Revenue from contracts with customers by reportable segment for the nine months ended September 30, 2018 is as follows:

Revenues are recognized when control of the promised goods or performance obligations for services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties. Revenues by geographic region by segment is included in Note 16 – Business Segments.

The following provides detailed information on the recognition of our revenues from contracts with customers:

Corporate finance and investment banking fees. 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. Fees from underwriting activities are recognized as revenues when the performance obligation for the services related to the underwriting transaction is satisfied under the terms of the engagement and is not subject to any other contingencies. Fees are also earned from financial advisory and consulting services rendered in connection with client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. The performance obligation for financial advisory services is satisfied over time as work progresses on the engagement and services are delivered to the client. The performance obligation for financial advisory services may also include success and performance based fees which are recognized as revenue when the performance obligation is no longer constrained and it is not probable that the revenue recognized would be subject to significant reversal in a future period. Generally, it is probable that the revenue recognized is no longer subject to significant reversal upon the closing of the investment banking transaction.

Wealth and asset management fees. Fees from wealth and asset management services consist primarily of investment management fees that are recognized over the period the performance obligation for 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.

Commissions, fees and reimbursed expenses. Commissions and other fees from clients for trading activities are earned from equity securities transactions executed as agent or principal are recorded at a point in time on a trade date basis. Commission, fees and reimbursed expenses earned on the sale of goods at auction and liquidation sales are recognized when evidence of a contract or arrangement exists, the transaction price has been determined, and the performance obligation has been satisfied when control of the product and risks of ownership has been transferred to the buyer. Revenues from fees and reimbursed expenses for valuation services to clients are recognized when the performance obligation is completed and is generally at the point in time upon delivery of the completed services to the customer.

Subscription services. Subscription service revenues are derived primarily from fees charged to pay accounts and are recognized in the period in which the transaction price has been determinable and the related performance obligations for 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.

Service contract revenues. Service contract revenues are primarily 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 over time when the performance obligation is satisfied. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of services to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill the contract include labor and other direct costs related to the contract. Due to the nature of the guarantees and performance obligations under these contracts, the estimation of revenue that is ultimately earned is complex and subject to many variables and requires significant judgment. It is common for these contracts to contain provisions that can either increase or decrease the transaction price upon completion of our performance obligations under the contract. Estimated amounts are included in the transaction price at the most likely amount it is probable that a significant reversal of revenue will not occur. Our estimates of variable consideration and determination of whether or not to include estimated amounts in the transaction price are based on an assessment of our anticipated performance under the contract taking into consideration all historical, current and forecasted information that is reasonably available to us.

Advertising and other. Advertising and other 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 and the sale of product revenues from the sale of mobile broadband service devices to customers. Advertising revenues are recognized 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 transaction price is 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. Sale of product revenues also includes the related shipping and handling fees.

Information on Remaining Performance Obligations and Revenue Recognized from Past Performance

We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at September 30, 2018. Corporate finance and investment banking fees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at September 30, 2018.

The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied. Receivables related to revenues from contracts with customers totaled $38,958 and $20,015 at September 30, 2018 and December 31, 2017, respectively. We had no significant impairments related to these receivables during the three and nine months ended September 30, 2018. Our deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment banking advisory engagements, asset management agreements, valuation and appraisal engagements and subscription services where the performance obligation has not yet been satisfied. Deferred revenue at September 30, 2018 and December 31, 2017 was $3,205 and $3,141, respectively. During the three and nine months ended September 30, 2018, we recognized revenue of $5,423 and $9,889, respectively, that was recorded as deferred revenue at the beginning of the period.

Contract costs include: (1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the revenue is recognized at a point in time and the costs are determined to be recoverable and (2) costs to fulfill auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where the revenue is recognized over time when the performance obligation is satisfied.

At September 30, 2018, capitalized costs to fulfill a contract were $2,387, which is recorded in prepaid expenses and other assets in the condensed consolidated balance sheet. For the three and nine months ended September 30, 2018, we recognized expenses and related capitalized costs to fulfill a contract of $0 and $602, respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the three and nine months ended September 30, 2018.

The Tax Reform Act was enacted on December 22, 2017. The Tax Reform Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, provides an exemption from U.S. federal tax for dividends received from foreign subsidiaries, and creates new taxes on certain foreign sourced earnings. As of the completion of these financial statements and related disclosures, we have not completed our accounting for the tax effects of the Tax Reform Act; however, we have made a reasonable estimate of such effects and recorded a provisional tax expense of $13,052, which is included as a component of income tax expense in the fourth quarter of 2017 and is comprised of (a) $12,954 related to the remeasurement of deferred tax assets and liabilities in the United States and (b) $98 related to the transition tax on foreign earnings. This provisional tax expense incorporates assumptions made based upon the Company’s current interpretation of the Tax Reform Act, and may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Reform Act evolves. In accordance with SEC Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Reform Act no later than the fourth quarter of 2018. Future adjustments made to the provisional effects will be reported as a component of income tax expense in the reporting period in which any such adjustments are determined.

The Company’s effective income tax rate was a provision of 24.9% and a benefit of 80.5% ~~and an expense of 38.9%~~ for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, 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.

As of September 30, ~~2017,~~2018, the Company had federal net operating loss ~~carry forwards~~carryforwards of approximately ~~$65,500~~$63,445 and state net operating loss ~~carry forwards~~carryforwards of ~~$77,200.~~$76,978. The Company’s federal net operating loss ~~carry forwards~~carryforwards will expire in the tax ~~year ending~~years commencing in December 31, ~~2036, the~~2029 through December 31, 2034. The state net operating loss ~~carry forwards~~carryforwards will expire in ~~2034, and~~ the ~~foreign~~ tax ~~credit carry forwards will expire~~years 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 forwards~~carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible ~~carry forward~~carryforward period, and other circumstances. ~~As a result of the common stock offering by the Company that was completed on June 5, 2014, the Company had a more than 50% ownership shift~~The Company’s net operating losses are subject to annual limitations in accordance with Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As of September 30, ~~2017,~~2018, the Company believes that the existing net operating loss ~~that existed as of the more than 50% ownership shift~~carryforwards will be utilized in future tax periods before the loss ~~carry forwards~~carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided ana valuation allowance. The Company believes that it is more likely than not that the Company will not be able to utilize the benefits related to certain state net operating loss and capital loss carryforwards and has provided a full valuation allowance in the amount of $4,694 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, ~~2013~~2014 to ~~2016.~~2017.

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 387,365 common shares in 2018 and 453,365 common shares in 2017 that are held in escrow and subject to forfeiture. The common shares held in escrow includes 387,365 common shares that are subject to forfeiture toindemnify the Company for certain representations and warranties in connection with the acquisition of Wunderlich, and in 2017 excluded66,000 common shares held in escrow issued to the former members of Great American Group, LLC that ~~are~~were subject to forfeiture upon the final settlement of claims for goods held for sale in connection with the transaction with Alternative Asset Management Acquisition Corp. in ~~2009~~2009. In August 2018, the shares held in escrow issued to the former members of Great American Group, LLC were released and ~~387,365 common~~21,233 of the 66,000 shares held in escrow were cancelled to satisfy the resolution of escrow claims.The shares that ~~are subject to forfeiture toindemnify the Company for certain representations and warranties~~remain in ~~connection with the acquisition of Wunderlich. These shares~~escroware subject to forfeiture upon the final settlement of claims as more fully described in the related escrow instructions. Dilutive common shares outstanding includes contingently issuable shares that are currently in escrow and subject to release if the conditions for the final settlement of claims in accordance with the escrow instructions were satisfied at the end of the respective periods.

