UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
Or
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-37503
B. RILEY FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 27-0223495 | |
(State or Other Jurisdiction of
| (I.R.S. Employer Identification No.) | |
|
| 90025 |
| (Address of Principal Executive Offices) | (Zip Code) |
(818) 884-3737(310) 966-1444
(Registrant’s telephone number, including area code)
21255 Burbank Boulevard, Suite 400
Woodland Hills, CA 91367
(Former Address)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.0001 per share | RILY | Nasdaq Global Market | ||
| Depositary Shares, each representing a 1/1000th fractional interest in a 6.875% share of Series A Cumulative Perpetual Preferred Stock | RILYP | Nasdaq Global Market | ||
| Depositary Shares, each representing a 1/1000th fractional interest in a 7.375% share of Series B Cumulative Perpetual Preferred Stock | RILYL | Nasdaq Global Market | ||
| 7.25% Senior Notes due 2027 | RILYG | Nasdaq Global Market | ||
| 7.50% Senior Notes due 2027 | RILYZ | Nasdaq Global Market | ||
| 6.50% Senior Notes due 2026 | RILYN | Nasdaq Global Market | ||
| 6.375% Senior Notes due 2025 | RILYM | Nasdaq Global Market | ||
| 6.75% Senior Notes due 2024 | RILYO | Nasdaq Global Market | ||
| 7.375% Senior Notes due 2023 | RILYH | Nasdaq Global Market | ||
| 6.875% Senior Notes due 2023 | RILYI | Nasdaq Global Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer ☐ | Accelerated filer ☒ | ||
| Non-accelerated filer ☐ | Smaller reporting company ☐ | ||
| Emerging growth |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 6, 2017,October 27, 2020, there were 26,467,59425,431,575 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
B. Riley Financial, Inc.
Quarterly Report on Form 10-Q
For The Quarterthe Quarterly Period Ended September 30, 2017 2020
Table of Contents
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 102,409 | $ | 112,105 | ||||
| Restricted cash | 9,269 | 3,294 | ||||||
| Due from clearing brokers | 21,580 | — | ||||||
| Securities and other investments owned, at fair value | 95,965 | 16,579 | ||||||
| Securities borrowed | 730,022 | — | ||||||
| Accounts receivable, net | 19,924 | 18,989 | ||||||
| Due from related parties | 6,082 | 3,009 | ||||||
| Advances against customer contracts | 5,298 | 427 | ||||||
| Prepaid expenses and other assets | 20,375 | 5,742 | ||||||
| Property and equipment, net | 13,105 | 5,785 | ||||||
| Goodwill | 100,903 | 48,903 | ||||||
| Other intangible assets, net | 59,671 | 41,166 | ||||||
| Deferred income taxes | 41,474 | 8,619 | ||||||
| Total assets | $ | 1,226,077 | $ | 264,618 | ||||
| Liabilities and Equity | ||||||||
| Liabilities | ||||||||
| Accounts payable | $ | 4,046 | $ | 2,703 | ||||
| Accrued expenses and other liabilities | 58,954 | 53,168 | ||||||
| Deferred revenue | 3,181 | 4,130 | ||||||
| Due to related parties and partners | 1,244 | 10,037 | ||||||
| Securities sold not yet purchased | 25,046 | 846 | ||||||
| Securities loaned | 728,201 | — | ||||||
| Mandatorily redeemable noncontrolling interests | 12,830 | 4,019 | ||||||
| Acquisition consideration payable | — | 10,381 | ||||||
| Notes payable | 2,364 | — | ||||||
| Senior notes payable | 115,574 | 27,700 | ||||||
| Contingent consideration | — | 1,242 | ||||||
| Total liabilities | 951,440 | 114,226 | ||||||
| Commitments and contingencies | ||||||||
| B. Riley Financial, Inc. stockholders’ equity: | ||||||||
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued | — | — | ||||||
| Common stock, $0.0001 par value; 40,000,000 shares authorized; 26,461,568 and 19,140,342 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 2 | 2 | ||||||
| Additional paid-in capital | 259,047 | 141,170 | ||||||
| Retained earnings | 15,956 | 9,887 | ||||||
| Accumulated other comprehensive loss | (321 | ) | (1,712 | ) | ||||
| Total B. Riley Financial, Inc. stockholders’ equity | 274,684 | 149,347 | ||||||
| Noncontrolling interests | (47 | ) | 1,045 | |||||
| Total equity | 274,637 | 150,392 | ||||||
| Total liabilities and equity | $ | 1,226,077 | $ | 264,618 | ||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 169,676 | $ | 104,268 | ||||
| Restricted cash | 1,410 | 471 | ||||||
| Due from clearing brokers | 19,589 | 23,818 | ||||||
| Securities and other investments owned, at fair value | 459,480 | 408,213 | ||||||
| Securities borrowed | 676,423 | 814,331 | ||||||
| Accounts receivable, net | 45,654 | 46,624 | ||||||
| Due from related parties | 3,766 | 5,832 | ||||||
| Advances against customer contracts | 900 | 27,347 | ||||||
| Loans receivable, at fair value (includes $236,018 from related parties at September 30, 2020) | 344,339 | 43,338 | ||||||
| Loans receivable, at cost (includes $157,080 from related parties at December 31, 2019) | — | 225,848 | ||||||
| Prepaid expenses and other assets | 87,560 | 81,808 | ||||||
| Operating lease right-of-use assets | 43,514 | 47,809 | ||||||
| Property and equipment, net | 11,986 | 12,727 | ||||||
| Goodwill | 227,046 | 223,697 | ||||||
| Other intangible assets, net | 194,516 | 220,525 | ||||||
| Deferred income taxes | 14,223 | 31,522 | ||||||
| Total assets | $ | 2,300,082 | $ | 2,318,178 | ||||
| Liabilities and Equity | ||||||||
| Liabilities: | ||||||||
| Accounts payable | $ | 4,226 | $ | 4,477 | ||||
| Accrued expenses and other liabilities | 127,036 | 130,714 | ||||||
| Deferred revenue | 70,565 | 67,121 | ||||||
| Due to related parties and partners | 777 | 1,750 | ||||||
| Securities sold not yet purchased | 48,125 | 41,820 | ||||||
| Securities loaned | 667,109 | 810,495 | ||||||
| Mandatorily redeemable noncontrolling interests | 4,462 | 4,616 | ||||||
| Operating lease liabilities | 55,790 | 61,511 | ||||||
| Notes payable | 714 | 38,167 | ||||||
| Loan participations sold | 13,919 | 12,478 | ||||||
| Term loan | 52,452 | 66,666 | ||||||
| Senior notes payable | 854,926 | 688,112 | ||||||
| Total liabilities | 1,900,101 | 1,927,927 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| B. Riley Financial, Inc. stockholders' equity: | ||||||||
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 3,831 and 2,349 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; liquidation preference of $95,773 and $58,723 as of September 30, 2020 and December 31, 2019, respectively. | — | — | ||||||
| Common stock, $0.0001 par value; 100,000,000 shares authorized; 25,431,575 and 26,972,332 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. | 3 | 3 | ||||||
| Additional paid-in capital | 332,085 | 323,109 | ||||||
| Retained earnings | 43,938 | 39,536 | ||||||
| Accumulated other comprehensive loss | (2,167 | ) | (1,988 | ) | ||||
| Total B. Riley Financial, Inc. stockholders' equity | 373,859 | 360,660 | ||||||
| Noncontrolling interests | 26,122 | 29,591 | ||||||
| Total equity | 399,981 | 390,251 | ||||||
| Total liabilities and equity | $ | 2,300,082 | $ | 2,318,178 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of OperationsIncome
(Unaudited)
(Dollars in thousands, except share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 144,823 | $ | 113,111 | $ | 429,799 | $ | 356,975 | ||||||||
| Trading income (loss) and fair value adjustments on loans | 31,753 | 40,268 | (36,142 | ) | 71,730 | |||||||||||
| Interest income - Loans and securities lending | 26,026 | 25,766 | 72,383 | 54,147 | ||||||||||||
| Sale of goods | 23,651 | 918 | 26,475 | 4,023 | ||||||||||||
| Total revenues | 226,253 | 180,063 | 492,515 | 486,875 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 23,264 | 7,936 | 51,201 | 41,715 | ||||||||||||
| Cost of goods sold | 9,813 | 911 | 11,442 | 3,835 | ||||||||||||
| Selling, general and administrative expenses | 97,143 | 101,092 | 291,449 | 287,963 | ||||||||||||
| Restructuring charge | 1,557 | — | 1,557 | 1,699 | ||||||||||||
| Impairment of tradenames | — | — | 12,500 | — | ||||||||||||
| Interest expense - Securities lending and loan participations sold | 10,975 | 10,273 | 30,669 | 22,579 | ||||||||||||
| Total operating expenses | 142,752 | 120,212 | 398,818 | 357,791 | ||||||||||||
| Operating income | 83,501 | 59,851 | 93,697 | 129,084 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 67 | 361 | 537 | 1,329 | ||||||||||||
| Income (loss) from equity investments | 409 | 1,113 | (145 | ) | (4,049 | ) | ||||||||||
| Interest expense | (16,374 | ) | (12,772 | ) | (48,537 | ) | (35,130 | ) | ||||||||
| Income before income taxes | 67,603 | 48,553 | 45,552 | 91,234 | ||||||||||||
| Provision for income taxes | (18,711 | ) | (14,409 | ) | (13,380 | ) | (26,802 | ) | ||||||||
| Net income | 48,892 | 34,144 | 32,172 | 64,432 | ||||||||||||
| Net income (loss) attributable to noncontrolling interests | 513 | (158 | ) | (1,382 | ) | (50 | ) | |||||||||
| Net income attributable to B. Riley Financial, Inc. | 48,379 | 34,302 | 33,554 | 64,482 | ||||||||||||
| Preferred stock dividends | 1,088 | — | 3,230 | — | ||||||||||||
| Net income available to common shareholders | $ | 47,291 | $ | 34,302 | $ | 30,324 | $ | 64,482 | ||||||||
| Basic income per common share | $ | 1.86 | $ | 1.29 | $ | 1.18 | $ | 2.45 | ||||||||
| Diluted income per common share | $ | 1.75 | $ | 1.21 | $ | 1.14 | $ | 2.37 | ||||||||
| Weighted average basic common shares outstanding | 25,446,292 | 26,556,223 | 25,699,735 | 26,351,839 | ||||||||||||
| Weighted average diluted common shares outstanding | 27,050,448 | 28,233,423 | 26,689,700 | 27,251,837 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 85,141 | $ | 50,300 | $ | 202,354 | $ | 90,505 | ||||||||
| Interest income - Securities lending | 7,206 | — | 9,424 | — | ||||||||||||
| Sale of goods | 79 | 6,666 | 221 | 6,668 | ||||||||||||
| Total revenues | 92,426 | 56,966 | 211,999 | 97,173 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 10,138 | 12,841 | 46,224 | 25,084 | ||||||||||||
| Cost of goods sold | 124 | 2,391 | 313 | 2,393 | ||||||||||||
| Selling, general and administrative expenses | 70,962 | 22,727 | 132,836 | 48,844 | ||||||||||||
| Restructuring charge | 4,896 | 3,585 | 11,484 | 3,585 | ||||||||||||
| Interest expense - Securities lending | 4,950 | — | 6,515 | — | ||||||||||||
| Total operating expenses | 91,070 | 41,544 | 197,372 | 79,906 | ||||||||||||
| Operating income | 1,356 | 15,422 | 14,627 | 17,267 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 76 | 26 | 358 | 32 | ||||||||||||
| Loss from equity investment | (157 | ) | — | (157 | ) | — | ||||||||||
| Interest expense | (2,510 | ) | (991 | ) | (5,195 | ) | (1,398 | ) | ||||||||
| (Loss) income before income taxes | (1,235 | ) | 14,457 | 9,633 | 15,901 | |||||||||||
| Benefit from (provision for) income taxes | 1,357 | (6,083 | ) | 7,753 | (6,184 | ) | ||||||||||
| Net income | 122 | 8,374 | 17,386 | 9,717 | ||||||||||||
| Net (loss) income attributable to noncontrolling interests | (246 | ) | (565 | ) | (283 | ) | 631 | |||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 368 | $ | 8,939 | $ | 17,669 | $ | 9,086 | ||||||||
| Basic income per share | $ | 0.01 | $ | 0.47 | $ | 0.80 | $ | 0.51 | ||||||||
| Diluted income per share | $ | 0.01 | $ | 0.47 | $ | 0.76 | $ | 0.50 | ||||||||
| Cash dividends per share | $ | 0.13 | $ | 0.03 | $ | 0.55 | $ | 0.03 | ||||||||
| Weighted average basic shares outstanding | 26,059,490 | 18,977,072 | 22,180,808 | 17,805,127 | ||||||||||||
| Weighted average diluted shares outstanding | 27,639,862 | 19,191,035 | 23,385,014 | 18,009,158 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income | $ | 122 | $ | 8,374 | $ | 17,386 | $ | 9,717 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in cumulative translation adjustment | 345 | (23 | ) | 1,391 | (40 | ) | ||||||||||
| Other comprehensive income (loss), net of tax | 345 | (23 | ) | 1,391 | (40 | ) | ||||||||||
| Total comprehensive income | 467 | 8,351 | 18,777 | 9,677 | ||||||||||||
| Comprehensive (loss) income attributable to noncontrolling interests | (246 | ) | (565 | ) | (283 | ) | 631 | |||||||||
| Comprehensive income attributable to B. Riley Financial, Inc. | $ | 713 | $ | 8,916 | $ | 19,060 | $ | 9,046 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | 48,892 | $ | 34,144 | $ | 32,172 | $ | 64,432 | ||||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Change in cumulative translation adjustment | 526 | (521 | ) | (179 | ) | (184 | ) | |||||||||
| Other comprehensive income (loss), net of tax | 526 | (521 | ) | (179 | ) | (184 | ) | |||||||||
| Total comprehensive income | 49,418 | 33,623 | 31,993 | 64,248 | ||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 513 | (158 | ) | (1,382 | ) | (50 | ) | |||||||||
| Comprehensive income attributable to B. Riley Financial, Inc. | $ | 48,905 | $ | 33,781 | $ | 33,375 | $ | 64,298 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Equity
(Unaudited)
(Dollars in thousands)thousands, except share data)
Three Months Ended September 30, 2020 and 2019
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, July 1, 2020 | 2,531 | $ | — | 25,864,393 | $ | 3 | $ | 306,772 | $ | 5,927 | $ | (2,693 | ) | $ | 26,210 | $ | 336,219 | |||||||||||||||||||
| Preferred stock issued | 1,300 | — | — | — | 31,377 | — | — | — | 31,377 | |||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes | — | — | 41,984 | — | (273 | ) | — | — | — | (273 | ) | |||||||||||||||||||||||||
| Common stock repurchased and retired | — | — | (474,802 | ) | — | (10,569 | ) | — | — | — | (10,569 | ) | ||||||||||||||||||||||||
| Share based payments | — | — | — | — | 4,778 | — | — | — | 4,778 | |||||||||||||||||||||||||||
| Dividends on common stock ($0.35 per share) | — | — | — | — | — | (9,280 | ) | — | — | (9,280 | ) | |||||||||||||||||||||||||
| Dividends on preferred stock ($429.69 per share) | — | — | — | — | — | (1,088 | ) | — | — | (1,088 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 48,379 | — | 513 | 48,892 | |||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (601 | ) | (601 | ) | |||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 526 | — | 526 | |||||||||||||||||||||||||||
| Balance, September 30, 2020 | 3,831 | $ | — | 25,431,575 | $ | 3 | $ | 332,085 | $ | 43,938 | $ | (2,167 | ) | $ | 26,122 | $ | 399,981 | |||||||||||||||||||
| Balance, July 1, 2019 | — | $ | — | 26,919,941 | $ | 3 | $ | 255,865 | $ | 22,424 | $ | (1,824 | ) | $ | 710 | $ | 277,178 | |||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes | — | — | 51,730 | — | (335 | ) | — | — | — | (335 | ) | |||||||||||||||||||||||||
| Common stock repurchased and retired | — | — | (50,171 | ) | — | (1,021 | ) | — | — | — | (1,021 | ) | ||||||||||||||||||||||||
| Share based payments | — | — | — | — | 4,728 | — | — | — | 4,728 | |||||||||||||||||||||||||||
| Dividends on common stock ($0.50 per share) | — | — | — | — | — | (14,769 | ) | — | — | (14,769 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 34,302 | — | (158 | ) | 34,144 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (521 | ) | — | (521 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2019 | — | $ | — | 26,921,500 | $ | 3 | $ | 259,237 | $ | 41,957 | $ | (2,345 | ) | $ | 552 | $ | 299,404 | |||||||||||||||||||
Nine Months Ended September 30, 2020 and 2019
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2016 | — | $ | — | 16,448,119 | $ | 2 | $ | 116,799 | $ | (6,305 | ) | $ | (1,058 | ) | $ | (118 | ) | $ | 109,320 | |||||||||||||||||
| Issuance of common stock for acquisition of MK Capital, LLC - contingent equity consideration on February 2, 2016 | — | — | 166,667 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Vesting of restricted stock | — | — | 7,306 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Offering of common stock, net of offering expenses | — | — | 2,420,980 | — | 22,759 | — | — | — | 22,759 | |||||||||||||||||||||||||||
| Share based payments | — | — | — | — | 1,831 | — | — | — | 1,831 | |||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | (571 | ) | — | — | (571 | ) | |||||||||||||||||||||||||
| Net income for the nine months ended September 30, 2016 | — | — | — | — | — | 9,086 | — | 1,209 | 10,295 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | (40 | ) | — | (40 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2016 | — | $ | — | 19,043,072 | $ | 2 | $ | 141,389 | $ | 2,210 | $ | (1,098 | ) | $ | 1,091 | $ | 143,594 | |||||||||||||||||||
| Balance, January 1, 2017 | — | $ | — | 19,140,342 | $ | 2 | $ | 141,170 | $ | 9,887 | $ | (1,712 | ) | $ | 1,045 | $ | 150,392 | |||||||||||||||||||
| Issuance of common stock for acquisition of MK Capital, LLC - contingent equity consideration on February 2, 2017 | — | — | 166,666 | — | 1,151 | — | — | — | 1,151 | |||||||||||||||||||||||||||
| Issuance of common stock for acquisition of Dialectic general partner interests on April 13, 2017 | — | — | 158,484 | — | 1,952 | — | — | — | 1,952 | |||||||||||||||||||||||||||
| Issuance of common stock for acquisition of FBR & Co. on June 1, 2017 | — | — | 4,779,354 | — | 73,472 | — | — | — | 73,472 | |||||||||||||||||||||||||||
| Issuance of common stock and common stock warrants for acquisition of Wunderlich on July 3, 2017 | — | — | 1,974,812 | — | 36,306 | — | — | — | 36,306 | |||||||||||||||||||||||||||
| Vesting of restricted stock, net of shares withheld for employer taxes | — | — | 241,910 | — | (2,683 | ) | — | — | — | (2,683 | ) | |||||||||||||||||||||||||
| Share based payments | — | — | — | — | 7,679 | — | — | — | 7,679 | |||||||||||||||||||||||||||
| Dividends on common stock | — | — | — | — | — | (11,600 | ) | — | — | (11,600 | ) | |||||||||||||||||||||||||
| Net income for the nine months ended September 30, 2017 | — | — | — | — | — | 17,669 | — | (170 | ) | 17,499 | ||||||||||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | — | — | (922 | ) | (922 | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | 1,391 | — | 1,391 | |||||||||||||||||||||||||||
| Balance, September 30, 2017 | — | $ | — | 26,461,568 | $ | 2 | $ | 259,047 | $ | 15,956 | $ | (321 | ) | $ | (47 | ) | $ | 274,637 | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2020 | 2,349 | $ | — | 26,972,332 | $ | 3 | $ | 323,109 | $ | 39,536 | $ | (1,988 | ) | $ | 29,591 | $ | 390,251 | |||||||||||||||||||
| Preferred stock issued | 1,482 | — | — | — | 36,007 | — | — | — | 36,007 | |||||||||||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes | — | — | 561,991 | — | (2,950 | ) | — | — | — | (2,950 | ) | |||||||||||||||||||||||||
| Common stock repurchased and retired | — | — | (2,102,748 | ) | — | (38,348 | ) | — | — | — | (38,348 | ) | ||||||||||||||||||||||||
| Share based payments | — | — | — | — | 14,267 | — | — | — | 14,267 | |||||||||||||||||||||||||||
| Dividends on common stock ($0.95 per share) | — | — | — | — | — | (25,922 | ) | — | — | (25,922 | ) | |||||||||||||||||||||||||
| Dividends on preferred stock ($1,289.07 per share) | — | — | — | — | — | (3,230 | ) | — | — | (3,230 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 33,554 | — | (1,382 | ) | 32,172 | ||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | (2,087 | ) | (2,087 | ) | |||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (179 | ) | — | (179 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2020 | 3,831 | $ | — | 25,431,575 | $ | 3 | $ | 332,085 | $ | 43,938 | $ | (2,167 | ) | $ | 26,122 | $ | 399,981 | |||||||||||||||||||
| Balance, January 1, 2019 | — | $ | — | 26,603,355 | $ | 2 | $ | 258,638 | $ | 1,579 | $ | (2,161 | ) | $ | 602 | $ | 258,660 | |||||||||||||||||||
| ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes | — | — | 556,077 | 1 | (2,627 | ) | — | — | — | (2,626 | ) | |||||||||||||||||||||||||
| Common stock repurchased and retired | — | — | (237,932 | ) | — | (4,273 | ) | — | — | — | �� | (4,273 | ) | |||||||||||||||||||||||
| Common stock warrants repurchased | — | — | — | — | (2,777 | ) | — | — | — | (2,777 | ) | |||||||||||||||||||||||||
| Share based payments | — | — | — | — | 10,276 | — | — | — | 10,276 | |||||||||||||||||||||||||||
| Dividends on common stock ($0.84 per share) | — | — | — | — | — | (24,104 | ) | — | — | (24,104 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | — | 64,482 | — | (50 | ) | 64,432 | ||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (184 | ) | — | (184 | ) | |||||||||||||||||||||||||
| Balance, September 30, 2019 | — | $ | — | 26,921,500 | $ | 3 | $ | 259,237 | $ | 41,957 | $ | (2,345 | ) | $ | 552 | $ | 299,404 | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 32,172 | $ | 64,432 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 14,765 | 14,217 | ||||||
| Provision for doubtful accounts | 2,438 | 1,646 | ||||||
| Share-based compensation | 14,267 | 10,276 | ||||||
| Fair value adjustments, non-cash | 21,755 | (13,343 | ) | |||||
| Non-cash interest and other | (12,901 | ) | (14,941 | ) | ||||
| Effect of foreign currency on operations | (602 | ) | 8 | |||||
| Loss from equity investments | 145 | 4,049 | ||||||
| Deferred income taxes | 17,312 | 6,358 | ||||||
| Impairment of intangibles and loss on disposal of fixed assets | 14,057 | (327 | ) | |||||
| Gain on extinguishment of debt | (1,556 | ) | — | |||||
| Income allocated for mandatorily redeemable noncontrolling interests | 779 | 857 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Due from clearing brokers | 4,230 | 9,947 | ||||||
| Securities and other investments owned | (36,859 | ) | (32,122 | ) | ||||
| Securities borrowed | 137,908 | 211,139 | ||||||
| Accounts receivable and advances against customer contracts | 25,336 | (8,645 | ) | |||||
| Prepaid expenses and other assets | (3,507 | ) | (9,619 | ) | ||||
| Accounts payable, accrued expenses and other liabilities | (10,297 | ) | 31,473 | |||||
| Amounts due to/from related parties and partners | 1,093 | (4,574 | ) | |||||
| Securities sold, not yet purchased | 6,304 | (8,531 | ) | |||||
| Deferred revenue | 3,444 | (502 | ) | |||||
| Securities loaned | (143,386 | ) | (215,575 | ) | ||||
| Net cash provided by operating activities | 86,897 | 46,223 | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of loans receivable | (169,100 | ) | (350,695 | ) | ||||
| Repayments of loans receivable | 75,982 | 98,742 | ||||||
| Sale of loan receivable to related party | 1,800 | — | ||||||
| Proceeds from loan participations sold | 2,400 | 31,806 | ||||||
| Repayment of loan participations sold | (1,131 | ) | (3,175 | ) | ||||
| Purchases of property, equipment and other | (1,517 | ) | (2,885 | ) | ||||
| Proceeds from sale of property, equipment and intangible assets | 1 | 504 | ||||||
| Purchase of equity investments | (6,486 | ) | (33,391 | ) | ||||
| Proceeds from sale of division of magicJack | — | 6,196 | ||||||
| Dividends and distributions from equity investments | 1,005 | 1,454 | ||||||
| Acquisition of other businesses | (1,500 | ) | – | |||||
| Net cash used in investing activities | (98,546 | ) | (251,444 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of asset based credit facility | (37,096 | ) | — | |||||
| Repayment of notes payable | (357 | ) | (357 | ) | ||||
| Proceeds from term loan | — | 10,000 | ||||||
| Repayment of term loan | (14,429 | ) | (17,924 | ) | ||||
| Proceeds from issuance of senior notes | 171,417 | 244,497 | ||||||
| Redemption of senior notes | (1,829 | ) | — | |||||
| Payment of debt issuance costs | (2,761 | ) | (4,212 | ) | ||||
| Payment of employment taxes on vesting of restricted stock | (2,950 | ) | (2,626 | ) | ||||
| Common dividends paid | (25,822 | ) | (25,049 | ) | ||||
| Preferred dividends paid | (3,230 | ) | — | |||||
| Repurchase of common stock | (38,348 | ) | (4,273 | ) | ||||
| Repurchase of warrants | — | (2,777 | ) | |||||
| Distribution to noncontrolling interests | (3,013 | ) | (1,095 | ) | ||||
| Proceeds from issuance of preferred stock | 36,007 | — | ||||||
| Net cash provided by financing activities | 77,589 | 196,184 | ||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 65,940 | (9,037 | ) | |||||
| Effect of foreign currency on cash, cash equivalents and restricted cash | 407 | (183 | ) | |||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 66,347 | (9,220 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of period | 104,739 | 180,278 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 171,086 | $ | 171,058 | ||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | 75,231 | $ | 52,931 | ||||
| Taxes paid | $ | 1,460 | $ | 5,029 | ||||
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 17,386 | $ | 9,717 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 7,705 | 2,381 | ||||||
| Provision (recoveries) for doubtful accounts | 827 | (178 | ) | |||||
| Share-based compensation | 7,679 | 1,831 | ||||||
| Recovery of key man life insurance | (6,000 | ) | — | |||||
| Non-cash interest and other | 319 | 147 | ||||||
| Effect of foreign currency on operations | (1,022 | ) | 640 | |||||
| Loss from equity investment | 157 | — | ||||||
| Deferred income taxes | (24,560 | ) | 1,839 | |||||
| Impairment of leaseholds, lease loss accrual and loss on disposal of fixed assets | 2,838 | — | ||||||
| Income allocated and fair value adjustment for mandatorily redeemable noncontrolling interests | 10,766 | 1,450 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Due from clearing brokers | 13,258 | — | ||||||
| Securities and other investments owned | (41,350 | ) | 16,515 | |||||
| Securities borrowed | 129,998 | — | ||||||
| Accounts receivable and advances against customer contracts | 1,635 | (1,871 | ) | |||||
| Goods held for sale or auction | — | (8,447 | ) | |||||
| Prepaid expenses and other assets | 15,522 | 1,410 | ||||||
| Accounts payable, accrued payroll and related expenses, accrued value added tax payable and other accrued expenses | (38,597 | ) | 3,032 | |||||
| Amounts due from related parties and partners | (12,313 | ) | (488 | ) | ||||
| Securities sold, not yet purchased | 7,700 | (343 | ) | |||||
| Deferred revenue | (1,302 | ) | 963 | |||||
| Securities loaned | (139,425 | ) | — | |||||
| Auction and liquidation proceeds payable | — | (672 | ) | |||||
| Net cash (used in) provided by operating activities | (48,779 | ) | 27,926 | |||||
| Cash flows from investing activities: | ||||||||
| Acquisition of Wunderlich, net of cash acquired $4,259 | (25,478 | ) | — | |||||
| Cash acquired from acquisition of FBR & Co. | 15,738 | — | ||||||
| Acquisition of United Online, net of cash acquired $125,542 in 2016 | (10,381 | ) | (33,430 | ) | ||||
| Acquisition of other businesses | (2,052 | ) | — | |||||
| Purchases of property and equipment | (550 | ) | (297 | ) | ||||
| Proceeds from key man life insurance | 6,000 | — | ||||||
| Proceeds from sale of property and equipment and intangible asset | 619 | 15 | ||||||
| Equity investment | (1,015 | ) | — | |||||
| Increase in restricted cash | (5,797 | ) | (78,161 | ) | ||||
| Net cash used in investing activities | (22,916 | ) | (111,873 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of revolving line of credit | — | (272 | ) | |||||
| Proceeds from asset based credit facility | 65,987 | 56,255 | ||||||
| Repayment of asset based credit facility | (65,987 | ) | (56,255 | ) | ||||
| Repayment of notes payable | (8,214 | ) | — | |||||
| Borrowings from participating note payable | — | 61,400 | ||||||
| Payment of contingent consideration | (1,250 | ) | (1,250 | ) | ||||
| Proceeds from issuance of senior notes | 89,330 | — | ||||||
| Payment of debt issuance costs | (2,093 | ) | — | |||||
| Proceeds from issuance of common stock | — | 22,999 | ||||||
| Offering costs from issuance of common stock | — | (240 | ) | |||||
| Payment of employment taxes on vesting of restricted stock | (2,683 | ) | — | |||||
| Dividends paid | (13,493 | ) | (571 | ) | ||||
| Distribution to noncontrolling interests | (2,878 | ) | (1,680 | ) | ||||
| Net cash provided by financing activities | 58,719 | 80,386 | ||||||
| Decrease in cash and cash equivalents | (12,976 | ) | (3,561 | ) | ||||
| Effect of foreign currency on cash | 3,280 | 23 | ||||||
| Net decrease in cash and cash equivalents | (9,696 | ) | (3,538 | ) | ||||
| Cash and cash equivalents, beginning of year | 112,105 | 30,012 | ||||||
| Cash and cash equivalents, end of period | $ | 102,409 | $ | 26,474 | ||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | 11,513 | $ | 505 | ||||
| Taxes paid | $ | 11,668 | $ | 409 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
B. RILEY FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1—ORGANIZATION AND NATURE OF BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
B. Riley Financial, Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate, institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional services firms throughout the United States, Australia, Canada, and Europe and with the acquisition ofconsumer Internet access and cloud communication services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”) and magicJack VocalTec Ltd. (“magicJack”). The Company acquired a majority ownership interest in BR Brand Holding, LLC (“BR Brand” or “Brands”) on July 1, 2016, provide consumer Internet access and related subscription services.October 28, 2019, which provides licensing of trademarks.
The Company operates in four5 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.services from United Online and cloud communication services primarily through the magicJack devices; and (v) Brands, which is focused on generating revenue through the licensing of trademarks.
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.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, 2016,2019, filed with the Securities and Exchange Commission (“SEC”)SEC on March 10, 2017.2020. The results of operations for the nine months ended September 30, 20172020 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 reservesand loan receivables, allowance for doubtful accounts, receivable and slow moving goods held for sale or auction, the carryingfair value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share-basedshare based arrangements, fair value of contingent consideration in business combination’s and accounting for income tax valuation allowances, recovery of contract assets and sales returns and 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.
8 On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve. The impact of the COVID-19 outbreak on the Company’s results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position and cash flows may be materially adversely affected.
|
Revenues are recognized in accordance with the accounting guidance when persuasive evidence of an arrangement exists, the related services have been provided, the fee is fixed or determinable, and collection is reasonably assured.
Revenues in the Capital Markets segment are primarily comprised of (i) fees earned from corporate finance, investment banking, restructuring and wealth management services; (ii) revenues from sales and trading activities; and (iii) interest income from securities lending activities.
Fees earned from corporate finance and investment banking services are derived from debt, equity and convertible securities offerings in which the Company acted as an underwriter or placement agent and from financial advisory services rendered in connection with client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. Fees from underwriting activities are recognized in earnings when the services related to the underwriting transaction are completed under the terms of the engagement and when the income was determined and is not subject to any other contingencies.
Fees earned from wealth management services consist primarily of investment management fees that are recognized over the period the services are provided. Investment management fees are primarily comprised of fees for investment management services and are generally based on the dollar amount of the assets being managed.
Revenues from sales and trading include (i) commissions resulting from equity securities transactions executed as agent or principal and are recorded on a trade date basis; (ii) related net trading gains and losses from market making activities and from the commitment of capital to facilitate customer orders; (iii) fees paid for equity research; and (iv) principal transactions which include realized and unrealized gains and losses and interest and dividend income resulting from our principal investments in equity and other securities for the Company’s account.
Revenues from securities lending activities consist of interest income from equity and fixed income securities that are borrowed from one party and loaned to another. The Company maintains relationships with a broad group of banks and broker-dealers to facilitate the sourcing, borrowing and lending of equity and fixed income securities in a “matched book” to limit the Company’s exposure to fluctuations in the market value or securities borrowed and securities loaned.
Revenues in the Auction and Liquidation segment are comprised of (i) commissions and fees earned on the sale of goods at auctions and liquidations; (ii) revenues from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation; (iii) revenue from the sale of goods that are purchased by the Company for sale at auction or liquidation sales events; (iv) fees earned from real estate services and the origination of loans; (v) revenues from financing activities is recorded over the lives of related loans receivable using the interest method; and (vi) revenues from contractual reimbursable expenses incurred in connection with auction and liquidation contracts.
Commission and fees earned on the sale of goods at auction and liquidation sales are recognized when evidence of an arrangement exists, the sales price has been determined, title has passed to the buyer and the buyer has assumed the risks of ownership, and collection is reasonably assured. The commission and fees earned for these services are included in revenues in the accompanying condensed consolidated statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs.
Revenues earned from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation are recognized based on proceeds received. The Company records proceeds received from these types of engagements first as a reduction of contractual reimbursable expenses, second as a recovery of its guarantee and thereafter as revenue, subject to such revenue meeting the criteria of having been fixed or determinable. Contractual reimbursable expenses and amounts advanced to customers for minimum guarantees are initially recorded as advances against customer contracts in the accompanying condensed consolidated balance sheets. If, during the auction or liquidation sale, the Company determines that the proceeds from the sale will not meet the minimum guaranteed recovery value as defined in the auction or liquidation services contract, the Company accrues a loss on the contract in the period that the loss becomes known.
