and employees
with a grant date fair value of $7,870 and 1,450,000 performance based restricted stock units granted to certain executives and
managers with a grant date fair value of $10,904.
The
restricted stock units generally vest over a period of one to three years based on continued service. Performance based restricted
stock units generally vest based on both the employee’s continued service and the Company’s common stock price, as
defined in the grant, achieving a set threshold during the three-year period following the grant. In determining the fair
value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends
based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the
risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.
As
of September 30, 2019, the expected remaining unrecognized share-based compensation expense of $22,256 will be expensed over a
weighted average period of 1.7 years.
A
summary of equity incentive award activity for the nine months ended September 30, 2019 was as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested at January 1,
2019
|
|
|
896,817
|
|
|
$
|
16.94
|
|
Granted
|
|
|
1,857,328
|
|
|
|
10.11
|
|
Vested
|
|
|
(474,362
|
)
|
|
|
15.04
|
|
Forfeited
|
|
|
(9,384
|
)
|
|
|
18.92
|
|
Nonvested at September 30,
2019
|
|
|
2,270,399
|
|
|
$
|
11.77
|
|
The
total fair value of shares vested during the nine months ended September 30, 2019 was $7,136.
(b)
Amended and Restated FBR & Co. 2006 Long-Term Stock Incentive Plan
In connection with
the acquisition of FBR & Co. 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 three
months ended September 30, 2019, the Company granted restricted stock units representing 513 shares of common stock with a total
grant date fair value of $10 under the FBR Stock Plan. The share-based compensation expense in connection with the FBR Stock Plan
restricted stock awards was $1,056 and $1,321 during the three months ended September 30, 2019 and 2018, respectively and $2,848
and $4,509 during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the expected
remaining unrecognized share-based compensation expense of $6,101 will be expensed over a weighted average period of 1.8 years.
A
summary of equity incentive award activity for the three months ended September 30, 2019 was as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested at January 1, 2019
|
|
|
689,430
|
|
|
$
|
17.64
|
|
Granted
|
|
|
130,509
|
|
|
|
19.14
|
|
Vested
|
|
|
(210,978
|
)
|
|
|
17.59
|
|
Forfeited
|
|
|
(110,801
|
)
|
|
|
16.49
|
|
Nonvested at September
30, 2019
|
|
|
498,160
|
|
|
$
|
18.31
|
|
The
per-share weighted average grant-date fair value of restricted stock units was $19.14 during the nine months ended September 30,
2019. There were 210,978 restricted stock units with a fair value of $3,711 that vested during the nine months ended September 30,
2019 under the FBR Stock Plan.
NOTE
17— NET CAPITAL REQUIREMENTS
B.
Riley FBR, MLV and B. Riley Wealth Management (“BRWM”), the Company’s broker-dealer subsidiaries, are registered
with the SEC as broker-dealers and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). The
Company’s broker-dealer subsidiaries are subject to 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 September 30, 2019, B.
Riley FBR had net capital of $133,682, which was $131,780 in excess of its required net capital of $1,902; MLV had net capital
of $679, which was $579 in excess of its required net capital of $100; and BRWM had net capital of $5,914, which was $5,447 in
excess of its required net capital of $467.