The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against our company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial position or results of operations.

In 2012, Gladden v. Cumberland Trust, WSI, et al. filed a complaint in Circuit Court, Hamblen County, TN at Morristown, Case No. 12-CV-119. This complaint alleges the improper distribution and misappropriation of trust funds. The plaintiff seeks damages of no less than $3,925, an accounting, and among other things, punitive damages. In October 2017, the Tennessee Supreme Court remanded the case to the Tennessee State Trial Court for determination of which claims are subject to arbitration and which are not. At the present time, the financial impact to the Company, if any, cannot be estimated.

In January 2015, Great American Group, LLC (“Great American Group”) was served with a lawsuit that seeks to assert claims of breach of contract and other matters in connection with auction services provided to a debtor. The proceeding in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”) is pending in the bankruptcy case of the debtor and its affiliates (the “Debtor”). In the lawsuit, a former landlord of the Debtor generally alleges that Great American Group and a joint venture partner were responsible for contamination while performing services in connection with the auction of certain assets of the Debtor and is seeking approximately $10,000 in damages. In 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~~January 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 January~~5,2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, 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 damages and reimbursement of certain costs and expenses. In August 2017, the Court granted Defendant’s Motion to Dismiss on Section 12 claims and found that the plaintiffs had not sufficiently alleged a corrective disclosure prior to August 6, 2015, when an SEC civil action was announced. ~~Defendant’s~~Defendants’ answer was filed on September 25, 2017. Plaintiffs have filed motions for class certification and to remand the case to state court following a positive ruling in an unrelated case by the U.S. Supreme Court. Although MLV is contractually entitled to be indemnified by Miller in connection with this lawsuit, Miller filed for bankruptcy in October 2015 and this likely will decrease or eliminate the value of the indemnity that MLV receives from Miller.

In 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 February 2017, certain former employees filed an arbitration claim with FINRA against ~~Wunderlich Securities, Inc. (“WSI”)~~WSI alleging misrepresentations in the recruitment of claimants to join WSI. Claimants also allege that WSI failed to support their mortgage trading business resulting in the loss of opportunities during their employment with WSI. Claimants are seeking ~~$10 million~~$10,000 in damages. WSI has counterclaimed alleging that claimants ~~mispresented~~misrepresented their process for doing business, particularly their capital needs, resulting in substantial losses to WSI. WSI believes the claims are meritless and intends to vigorously defend the action. ~~A hearing has been scheduled for March 2018.~~

In March 2017, United Online, Inc. received a letter from PeopleConnect, Inc. (formerly, Classmates, Inc.) (“Classmates”) regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of four California counties (“California DAs”). These entities suggest that Classmates may be in violation of California codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices. Classmates asserts that these claims are indemnifiable claims under the purchase agreement between United Online, Inc. and the buyer of Classmates. A tolling agreement with ~~the~~certain California ~~DAs~~District Attorneys 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~~$8,000 plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend the action.

In September 2017, Frontier State Bank (“Frontier”) filed a ~~statement~~lawsuit against Wunderlich Loan Capital Corp., a subsidiary of ~~claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting~~WIC (“WLCC”), seeking rescission of the ~~now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc.~~purchase a residential mortgage in the amount of $1,300. Vanguard Funding, LLC (“~~Quantum”~~Vanguard”)~~. 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~~ sold the ~~other underwriters requesting~~mortgage to WLCC who then assigned its rights to Frontier. Shortly after closing, Frontier was advised that the ~~claim be dismissed on~~mortgage had been previously pledged to another lender. In the ~~grounds that~~lawsuit against WLCC, it is ~~improper under FINRA Rules 12204~~alleged that WLCC did not deliver the mortgage to Frontier with clear title. In September 2018, the matter was settled 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.general releases were exchanged.

During the nine months ended September 30, 2018, the Company granted restricted stock units representing 424,235 shares of common stock with a total fair value of $8,855 to certain employees and directors of the Company under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”). During the year ended December 31, 2017, the Company granted 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 and directors of the Company under the Plan. Share-based compensation expense for such restricted stock units was $1,714 and $1,410 for the three months ended September 30, 2018 and 2017, respectively, and $4,085 and $3,624 for ~~the three and~~ nine months ended September 30, ~~2017, respectively. Share-based compensation expense for such restricted stock units was $834~~2018 and ~~$1,831 for the three and nine months ended September 30, 2016,~~2017, respectively.

The restricted stock units generally vest over a period of one to three years based on continued service. In determining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.

As of September 30, ~~2017,~~2018, the expected remaining unrecognized share-based compensationexpense of ~~$9,271~~$12,661 will be expensed over a weighted average period of 2.2 years.

A summary of equity incentive award activity under the Plan for the nine months ended September 30, ~~2017~~2018 was as follows:

The per-share weighted average grant-date fair value of restricted stock units was ~~$15.91~~$20.87 during the nine months ended September 30, ~~2017.~~2018. There were ~~193,626~~304,599 restricted stock units with a fair value of ~~$1,999~~$4,012 that vested during the nine months ended September 30, ~~2017~~2018 under the Plan.

In connection with the acquisition of FBR on June 1, 2017, the equity awards previously granted or available for issuance under the FBR & Co. 2006 Long-Term Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan. During the nine months ended September 30, ~~2017,~~2018, the Company granted restricted stock units representing ~~784,638~~186,662 shares of common stock with a total grant date fair value of ~~$13,129.~~$3,869 under the FBR Stock Plan. During the year ended December 31, 2017, the Company granted restricted stock units representing 871,317 shares of common stock with a total fair value of $14,577 to certain employees under the FBR Stock Plan. Share-based compensation expense was $1,321 and $4,509 for the three and nine months ended September 30, 2018, respectively. Share-based compensation was $1,383 and $1,687 for the three and nine months ended September 30, 2017, ~~respectively, in connection with the June 13, 2017 restricted stock award. In connection with the restructuring discussed in Note 2(i), the Company recorded share-based compensation expense of $2,391related to the accelerated vesting of restricted stock awards. Of the $2,391, $884 related to former corporate executives of FBR and $1,507 related to employees in the Capital Markets segment.~~respectively. As of September 30, ~~2017,~~2018, the expected remaining unrecognized share-based compensation expense of ~~$11,916~~$9,468 will be expensed over a weighted average period of ~~2.7~~2.3 years.

A summary of equity incentive award activity under the Plan for the ~~period from June 1, 2017, the date of the acquisition of FBR, through~~nine months ended September 30, ~~2017~~2018 was as follows:

The per-share weighted average grant-date fair value of restricted stock units was $20.73 during the nine months ended September 30, 2018. There were 347,265 restricted stock units with a fair value of $5,324 that vested during the nine months ended September 30, 2018 under the FBR Stock Plan.