The Company also evaluates revenue from auction and liquidation contracts in accordance with the accounting guidance to determine whether to report Auction and Liquidation segment revenue on a gross or net basis. The Company has determined that it acts as an agent in a substantial majority of its auction and liquidation services contracts and therefore reports the auction and liquidation revenues on a net basis.
Revenues from the sale of goods are recorded gross and are recognized in the period in which the sale of goods held for sale or auction are completed, title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the transaction. These revenues are primarily the result of the Company acquiring title to merchandise with the intent of selling the items at auction or for augmenting liquidation sales. For liquidation contracts where we take title to retail goods, our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax.
Revenues in the Valuation and Appraisal segment are primarily comprised of fees for valuation and appraisal services. Revenues are recognized upon the delivery of the completed services to the related customers and collection of the fee is reasonably assured. Revenues in the Valuation and Appraisal segment also include contractual reimbursable costs.
Revenues in the Principal Investments - United Online segment are primarily comprised of services revenues, which are derived primarily from fees charged to pay accounts; advertising and other revenues; and products revenues, which are derived primarily from the sale mobile broadband service devices, including the related shipping and handling fees.
Service revenues are derived primarily from fees charged to pay accounts and are recognized in the period in which fees are fixed or determinable and the related services are provided to the customer. The Company’s pay accounts generally pay in advance for their services by credit card, PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance payments from pay accounts are recorded in the condensed consolidated balance sheets as deferred revenue. In circumstances where payment is not received in advance, revenues are only recognized if collectability is reasonably assured.
Advertising revenues consist primarily of amounts from the Company’s Internet search partner that are generated as a result of users utilizing the partner’s Internet search services and amounts generated from display advertisements. The Company recognizes such advertising revenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the related performance criteria are met. In determining whether an arrangement exists, the Company ensures that a written contract is in place, such as a standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided performance data to the contractual performance obligation and to internal or third-party performance data in circumstances where that data is available.
(c) Interest Expense — Securities Lending Activities and Loan Participations Sold
Direct cost of services relate to service and fee revenues. The costs consist of employee compensation and related payroll benefits, travel expenses, the cost of consultants assigned to revenue-generating activities and direct expenses billable to clients in the Valuation and Appraisal segment. Direct costs of services include participation in profits under collaborative arrangements in which the Company is a majority participant. Direct costs of services also include the cost of consultants and other direct expenses related to auction and liquidation contracts pursuant to commission and fee based arrangements in the Auction and Liquidation segment. Direct cost of services in the Principal Investments - United Online segment include cost of telecommunications and data center costs, personnel and overhead-related costs associated with operating the Company’s networks and data centers, depreciation of network computers and equipment, third party advertising sales commissions, license fees, costs related to providing customer support, costs related to customer billing and processing of customer credit cards and associated bank fees. Direct cost of services does not include an allocation of the Company’s overhead costs.
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.
Revenue from one liquidation engagement represented 24.4% of total revenues duringCompany and totaled $10,530 and $9,721 for the three months ended September 30, 20162020 and 15.6% of total revenues during2019, respectively, and $29,253 and $22,027 for the nine months ended September 30, 2016. 2020 and 2019, respectively. Loan participations sold as of September 30, 2020 and 2019 totaled $13,919 and $28,872, respectively. Interest expense from loan participations sold totaled $445 for the three months ended September 30, 2020, and $1,416 for the nine months ended September 30, 2020. Interest expense from loan participations sold totaled $552 for the three and nine months ended September 30, 2019.
(d) 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. Revenues in the Brands segment are primarily generated in the United States and Canada.
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 liquidationliquidations services contract, the Company sometimes conducts operations with third parties through collaborative arrangements.
The Company maintains cash in various federally insured banking institutions. The account balances at each institution periodically exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. The Company also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributed to parties in accordance with the collaborative arrangements.
(e) Advertising Expenses
The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $183$560 and $339$437 for the three months ended September 30, 20172020 and 2016,2019, respectively, and $1,227$2,264 and $1,235$1,383 for the nine months ended September 30, 20172020 and 2016,2019, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.income.
(f) Share-Based Compensation
The Company’s share-based payment awards principally consist of grants of restricted stock, and restricted stock units.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 operationsincome 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.
(g) Income Taxes
The Company recorded a restructuring charge in the amount of $11,484 during the nine months ended September 30, 2017. In the second and third quarters of 2017, the Company implemented costs savings measures taking into account the planned synergies as a result of the acquisition of FBR & Co. (“FBR”) and Wunderlich Investment Company, Inc. (“Wunderlich”), as more fully described in Note 3, which included a reduction in force for some of the corporate executives of FBR’s and Wunderlich and a restructuring to integrate FBR and Wunderlich’s operations with the Company’s existing operations. These initiatives resulted in a restructuring charge of $6,105 in the second quarter of 2017 and $4,746 in the third quarters of 2017. The restructuring charges during the second and third quarter of 2017 included $2,400 related to severance and $884 related to the accelerated vesting of restricted stock awards to former corporate executives of FBR and Wunderlich and $3,109 of severance and $1,710 related to accelerated vesting of stock awards to employees and $2,748 of lease loss accruals and impairments for the planned consolidation of office space related to operations of FBR and Wunderlich. Of the $10,851 of restructuring charges related to these initiatives, $7,245 related to the Capital Markets segment and $3,606 related to corporate overhead. The restructuring charge in 2017 also included employee termination costs of $150 and $633 in the third quarter and the nine months ended 2017, respectively, related to a reduction in personnel in the principal investments – United Online segment of our operations.
The following table summarizes the changes in accrued restructuring charge during the nine months ended September 30, 2017:
| Nine Months Ended | ||||
| September 30, 2017 | ||||
| Accrued restructuring charge, beginning of year | $ | 694 | ||
| Restructuring charge | 11,484 | |||
| Cash paid | (4,880 | ) | ||
| Non-cash items | (3,939 | ) | ||
| Accrued restructuring charge, end of period | $ | 3,359 | ||
The following tables summarize the restructuring activities during the three and nine months ended September 30, 2017 and 2016:
| Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||||||||
| Capital Markets | Principal Investments - United Online | Corporate | Total | Capital Markets | Principal Investments - United Online | Corporate | Total | |||||||||||||||||||||||||
| Restructuring charge: | ||||||||||||||||||||||||||||||||
| Employee termination costs | $ | 2,285 | $ | 150 | $ | 1,102 | $ | 3,537 | $ | — | $ | 3,187 | $ | — | $ | 3,187 | ||||||||||||||||
| Facility closure and consolidation charge | 1,037 | — | 322 | 1,359 | — | — | 398 | 398 | ||||||||||||||||||||||||
| Total restructuring charge | $ | 3,322 | $ | 150 | $ | 1,424 | $ | 4,896 | $ | — | $ | 3,187 | $ | 398 | $ | 3,585 | ||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||||||||||
| Capital Markets | Principal Investments - United Online | Corporate | Total | Capital Markets | Principal Investments - United Online | Corporate | Total | |||||||||||||||||||||||||
| Restructuring charge: | ||||||||||||||||||||||||||||||||
| Employee termination costs | $ | 4,819 | $ | 633 | $ | 3,284 | $ | 8,736 | $ | — | $ | 3,187 | $ | — | $ | 3,187 | ||||||||||||||||
| Facility closure and consolidation charge | 2,426 | — | 322 | 2,748 | — | — | 398 | 398 | ||||||||||||||||||||||||
| Total restructuring charge | $ | 7,245 | $ | 633 | $ | 3,606 | $ | 11,484 | $ | — | $ | 3,187 | $ | 398 | $ | 3,585 | ||||||||||||||||
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
(h) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(i) Restricted Cash
As of September 30, 2017,2020, restricted cash balance of $9,269 included $8,759 of cash collateral related to certain retail liquidation engagements and $510 cash segregated in a special bank account for the benefit of customers related to our broker dealer subsidiary and collateral for one of our telecommunication supplier. As of December 31, 2016, restricted cash balance of $3,294 included $1,440 of cash collateral related to a retail liquidation engagement in Australia, $1,320$939 of cash collateral for foreign exchange contracts and $534 cash segregated in a special bank account for the benefit$471 of customerscollateral related to our broker dealer subsidiary and collateral for one of ourthe Company’s telecommunication suppliers. As of December 31, 2019, restricted cash included $471 of collateral related to one of the Company’s telecommunication suppliers.
(j) Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained, or excess collateral recalled, when deemed appropriate.
The Company accounts for securities lending transactions in accordance with Accounting Standards Update (“ASU”) 2013-01, “BalanceASC “Topic 210: Balance Sheet, (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” requiringwhich requires companies to report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed consolidated balance sheets.
(k) Property and Equipment
The Company clears all of its proprietary and customer transactions through other broker-dealers on a fully disclosed basis. The amount receivable from or payable to the clearing brokers represents the net of proceeds from unsettled securities sold, the Company’s clearing deposit and amounts receivable for commissions less amounts payable for unsettled securities purchased by the Company and amounts payable for clearing costs and other settlement charges. This amount also includes the cash collateral received for securities loaned less cash collateral for securities borrowed. Any amounts payable would be fully collateralized by all of the securities owned by the Company and held on deposit at the clearing broker.
Accounts receivable represents amounts due from the Company’s auction and liquidation, valuation and appraisal, capital markets and principal investments - United Online customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management utilizes a specific customer identification methodology. Management also considers historical losses adjusted for current market conditions and the customers’ financial condition and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. Bad debt expense and changes in the allowance for doubtful accounts for the three and nine months ended September 30, 2017 and 2016 are included in Note 5.
Advances against customer contracts represent advances of contractually reimbursable expenses incurred prior to, and during the term of the auction and liquidation services contract. These advances are charged to expense in the period that revenue is recognized under the contract.
Property and equipment are stated at cost. Depreciation and amortization isare computed using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capitalfinance 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 $1,243$967 and $531$1,163 for the three months ended September 30, 20172020 and 2016,2019, respectively, and $2,458$2,798 and $706$4,186 for the nine months ended September 30, 20172020 and 2016,2019, respectively.
(l) Loans Receivable
The Company adopted the new credit loss standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized cost. Under the fair value option, loans receivable are measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the condensed consolidated statements of income. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to the condensed consolidated financial statements.
Loans receivable, at fair value totaled $344,339 and $43,338 at September 30, 2020 and December 31, 2019, respectively. The loans have various maturities through December 2024. As of September 30, 2020 and December 31, 2019, the historical cost of loans receivable accounted for under the fair value option was $355,413 and $32,578, respectively, which included principal balances of $360,500 and $32,691 and unamortized costs, origination fees, premiums and discounts, totaling $5,087 and $113, respectively. During the three and nine months ended September 30, 2020, the Company recorded unrealized gains (losses) of $141 and ($21,835), respectively on the loans receivable, at fair value, which is included in trading income (losses) and fair value adjustments on loans on the condensed consolidated statement of income.
Prior to the adoption of the new credit loss standard effective January 1, 2020, at December 31, 2019 loans receivable, at historical cost totaled $225,848. Loans receivable, at cost are reported at their outstanding principal balances of $232,118 net of $6,270 of unearned income, and loan origination costs which includes unamortized deferred fees and costs on originated loans, and for purchased loans, net of any unamortized premiums or discounts.
The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending customers. At September 30, 2020, the Company has provided limited guarantees with respect to the Franchise Group, Inc. (collectively with all of its affiliates, “FRG”) as further described in Note 17 and Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 14(c). In accordance with the new credit loss standard, the Company evaluates the need to record an allowance for credit losses for these loan guarantees since they have off-balance sheet credit exposures. At September 30, 2020, the Company has not recorded any provision for credit losses on the FRG and B&W guarantees since the underlying guaranteed loans are senior to most of the outstanding debt of FRG and B&W and the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure. The maximum amount of credit exposure related to these limited guarantees is approximately $205,000.
Interest income on loans receivable is recognized based on the stated interest rate of the loan on the unpaid principal balance plus the amortization of any costs, origination fees, premiums and discounts and is included in interest income - loans and securities lending on the condensed consolidated statement of income. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology.
(m) Securities and Other Investments Owned and Securities Sold Not Yet Purchased
Securities and other investments owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.
As of September 30, 20172020 and December 31, 2016,2019, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:
| September 30, 2017 | December 31, 2016 | |||||||
| Securities and other investments owned: | ||||||||
| Common stocks and warrants | $ | 41,412 | $ | 2,084 | ||||
| Corporate bonds | 6,328 | 1,025 | ||||||
| Loan receivable | 26,868 | — | ||||||
| Partnership interests and other | 21,357 | 13,470 | ||||||
| $ | 95,965 | $ | 16,579 | |||||
| Securities sold not yet purchased: | ||||||||
| Common stocks | $ | 23,570 | $ | — | ||||
| Corporate bonds | 982 | 846 | ||||||
| Partnership interests and other | 494 | — | ||||||
| $ | 25,046 | $ | 846 | |||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Securities and other investments owned: | ||||||||
| Equity securities | $ | 392,674 | $ | 353,162 | ||||
| Corporate bonds | 5,956 | 19,020 | ||||||
| Other fixed income securities | 3,557 | 8,414 | ||||||
| Partnership interests and other | 57,293 | 27,617 | ||||||
| $ | 459,480 | $ | 408,213 | |||||
| Securities sold not yet purchased: | ||||||||
| Equity securities | $ | 42,086 | $ | 5,360 | ||||
| Corporate bonds | 4,490 | 33,436 | ||||||
| Other fixed income securities | 1,549 | 3,024 | ||||||
| $ | 48,125 | $ | 41,820 | |||||
(n) Fair Value Measurements
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’s securities and other investments owned and securities sold and not yet purchased are comprised of common and preferred stocks and warrants, corporate bonds, loans receivable and investments in partnerships. Investments in common stocks that are based on quoted prices in active markets which are included in Level 1 of the fair value hierarchy. The Company also holds loans receivable valued at fair value, nonpublic common and preferred stocks and warrants for which there is little or no public market and fair value is determined by management on a consistent basis. For investments where little or no public market exists, management’s determination of fair value is based on the best available information which may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments in partnership interests include investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lending funds. The Company’s partnership interests are valued based on the Company’s proportionate share of the net assets of the partnership which is derived from the most recent statements received from the general partner which are included in Level 2 of the fair value hierarchy. The Company also invests in proprietarypriority investment funds that are valued at net asset value (“NAV”) determined byand the fund administrator. The underlying securities held by these investment companiesfunds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. As a practical expedient, the Company reliesThe Company’s partnership and investment fund interests are valued based on the NAVCompany’s proportionate share of the net assets of the partnerships and funds; the value for these investments as their fair value. The NAVs that have been provided by the fund administrators are derived from the fair values ofmost recent statements received from the underlying investments as of the reporting date. Ingeneral partner or fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) in accordance with ASU 2015-07, “FairASC “Topic 820: Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),Measurements.” (“ASU 2015-07”), these investment funds are not categorized within the fair value hierarchy.
The fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.
The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of September 30, 20172020 and December 31, 2016.2019.
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2020 Using | ||||||||||||||||
| Fair value at September 30, | Quoted prices in active markets for identical assets | Other observable inputs | Significant unobservable inputs | |||||||||||||
| 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ | 392,674 | $ | 290,425 | $ | — | $ | 102,249 | ||||||||
| Corporate bonds | 5,956 | — | 5,956 | — | ||||||||||||
| Other fixed income securities | 3,557 | — | 3,557 | — | ||||||||||||
| Investment funds valued at net asset value(1) | 57,293 | |||||||||||||||
| Total securities and other investments owned | 459,480 | 290,425 | 9,513 | 102,249 | ||||||||||||
| Loans receivable, at fair value | 344,339 | — | — | 344,339 | ||||||||||||
| Total assets measured at fair value | $ | 803,819 | $ | 290,425 | $ | 9,513 | $ | 446,588 | ||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | 42,086 | $ | 42,086 | $ | — | $ | — | ||||||||
| Corporate bonds | 4,490 | — | 4,490 | — | ||||||||||||
| Other fixed income securities | 1,549 | — | 1,549 | — | ||||||||||||
| Total securities sold not yet purchased | 48,125 | 42,086 | 6,039 | — | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,462 | — | — | 4,462 | ||||||||||||
| Total liabilities measured at fair value | $ | 52,587 | $ | 42,086 | $ | 6,039 | $ | 4,462 | ||||||||
| Financial Assets and Liabilities Measured at Fair Value | ||||||||||||||||
| on a Recurring Basis at December 31, 2019 Using | ||||||||||||||||
| Fair value at December 31, 2019 | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Equity securities | $ | 353,162 | $ | 243,911 | $ | — | $ | 109,251 | ||||||||
| Corporate bonds | 19,020 | — | 19,020 | — | ||||||||||||
| Other fixed income securities | 8,414 | — | 8,414 | — | ||||||||||||
| Investment funds valued at net asset value(1) | 27,617 | |||||||||||||||
| Total securities and other investments owned | 408,213 | 243,911 | 27,434 | 109,251 | ||||||||||||
| Loans receivable, at fair value | 43,338 | — | — | 43,338 | ||||||||||||
| Total assets measured at fair value | $ | 451,551 | $ | 243,911 | $ | 27,434 | $ | 152,589 | ||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Equity securities | $ | 5,360 | $ | 5,360 | $ | — | $ | — | ||||||||
| Corporate bonds | 33,436 | — | 33,436 | — | ||||||||||||
| Other fixed income securities | 3,024 | — | 3,024 | — | ||||||||||||
| Total securities sold not yet purchased | 41,820 | 5,360 | 36,460 | — | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,616 | — | — | 4,616 | ||||||||||||
| Total liabilities measured at fair value | $ | 46,436 | $ | 5,360 | $ | 36,460 | $ | 4,616 | ||||||||
| (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. |
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2017, Using | ||||||||||||||||
| Fair value at September 30, 2017 | Quoted prices in active markets identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Common stocks and warrants | $ | 41,412 | $ | 31,430 | $ | — | $ | 9,982 | ||||||||
| Corporate bonds | 6,328 | — | 6,328 | — | ||||||||||||
| Loan receivable | 26,868 | — | — | 26,868 | ||||||||||||
| Partnership interests and other | 16,505 | 4,462 | 187 | 11,856 | ||||||||||||
| Total assets measured at fair value | $ | 91,113 | $ | 35,892 | $ | 6,515 | $ | 48,706 | ||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | ||||||||||||||||
| Common stocks | $ | 23,569 | $ | 23,569 | $ | — | $ | — | ||||||||
| Corporate bonds | 982 | — | 982 | |||||||||||||
| Partnership interests and other | 495 | — | 495 | — | ||||||||||||
| Total securities sold not yet purchased | 25,046 | 23,569 | 1,477 | — | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 12,830 | — | — | 12,830 | ||||||||||||
| Total liabilities measured at fair value | $ | 37,876 | $ | 23,569 | $ | 1,477 | $ | 12,830 | ||||||||
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2016, Using | ||||||||||||||||
| Fair value at December 31, 2016 | Quoted prices in active markets identical assets (Level 1) | Other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Securities and other investments owned: | ||||||||||||||||
| Common stocks | $ | 2,084 | $ | 1,785 | $ | — | $ | 299 | ||||||||
| Corporate bonds | 1,025 | — | 865 | 160 | ||||||||||||
| Partnership interests | 13,470 | — | 44 | 13,426 | ||||||||||||
| Total assets measured at fair value | $ | 16,579 | $ | 1,785 | $ | 909 | $ | 13,885 | ||||||||
| Liabilities: | ||||||||||||||||
| Securities sold not yet purchased: | $ | 846 | $ | — | $ | 846 | $ | — | ||||||||
| Corporate bonds | ||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 3,214 | — | — | 3,214 | ||||||||||||
| Contingent consideration | 1,242 | — | — | 1,242 | ||||||||||||
| Total liabilities measured at fair value | $ | 5,302 | $ | — | $ | 846 | $ | 4,456 | ||||||||
As of September 30, 2017, securities and other investments owned included $4,852 of investment funds valued at NAV per share. As such, total securities and other investments owned of $95,965 in the condensed consolidated balance sheets at September 30, 2017 included investments in investment funds of $4,852 and securities and other investments owned in the amount of $91,113 as outlined in the fair value table above.
As of September 30, 20172020 and December 31, 2016,2019, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $48,706$446,588 and $13,885,$152,589, respectively, or 4.0%19.4% and 5.2%6.6%, 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, 2020:
| Fair value at | ||||||||||||
| September 30, | Weighted | |||||||||||
| 2020 | Valuation Technique | Unobservable Input | Range | Average | ||||||||
| Assets: | ||||||||||||
| Equity securities | $ | 102,249 | Market approach | Multiple of revenue | 2.49x - 6.29x | 4.92x | ||||||
| Multiple of EBITDA | 5.50x - 10.00x | 5.70x | ||||||||||
| Multiple of PV-10 | .28x | .28x | ||||||||||
| Market price of related security | $0.43 - $4.00/share | $1.39 | ||||||||||
| Option pricing model | Annualized volatility | 107.0% | 107.0% | |||||||||
| Loans receivable at fair value | 344,339 | Discounted cash flow | Market interest rate | 4.9%-17.3% | 15% | |||||||
| Market approach | Market price of related security | $0.43/share | $0.43 | |||||||||
| Total level 3 assets measured at fair value | $ | 446,588 | ||||||||||
| Liabilities: | ||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ | 4,462 | Market approach | Operating income multiple | 6.0x | 6.0x | ||||||
The changes in Level 3 fair value hierarchy during the nine months ended September 30, 20172020 and 20162019 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, 2020 | ||||||||||||||||||||||||
| Equity securities | $ | 109,251 | $ | (11,314 | ) | $ | — | $ | 4,984 | $ | (672 | ) | $ | 102,249 | ||||||||||
| Loans receivable at fair value | 43,338 | (21,834 | ) | 3,134 | 93,853 | 225,848 | 344,339 | |||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,616 | — | (154 | ) | — | — | 4,462 | |||||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Equity securities | $ | 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 | |||||||||||||||||
| Level 3 | Level 3 Changes During the Period | Level 3 | ||||||||||||||||||||||
| Balance at | Fair | Relating to | Purchases, | Transfer in | Balance at | |||||||||||||||||||
| Beginning of | Value | Undistributed | Sales and | and/or out | End of | |||||||||||||||||||
| Period | Adjustments | Earnings | Settlements | of Level 3 | Period | |||||||||||||||||||
| Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
| Common stocks and warrants | $ | 299 | $ | (463 | ) | $ | — | $ | 10,146 | $ | — | $ | 9,982 | |||||||||||
| Corporate bonds | 160 | — | — | — | (160 | ) | — | |||||||||||||||||
| Loan receivable | — | 1,375 | — | 25,493 | — | 26,868 | ||||||||||||||||||
| Partnership interests and other | 13,426 | 2,820 | — | (4,390 | ) | — | 11,856 | |||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 3,214 | 9,000 | (190 | ) | — | 806 | 12,830 | |||||||||||||||||
| Contingent consideration | 1,242 | 8 | — | (1,250 | ) | — | — | |||||||||||||||||
| Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
| Common stocks | $ | 290 | $ | (15 | ) | $ | — | $ | — | $ | — | $ | 275 | |||||||||||
| Corporate bonds | — | (409 | ) | — | 569 | — | 160 | |||||||||||||||||
| Partnership interests | 1,766 | 123 | 418 | 94 | — | 2,401 | ||||||||||||||||||
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 2,330 | — | (96 | ) | — | — | 2,234 | |||||||||||||||||
| Contingent consideration | 2,391 | 78 | — | (1,250 | ) | — | 1,219 | |||||||||||||||||
The Company adopted ASU 2016-13 and its amendment ASU 2019-05 effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value adjustmentoption for contingent considerationall outstanding loans receivable that were measured at amortized cost as of $8 and $78 represents imputed interestDecember 31, 2019. The loans receivable, at fair value are included in transfers into level 3 fair value assets in the above table.
The amount reported in the table above for the nine months ended September 30, 20172020 and 2016, respectively. The Company had a triggering event in the second quarter of 2017 for the mandatorily redeemable noncontrolling interests that resulted in a fair value adjustment of $6,050 of the total fair value adjustment of $9,000 for the nine months ended September 30, 2017. In connection with this event, the Company received proceeds of $6,000 from key man life insurance. These amounts have been recorded in the condensed consolidated statements of operations in Selling, general and administrative expenses in the corporate segment. The amount reported in the table above also for the nine months ended September 30, 2017 and 20162019 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 accrued payroll and related, accrued value added tax, income taxes payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturity of these instruments.
As of September 30, 2020, the senior notes payable had a carrying amount of $854,926 and fair value of $845,227. The carrying amount of the senior notes payableterm loan approximates fair value because the contractual interest rates or effective yieldsyield of such instruments areinstrument is consistent with current market rates of interest for instruments of comparable credit risk.
During the nine months ended September 30, 20172020 and 2016,2019, except for the impact of the intangible impairment charge as described in Note 7- Goodwill and Other Intangible Assets, there were no assets or liabilities measured at fair value on a non-recurring basis.
In connection with the acquisition of MK Capital Advisors, LLC (“MK Capital”) on February 2, 2015, the purchase agreement required the payment of contingent consideration to the former members of MK Capital in the form of future cash payments of $1,250 and issuance of 166,667 shares of common stock on the first anniversary date of the closing (February 2, 2016) and a final cash payment of $1,250 and issuance of 166,666 shares of common stock on the second anniversary date of the closing (February 2, 2017). The contingent cash consideration was classified as a liability in the condensed consolidated balance sheets in accordance with ASC 805, “Business Combination” (“ASC 805”). The fair value of the contingentindefinite-lived intangible assets was determined based on a discounted cash consideration was discounted at 8.0%flow model using a rate of 13.8%. The balance of the contingent consideration liabilityindefinite-lived intangible assets are level 3 assets in the condensed consolidated balance sheets was $1,242 (discount of $8) at December 31, 2016. Imputed interest expense totaled $23 for the three months ended September 30, 2016 and $8 and $78 for the nine months ended September 30, 2017 and 2016, respectively. The fair value of the contingent stock consideration was classified as equity in accordance with ASC 805.hierarchy.
(o) Derivative and Foreign Currency Translation
The contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second anniversary periods and the contingent cash consideration and contingent stock consideration for the first anniversary period was paid and issued on February 2, 2016 and for the second anniversary period was paid and issued on February 2, 2017. Upon the payment of the contingent stock consideration on February 2, 2017, the Company recorded a deferred tax asset and an increase to additional paid-in capital in the amount of $1,151 in accordance with ASC 805.
The Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain auctionloans receivable and liquidationAuction and Liquidation engagements with operations outside the United States. During the nine months ended September 30, 2017,2020, the Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of $25,000 Australian dollars that was settled on January 31, 2017. During12,700 Euros, of which 2,000 Euros were settled. As of September 30, 2020, forward exchange contracts in the amount of 10,700 Euros were outstanding. The Company did not use any derivative contracts during the nine months ended September 30, 2016, the Company’s use of derivatives consisted of the purchase of2019.
The forward exchange contracts (a) in the amount of $10,200 Canadian dollars that was settled at various periods prior to August 31, 2016, (b) in the amount of $20,000 Australian dollars that was settled on December 30, 2016, and (c) 5,600 Euro’s that was settled on December 30, 2016. The forward exchange contract waswere entered into to improve the predictability of cash flows related to a retail store liquidation engagement that was completed in December 2016.and a loan receivable. The net loss from forward exchange contracts was $33 and $103$16 during the three and nine months ended September 30, 2017, respectively, and $76 and $115 during the three and nine months ended September 30, 2016, respectively.2020. This amount is reported as a component of selling,Selling, general and administrative expenses in the condensed consolidated statements of operations.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 loss in the accompanying condensed consolidated balance sheets. Transaction losses(loss) gains were $389($97) and $511$446 during the three months ended September 30, 20172020 and 2016,2019, respectively and $919$413 and $531$121 during the nine months ended September 30, 20172020 and 2016,2019, respectively. These amounts are included in selling, general and administrative expenses in ourthe Company’s condensed consolidated statements of operations.income.
(p) Common Stock Warrants
The Company issued 821,816 warrants to purchase common stock of the Company (the “Wunderlich Warrants”) in connection with the acquisition of Wunderlich Securities, Inc. (“Wunderlich”) on July 3, 2017. The common stock warrantsWunderlich Warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at aan exercise 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 Priceexercise 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. On May 16, 2019, the Company repurchased 638,311 warrants for $2,777 ($4.35 per warrant). On June 11, 2020, 167,352 warrants held in escrow from the acquisition of Wunderlich were cancelled in accordance with the terms of the escrow instructions. The common stock warrantsWunderlich Warrants expire on July 3, 2022. As of September 30, 2020, Wunderlich Warrants to purchase 16,153 shares of common stock were outstanding.
On October 28, 2019, the Company issued 200,000 warrants to purchase common stock of the Company (the “BR Brands Warrants”) in connection with the acquisition of a majority ownership interest in BR Brand Holdings LLC. The BR Brand Warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at an exercise price of $26.24 per share. One-third of the BR Brand Warrants immediately vested and became exercisable upon issuance, and the remaining two-thirds of warrants will vest and become exercisable following the first and/or second anniversaries of the closing, subject to BR Brand’s (or another related joint venture with Bluestar Alliance LLC) satisfaction of specified financial performance targets. The BR Brand warrants expire three years after the last vesting event occurs.
(q) Equity Investments
bebe stores, inc.
At September 30, 2020, 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
In 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, 2020, the Company owned 6,159,550 shares of National Holdings’ common stock, representing 45.3% of National Holdings’ outstanding shares. 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.
As of September 30, 2020, the carrying values of the Company’s investments in bebe and National Holdings exceeded their fair values based on their quoted market prices. In light of these facts, the Company evaluated its investments in bebe and National Holdings for impairment. The Company utilized no bright- line tests in such evaluations. Based on the available facts and information regarding the operating results of both entities, the Company’s ability and intent to hold the investments until recovery, the relative amount of the declines, and the length of time that the fair values were less than the carrying values, the Company concluded that recognition of impairment losses in earnings was not required. However, the Company will continue to monitor these investments and it is possible that impairment losses will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.
(r) Loan Participations Sold
As of September 30, 2020, 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, 2020, the Company had entered into participation agreements for a total of $13,919. 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.
(s) Supplemental Non-cash Disclosures
During the nine months ended September 30, 2020, non-cash investing activities included $4,633 non-cash conversion of an equity method investment and $9,778 conversion of loans receivable to shares of stock.
(t) Reclassifications
As of December 31, 2019, loans receivable recorded at fair value of $43,338 were previously included in securities and other investments owned, at fair value. These loans receivable amounts have been reclassified and reported in loans receivable, at fair value to conform to the 2020 presentation. During the three and nine months ended September 30, 2019, trading income and fair value adjustments on loans of $40,268 and $71,730, respectively were previously included in services and fees income in the capital markets segment. These trading income and fair value adjustments on loans amounts have been reclassified and reported in trading income and fair value adjustments on loans to conform to the 2020 presentation. During the three and nine months ended September 30, 2019, expenses of $4,505 and $13,495, respectively, were previously included in direct cost of services in the valuation and appraisal segment. These expenses have been reclassified and reported in selling, general and administrative expenses to conform to the 2020 presentation.
(u) 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.
| Partnership investments | $ | 20,308 | ||
| Due from related party | 372 | |||
| Maximum exposure to loss | $ | 20,680 |
(v) Recent Accounting Standards
Not yet adopted
In February 2016,December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02: LeasesAccounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 842) (“ASU 2016-02”). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company in fiscal year 2019, but early application is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, revenue is recognized at the time when goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. This standard sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance. In March, April, May and December 2016, the FASB issued amendments to this new guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements and other narrow scope improvements. This standard is effective in the first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to adoption. The Company believes the adoption of this standard may impact engagements that contain performance-based arrangements in which a success or completion fee is earned when and if certain predefined outcomes occur and engagements and contracts where services are provided under fixed-fees arrangements that have multiple performance obligations. The Company has not completed an assessment and has not yet determined whether the impact of the adoption of this standard on the consolidated financial statements will be material. The Company will adopt this standard on January 1, 2018 but have not concluded on a transition approach. The Company expects to complete the assessment process, including selecting a transition method for adoption during fourth quarter of 2017.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)740): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019, but early application is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the TestAccounting for Goodwill Impairment.Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes on investments, performing intra-period allocations, and calculating income taxes in interim periods. The ASU also adds guidance to reduce the complexity in certain areas, including recognizing deferred taxes for tax goodwill impairment. The guidance removes Step 2and allocating taxes to members 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.consolidated group. The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers for its annual periods or any interim goodwill impairment tests inperiods with fiscal years beginning after December 15, 2019.2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.periods for which financial statements have not been issued. 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.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This Update addresses issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. In addition to eliminating certain accounting models, the ASU also provides guidance to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. Additionally, the ASU amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, and to amend the related EPS guidance. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial condition and results of operations.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The Update is intended to clarify the Codification and make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial condition and results of operations
Recently adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments − Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). 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. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments − Credit Losses (Topic 326); Targeted Transition Relief,” which allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. ASU 2016-13 and ASU 2019-05 are effective for public companies for interim and annual period beginning December 15, 2019.
The Company adopted the new credit losses standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized cost. Under the fair value option, loans receivable are now measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the consolidated statements of income. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to the condensed consolidated financial statements.
NOTE 3—ACQUISITIONS
Membership Interest Purchase Agreement with BR Brand Acquisition LLC
Acquisition of Wunderlich Investment Company, Inc.
On May 17, 2017,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 MergerMembership Interest Purchase Agreement (the “Wunderlich Merger Agreement”“MIPA”) with Wunderlich,BR Brand Acquisition LLC (the “BR Brand Member”) and BR Brand, pursuant to which the B. Riley Member acquired a Delaware Corporation. Pursuantmajority of the equity interest in BR Brand. The closing of the transactions in accordance with the MIPA (the “Closing”) occurred on October 28, 2019.