NOTE
18— RELATED PARTY TRANSACTIONS
At
September 30, 2019, amounts due from related parties of $6,689 includes $161 from GACP I, L.P. (“GACP I”) and $1,210
from GACP II, L.P. (“GACP II”) for management fees and other operating expenses, $13 due from B. Riley Principal Merger
Corp, a company that consummated its initial public offering on April 11, 2019, and our wholly owned subsidiary, B. Riley Principal
Sponsor Co. LLC, is the Sponsor, and $5,304 due from John Ahn, President of Great American Partners, LLC, our indirect wholly
owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory Note connected with a Transfer Agreement as further
discussed below. At September 30, 2019, amounts due to related parties includes $1,358 due from CA Global Partners (“CA
Global”) for operating expenses related to wholesale and industrial liquidation engagements managed by CA Global on behalf
of GA Global Ptrs, and is included in due to related parties and partners on the accompanying condensed balance sheets. At September 30,
2019, the Company had sold loan participations to B. Riley Partners Opportunity Fund, a private equity fund managed by one of
our subsidiaries, in the amount of $13,066, and recorded interest expense of $429 during the nine months ended September 30,
2019 related to B. Riley Partners Opportunity Fund’s loan participations. Our executive officer’s and board
of directors have a 58.5% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer,
of 50.7% in the B. Riley Partners Opportunity Fund at September 30, 2019. At December 31, 2018, amounts due from related
parties of $1,729 include $194 from GACP I, $724 from GACP II, and $812 from CA Global for management fees, incentive fees and
other operating expenses.
On April 1, 2019,
the Company entered into a Transfer Agreement (the “Transfer Agreement”) with GACP II, a fund managed by GACP, and
John Ahn, the President of GACP. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn 55.56% of the
Company’s limited partnership interest in GACP II (the “Transferred Interest”), which represents a capital commitment
in the aggregate amount of $5,000. In connection with the Transfer Agreement, the Company provided Mr. J. Ahn with a non-recourse,
secured line of credit in an aggregate amount of up to $5,003 pursuant to the terms of a Secured Line of Credit Promissory Note
(the “Note”) dated April 1, 2019, to fund the purchase price of the Transferred Interest. We also entered into a Security
Agreement with Mr. J. Ahn on April 1, 2019, which granted to the Company a security interest in the Transferred Interest to secure
Mr. J. Ahn’s obligations under the Note. The Note is subject to an interest rate per annum of 7.00%. As of September 30,
2019, the principal and accrued interest on the Note were $5,167 (amount transferred as of September 30, 2019) and $137, respectively.
For the period from April 1, 2019 (inception) to September 30, 2019 interest earned on the note was $137.
NOTE
19— BUSINESS SEGMENTS
The
Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal
segment and Principal Investments — United Online and magicJack segment. These reportable segments are all distinct businesses,
each with a different marketing strategy and management structure.
The
following is a summary of certain financial data for each of the Company’s reportable segments:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Capital
Markets segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
$
|
108,330
|
|
|
|
66,558
|
|
|
|
259,498
|
|
|
|
189,051
|
|
Interest
income - Loans and securities lending
|
|
|
25,766
|
|
|
|
9,785
|
|
|
|
54,147
|
|
|
|
25,406
|
|
Total
revenues
|
|
|
134,096
|
|
|
|
76,343
|
|
|
|
313,645
|
|
|
|