B. Riley & Co., LLC (“BRC”), ~~FBRCM,~~B. Riley FBR, MLV and ~~Wunderlich Securities, Inc.~~B. Riley Wealth Management (“~~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”). The Company’s broker-dealer subsidiaries are subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the subsidiaries to maintain minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. As such, they are subject to the minimum net capital requirements promulgated by the SEC. As of September 30, ~~2017,~~2018, BRC had net capital of ~~$12,052,~~$350, which was ~~$11,728~~$100 in excess of its required net capital of ~~$324, FBRCM~~$250 (net capital ratio of 3.50 to 1); B. Riley FBR had net capital of ~~$38,976,~~$76,053, which was ~~$37,976~~$74,059 in excess of its required net capital of ~~$1,000,~~$1,994 (net capital ratio of 1.03 to 1); MLV had net capital of ~~$407,~~$657, which was ~~$307~~$557 in excess of its required net capital of $100 (net capital ratio of 1.18 to 1), and ~~WSI~~BRWM had net capital of ~~$3,601,~~$4,128, which was ~~$2,891~~$3,514 in excess of its required net capital of ~~$710.~~$614 (net capital ratio of 1.17 to 1).

At September 30, ~~2017,~~2018, amounts due from related parties include ~~$5,452~~$6,807 from GACP I, L.P. (“GACP I”) and ~~$30~~$1,943 from GACP II, L.P. (“GACP II”) for management fees, incentive fees and other operating expenses and~~$600~~ $1,171 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.~~Global on behalf of GA Global Ptrs. At December 31, ~~2016,~~2017, amounts due from related parties include ~~$2,050~~$5,585 from GACP I, ~~L.P.~~$52 from GACP II, and $52 from CA Global for management fees, incentive fees and other operating ~~expenses and $959~~expenses.

On April 19, 2018, the Company borrowed $51,020 from ~~CA Global.~~GACP II, L.P., a direct lending fund managed by Great American Capital Partners, LLC, a wholly owned subsidiary of the ~~Company, is the general partner~~Company. The note was fully repaid as of ~~GACP I, L.P. CA Global is one~~September 30, 2018. Interest expense was $1,103 (including amortization of ~~the members~~deferred loan fees of ~~Great American Global Partners, LLC (“GA Global Ptrs”). The amounts receivable~~$620) and ~~payable from CA Global are comprised~~$2,721 (including amortization of ~~amounts due to~~deferred loan fees $1,110) for three 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.~~nine months ended September 30, 2018, respectively.

~~In connection with the offering of $28,750 of 2021 Notes as more fully described in~~See Note 8 ~~certain members of management and the Board of Directors of the Company purchased $2,731 or 9.5% of the Senior Notes offered by the Company.~~for additional information.

The Company’s operating segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance internally. The Company has several operating subsidiaries through which it delivers specific services. The Company provides investment banking, corporate finance, securities lending, restructuring, consulting, research, sales and trading and wealth management services to corporate, institutional and high net worth clients. The Company also provides auction and liquidation services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property and valuation and appraisal services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs. As a result of the acquisition of UOL on July 1, 2016, the Company provides consumer services and products over the Internet.

The Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment and Principal Investments - United Online segment. These reportable segments are all distinct businesses, each with a different marketing strategy and management structure.

The following is a summary of certain financial data for each of the Company’s reportable segments:

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Capital Markets reportable segment:
Revenues - Services and fees	$	56,473		$	10,063		$	95,872		$	22,799		$	67,389		$	56,782		$	191,621		$	96,181
Interest income - Securities lending		7,206			—			9,424			—			8,954			6,897			22,836			9,115
Total revenues		63,679			10,063			105,296			22,799			76,343			63,679			214,457			105,296
Selling, general, and administrative expenses		(53,955	)		(8,916	)		(87,753	)		(22,535	)		(57,207	)		(53,955	)		(168,559	)		(87,753	)
Restructuring costs		(3,322	)		—			(7,245	)		—
Restructuring charge														(428	)		(3,322	)		(2,457	)		(7,245	)
Interest expense - Securities lending		(4,950	)		—			(6,515	)		—			(6,425	)		(4,950	)		(16,317	)		(6,515	)
Depreciation and amortization		(1,636	)		(138	)		(2,167	)		(406	)		(1,309	)		(1,636	)		(4,428	)		(2,167	)
Segment (loss) income		(184	)		1,009			1,616			(142	)
Segment income (loss)														10,974			(184	)		22,696			1,616
Auction and Liquidation reportable segment:
Revenues - Services and fees		7,376			17,058			43,179			29,358			2,459			7,376			44,812			43,179
Revenues - Sale of goods		1			6,503			1			6,505			48			1			48			1
Total revenues		7,377			23,561			43,180			35,863			2,507			7,377			44,860			43,180
Direct cost of services		(3,385	)		(4,365	)		(25,482	)		(9,870	)		(838	)		(3,385	)		(12,263	)		(25,482	)
Cost of goods sold		(2	)		(2,223	)		(2	)		(2,225	)		(24	)		(2	)		(41	)		(2	)
Selling, general, and administrative expenses		(1,963	)		(3,976	)		(6,562	)		(6,840	)		(1,289	)		(1,963	)		(7,787	)		(6,562	)
Depreciation and amortization		(5	)		(6	)		(15	)		(22	)		(7	)		(5	)		(23	)		(15	)
Segment income		2,022			12,991			11,119			16,906			349			2,022			24,746			11,119
Valuation and Appraisal reportable segment:
Revenues - Services and fees		9,043			7,696			24,799			22,865			9,404			9,043			27,383			24,799
Direct cost of services		(3,778	)		(3,549	)		(11,031	)		(10,287	)		(4,067	)		(3,778	)		(12,388	)		(11,031	)
Selling, general, and administrative expenses		(2,253	)		(2,136	)		(6,395	)		(6,379	)		(2,379	)		(2,253	)		(7,138	)		(6,395	)
Depreciation and amortization		(43	)		(19	)		(130	)		(72	)		(56	)		(43	)		(159	)		(130	)
Segment income		2,969			1,992			7,243			6,127			2,902			2,969			7,698			7,243
Principal Investments - United Online segment:
Revenues - Services and fees		12,249			15,483			38,504			15,483			11,403			12,249			34,170			38,504
Revenues - Sale of goods		78			163			220			163			24			78			90			220
Total revenues		12,327			15,646			38,724			15,646			11,427			12,327			34,260			38,724
Direct cost of services		(2,975	)		(4,927	)		(9,711	)		(4,927	)		(3,251	)		(2,975	)		(9,082	)		(9,711	)
Cost of goods sold		(122	)		(168	)		(311	)		(168	)		(28	)		(122	)		(101	)		(311	)
Selling, general, and administrative expenses		(2,433	)		(2,139	)		(8,536	)		(2,139	)		(2,348	)		(2,433	)		(6,321	)		(8,536	)
Depreciation and amortization		(1,703	)		(1,802	)		(5,313	)		(1,802	)		(1,682	)		(1,703	)		(5,040	)		(5,313	)
Restructuring costs		(150	)		(3,187	)		(633	)		(3,187	)
Restructuring charge														—			(150	)		—			(633	)
Segment income		4,944			3,423			14,220			3,423			4,118			4,944			13,716			14,220
Consolidated operating income from reportable segments		9,751			19,415			34,198			26,314			18,343			9,751			68,856			34,198

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	)
Corporate and other expenses (including restructuring recovery of $210 during the nine months ended September 30, 2018; and restructuring charge of $1,424 and $3,606 during the three and nine months ended September 30, 2017, respectively.														(5,505	)		(8,395	)		(16,938	)		(19,571	)
Interest income		76			26			358			32			442			76			736			358
Loss on equity investment		(157	)		—			(157	)		—
Income (loss) on equity investments														828			(157	)		5,049			(157	)
Interest expense		(2,510	)		(991	)		(5,195	)		(1,398	)		(9,340	)		(2,510	)		(23,926	)		(5,195	)
(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	)
Income (loss) before income taxes														4,768			(1,235	)		33,777			9,633
(Provision for) benefit from income taxes														(2,046	)		1,357			(8,412	)		7,753
Net income		122			8,374			17,386			9,717			2,722			122			25,365			17,386
Net (loss) income attributable to noncontrolling interests		(246	)		(565	)		(283	)		631			(92	)		(246	)		1,051			(283	)
Net income attributable to B. Riley Financial, Inc.	$	368		$	8,939		$	17,669		$	9,086		$	2,814		$	368		$	24,314		$	17,669