The B. Riley Member completed the Closing of a majority of the equity interest in BR Brand pursuant to the Wunderlich Merger Agreement, customary closing conditions were satisfied andterms of the acquisition was completed on July 3, 2017. In connection with the Wunderlich acquisition on July 3, 2017, the totalMIPA in exchange for (i) aggregate consideration of $66,043 paid$116,500 in cash and (ii) warrant consideration of $990 from the issuance by the Company to Wunderlich shareholders was comprisedBluestar Alliance LLC (“Bluestar”), an affiliate of (a) cash in the amountBR Brand Member, of $29,737; (b) 1,974,812 newly issueda warrant to purchase up to 200,000 shares of the Company’s common stock at closing which were valuedan exercise price per share equal to $26.24. One-third of the shares of common stock issuable under the warrant immediately vested and became exercisable upon issuance at $31,414 for accounting purposesthe 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 BR Brand’s (or another related joint venture with Bluestar) satisfaction of specified financial performance targets. The fair value of the non-controlling interest in the amount of $29,373 was determined based on the closing market price of the Company’s shares of common stock on the acquisition date on July 3, 2017, less a 13.3% discount for lack of marketability as the shares issued are subject to certain escrow provisions and restrictions that limit their trade or transfer; and (c) 821,816 newly issued common stock warrants with an estimatedrelative fair value of $4,892.the net assets acquired. The common stock and common stock warrants issued includes 387,365 common shares and 167,352 common stock warrants that are held in escrow and subject to forfeiture to indemnify the Company for certain representations and warrantiesincurred $570 of transaction costs in connection with the acquisition.
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 BR Brand 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 BR Brand and certain other commercial agreements.
The Company believesevaluated the transaction under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and Accounting Standards Update (“ASU”) 2017-01, Business Combinations: Clarifying the Definition of a Business. Based on this evaluation, the Company has determined that the acquisition did not meet the definition of Wunderlich will allowa business and, therefore, has accounted for the Company to benefit from wealth management, investment banking, corporate finance, and sales and trading services provided by Wunderlich. Thetransaction as an acquisition of Wunderlich is accounted for usingassets. The fair value of the purchase method of accounting. assets acquired, including transaction costs, have been reflected in the accompanying financial statements as follows:
| Consideration paid by B. Riley: | ||||
| Cash acquisition consideration | $ | 116,500 | ||
| Transaction costs | 570 | |||
| Total cash consideration | 117,070 | |||
| Warrant consideration | 990 | |||
| Total consideration | $ | 118,060 | ||
| Tangible assets acquired and assumed: | ||||
| Cash and cash equivalents | $ | 2,160 | ||
| Accounts receivable | 1,751 | |||
| Deferred revenue | (1,332 | ) | ||
| Tradename | 136,176 | |||
| Customer list | 8,678 | |||
| Non-controlling interest | (29,373 | ) | ||
| Total | $ | 118,060 | ||
NOTE 4—RESTRUCTURING CHARGE
The Company also entered into a registration rights agreement with certain shareholdersrecorded restructuring charges of Wunderlich (the “Registration Rights Agreement”) on July 3, 2017$1,557 for the shares issued in connection withthree months and nine months ended September 30, 2020. The Company recorded no restructuring charges for the Wunderlich Merger Agreement.three months ended September 30, 2019. The Registration Rights Agreement provides the Wunderlich shareholders with the right to noticeCompany recorded restructuring charges of $1,557 and subject to certain conditions, the right to register shares of the Company’s common stock in certain future registered offerings of shares of the Company’s common stock.
The assets and liabilities of Wunderlich, both tangible and intangible, were recorded at their estimated fair values as of the July 3, 2017 acquisition date for Wunderlich. The application of the purchase method of accounting resulted in goodwill of $33,568 which represents the benefits from synergies with our existing business and acquired workforce. Acquisition related costs, such as legal, accounting, valuation and other professional fees related to the acquisition of Wunderlich, were charged against earnings in the amount of approximately $53 and included in selling, general and administrative expenses in the condensed consolidated statements of operations$1,699 for the nine months ended September 30, 2017. The preliminary purchase accounting for the acquisition has been accounted for as a stock purchase with all of the recognized goodwill is expected to be non-deductible for tax purposes.2020 and 2019, respectively.
The preliminary purchase price allocation was as follows:
| Consideration paid by B. Riley: | ||||
| Cash paid | $ | 29,737 | ||
| Fair value of 1,974,812 B. Riley common shares issued | 31,414 | |||
| Fair value of 821,816 B. Riley common stock warrants issued | 4,892 | |||
| Total consideration | $ | 66,043 |
The preliminary assets acquired and assumed was as follows:
| Tangible assets acquired and assumed: | ||||
| Cash and cash equivalents | $ | 4,259 | ||
| Securities owned | 1,413 | |||
| Accounts receivable | 3,193 | |||
| Due from clearing broker | 15,133 | |||
| Prepaid expenses and other assets | 10,248 | |||
| Property and equipment | 2,315 | |||
| Deferred taxes | 8,067 | |||
| Accounts payable | (517 | ) | ||
| Accrued payroll and related expenses | (6,387 | ) | ||
| Accrued expenses and other liabilities | (9,773 | ) | ||
| Securities sold, not yet purchased | (1,707 | ) | ||
| Notes payable | (10,579 | ) | ||
| Customer relationships | 15,440 | |||
| Trademarks | 1,370 | |||
| Goodwill | 33,568 | |||
| Total | $ | 66,043 |
The revenue and loss of Wunderlich included in our condensed consolidated financial statements for the period from July 3, 2017 (the date of acquisition) through September 30, 2017 were $20,412 and $1,928, respectively. The loss from Wunderlich of $1,928 includes a restructuring charge in the amount of $1,387 related primarily to severance costs and lease loss accruals for the planned consolidation of office space related to operations in the Capital Markets segment.
Acquisition of FBR & Co.
On February 17, 2017, the Company entered into an Agreement and Plan of Merger (the “FBR Merger Agreement”) with FBR, pursuant to which FBR was to merge with and into the Company (or a subsidiary of the Company), with the Company (or its subsidiary) as the surviving corporation (the “Merger”). On May 1, 2017, the Company and FBR filed a registration statement for the planned Merger. The stockholders of the Company and FBR approved the acquisition on June 1, 2017, customary closing conditions were satisfied and the acquisition was completed on June 1, 2017. Subject to the terms and conditions of the FBR Merger Agreement, each outstanding share of FBR common stock (“FBR Common Stock”) was converted into the right to receive 0.671 of a share of the Company’s common stock as summarized below. The Company believes that the acquisition of FBR will allow the Company to benefit from investment banking,corporate finance, securities lending, research, and sales and tradingservices provided by FBR and planned synergies from the elimination of duplicate corporate overhead and management functions with the Company. The acquisition of FBR is accounted for using the purchase method of accounting.
The assets and liabilities of FBR, both tangible and intangible, were recorded at their estimated fair values as of the June 1, 2017 acquisition date for FBR. The application of the purchase method of accounting resulted in goodwill of $14,528 which represents expected overhead synergies and acquired workforce. Acquisition related costs, such as legal, accounting, valuation and other professional fees related to the acquisition of FBR, were charged against earnings in the amount of approximately $1,389 and included in selling, general and administrative expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2017. The preliminary purchase accounting for the acquisition has been accounted for as a stock purchase with all of the recognized goodwill is expected to be non-deductible for tax purposes.
The preliminary purchase price allocation was as follows:
| Consideration paid by B. Riley: | ||||
| Number of FBR Common Shares outstanding at June 1, 2017 | 7,099,511 | |||
| Stock merger exchange ratio | 0.671 | |||
| Number of B. Riley common shares | 4,763,772 | |||
| Number of B. Riley common shares to be issued from acceleration of vesting for outstanding FBR stock options, restricted stock and RSU awards | 67,861 | |||
| Total number of B. Riley common shares to be issued | 4,831,633 | |||
| Closing market price of B. Riley common shares on December 31, 2016 | $ | 14.70 | ||
| Total value of B. Riley common shares | 71,025 | |||
| Fair value of RSU’s attributable to service period prior to June 1, 2017(a) | 2,446 | |||
| Total consideration | $ | 73,471 | ||
The preliminary assets acquired and assumed was as follows:
| Tangible assets acquired and assumed: | ||||
| Cash and cash equivalents | $ | 15,738 | ||
| Securities owned | 11,188 | |||
| Securities borrowed | 861,197 | |||
| Accounts receivable | 4,341 | |||
| Due from clearing broker | 29,169 | |||
| Prepaid expenses and other assets | 5,486 | |||
| Property and equipment | 8,663 | |||
| Deferred taxes | 14,514 | |||
| Accounts payable | (1,524 | ) | ||
| Accrued payroll and related expenses | (7,182 | ) | ||
| Accrued expenses and other liabilities | (22,411 | ) | ||
| Securities loaned | (867,626 | ) | ||
| Customer relationships | 5,600 | |||
| Tradename and other intangibles | 1,790 | |||
| Goodwill | 14,528 | |||
| Total | $ | 73,471 |
The revenue and loss of FBR included in our condensed consolidated financial statements for the period from June 1, 2017 (the date of acquisition) through September 30, 2017 were $37,745 and $12,706, respectively. The loss from FBR of $12,706 includes transaction costs of $3,551 related to an employment agreement with the former Chief Executive Officer of FBR and restructuring charges in the amount of $9,096 related primarily to severance costs and lease loss accruals for the planned consolidation of office space related to operations in the Capital Markets segment.
Acquisition of Rights to Manage Dialectic Hedge Funds
On April 13, 2017, the Company entered into an Asset Purchase and Assignment Agreement with Dialectic Capital Management, L.P., Dialectic Capital, LLC and John Fichthorn (collectively “Dialectic”), pursuant to which Dialectic assigned and transferred the rights to manage certain hedge funds to the Company (the “Dialectic Acquisition”). In addition to obtaining the rights to manage certain hedge funds previously managed by Dialectic, the Company hired the employees that were previously employed by the management company that managed the Dialectic hedge funds and assumed Dialectic’s office lease. In connection with the Dialectic Acquisition, the Company paid the Dialectic parties $700 in cash consideration and 158,484 shares of common stock which has a fair value of approximately $1,952 for total purchase consideration of $2,652. The Dialectic Acquisition expands the Company’s assets under management in the Capital Markets segment and the Company believes such acquisition will allow the Company to benefit from planned synergies from the elimination of duplicate administrative functions of the Company. The acquisition of Dialecticis accounted for using the purchase method of accounting.
The assets acquired from Dialectic were recorded at fair value as of April 13, 2017, the acquisition date of Dialectic. The application of the purchase method of accounting resulted in preliminary purchase allocation of $2,552 to goodwill, whichrepresents expected overhead synergies and acquired workforce,and $100 to other intangible assets - customer relationship for total acquisition consideration of $2,652. There were tangible assets or liabilities acquired in connection with Dialectic. The preliminary purchase accounting for the acquisition has been accounted for as an asset purchase with all of the recognized goodwill and other intangible assets expected to be deductible for tax purposes.
The revenue and loss of Dialectic included in our condensed consolidated financial statements for the period from April 13, 2017 (the date of acquisition) through September 30, 2017 were $714 and $392, respectively.
Acquisition of UOL
On May 4, 2016, the Company entered into a definitive agreement and plan of merger to acquire all of the outstanding common stock of UOL, a provider of consumer Internet access and related subscription services, for $11.00 per share, or approximately $169,354 in aggregate merger consideration plus an additional $1,352 of cash consideration paid to settle the legal matter as more fully described in Note 11. The shareholders of UOL approved the acquisition on June 29, 2016 and customary closing conditions were satisfied and the acquisition was completed on July 1, 2016. The acquisition of UOL allows the Company to benefit from the expected cash flows of UOL due in part to planned synergies from the elimination of duplicate overhead functions with the Company. The acquisition of UOL is accounted for using the purchase method of accounting.
The assets and liabilities of UOL, both tangible and intangible, were recorded at their estimated fair values as of the July 1, 2016 acquisition date for UOL. The application of the purchase method of accounting resulted in goodwill of $14,375 which represents expected overhead synergies and acquired workforce. The revenue and earnings of UOL included in our condensed consolidated financial statements for the three months ended September 30, 2017 were $12,327 and $4,944, respectively, and $38,724 and $14,220 respectively, for the nine months ended September 30, 2017. The revenue and earnings of UOL included in the condensed consolidated financial statements forduring the three and nine months ended September 30, 20162020 were $15,646primarily related to impairment of certain acquired tradename intangibles associated with the Company’s brand realignment across its subsidiary companies to provide greater external consistency and $3,423, respectively.affiliation.
Pro Forma Financial Information
The unaudited financial informationrestructuring 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 table below summarizesPrincipal Investments – United Online and magicJack segment.
The following tables summarize the combined results of operations ofchanges in accrued restructuring charge during the Company, Wunderlich, FBRthree and UOL, as thoughnine months ended September 30, 2020 and 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Balance, beginning of period | $ | 979 | 2,642 | 1,600 | 3,855 | |||||||||||
| Restructuring charge | 1,557 | — | 1,557 | 1,699 | ||||||||||||
| Cash paid | (189 | ) | (779 | ) | (820 | ) | (3,827 | ) | ||||||||
| Non-cash items | (1,554 | ) | 60 | (1,544 | ) | 196 | ||||||||||
| Balance, end of period | $ | 793 | $ | 1,923 | $ | 793 | $ | 1,923 | ||||||||
The following tables summarize the acquisitions had occurred as of January 1, ofrestructuring activities by reportable segment during the respective periods presented. The pro forma financial information presented includes the effects of adjustments related to the amortization charges from the acquired intangible assetsthree and the elimination of certain activities excluded from the transactionnine months ended September 30, 2020 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.2019:
| Pro Forma (Unaudited) | ||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues | $ | 92,461 | $ | 111,340 | $ | 320,546 | $ | 298,118 | ||||||||
| Net (loss) income attributable to B. Riley Financial, Inc. | $ | (42 | ) | $ | 2,843 | $ | 11,780 | $ | (13,657 | ) | ||||||
| Basic (loss) earnings per share | $ | (0.00 | ) | $ | 0.11 | $ | 0.41 | $ | (0.55 | ) | ||||||
| Diluted (loss) earnings per share | $ | (0.00 | ) | $ | 0.11 | $ | 0.41 | $ | (0.55 | ) | ||||||
| Weighted average basic shares outstanding | 32,366,657 | 25,783,517 | 28,487,975 | 24,611,572 | ||||||||||||
| Weighted average diluted shares outstanding | 32,366,657 | 25,997,480 | 28,692,181 | 24,611,572 | ||||||||||||
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||||||||||
| Auction | Investments - United Online | Auction | Investments - United Online | |||||||||||||||||||||||||||||
| Capital | and | and | Capital | and | and | |||||||||||||||||||||||||||
| Markets | Liquidation | magicJack | Total | Markets | Liquidation | magicJack | Total | |||||||||||||||||||||||||
| Restructuring charge: | ||||||||||||||||||||||||||||||||
| Impairment of intangibles | 1,417 | 140 | — | 1,557 | — | — | — | — | ||||||||||||||||||||||||
| Total restructuring charge | $ | 1,417 | $ | 140 | $ | — | $ | 1,557 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||||||||||
| Auction | Investments - United Online | Auction | Investments - United Online | |||||||||||||||||||||||||||||
| Capital | and | and | Capital | and | and | |||||||||||||||||||||||||||
| Markets | Liquidation | magicJack | Total | Markets | Liquidation | magicJack | Total | |||||||||||||||||||||||||
| Restructuring charge: | ||||||||||||||||||||||||||||||||
| Employee termination | — | — | — | — | — | — | 1,594 | 1,594 | ||||||||||||||||||||||||
| Impairment of intangibles | 1,417 | 140 | — | 1,557 | — | — | — | — | ||||||||||||||||||||||||
| Facility closure and consolidation | — | — | — | — | (4 | ) | — | 109 | 105 | |||||||||||||||||||||||
| Total restructuring charge | $ | 1,417 | $ | 140 | $ | — | $ | 1,557 | $ | (4 | ) | $ | — | $ | 1,703 | $ | 1,699 | |||||||||||||||
NOTE 4— 5—SECURITIES LENDING
As a result of the acquisition of FBR, the Company has an active securities borrowed and loaned business in which it borrows securities from one party and lends them to another. Securities borrowed and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of the securitiesborrowed and loaned on a daily basis, with additional collateral obtained, or excess collateral recalled, when deemed appropriate.
The following table presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of September 30, 20172020 and December 31, 2019:
| 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, 2020 | ||||||||||||||||||||
| Securities borrowed | $ | 676,423 | $ | — | $ | 676,423 | $ | 676,423 | $ | — | ||||||||||
| Securities loaned | $ | 667,109 | $ | — | $ | 667,109 | $ | 667,109 | $ | — | ||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Securities borrowed | $ | 814,331 | $ | — | $ | 814,331 | $ | 814,331 | $ | — | ||||||||||
| Securities loaned | $ | 810,495 | $ | — | $ | 810,495 | $ | 810,495 | $ | — | ||||||||||
| Amounts not | ||||||||||||||||||||
| offset in the | ||||||||||||||||||||
| consolidated balance | ||||||||||||||||||||
| Gross amounts | Net amounts | sheets but eligible | ||||||||||||||||||
| offset in the | included in the | for offsetting | ||||||||||||||||||
| Gross amounts | consolidated | consolidated | upon counterparty | |||||||||||||||||
| recognized | balance sheets(1) | balance sheets | default(2) | Net amounts | ||||||||||||||||
| As of September 30, 2017 | ||||||||||||||||||||
| Securities borrowed | $ | 730,022 | $ | — | $ | 730,022 | $ | 730,022 | $ | — | ||||||||||
| Securities loaned | $ | 728,201 | $ | — | $ | 728,201 | $ | 728,201 | $ | — | ||||||||||
| (1) | Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred. |
| (2) | Includes the amount of cash collateral held/posted. |
NOTE 5— 6—ACCOUNTS RECEIVABLE
The components of accounts receivable, net, include the following:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Accounts receivable | $ | 38,421 | $ | 36,385 | ||||
| Investment banking fees, commissions and other receivables | 4,247 | 8,043 | ||||||
| Unbilled receivables | 5,738 | 3,710 | ||||||
| Total accounts receivable | 48,405 | 48,138 | ||||||
| Allowance for doubtful accounts | (2,752 | ) | (1,514 | ) | ||||
| Accounts receivable, net | $ | 45,654 | $ | 46,624 | ||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Accounts receivable | $ | 14,218 | $ | 16,610 | ||||
| Investment banking fees, commissions and other receivables | 5,074 | 576 | ||||||
| Unbilled receivables | 1,260 | 2,058 | ||||||
| Total accounts receivable | 20,552 | 19,244 | ||||||
| Allowance for doubtful accounts | (628 | ) | (255 | ) | ||||
| Accounts receivable, net | $ | 19,924 | $ | 18,989 | ||||
Additions and changes to the allowance for doubtful accounts consist of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Balance, beginning of period | $ | 599 | $ | 86 | $ | 255 | $ | 89 | ||||||||
| Add: Additions to reserve | 123 | 428 | 827 | 488 | ||||||||||||
| Less: Write-offs | (94 | ) | (15 | ) | (262 | ) | (49 | ) | ||||||||
| Less: Recoveries | — | (321 | ) | (192 | ) | (350 | ) | |||||||||
| Balance, end of period | $ | 628 | $ | 178 | $ | 628 | $ | 178 | ||||||||
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.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Balance, beginning of period | $ | 2,760 | $ | 1,360 | $ | 1,514 | $ | 696 | ||||||||
| Add: Additions to reserve | 356 | 615 | 2,438 | 1,681 | ||||||||||||
| Less: Write-offs | (364 | ) | (376 | ) | (1,200 | ) | (759 | ) | ||||||||
| Less: Recovery | — | (138 | ) | — | (157 | ) | ||||||||||
| Balance, end of period | $ | 2,752 | $ | 1,461 | $ | 2,752 | $ | 1,461 | ||||||||
NOTE 6— 7—GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $100,903 and $48,903$227,046 at September 30, 20172020 and December 31, 2016, respectively. Goodwill at September 30, 2017 is comprised of $79,488 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment and $15,727 in the Principal Investments - United Online segment. Goodwill in the Capital Markets segment increased by $50,648 due to $33,568 from the acquisition of Wunderlich, $14,528 from the acquisition of FBR and $2,552 from the acquisition of Dialectic. Goodwill in the Principal Investments - United Online segment increased by $1,352 from the resolution of acquisition relatedlegal matter as more fully described in Note 11.Goodwill$223,697 at December 31, 2016 is comprised of $28,840 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment and $14,375 in the Principal Investments - United Online segment.2019.
Intangible assets consisted of the following:
| As of September 30, 2020 | As of December 31, 2019 | |||||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||||
| Carrying | Accumulated | Intangibles | Carrying | Accumulated | Intangibles | |||||||||||||||||||||
| Useful Life | Value | Amortization | Net | Value | Amortization | Net | ||||||||||||||||||||
| Amortizable assets: | ||||||||||||||||||||||||||
| Customer relationships | 2 to 16 Years | $ | 98,898 | $ | 37,023 | $ | 61,875 | $ | 99,008 | $ | 27,269 | $ | 71,739 | |||||||||||||
| Domain names | 7 Years | 235 | 140 | 95 | 233 | 117 | 116 | |||||||||||||||||||
| Advertising relationships | 8 Years | 100 | 53 | 47 | 100 | 44 | 56 | |||||||||||||||||||
| Internally developed software and other intangibles | 0.5 to 5 Years | 11,775 | 6,490 | 5,285 | 11,765 | 4,843 | 6,922 | |||||||||||||||||||
| Trademarks | 7 to 10 Years | 2,850 | 912 | 1,938 | 4,600 | 1,324 | 3,276 | |||||||||||||||||||
| Total | 113,858 | 44,618 | 69,240 | 115,706 | 33,597 | 82,109 | ||||||||||||||||||||
| Non-amortizable assets: | ||||||||||||||||||||||||||
| Tradenames | 125,276 | — | 125,276 | 138,416 | — | 138,416 | ||||||||||||||||||||
| Total intangible assets | $ | 239,134 | $ | 44,618 | $ | 194,516 | $ | 254,122 | $ | 33,597 | $ | 220,525 | ||||||||||||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||||
| Carrying | Accumulated | Intangibles | Carrying | Accumulated | Intangibles | |||||||||||||||||||||
| Useful Life | Value | Amortization | Net | Value | Amortization | Net | ||||||||||||||||||||
| Amortizable assets: | ||||||||||||||||||||||||||
| Customer relationships | 4 to 13 Years | $ | 58,440 | $ | 7,301 | $ | 51,139 | $ | 37,300 | $ | 3,100 | $ | 34,200 | |||||||||||||
| Domain names | 7 Years | 807 | 144 | 663 | 1,419 | 101 | 1,318 | |||||||||||||||||||
| Advertising relationships | 8 Years | 100 | 16 | 84 | 100 | 6 | 94 | |||||||||||||||||||
| Internally developed software and other intangibles | 0.5 to 4 Years | 3,373 | 1,245 | 2,128 | 3,333 | 550 | 2,783 | |||||||||||||||||||
| Trademarks | 7 to 9 Years | 4,220 | 302 | 3,918 | 1,100 | 69 | 1,031 | |||||||||||||||||||
| Total | 66,940 | 9,008 | 57,932 | 43,252 | 3,826 | 39,426 | ||||||||||||||||||||
| Non-amortizable assets: | ||||||||||||||||||||||||||
| Tradenames | 1,740 | — | 1,740 | 1,740 | — | 1,740 | ||||||||||||||||||||
| Total intangible assets | $ | 68,680 | $ | 9,008 | $ | 59,672 | $ | 44,992 | $ | 3,826 | $ | 41,166 | ||||||||||||||
Amortization expense was $2,172$3,919 and $1,465$3,310 for the three months ended September 30, 20172020 and 2016,2019, respectively and $5,248$11,967 and $1,688$10,031 for the nine months ended September 30, 20172020 and 2016,2019, respectively. At September 30, 2017,2020, estimated future amortization expense is $2,205, $8,590, $8,470, $8,088was $3,769, $14,961, $14,307, $12,316 and $7,706$8,376 for the years ended December 31, 20172020 (remaining three months), 2018, 2019, 20202021, 2022, 2023 and 2021,2024, respectively. The estimated future amortization expense after December 31, 2021 is $22,872.2024 was $15,512.
NOTE 7— CREDIT FACILITIES
Credit facilities consistIn the first quarter of 2020, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, the Company made a qualitative assessment of the following arrangements:impact of the COVID-19 outbreak on goodwill and other intangible assets. The Company determined that the COVID-19 outbreak was a triggering event for testing the indefinite-lived tradenames in the Brands segment and made a determination that the indefinite-lived tradenames in the Brands segment were impaired and the Company recognized an impairment charge of $4,000. As a result of the continuing impact and duration of the COVID-19 outbreak on the operations of the Brands segment, the Company determined that there was another triggering event for testing the indefinite-lived tradenames in the Brands segment and made a determination that the indefinite-lived tradenames in the Brands segment were impaired and the Company recognized an additional impairment charge of $8,500 in the second quarter of 2020. The Company will continue to monitor the impacts of the COVID-19 outbreak in future quarters. Changes in our forecasts could cause the book values of indefinite-lived tradenames to exceed fair values which may result in additional impairment charges in future periods.
NOTE 8—NOTES PAYABLE
Asset Based Credit Facility
On April 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $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).contracts. 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 $168$109 and $813 (including amortization of deferred loan fees of $23)$240 for the three months ended September 30, 20172020 and 2016,2019, respectively and $863$529 and $1,087 (including amortization of deferred loan fees of $69)$826 for the nine months ended September 30, 20172020 and 2016,2019, respectively. There was no outstanding balance ofon this credit facility at September 30, 20172020. The outstanding balance on this credit facility was $37,096 at December 31, 2019. At September 30, 2020, 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, 2020.
Other Notes Payable
Notes payable include notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at the prime rate plus 2.0% (6.75% at September 30, 2020) payable annually, maturing January 31, 2022. At September 30, 2020 and December 31, 2016.2019, the outstanding balance for the notes payable was $714 and $1,071, respectively. Interest expense was $12 and $22 for the three months ended September 30, 2020 and 2019, respectively and $75 and $66 for the nine months ended September 30, 2020 and 2019, respectively.
NOTE 9—TERM LOAN
The Credit Agreement governingOn December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations (collectively, the credit facility contains certain covenants, including covenants that limit or restrict“Borrowers”), indirect wholly owned subsidiaries of the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Agreement, the lender may cease making loans, terminate the Credit Agreement and declare all amounts outstanding under the Credit Agreement to be immediately due and payable. The Credit Agreement specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, nonpayment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults.
On April 13, 2017, UOL,Company, in the capacity as borrower,borrowers, entered into a credit agreement (the “UOL“BRPAC Credit Agreement”) with the Banc of California, N.A. in the capacity as agent (the “Agent”) and lender. The UOL Credit Agreement provides for a revolving credit facility under which UOL may borrow (or requestlender and with the issuance of letters of credit) up to $20,000 which amount is reduced by $1,500 commencing on June 30, 2017 and on the last day of each calendar quarter thereafter. The final maturity date is April 13, 2020. The proceedsother lenders party thereto (the “Closing Date Lenders”). Certain of the UOL Credit Agreement can be used (a) for working capital and general corporate purposes and/or (b) to pay dividends or permitted tax distributions to its parent company, subject to the terms of the UOL Credit Agreement. Borrowings under the UOL Credit Agreement will bear interest at a rate equal to (a) (i) the base rate (the greater of the federal funds rate plus one half of one percent (0.5%), or the prime rate) for U.S. dollar loans or (ii) at UOL’s option, the LIBOR Rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two percent (2%) to three and one-half percent (3.5%) per annum, based upon UOL’s ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the preceding four (4) fiscal quarters. Interest payments are to be made each one, three or six months for Eurodollar loans, and quarterly for U.S. dollar loans.
UOL paid a commitment fee equal to 1.00% of the aggregate commitments upon the closing of the UOL Credit Agreement. The UOL Credit Agreement also provides for an unused line fee payable quarterly, in arrears, in an amount equal to: (a) 0.50% per annum times the amount of the unused revolving commitment that is less than or equal to the amount of the cash maintained in accounts with the agent (as depositary bank); plus (b) 1.00% per annum times the amount of the unused revolving commitment that is greater than the amount of the cash maintained in accounts with the agent (as depositary bank). Any amounts outstanding under the UOL Credit Facility are due at maturity. There was no outstanding balance under the UOL Credit Agreement at September 30, 2017.
Each of UOL’sBorrowers’ U.S. subsidiaries is a guarantorare guarantors of all obligations under the UOLBRPAC Credit Agreement and are parties to the UOLBRPAC 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 (“BRPI”), the parent corporation of UOLBRPAC and a subsidiary of the Company, are guarantors of the obligations under the UOLBRPAC Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares outstanding membership interests of outstanding capital stock of UOLBRPAC are pledged as collateral.
The obligations under the UOLBRPAC Credit Agreement are secured by first-priority liens on, and a first-priorityfirst priority security interest in, substantially all of the assets of UOL and the Secured Guarantors,Credit Parties, including a pledge of (a) 100% of the equity interests of the Secured Guarantors andCredit 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.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 UOLBRPAC Credit Agreement contains certain negative covenants, including those limiting UOL’sthe Credit Parties’, and itstheir 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 UOLBRPAC Credit Agreement requires UOL and its subsidiariesthe 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.
NOTE 8—NOTES PAYABLE
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) $34,034 Senior Notes Payable due October 31, 2021
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, 2017,2020 interest rate on the Company had $34,034 of Senior Notes Payable (“2021 Notes”)BRPAC Credit Agreement was at 2.90%. Interest payments are to be made each one, three or six months. Amounts outstanding under the BRPAC Credit Agreement are due in 2021, interest payable quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at 7.5%. On November 2, 2016,maturity. For the Company issued $28,750$80,000 loan, quarterly installments from September 30, 2020 to December 31, 2022 are in the amount of 2021 Notes$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, 2020 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, 2020, and December 31, 2019, the outstanding balance on the term loan was $52,452 (net of unamortized debt issuance costs of $385) and $66,666 (net of unamortized debt issuance costs of $600), respectively. Interest expense on the term loan during the three months ended September 30, 2017,2020 and 2019 was $497 (including amortization of deferred debt issuance costs of $67) and $1,118 (including amortization of deferred debt issuance costs of $87), respectively. Interest expense on the term loan during the nine months ended September 30, 2020 and 2019 was $1,912 (including amortization of deferred debt issuance costs of $216) 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, 2020.
NOTE 10—SENIOR NOTES PAYABLE
Senior notes payable, net, are comprised of the following:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| 7.50% Senior notes due May 31, 2027 | $ | 125,536 | $ | 117,954 | ||||
| 7.25% Senior notes due December 31, 2027 | 122,545 | 120,126 | ||||||
| 7.375% Senior notes due May 31, 2023 | 127,697 | 122,140 | ||||||
| 6.875% Senior notes due September 30, 2023 | 113,109 | 105,952 | ||||||
| 6.75% Senior notes due May 31, 2024 | 110,476 | 106,589 | ||||||
| 6.50% Senior notes due September 30, 2026 | 134,657 | 124,226 | ||||||
| 6.375% Senior notes due February 28, 2025 | 130,942 | — | ||||||
| 864,962 | 696,987 | |||||||
| Less: Unamortized debt issuance costs | (10,036 | ) | (8,875 | ) | ||||
| $ | 854,926 | $ | 688,112 | |||||
During the nine months ended September 30, 2020, the Company issued an additional $5,284$39,167 of 2021 Notessenior notes with maturity dates ranging from May 2023 to December 2027 pursuant to an At Thethe Market Issuance Sales Agreement (the “Sales Agreement”Agreements with B. Riley Securities, Inc. (fka B. Riley FBR, Inc.) as further discussed below.(“B. Riley Securities”), which governs the program of at-the-market sales of the Company’s senior notes.
On February 12, 2020, the Company issued $132,250 of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus supplement dated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 6.375%. The 20216.375% 2025 Notes are unsecured and due and payable in full on October 31, 2021.February 28, 2025. In connection with the issuance of the 20216.375% 2025 Notes, on November 2, 2016, the Company received net proceeds of $27,664$129,213 (after underwriting commissions, fees and other issuance costs of $1,086)$3,037). In connection
During March 2020, the Company repurchased bonds with an aggregate face value of $3,443 for $1,829 resulting in a gain net of expenses and original issue discount of $1,556 during the issuancenine months ended September 30, 2020. As part of the 2021 Notes in 2017 pursuant to the Sales Agreement,repurchase, the Company received net proceedspaid $30 in interest accrued through the date of $5,364 (after premiums less underwriting commissions, feeseach respective repurchase.
At September 30, 2020 and other issuance costs of $80). TheDecember 31, 2019, the total senior notes outstanding balance of the 2021 Notes was $33,224 (net of unamortized debt issue costs and premiums of $810) and $27,700$854,926 (net of unamortized debt issue costs of $1,050) at September 30, 2017$10,036) and December 31, 2016,$688,112 (net of unamortized debt issue costs of $8,875) with a weighted average interest rate of 6.94% and 7.05%, respectively. In connection with the offering of 2021 NotesInterest on November 2, 2016, certain members of management and the Board of Directors of the Company purchased $2,731 or 9.5% of the 2021 Notes offered by the Company.senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $15,562 and $11,255 for the 2021three months ended September 30, 2020 and 2019, respectively and $45,543 and $30,181 for the nine months ended September 30, 2020 and 2019, respectively.
Sales Agreement Prospectus to Issue Up to $150,000 of Senior Notes totaled $643 and $1,829
On February 14, 2020, the Company entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. Riley Securities, governing a program of at-the-market sales of certain of the Company’s senior notes. This program provides for the sale by the Company of up to $150,000 of certain of the Company’s senior notes. As of September 30, 2020, the Company had $148,076 remaining availability under the February 2020 Sales Agreement.