214,457
|
|
Selling,
general and administrative expenses
|
|
|
(70,140
|
)
|
|
|
(57,207
|
)
|
|
|
(196,570
|
)
|
|
|
(168,559
|
)
|
Restructuring
(charge) recovery
|
|
|
—
|
|
|
|
(428
|
)
|
|
|
4
|
|
|
|
(2,457
|
)
|
Interest
expense - Securities lending and loan participations sold
|
|
|
(10,273
|
)
|
|
|
(6,425
|
)
|
|
|
(22,579
|
)
|
|
|
(16,317
|
)
|
Depreciation
and amortization
|
|
|
(1,281
|
)
|
|
|
(1,309
|
)
|
|
|
(3,844
|
)
|
|
|
(4,428
|
)
|
Segment
income
|
|
|
52,402
|
|
|
|
10,974
|
|
|
|
90,656
|
|
|
|
22,696
|
|
Auction
and Liquidation segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
11,232
|
|
|
|
2,459
|
|
|
|
65,681
|
|
|
|
44,812
|
|
Revenues
- Sale of goods
|
|
|
54
|
|
|
|
48
|
|
|
|
1,230
|
|
|
|
48
|
|
Total
revenues
|
|
|
11,286
|
|
|
|
2,507
|
|
|
|
66,911
|
|
|
|
44,860
|
|
Direct
cost of services
|
|
|
(2,371
|
)
|
|
|
(838
|
)
|
|
|
(21,584
|
)
|
|
|
(12,263
|
)
|
Cost
of goods sold
|
|
|
(126
|
)
|
|
|
(24
|
)
|
|
|
(992
|
)
|
|
|
(41
|
)
|
Selling,
general and administrative expenses
|
|
|
(2,835
|
)
|
|
|
(1,289
|
)
|
|
|
(9,045
|
)
|
|
|
(7,787
|
)
|
Depreciation
and amortization
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
|
(23
|
)
|
Segment
income
|
|
|
5,953
|
|
|
|
349
|
|
|
|
35,285
|
|
|
|
24,746
|
|
Valuation
and Appraisal segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
10,818
|
|
|
|
9,404
|
|
|
|
29,143
|
|
|
|
27,383
|
|
Direct
cost of services
|
|
|
(4,505
|
)
|
|
|
(4,067
|
)
|
|
|
(13,495
|
)
|
|
|
(12,388
|
)
|
Selling,
general and administrative expenses
|
|
|
(2,826
|
)
|
|
|
(2,379
|
)
|
|
|
(7,997
|
)
|
|
|
(7,138
|
)
|
Depreciation
and amortization
|
|
|
(36
|
)
|
|
|
(56
|
)
|
|
|
(100
|
)
|
|
|
(159
|
)
|
Segment
income
|
|
|
3,451
|
|
|
|
2,902
|
|
|
|
7,551
|
|
|
|
7,698
|
|
Principal
Investments - United Online and magicJack segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Services and fees
|
|
|
22,999
|
|
|
|
11,403
|
|
|
|
74,383
|
|
|
|
34,170
|
|
Revenues
- Sale of goods
|
|
|
864
|
|
|
|
24
|
|
|
|
2,793
|
|
|
|
90
|
|
Total
revenues
|
|
|
23,863
|
|
|
|
11,427
|
|
|
|
77,176
|
|
|
|
34,260
|
|
Direct
cost of services
|
|
|
(5,565
|
)
|
|
|
(3,251
|
)
|
|
|
(20,131
|
)
|
|
|
(9,082
|
)
|
Cost
of goods sold
|
|
|
(785
|
)
|
|
|
(28
|
)
|
|
|
(2,843
|
)
|
|
|
(101
|
)
|
Selling,
general and administrative expenses
|
|
|
(5,895
|
)
|
|
|
(2,348
|
)
|
|
|
(18,410
|
)
|
|
|
(6,321
|
)
|
Depreciation
and amortization
|
|
|
(2,956
|
)
|
|
|
(1,682
|
)
|
|
|
(9,719
|
)
|
|
|
(5,040
|
)
|
Restructuring
charge
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,703
|
)
|
|
|
—
|
|
Segment
income
|
|
|
8,662
|
|
|
|
4,118
|
|
|
|
24,370
|
|
|
|
13,716
|
|
Consolidated
operating income from reportable segments
|
|
|
70,468
|
|
|
|
18,343
|
|
|
|
157,862
|
|
|
|
68,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and other expenses (including restructuring recovery of $210 during the nine months ended September 30, 2018)
|
|
|
(10,617
|
)
|
|
|
(5,505
|
)
|
|
|
(28,778
|
)
|
|
|
(16,938
|
)
|
Interest
income
|
|
|
361
|
|
|
|
442
|
|
|
|
1,329
|
|
|
|
736
|
|
Income
(loss) on equity investments
|
|
|
1,113
|
|
|
|
828
|
|
|
|
(4,049
|
)
|
|
|
5,049
|
|
Interest
expense
|
|
|
(12,772
|
)
|
|
|
(9,340
|
)
|
|
|
(35,130
|
)
|
|
|
(23,926
|
)
|
Income
before income taxes
|
|
|
48,553
|
|
|
|
4,768
|
|
|
|
91,234
|
|
|
|
33,777
|
|
Provision
for income taxes
|
|
|
(14,409
|
)
|
|
|
(2,046
|
)
|
|
|
(26,802
|
)
|
|
|
(8,412
|
)
|
Net
income
|
|
|
34,144
|
|
|
|
2,722
|
|
|
|
64,432
|
|
|
|
25,365
|
|
Net
income attributable to noncontrolling interests
|
|
|
(158
|
)
|
|
|
(92
|
)
|
|
|
(50
|
)
|
|
|
1,051
|
|
Net
income attributable to B. Riley Financial, Inc.