The following table presents revenues by geographical area:

									Three Months Ended				Nine Months Ended
	Three Months Ended September 30,				Nine Months Ended September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenues:
Revenues - Services and fees:
North America	$	85,128	$	49,882	$	200,500	$	89,790	$	90,649	$	85,437	$	296,718	$	200,809
Australia		—		—		940		—		—		—		—		940
Europe		13		418		914		715		6		13		1,268		914
Total Revenues - Services and fees	$	85,141	$	50,300	$	202,354	$	90,505	$	90,655	$	85,450	$	297,986	$	202,663

Revenues - Sale of goods
North America	$	79	$	163	$	221	$	165	$	72	$	79	$	138	$	221
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	$	—	$	8,954	$	6,897	$	22,836	$	9,115

Total Revenues:
North America	$	92,406	$	50,045	$	210,138	$	89,955	$	99,675	$	92,413	$	319,692	$	210,145
Australia		—		—		940		—		—		—		—		940
Europe		20		6,921		921		7,218		6		13		1,268		914
Total Revenues	$	92,426	$	56,966	$	211,999	$	97,173	$	99,681	$	92,426	$	320,960	$	211,999

The following table presents long-lived assets, which consists of property and equipment and other assets, by geographical area:

	As of		As of
	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
Long-lived Assets - Property and Equipment, net:			��
North America	$	13,105	$	5,785	$	11,143	$	11,977
Australia		—		—		—		—
Europe		—		—		—		—
Total	$	13,105	$	5,785	$	11,143	$	11,977

Segment assets are not reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

~~NOTE 16— SUBSEQUENT EVENTS~~38

On November 8, 2017, the Company’s Board of Directors approved a regular quarterly dividend of $0.08 per share and a special dividend of $0.04 per share, which will be paid on or about November 30, 2017 to stockholders of record on November 22, 2017.

~~Acquisition of magicJack VocalTec Ltd.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” “seek,” “likely,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report to conform such statements to actual results or to changes in our expectations.

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the caption “Risk Factors.”

Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; the short term nature of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities 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 possibility that our proposed acquisition of magicJack VocalTee Ltd. (“magicJack”) does not close when expected or at all; our ability to promptly and effectively integrate our business with that of magicJack if such transaction closes; the reaction to ~~our recently completed~~the magicJack acquisition of our and magicJack’s customers, employees and counterparties; and the diversion of management time on acquisition-related issues. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Except as otherwise required by the context, references in this 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

B. Riley Financial, Inc. (NASDAQ: RILY) and its subsidiaries ~~(NASDAQ: RILY)~~ provide collaborative financial services and solutions through several operating subsidiaries, including:

●

B. Riley ~~& Co., LLC~~FBR, Inc. (“~~BRC”~~B. Riley FBR”)~~, FBR Capital Markets & Co. and Wunderlich Securities, Inc., are mid-sized,~~ is a leading, full service investment ~~banks~~bank providing financial advisory, corporate finance, research, securities lending and sales & trading services to corporate, institutional and high net worth individual clients. B. Riley FBR was formed in November 2017 through the merger of B. Riley & Co, LLC (“BRC”) and FBR Capital Markets & Co.; the name of the combined broker dealer was subsequently changed to B. Riley FBR, Inc. FBR Capital Markets & Co. was acquired by B. Riley Financial in June 2017.

●

Wunderlich ~~also~~Securities, Inc., acquired by B. Riley Financial in July 2017, provides comprehensive wealth management and brokerage services to ~~high net worth~~ individuals and ~~families;~~families, corporations and non-profit organizations, including qualified retirement plans, trusts, foundations and endowments. In June 2018, Wunderlich Securities, Inc. changed its name to B. Riley Wealth Management, Inc.

●

B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registered investment advisor, which includes:

○

B. Riley Asset Management, an advisor to certain private funds and to institutional and high net worth investors;

○

B. Riley Wealth Management, ~~(formerly MK Capital Advisors),~~ a multi-family office practice and wealth management firm focused on the needs of ultra-high net worth individuals and families; and

○

Great American Capital Partners, LLC (“GACP”), the general partner of atwo private ~~fund,~~funds, GACP I, L.P. aand GACP II, L.P., both direct lending ~~fund~~funds that ~~provides~~provide senior secured loans and second lien secured loan facilities to middle market public and private U.S. ~~companies;~~companies.

●

GlassRatner Advisory & Capital Group LLC (“GlassRatner”), a specialty financial advisory services firm we acquired on July 31, 2018, provides consulting services to shareholders, creditors and companies, including due diligence, fraud investigations, corporate litigation support, crisis management and bankruptcy services. The addition of GlassRatner, strengthens B. Riley’s diverse platform and compliments the restructuring services provided by B. Riley FBR.

●

Great American Group, LLC, a leading provider of asset disposition and auction solutions to a wide range of retail and industrial ~~clients; and~~clients.

●

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.

We also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics. On July 1, 2016, we acquired United Online, Inc. (“UOL”) as part of our principal investment strategy.

●

UOL is a communications company that offerssubscription services and products, consisting of Internet access services and devices under the NetZero and Juno brands primarily sold in the United States.

We are headquartered in Los Angeles with offices in major ~~financial markets~~cities throughout the United States including New York, Chicago, Boston, Memphis, and ~~Europe.~~Metro Washington D.C.

For financial reporting purposes we classify our businesses into four segments: (i) ~~capital markets,~~Capital Markets; (ii) ~~auction~~Auction and ~~liquidation,~~Liquidation; (iii) ~~valuation~~Valuation and ~~appraisal;~~Appraisal; and ~~(vi) principal investments~~(iv) Principal Investments – United Online.

Capital Markets Segment. Our ~~capital markets~~Capital Markets segment provides a full array of investment banking, corporate finance, consulting, research, securities lending, wealth management, sales and trading services to corporate, institutional and high net worth clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our ~~capital markets~~Capital Markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors.

Auction and Liquidation Segment. Our ~~auction~~Auction and ~~liquidation~~Liquidation segment utilizes our significant industry experience, a scalable network of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North American as well as parts of Europe, Asia and Australia. Our ~~auction~~Auction and ~~liquidation~~Liquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions division operates through limited liability companies that are controlled by us.

Valuation and Appraisal Segment. Our ~~valuation~~Valuation and ~~appraisal~~Appraisal segment provides valuation and appraisal services to financial institutions, lenders, private equity firms and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our ~~valuation~~Valuation and ~~appraisal~~Appraisal segment operates through limited liability companies that are majority owned by us.

Principal Investments – United Online Segment. Our ~~principal investments~~Principal Investments - United Online segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, a company that offers consumer subscription services consisting of Internet access under the NetZero and Juno brands. Internet access includes paid dial-up, mobile broadband and DSL subscription services. We also offer email, Internet security, web hosting services, and other services.