NOTE 11—REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers by reportable segment for the three and nine months ended September 30, 2017, respectively.2020 and 2019 is as follows:
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Reportable Segment | ||||||||||||||||||||||||
| Principal | ||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||
| Capital | Auction and | Valuation and | United Online and | |||||||||||||||||||||
| Markets | Liquidation | Appraisal | magicJack | Brands | Total | |||||||||||||||||||
| Revenues from contracts with customers: | �� | |||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | 45,970 | $ | — | $ | — | $ | — | $ | — | $ | 45,970 | ||||||||||||
| Wealth and asset management fees | 16,500 | — | — | — | — | 16,500 | ||||||||||||||||||
| Commissions, fees and reimbursed expenses | 9,053 | 17,278 | 9,655 | — | — | 35,986 | ||||||||||||||||||
| Subscription services | — | — | — | 17,948 | — | 17,948 | ||||||||||||||||||
| Service contract revenues | — | 4,195 | — | — | — | 4,195 | ||||||||||||||||||
| Advertising, licensing and other | — | 22,712 | — | 3,654 | 4,000 | 30,366 | ||||||||||||||||||
| Total revenues from contracts with customers | 71,523 | 44,185 | 9,655 | 21,602 | 4,000 | 150,965 | ||||||||||||||||||
| Other sources of revenue: | ||||||||||||||||||||||||
| Interest income - Loans and securities lending | 26,026 | — | — | — | — | 26,026 | ||||||||||||||||||
| Trading gains on investments | 31,613 | — | — | — | — | 31,613 | ||||||||||||||||||
| Fair value adjustment on loans | 140 | — | — | — | — | 140 | ||||||||||||||||||
| Other | 17,509 | — | — | — | — | 17,509 | ||||||||||||||||||
| Total revenues | $ | 146,811 | $ | 44,185 | $ | 9,655 | $ | 21,602 | $ | 4,000 | $ | 226,253 | ||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Reportable Segment | ||||||||||||||||||||||||
| Principal | ||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||
| Capital | Auction and | Valuation and | United Online and | |||||||||||||||||||||
| Markets | Liquidation | Appraisal | magicJack | Brands | Total | |||||||||||||||||||
| Revenues from contracts with customers: | ||||||||||||||||||||||||
| 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, licensing and other | — | 54 | — | 4,438 | — | 4,492 | ||||||||||||||||||
| Total revenues from contracts with customers | 65,888 | 11,286 | 10,818 | 23,863 | — | 111,855 | ||||||||||||||||||
| Other sources of revenue: | ||||||||||||||||||||||||
| Interest income - Loans and securities lending | 25,766 | — | — | — | — | 25,766 | ||||||||||||||||||
| Trading gains on investments | 32,564 | — | — | — | — | 32,564 | ||||||||||||||||||
| Fair value adjustment on loans | 7,704 | — | — | — | — | 7,704 | ||||||||||||||||||
| Other | 2,174 | — | — | — | — | 2,174 | ||||||||||||||||||
| Total revenues | $ | 134,096 | $ | 11,286 | $ | 10,818 | $ | 23,863 | $ | — | $ | 180,063 | ||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Reportable Segment | ||||||||||||||||||||||||
| Principal | ||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||
| Capital | Auction and | Valuation and | United Online and | |||||||||||||||||||||
| Markets | Liquidation | Appraisal | magicJack | Brands | Total | |||||||||||||||||||
| Revenues from contracts with customers: | ||||||||||||||||||||||||
| Corporate finance, consulting and investment banking fees | $ | 163,004 | $ | — | $ | — | $ | — | $ | — | $ | 163,004 | ||||||||||||
| Wealth and asset management fees | 55,522 | — | — | — | — | 55,522 | ||||||||||||||||||
| Commissions, fees and reimbursed expenses | 36,308 | 36,052 | 26,112 | — | — | 98,472 | ||||||||||||||||||
| Subscription services | — | — | — | 55,067 | — | 55,067 | ||||||||||||||||||
| Service contract revenues | — | 13,288 | — | — | — | 13,288 | ||||||||||||||||||
| Advertising, licensing and other | — | 23,757 | — | 10,688 | 11,007 | 45,452 | ||||||||||||||||||
| Total revenues from contracts with customers | 254,834 | 73,097 | 26,112 | 65,755 | 11,007 | 430,805 | ||||||||||||||||||
| Other sources of revenue: | ||||||||||||||||||||||||
| Interest income - Loans and securities lending | 72,383 | — | — | — | — | 72,383 | ||||||||||||||||||
| Trading losses on investments | (14,307 | ) | — | — | — | — | (14,307 | ) | ||||||||||||||||
| Fair value adjustment on loans | (21,835 | ) | — | — | — | — | (21,835 | ) | ||||||||||||||||
| Other | 25,469 | — | — | — | — | 25,469 | ||||||||||||||||||
| Total revenues | $ | 316,544 | $ | 73,097 | $ | 26,112 | $ | 65,755 | $ | 11,007 | $ | 492,515 | ||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
| Reportable Segment | ||||||||||||||||||||||||
| Principal | ||||||||||||||||||||||||
| Investments - | ||||||||||||||||||||||||
| Capital | Auction and | Valuation and | United Online and | |||||||||||||||||||||
| Markets | Liquidation | Appraisal | magicJack | Brands | Total | |||||||||||||||||||
| Revenues 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, licensing and other | — | 1,230 | — | 14,282 | — | 15,512 | ||||||||||||||||||
| Total revenues from contracts with customers | 180,638 | 66,911 | 29,143 | 77,176 | — | 353,868 | ||||||||||||||||||
| Other sources of revenue: | ||||||||||||||||||||||||
| Interest income - Loans and securities lending | 54,147 | — | — | — | — | 54,147 | ||||||||||||||||||
| Trading gains on investments | 58,387 | — | — | — | — | 58,387 | ||||||||||||||||||
| Fair value adjustment on loans | 13,343 | — | — | — | — | 13,343 | ||||||||||||||||||
| Other | 7,130 | — | — | — | — | 7,130 | ||||||||||||||||||
| Total revenues | $ | 313,645 | $ | 66,911 | $ | 29,143 | $ | 77,176 | $ | — | $ | 486,875 | ||||||||||||
(b) $84,047 Senior Notes Payable due May 31, 2027Contract Balances
At September 30, 2017,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 had $84,047has an unconditional right to payment. Alternatively, when payment precedes the provision of Senior Notes Payable (“2027 Notes”) due in 2027, interest payable quarterly at 7.5%. On May 31, 2017,the related services, the Company issued $60,375 of 2027 Notesrecords deferred revenue until the performance obligations are satisfied. Receivables related to revenues from contracts with customers totaled $45,654 and during the three months ended September 30, 2017 the Company issued an additional $23,672 of 2027 Notes pursuant to the Sales Agreement as further discussed below. The 2027 Notes are unsecured and due and payable in full on May 31, 2027. In connection with the issuance of the 2027 Notes, the Company received net proceeds of $82,284 (after underwriting commissions, fees and other issuance costs of $1,763). The outstanding balance of the 2027 Notes was $82,350 (net of unamortized debt issue costs of $1,697)$46,624 at September 30, 2017. Interest expense on the 2027 Notes totaled $1,4072020 and $1,810 forDecember 31, 2019, respectively. The Company had no significant impairments related to these receivables during the three and nine months ended September 30, 2017.
(c) At Market Issuance Sales Agreement2020. The Company’s deferred revenue primarily relates to Issue Up to Aggregate of $39,625 of 2021 Notes or 2027 Notes
On June 28, 2017,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 Company entered into the Sales Agreementperformance obligation has not yet been satisfied. Deferred revenue at September 30, 2020 and filed a prospectus supplement, pursuant to which the Company may sell from time to time, at the Company’s option up to an aggregate of $39,625 of 2021 Notes or 2027 Notes. The Notes sold pursuant to the Sales Agreement will be issued pursuant to a prospectus dated March 29, 2017, as supplemented by a prospectus supplement dated June 28, 2017, in each case filed with the SecuritiesDecember 31, 2019 was $70,565 and Exchange Commission pursuant to the Company’s effective Registration Statement on Form S-3 (File No. 333-216763), which was declared effective by the SEC on March 29, 2017. The Notes will be issued pursuant to the Indenture, dated as of November 2, 2016, as supplemented by a First Supplemental Indenture, dated as of November 2, 2016 and the Second Supplemental Indenture, dated as of May 31, 2017, each between the Company and U.S. Bank, National Association, as trustee. Future sales of the 2021 Notes and 2027 Notes pursuant to the Sales Agreement will depend on a variety of factors including, but not limited to, market conditions, the trading price of the notes and the Company’s capital needs.$67,121, respectively. During the three months ended September 30, 2017,2020 and 2019, the Company issued $5,284recognized revenue of 2021 Notes$8,102 and $23,672$9,166 that was recorded as deferred revenue at the beginning of 2027 Notes. Atthe respective year. During the nine months ended September 30, 2017,2020 and 2019, the Company has an additional $10,669recognized revenue of 2021 Notes or 2027 Notes$32,176 and $34,331 that maywas recorded as deferred revenue at the beginning of the respective 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 sold pursuantrecoverable; (2) costs to the Sales Agreement. There can be no assurance thatfulfill Auction and Liquidation services contracts where the Company will be successful in consummating future sales based on prevailing market conditionsguarantees a minimum recovery value for goods being sold at auction or inliquidation where the quantities or atrevenue is recognized over time when the prices thatperformance obligation is satisfied; and (3) commissions paid to obtain magicJack contracts which are recognized ratably over the Company may deem appropriate.
(d) Australian Dollar $80,000 Note Payable
In August 2016, the Company formed GA Retail Investments, L.P., a Delaware limited partnership, (the “Partnership”) which required the Company to contribute $15,350. The Partnership borrowed $80,000 Australian dollars from acontract term and third party investor in connection with its formationsupport costs for magicJack and related equipment purchased by customers which are recognized ratably over the $80,000 Australian dollarsservice period.
The capitalized costs to fulfill a contract were exchanged for a 50% special limited partnership interest in the Partnership. The Partnership was formed to provide funding for the retail liquidation engagement the Company entered into to liquidate the Masters Home Improvement stores. The $80,000 Australian dollar participating note payable was non-interest bearing, shares in 50% of the all of the profits$448 and losses of the Partnership and was subject to repayment upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. Although the terms of the participating note payable included the issuance of a 50% equity interest in the Partnership, sharing in all profits and losses of the Partnership, and no repayment until certain events occur, in accordance with ASC 480 Distinguishing Liabilities From Equity, this financial instrument was classified as a participating note payable. The $80,000 Australian dollar participating note payable was repaid in December 2016 upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. At$450 at September 30, 20172020 and December 31, 2016, $5242019, respectively, and $10,037, respectively, were payableare recorded in accordance with the participating note payable share of profitsprepaid expenses and is included in due to related parties and partnersother assets in the condensed consolidated balance sheets. For the three months ended September 30, 2020 and 2019, the Company recognized expenses of $68 and $246 related to capitalized costs to fulfill a contract, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized expenses of $210 and $1,277 related to capitalized costs to fulfill a contract, respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the three and nine months ended September 30, 2020 and 2019.
Remaining Performance Obligations and Revenue Recognized from Past Performance
(e) Other Notes Payable
Other notes payable include notes payableThe Company does not disclose information about remaining performance obligations pertaining to a clearing organization forcontracts that have an original expected duration of one of the Company’s broker dealers.year or less. The notes payable accrue interest at rates ranging from the prime rate plus 0.25%transaction price allocated to 2.0% (4.5% to 6.25%remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at September 30, 2017) payable annually. The principal payments on2020. 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 notes payablefees are due annuallyconsidered variable and not included in the amount of $121 on October 31, $214 ontransaction price at September 30, and $357 on January 31. The notes payable mature at various dates from January 31, 2018 through January 31, 2022. At September 30, 2017, the outstanding balance for the notes payable was $2,364.
2020.
NOTE 9— 12—INCOME TAXES
The Company’s effective income tax rate was a benefit of 80.5% and an expense of 38.9%29.4% for both the nine months ended September 30, 20172020 and 2016, respectively. During the nine months ended September 30, 2017, the Company elected to treat the acquisition of UOL as a taxable business combination for income tax purposes in accordance with Internal Revenue Code Section 338(g) (“IRS Code Section 338(g)”). This resulted in the Company foregoing the income tax attributes of UOL that existed at the acquisition date which included net operating loss carryforwards, capital loss carryforwards and foreign tax credits. The income tax election in accordance with IRS Code Section 338(g) provides the Company with a tax step-up in the basis of the intangible assets and goodwill acquired for tax purposes. In accordance with ASC 740, the impact of the election in accordance with IRS Code Section 338(g) on deferred income taxes resulted in the recording of a tax benefit in the amount of $8,389 during the nine months ended September 30, 2017. The effective income tax rate for the nine months ended September 30, 2016 was lower than the statutory federal and state income tax rate due to the tax differential on net income attributable to noncontrolling interests.2019.
As of September 30, 2017,2020, the Company had federal net operating loss carry forwardscarryforwards of approximately $65,500$53,932 and state net operating loss carry forwardscarryforwards of $77,200.$64,088. The Company’s federal net operating loss carry forwardscarryforwards will expire in the tax year endingyears commencing in December 31, 2036, the2032 through December 31, 2037. The state net operating loss carry forwardscarryforwards will expire in 2034, and the foreign tax credit carry forwards will expireyears commencing in 2023.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 carry forwardscarryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forwardcarryforward period, and other circumstances. As a result of the common stock offering by the Company that was completed on June 5, 2014, the Company had a more than 50% ownership shiftThe 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, 2017,2020, the Company believes that the existing net operating loss that existed as of the more than 50% ownership shiftcarryforwards will be utilized in future tax periods before the loss carry forwardscarryforwards 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 ana 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 $61,945 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, 20132016 to 2016.2019.
NOTE 10— 13—EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 453,365387,365 common shares in 2019 that arewere held in escrow and subject to forfeiture. The 387,365 common shares held in escrow includes 66,000 common shares issuedwere forfeited and cancelled on June 11, 2020 to the former members of Great American Group, LLC that are 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 and 387,365 common shares that are subject to forfeiture toindemnify the Company for certain representations and warranties in connection with theand related claims pursuant to a related acquisition of Wunderlich. These sharesare subject to forfeiture upon the final settlement of claims as more fully describedagreement. Securities that could potentially dilute basic net income per share in the related escrow instructions. Dilutive common shares outstanding includes contingently issuable sharesfuture that are currentlywere not included in escrowthe computation of diluted net income per share were 1,059,919 and subject to release if the conditions1,369,674 for the final settlement of claims in accordance withthree months ended September 30, 2020 and 2019, respectively and 1,212,563 and 1,474,104 for the escrow instructions were satisfied at the end of the respective periods.nine months ended September 30, 2020 and 2019, respectively, because to do so would have been anti-dilutive.
Basic and diluted earnings per share waswere calculated as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 368 | $ | 8,939 | $ | 17,669 | $ | 9,086 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 26,059,490 | 18,977,072 | 22,180,808 | 17,805,127 | ||||||||||||
| Effect of dilutive potential common shares: | ||||||||||||||||
| Restricted stock units and non-vested shares | 1,193,007 | 169,311 | 816,841 | 159,376 | ||||||||||||
| Contingently issuable shares | 387,365 | 44,652 | 387,365 | 44,655 | ||||||||||||
| Diluted | 27,639,862 | 19,191,035 | 23,385,014 | 18,009,158 | ||||||||||||
| Basic income per share | $ | 0.01 | $ | 0.47 | $ | 0.80 | $ | 0.51 | ||||||||
| Diluted income per share | $ | 0.01 | $ | 0.47 | $ | 0.76 | $ | 0.50 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 48,379 | $ | 34,302 | $ | 33,554 | $ | 64,482 | ||||||||
| Preferred stock dividends | 1,088 | — | 3,230 | — | ||||||||||||
| Net income applicable to common shareholders | $ | 47,291 | $ | 34,302 | $ | 30,324 | $ | 64,482 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 25,446,292 | 26,556,223 | 25,699,735 | 26,351,839 | ||||||||||||
| Effect of dilutive potential common shares: | ||||||||||||||||
| Restricted stock units and warrants | 1,604,156 | 1,613,993 | 989,965 | 836,791 | ||||||||||||
| Contingently issuable shares | — | 63,207 | — | 63,207 | ||||||||||||
| Diluted | 27,050,448 | 28,233,423 | 26,689,700 | 27,251,837 | ||||||||||||
| Basic income per common share | $ | 1.86 | $ | 1.29 | $ | 1.18 | $ | 2.45 | ||||||||
| Diluted income per common share | $ | 1.75 | $ | 1.21 | $ | 1.14 | $ | 2.37 | ||||||||
NOTE 11— 14—COMMITMENTS AND CONTINGENCIES
(a) Legal Matters
The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from ourthe 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 ourthe 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 our company,the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, wethe 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.
In 2012, Gladden v. Cumberland Trust, WSI, et al. filed a complaint in Circuit Court, Hamblen County, TN at Morristown, Case No. 12-CV-119. This complaint alleges the improper distribution and misappropriation of trust funds. The plaintiff seeks damages of no less than $3,925, an accounting, and among other things, punitive damages. In October 2017, the Tennessee Supreme Court remanded the case to the Tennessee State Trial Court for determination of which claims are subject to arbitration and which are not. At the present time, the financial impact to the Company, if any, cannot be estimated.
In January 2015, Great American Group, LLC (“Great American Group”) was served with a lawsuit that seeks to assert claims of breach of contract and other matters in connection with auction services provided to a debtor. The proceeding in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”) is pending in the bankruptcy case of the debtor and its affiliates (the “Debtor”). In the lawsuit, a former landlord of the Debtor generally alleges that Great American Group and a joint venture partner were responsible for contamination while performing services in connection with the auction of certain assets of the Debtor and is seeking approximately $10,000 in damages. In January 2017, the parties filed a proposed scheduling order with the Bankruptcy Court. Discovery in the action is currently proceeding. Great American Group is vigorously defending this lawsuit. This lawsuit is ongoing, and the financial impact to the Company, if any, cannot be estimated.
On July 5, 2016, Quadre Investments LP (“Quadre”) filed a petition with the Delaware Court of Chancery (the “Court”) seeking a determination of fair value for 943,769 shares of common stock of UOL in connection with the acquisition of UOL by the Company. Such transaction gave rise to appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware. As a result, Quadre petitioned the Court to receive fair value as determined by the Court. On June 30, 2017, the parties settled the action and the petition was dismissed. As discussed in Note 3, the settlement of this action resulted in an increased in goodwill.
In May 2014, Waterford Township Police & Fire Retirement System et al. v. Regional Management Corp et al., filed a complaint in the Southern District of New York (the “Court”), against underwriters alleging violations under sections 11 and 12 of the Securities Act of 1933, as amended (the “Securities Act”). FBR Capital Markets & Co. (“FBRCM”), a broker-dealer subsidiary of ours, was a co-manager of 2 offerings. On January 30, 2017, the Court denied the plaintiffs’ motion to file a first amended complaint, which would have revived claims previously dismissed by the Court on March 30, 2016. On March 1,2017, the plaintiffs filed a notice of appeal and an opening brief on June 21, 2017. Defendant’s opposition motion was filed on September 12, 2017. Appellants filed their reply brief on October 17, 2017 and oral argument has been scheduled for November 17, 2017. Regional Management continues to indemnify all of the underwriters, including FBRCM, pursuant to the operative underwriting agreement.
On January5,2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR,B. Riley Securities (fka 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, styledGaynor v. Miller et al.,is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately $151,000. The plaintiffs seek unspecified compensatory damagesCourt ordered mediation before a federal magistrate took place on August 6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020, the Company agreed to settle this matter, subject to court approval which is expected by the end of 2020 or in early 2021.
(b) Franchise Group Commitment Letter and reimbursementLoan Participant Guaranty
Commitment Letter
On February 14, 2020, affiliates of Franchise Group, Inc. (collectively with all of its affiliates, “FRG”) entered into an ABL Credit Agreement (the “Franchise Credit Agreement”), with GACP Finance Co., LLC (“GACP Finance”) as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided an asset based credit facility to FRG in an aggregate principal amount of $100.0 million. The obligations under the Franchise Credit Agreement were refinanced in full on September 23, 2020 (the “Refinancing”). In connection with the Franchise Credit Agreement, the Company entered into a commitment letter (as amended, the “Commitment Letter”), pursuant to which the Company committed to provide a $100.0 million asset based lending facility to FRG five days prior to the maturity date of the Franchise Credit Agreement if, on or before such date, the obligations under the Franchise Credit Agreement are not refinanced in full. Such commitment terminated upon the consummation of the Refinancing.
The Loan Participant Guaranty
On February 14, 2020, FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the “Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principal amount of $575,000. On February 19, 2020, the Company entered into a limited guaranty (the “Loan Participant Guaranty”) to one of the lenders under the Term Loan Credit Agreement (the “Loan Participant”) pursuant to which the Company guaranteed the payment when due of certain costsobligations, including principal, interest, and expenses. In August 2017,other amounts payable to the Court granted Defendant’s MotionLoan Participant under the Term Loan Credit Agreement in an amount not to Dismiss on Section 12 claimsexceed $50,000 plus certain expenses of the Loan Participant and foundcertain protective advances related to such guaranteed obligations (the “Loan Participant Guaranteed Obligations”). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant to the Term Loan Credit Agreement. The Loan Participant Guaranty remains in effect until the date that the plaintiffs had not sufficiently allegedLoan Participant Guaranteed Obligations have been paid in full.
The Loan Participant Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
(c) Babcock & Wilcock Commitments and Guarantee
On May 14, 2020, the Company entered into an a corrective disclosure prioragreement to provide Babcock & Wilcox Enterprises, Inc. (“B&W”) future commitments to loan B&W up to $40,000 at various dates starting in November 2020 and the Company provided a limited guaranty of B&W’s obligations under B&W’s amended credit facility as more fully described in Note 17 - Related Party Transactions.
On August 6, 2015, when an SEC civil action was announced. Defendant’s answer was filed on September 25, 2017. Although MLV is contractually entitled10, 2020, the Company entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Company and/or Berkley Regional Insurance Company (collectively, “Berkley”) to be indemnifieda general agreement of indemnity made by MillerB&W in favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkley in connection with this lawsuit, Miller filed for bankruptcy in October 2015a default by B&W under the Indemnity Agreement relating to a $29,970 payment and this likely will decrease or eliminate the value of the indemnity that MLV receives from Miller.
In April 2017, two purported shareholders of FBR filed a putative class action against FBR and the members of its board of directors that challenged the disclosures madeperformance bond issued by Berkley in connection with a construction project undertaken by B&W. In consideration for providing the merger of FBR withIndemnity Rider, B&W paid the Company styledMichael Rubin v. FBR & Co., et al., Case No. 1:17-cv-00410-LMB-MSN andKim v. FBR & Co., et al. Case No.1:17-cv-004440LMB-IDD. The complaints alleged that the registration statement filed in connection with the Merger failed to disclose certain allegedly material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Ru1e 14a-9 promulgated thereunder. On July 12, 2017, per stipulation, the complaints were dismissed - with prejudice as to the named plaintiffs only, without prejudice as to the class. In$600 on August 2017, a mootness fee was paid and the case was dismissed.26, 2020.
(d) BRPM II Equity Commitment Letter
In February 2017, certain former employees filedThe Company is a party to an arbitration claimEquity Commitment Letter with FINRA against Wunderlich Securities, Inc. (“WSI”) alleging misrepresentationsB. Riley Principal Merger Corp. II and B. Riley Principal Sponsor Co. II, LLC, as disclosed below in the recruitment of claimants to join WSI. Claimants also allege that WSI failed to support their mortgage trading business resulting in the loss of opportunities during their employment with WSI. Claimants are seeking $10 million in damages. WSI has counterclaimed alleging that claimants mispresented their process for doing business, particularly their capital needs, resulting in substantial losses to WSI. WSI believes the claims are meritless and intends to vigorously defend the action. A hearing has been scheduled for March 2018.Note 17 – Related Party Transactions.
In March 2017, United Online, Inc. received a letter from PeopleConnect, Inc. (formerly, Classmates, Inc.) (“Classmates”) regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of four California counties (“California DAs”). These entities suggest that Classmates may be in violation of California codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices. Classmates asserts that these claims are indemnifiable claims under the purchase agreement between United Online, Inc. and the buyer of Classmates. A tolling agreement with the California DAs has been signed and informal discovery and production is in process. At the present time, the financial impact to the Company, if any, cannot be estimated.
In July 2017, an arbitration claim was filed with FINRA by Dominick & Dickerman LLC and Michael Campbell against WSI and Gary Wunderlich with respect to the acquisition by Wunderlich Investment Company, Inc. (“WIC”) (the parent corporation of WSI) of certain assets of Dominick & Dominick LLC in 2015. The Claimants allege that respondents overvalued WIC so that the purchase price paid to the Claimants in shares of WIC stock was artificially inflated. The Statement of Claim includes claims for common law fraud, negligent misrepresentation, and breach of contract. Claimants are seeking damages of approximately $8 million plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend the action.
In September 2017, a statement of claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting of the now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum”). Claimants are seeking $37,000 in actual damages, plus $75,000 in punitive damages and attorney’s fees. On October 24, 2017, we joined in a motion with the other underwriters requesting that the claim be dismissed on the grounds that it is improper under FINRA Rules 12204 and 122205 which prohibit class actions and derivative claims, respectively. Our initial response is due in November 2017 and we have agreed to a dual representation arrangement with the other underwriters. At the present time, the financial impact to the Company, if any, cannot be estimated.
NOTE 12— 15—SHARE-BASED PAYMENTS AND COMMON STOCK
(a) Amended and Restated 2009Employee Stock Incentive PlanPlans
During the nine months ended September 30, 2017, the Company grantedShare-based compensation expense for restricted stock units representing 486,049 shares of common stock with a total fair value of $7,732 to certain employees of the Company under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”). During the year ended December 31, 2016, the Company granted restricted stock units representing 544,605 shares of common stock with a total fair value of $5,301 to certain employees was $4,680 and directors of the Company under the Plan. Share-based compensation expense for such restricted stock units was $1,410 and $3,624$4,660 for the three months ended September 30, 2020 and 2019, respectively and $13,945 and $10,013 for the nine months ended September 30, 2017,2020 and 2019, respectively. Share-based compensation expense for such restricted stock units was $834 and $1,831 forDuring the three and nine months ended September 30, 2016, respectively.
2020, in connection with employee stock incentive plans the Company granted 606,063 restricted stock units with a weighted average grant date fair value of $18.77 per share. 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
(b) Employee Stock Purchase Plan
In connection with the Company’s Purchase Plan, share based compensation was $96 and $68 for the three months ended September 30, 2017, the expected remaining unrecognized share-based compensationexpense of $9,271 will be expensed over a weighted average period of 2.2 years.
A summary of equity incentive award activity under the Plan2020 and 2019, respectively and $320 and $263 for the nine months ended September 30, 2017 was as follows:
| Weighted | ||||||||
| Average | ||||||||
| Shares | Fair Value | |||||||
| Nonvested at December 31, 2016 | 680,135 | $ | 9.74 | |||||
| Granted | 486,049 | 15.91 | ||||||
| Vested | (193,626 | ) | 10.32 | |||||
| Forfeited | (29,724 | ) | 10.49 | |||||
| Nonvested at September 30, 2017 | 942,834 | $ | 12.78 | |||||
The per-share weighted average grant-date fair value of restricted stock units was $15.91 during the nine months ended2020 and 2019, respectively. At September 30, 2017. There2020, there were 193,626 restricted stock units with a fair value of $1,999 that vested during the nine months ended September 30, 2017 under the Plan.
Amended and Restated FBR & Co. 2006 Long-Term Stock Incentive Plan
In connection with the acquisition of FBR on June 1, 2017, the equity awards previously granted or available524,891 shares reserved for issuance under the FBR & Co. 2006 Long-TermPurchase Plan.
(c) Common Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan.
During the nine months ended September 30, 2017,2020, the Company granted restrictedrepurchased 1,715,383 shares of its common stock units representing 784,638for $38,348 which represents an average price of $22.36 per common share. On July 1, 2020, the Company entered into an agreement to repurchase 900,000 shares of its common stock for $19,800 ($22.00 per common share) from one of its shareholders. In accordance with the agreement, the Company repurchased 450,000 shares for $9,900 on July 2, 2020 and the remaining 450,000 shares are required to be repurchased for $9,900 at a mutually agreeable date prior to January 1, 2021. In addition to the repurchases of common stock, 387,365 shares of the Company’s common stock that were previously held in escrow in connection with the acquisition of a total grant date fair valuewealth management company in 2017 were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations and warranties and related claims pursuant to a related acquisition agreement.
(d) Preferred Stock
The Company has issued depository shares equivalent to 2,531 shares of $13,129. Share-based compensation expenseSeries A Preferred Stock with dividends payable at a rate of 6.875% per annum. There were 2,531 shares and 2,349 shares issued and outstanding as of September 30, 2020, and December 31, 2019, respectively. The Series A has a liquidation preference of $25 per 1/1000 depository share or $25,000 per preferred share. Total liquidation preference for the Series A at September 30, 2020, and December 31, 2019, was $1,383$63,273 and $1,687 for$58,723, respectively. Dividends on the Series A preferred paid during the three and nine months ended September 30, 2017, respectively, in connection with2020, were $0.4296875 and $1.29 per depository share, respectively.
During the June 13, 2017 restricted stock award. In connection with the restructuring discussed in Note 2(i),three months ended September 30, 2020, the Company recorded share-based compensation expenseissued depository shares equivalent to 1,300 shares of $2,391related toSeries B Preferred Stock with dividends payable at a rate of 7.375% per annum. The Series B has a liquidation preference of $25 per 1/1000 depository share or $25,000 per preferred share. Total liquidation preference for the accelerated vesting of restricted stock awards. Of the $2,391, $884 related to former corporate executives of FBR and $1,507 related to employees in the Capital Markets segment.As ofSeries B at September 30, 2017,2020, was $32,500. No dividends were paid on the expected remaining unrecognized share-based compensation expense of $11,916 will be expensed over a weighted average period of 2.7 years.
A summary of equity incentive award activity forSeries B during the period from June 1, 2017, the date of the acquisition of FBR, throughthree months ended September 30, 2017 was as follows:2020.
| Weighted | ||||||||
| Average | ||||||||
| Shares | Fair Value | |||||||
| Nonvested at June 1, 2017, acquisition date of FBR resulting from the exchange of previously existing FBR awards | 530,661 | $ | 14.70 | |||||
| Granted | 784,638 | 16.73 | ||||||
| Vested | (200,905 | ) | 15.08 | |||||
| Forfeited | (93,963 | ) | 15.93 | |||||
| Nonvested at September 30, 2017 | 1,020,431 | $ | 16.14 | |||||
NOTE 13— 16—NET CAPITAL REQUIREMENTS
B. Riley & Co., LLCSecurities and B. Riley Wealth Management (“BRC”), FBRCM, MLV and Wunderlich Securities, Inc. (“WSI”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”). As such, theyThe Company’s broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1) which requires the subsidiaries to maintain minimum net capital requirements promulgated byand provides that the SEC.ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. As of September 30, 2017, BRC2020, B. Riley Securities had net capital of $12,052,$137,777, which was $11,728$134,273 in excess of its required net capital of $324, FBRCM$3,504; and BRWM had net capital of $38,976,$4,090 which was $37,976$3,444 in excess of its required net capital of $1,000, MLV had net capital of $407, which was $307 in excess of its required net capital of $100, and WSI had net capital of $3,601, which was $2,891 in excess of its required net capital of $710.$646.
NOTE 14— 17—RELATED PARTY TRANSACTIONS
At September 30, 2017,2020, amounts due from related parties include $5,452of $3,766 included $23 from GACP I, L.P. (“GACP I”) and $30$372 from GACP II, L.P. (“GACP II”) for management fees, incentive fees and other operating expenses, and$600 $3,371 due from CA Global Partners LLC (“CA Global”) for advances on certain wholesale and industrial liquidation engagements. Amounts due to related parties includes $720 payable to CA Global for operating expenses related to wholesale and industrial liquidation engagements managed by CA Global. At December 31, 2016, amounts due from related parties include $2,050 from GACP I, L.P. for management fees, incentive fees and other operating expenses and $959 from CA Global. Great American Capital Partners, LLC, a subsidiary of the Company, is the general partner of GACP I, L.P. CA Global is one of the members of Great American Global Partners, LLC (“GA Global Ptrs”). The amounts receivable and payable from CA Global are comprised of amounts due to and due from CA Global in connection with certain auctions of wholesale and industrial machinery and equipment that they were managed by CA Global on behalf of GA Global Ptrs. At December 31, 2019, amounts due from related parties of $5,832 included $145 from GACP I and $12 from 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, for which our wholly owned subsidiary, B. Riley Principal Sponsor Co. LLC, was the Sponsor, and $3,846 due from John Ahn, who at the time was the President of Great American Capital Partners, LLC, our indirect wholly owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory Note related to a Transfer Agreement as further discussed below. During the nine months ended September 30, 2020, the Company sold a portion of a loan receivable to GACP for $1,800. At September 30, 2020, the Company had sold loan participations to BRC Partners Opportunity Fund, LP (“BRCPOF”), a private equity fund managed by one of its subsidiaries, in the amount of $13,919, and recorded interest expense of $1,416 during the nine months ended September 30, 2020 related to BRCPOF’s loan participations. Our executive officers and members of our board of directors have a 43.8% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 38.5% in the BRCPOF at September 30, 2020. At September 30, 2020 and December 31, 2019, the Company had outstanding loan to participations to BRCPOF in the amount of $13,919 and $12,478, respectively.
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, who is the brother of Phil Ahn, the Company’s Chief Financial Officer and Chief Operating Officer. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn of 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 December 31, 2019, the principal and accrued interest on the Note were $3,798 and $48, respectively. In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P., a limited partnership controlled by Mr. J. Ahn, (“Whitehawk”). Whitehawk has agreed to provide investment advisory services for GACP I and GACP II. In accordance with the terms of the Note, Mr. Ahn surrendered the Transferred Interest to the Company in exchange for the cancellation of the Note. During the nine months ended September 30, 2020, interest payments received on the Note were $121 and management fees paid for investment advisory services by Whitehawk was $731.
On May 22, 2020, the Company earned $3,275 of underwriting fees from the initial public offering of $28,750B. Riley Principal Merger Corp. II, (“BRPM II”), which was formed for the purpose of 2021 Notes aseffecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more fully describedbusinesses (the “BRPM II IPO”). The Company has also agreed to loan BRPM II up to $300 for operating expenses. The loan is interest free and there were no amounts outstanding at September 30, 2020. On September 7, 2020, BRPM II entered into an agreement and plan of merger (the “Merger Agreement”) to acquire Eos Energy Storage LLC, a Delaware limited liability company, a privately held company that is not related to the Company (the “Proposed Acquisition”).
The Proposed Acquisition is expected to be completed in Note 8,the fourth quarter of 2020, subject to certain memberscustomary conditions, including, among other things, approval by the BRPM II’s stockholders of managementthe Merger Agreement and the Boardbusiness combination. In addition, closing is subject to certain other conditions, including, among other things, that BRPM II maintain a certain level of Directorscash (before taking into account certain transaction expenses, but after taking into account any redemptions by the BRPM II’s public stockholders) available from the trust account established in connection with the BRPM II IPO and from other equity financing sources.
In order to help meet the condition under the Merger Agreement that BRPM II maintain a certain level of cash available upon the closing (before taking into account certain transaction expenses), the Company entered into an Equity Commitment Letter with BRPM II and B. Riley Principal Sponsor Co. II, LLC, pursuant to which the Company committed to provide up to $40,000 in equity financing at closing, less the number of shares of BRPM II’s common stock already issued pursuant to subscription agreements entered into with investors prior to the closing.