|
|
$
|
34,302
|
|
|
$
|
2,814
|
|
|
$
|
64,482
|
|
|
$
|
24,314
|
|
The
following table presents revenues by geographical area:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - Services
and fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
153,379
|
|
|
$
|
89,818
|
|
|
$
|
428,629
|
|
|
$
|
294,148
|
|
Australia
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
Europe
|
|
|
—
|
|
|
|
6
|
|
|
|
61
|
|
|
|
1,268
|
|
Total
Revenues - Services and fees
|
|
$
|
153,379
|
|
|
$
|
89,824
|
|
|
$
|
428,705
|
|
|
$
|
295,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Sale of goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
918
|
|
|
$
|
72
|
|
|
$
|
4,023
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
- Interest income - Loans and securities lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
25,766
|
|
|
$
|
9,785
|
|
|
$
|
54,147
|
|
|
$
|
25,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
180,063
|
|
|
$
|
99,675
|
|
|
$
|
486,799
|
|
|
$
|
319,692
|
|
Australia
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
|
|
—
|
|
Europe
|
|
|
—
|
|
|
|
6
|
|
|
|
61
|
|
|
|
1,268
|
|
Total
Revenues
|
|
$
|
180,063
|
|
|
$
|
99,681
|
|
|
$
|
486,875
|
|
|
$
|
320,960
|
|
The
following table presents long-lived assets, which consists of property and equipment and other assets, by geographical area:
|
|
As
of
|
|
|
As
of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Property and equipment, net:
|
|
|
|
|
|
|
North
America
|
|
$
|
13,171
|
|
|
$
|
15,489
|
|
Europe
|
|
|
—
|
|
|
|
34
|
|
Total
|
|
$
|
13,171
|
|
|
$
|
15,523
|
|
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
20— SUBSEQUENT EVENTS
Membership
Interest Purchase Agreement with BR Brand Acquisition LLC
On October 11,
2019, the Company and B. Riley Brand Management LLC, an indirect wholly-owned subsidiary of the Company (the “B. Riley
Member”), entered into a Membership Interest Purchase Agreement (the “MIPA”) with BR Brand Acquisition LLC
(the “BR Brand Member”) and BR Brand Holdings LLC (the “Operating Company,” and, together with the B. Riley
Member, the BR Brand Member and the Company, the “Parties”), pursuant to which the B. Riley Member agreed to acquire
a majority of the equity interest in the Operating Company. The closing of the transactions contemplated by the MIPA (the “Closing”)
occurred on October 28, 2019.
On October 28, 2019,
the B. Riley Member completed the Closing of a majority of the equity interest in the Operating Company pursuant to the terms of
the MIPA in exchange for (i) aggregate consideration of approximately $116,500 in cash, $78,250 of which was paid at the Closing,
and the remainder of which will be paid on or before November 4, 2019, and (ii) the issuance by the Company to Bluestar Alliance
LLC (“Bluestar”), an affiliate of the BR Brand Member, of a warrant to purchase up to 200,000 shares of the Company’s
Common Stock, par value $0.0001 per share, at an exercise price per share equal to $26.24. One-third of the shares of common stock
issuable under the Warrant will immediately vest and become exercisable upon its issuance at the Closing, and the remaining two-thirds
of such shares of common stock will vest and become exercisable following the first and/or second anniversaries of the Closing,
subject to the Operating Company’s (or another related joint venture with Bluestar) satisfaction of specified financial performance
targets.