Recent Developments

On ~~February~~September 6, 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley FBR, as representative of several underwriters named in the Underwriting Agreement, pursuant to which we agreed to sell to the underwriters up to an aggregate principal amount of $87,000,000 of the September 2023 Notes, plus an additional $13,050,000 aggregate principal amount to cover underwriter overallotments. As of September 30, 2018, the Company sold $100,050,000 of the September 2023 Notes. The September 2023 Notes were issued pursuant to the Indenture, dated as of November 2, 2016, as supplemented by a First Supplemental Indenture, dated as of November 2, 2016, a Second Supplemental Indenture, dated as of May 31, 2017, a Third Supplemental Indenture, dated as of December 13, 2017, a Fourth Supplemental Indenture, dated as of May 17, ~~2017,~~2018, and a Fifth Supplemental Indenture, dated as of September 11, 2018 (as supplemented, the “Indenture”), each between the Company and U.S. Bank, National Association, as trustee. The September 2023 Notes sold under the Underwriting Agreement were issued pursuant to a prospectus dated April 6, 2018, as supplemented by a prospectus supplement dated September 7, 2018, each filed with the SEC pursuant to the Company’s effective Registration Statement on Form S-3 (File No. 333-223789), which was declared effective by the SEC on April 6, 2018.

On June 17, 2018, we entered into various agreements pursuant to which we agreed to provide financial support to Vintage Capital Management, LLC (“Vintage Capital”) in an indirect acquisition of Rent-A-Center, Inc. (“Rent-A-Center”). Specifically, Vintage Capital, through its affiliates Vintage Rodeo Parent, LLC, a Delaware limited liability company (the “Parent”), and Vintage Rodeo Acquisition, Inc., a Delaware corporation and a wholly-owned subsidiary of the Parent (the “Merger Sub”), entered into an Agreement and Plan of Merger with Rent-A-Center, dated as of June 17, 2018 (the ~~“FBR Merger~~“Merger Agreement”~~) with FBR & Co. (“FBR”~~), pursuant to which ~~FBR was to~~the Merger Sub will merge with and into Rent-A-Center, whereby Rent-A-Center will be the ~~Company (or~~surviving corporation and become a wholly-owned subsidiary of the ~~Company)~~Parent. Vintage Capital agreed to pay $15.00 per share in cash for each common share of Rent-A-Center, which including the assumption of net debt, represents a total transaction value of approximately $1.365 billion. We, along with Vintage Capital, our subsidiary GACP, and affiliates of Guggenheim Corporate Funding, LLC (“Guggenheim”), entered into a Debt Commitment Letter dated June 17, 2018, pursuant to which we agreed to provide an aggregate principal amount of approximately $1.1 billion in debt to finance the transaction. We also entered into an Equity Commitment Letter, dated as of June 17, 2018, with Vintage Rodeo, L.P. (the “Partnership”) and the Parent, pursuant to which we agreed to contribute equity in an amount of up to $429 million (the “Equity Commitment”). Additionally, we entered into a corresponding Subscription Agreement and Side Letter Agreement, each dated as of June 17, 2018, pursuant to which the Equity Commitment will be allocated to cash subscriptions of limited partnership interest for up to (i) $315 million of common limited partnership interests of the Partnership, and (ii) $114 million of 13% PIK preferred limited partnership interests of the Partnership. Further, we entered into a Limited Guarantee on June 17, 2018, in favor of Rent-A-Center, pursuant to which we, together with Vintage RTO, L.P., agreed to guarantee, jointly and severally, the due and punctual payment, performance and discharge when required by the Parent or the Merger Sub to Rent-A-Center of all of the liabilities and obligations of the Parent or Merger Sub under the Merger Agreement. We are also parties to a Mutual Indemnity/Contribution Agreement, dated as of June 17, 2018, pursuant to which (i) we agreed to indemnify and hold harmless Vintage RTO, L.P. and Samjor Family, LP (collectively, the “Vintage Guarantors”) from damages and liabilities arising out of obligations under the Limited Guarantee caused by a default in funding by us or our affiliates, and (ii) the Vintage Guarantors agreed, jointly and severally, to indemnify and hold harmless us and our affiliates from damages and liabilities arising out of all other obligations under the Limited Guarantee.

On June 5, 2018, the Company 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 $50.0 million, including notes offered pursuant to the prior prospectus supplement, of the 2021 Notes, the 7.50% 2027 Notes, the 7.25% 2027 Notes and the May 2023 Notes. On December 19, 2017, the Company previously entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc., pursuant to which the Company may offer to sell, from time to time, the 2021 Notes, the 7.50% 2027 Notes and the 7.25% 2027 Notes. As of June 5, 2018, the Company sold Notes having an aggregate offering price of $6.3 million under the prior prospectus supplement dated April 25, 2018, leaving up to $43.7 million available for offer and sale pursuant to the June 5, 2018 prospectus. The Notes sold pursuant to the Sales Agreement on or following June 5, 2018 will be issued pursuant to a prospectus dated April 6, 2018, as supplemented by a prospectus supplement dated June 5, 2018, in each case filed with the SEC pursuant to the Company’s effective Registration Statement on Form S-3 (File No. 333-223789), which was declared effective by the SEC on April 6, 2018. As of September 30, 2018, the Company ~~(or~~sold Notes pursuant to the June 5, 2018 prospectus having an aggregate offering price of $36.9 million (inclusive of the 6.3 million sold under the April 25, 2018 prospectus supplement), leaving up to $13.1 million available for offer and sale pursuant to the June 5, 2018 prospectus. The Notes will be issued pursuant to the Indenture. Future sales of the 2021 Notes, 7.50% 2027 Notes, 7.25% 2027 Notes and the May 2023 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.

On April 18, 2018, the United States Bankruptcy Court for the District of Delaware issued an order (the “Order”) approving the sale of certain rights to the assets of The Bon-Ton Stores, Inc. and its ~~subsidiary)~~affiliates (the “Debtors”) and granted certain other relief to GA Retail, Inc. (“GA”), an indirect wholly owned subsidiary of the Company, Tiger Capital Group, LLC (“Tiger”), and the indenture trustee (the “Indenture Trustee”; together with GA and Tiger, the “Joint Venture”) under the Second Lien Indenture (as defined in the Order). Among other things, the Order approved the Joint Venture’s right to act as the Debtors’ exclusive agent to conduct the sale of substantially all of the Debtors’ assets on the terms and conditions set forth in that certain agency agreement dated April 18, 2018 by and among the Debtors and the Joint Venture (the “Agency Agreement” and the related transactions, the “Bon-Ton Transactions”).

Pursuant to the Agency Agreement, the Joint Venture agreed to pay (a) a cash purchase price of approximately $560.0 million (the “Cash Purchase Price”), which includes all amounts due and owing by the Debtors to the lenders under that certain debtor in possession financing facility, the cash amounts used to collateralize certain letters of credit and an amount to fund the payment of certain fees and expenses incurred by the Debtors’ professionals, (b) a credit bid of $125.0 million, and (c) $93.8 million to pay for certain administrative expenses of the Debtors as reflected in an agreed upon wind down budget. In exchange for such payments and the payment of certain expenses, the Joint Venture received the right to receive all proceeds (cash or otherwise) of any of the Debtors’ Assets except as otherwise set forth in the Agency Agreement (the “Proceeds”). The sale of inventory and certain of the assets of Bon-Ton through a going-out-of-business sale was completed on August 31, 2018. The Joint Venture continues to wind down the business activities of Bon-Ton and sale of certain real property, among other items, in accordance with the Agency Agreement.