In addition to the above, the Company from time to time participates in loans and financing arrangements in respect of companies in which the Company has an equity ownership and representation on the board of directors or equivalent body. The Company may also provide consulting services or investment banking services to raise capital for these companies. These transactions can be summarized as follows:
Sonim
The Company had a loan receivable due from Sonim Technologies, Inc. (“Sonim”) that was included in loans receivable at fair value with a fair value of $9,603 at December 31, 2019. Interest is payable at 10.0% per annum with a maturity date of September 1, 2022. The original loan was made in October 2017 in connection with the Company’s initial investment in common stock and preferred stock that was purchased from Sonim’s existing shareholders. In October 2017, the Company also entered into a management services agreement with Sonim to provide advisory and consulting services for management fees of up to $200 per year. The management services agreement was terminated in September 2019.
In June 2020, Sonim repaid $4,000 of the outstanding loan balance in cash and the remaining principal amount, accrued interest and other amounts outstanding of $6,170 under the loan converted into shares of common stock of Sonim at the then public offering price of shares of Sonim’s common stock.
Babcock and Wilcox
The Company has a last-out term loan receivable due from B&W that is included in loans receivable, at fair value with a fair value of $164,539 at September 30, 2020. As of December 31, 2019, the last-out term loan was included in loans receivable, at cost with a carrying value of $109,147. On January 31, 2020, the Company provided B&W with an additional $30,000 of last-out term loans pursuant to new amendments to B&W’s credit agreement. On May 14, 2020, the Company provided B&W with another $30,000 of last-out term loans pursuant to a further amendment to B&W’s credit agreement which also included future commitments for the Company to loan B&W $40,000 at various dates starting in November 2020 and a limited guaranty by the Company of B&W’s obligations under the amended credit facility, (the “Amendment Transactions”). Interest is payable quarterly at the fixed rate of 12.0% per annum in common stock of B&W at $2.28 per common share through December 31, 2020 and in cash thereafter. All of these loans were made to B&W as part of various amendments to B&W’s existing credit agreement with other lenders not related to the Company. As part of the Amendment Transactions, the Company entered into the following agreements: (i) an Amendment and Restatement Agreement, dated as of May 14, 2020, among B&W, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, including the Company; (ii) a Fee Letter, dated as of May 14, 2020, among the Company and B&W; (iii) a Fee and Interest Equitization Agreement, dated May 14, 2020, between the Company, B. Riley Securities, and B&W; (iv) a Termination Agreement, dated as of May 14, 2020, the Company and B&W and acknowledged by Bank of America, N.A. with respect to the Backstop Commitment Letter; and (v) a Limited Guaranty Agreement, dated as of May 14, 2020, among the Company, B&W and Bank of America, N.A.
In connection with making the loan to B&W, in April 2019 the Company received warrants to purchase 1,666,667 shares of common stock of B&W with an exercise price of $0.01 per share. The option to exercise the warrants expires on April 5, 2022.
One of the Company’s wholly owned subsidiaries entered into a services agreement with B&W that provided for the President of the Company purchased $2,731 or 9.5%to serve as the Chief Executive Officer of B&W until November 30, 2020 (the “Executive Consulting Agreement”), unless terminated by either party with thirty days written notice. Under this agreement, fees for services provided are $750 per annum, paid monthly. In addition, subject to the achievement of certain performance objectives as determined by B&W’s compensation committee of the Senior Notes offered byboard, a bonus or bonuses may also be earned and payable to the Company.
The Company is also a party to an Indemnity Rider with B&W, as disclosed above in Note 14 – Commitments and Contingencies.
NOTE 15— BUSINESS SEGMENTS
Maven
The Company’s operating segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance internally. The Company has several operating subsidiariesloans receivable due from the Maven, Inc. (“Maven”) that are included in loans receivable, at fair value of $71,479 at September 30, 2020. At December 31, 2019, the Company had a loan receivable due from Maven that is included in loans receivable at fair value of $21,150 and another loan receivable from Maven that is included in loans receivable at historical cost with a carrying value of $47,933 (which is comprised of the principal balance due in the amount of $49,921, less original issue discount of $1,988). Interest on these loans is payable at 12.0% to 15.0% per annum with maturity dates through which it delivers specific services. The Company provides investment banking, corporate finance, securities lending, restructuring, research, sales and trading and wealth management services to corporate, institutional and high net worth clients. The Company also provides auction and liquidation services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property and valuation and appraisal services to clients with independent appraisalsJune 2022.
On October 28, 2020, in connection with asset baseda capital raise by Maven, the Company converted $3,367 of Maven notes receivable that is included in notes receivable from related party at September 30, 2020 into 3,367 shares of Series K Preferred stock of Maven.
Franchise Group
The Company has a loan receivable due from Vitamin Shoppe, a subsidiary of FRG, (“Vitamin Shoppe”) that was included in loans acquisitions, divestituresreceivable, at fair value with a fair value of $4,951 at December 31, 2019. Interest was payable at 13.7% per annum with a maturity date of December 16, 2022. The principal balance of $4,697 on the Vitamin Shoppe loan receivable was repaid in May 2020 and other business needs. As a resultthe final interest payment of $31 was paid on June 1, 2020. During the nine months ended September 30, 2020, the Company earned $4,329 of underwriting fees from FRG in connection with FRG’s capital raising activities. In the second quarter of 2020, B. Riley no longer had representation on the board of directors or the right to appoint members of the acquisitionboard of UOL on July 1, 2016,directors of FRG and no longer exercised significant influence over FRG. As such, FRG is no longer a related party.
As of September 30, 2020, the Company provides consumer servicesis party to a Loan Participant Guaranty with FRG as disclosed above in Note 14 – Commitments and products over the Internet.Contingencies.
NOTE 18—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, and Brands 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, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Capital Markets reportable segment: | ||||||||||||||||
| Revenues - Services and fees | $ | 56,473 | $ | 10,063 | $ | 95,872 | $ | 22,799 | ||||||||
| Interest income - Securities lending | 7,206 | — | 9,424 | — | ||||||||||||
| Total revenues | 63,679 | 10,063 | 105,296 | 22,799 | ||||||||||||
| Selling, general, and administrative expenses | (53,955 | ) | (8,916 | ) | (87,753 | ) | (22,535 | ) | ||||||||
| Restructuring costs | (3,322 | ) | — | (7,245 | ) | — | ||||||||||
| Interest expense - Securities lending | (4,950 | ) | — | (6,515 | ) | — | ||||||||||
| Depreciation and amortization | (1,636 | ) | (138 | ) | (2,167 | ) | (406 | ) | ||||||||
| Segment (loss) income | (184 | ) | 1,009 | 1,616 | (142 | ) | ||||||||||
| Auction and Liquidation reportable segment: | ||||||||||||||||
| Revenues - Services and fees | 7,376 | 17,058 | 43,179 | 29,358 | ||||||||||||
| Revenues - Sale of goods | 1 | 6,503 | 1 | 6,505 | ||||||||||||
| Total revenues | 7,377 | 23,561 | 43,180 | 35,863 | ||||||||||||
| Direct cost of services | (3,385 | ) | (4,365 | ) | (25,482 | ) | (9,870 | ) | ||||||||
| Cost of goods sold | (2 | ) | (2,223 | ) | (2 | ) | (2,225 | ) | ||||||||
| Selling, general, and administrative expenses | (1,963 | ) | (3,976 | ) | (6,562 | ) | (6,840 | ) | ||||||||
| Depreciation and amortization | (5 | ) | (6 | ) | (15 | ) | (22 | ) | ||||||||
| Segment income | 2,022 | 12,991 | 11,119 | 16,906 | ||||||||||||
| Valuation and Appraisal reportable segment: | ||||||||||||||||
| Revenues - Services and fees | 9,043 | 7,696 | 24,799 | 22,865 | ||||||||||||
| Direct cost of services | (3,778 | ) | (3,549 | ) | (11,031 | ) | (10,287 | ) | ||||||||
| Selling, general, and administrative expenses | (2,253 | ) | (2,136 | ) | (6,395 | ) | (6,379 | ) | ||||||||
| Depreciation and amortization | (43 | ) | (19 | ) | (130 | ) | (72 | ) | ||||||||
| Segment income | 2,969 | 1,992 | 7,243 | 6,127 | ||||||||||||
| Principal Investments - United Online segment: | ||||||||||||||||
| Revenues - Services and fees | 12,249 | 15,483 | 38,504 | 15,483 | ||||||||||||
| Revenues - Sale of goods | 78 | 163 | 220 | 163 | ||||||||||||
| Total revenues | 12,327 | 15,646 | 38,724 | 15,646 | ||||||||||||
| Direct cost of services | (2,975 | ) | (4,927 | ) | (9,711 | ) | (4,927 | ) | ||||||||
| Cost of goods sold | (122 | ) | (168 | ) | (311 | ) | (168 | ) | ||||||||
| Selling, general, and administrative expenses | (2,433 | ) | (2,139 | ) | (8,536 | ) | (2,139 | ) | ||||||||
| Depreciation and amortization | (1,703 | ) | (1,802 | ) | (5,313 | ) | (1,802 | ) | ||||||||
| Restructuring costs | (150 | ) | (3,187 | ) | (633 | ) | (3,187 | ) | ||||||||
| Segment income | 4,944 | 3,423 | 14,220 | 3,423 | ||||||||||||
| Consolidated operating income from reportable segments | 9,751 | 19,415 | 34,198 | 26,314 | ||||||||||||
| Corporate and other expenses (including restructuring costs of $1,424 and $3,606 during the three and nine months ended September 30, 2017, respectively, and $398 during the three and nine months ended September 30, 2016) | (8,395 | ) | (3,993 | ) | (19,571 | ) | (9,047 | ) | ||||||||
| Interest income | 76 | 26 | 358 | 32 | ||||||||||||
| Loss on equity investment | (157 | ) | — | (157 | ) | — | ||||||||||
| Interest expense | (2,510 | ) | (991 | ) | (5,195 | ) | (1,398 | ) | ||||||||
| (Loss) income before income taxes | (1,235 | ) | 14,457 | 9,633 | 15,901 | |||||||||||
| Benefit from (provision for) income taxes | 1,357 | (6,083 | ) | 7,753 | (6,184 | ) | ||||||||||
| Net income | 122 | 8,374 | 17,386 | 9,717 | ||||||||||||
| Net (loss) income attributable to noncontrolling interests | (246 | ) | (565 | ) | (283 | ) | 631 | |||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 368 | $ | 8,939 | $ | 17,669 | $ | 9,086 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Capital Markets segment: | ||||||||||||||||
| Revenues - Services and fees | $ | 89,032 | $ | 68,062 | $ | 280,303 | $ | 187,768 | ||||||||
| Trading income (losses) and fair value adjustments on loans | 31,753 | 40,268 | (36,142 | ) | 71,730 | |||||||||||
| Interest income - Loans and securities lending | 26,026 | 25,766 | 72,383 | 54,147 | ||||||||||||
| Total revenues | 146,811 | 134,096 | 316,544 | 313,645 | ||||||||||||
| Selling, general and administrative expenses | (68,442 | ) | (70,140 | ) | (204,183 | ) | (196,570 | ) | ||||||||
| Restructuring (charge) recovery | (1,417 | ) | — | (1,417 | ) | 4 | ||||||||||
| Interest expense - Securities lending and loan participations sold | (10,975 | ) | (10,273 | ) | (30,669 | ) | (22,579 | ) | ||||||||
| Depreciation and amortization | (1,166 | ) | (1,281 | ) | (3,362 | ) | (3,844 | ) | ||||||||
| Segment income | 64,811 | 52,402 | 76,913 | 90,656 | ||||||||||||
| Auction and Liquidation segment: | ||||||||||||||||
| Revenues - Services and fees | 21,473 | 11,232 | 49,340 | 65,681 | ||||||||||||
| Revenues - Sale of goods | 22,712 | 54 | 23,757 | 1,230 | ||||||||||||
| Total revenues | 44,185 | 11,286 | 73,097 | 66,911 | ||||||||||||
| Direct cost of services | (18,373 | ) | (2,371 | ) | (36,406 | ) | (21,584 | ) | ||||||||
| Cost of goods sold | (9,046 | ) | (126 | ) | (9,360 | ) | (992 | ) | ||||||||
| Selling, general and administrative expenses | (4,625 | ) | (2,835 | ) | (8,880 | ) | (9,045 | ) | ||||||||
| Restructuring (charge) recovery | (140 | ) | — | (140 | ) | — | ||||||||||
| Depreciation and amortization | (1 | ) | (1 | ) | (2 | ) | (5 | ) | ||||||||
| Segment income | 12,000 | 5,953 | 18,309 | 35,285 | ||||||||||||
| Valuation and Appraisal segment: | ||||||||||||||||
| Revenues - Services and fees | 9,655 | 10,818 | 26,112 | 29,143 | ||||||||||||
| Selling, general and administrative expenses | (6,632 | ) | (7,331 | ) | (19,643 | ) | (21,492 | ) | ||||||||
| Depreciation and amortization | (51 | ) | (36 | ) | (139 | ) | (100 | ) | ||||||||
| Segment income | 2,972 | 3,451 | 6,330 | 7,551 | ||||||||||||
| Principal Investments - United Online and magicJack segment: | ||||||||||||||||
| Revenues - Services and fees | 20,663 | 22,999 | 63,037 | 74,383 | ||||||||||||
| Revenues - Sale of goods | 939 | 864 | 2,718 | 2,793 | ||||||||||||
| Total revenues | 21,602 | 23,863 | 65,755 | 77,176 | ||||||||||||
| Direct cost of services | (4,891 | ) | (5,565 | ) | (14,795 | ) | (20,131 | ) | ||||||||
| Cost of goods sold | (767 | ) | (785 | ) | (2,082 | ) | (2,843 | ) | ||||||||
| Selling, general and administrative expenses | (4,840 | ) | (5,895 | ) | (14,352 | ) | (18,410 | ) | ||||||||
| Depreciation and amortization | (2,736 | ) | (2,956 | ) | (8,466 | ) | (9,719 | ) | ||||||||
| Restructuring charge | — | — | — | (1,703 | ) | |||||||||||
| Segment income | 8,368 | 8,662 | 26,060 | 24,370 | ||||||||||||
| Brands segment: | ||||||||||||||||
| Revenues - Services and fees | 4,000 | — | 11,007 | — | ||||||||||||
| Selling, general and administrative expenses | (994 | ) | — | (2,207 | ) | — | ||||||||||
| Depreciation and amortization | (714 | ) | — | (2,143 | ) | — | ||||||||||
| Impairment of tradenames | — | — | (12,500 | ) | — | |||||||||||
| Segment income (loss) | 2,292 | — | (5,843 | ) | — | |||||||||||
| Consolidated operating income from reportable segments | 90,443 | 70,468 | 121,769 | 157,862 | ||||||||||||
| Corporate and other expenses | (6,942 | ) | (10,617 | ) | (28,072 | ) | (28,778 | ) | ||||||||
| Interest income | 67 | 361 | 537 | 1,329 | ||||||||||||
| Income (loss) on equity investments | 409 | 1,113 | (145 | ) | (4,049 | ) | ||||||||||
| Interest expense | (16,374 | ) | (12,772 | ) | (48,537 | ) | (35,130 | ) | ||||||||
| Income before income taxes | 67,603 | 48,553 | 45,552 | 91,234 | ||||||||||||
| Provision for income taxes | (18,711 | ) | (14,409 | ) | (13,380 | ) | (26,802 | ) | ||||||||
| Net income | 48,892 | 34,144 | 32,172 | 64,432 | ||||||||||||
| Net income (loss) attributable to noncontrolling interests | 513 | (158 | ) | (1,382 | ) | (50 | ) | |||||||||
| Net income attributable to B. Riley Financial, Inc. | 48,379 | 34,302 | 33,554 | 64,482 | ||||||||||||
| Preferred stock dividends | 1,088 | — | 3,230 | — | ||||||||||||
| Net income available to common shareholders | $ | 47,291 | $ | 34,302 | $ | 30,324 | $ | 64,482 | ||||||||
The following table presents revenues by geographical area:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| North America | $ | 123,106 | $ | 113,111 | $ | 405,611 | $ | 356,899 | ||||||||
| Australia | 6,094 | — | 7,796 | 15 | ||||||||||||
| Europe | 15,623 | — | 16,392 | 61 | ||||||||||||
| Total Revenues - Services and fees | $ | 144,823 | $ | 113,111 | $ | 429,799 | $ | 356,975 | ||||||||
| Trading income (losses) and fair value adjustments on loans | ||||||||||||||||
| North America | $ | 31,753 | $ | 40,268 | $ | (36,142 | ) | $ | 71,730 | |||||||
| Revenues - Sale of goods | ||||||||||||||||
| North America | $ | 4,242 | $ | 918 | $ | 6,028 | $ | 4,023 | ||||||||
| Europe | 19,409 | — | 20,447 | — | ||||||||||||
| Total Revenues - Sale of Goods | $ | 23,651 | $ | 918 | $ | 26,475 | $ | 4,023 | ||||||||
| Revenues - Interest income - Loans and securities lending: | ||||||||||||||||
| North America | $ | 26,026 | $ | 25,766 | $ | 72,383 | $ | 54,147 | ||||||||
| Total Revenues: | ||||||||||||||||
| North America | $ | 185,127 | $ | 180,063 | $ | 447,880 | $ | 486,799 | ||||||||
| Australia | 6,094 | — | 7,796 | 15 | ||||||||||||
| Europe | 35,032 | — | 36,839 | 61 | ||||||||||||
| Total Revenues | $ | 226,253 | $ | 180,063 | $ | 492,515 | $ | 486,875 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| North America | $ | 85,128 | $ | 49,882 | $ | 200,500 | $ | 89,790 | ||||||||
| Australia | — | — | 940 | — | ||||||||||||
| Europe | 13 | 418 | 914 | 715 | ||||||||||||
| Total Revenues - Services and fees | $ | 85,141 | $ | 50,300 | $ | 202,354 | $ | 90,505 | ||||||||
| Revenues - Sale of goods | ||||||||||||||||
| North America | $ | 79 | $ | 163 | $ | 221 | $ | 165 | ||||||||
| Europe | — | 6,503 | — | 6,503 | ||||||||||||
| Total Revenues - Sale of goods | $ | 79 | $ | 6,666 | $ | 221 | $ | 6,668 | ||||||||
| Revenues - Interest income - Securities lending: | ||||||||||||||||
| North America | $ | 7,206 | $ | — | $ | 9,424 | $ | — | ||||||||
| Total Revenues: | ||||||||||||||||
| North America | $ | 92,406 | $ | 50,045 | $ | 210,138 | $ | 89,955 | ||||||||
| Australia | — | — | 940 | — | ||||||||||||
| Europe | 20 | 6,921 | 921 | 7,218 | ||||||||||||
| Total Revenues | $ | 92,426 | $ | 56,966 | $ | 211,999 | $ | 97,173 | ||||||||
The following table presentsAs of September 30, 2020 and December 31, 2019 long-lived assets, which consistsconsist of property and equipment and other assets by geographical area:of $11,986 and $12,727, respectively, were located in North America.
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Long-lived Assets - Property and Equipment, net: | �� | |||||||
| North America | $ | 13,105 | $ | 5,785 | ||||
| Australia | — | — | ||||||
| Europe | — | — | ||||||
| Total | $ | 13,105 | $ | 5,785 | ||||
Segment assets are not reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.
NOTE 16— 19—SUBSEQUENT EVENTS
From time to time, the Company may decide to pay dividends which will be dependent upon our financial condition and results of operations. On November 8, 2017,October 28, 2020, the Company’s Board of Directors approvedannounced an increase to the regular quarterly dividend from $0.30 per share to $0.375 per share. On October 28, 2020, the Company declared a regular quarterly dividend of $0.08 per share and a special dividend of $0.04$0.375 per share, which will be paid on or about November 30, 201724, 2020 to stockholders of record as of November 10, 2020. While it is the Board’s current intention to make regular dividend payments each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends on November 22, 2017.
Acquisition of magicJack VocalTec Ltd.
On November 9, 2017, the Company entered into an Agreement and Plan of Merger with B. R. Acquisition Ltd., an Israeli corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and magicJack VocalTec Ltd., an Israeli corporation (“magicJack”), pursuant to which Merger Sub will merge with and into magicJack, with magicJack continuing as the surviving corporation and as an indirect subsidiary of the Company. Subject to the terms and conditions of the Agreement and Plan of Merger, each outstanding share of magicJackour common stock will be converted intomade at the right to receive $8.71 indiscretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash without interest, representing approximately $143,500 in aggregate merger consideration. The closingflows, capital expenditures, and other factors that may be deemed relevant by our Board of the transaction is subject to the receipt of certain regulatory approvals, the approval of the magicJack shareholder’s and the satisfaction of other closing conditions. It is anticipated that the acquisition of magicJack will close in the first half of 2018.Directors.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “seek,” “likely,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the caption “Risk Factors.”
Risk factors that could cause actual results to differ materially from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; the unpredictable and ongoing impact of the COVID-19 pandemic; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; our exposure to credit risk; the short term nature of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities or at-the-market offering as necessary; failure to comply with the terms of our credit agreements or senior notes; our ability to meet future capital requirements; our ability to realize the benefits of our completed acquisitions, including our ability to achieve anticipated opportunities and operating cost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frame expected by management or at all; the reaction to our recently completed acquisition of customers, employees and counterparties; and the diversion of management time on acquisition-related issues.acquisition- related issues; the failure of our brand investment portfolio licensees to pay us royalties; and the intense competition to which our brand investment portfolio is subject. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Except as otherwise required by the context, references in this Quarterly Report to the “Company,” “B. Riley,” “B. Riley Financial,” “we,” “us” or “our” refer to the combined business of B. Riley Financial, Inc. and all of its subsidiaries.
Overview
General
B. Riley Financial, Inc. (NASDAQ: RILY) and its subsidiaries (NASDAQ: RILY) provide collaborative financial services and solutions through several operating subsidiaries including:
| ● | B. Riley |
| ● | B. Riley Wealth Management, Inc. (“B. Riley Wealth Management”) provides comprehensive wealth management and brokerage services to |
| ● | B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registered investment advisor, which includes: |
| B. Riley Asset Management, an advisor to certain private funds and to institutional and high net worth |
| Great American Capital Partners, LLC (“GACP”), the general partner of |
| ● |
| o | GlassRatner Advisory & Capital Group LLC (“GlassRatner”), a |
| Great American Group Advisory and Valuation Services, LLC, a leading provider of appraisal and valuation services for asset based lenders, private equity firms and corporate clients. |
| ● | B. Riley Retail Solutions, LLC (fka Great American Group, LLC), a leading provider of asset disposition and auction solutions to a wide range of retail and industrial clients. |
We also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics. On July 1, 2016, weWe acquired United Online, Inc. (“UOL” or “United Online”) on July 1, 2016 and magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018 as part of our principal investment strategy.
| ● | UOL is a communications company that offers consumer subscription services and products, consisting of Internet access services and devices under the NetZero and Juno brands primarily sold in the United States. |
| ● | magicJack is a Voice over IP (“VoIP”) cloud-based technology and services communications provider. |
BR Brand, in which the Company owns a majority interest, provides licensing of a brand investment portfolio. BR Brand owns the assets and intellectual property related to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore.
We are headquartered in Los Angeles with offices in major financial marketscities throughout the United States including New York, Chicago, Boston, Dallas, Memphis, Metro Washington D.C and Europe.West Palm Beach.
For financial reporting purposes we classify our businesses into fourfive operating segments: (i) capital markets,Capital Markets, (ii) auctionAuction and liquidation,Liquidation, (iii) valuationValuation and appraisal; and (vi) principal investmentsAppraisal, (iv) Principal Investments – United Online.Online and magicJack and (v) Brands.
Capital Markets Segment. Our capital marketsCapital Markets segment provides a full array of investment banking, corporate finance, consulting, financial advisory, research, securities lending, wealth management and sales and trading services to corporate, institutional and high net worth clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our capital marketsCapital Markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors.
Auction and Liquidation Segment.Segment. Our auctionAuction and liquidationLiquidation segment utilizes our significant industry experience, a scalable network of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North American as well as parts of Europe, Asia and Australia. Our auctionAuction and liquidationLiquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions division operates through limited liability companies that are controlled by us.
Valuation and Appraisal Segment.Segment. Our valuationValuation and appraisalAppraisal segment provides valuationValuation and appraisalAppraisal services to financial institutions, lenders, private equity firms and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our valuationValuation and appraisalAppraisal segment operates through limited liability companies that are majority owned by us.
Principal Investments – United Online Segment. Our principal investments - United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, a company that offersthrough which we provide consumer subscription services consisting of Internet access, underand magicJack, through which we provide VoIP communication and related product and subscription services.
Brands Segment. Our Brands segment consists of our brand investment portfolio that is focused on generating revenue through the NetZerolicensing of trademarks and Juno brands. Internet access includes paid dial-up, mobile broadband and DSL subscription services. We also offer email, Internet security, web hosting services, and other services.is held by BR Brand.
Recent Developments
On February 17, 2017, we entered into an Agreement and PlanJanuary 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of Mergera new strain of coronavirus (the “FBR Merger Agreement”“COVID-19 outbreak”) with FBR & Co. (“FBR”), pursuant to which FBR was to merge with and into. In March 2020, the Company (orWHO classified the COVID-19 outbreak as a subsidiarypandemic, based on the rapid increase in exposure globally. The full impact of the Company), with the Company (or its subsidiary) as the surviving corporation (the “Merger”). On May 1, 2017, the Company and FBR filed a registration statement for the planned Merger.COVID-19 outbreak continues to evolve. The shareholdersimpact of the CompanyCOVID-19 outbreak on our results of operations, financial position and FBR approvedcash flows will depend on future developments, including the acquisition on June 1, 2017, customary closing conditions were satisfiedduration and spread of the outbreak and related advisories and restrictions. These developments and the acquisition was completed on June 1, 2017. Subject to the terms and conditionsimpact of the FBR Merger Agreement, each outstanding share of FBR common stock (“FBR Common Stock”) was converted into the right to receive 0.671 of a share of our common stock. The total acquisition consideration for FBR was estimated to be $73.5 million, which includes the issuance ofapproximately 4,831,633 shares of our common stock with an estimated fair value of $71.0 million (basedCOVID-19 outbreak on the closing price of our common stock on June 1, 2017) and restricted stock awards with a fair value of $2.5 million attributable to the service period prior to June 1, 2017. We believe that the acquisition of FBR will allow us to benefit from investment banking,corporate finance, securities lending, research, and sales and tradingservices provided by FBR and planned synergies from the elimination of duplicate corporate overhead and management functions with us.
On May 17, 2017, we entered into a Merger Agreement with Wunderlich Investment Company, Inc., a Delaware corporation (“Wunderlich”), and Stephen Bonnema, in his capacity as the Stockholder Representative (the “Stockholder Representative”), collectively (the “Wunderlich Merger Agreement”). Pursuant to the Wunderlich Merger Agreement, customary closing conditions were satisfiedfinancial markets and the acquisition was completed on July 3, 2017. We also entered into a registration rights agreement with certain shareholdersoverall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results of Wunderlich (the “Registration Rights Agreement”) on July 3, 2017. The Registration Rights Agreement provides the Wunderlich shareholder signatories with the right to notice ofoperations, financial position and subject to certain conditions, the right to register shares of our common stock in certain future registered offerings of shares of our common stock. In connection with the acquisition Wunderlich on July 3, 2017, the total consideration of $66.0 million included $29.7 million of cash and the issuance of approximately 1,974,812 shares of the Company’s common stock with an estimated fair value of $31.4 million and 821,816 newly issued common stock warrants with an estimated fair value of $4.9 million.flows may be materially adversely affected.
In connection with terms of the Wunderlich Merger Agreement, on July 5, 2017 the number of directors comprising our full Board of Directors was increased by one, with Gary K. Wunderlich, Jr., Chief Executive Officer of Wunderlich, being appointed to fill the new seat in accordance with the terms of his employment agreement. Concurrently with the appointment of Mr. Wunderlich, the number of directors comprising our full Board of Directors was again increased by one, with Michael J. Sheldon appointed as an independent director to fill the new seat.
In second and third quarters of 2017, we implemented costs savings measures taking into account the planned synergies as a result of the acquisition of FBR and Wunderlich which included a reduction in force for some of the corporate executives of FBR and Wunderlich and a restructuring to integrate FBR and Wunderlich’s operations with our operations. These initiatives resulted in restructuring charges of $10.8 million in the second and third quarters of 2017. Restructuring charges included $3.3 million related to severance and accelerated vesting of restricted stock awards to former corporate executives of FBR and Wunderlich and $4.8 million of severance, accelerated vesting of stock awards to employees and $2.7 million of lease loss accruals for the planned consolidation of office space related to operations in the Capital Markets segment.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, reserves for accounts receivable and slow moving goods held for sale or auction, the carrying value of goodwill and other intangible assets, fair value measurements, share-based compensation and accounting for income tax valuation allowances can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes to the policies noted above as of this quarterly report on Form 10-Q for the period ended September 30, 2017.
Results of Operations
The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.
Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
Condensed Consolidated Statements of OperationsIncome
(Dollars in thousands)
| Three Months September 30, 2017 | Three Months September 30, 2016 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 85,141 | 92.1 | % | $ | 50,300 | 88.3 | % | ||||||||
| Interest income - Securities lending | 7,206 | 7.8 | % | — | 0.0 | % | ||||||||||
| Sale of goods | 79 | 0.1 | % | 6,666 | 11.7 | % | ||||||||||
| Total revenues | 92,426 | 100.0 | % | 56,966 | 100.0 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 10,138 | 11.0 | % | 12,841 | 22.5 | % | ||||||||||
| Cost of goods sold | 124 | 0.1 | % | 2,391 | 4.2 | % | ||||||||||
| Selling, general and administrative expenses | 70,962 | 76.8 | % | 22,727 | 39.9 | % | ||||||||||
| Restructuring costs | 4,896 | 5.3 | % | 3,585 | 6.3 | % | ||||||||||
| Interest expense - Securities lending | 4,950 | 5.4 | % | — | 0.0 | % | ||||||||||
| Total operating expenses | 91,070 | 98.5 | % | 41,544 | 72.9 | % | ||||||||||
| Operating income | 1,356 | 1.5 | % | 15,422 | 27.1 | % | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 76 | 0.1 | % | 26 | 0.0 | % | ||||||||||
| Loss from equity investment | (157 | ) | (0.2 | %) | — | 0.0 | % | |||||||||
| Interest expense | (2,510 | ) | (2.7 | %) | (991 | ) | (1.7 | %) | ||||||||
| (Loss) income before income taxes | (1,235 | ) | (1.3 | %) | 14,457 | 25.3 | % | |||||||||
| Benefit from (provision for) income taxes | 1,357 | 1.5 | % | (6,083 | ) | (10.7 | %) | |||||||||
| Net income | 122 | 0.1 | % | 8,374 | 14.7 | % | ||||||||||
| Net loss attributable to noncontrolling interests | (246 | ) | (0.3 | %) | (565 | ) | (1.0 | %) | ||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 368 | 0.4 | % | $ | 8,939 | 15.7 | % | ||||||||
| Three Months Ended September 30, | Change | |||||||||||||||
| 2020 | 2019 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 144,823 | $ | 113,111 | $ | 31,712 | 28.0 | % | ||||||||
| Trading income and fair value adjustments on loans | 31,753 | 40,268 | (8,515 | ) | (21.1 | )% | ||||||||||
| Interest income - Loans and securities lending | 26,026 | 25,766 | 260 | 1.0 | % | |||||||||||
| Sale of goods | 23,651 | 918 | 22,733 | n/m | ||||||||||||
| Total revenues | 226,253 | 180,063 | 46,190 | 25.7 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 23,264 | 7,936 | 15,328 | 193.1 | % | |||||||||||
| Cost of goods sold | 9,813 | 911 | 8,902 | n/m | ||||||||||||
| Selling, general and administrative expenses | 97,143 | 101,092 | (3,949 | ) | (3.9 | )% | ||||||||||
| Restructuring charge | 1,557 | — | 1,557 | 100.0 | % | |||||||||||
| Interest expense - Securities lending and loan participations sold | 10,975 | 10,273 | 702 | 6.8 | % | |||||||||||
| Total operating expenses | 142,752 | 120,212 | 22,540 | 18.8 | % | |||||||||||
| Operating income | 83,501 | 59,851 | 23,650 | 39.5 | % | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 67 | 361 | (294 | ) | (81.4 | )% | ||||||||||
| Income from equity investments | 409 | 1,113 | (704 | ) | (63.3 | )% | ||||||||||
| Interest expense | (16,374 | ) | (12,772 | ) | (3,602 | ) | 28.2 | % | ||||||||
| Income before income taxes | 67,603 | 48,553 | 19,050 | 39.2 | % | |||||||||||
| Provision for income taxes | (18,711 | ) | (14,409 | ) | (4,302 | ) | 29.9 | % | ||||||||
| Net income | 48,892 | 34,144 | 14,748 | 43.2 | % | |||||||||||
| Net income (loss) attributable to noncontrolling interests | 513 | (158 | ) | 671 | n/m | |||||||||||
| Net income attributable to B. Riley Financial, Inc. | 48,379 | 34,302 | 14,077 | 41.0 | % | |||||||||||
| Preferred stock dividends | 1,088 | — | 1,088 | 100.0 | % | |||||||||||
| Net income available to common shareholders | $ | 47,291 | $ | 34,302 | $ | 12,989 | 37.9 | % | ||||||||
n/m - Not applicable or not meaningful.
Revenues
Revenues
The table below and the discussion that follows are based on how we analyze our business.