In connection with
the Closing, (i) the BR Brand Member has caused the transfer of certain trademarks, domain names, license agreements and related
assets from existing brand owners to the Operating Company and (ii) the Company, Bluestar and certain of their affiliates (including
the B. Riley Member and the BR Brand Member) entered into an amended and restated operating agreement for the Operating Company
and certain other commercial agreements.
Each of the B. Riley
Member and the BR Brand Member is subject to certain post-Closing obligations to indemnify the Operating Company for breaches
of representations or warranties or covenants in the MIPA, for certain tax liabilities, and, with respect to the BR Brand
Member only, certain pre-closing liabilities. The Company is guaranteeing the performance by the B. Riley Member of its obligations
under the MIPA to make the Closing Payment and to make any payments in respect of its indemnification obligations.
Preferred Stock
Offering
On
October 7, 2019, the Company closed its underwritten public offering of depositary shares (the “Depositary Shares”),
each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001
per share (the “Series A Preferred Stock”). The liquidation preference of each share of Series A Preferred Stock is
$25,000 ($25.00 per Depositary Share). At the closing, the Company issued 2,000 shares of Series A Preferred Stock represented
by 2,000,000 Depositary Shares issued. The offering was conducted pursuant to an underwriting agreement (the “Underwriting
Agreement”), dated October 2, 2019, by and among the Company and B. Riley FBR, Inc., as representative of the several underwriters
named therein (the “Underwriters”). The Company also granted the underwriters an option to purchase up to 300,000
additional Depositary Shares during the 30 days following the date of the Underwriting Agreement. On October 11, 2019, the
Company completed the sale of an additional 300,000 Depositary Shares (the “Option Shares”), pursuant to the Underwriters’
full exercise of their over-allotment option to purchase additional Depositary Shares. The offering of the 2,300,000 Depository
Shares generated $57,500 of gross proceeds. The Depositary Shares were offered pursuant to the Company’s shelf registration
statement on Form S-3 initially filed with the Securities and Exchange Commission on September 23, 2019 and declared effective
on September 30, 2019.
On
October 4, 2019, the Company filed a Certificate of Designation (“Certificate of Designation”) for the Series A Preferred
Stock with the Secretary of State of the State of Delaware, which became effective upon acceptance for record. The Certificate
of Designation classified a total of 10,000 shares of the Company’s authorized shares of preferred stock, $0.0001 par value
per share, as Series A Preferred Stock.
As set forth in the
Certificate of Designation, the Series A Preferred Stock ranks, as to dividend rights and rights upon the Company’s liquidation,
dissolution or winding up: (i) senior to all classes or series of the Company’s common stock and to all other equity securities
issued by the Company other than equity securities issued with terms specifically providing that those equity securities rank on
a parity with the Series A Preferred Stock, (ii) junior to all equity securities issued by the Company with terms specifically
providing that those equity securities rank senior to the Series A Preferred Stock with respect to payment of dividends and the
distribution of assets upon the Company’s liquidation, dissolution or winding up and (iii) effectively junior to all of the
Company’s existing and future indebtedness (including indebtedness convertible into our common stock or preferred stock)
and to the indebtedness and other liabilities of (as well as any preferred equity interests held by others in) the Company’s
existing or future subsidiaries. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company,
are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per depositary
share) per year (equivalent to $1,718.75 or $1.71875 per depositary share). Dividends will be payable quarterly in arrears, on
or about the last day of January, April, July and October, beginning on or about October 31, 2019. Generally, the Series A Preferred
Stock is not redeemable by the Company prior to October 7, 2024. However, upon a change of control or delisting event, the Company
will have the special option to redeem the Series A Preferred Stock.