To fund GA’s portion of the Cash Purchase Price, GA borrowed (i) $300.0 million from Wells Fargo Bank, N.A. (“Wells Fargo Bank”) pursuant to an amended and restated consent dated April 19, 2018 to that certain credit agreement among GA, its affiliates and Wells Fargo Bank, as amended (the “Credit Agreement”), and (ii) approximately $51.0 million from GACP II, L.P., a direct lending fund managed by GACP, an affiliate of GA and a wholly owned subsidiary of the Company. Each of these loans is to be repaid from the Proceeds after the payment of certain expenses incurred by the Joint Venture in connection with the sale. In connection with the borrowing from Wells Fargo Bank, the maximum borrowing limit under the Credit Agreement was increased solely for purposes of the Bon-Ton Transactions from $200.0 million to $300.0 million and reverted back to $200.0 million upon repayment of the amounts borrowed in connection with the Bon-Ton Transactions. The amounts borrowed in connection with the Bon-Ton Transaction were fully repaid as of September 30, 2018.

On March 15, 2018, the Company was a party to a Secondary Stock Purchase Agreement with ACP BD Investments, LLC (“ACP”) which required the Company to purchase 950,000 shares of the Company’s common stock at $18.25 per share or approximately $17.3 million in cash. The stock was repurchased from ACP on April 2, 2018 and retired by the Company.

On January 12, 2018, the Company converted a loan receivable from bebe stores, inc. (“bebe”) in the amount of $16.9 million in principal and accrued interest into 2,819,528 shares of common stock of bebe, representing a conversion price at $6.00 per share. On January 12, 2018, the Company also purchased 500,000 shares of bebe common stock at $6.00 per share of which 250,000 shares were newly issued common stock by bebe and 250,000 shares were purchased from the majority shareholder of bebe. In total, the Company acquired 3,319,528 shares of bebe common stock. In connection with such transactions, bebe fixed the size of its board of directors at five members of which two employees of the Company were newly appointed to the bebe board. At September 30, 2018, the Company had an ownership of approximately 30.1% of bebe’s outstanding common shares.

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 ~~(the “Merger”). On May 1, 2017, the Company~~ and ~~FBR filed a registration statement for the planned Merger. The shareholders~~as an indirect subsidiary 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.~~Company. Subject to the terms and conditions of the ~~FBR~~Agreement and Plan of Merger, ~~Agreement,~~ each outstanding share of ~~FBR common stock (“FBR Common Stock”) was~~magicJack will be converted into the right to receive ~~0.671~~$8.71 in cash without interest, representingapproximately $143.5 million in aggregate merger consideration. The closing of ~~a share of our common stock. The total acquisition consideration for FBR was estimated to be $73.5 million, which includes~~ the ~~issuance of~~approximately 4,831,633 shares of our common stock with an estimated fair value of $71.0 million (based on the closing price of our common stock on June 1, 2017) and restricted stock awards with a fair value of $2.5 million attributabletransaction is subject to the ~~service period prior to June 1, 2017. We believe that the acquisition~~receipt 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 satisfiedcertain regulatory approvals and the ~~acquisition was completed on July 3, 2017. We also entered into a registration rights agreement with certain shareholders~~satisfaction of Wunderlich (the “Registration Rights Agreement”) on July 3, 2017. The Registration Rights Agreement provides the Wunderlich shareholder signatories with the right to notice of and, subject to certain conditions, the right to register shares of our common stock in certain future registered offerings of shares of our common stock. In connection with the acquisition Wunderlich on July 3, 2017, the total consideration of $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.

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~~other closing conditions. It is anticipated that 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 millionmagicJack will close in the ~~second and third quarters~~fourth quarter 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.2018.

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.~~amounts of assets and liabilities and disclosures of contingent assets and liabilities. 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~~2017. On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 –Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on our consolidated financial statements. The new revenue standard was applied prospectively in our condensed consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the ~~policies noted above as~~accounting standards in effect during those historical periods. See Note 9 for additional information on the adoption of this ~~quarterly report on Form 10-Q for the period ended September 30, 2017.~~standard.

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, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

Condensed Consolidated Statements of ~~Operations~~Income

(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						Three Months Ended
	September 30, 2018						September 30, 2017
	Amount			%			Amount			%
Revenues:
Services and fees	$	90,655			90.9	%	$	85,450			92.5	%
Interest income - Securities lending		8,954			9.0	%		6,897			7.5	%
Sale of goods		72			0.1	%		79			0.1	%
Total revenues		99,681			100.0	%		92,426			100.0	%

Operating expenses:
Direct cost of services		8,156			8.2	%		10,138			11.0	%
Cost of goods sold		52			0.1	%		124			0.1	%
Selling, general and administrative expenses		71,782			72.0	%		70,962			76.8	%
Restructuring charge		428			0.4	%		4,896			5.3	%
Interest expense - Securities lending		6,425			6.4	%		4,950			5.4	%
Total operating expenses		86,843			87.1	%		91,070			98.5	%
Operating income		12,838			12.9	%		1,356			1.5	%
Other income (expense):
Interest income		442			0.4	%		76			0.1	%
Income (loss) from equity investment		828			0.8	%		(157	)		(0.2	%)
Interest expense		(9,340	)		(9.4	%)		(2,510	)		(2.7	%)
Income (loss) before income taxes		4,768			4.8	%		(1,235	)		(1.3	%)
(Provision for) benefit from income taxes		(2,046	)		(2.1	%)		1,357			1.5	%
Net income		2,722			2.7	%		122			0.1	%
Net loss attributable to noncontrolling interests		(92	)		(0.1	%)		(246	)		(0.3	%)
Net income attributable to B. Riley Financial, Inc.	$	2,814			2.8	%	$	368			0.4	%

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					Three Months Ended
	September 30, 2018					September 30, 2017					Change
	Amount		%			Amount		%			Amount			%
Revenues - Services and fees:
Capital Markets segment	$	67,389		67.6	%	$	56,782		61.4	%	$	10,607			18.7	%
Auction and Liquidation segment		2,459		2.5	%		7,376		8.0	%		(4,917	)		-66.7	%
Valuation and Appraisal segment		9,404		9.4	%		9,043		9.8	%		361			4.0	%
Principal Investments - United Online segment		11,403		11.4	%		12,249		13.3	%		(846	)		-6.9	%
Subtotal		90,655		90.9	%		85,450		92.4	%		5,205			6.1	%

Revenues - Sale of goods:
Auction and Liquidation segment		48		0.0	%		1		0.0	%		47			n/m
Principal Investments - United Online segment		24		0.0	%		78		0.1	%		(54	)		-69.2	%
Subtotal		72		0.1	%		79		0.1	%		(7	)		-8.9	%

Interest income - Securities lending:
Capital Markets segment		8,954		9.0	%		6,897		7.5	%		2,057			29.8	%
Total revenues	$	99,681		100.0	%	$	92,426		100.0	%	$	7,255			7.8	%

n/m - Not applicable or not meaningful.