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Change | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Revenues - Services and Fees: | |||||||||||||||||||||||
| Capital Markets segment | $ | 56,473 | 61.1 | % | $ | 10,063 | 17.7 | % | $ | 46,410 | 461.2 | % | |||||||||||
| Auction and Liquidation segment | 7,376 | 8.0 | % | 17,058 | 29.9 | % | (9,682 | ) | -56.8 | % | |||||||||||||
| Valuation and Appraisal segment | 9,043 | 9.8 | % | 7,696 | 13.5 | % | 1,347 | 17.5 | % | ||||||||||||||
| Principal Investments - United Online segment | 12,249 | 13.3 | % | 15,483 | 27.2 | % | (3,234 | ) | -20.9 | % | |||||||||||||
| Subtotal | 85,141 | 92.1 | % | 50,300 | 88.3 | % | 34,841 | 69.3 | % | ||||||||||||||
| Revenues - Sale of goods: | |||||||||||||||||||||||
| Auction and Liquidation segment | 1 | 0.0 | % | 6,503 | 11.4 | % | (6,502 | ) | 100.0 | % | |||||||||||||
| Principal Investments - United Online segment | 78 | 0.1 | % | 163 | 0.3 | % | (85 | ) | -52.1 | % | |||||||||||||
| Subtotal | 79 | 0.1 | % | 6,666 | 11.7 | % | (6,587 | ) | -98.8 | % | |||||||||||||
| Interest income - Securities lending: | |||||||||||||||||||||||
| Capital Markets segment | 7,206 | 7.8 | % | — | n/m | 7,206 | n/m | ||||||||||||||||
| Total revenues | $ | 92,426 | 100.0 | % | $ | 56,966 | 100.0 | % | $ | 35,460 | 62.2 | % | |||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 89,032 | $ | 68,062 | $ | 20,970 | 30.8 | % | ||||||||
| Auction and Liquidation segment | 21,473 | 11,232 | 10,241 | 91.2 | % | |||||||||||
| Valuation and Appraisal segment | 9,655 | 10,818 | (1,163 | ) | -10.8 | % | ||||||||||
| Principal Investments - United Online and magicJack segment | 20,663 | 22,999 | (2,336 | ) | -10.2 | % | ||||||||||
| Brands | 4,000 | — | 4,000 | 100.0 | % | |||||||||||
| Subtotal | 144,823 | 113,111 | 31,712 | 28.0 | % | |||||||||||
| Revenues - Sale of goods: | ||||||||||||||||
| Auction and Liquidation segment | 22,712 | 54 | 22,658 | n/m | ||||||||||||
| Principal Investments - United Online and magicJack segment | 939 | 864 | 75 | 8.7 | % | |||||||||||
| Subtotal | 23,651 | 918 | 22,733 | n/m | ||||||||||||
| Trading income and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | 31,753 | 40,268 | (8,515 | ) | -21.1 | % | ||||||||||
| Subtotal | 31,753 | 40,268 | (8,515 | ) | -21.1 | % | ||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 26,026 | 25,766 | 260 | 1.0 | % | |||||||||||
| Total revenues | $ | 226,253 | $ | 180,063 | $ | 46,190 | 25.7 | % | ||||||||
n/m - Not applicable or not meaningful.
Total revenues increased $35.5approximately $46.2 million to $92.4$226.3 million during the three months ended September 30, 20172020 from $57.0$180.1 million during the three months ended September 30, 2016.2019. The increase in revenues during the three months ended September 30, 20172020 was primarily due to an increaseincreases in revenuesrevenue from services and fees of $34.8$31.7 million, sales of goods of $22.7 million and increase in revenues from interest income –- loans and securities lending of $7.2$0.3 million, partially offset by a decreasedecreases in revenues from the saletrading income and fair value adjustments on loans of goods of $6.5$8.5 million. The increase in revenuesrevenue from services and fees of $34.8$31.7 million in 2017the three months ended September 30, 2020 was primarily due to an increaseincreases in revenuesrevenue of $46.4$21.0 million in the capital marketsCapital Markets segment, and $1.3$10.2 million in the valuationAuction and appraisalLiquidation segment offset by a decrease in revenues of $9.7and $4.0 million in the auction and liquidationBrands segment and a decreasepartially offset by decreases in revenue of $3.2$1.2 million in the principal investments –Valuation and Appraisal segment and $2.3 million in the Principal Investments — United Online and magicJack segment. The increase of $7.2 million in interest income – securities lending was as a result of the acquisition of FBR on June 1, 2017. The decrease in revenues from sale of goods of $6.6 million was due to the sale of retail goods that we acquired title to in September 2016 from the bankruptcy trustee of MS Mode, a retailer of women’s apparel that operates 130 retail locations throughout the Netherlands.
Revenues from services and fees in the capital marketsCapital Markets segment increased $46.4$21.0 million, to $56.5$89.0 million during the three months ended September 30, 20172020 from $10.1$68.1 million during the three months ended September 30, 2016. The increase in revenues was primarily due to an increase in revenues of $16.8 million from investment banking fees, $12.4 million from commissions, fees and other income primarily earned from research, sales and trading, $16.0 million from wealth management services and $1.2 million from trading income. The increase in revenues from investment banking fees was primarily due to an increase in the number of investment banking transactions where we acted as an advisor in 2017 as compared to the same period in 2016. Of the $16.8 million increase in investment banking fees, $14.4 million of the increase was primarily due to operations of FBR that we acquired on June 1, 2017 and Wunderlich that we acquired on July 3, 2017. The increase in revenues from commissions, fees and other income primarily earned from research, sales and trading, was primarily due to an increase in fees and commissions earned from research, sales and trading and incentive management fees earned from our various funds we manage which included $10.4 million of revenues from the acquisition of FBR on June 1, 2017 and Wunderlich on July 3, 2017. The increase in revenues from wealth management services included $15.9 million of revenues from the acquisition of Wunderlich on July 3, 2017. The increase in revenues from trading income in 2017 was primarily due to an increase in income we earned from trading activities in our propriety trading account.
Revenues from services and fees in the auction and liquidation solutions decreased $9.7 million, to $7.4 million during the three months ended September 30, 2017 from $17.1 million during the three months ended September 30, 2016. The decrease in revenues of $9.7 million was primarily due to a decrease in revenues of $10.1 million from services and fees from retail liquidation engagements, offset by an increase in revenues of $0.4 million from services and fees in our wholesale and industrial auction division. The decrease in revenues from services and fees from retail liquidation engagements in 2017 was primarily due to impact of the revenues we generated in the prior year from thegoing-out-of-business sale of 185 Hancock Fabric stores in the United States. In the third quarter of 2017, we did not have any similar large retail liquidation engagements that were completed.The increase in revenues from services and fees in our wholesale and industrial division was primarily due to an increase in the number of wholesale and industrial auction engagements in 2017 as compared to the same period in 2016.
Revenues from services and fees in the valuation and appraisal segment increased $1.3 million, or 17.5%, to $9.0 million during the three months ended September 30, 2017 from $7.7 million during the three months ended September 30, 2016.2019. The increase in revenues was primarily due to increases in revenue of (a) $0.9$8.1 million relatedfrom corporate finance, consulting and investment banking fees and other income, including investment dividends, of $15.3 million, partially offset by a decrease in asset management fees of $2.5 million.
Revenues from services and fees in the Auction and Liquidation segment increased $10.2 million to $21.5 million during the three months ended September 30, 2020 from $11.2 million during the three months ended September 30, 2019. The increase in revenues in the Auction and Liquidation segment was primarily due an increase in retail fee liquidation engagements during the quarter. In June 2020, a number of retail liquidation engagements resumed as a number of states allowed the reopening of retail stores.
Revenues from services and fees in the Valuation and Appraisal segment decreased $1.2 million to $9.7 million during the three months ended September 30, 2020 from $10.8 million during the three months ended September 30, 2019. The decrease in revenues in the Valuation and Appraisal segment is primarily due to a decrease in revenues for appraisal engagements of $0.7 million where we perform valuationsfor the monitoring of collateral for financial institutions, lenders, and private equity investorsand (b) $0.4$0.5 million related tofor appraisal engagements where we perform valuationsprovide corporate valuation services and the valuation of intellectual propertymachinery and business valuations.equipment.
Revenues from services and fees in the principal investmentsPrincipal Investments - United Online and magicJack segment decreased $3.2$2.3 million to $20.7 million during the three months ended September 30, 2020 from $23.0 million during the three months ended September 30, 2019. The decrease in revenues from services and fees is a result of a decrease in subscription services of $1.5 million and a decrease in advertising licensing and other of $0.8 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.
Revenues from services and fees in the Brands segment were $4.0 million for the three months ended September 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority interest in BR Brands on October 28, 2019. The primary source of revenue included in this segment is the licensing of trademarks.
Revenues from sales of goods increased $22.7 million to $23.7 million for the three months ended September 30, 2020 from $0.9 million for the three months ended September 30, 2019. The increase in revenue from sales of goods of $22.7 million in the three months ended September 30, 2020 was primarily due to increases in revenue of $22.7 million in the Auction and Liquidation segment as a result of the sale of goods for certain retail liquidation engagements where we acquired the title to inventory goods in Europe and operated the retail stores as part of a going-out-of-business sale.
Trading income and fair value adjustments on loans decreased $8.5 million to $31.8 million for the three months ended September 30, 2020 from $40.3 million for the three months ended September 30, 2019. The $31.8 million gain for the three months ended September 30, 2020 includes realized and unrealized gains earned on investments made in our proprietary trading account of $31.6 million and unrealized gains on our loans receivable that are measured at fair value of $0.2 million.
Interest income – loans and securities lending increased $0.3 million, to $26.0 million during the three months ended September 30, 2020 from $25.8 million during the three months ended September 30, 2019. Interest income from securities lending was $13.3 million and $12.2 million during the three months ended September 30, 20172020 and 2019, respectively. Interest income from $15.5loans was $12.7 million and $13.6 million during the three months ended September 30, 2016.2020 and 2019, respectively. The decreaseincrease in revenuesinterest income on loans was primarily due to lower paid subscribersthe increase in lending activities in our Capital Markets segment which included an increase in loans receivable to our services$344.3 million at September 30, 2020 from $295.9 million at September 30, 2019.
Sale of Goods, Cost of Goods Sold and lower advertising impressions as a resultGross Margin
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||
| Investments - | Investments - | |||||||||||||||||||||||
| Auction and | United Online and | Auction and | United Online and | |||||||||||||||||||||
| Liquidation | magicJack | Liquidation | magicJack | |||||||||||||||||||||
| Segment | Segment | Total | Segment | Segment | Total | |||||||||||||||||||
| Revenues - Sale of Goods | $ | 22,712 | $ | 939 | $ | 23,651 | $ | 54 | $ | 864 | $ | 918 | ||||||||||||
| Cost of goods sold | 9,046 | 767 | 9,813 | 126 | 785 | 911 | ||||||||||||||||||
| Gross margin on sale of goods | $ | 13,666 | $ | 172 | $ | 13,838 | $ | (72 | ) | $ | 79 | $ | 7 | |||||||||||
| Gross margin percentage | 60.2 | % | 18.3 | % | 58.5 | % | (133.3 | )% | 9.1 | % | 0.8 | % | ||||||||||||
Revenues from the sale of a decline in active accounts. Services revenues primarily from customer paid accounts related to our Internet access and related subscription services decreased $1.9goods increased $22.7 million, to $9.3$23.7 million during the three months ended September 30, 20172020 from $11.2$0.9 million during the three months ended September 30, 2016. Advertising2019. The increase in revenues from Internet display advertisingsale of goods was primarily attributable to the sale of goods for certain retail liquidation engagements where we acquired the title to inventory goods in Europe and search related to our email and Internet access services decreased $1.4 million to $2.9 million duringoperated the retail stores as part of a going-out-of-business sale. Cost of goods sold for the three months ended September 30, 2017 from $4.32020 was $9.8 million, during the three months ended September 30, 2016. Over the past several years revenues from paid subscription services have declined year over year asresulting in a resultgross margin of a decline in the number of paid subscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL. Management expects revenues in the principal investments - United Online segment to continue to decline year over year.58.5%.
Operating Expenses
Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment during the three months ended September 30, 20172020 and 20162019 are as follows:
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||
| Investments - | Investments - | |||||||||||||||||||||||
| Auction and | United Online and | Auction and | United Online and | |||||||||||||||||||||
| Liquidation | magicJack | Liquidation | magicJack | |||||||||||||||||||||
| Segment | Segment | Total | Segment | Segment | Total | |||||||||||||||||||
| Revenues - Services and fees | $ | 21,473 | $ | 20,663 | $ | 11,232 | $ | 22,999 | ||||||||||||||||
| Direct cost of services | 18,373 | 4,891 | $ | 23,264 | 2,371 | 5,565 | $ | 7,936 | ||||||||||||||||
| Gross margin on services and fees | $ | 3,100 | $ | 15,772 | $ | 8,861 | $ | 17,434 | ||||||||||||||||
| Gross margin percentage | 14.4 | % | 76.3 | % | 78.9 | % | 75.8 | % | ||||||||||||||||
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||||||||||
| Auction and | Valuation and | Investments - | Auction and | Valuation and | Investments - | |||||||||||||||||||||||||||
| Liquidation | Appraisal | United Online | Liquidation | Appraisal | United Online | |||||||||||||||||||||||||||
| Segment | Segment | Segment | Total | Segment | Segment | Segment | Total | |||||||||||||||||||||||||
| Revenues - Services and fees | $ | 7,376 | $ | 9,043 | $ | 12,249 | $ | 17,058 | $ | 7,696 | $ | 15,483 | ||||||||||||||||||||
| Direct cost of services | 3,385 | 3,778 | 2,975 | $ | 10,138 | 4,365 | 3,549 | 4,927 | $ | 12,841 | ||||||||||||||||||||||
| Gross margin on services and fees | $ | 3,991 | $ | 5,265 | $ | 9,274 | $ | 12,693 | $ | 4,147 | $ | 10,556 | ||||||||||||||||||||
| Gross margin percentage | 54.1 | % | 58.2 | % | 75.7 | % | 74.4 | % | 53.9 | % | 68.2 | % | ||||||||||||||||||||
Total direct costs decreased $2.7increased $15.3 million, to $10.1$23.3 million during the three months ended September 30, 20172020 from $12.8$7.9 million during the three months ended September 30, 2016.2019. Direct costs of services decreasedincreased by $1.0$16.0 million in the auctionAuction and liquidationLiquidation segment and $1.9decreased $0.7 million in the principal investments -Principal Investments — United Online offset by anand magicJack segment. The increase of $0.2 millionin direct costs in the valuationAuction and appraisal segment.Liquidation segment was primarily due to the costs incurred to operate the retail stores where we acquired title to inventory goods in Europe and operated a going-out-of-business sale. The decrease in direct costs in the auctionPrincipal Investments — United Online and liquidationmagicJack segment was primarily due toas a decrease in the number larger feeresult of declining sales.
Auction and commission retail liquidation engagements in 2017 as compared to the same period of 2016. The decrease in direct costs in the principal investments – United Online was primarily due to a decrease in costs to support the lower number of subscribers for dial-up internet service in 2017 as compared to the same period in 2016. The increase in direct costs of services in the valuation and appraisal segment was primarily due to an increase in payroll and related expenses in 2017 as compared to the same period in 2016.Liquidation
Gross margin in the auctionAuction and liquidationLiquidation segment for services and fees decreased to 54.1%14.4% of revenues during the three months ended September 30, 2017,2020, as compared to 74.4%78.9% of revenues during the three months ended September 30, 2016.2019. The decrease in margin in the Auction and Liquidation segment was primarily due to the impact ofcosts incurred to operate the revenuesretail stores where we acquired title to inventory goods in Europe and margin we generatedoperated a going-out-of-business sale.
Principal Investments — United Online and magicJack
Gross margins in the prior year from thegoing-out-of-business sale of 185 Hancock Fabric stores in thePrincipal Investments — United States. In the third quarter of 2017, we did not have any similar large retail liquidation engagements that were completed which resulted in lower gross margins from retail liquidation engagements.
Gross margin in the valuationOnline and appraisalmagicJack segment for services and fees increased to 58.2%76.3% of revenues during the three months ended September 30, 2017, from 53.9%2020, as compared to 75.8% of revenues during the three months ended September 30, 2016.2019. The increase in gross margin in the Principal Investments — United Online and magicJack segment is primarily due to an increase in revenues due to higher average fees during the third quarter of 2017 and compared to the same period of 2016.cost savings for magicJack.
Selling, General and Administrative Expenses. Selling, general and administrative expenses during the three months ended September 30, 20172020 and 20162019 were comprised of the following:
Selling, General and Administrative Expenses
| Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 55,591 | 78.4 | % | $ | 9,054 | 39.9 | % | $ | 46,537 | 514.0 | % | ||||||||||||
| Auction and Liquidation segment | 1,968 | 2.8 | % | 3,982 | 17.5 | % | (2,014 | ) | (50.6 | %) | ||||||||||||||
| Valuation and Appraisal segment | 2,296 | 3.2 | % | 2,155 | 9.5 | % | 141 | 6.5 | % | |||||||||||||||
| Principal Investments - United Online segment | 4,136 | 5.8 | % | 3,941 | 17.3 | % | 195 | 4.9 | % | |||||||||||||||
| Corporate and Other segment | 6,971 | 9.8 | % | 3,595 | 15.8 | % | 3,376 | 93.9 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 70,962 | 100.0 | % | $ | 22,727 | 100.0 | % | $ | 48,235 | 212.2 | % | ||||||||||||
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 69,608 | 71.6 | % | $ | 71,421 | 70.6 | % | $ | (1,813 | ) | (2.5 | )% | |||||||||||
| Auction and Liquidation segment | 4,626 | 4.8 | % | 2,836 | 2.8 | % | 1,790 | 63.1 | % | |||||||||||||||
| Valuation and Appraisal segment | 6,683 | 6.9 | % | 7,367 | 7.3 | % | (684 | ) | (9.3 | )% | ||||||||||||||
| Principal Investments - United Online and magicJack segment | 7,576 | 7.8 | % | 8,851 | 8.8 | % | (1,275 | ) | (14.4 | )% | ||||||||||||||
| Brands segment | 1,708 | 1.8 | % | — | 0.0 | % | 1,708 | 100.0 | % | |||||||||||||||
| Corporate and Other segment | 6,942 | 7.1 | % | 10,617 | 10.5 | % | (3,675 | ) | (34.6 | )% | ||||||||||||||
| Total selling, general & administrative expenses | $ | 97,143 | 100.0 | % | $ | 101,092 | 100.0 | % | $ | (3,949 | ) | (3.9 | )% | |||||||||||
Total selling, general and administrative expenses increased $48.2decreased approximately $3.9 million to $71.0$97.1 million during the three months ended September 30, 20172020 from $22.7$101.1 million for the three months ended September 30, 2016.2019. The increase was due to an increasedecrease of approximately $3.9 million in selling, general and administrative expenses was due to decreases of $46.5$1.8 million in the capital marketsCapital Markets segment, $3.4 million in corporate and other segment, $0.2$0.7 million in the principal investments – United OnlineValuation and Appraisal segment, and $0.1$1.3 million in the valuationPrincipal Investments — United Online and appraisalmagicJack segment offset by a decrease of $2.0and $3.7 million in the auctionCorporate and liquidationOther segment, partially offset by increases of $1.8 million in the Auction and Liquidation segment and $1.7 million in the Brands segment.
Capital Markets
Selling, general and administrative expenses in the capital marketsCapital Markets segment increaseddecreased by $46.5$1.8 million to $55.6$69.6 million during the three months ended September 30, 20172020 from $9.1$71.4 million during the three months ended September 30, 2016.2019. The increase in expensesdecrease was primarily due to an increasedecreases of $0.6 million in (a)occupancy expenses, $2.0 million in payroll and related expenses of $15.2and $0.7 million from the acquisition of Wunderlich on July 3, 2017in travel and $10.3 million from the acquisition of FBR on June 1, 2017, (b) $11.7 million of operatingentertainment expenses, related to the acquisition of FBR and $5.2 million of operating expenses related to the acquisition of Wunderlich, (c) payroll and related expenses of $2.6 million primarily related to anpartially offset by increases in incentive compensation as a result of the increase in revenues from investment banking fees in 2017 as compared to the same period in 2016, and (d) other operating expenses of $1.5 million.million in legal expenses.
Auction and Liquidation
Selling, general and administrative expenses in the auctionAuction and liquidationLiquidation segment decreased $2.0increased by $1.8 million or 50.6%, to $2.0$4.6 million during the three months ended September 30, 20172020 from $4.0$2.8 million during the three months ended September 30, 2019. The increase in selling, general and administrative expenses in the Auction and Liquidation segment was primarily due to increases of $0.8 million in losses from foreign currency exchange and $0.9 million in business development expenses.
Valuation and Appraisal
Selling, general and administrative expenses in the Valuation and Appraisal segment decreased by $0.7 million to $6.7 million during the three months ended September 30, 2020 from $7.4 million during the three months ended September 30, 2019. The decrease in selling, general and administrative expenses in the Valuation and Appraisal segment was primarily due to a decrease of $0.6 million in travel and entertainment expenses.
Principal Investments — United Online and magicJack
Selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment decreased by $1.3 million to $7.6 million for the three months ended September 30, 2016.2020 from $8.9 million for the three months ended September 30, 2019. The decrease in selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment was primarily due to a decreasedecreases of $0.4 million in (a) payroll and related expenses and $0.6 million in the amount of $1.3 million, (b) legal and professional fees of $0.5 million and (c) other administrative expenses of $0.2 million.expenses.
Valuation and AppraisalBrands
Selling, general and administrative expenses in the valuationBrands segment was $1.7 million for the three months ended September 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority equity interest in BR Brands on October 28, 2019.
Corporate and appraisalOther
Selling, general and administrative expenses for the Corporate and Other segment were $2.3decreased approximately $3.7 million and $2.2to $6.9 million during the three months ended September 30, 2017 and 2016, respectively.
Principal Investments - United Online
Selling, general and administrative2020 from $10.6 million for the three months ended September 30, 2019. The decrease in expenses in the principal investments - United OnlineCorporate and Other segment increased $0.2for the three months ended September 30, 2020 was primarily due to a decrease of $2.3 million or 4.9%, to $4.1in payroll and related expenses and a decrease in professional fees and other expenses of $1.3 million.
Restructuring Charge. Restructuring charges of $1.6 million during the three months ended September 30, 2017 from $3.9 million2020 were primarily related to impairment of certain acquired tradename intangibles associated with the Company’s brand realignment across its subsidiary companies to provide greater external consistency and affiliation. There were no restructuring charges during the three months ended September 30, 2016. For the three months ended September 30, 2017, these expenses include $1.1 million of technology and development expenses, $0.3 million of sales and marketing expenses, $1.5 million of general and administrative expenses and $1.3 million of amortization of intangibles. For the three months ended September 30, 2016, these expenses include $1.2 million of technology and development expenses, $0.4 million of sales and marketing expenses, $1.0 million of general and administrative expenses and $1.4 million of amortization of intangibles. Technology and development expenses include expenses for product development, maintenance of existing software, technology and websites. Sales and marketing expenses include expenses associated personnel and overhead-related expenses for marketing, customer service, and advertising sales personnel to acquire and retain paid subscribers. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. General and administrative expenses consist of personnel-related expenses for management in the principal investments - United Online segment, facilities, internal customer support personnel, personnel associated with operating our corporate systems and insurance recoveries. Amortization of intangibles includes amortization expense related to customer lists, advertising relationships, domain names and internally developed software.
30,2019.
Corporate and Other
Selling, general and administrative expenses for corporate and other increased $3.4 million, to $7.0 million during the three months ended September 30, 2017 from $3.6 million for the three months ended September 30 2016. The increase was primarily due to an increase in (a) fair value adjustment on mandatorily redeemable noncontrolling interest of $2.8 million (b) transactions costs of $0.4 million incurred for professional fees that primarily related to the acquisitions of Wunderlich, FBR and Dialectic during the nine months ended September 30, 2017.
Restructuring Charge.During the three months ended September 30 2017, we incurred a restructuring charge of $4.9 million. In second and third quarters of 2017, we implemented costs savings measures taking into account the planned synergies as a result of the acquisitions of FBR and Wunderlich which included a reduction in force for some of the corporate executives of FBR and a restructuring to integrate FBR and Wunderlich’s operations with our operations. These initiatives resulted in a restructuring charge of $4.7 million in the third quarter of 2017. The restructuring charge included $1.1 million related to severance and accelerated vesting of restricted stock awards to former corporate executives of Wunderlich and $2.3 million of severance, accelerated vesting of stock awards to employees and $1.3 million of lease loss accruals for the planned consolidation of office space. The restructuring charge in 2017 also included employee termination costs of $0.2 million related to a reduction in personnel in the principal investments – United Online segment of our operations.
Restructuring charge of $3.6 million during the three months ended September 30, 2016 includes $3.2 million of employee termination costs related to a reduction in personnel in the corporate offices of UOL after our acquisition of UOL on July 1, 2016 and $0.4 million of charges related to combing our corporate office location with the offices of UOL.
Other Income (Expense). Other income included interest income of less than $0.1 million during each of the three months ended September 30, 2017 and 2016. Interest expense was $2.5 million during the three months ended September 30, 2017 as compared to $1.02020 and $0.4 million during the three months ended September 30, 2016.2019. Interest expense was $16.4 million during the three months ended September 30, 2020 compared to $12.8 million during the three months ended September 30, 2019. The increase in interest expense during the three months ended September 30, 20172020 was primarily due to an increase in interest expense of $2.0$4.3 million incurred in 2017 from the issuance of additional senior notes, duepartially offset by a decrease in 2021 and 2027.interest expense of $0.6 million from the term loan dated December 2018. Other income in the three months ended September 30, 2020 also included income from equity investments of $0.4 million, a decrease from $1.1 million in the prior year period.
Income (Loss) Before Income Taxes.Taxes. Income before income taxes decreased $15.7 million to loss before income taxes of $1.2was $67.6 million during the three months ended September 30, 2017 from an2020 compared to income before income taxes of $14.5$48.6 million during the three months ended September 30, 2016.2019. The decreaseincrease in income before income taxes was primarily due to (a) an increaseincreases in corporate and other expenses of $4.4 million, which includes an increase in restructuring charges of $1.0 million, (b) a decrease in operatingsegment income of $11.0$12.4 million in our auction and liquidationthe Capital Markets segment, (c) a decrease in operating income of $1.2$6.0 million in our capital marketsthe Auction and Liquidation segment (d)and $2.3 million in the Brands segment, partially offset by an increase in interest expense of $1.5 million, and (e) loss on equity investment of $0.2 million, offset by (a) an increase in operating income of $1.5 million in our principal investments – United Online segment, (b) an increase in interest income of $0.1 million and (c) an increase in operating income of $1.0 million in our valuation and appraisal segment.$3.6 million.
Benefit from (Provision for)Provision for Income Taxes. Benefit fromProvision for income taxes was $1.4$18.7 million during the three months ended September 30, 20172020 compared to provision for income taxes of $6.1$14.4 million during the three months ended September 30, 2016.2019. The effective income tax rate was a benefit of 109.9%27.7% for the three months ended September 30, 20172020 as compared to a provision of 42.1%29.7% for the three months ended September 30, 2016.2019.
Net LossIncome (Loss) Attributable to Noncontrolling Interest.Interest. Net lossincome attributable to noncontrolling interests represents the proportionate share of net income generated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners, LLC, in which we have a 50% of the membership interest thatof which we do not own. The net income attributable to noncontrolling interests was $0.5 million during the three months ended September 30, 2020 compared to net loss attributable to noncontrolling interests wasof $0.2 million during the three months ended September 30, 2017 compared to net loss attributable to noncontrolling interests of $0.6 million during the three months ended September 30, 2016.2019.
Net Income Attributable to the Company.Company. Net income attributable to the Company for the three months ended September 30, 2017 was $0.42020 increased to $48.4 million, a decreasean increase of net income of $8.6$14.1 million, from net income attributable to the Company of $8.9$34.3 million for the three months ended September 30, 2016. Decrease2019. The increase in net income attributable to the Company during the three months ended September 30, 20172020 as compared to the same period in 20162019 was primarily due to an increase in selling, generaloperating income of $23.7 million and administrate expensesan increase in income attributable to noncontrolling interest of $48.2$0.7 million, partially offset by an increase in total revenuesprovision for income taxes of $35.5$4.3 million, an increase in interest expense of $3.6 million and the impacta decrease in income from equity investments of benefit from taxes as discussed above.$0.7 million.
Preferred Stock Dividends. On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock (trading under the NASDAQ symbol “RILYP”), par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On July 7, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 31, 2020 to holders of record as of the close of business on July 21, 2020. On October 8, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or around October 31, 2020, to holders of record as of the close of business on October 21, 2020.
On September 4, 2020, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B Cumulative Perpetual Preferred Stock (trading under the NASDAQ symbol “RILYL”), par value $0.0001 per share. Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On October 8, 2020, the Company declared a cash dividend $0.29193 per Depositary Share, which will be paid on or around October 31, 2020, to holders of record as of the close of business on October 21, 2020.
Net Income Available to Common Shareholders. Net income available to common shareholders for the three months ended September 30, 2020 was $47.3 million, from net income available to common shareholders of $34.3 million for the three months ended September 30, 2019. The increase in net income available to common shareholders during the three months ended September 30, 2020 as compared to the same period in 2019 was primarily due to an increase in operating income of $23.7 million, partially offset by an increase in provision for income taxes of $4.3 million, an increase in interest expense of $3.6 million, an increase in income attributable to noncontrolling interest of $0.7 million and preferred stock dividends of $1.1 million and a decrease in income from equity investments of $0.7 million.
Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019
Condensed Consolidated Statements of OperationsIncome
(Dollars in thousands)
| Nine Months Ended September 30, | Change | |||||||||||||||
| 2020 | 2019 | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 429,799 | $ | 356,975 | $ | 72,824 | 20.4 | % | ||||||||
| Trading (losses) income and fair value adjustments on loans | (36,142 | ) | 71,730 | (107,872 | ) | (150.4 | )% | |||||||||
| Interest income - Loans and securities lending | 72,383 | 54,147 | 18,236 | 33.7 | % | |||||||||||
| Sale of goods | 26,475 | 4,023 | 22,452 | n/m | ||||||||||||
| Total revenues | 492,515 | 486,875 | 5,640 | 1.2 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 51,201 | 41,715 | 9,486 | 22.7 | % | |||||||||||
| Cost of goods sold | 11,442 | 3,835 | 7,607 | 198.4 | % | |||||||||||
| Selling, general and administrative expenses | 291,449 | 287,963 | 3,486 | 1.2 | % | |||||||||||
| Restructuring charge | 1,557 | 1,699 | (142 | ) | (8.4 | )% | ||||||||||
| Impairment of tradenames | 12,500 | — | 12,500 | 100.0 | % | |||||||||||
| Interest expense - Securities lending and loan participations sold | 30,669 | 22,579 | 8,090 | 35.8 | % | |||||||||||
| Total operating expenses | 398,818 | 357,791 | 41,027 | 11.5 | % | |||||||||||
| Operating income | 93,697 | 129,084 | (35,387 | ) | (27.4 | )% | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 537 | 1,329 | (792 | ) | (59.6 | )% | ||||||||||
| Loss from equity investments | (145 | ) | (4,049 | ) | 3,904 | (96.4 | )% | |||||||||
| Interest expense | (48,537 | ) | (35,130 | ) | (13,407 | ) | 38.2 | % | ||||||||
| Income before income taxes | 45,552 | 91,234 | (45,682 | ) | (50.1 | )% | ||||||||||
| Provision for income taxes | (13,380 | ) | (26,802 | ) | 13,422 | (50.1 | )% | |||||||||
| Net income | 32,172 | 64,432 | (32,260 | ) | (50.1 | )% | ||||||||||
| Net loss attributable to noncontrolling interests | (1,382 | ) | (50 | ) | (1,332 | ) | n/m | |||||||||
| Net income attributable to B. Riley Financial, Inc. | 33,554 | 64,482 | (30,928 | ) | (48.0 | )% | ||||||||||
| Preferred stock dividends | 3,230 | — | 3,230 | 100.0 | % | |||||||||||
| Net income available to common shareholders | $ | 30,324 | $ | 64,482 | $ | (34,158 | ) | (53.0 | )% | |||||||
n/m - Not applicable or not meaningful.
Nine Months |
| Nine Months | ||||||||||||||
| Amount | % | Amount | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Services and fees | $ | 202,354 | 95.5 | % | $ | 90,505 | 93.1 | % | ||||||||
| Interest income - Securities lending | 9,424 | 4.4 | % | — | 0.0 | % | ||||||||||
| Sale of goods | 221 | 0.1 | % | 6,668 | 6.9 | % | ||||||||||
| Total revenues | 211,999 | 100.0 | % | 97,173 | 100.0 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Direct cost of services | 46,224 | 21.8 | % | 25,084 | 25.8 | % | ||||||||||
| Cost of goods sold | 313 | 0.1 | % | 2,393 | 2.5 | % | ||||||||||
| Selling, general and administrative expenses | 132,836 | 62.7 | % | 48,844 | 50.3 | % | ||||||||||
| Restructuring costs | 11,484 | 5.4 | % | 3,585 | 3.7 | % | ||||||||||
| Interest expense - Securities lending | 6,515 | 3.1 | % | — | 0.0 | % | ||||||||||
| Total operating expenses | 197,372 | 93.1 | % | 79,906 | 82.2 | % | ||||||||||
| Operating income | 14,627 | 6.9 | % | 17,267 | 17.8 | % | ||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 358 | 0.2 | % | 32 | 0.0 | % | ||||||||||
| Loss from equity investment | (157 | ) | (0.1 | %) | — | 0.0 | % | |||||||||
| Interest expense | (5,195 | ) | (2.5 | %) | (1,398 | ) | (1.4 | %) | ||||||||
| Income before income taxes | 9,633 | 4.5 | % | 15,901 | 16.4 | % | ||||||||||
| Benefit from (provision for) income taxes | 7,753 | 3.7 | % | (6,184 | ) | (6.4 | %) | |||||||||
| Net income | 17,386 | 8.2 | % | 9,717 | 10.0 | % | ||||||||||
| Net (loss) income attributable to noncontrolling interests | (283 | ) | (0.1 | %) | 631 | 0.5 | % | |||||||||
| Net income attributable to B. Riley Financial, Inc. | $ | 17,669 | 8.3 | % | $ | 9,086 | 9.4 | % | ||||||||
Revenues
Revenues
The table below and the discussion that follows are based on how we analyze our business.