Total revenues increased ~~$35.5~~$7.3 million to $99.7 million during the three months ended September 30, 2018 from $92.4 million during the three months ended September 30, ~~2017 from $57.0 million during the three months ended September 30, 2016.~~2017. The increase in revenues during the three months ended September 30, ~~2017~~2018 was primarily due to an increase in revenues from services and fees of ~~$34.8~~$5.2 million and an increase in revenues from interest income – securities lending of ~~$7.2 million, offset by a decrease in revenues from the sale of goods of $6.5~~$2.1 million. The increase in revenues from services and fees of ~~$34.8~~$5.2 million in ~~2017~~2018 was primarily due to an increase in revenues of ~~$46.4~~$10.6 million in the ~~capital markets~~Capital Markets segment and ~~$1.3~~$0.4 million in the ~~valuation~~Valuation and ~~appraisal~~Liquidation segment, offset by a decrease in revenues of ~~$9.7~~$4.9 million in the ~~auction~~Auction and ~~liquidation~~Liquidation segment and ~~a decrease of $3.2~~$0.8 million in the ~~principal investments~~Principal Investments – United Online 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 markets~~Capital Markets segment increased ~~$46.4~~$10.6 million, to ~~$56.5~~$67.4 million during the three months ended September 30, ~~2017~~2018 from ~~$10.1~~$56.8 million during the three months ended September 30, ~~2016.~~2017. The increase in revenues was primarily due to an increase in ~~revenues~~revenue of ~~$16.8~~$8.7 million from investment banking fees, ~~$12.4~~an increase in revenue of $5.1 million from consulting fees as a result of the acquisition of GlassRatner on July 31, 2018, an increase of $1.0 million from commissions and fees revenue, and ~~other income primarily earned from research, sales and trading, $16.0~~an increase in revenue of $0.6 million from wealth management services, ~~and $1.2~~offset by a decrease in revenues of $4.7 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~~a decrease of $0.1 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.other revenues.

Revenues from services and fees in the ~~auction~~Valuation and ~~liquidation solutions~~Appraisal segment increased $0.4 million, to $9.4 million during the three months ended September 30, 2018 from $9.0 million during the three months ended September 30, 2017. The increase in revenues was primarily due to $0.3 million increase related to appraisal engagements where we perform valuations of intellectual property and business valuations, and $0.1 million increase related to appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors.

Revenues from services and fees in the Auction and Liquidation segment decreased ~~$9.7~~$4.9 million to $2.5 million during the three months ended September 30, 2018 from $7.4 million during the three months ended September 30, ~~2017 from $17.1 million during the three months ended September 30, 2016.~~2017. The decrease in revenues of ~~$9.7~~$4.9 million was primarily due to a decrease in revenues of ~~$10.1~~$4.5 million from services and fees from retail liquidation engagements ~~offset by an increase~~and a decrease 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~~Principal Investments - United Online segment ~~increased $1.3~~decreased $0.8 million ~~or 17.5%,~~ to ~~$9.0~~$11.4 million during the three months ended September 30, ~~2017~~2018 from ~~$7.7 million during the three months ended September 30, 2016. The increase in revenues was primarily due to increases of (a) $0.9 million related to appraisal engagements where we perform valuationsfor the monitoring of collateral for financial institutions, lenders, and private equity investorsand (b) $0.4 million related to appraisal engagements where we perform valuations of intellectual property and business valuations.~~

~~Revenues from services and fees in the principal investments - United Online segment decreased $3.2 million to~~ $12.2 million during the three months ended September 30, ~~2017 from $15.5 million during the three months ended September 30, 2016.~~2017. The decrease in revenues was primarily due to lower paid subscribers to our services and lower advertising impressions as a result of a decline in active accounts. Services revenues primarily from customer paid accounts related to our Internet access and related subscription services decreased ~~$1.9~~approximately $0.1 million to $9.2 million during the three months ended September 30, 2018 from $9.3 million during the three months ended September 30, ~~2017 from $11.2 million during the three months ended September 30, 2016.~~2017. Advertising revenues from Internet display advertising and search related to our email and Internet access services decreased ~~$1.4~~$0.6 million to $2.3 million during the three months ended September 30, 2018 from $2.9 million during the three months ended September 30, ~~2017 from $4.3 million during the three months ended September 30, 2016.~~2017. Over the past several years revenues from paid subscription services have declined year over year as a result of a decline in the number of paid subscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL. Management expects revenues in the ~~principal investments~~Principal Investments - United Online segment to continue to decline year over year.

��

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, ~~2017~~2018 and ~~2016~~2017 are as follows:

	Three Months Ended September 30, 2017											Three Months Ended September 30, 2016											Three Months Ended September 30, 2018											Three Months Ended September 30, 2017
							Principal											Principal											Principal											Principal
	Auction and			Valuation and			Investments -					Auction and			Valuation and			Investments -					Auction and			Valuation and			Investments -					Auction and			Valuation and			Investments -
	Liquidation			Appraisal			United Online					Liquidation			Appraisal			United Online					Liquidation			Appraisal			United Online					Liquidation			Appraisal			United Online
	Segment			Segment			Segment			Total		Segment			Segment			Segment			Total		Segment			Segment			Segment			Total		Segment			Segment			Segment			Total
Revenues - Services and fees	$	7,376		$	9,043		$	12,249				$	17,058		$	7,696		$	15,483				$	2,459		$	9,404		$	11,403				$	7,376		$	9,043		$	12,249
Direct cost of services		3,385			3,778			2,975		$	10,138		4,365			3,549			4,927		$	12,841		838			4,067			3,251		$	8,156		3,385			3,778			2,975		$	10,138
Gross margin on services and fees	$	3,991		$	5,265		$	9,274				$	12,693		$	4,147		$	10,556				$	1,621		$	5,337		$	8,152				$	3,991		$	5,265		$	9,274
Gross margin percentage		54.1	%		58.2	%		75.7	%				74.4	%		53.9	%		68.2	%				65.9	%		56.8	%		71.5	%				54.1	%		58.2	%		75.7	%

Total direct costs of services decreased ~~$2.7~~approximately $1.9 million, to $8.2 million during the three months ended September 30, 2018 from $10.1 million during the three months ended September 30, 2017. Direct costs of services decreased by $2.5 million in the Auction and Liquidation segment, offset by an increase of $0.3 million in the Principal Investments - United Online segment and an increase of $0.3 million in the Valuation and Appraisal segment. The decrease in direct costs in the Auction and Liquidation segment was primarily due to mix of engagement types performed during the three months ended September 30, 2018 as compared to the same 2017 period. The increase in direct costs in the Principal Investments – United Online was primarily due to an increase in telecommunication usage associated with the telecommunication resale business. 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 2018 as compared to the same period in 2017.

Gross margin in the Auction and Liquidation segment for services and fees increased 11.8% to 65.9% of revenues during the three months ended September 30, 2018, as compared to 54.1% of revenues during the three months ended September 30, 2017. The increase in margin in the Auction and Liquidation segment is due to the mix of engagement types between guarantee and commission and fees engagements performed during the three months ended September 30, 2018 as compared to the same 2017 period.

Gross margin in the Valuation and Appraisal segment for services and fees decreased 1.4% to 56.8% of revenues during the three months ended September 30, 2018, from ~~$12.8~~58.2% of revenues during the three months ended September 30, 2017. The decrease in margin in the Valuation and Appraisal segment is primarily due to impact of the increase in revenues in 2018 as compared to the same 2017 period.

Gross margin in the Principal Investments – United Online segment for services and fees decreased 4.2% to 71.5% of revenues during the three months ended September 30, 2018, from 75.7% of revenues during the three months ended September 30, 2017. The decrease in margin in the Principal Investments – United Online segment is primarily due to the mix of revenues of services and fees.