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | Change | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||
| Revenues - Services and fees: | |||||||||||||||||||||||
| Capital Markets segment | $ | 95,872 | 45.2 | % | $ | 22,799 | 23.5 | % | $ | 73,073 | 320.5 | % | |||||||||||
| Auction and Liquidation segment | 43,179 | 20.4 | % | 29,358 | 30.2 | % | 13,821 | 47.1 | % | ||||||||||||||
| Valuation and Appraisal segment | 24,799 | 11.7 | % | 22,865 | 23.5 | % | 1,934 | 8.5 | % | ||||||||||||||
| Principal Investments - United Online segment | 38,504 | 18.2 | % | 15,483 | 15.9 | % | 23,021 | 148.7 | % | ||||||||||||||
| Subtotal | 202,354 | 95.5 | % | 90,505 | 93.1 | % | 111,849 | 123.6 | % | ||||||||||||||
| Revenues - Sale of goods: | |||||||||||||||||||||||
| Auction and Liquidation segment | 1 | n/m | 6,505 | 6.7 | % | (6,504 | ) | (100.0 | %) | ||||||||||||||
| Principal Investments - United Online segment | 220 | 0.1 | % | 163 | 0.2 | % | 57 | 35.0 | % | ||||||||||||||
| Subtotal | 221 | 0.1 | % | 6,668 | 6.9 | % | (6,447 | ) | (96.7 | %) | |||||||||||||
| Interest income - Securities lending: | |||||||||||||||||||||||
| Capital Markets segment | 9,424 | 4.4 | % | — | n/m | 9,424 | n/m | ||||||||||||||||
| Total revenues | $ | 211,999 | 100.0 | % | $ | 97,173 | 100.0 | % | $ | 114,826 | 118.2 | % | |||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||
| Amount | Amount | Amount | % | |||||||||||||
| Revenues - Services and fees: | ||||||||||||||||
| Capital Markets segment | $ | 280,303 | $ | 187,768 | $ | 92,535 | 49.3 | % | ||||||||
| Auction and Liquidation segment | 49,340 | 65,681 | (16,341 | ) | -24.9 | % | ||||||||||
| Valuation and Appraisal segment | 26,112 | 29,143 | (3,031 | ) | -10.4 | % | ||||||||||
| Principal Investments - United Online and magicJack segment | 63,037 | 74,383 | (11,346 | ) | -15.3 | % | ||||||||||
| Brands | 11,007 | — | 11,007 | 100.0 | % | |||||||||||
| Subtotal | 429,799 | 356,975 | 72,824 | 20.4 | % | |||||||||||
| Revenues - Sale of goods: | ||||||||||||||||
| Auction and Liquidation segment | 23,757 | 1,230 | 22,527 | n/m | ||||||||||||
| Principal Investments - United Online and magicJack segment | 2,718 | 2,793 | (75 | ) | -2.7 | % | ||||||||||
| Subtotal | 26,475 | 4,023 | 22,452 | n/m | ||||||||||||
| Trading (losses) income and fair value adjustments on loans | ||||||||||||||||
| Capital Markets segment | (36,142 | ) | 71,730 | (107,872 | ) | n/m | ||||||||||
| Subtotal | (36,142 | ) | 71,730 | (107,872 | ) | n/m | ||||||||||
| Interest income - Loans and securities lending: | ||||||||||||||||
| Capital Markets segment | 72,383 | 54,147 | 18,236 | 33.7 | % | |||||||||||
| Total revenues | $ | 492,515 | $ | 486,875 | $ | 5,640 | 1.2 | % | ||||||||
n/m - Not applicable or not meaningful.
40
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Total revenues increased $114.8approximately $5.6 million to $212.0$492.5 million during the nine months ended September 30, 20172020 from $97.2$486.9 million during the nine months ended September 30, 2016.2019. The increase in revenues during the nine months ended September 30, 20172020 was primarily due to an increaseincreases in revenuesrevenue from services and fees of $111.8$72.8 million, revenues from sales of goods of $22.5 million and revenues from interest income –- loans and securities lending of $9.4,$18.2 million, partially offset by a decrease in revenuesrevenue from the saletrading losses and fair value adjustments on loans of goods of $6.4$107.9 million. The increase in revenuesrevenue from services and fees of $111.8 million in 2017 was due to an increase in revenues of (a) $73.1 million in the capital markets segment, (b) $13.8 million in the auction and liquidation segment, (c) $1.9 million in the valuation and appraisal segment, and (d) $23.0 million in the principal investments - United Online segment from the acquisition of UOL on July 1, 2016. Interest income from securities lending of $9.4 million in 2017 was as a result of the acquisition of FBR. The decrease in revenues from sale of goods of $6.4 million was primarily due to sale of certain products in the auction and liquidation segment in 2016.
Revenues from servicesand fees in the capital markets segment increased $73.1 million, to $95.9$72.8 million during the nine months ended September 30, 2017 from $22.8 millionduring the nine months ended September 30, 2016. The increase in revenues2020 was primarily due to an increaseincreases in revenuesrevenue of $33.3$92.5 million from investment banking fees, $20.1 million from commissions, fees and other income primarily earned from research, sales and trading, and $16.0 million from wealth management services and $3.7 million from trading income. The increase in revenues from investment banking fees was primarily due an increase in the numberCapital Markets segment and $11.0 million in the Brands segment, partially offset by decreases in revenue of investment banking transactions where we acted as an advisor$16.3 million in 2017 as compared to the same periodAuction and Liquidation segment, $3.0 million in 2016. Of the $33.3Valuation and Appraisal segment and $11.3 million increase in investment banking fees, $20.6 million of the increase was primarily due to operations of FBR that we acquired on June 1, 2017Principal Investments — United Online and Wunderlich that we acquired on July 3, 2017. The increase in revenues from commissions, fees and other income primarily earned from research, sales and trading was primarily due to an increase in fees and commissions earned from research, sales and trading and incentive management fees earned from our various funds we manage which included $12.9 million of revenues from the acquisition of FBR on June 1, 2017 and Wunderlich on July 3, 2017. The increase in revenues from wealth management services included $15.9 million of revenues from the acquisition of Wunderlich on July 3, 2017. The increase in revenues from trading income in 2017 was primarily due to an increase in income we earned from trading activities in our propriety trading account.magicJack segment.
Revenues from services and fees in the auction and liquidation solutionsCapital Markets segment increased $13.8$92.5 million, to $43.2$280.3 million during the nine months ended September 30, 20172020 from $29.4$187.8 million during the nine months ended September 30, 2016. The increase in revenues of $13.8 million was primarily due to an increase in revenues of $15.7 million from services and fees from retail liquidation engagements, offset by a decrease in revenues of $1.9 million from services and fees in our wholesale and industrial auction division. The increase in revenues from services and fees from retail liquidation engagements was primarily due to an increase in the number of fee and commission based retail liquidation engagements for store closings and going-out-of-business sales in 2017 as compared to the same period in 2016. The decrease in revenues from services and fees in our wholesale and industrial division was primarily due to a decrease in the number of wholesale and industrial auction engagements in 2017 as compared to the same period in 2016.
Revenues from services and fees in the valuation and appraisal segment increased $1.9 million, or 8.5%, to $24.8 million during the nine months ended September 30, 2017 from $22.9 million during the nine months ended September 30, 2016.2019. The increase in revenues was primarily due to increases in revenue of (a) $1.1$67.7 million relatedfrom corporate finance, consulting and investment banking fees, in commissions of $6.0 million and in other income, including investment dividends of $18.3 million.
Revenues from services and fees in the Auction and Liquidation segment decreased $16.3 million to $49.3 million during the nine months ended September 30, 2020 from $65.7 million during the nine months ended September 30, 2019. The decrease in revenues in the Auction and Liquidation segment was primarily due to fewer large retail liquidation engagements during the first half of 2020 and the impact of COVID-19 which resulted in delays and temporary stoppage in certain retail liquidation engagements. In June 2020, a number of retail liquidation engagements resumed as a number of states allowed the reopening of retail stores.
Revenues from services and fees in the Valuation and Appraisal segment decreased $3.0 million to $26.1 million during the nine months ended September 30, 2020 from $29.1 million during the nine months ended September 30, 2019. The decrease in revenues in the Valuation and Appraisal segment is primarily due to a decrease in revenues of $1.3 million for appraisal engagements where we perform valuationsfor the monitoring of collateral for financial institutions, lenders, and private equity investors;(b) $0.2investors and $1.7 million related tofor appraisal engagements where we perform valuationsprovide corporate valuation services and the valuation of machinery and equipment, and (c) $0.6 million related to appraisal engagements where we perform valuations of intellectual property and business valuations.equipment.
Revenues from services and fees in the principal investmentsPrincipal Investments - United Online and magicJack segment increased $23.0decreased $11.3 million to $38.5$63.0 million during the nine months ended September 30, 20172020 from $15.5$74.4 million during the nine months ended September 30, 2016.2019. The increase was as a result of the acquisition of UOL on July 1, 2016. For the nine months ended September 30, 2017, thedecrease in revenues include $29.8 million infrom services and fees primarily from customer paid accounts related to our Internet access and related subscription services and $8.7 million in advertising revenues from Internet display advertising and search related to our email and Internet access services. For the nine months ended September 30, 2016, the revenues include $11.2 million in services and fees from customer paid accounts and $4.3 million in advertising revenues. Over the past several years revenues from paid subscription services have declined year over year asis a result of a declinedecrease in the numbersubscription services of paid subscribers for our services. Management believes the decline$7.8 million and a decrease in paid subscriber accounts is primarily attributable to the industry trendsadvertising licensing and other of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL.$3.6 million. Management expects revenues infrom the principal investmentsPrincipal Investments - United Online and magicJack segment to continue to decline year over year.
Revenues from services and fees in the Brands segment were $11.0 million for the nine months ended September 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority interest in BR Brands on October 28, 2019. The primary source of revenue included in this segment is the licensing of trademarks.
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Trading (losses) income and fair value adjustments on loans decreased $107.9 million to a loss of $36.1 million for the nine months ended September 30, 2020 from a gain of $71.7 million for the nine months ended September 30, 2019. The $36.1 million loss for the nine months ended September 30, 2020 includes realized and unrealized loss amounts on investments made in our proprietary trading account of $14.3 million and unrealized losses on our loans receivable at fair value of $21.8 million.
Interest income – loans and securities lending increased $18.2 million, to $72.4 million during the nine months ended September 30, 2020 from $54.1 million during the nine months ended September 30, 2019. Interest income from securities lending was $36.9 million and $29.2 million during the nine months ended September 30, 2020 and 2019, respectively. Interest income from loans was $35.4 million and $24.9 million during the nine months ended September 30, 2020 and 2019, respectively. The increase in interest income on loans was primarily due to the increase in lending activities in our Capital Markets segment which included an increase in loans receivable to $344.3 million at September 30, 2020 from $295.9 million at September 30, 2019.
Sale of Goods, Cost of Goods Sold and Gross Margin
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||
| Investments - | Investments - | |||||||||||||||||||||||
| Auction and | United Online and | Auction and | United Online and | |||||||||||||||||||||
| Liquidation | magicJack | Liquidation | magicJack | |||||||||||||||||||||
| Segment | Segment | Total | Segment | Segment | Total | |||||||||||||||||||
| Revenues - Sale of Goods | $ | 23,757 | $ | 2,718 | $ | 26,475 | $ | 1,230 | $ | 2,793 | $ | 4,023 | ||||||||||||
| Cost of goods sold | 9,360 | 2,082 | 11,442 | 992 | 2,843 | 3,835 | ||||||||||||||||||
| Gross margin on sale of goods | $ | 14,397 | $ | 636 | $ | 15,033 | $ | 238 | $ | (50 | ) | $ | 188 | |||||||||||
| Gross margin percentage | 60.6 | % | 23.4 | % | 56.8 | % | 19.3 | % | (1.8 | )% | 4.7 | % | ||||||||||||
Revenues from the sale of goods increased $22.5 million, to $26.5 million during the nine months ended September 30, 2020 from $4.0 million during the nine months ended September 30, 2019. The increase in revenues from sale of goods was primarily attributable to the sale of goods for certain retail liquidation engagements where we acquired the title to inventory goods in Europe and operated the retail stores as part of a going-out-of-business sale. Cost of goods sold for the nine months ended September 30, 2020 was $11.4 million, resulting in a gross margin of 56.8%.
Operating Expenses
Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment during the nine months ended September 30, 20172020 and 2016 are2019 were as follows:
| Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||||||||||
| Auction and | Valuation and | Investments - | Auction and | Valuation and | Investments - | |||||||||||||||||||||||||||
| Liquidation | Appraisal | United Online | Liquidation | Appraisal | United Online | |||||||||||||||||||||||||||
| Segment | Segment | Segment | Total | Segment | Segment | Segment | Total | |||||||||||||||||||||||||
| Revenues - Services and fees | $ | 43,179 | $ | 24,799 | $ | 38,504 | $ | 29,358 | $ | 22,865 | $ | 15,483 | ||||||||||||||||||||
| Direct cost of services | 25,482 | 11,031 | 9,711 | $ | 46,224 | 9,870 | 10,287 | 4,927 | $ | 25,084 | ||||||||||||||||||||||
| Gross margin on services and fees | $ | 17,697 | $ | 13,768 | $ | 28,793 | $ | 19,488 | $ | 12,578 | $ | 10,556 | ||||||||||||||||||||
| Gross margin percentage | 41.0 | % | 55.5 | % | 74.8 | % | 66.4 | % | 55.0 | % | 68.2 | % | ||||||||||||||||||||
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
| Principal | Principal | |||||||||||||||||||||||
| Investments - | Investments - | |||||||||||||||||||||||
| Auction and | United Online and | Auction and | United Online and | |||||||||||||||||||||
| Liquidation | magicJack | Liquidation | magicJack | |||||||||||||||||||||
| Segment | Segment | Total | Segment | Segment | Total | |||||||||||||||||||
| Revenues - Services and fees | $ | 49,340 | $ | 63,037 | $ | 65,681 | $ | 74,383 | ||||||||||||||||
| Direct cost of services | 36,406 | 14,795 | $ | 51,201 | 21,584 | 20,131 | $ | 41,715 | ||||||||||||||||
| Gross margin on services and fees | $ | 12,934 | $ | 48,242 | $ | 44,097 | $ | 54,252 | ||||||||||||||||
| Gross margin percentage | 26.2 | % | 76.5 | % | 67.1 | % | 72.9 | % | ||||||||||||||||
n/m - Not applicable or not meaningful.
Total direct costs increased $21.1$9.5 million, to $46.2$51.2 million during the nine months ended September 30, 20172020 from $25.1$41.7 million during the nine months ended September 30, 2016.2019. Direct costs of services increased by (a) $15.6$14.8 million in the auctionAuction and liquidationLiquidation segment (b) $0.7and decreased by $5.3 million in the valuation and appraisal segment, and (c) $4.8 million in the principal investments -Principal Investments — United Online segment as a result of the acquisition of UOL on July 1, 2016.and magicJack segment. The increase in direct costs in the auctionAuction and liquidationLiquidation segment was primarily due to an increasethe costs incurred to operate the retail stores where we acquired title to inventory goods in the number of feeEurope and commission type engagements in 2017 compared to the same period in 2016.operated a going-out-of-business sale. The increasedecrease in direct costs of services in the valuationPrincipal Investments — United Online and appraisalmagicJack segment was primarily due to an increasea result of the sale of a division of magicJack in payrollMay of 2019 and related expenses due to an increase headcount 2017 as compared to the same periodreduced costs in 2016.magicJack in 2020.
Auction and Liquidation
Gross margin in the auctionAuction and liquidationLiquidation segment for services and fees decreased to 41.0%26.2% of revenues during the nine months ended September 30, 2017,2020, as compared to 66.4%67.1% of revenues during the nine months ended September 30, 2016.2019. The decrease in gross margin in 2017the Auction and Liquidation segment is primarily due to the increasecosts incurred to operate the retail stores where we acquired title to inventory goods in Europe and operated a going-out-of-business sale.
Principal Investments — United Online and magicJack
Gross margins in the number of feePrincipal Investments — United Online and commission type retail liquidation engagements as compared to the same period in 2016.
Gross margin in the valuation and appraisalmagicJack segment for services and fees increased to 55.5%76.5% of revenues during the nine months ended September 30, 2017,2020, as compared to 55.0%72.9% of revenues during the nine months ended September 20, 2016.30, 2019. The increase in margin in the Principal Investments — United Online and magicJack segment is primarily due to the sale of a division of magicJack in May of 2019 and declining sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses during the nine months ended June, 2017September 30, 2020 and 20162019 were comprised of the following:
Selling, General and Administrative Expenses
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 207,545 | 71.3 | % | $ | 200,414 | 69.6 | % | $ | 7,131 | 3.6 | % | ||||||||||||
| Auction and Liquidation segment | 8,882 | 3.0 | % | 9,050 | 3.1 | % | (168 | ) | (1.9 | )% | ||||||||||||||
| Valuation and Appraisal segment | 19,782 | 6.8 | % | 21,592 | 7.5 | % | (1,810 | ) | (8.4 | )% | ||||||||||||||
| Principal Investments - United Online and magicJack segment | 22,818 | 7.8 | % | 28,129 | 9.8 | % | (5,311 | ) | (18.9 | )% | ||||||||||||||
| Brands segment | 4,350 | 1.5 | % | — | 0.0 | % | 4,350 | 100.0 | % | |||||||||||||||
| Corporate and Other segment | 28,072 | 9.6 | % | 28,778 | 10.0 | % | (706 | ) | (2.5 | )% | ||||||||||||||
| Total selling, general & administrative expenses | $ | 291,449 | 100.0 | % | $ | 287,963 | 100.0 | % | $ | 3,486 | 1.2 | % | ||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | Change | ||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
| Capital Markets segment | $ | 89,920 | 67.7 | % | $ | 22,941 | 47.0 | % | $ | 66,979 | 292.0 | % | ||||||||||||
| Auction and Liquidation segment | 6,577 | 5.0 | % | 6,862 | 14.0 | % | (285 | ) | (4.2 | %) | ||||||||||||||
| Valuation and Appraisal segment | 6,525 | 4.9 | % | 6,451 | 13.2 | % | 74 | 1.1 | % | |||||||||||||||
| Principal Investments - United Online segment | 13,849 | 10.4 | % | 3,941 | 8.1 | % | 9,908 | 251.4 | % | |||||||||||||||
| Corporate and Other segment | 15,965 | 12.0 | % | 8,649 | 17.7 | % | 7,316 | 84.6 | % | |||||||||||||||
| Total selling, general & administrative expenses | $ | 132,836 | 100.0 | % | $ | 48,844 | 100.0 | % | $ | 83,992 | 172.0 | % | ||||||||||||
Total selling, general and administrative expenses increased $84.0approximately $3.5 million to $132.9$291.4 million during the nine months ended September 30, 20172020 from $48.8$288.0 million for the nine months ended September 30, 2016.2019. The increase was primarily due to an increaseof approximately $3.5 million in selling, general and administrative expenses was due to increases of (a) $67.0$7.1 million in the capital marketsCapital Markets segment (b) $9.9and $4.4 million in the principal investments - United OnlineBrands segment, as a resultpartially offset by decreases of the acquisition of UOL on July 1, 2016, (c) $7.3 million in corporate and other, and (d) $0.1$0.2 million in the valuationAuction and appraisalLiquidation segment, offset by a decrease of $0.3$1.8 million in the auctionValuation and liquidationAppraisal segment and $5.3 million in the Principal Investments — United Online and magicJack segment and $0.7 million in the Corporate and Other segment.
Capital Markets
Selling, general and administrative expenses in the capital marketsCapital Markets segment increased by $67.0$7.1 million or 292.0% to $90.0$207.5 million during the nine months ended September 30, 20172020 from $22.9$200.4 million during the nine months ended September 30, 2016.2019. The increase in expenses was primarily due to (a)increases of $15.9 million in payroll and related expenses, partially offset by a decrease of $15.2$8.7 million from the acquisition of Wunderlich on July 3, 2017 and $15.6 million from the acquisition of FBR on June 1, 2017, (b) $15.4 million operating expenses related to the acquisition of FBR and $5.2 million operating expenses related to the acquisition of Wunderlich, (c) payroll and related expenses of $9.8 primarily related to an increase in incentive compensation as a result of the increase in revenues from investment banking fees in 2017 as compared to the same period in 2016, and (d) other operating expenses of $1.3 million.
consulting expenses.
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Auction and Liquidation
Selling, general and administrative expenses in the auctionAuction and liquidationLiquidation segment were $6.6decreased by $0.2 million and $6.9to $8.9 million during the nine months ended September 30, 2017 and 2016, respectively. The decrease in expenses was primarily due a decrease in payroll and related expenses in the amount of $0.5 million and legal and professional fees of $0.2 million, offset by an increase in other expenses of $0.4 million.
Valuation and Appraisal
Selling, general and administrative expenses in the valuation and appraisal segment was $6.52020 from $9.1 million during the nine months ended September 30, 2017, consistent with2019. The decrease in selling, general and administrative expenses in the same 2016 period.Auction and Liquidation segment was primarily due to decreases of $1.5 million in payroll and related expenses and $0.3 million in legal expenses, partially offset by increases of $1.0 million in business development and $0.7 million in losses from foreign currency exchange.
Valuation and Appraisal
Principal Investments - United Online
Selling, general and administrative expenses in the principal investments - United OnlineValuation and Appraisal segment increased $9.9decreased by $1.8 million or 251.4%, to $13.8$19.8 million during the nine months ended September 30, 20172020 from $3.9$21.6 million during the nine months ended September 30, 2016 as a result2019. The decrease in selling, general and administrative expenses in the Valuation and Appraisal segment was primarily due to decreases of $1.3 million in travel and entertainment expenses, $0.3 million in legal expenses and $0.2 million in business development expenses.
Principal Investments — United Online and magicJack
Selling, general and administrative expenses in the acquisition of UOL on July 1, 2016. ForPrincipal Investments — United Online and magicJack segment decreased $5.3 million to $22.8 million for the nine months ended September 30, 2017, these expenses include $3.62020 from $28.1 million of technology and development expenses, $0.9 million of sales and marketing expenses, $5.2 million of general and administrative expenses and $4.1 million of amortization of intangibles. Forfor the nine months ended September 30, 2016, these expenses include $1.2 million of technology and development expenses, $0.4 million of sales and marketing expenses, $1.0 million of2019. The decrease in selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment is primarily due to decreases of $1.8 million in payroll and related expenses, $1.4 million ofin legal expenses, $1.0 million in other expenses, $0.3 million in transaction costs, $0.6 million in depreciation and amortization of intangibles. Technologyexpense and development expenses include expenses for product development, maintenance of existing software, technology$0.3 million in travel and websites. Sales and marketing expenses include expenses associated personnel and overhead-related expenses for marketing, customer service, and advertising sales personnel to acquire and retain paid subscribers. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. Generalentertainment expense.
Brands
Selling, general and administrative expenses consist of personnel-related expenses for management in the principal investments - United OnlineBrands segment facilities, internal customer support personnel, personnel associated with operating our corporate systems and insurance recoveries. Amortizationwas $4.4 million for the nine months ended September 30, 2020. We established the Brands segment in 2019 following the acquisition of intangibles includes amortization expense related to customer lists, advertising relationships, domain names and internally developed software.a majority equity interest in BR Brands on October 28, 2019.
Corporate and Other
Selling, general and administrative expenses for corporatethe Corporate and other increased $7.3Other segment decreased approximately $0.7 million to $16.0$28.1 million during the nine months ended September 30, 20172020 from $8.6$28.8 million for the nine months ended September 30, 2016.2019. The increase was primarily due to an increase in (a)fair value adjustmentdecrease of $9.0 million in connection with the mandatorily redeemable noncontrolling interests, (b) payroll and related expenses of $1.7 million and(c) transactions costs of $1.6 million incurred for professional fees that primarily related to the acquisition of Wunderlich, FBR and Dialectic during the second and third quarters of 2017. These increases in corporate overhead were offset by an insurance recovery in the amount of $6.0 million related to key man life insurance on one of our executives in our appraisal segment.
Restructuring Charge. DuringCorporate and Other segment for the nine months ended September 30, 2017, we incurred2020 was primarily due to a restructuring charge$1.6 million gain on extinguishment of $11.5 million.In the second and third quartersdebt, partially offset by an increase of 2017, we implemented costs savings measures taking into account the planned synergies as a result of the acquisitions of Wunderlich and FBR which included a reduction in force for some of the corporate executives of Wunderlich and FBR and a restructuring to integrate Wunderlich and FBR’s operations with our operations. These initiatives resulted in a restructuring charge of $10.9$0.7 million in the second and third quarterlegal expenses.
Restructuring Charge. Restructuring charges of 2017. The restructuring charge included $3.3 million related to severance and accelerated vesting of restricted stock awards to former corporate executives of Wunderlich and FBR and $4.8 million of severance, accelerated vesting of stock awards to employees and $2.8 million of lease loss accruals for the planned consolidation of office space related to operations. The restructuring charge in 2017 also included employee termination costs of $0.6 million related to a reduction in personnel in the principal investments – United Online segment of our operations.
Restructuring charge of $3.6 million during the three months ended September 30, 2016 include $3.2 million of employee termination costs related to a reduction in personnel in the corporate offices of UOL after our acquisition of UOL on July 1, 2016 and $0.4 million of charges related to combing our corporate office location with the offices of UOL.
Other Income (Expense). Other income (expense) included interest income of $0.4$1.6 million during the nine months ended September 30, 20172020 were primarily related to impairment of certain acquired tradename intangibles associated with the Company’s brand realignment across its subsidiary companies to provide greater external consistency and less than $0.1affiliation. Restructuring charges of $1.7 million during the nine months ended September 30, 2016. Interest expense was $5.22019 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.
Impairment of tradenames. Due to the impact of the COVID-19 outbreak on economic activity and market volatility, we tested our intangible assets as of March 31, 2020 and June 30, 2020 and made the determination that the indefinite-lived tradenames in the Brands segment were impaired and the Company recognized impairment charges of $12.5 million.
Other Income (Expense). Other income included interest income of $0.5 million during the nine months ended September 30, 2017 as compared to $1.42020 and $1.3 million during the nine months ended September 30, 2016.2019. Interest expense was $48.5 million during the nine months ended September 30, 2020 compared to $35.1 million during the nine months ended September 30, 2019. The increase in interest expense during the nine months ended September 30, 20172020 was primarily due to (a) interest expense of $0.4 million incurred on the acquisition consideration payable related to our acquisition of UOL on July 1, 2016 as a result of the Quadre Litigation; (b) an increase in interest expense of $0.2$15.4 million incurred on borrowing underfrom the issuance of additional senior notes, partially offset by decreases in interest expense of $1.7 million from the term loan dated December 2018 and our asset based credit facility for retail liquidation engagements; and (c) interest expenseother of $3.6$0.3 million. Other income in the nine months ended September 30, 2020 also included losses on equity investments of $0.1 million, incurreda decrease from losses from equity investments of $4.0 million in 2017 from the issuance of senior notes.
prior year period.
Income Before Income Taxes.Taxes. Income before income taxes decreased $6.3 million to $9.6was $45.6 million during the nine months ended September 30, 2017 from $15.92020 compared to income before income taxes of $91.2 million during the nine months ended September 30, 2016.2019. The decrease in income before income taxes was primarily due to (a) an increaseincreases in corporate and otheroperating expenses of $10.5$41.0 million which includes an increase in restructuring charges of $3.2 million, (b) a decrease in operating income of $5.8 million in our auction and liquidation segment, (c) an increase in interest expense of $3.8$13.4 million, partially offset by increases in revenues of approximately $5.6 million and (d) loss onlosses from equity investmentinvestments of $0.2$3.9 million offset by (a) an increase in operating income of $10.8 million in our principal investments – United Online segment asand a result of the acquisition of UOL on July 1, 2016, (b) an increase in operating income of $1.8 million in our capital markets segment, (c) an increase in operating income of $1.1 million in our valuation and appraisal segment, and (d) an increasedecrease in interest income of $0.3 million.$0.8 million, as discussed above.
Benefit from (Provision for)Provision for Income Taxes. Benefit fromProvision for income taxes was $7.8$13.4 million during the nine months ended September 30, 20172020 compared to provision for taxes of $6.2$26.8 million during the nine months ended September 30, 2016.2019. The benefiteffective income tax rate was 29.4% for income taxes duringboth the nine months ended September 30, 2017 included a tax benefit of $8.4 million related to our election to treat the acquisition of UOL as a taxable business combination for income tax purposes in accordance with Internal Revenue Code Section 338(g) as more fully discussed in note 9 in the condensed consolidated financial statements. The tax provision during the nine months ended September 30, 2017 also a tax benefit due to a non-taxable insurance recovery in the amount of $6.0 million that was received in the second quarter of 2017. The effective income tax rate was a benefit of 80.5% for the nine months ended September 30, 2017 compared to provision of 38.9% for the nine months ended September 30, 2016.2020 and 2019.
Net (Loss) IncomeLoss Attributable to Noncontrolling Interest.Interest. Net incomeloss attributable to noncontrolling interests represents the proportionate share of net income generated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners, LLC, in which we have a 50% of the membership interest thatof which we do not own. The net loss attributable to noncontrolling interests was $0.3$1.4 million during the nine months ended September 30, 20172020 compared to net income attributable to noncontrolling interests of $0.6$0.1 million during the nine months ended September 30, 2016.2019.
Net Income Attributable to the Company.Company. Net income attributable to the Company for the nine months ended September 30, 20172020 was $17.7 million, an increase of $8.6$33.6 million, from $9.1net income attributable to the Company of $64.5 million for the nine months ended September 30, 2016.2019. The increasedecrease in net income attributable to the Company during the nine months ended September 30, 20172020 as compared to the same period in 20162019 was primarily due to (a) operating income from the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016 as discussed above, (b) an increasedecreases in operating income of $35.4 million and interest income of $0.8 million and increases in interest expense of $13.4 million and loss attributable to noncontrolling interest of $1.3 million, partially offset by a decreases in loss from equity investments of $3.9 million and provision from income taxes of $13.4 million.
Preferred Stock Dividends. On October 7, 2019, the valuationCompany closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share. Holders of Series A Preferred Stock, when and appraisal segment; (c) an increaseas 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. On January 9, 2020, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holders of record as of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020. On July 7, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 31, 2020 to holders of record as of the close of business on July 21, 2020. On October 8, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or around October 31, 2020, to holders of record as of the close of business on October 21, 2020.
On September 4, 2020, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 7.375% Series B Cumulative Perpetual Preferred Stock (trading under the NASDAQ symbol “RILYL”), par value $0.0001 per share. Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On October 8, 2020, the Company declared a cash dividend $0.29193 per Depositary Share, which will be paid on or around October 31, 2020, to holders of record as of the close of business on October 21, 2020.
Net Income Available to Common Shareholders. Net income available to common shareholders for the nine months ended September 30, 2020 was $30.3 million, from net income available to common shareholders of $64.5 million for the nine months ended September 30, 2019. The decrease in net income available to common shareholders during the nine months ended September 30, 2020 as compared to the same period in 2019 was primarily due to a decreases in operating income of $35.4 million and interest income of $0.8 million and increases in the capital markets segment;interest expense of $13.4 million, loss attributable to noncontrolling interest of $1.3 million and (d) the impactpreferred stock dividends of the benefit$3.2 million, partially offset by decreases in loss from equity investments of $3.9 million and provision for income taxes as discussed above.of $13.4 million.
Liquidity and Capital Resources
Our operations are funded through a combination of existing cash on hand, cash generated from operations, proceeds from the issuance of common stock, and borrowings under our senior notes payable, preferred stock issuances, term loan and credit facility, and special purposes financing arrangements.
On May 10, 2016, we completedJanuary 30, 2020, the World Health Organization (“WHO”) announced a secondary offeringglobal health emergency because of 2,420,980 sharesa new strain of common stock atcoronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a price to the public of $9.50 per share. The net proceeds from the offering were $22.8 million after deducting underwriting commissions and other offering expenses. On November 2, 2016, we issued $28.8 million of Senior Notes due in 2021 (the “2021 Notes”), and during the third quarter of 2017, we issued an additional $5.3 million of 2021 Notes pursuant to an At The Market Issuance Sales Agreement (the “Sales Agreement”) as further discussed below. Interestpandemic, based on the 2021 Notes are payable quarterly at 7.5% commencing January 31, 2017.rapid increase in exposure globally. The 2021 Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuanceimpact of the 2021 Notes on November 2, 2016, we received net proceeds of $27.7 million (after underwriting commissions, fees and other issuance costs of $1.1 million). In connection with the issuanceCOVID-19 outbreak continues to evolve. The impact of the 2021 Notes in 2017 pursuant toCOVID-19 outbreak on the Sales Agreement, we received net proceedsCompany’s results of $5.4 million (after premium less underwriting commissions, feesoperations, financial position and other issuance costs of $0.1 million). On May 31, 2017, we issued $60.4 million of Senior Notes due in 2027 (the “2027 Notes”),cash flows will depend on future developments, including the duration and during the third quarter of 2017, we issued an additional $23.7 million of 2027 Notes pursuant to the Sales Agreement. Interests are payable quarterly at 7.5% commencing July 31, 2017. The 2027 Notes are unsecured and due and payable in full on July 31, 2027. In connection with the issuancespread of the 2027 Notes, we received net proceedsoutbreak and related advisories and restrictions. These developments and the impact of $82.3 million (after premium, underwriting commissions, feesthe COVID-19 outbreak on the financial markets and other issuance coststhe overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of $1.8 million). operations, financial position and cash flows may be materially adversely affected.
During the nine months ended September 30, 20172020 and year ended December 31, 2016,2019, we generated net income of $17.7$32.2 million and $21.5$64.4 million, respectively. Our cash flows and profitability are impacted by the number and size of retail liquidation and capital markets engagements performed on a quarterly and annual basis.
As of September 30, 2017,2020, we had $102.4$169.7 million of unrestricted cash $9.3and cash equivalents, $1.4 million of restricted cash, investments in$459.5 million of securities and other investments held at fair value, $344.3 million of $96.0 million,loans receivable, and $117.9$922.1 million of borrowings outstanding. The borrowings outstanding of approximately $117.9$922.1 million at September 30, 20172020 included (a) $33.2$855.0 million of borrowings from the issuance of the 2021series of Senior Notes that are due at various dates ranging from May 31, 2023 to December 31, 2023 with interest rates ranging from 6.375% to 7.5%, (b) $82.4$52.5 million term loan borrowed pursuant to the BRPAC Credit Agreement discussed below, (c) $0.7 million of borrowings from the issuance of the 2027 Notes, and (c) other notes payable, and (d) $13.9 million of $2.4 million.loan participations sold. We believe that our current cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility, UOL line of credit and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.
From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On October 28, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.30 per share to $0.375 per share. On October 28, 2020, the Company declared a regular quarterly dividend of $0.375 per share, which will be paid on or about November 24, 2020 to stockholders of record as of November 10, 2020. On July 30, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.25 per share to $0.30 per share. On July 30, 2020, the Company declared a regular quarterly dividend of $0.30 per share and a special dividend of $0.05 per share which was paid on August 28, 2020 to stockholders of record as of August 14, 2020. On May 8, 2020, we declared a quarterly dividend of $0.25 per share which was paid on June 10, 2020 to stockholders of record as of June 1, 2020. During the nine months ended September 30, 2017 and year ended December 31, 2016,2019, we paid cash dividends of $11.6 million and $5.3 million, respectively, on our common stock.stock of $41.1 million. On March 3, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.175 per share to $0.25 per share. While it is the Board’s current intention to make regular dividend payments of $0.08$0.30 per share each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends or repurchases of our common stock will be made at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board of Directors.
A summary of our common stock dividend activity for the nine months ended September 30, 2020 and the year ended December 31, 2019 was as follows:
| Regular | Special | Total | ||||||||||||||
| Stockholder | Dividend | Dividend | Dividend | |||||||||||||
| Date Declared | Date Paid | Record Date | Amount | Amount | Amount | |||||||||||
| July 30, 2020 | August 28, 2020 | August 14, 2020 | $ | 0.30 | $ | 0.05 | $ | 0.35 | ||||||||
| May 8, 2020 | June 10, 2020 | June 1, 2020 | 0.25 | 0.00 | 0.25 | |||||||||||
| March 3, 2020 | March 31, 2020 | March 17, 2020 | 0.25 | 0.10 | 0.35 | |||||||||||
| October 30, 2019 | November 26, 2019 | November 14, 2019 | 0.175 | 0.475 | 0.650 | |||||||||||
| August 1, 2019 | August 29, 2019 | August 15, 2019 | 0.175 | 0.325 | 0.500 | |||||||||||
| May 1, 2019 | May 29, 2019 | May 15, 2019 | 0.08 | 0.18 | 0.26 | |||||||||||
| March 5, 2019 | March 26, 2019 | March 19, 2019 | 0.08 | 0.00 | 0.08 | |||||||||||
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. On January 9, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holders of record as of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020. On July 7, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 31, 2020 to holders of record as of the close of business on July 21, 2020. On October 8, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or about October 31, 2020 to holders of record as of the close of business on October 21, 2020.
Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On October 8, 2020, the Company declared a cash dividend $0.29193 per Depositary Share, which will be paid on or about October 31, 2020 to holders of record as of the close of business on October 21, 2020.
Our principal sources of liquidity to finance our business isare our existing cash on hand, cash flows generated from operating activities, funds availableoperations, borrowings under revolvingour senior notes payable, term loan and credit facilitiesfacility, issuances of common and preferred stock and special purpose financing arrangements.
Cash Flow Summary
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (Dollars in thousands) | ||||||||
| Net cash (used in) provided by: | ||||||||
| Operating activities | $ | (48,779 | ) | $ | 27,926 | |||
| Investing activities | (22,916 | ) | (111,873 | ) | ||||
| Financing activities | 58,719 | 80,386 | ||||||
| Effect of foreign currency on cash | 3,280 | 23 | ||||||
| Net decrease in cash and cash equivalents | $ | (9,696 | ) | $ | (3,538 | ) | ||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| (Dollars in thousands) | ||||||||
| Net cash provided by (used in): | ||||||||
| Operating activities | $ | 86,897 | $ | 46,223 | ||||
| Investing activities | (98,546 | ) | (251,444 | ) | ||||
| Financing activities | 77,589 | 196,184 | ||||||
| Effect of foreign currency on cash | 407 | (183 | ) | |||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 66,347 | $ | (9,220 | ) | |||
Cash used inprovided by operating activities was $48.8$86.9 million forduring the nine months ended September 30, 2017, an increase of $76.72020 compared to $46.2 million from cash provided by operating activities of $27.9 million forduring the nine months ended September 30, 2016.2019. Cash used inprovided by operating activities for the nine months ended September 30, 2017 includes2020 included net income of $17.4$32.2 million adjusted for noncash items of $70.5 million and changes in operating assets and liabilities.The increase in cash used in operating activitiesliabilities of $76.7 million was primarily due to (a) a decrease in non-cash charges and other$15.7 million. Noncash items of $1.3$70.5 million which included recovery of key man life insurance of $(6.0) million and deferred income taxes of $(24.6) million, effect on foreign currency on operations of $(1.0) million, loss on equity investment of $0.2 million,include (a) depreciation and amortization of $7.7$14.8 million, (b) share-based compensation $7.7of $14.3 million, income allocated and(c) loss on equity investments of $0.2 million, (d) fair value adjustmentadjustments of $21.8 million, (e) provision for doubtful accounts of $2.4 million, (f) income allocated for mandatorily redeemable noncontrolling interests of $10.8$0.8 million, (g) other non-cash interest and other of $12.9 million, (h) deferred income taxes of $17.3 million, (i) impairment of leaseholds lease loss accrualintangibles and loss on disposal of fixed assets of $2.8$14.1 million and $0.3 million for non-cash interest and other, and (b) changes(j) gain on extinguishment of debt of $1.6 million.
Cash used in operating assets and liabilities that resulted in adecrease of $64.9 millionin cash flows from operations during the nine months ended September 30, 2017, offset by an increase in net income of $7.7 million to $17.4investing activities was $98.5 million during the nine months ended September 30, 2017, from $9.7 million during the comparable period in 2016.
Cash2020 compared to cash used in investing activities of $251.4 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, cash used in investing activities consisted of cash used for purchases of loans receivable of $169.1 million, repayments of loan participations sold of $1.1 million, cash used for equity investments of $6.5 million and cash used for acquisition of other businesses of $1.5 million, offset by cash received from loans receivable repayment of $76.0 million, sale of a loan receivable to a related party of $1.8 million, loan participations sold of $2.4 million and dividends from equity investments of $1.0 million. During the nine months ended September 30, 2019, cash used in investing activities consisted of cash used for loans receivable of $350.7 million, cash used for equity investments of $33.4 million, repayments of loan participations sold of $3.2 million, and cash used for purchases of property and equipment of $2.9 million, offset by proceeds from sale of division of magicJack of $6.2 million, cash received from loans receivable repayment of $98.7 million, loan participations sold of $31.8 million, dividends from equity investments of $1.5 million and proceeds from sale of property, equipment and intangible assets of $0.5 million.
Cash provided by financing activities was $22.9$77.6 million during the nine months ended September 30, 20172020 compared to cash used in investing activities of $111.9 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, cash used in investing activities consisted of (a) cash used to purchase Wunderlich and United Online in the amounts of $25.4 million and $10.4 million, respectively, (b) an increase in restricted cash of $5.8 million, (c) cash use of $2.1 million for the acquisition of other businesses, (d) cash use of $1.0 million for an equity investment, and (e) cash use of $0.5 million for purchases of property and equipment, offset by (a) cash acquired from the acquisition of FBR of $15.7 million, (b) proceeds from key man life insurance of $6.0 million, and (c) proceeds from sale of property, equipment and other intangibles of $0.6 million. During the nine months ended September 30, 2016, cash used in investing activities was primarily comprised of an increase in restricted cash of $78.2 million and cash used to acquire United Online of $33.4 million.
Cash provided by financing activities was $58.7of $196.2 million during the nine months ended September 30, 2017 compared to $80.4 million during the nine months ended September 30, 2016.2019. During the nine months ended September 30, 2017,2020, cash provided by financing activities primarily consisted of (a) $66.0$171.4 million proceeds from issuance of senior notes and $36.0 million proceeds from issuance of preferred stock, offset by (a) $37.1 million used to repay our asset based credit facility, (b) $38.3 million used to repurchase our common stock, (c) $25.8 million used to pay dividends on our common shares, (d) $14.4 million use for repayment on our term loan, (e) $1.8 million used to repurchase our senior notes, (f) $2.8 million used to pay debt issuance costs, (g) $3.0 million distribution to noncontrolling interests, (h) $3.2 million used to pay dividends on our preferred shares (i) $3.0 million used for payment of employment taxes on vesting of restricted stock and (b) $89.3(j) $0.4 million used to repay our other notes payable. During the nine months ended September 30, 2019, cash provided by financing activities primarily consisted of $10.0 million proceeds from our term loan, $244.5 million proceeds from issuance of senior notes, offset by (a) $66.0 million used to repay the asset based credit facility, (b) $13.5$25.0 million used to pay cash dividends on our common shares, (b) $17.9 million use for repayment on our term loan, (c) $8.2$7.1 million used to repay other notes payable in connection with the acquisition of Wunderlich,repurchase our common stock and warrants, (d) $2.9 million distributions to noncontrolling interests, (e) $2.0$4.2 million used forto pay debt issuance costs, (f) $1.3(e) $2.6 million used for the payment of contingent consideration, and (g) $2.7 million used for the payment of employment taxes on vesting of restricted stock. During the nine months ended September 30, 2016, cash provided by financing activities primarily consisted of (a) $23.0stock, (f) $1.1 million of net proceeds from the issuance of common stock in May 2016, (b) $61.4 million of borrowings in connection with the participating notes payable, (c) $1.3 million payment of contingent consideration in connection with the acquisition of MK Capital, (d) $0.3distribution to noncontrolling interests, and (g) $0.4 million used to repay a revolving line of credit, (e) $0.6 million of dividends paid on our common stock and (f) $1.7 million of distributions to noncontrolling interest.other notes payable.
45
Contingent Consideration
In connection with the acquisition of MK Capital on February 2, 2015 for a total purchase price of $9.4 million, at closing $2.5 million of the purchase price was paid in cash and 333,333 newly issued shares of our common stock with a fair value of $2.7 million were issued to the former members of MK Capital. The purchase agreement also required the payment of contingent consideration in the form of future cash payments with a fair value of $2.2 million and the issuance of shares of common stock with a fair value of $2.0 million. The contingent cash consideration of $2.2 million payable to the former members of MK Capital represents the fair value of the contingent cash consideration of $1.25 million due on the first anniversary date of the closing (February 2, 2016) and a final cash payment of $1.25 million due on the second anniversary date of the closing (February 2, 2017), with imputed interest expense calculated at 8% per annum. The contingent stock consideration of $2.0 million was comprised of the issuance of 166,667 shares of common stock on the first anniversary date of the closing (February 2, 2016) and 166,666 shares of common stock on the second anniversary date of the closing (February 2, 2017). The contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second anniversary periods. The contingent cash consideration for such first anniversary period of $1.25 million was paid and contingent stock consideration for such first anniversary period of 166,667 common shares was issued to the former members of MK Capital on February 2, 2016. The contingent cash consideration for such second anniversary period of $1.25 million was paid and contingent stock consideration for such second anniversary period of 166,666 common shares was issued to the former members of MK Capital on February 2, 2017.
Credit Agreements
On April 21, 2017, we amended the asset based credit facility agreement (as amended, the “Credit Agreement”) governing our asset based credit facility with Wells Fargo Bank National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $100.0 million to $200.0 million. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under 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 with borrowings up to 50.0 million British Pounds. Any borrowing on the UK Credit Agreement reduce the availability of the asset based $200.0 million credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the credit agreement governing the credit facility.Credit Agreement. The Credit Agreement continues to include the addition of our Canadian subsidiary, from the October 5, 2016 amendment to the Credit Agreement, to facilitate borrowings to fund retail liquidation transactions in Canada. From time to time, we utilize this credit facility to fund costs and expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue letters of credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets, we are permitted to borrow up to $200.0 million under the credit facility, less the aggregate principal amount borrowed under the UK Credit Agreement (if in effect). Borrowings under the credit facility are only made at the discretion of the lender and are generally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related credit agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. The credit facility is secured by the proceeds received for services rendered in connection with the liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract, if any. The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on liquidation engagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowings on an engagement-by- engagement basis. The credit agreement governing the credit facility contains certain covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. There was no outstanding balance on this credit facility at September 30, 2020. The outstanding balance on this credit facility was $37.1 million at December 31, 2019. At September 30, 2017 and December 31, 2016,2020, there were no borrowings oropen letters of credits outstanding undercredit outstanding.
On December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations (collectively, the credit facility.
On April 13, 2017, UOL,“Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacity as borrower,of borrowers, entered into a credit agreement (the “UOL Credit Agreement”) with the Banc of California, N.A. in the capacity as agent and lender. The UOLlender and with the other lenders party thereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, provides for a revolving credit facility under which UOL may borrow (or request the issuance of letters of credit) up to $20.0we borrowed $80.0 million which amount is reduced by $1.5 million commencing on June 30, 2017 and on the last day of each calendar quarter thereafter. The final maturity date is April 13, 2020. The proceeds of the UOL Credit Agreement can be used (a) for working capital and general corporate purposes and/or (b) to pay dividends or permitted tax distributions to its parent company, subjectdue December 19, 2023. Pursuant to the terms of the UOLBRPAC Credit Agreement, we may request additional optional term loans in an aggregate principal amount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019, the Borrowers entered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in which the new lender extended to Borrowers the additional $10.0 million as further discussed in Note 9 to the accompanying financial statements. The borrowings under the BRPAC Credit Agreement bear interest equal to the LIBOR plus a margin of 2.50% to 3.00% depending on the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC Credit Agreement.
Borrowings under the UOLBRPAC Credit Agreement will bear interest at a rate equal to (a) (i) the base rate (the greater of the federal funds rate plus one half of one percent (0.5%), or the prime rate) for U.S. dollar loans or (ii) at UOL’s option, the LIBOR Rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two percent (2%) to three and one-half percent (3.5%) per annum, based upon UOL’s ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the preceding four (4) fiscal quarters. Interest payments are to be made each one, three or six months for Eurodollar loans, anddue in quarterly for U.S. dollar loans.
UOL paid a commitment fee equal to 1.00% of the aggregate commitments upon the closing of the UOL Credit Agreement. The UOL Credit Agreement also provides for an unused line fee payable quarterly, in arrears, in an amount equal to: (a) 0.50% per annum times the amount of the unused revolving commitment that is less than or equal to the amount of the cash maintained in accountsinstallments commencing on March 31, 2019 with the agent (as depositary bank); plus (b) 1.00% per annum times the amount of the unused revolving commitment that is greater than the amount of the cash maintained in accounts with the agent (as depositary bank). Anyany remaining amounts outstanding under the UOL Credit Facility are due at maturity. For the $80.0 million loan, quarterly installments from September 30, 2020 to December 31, 2022 are $4.2 million per quarter and from March 31, 2023 to December 31, 2023, the quarterly installments are $2.1 million per quarter. For the $10.0 million loan, quarterly installments from September 30, 2020 to December 31, 2022 are $0.6 million per quarter and from March 31, 2023 to December 31, 2023, the quarterly installments are $0.3 million per quarter. At September 30, 2017, there were no borrowings or letters2020 and December 31, 2019, the outstanding balance of credits outstanding under this credit facility.
On November 2, 2016, we issued $28.8the term loan was $52.5 million (net of 2021 Notes,unamortized debt issuance costs of $0.4 million) and during$66.7 million (net of unamortized debt issuance costs of $0.6 million), respectively.
Senior Note Offerings
During the threenine months ended September 30, 2017,2020, we issued an additional $5.3$39.2 million of 2021 Notes,senior notes due with maturities dates ranging from May 2023 to December 2027 pursuant to At the Market Issuance Sales Agreement as further discussed below. InterestAgreements with B. Riley Securities, which governs the program of at-the-market sales of our senior notes. We filed a series of prospectus supplements with the SEC which allowed us to sell these senior notes.
On February 12, 2020, we issued $132.3 million of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus supplement dated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 7.5% commencing January 31, 2017.6.375%. The 20216.375% 2025 Notes are unsecured and due and payable in full on October 31, 2021.February 28, 2025. In connection with the issuance of the 20216.375% 2025 Notes, we received net proceeds of $33.1 million (after premium, underwriting commissions, fees and other issuance costs of $1.0 million). The outstanding balance of the 2021 Notes was $33.2 million (net of unamortized debt issue costs and premiums of $0.9 million) at September 30, 2017. In connection with the offering of 2021 Notes, certain members of our management and the Board of Directors purchased $2.7 million or 9.5% of the 2021 Notes offered by us.
On May 31, 2017, we issued $60.4 million of 2027 Notes,and during the three months ended September 30, 2017 we issued an additional $23.7 million of 2027 Notes pursuant to the Sales Agreement as further discussed below. Interest is payable quarterly at 7.5% commencing July 31, 2017. The 2027 Notes are unsecured and due and payable in full on May 31, 2027. In connection with the issuance of the 2027 Notes, we received net proceeds of $82.3$129.2 million (after underwriting commissions, fees and other issuance costs of $1.8$3.0 million). The outstanding balanceWe currently anticipate using the net proceeds from the 6.375% 2025 notes for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.
During March 2020, we repurchased bonds with an aggregate face value of $3.4 million for $1.8 million resulting in a gain net of expenses of $1.6 million as of September 30, 2020. As part of the 2027 Notesrepurchase, we paid $30 thousand in interest accrued through the date of each respective repurchase.
At September 30, 2020 and December 31, 2019, the total senior notes outstanding was $82.4$854.9 million (net of unamortized debt issue costs of $1.7$10.0 million) at September 30, 2017.
On June 28, 2017, we entered into the Sales Agreement and filed$688.1 million (net of unamortized debt issue costs of $8.9 million) with a prospectus supplement, pursuant to which we may sell from time to time, at our option up to an aggregateweighted average interest rate of $39.6 million of 2021 Notes or 2027 Notes.The Notes sold pursuant to the Sales Agreement will be issued pursuant to a prospectus dated March 29, 2017, as supplemented by a prospectus supplement dated June 28, 2017, in each case filed with the Securities6.94% and Exchange Commission pursuant to our effective Registration Statement7.05%, respectively. Interest on Form S-3 (File No. 333-216763), which was declared effective by the Securities and Exchange Commission on March 29, 2017. The Notes will be issued pursuant to the Indenture, dated as of November 2, 2016, as supplemented by a First Supplemental Indenture, dated as of November 2, 2016 and the Second Supplemental Indenture, dated as of May 31, 2017, each between us and U.S. Bank, National Association, as trustee.Future sales of the 2021 Notes and 2027 Notes pursuant to the Sales Agreement will dependsenior notes is payable on a variety of factors including, but not limited to, market conditions, the trading price of thequarterly basis. Interest expense on senior notes totaled $15.6 million and our capital needs.During$11.3 million for the three months ended September 30, 2017,2020 and 2019, respectively and $45.5 million and $30.2 million for the nine months ended September 30, 2020 and 2019, respectively.
On February 14, 2020, we issued $5.3entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. Riley Securities governing a program of at-the-market sales of certain of our senior notes. The most recent sales agreement prospectus was filed by us with the SEC on February 14, 2020 (the “February 2020 Sales Agreement Prospectus”). The Sales Agreement Prospectus allows us to sell up to $150.0 million of 2021 Notes and $23.7 millioncertain of 2027 Notes. Atour senior notes pursuant to an effective Registration Statement on Form S-3. As of September 30, 2017,2020, we have an additional $10.6had $148.1 million remaining availability under the February 2020 Sales Agreement.
Off Balance Sheet Arrangements
As part of 2021 Notes or 2027 Notesour investment banking and financial services activities, from time to time we enter into guaranties of debt, commitments of other entities, and similar transactions that may be soldconsidered off-balance sheet arrangements.
B&W Credit Agreement and Backstop
On January 31, 2020, the Company provided Babcock & Wilcox Enterprises, Inc. (“B&W”) $30 million of additional Tranche A-4 last out term loans pursuant to Amendment No. 20 (“Amendment No. 20”) to the Credit Agreement, dated May 11, 2015 (as amended to date, the “B&W Credit Agreement”) with Bank of America, N.A., as administrative agent and lender, and the other lenders party thereto. The Company is a lender with respect to B&W’s existing last out term loans under the Credit Agreement. Kenneth Young, our President, is the Chief Executive Officer of B&W. Pursuant to Amendment No. 20, B&W and the lenders, including the Company, also agreed upon a term sheet pursuant to which B&W would undertake a refinancing transaction on or prior to May 11, 2020 (the “Refinancing”) and B&W and the lenders, including the Company, would amend and restate the Credit Agreement on the terms specified therein. As part of the Refinancing, the size of B&W’s board of directors may also be reduced to 5 members, with the Company retaining the ability to appoint 2 members. On January 31, 2020, B&W also entered into a letter agreement with the Company (the “Backstop Commitment Letter”) pursuant to which the Company agreed to fund any shortfall in the $200 million of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties on the same terms contemplated by the Refinancing. On May 14, 2020, the Company entered into the Amendment Transactions with B&W as more provided B&W with another $30,000 of last-out term loans pursuant to a further amendments to B&W’s credit agreement which also included future commitments for the Company to loan B&W $40,000 as various dates starting in November 2020 and a limited guaranty by the Company of B&W’s obligations under the amended credit.
On August 10, 2020, the Company entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Company and/or Berkley Regional Insurance Company (collectively, “Berkley”) to a general agreement of indemnity made by B&W in favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkley in connection with a default by B&W under the Indemnity Agreement relating to a $29,970 payment and performance bond issued by Berkley in connection with a construction project undertaken by B&W. In consideration for providing the Indemnity Rider, B&W paid the Company $600 on August 26, 2020.
Franchise Group Commitment Letter and Loan Participant Guaranty
Commitment Letter
On February 14, 2020, affiliates of Franchise Group, Inc. (collectively with all of its affiliates, “FRG”) entered into an ABL Credit Agreement (the “Franchise Credit Agreement”), with GACP Finance Co., LLC (“GACP Finance”) as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided an asset based credit facility to FRG in an aggregate principal amount of $100.0 million. The obligations under the Franchise Credit Agreement were refinanced in full on September 23, 2020 (the “Refinancing”). In connection with the Franchise Credit Agreement, the Company entered into a commitment letter (as amended, the “Commitment Letter”), pursuant to which the Company committed to provide a $100.0 million asset based lending facility to FRG five days prior to the maturity date of the Franchise Credit Agreement if, on or before such date, the obligations under the Franchise Credit Agreement are not refinanced in full. Such commitment terminated upon the consummation of the Refinancing.
The Loan Participant Guaranty
On February 14, 2020 FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the “Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principal amount of $575.0 million.
On February 19, 2020, the Company entered into a limited guaranty (the “Loan Participant Guaranty”) to one of the lenders under the Term Loan Credit Agreement (the “Loan Participant”) pursuant to which the Company guaranteed the payment when due of certain obligations, including principal, interest, and other amounts payable to the Loan Participant under the Term Loan Credit Agreement in an amount not to exceed $50.0 million plus certain expenses of the Loan Participant and certain protective advances related to such guaranteed obligations (the “Loan Participant Guaranteed Obligations”). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant to the SalesTerm Loan Credit Agreement.There can be no assurance we will be successful The Loan Participant Guaranty remains in consummatingeffect until the date that the Loan Participant Guaranteed Obligations have been paid in full.
The Loan Participant Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future sales based on prevailing market conditionsunsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.
B. Riley Principal Merger Corp. II LOI Backstop Commitment
B. Riley Principal Merger Corp. II (“BRPM II”) was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or in the quantitiessimilar business combination with one or at the prices that we may deem appropriate.
Other Borrowings
In August 2016, we formedGA Retail Investments, L.P.,more businesses. BRPM II entered into an agreement and plan of merger (the “Merger Agreement”) to acquire Eos Energy Storage LLC, a Delaware limited partnership, (liability company, a privately held company that is not related to the “Partnership”Company (the “Proposed Acquisition”) which required us. Closing is subject to contribute $15.4 million. The Partnership borrowed $80.0 million Australian dollarscertain other conditions, including, among other things, that BRPM II maintain a certain level of cash (before taking into account certain transaction expenses, but after taking into account any redemptions by the BRPM II’s public stockholders) available from a third party investorthe trust account established in connection with its formationthe BRPM II IPO and the $80.0 million Australian dollars was exchanged for a 50% special limited partnership interest in the Partnership. The Partnership was formed to provide funding for the retail liquidation engagementfrom other equity financing sources.
Except as disclosed above, we entered into to liquidate the Masters Home Improvement stores. The $80.0 million Australian dollar participating note payable was non-interest bearing, shares in 50% of the all of the profits and losses of the Partnership and the principal amount was repaid in December 2016 upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. At September 30, 2017 and December 31, 2016, $0.5 million and $10.0 million, respectively, was payable in accordance with the participating note payable share of profits and is included net income attributable to noncontrolling interests and amounts due to related parties and partners in the condensed consolidated financial statements.
Other notes payable includenotes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at rates ranging from the prime rate plus 0.25% to 2.0% (4.5% to 6.25% at September 30, 2017) payable annually. The principal payments on the notes payable are due annually in the amount of $0.1 million on October 31, $0.2 million on September 30, and $0.4 million on January 31. The notes payable mature at various dates from January 31, 2018 through January 31, 2022. At September 30, 2017, the outstanding balance for the notes payable were $2.4 million.
Off-Balance Sheet Arrangements
We have no material obligations, assets or liabilities which would be considered off-balance sheet arrangements and do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, established for the purpose of facilitating off-balance sheet arrangements. We have not guaranteed any debt or commitments
Contractual Obligations
In February 2020, we issued $132.3 million of our 6.375% 2025 Notes, which are due and payable in full on February 28, 2025. As a result, our total senior notes payable increased to $1,161.2 million as of September 30, 2020 and our senior notes payable due in more than 5 years increased to $459.4 million. There were no other entities or entered into any optionsmaterial changes to our contractual obligations from those disclosed in our Annual Report on non-financial assets.Form 10-K for the year ended December 31, 2019.
NewRecent Accounting Standards
In February 2016,See Note 2(v) to the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02: Leases (Topic 842) (“ASU 2016-02”). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company in fiscal year 2019, but early application is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue are recognized at the time when goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. This standard sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance. This standard is effective in the first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to adoption. The Company believes the adoption of this standard may impact engagements that contain performance-based arrangements in which a success or completion fee is earned when and if certain predefined outcomes occur and engagements and contracts where services are provided under fixed-fees arrangements that have multiple performance obligations. The Company has not completed an assessment and has not yet determined whether the impact of the adoption of this standard on the consolidatedaccompanying financial statements will be material. The Company will adopt this standard on January 1, 2018 butfor recent accounting pronouncements we have not concluded on a transition approach. The Company expects to complete the assessment process, including selecting a transition method for adoption during fourth quarter of 2017.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in this update do not change the core principle of the guidance as noted above at ASU No. 2014-09. The amendments clarify the implementation guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU No. 2014-09. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019, but early application is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.
recently adopted.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet adopted this update and currently evaluating the effect this new standard will have on its financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
B. Riley’s primary exposure to market risk consists of risk related to changes in interest rates. B. Riley has not used derivative financial instruments for speculation or trading purposes.
Interest Rate Risk
Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable and credit facilities to fund costs and expenses incurred in connection with our investments, acquisitions and retail liquidation engagements. Borrowings under our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floating rate of interest. We invest in loans receivable that primarily bear interest at floating rates of interest.
The primary objective of our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing the income we receive from investments without significantly increasing risk. To achieve these objectives, our investments allow us to maintain a portfolio of cash equivalents, short-term investments through a variety of securities owned that primarily includes common stocks, corporate bonds and investments in partnership interests, and loans receivable. Our cash and cash equivalents through September 30, 2020 included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activities in convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities.
Not applicable.
Foreign Currency Risk
The majority of our operating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled $44.6 million for the nine months ended September 30, 2020 or 9.1% of our total revenues of $492.5 million during the nine months ended September 30, 2020. The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive loss. Transaction gains (losses), which were included in our condensed consolidated statements of operations, amounted to gains of $0.4 million and $0.1 million during the nine months ended September 30, 2020 and 2019, respectively. We may be exposed to foreign currency risk; however, our operating results during the nine months ended September 30, 2020 included $44.6 million of revenues from our foreign subsidiaries and a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would result in a $0.7 million increase in our operating income and a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating income of $0.7 million for the nine months ended September 30, 2020.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoing evaluation, our ChiefCo-Chief Executive OfficerOfficers and our Chief Financial Officer concluded that as of September 30, 20172020 our disclosure controls and procedures were effective atas of such date.
Remediation of Material Weakness
Since the reasonable assurance level.quarter ended December 31, 2019, management undertook remediation measures related to the previously reported material weakness in internal control over financial reporting. We completed these remediation measures in the quarter ended June 30, 2020, including testing of the design and concluding on the operating effectiveness of the related controls. Specifically, we enhanced the related party policies and procedures, with a specific focus on related party disclosures, that included the creation of a related party oversight function and increasing the frequency of related party controls.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on Effectiveness of Controls
Our management, including our ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designedwell- designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against our company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial position or results of operations.
In 2012, Gladden v. Cumberland Trust, WSI, et al. filed a complaint in Circuit Court, Hamblen County, TN at Morristown, Case No. 12-CV-119. This complaint alleges the improper distribution and misappropriation of trust funds. The plaintiff seeks damages of no less than $3.9 million, an accounting, and among other things, punitive damages. In October 2017, the Tennessee Supreme Court remanded the case to the Tennessee State Trial Court for determination of which claims are subject to arbitration and which are not. At the present time, the financial impact to the Company, if any, cannot be estimated.
In January 2015, we were served with a lawsuit that seeks to assert claims of breach of contract and other matters in connection with auction services provided to a debtor. The proceeding in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”) is pending in the bankruptcy case of the debtor and its affiliates (the “Debtor”). In the lawsuit, a former landlord of the Debtor generally alleges that the Company and a joint venture partner were responsible for contamination while performing services in connection with the auction of certain assets of the Debtor and is seeking approximately $10.0 million in damages. In January 2017, the parties filed a proposed scheduling order with the Bankruptcy Court. Discovery in the action is currently proceeding. We intend to vigorously defending this lawsuit. This lawsuit is ongoing, and the financial impact to the Company, if any, cannot be estimated.
On July 5, 2016, Quadre Investments LP (“Quadre”) filed a petition with the Delaware Court of Chancery (the “Court”) seeking a determination of fair value for 943,769 shares of common stock of UOL in connection with the acquisition of UOL by us. Such transaction gave rise to appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware. As a result, Quadre petitioned the Court to receive fair value as determined by the Court. On June 29, 2017, the parties settled the action and the petition was dismissed.
In May 2014, Waterford Township Police & Fire Retirement System et al. v. Regional Management Corp et al., filed a complaint in the Southern District of New York (the “Court”), against underwriters alleging violations under sections 11 and 12 of the Securities Act of 1933, as amended (the “Securities Act”). FBR Capital Markets & Co. (“FBRCM”), a broker-dealer subsidiary of ours, was a co-manager of 2 offerings. On January 30, 2017, the Court denied the plaintiffs’ motion to file a first amended complaint, which would have revived claims previously dismissed by the Court on March 30, 2016. On March 1,2017, the plaintiffs filed a notice of appeal and an opening brief on June 21, 2017. Defendant’s opposition motion was filed on September 12, 2017. Appellants filed their reply brief on October 17, 2017 and oral argument has been scheduled for November 17, 2017. Regional Management continues to indemnify all of the underwriters, including FBRCM, pursuant to the operative underwriting agreement.
On January5,2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR,B. Riley Securities (fka FBR), as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately $151.0 million.$151,000. The plaintiffs seek unspecified compensatory damages and reimbursement of certain costs and expenses.Court ordered mediation before a federal magistrate took place on August 6, 2019, with no resolution. In August 2017,December 2019, the Court granted Defendant’s Motionremanded the case to Dismiss on Section 12 claims and found thatstate court. In July 2020, the plaintiffs had not sufficiently allegedCompany signed a corrective disclosure priorbinding term sheet to August 6, 2015, when an SEC civil action was announced. Defendant’s answer was filed on September 25, 2017. Although MLVsettle this matter, subject to court approval which is contractually entitledexpected to be indemnifiedreceived by Millerthe end of 2020 or in connection with this lawsuit, Miller filed for bankruptcy in October 2015 and this likely will decrease or eliminate the value of the indemnity that MLV receives from Miller.early 2021.
In March 2017, United Online, Inc. received a letter from PeopleConnect, Inc. (formerly, Classmates, Inc.) (“Classmates”) regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of four California counties (“California DAs”). These entities suggest that Classmates may be in violation of California codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices. Classmates asserts that these claims are indemnifiable claims under the purchase agreement between United Online, Inc. and the buyer of Classmates. A tolling agreement with the California DAs has been signed and informal discovery and production is in process. At the present time, the financial impact to the Company, if any, cannot be estimated.
In April 2017, two purported shareholders of FBR filed a putative class action against FBR and the members of its board of directors that challenged the disclosures made in connection with the merger of FBR with the Company, styled Michael Rubin v. FBR & Co., et al., Case No. 1:17-cv-00410-LMB-MSN and Kim v. FBR & Co., et al. Case No.1:17-cv-004440LMB-IDD. The complaints alleged that the registration statement filed in connection with the Merger failed to disclose certain allegedly material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Ru1e 14a-9 promulgated thereunder. On July 12, 2017, per stipulation, the complaints were dismissed - with prejudice as to the named plaintiffs only, without prejudice as to the class. In August 2017, a mootness fee was paid and the case was dismissed.
In September 2017, a statement of claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting of the now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc. (“Quantum”). Claimants are seeking $37.0 million in actual damages, plus $75.0 million in punitive damages and attorney’s fees. On October 24, 2017, we joined in a motion with the other underwriters requesting that the claim be dismissed on the grounds that it is improper under FINRA Rules 12204 and 122205 which prohibit class actions and derivative claims, respectively. Our initial response is due in November 2017 and we have agreed to a dual representation arrangement with the other underwriters. At the present time, the financial impact to the Company, if any, cannot be estimated.
Item 1A. Risk Factors.
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016,2019, filed with the Securities and Exchange Commission on March 10, 2017.9, 2020 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, filed with the Securities and Exchange Commission on May 11, 2020. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in the Annual Report on Form 10-K for the year ended December 31, 20162019 and the Quarterly Report on Form 10-Q for the three months ended March 31, 2020, could materially affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. There have been no material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2016.
2019 and the Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits filed as part of this Quarterly Report are listed in the index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.
51
Exhibit Index
| § | The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to the Company. Certain schedules and annexes to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or annex will be furnished to the U.S. Securities and Exchange Commission or its staff upon request. |
| * | Filed herewith. |
| ** | Furnished herewith. |
| # | Management contract or compensatory plan or arrangement |
| ^ | Pursuant to Item 601(b)(10) of Regulation S-K, certain annexes to the agreement have not been filed herewith. The registrant agrees to furnish supplementally a copy of any omitted annex to the Securities and Exchange Commission upon request. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| B. Riley Financial, Inc. | |||
| Date: | By: | /s/ PHILLIP J. AHN | |
| Name: Phillip J. Ahn | |||
| Title: Chief Financial Officer and Chief Operating Officer | |||
| (Principal Financial Officer) | |||
52
51
Exhibit Index