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the three months ended September 30, 2018 and 2017 were comprised of the following:

Selling, General and Administrative Expenses

	Three Months Ended					Three Months Ended
	September 30, 2018					September 30, 2017					Change
	Amount		%			Amount		%			Amount			%
Capital Markets segment	$	58,516		81.5	%	$	55,591		78.4	%	$	2,925			5.3	%
Auction and Liquidation segment		1,296		1.8	%		1,968		2.8	%		(672	)		(34.1	%)
Valuation and Appraisal segment		2,435		3.4	%		2,296		3.2	%		139			6.1	%
Principal Investments - United Online segment		4,030		5.6	%		4,136		5.8	%		(106	)		(2.6	%)
Corporate and Other segment		5,505		7.7	%		6,971		9.8	%		(1,466	)		(21.0	%)
Total selling, general & administrative expenses	$	71,782		100.0	%	$	70,962		100.0	%	$	820			1.2	%

Total selling, general and administrative expenses was $71.8 million during the three months ended September 30, ~~2016.~~2018 compared to $71.0 million for the three months ended September 30, 2017. The increase of $0.8 million was due to an increase in selling, general and administrative expenses of $2.9 million in the Capital Markets segment and $0.1 million in the Valuation and Appraisal segment, offset by decreases in selling, general and administrative expenses of $1.5 million in the Corporate and Other segment, $0.7 million in the Auction and Liquidation segment and $0.1 million in the Principal Investments - United Online segment.

Capital Markets

Selling, general and administrative expenses in the Capital Markets segment increased by $2.9 million to $58.5 million during the three months ended September 30, 2018 from $55.6 million during the three months ended September 30, 2017. The increase in expenses was primarily due to an increase of $3.8 million as a result of the acquisition of GlassRatner on July 31, 2018, an increase of $0.3 million in rent and occupancy expense, and an increase of $0.5 million in payroll and related expenses, offset by a decrease of $0.5 million in legal and professional fees and a decrease of $1.1 million in market data and other communication expenses. Of the $3.7 million increase as a result of the acquisition of GlassRatner, $2.7 million was payroll and related expenses.

Auction and Liquidation

Selling, general and administrative expenses in the Auction and Liquidation segment decreased $0.7 million to $1.3 million during the three months ended September 30, 2018 from $2.0 million for the three months ended September 30, 2017. The decrease in expenses of $0.7 million was primarily due to a decrease of $0.5 million in transaction losses from foreign currency translation adjustment and a decrease of $0.2 million in bad debt expense.

Valuation and Appraisal

Selling, general and administrative expenses in the Valuation and Appraisal segment increased $0.1 million to $2.4 million during the three months ended September 30, 2018 from $2.3 million for the three months ended September 30, 2017.

Principal Investments - United Online

Selling, general and administrative expenses in the Principal Investments - United Online segment decreased $0.1 million to $4.0 million during the three months ended September 30, 2018 from $4.1 million during the three months ended September 30, 2017.

Corporate and Other

Selling, general and administrative expenses in the Corporate and Other segment decreased $1.5 million to $5.5 million during the three months ended September 30, 2018 from $7.0 million for the three months ended September 30, 2017. The decrease is primarily due to a fair value adjustment on mandatorily redeemable noncontrolling interest of $2.8 million in the three months ended September 30, 2017 and a decrease of $0.5 million of other general administrative expenses, offset by an increase of $0.8 million in payroll and related incentive compensation due to increase profitability during the three months ended September 30, 2018 compared to the same period in 2017 and an increase of $1.0 million in legal and professional fees.

Restructuring Charge.During the three months ended September 30, 2018, we incurred restructuring charge of $0.4 million compared to restructuring charge of $4.9 million during the same period in 2017. Restructuring charge of $0.4 million during the 2018 period was primarily comprised of lease loss accruals for the consolidation of office space and severance expense related to operations in the Capital Markets segment. Restructuring charge of $4.9 million during the three months ended September 30, 2017 was related to the implementation of costs savings measures taking into account the planned synergies as a result of the acquisitions of FBR and Wunderlich.

Other Income (Expense). Other income included interest income of $0.4 million and less than $0.1 million during the three months ended September 30, 2018 and 2017, respectively. Interest expense was $9.3 million during the three months ended September 30, 2018 as compared to $2.5 million during the three months ended September 30, 2017. The increase in interest expense of $6.8 million during the three months ended September 30, 2018 compared to the same period in 2017 was primarily due to an increase in interest expense of $5.2 million from the issuances of senior notes due in 2021, 2023 and 2027; and approximately $1.8 million interest expense incurred during the three month ended September 30, 2018 related to borrowings in connection with retail liquidation engagements, offset by a decrease in other interest expense of $0.2 million. Other income in the three months ended September 30, 2018 included $0.8 million income on equity investments compared to a loss on equity investment of $0.2 million during the same period in 2017.

Income (Loss) Before Income Taxes. Income before income taxes increased $6.0 million to income before income taxes of $4.8 million during the three months ended September 30, 2018 from a loss before income taxes of $1.2 million during the three months ended September 30, 2017. The increase in income before income taxes of $6.0 million was due to an increase in revenues of $7.3 million, a decrease in operating expenses of $4.2 million, an increase in income from equity investments of $1.0 million, an increase in interest income of $0.3 million, offset by an increase in interest expense of $6.8 million.

(Provision for) Benefit from Income Taxes. Provision for income taxes was $2.0 million during the three months ended September 30, 2018 compared to a benefit from income taxes of $1.4 million during the three months ended September 30, 2017. The effective income tax rate was a provision of 42.9% for the three months ended September 30, 2018 as compared to a benefit of 109.9% for the three months ended September 30, 2017.

Net Income (Loss) Attributable to Noncontrolling Interest. Net income (loss) attributable to noncontrolling interests represents the proportionate share of net income (loss) generated by Great American Global Partners, LLC, in which we have a 50% membership interest that we do not own. The net loss attributable to noncontrolling interests was $0.1 million during the three months ended September 30, 2018 compared to net loss attributable to noncontrolling interests of $0.2 million during the three months ended September 30, 2017.

Net Income Attributable to the Company. Net income attributable to the Company for the three months ended September 30, 2018 was $2.8 million, an increase of approximately $2.4 million, from net income attributable to the Company of $0.4 million for the three months ended September 30, 2017. The increase in net income attributable to the Company during the three months ended September 30, 2018 of approximately $2.4 million was primarily due to an increase in total revenues of $7.3 million, a decrease in operating expenses of $4.2 million and an increase in income from equity investments of $1.0 million, offset by an increase in interest expense of $6.8 million and an increase in provision for income taxes of $3.4 million.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Condensed Consolidated Statements of Income

(Dollars in thousands)

	Nine Months Ended						Nine Months Ended
	September 30, 2018						September 30, 2017
	Amount			%			Amount			%
Revenues:
Services and fees	$	297,986			92.8	%	$	202,663			95.6	%
Interest income - Securities lending		22,836			7.1	%		9,115			4.3	%
Sale of goods		138			0.0	%		221			0.1	%
Total revenues		320,960			100.0	%		211,999			100.0	%

Operating expenses:
Direct cost of services		33,733			10.5	%		46,224			21.8	%
Cost of goods sold		142			0.0	%		313			0.1	%
Selling, general and administrative expenses		216,603			67.5	%		132,836			62.7	%
Restructuring charge		2,247			0.7	%		11,484			5.4	%
Interest expense - Securities lending		16,317			5.1	%		6,515			3.1	%
Total operating expenses		269,042			83.8	%		197,372			93.1	%
Operating income		51,918			16.2	%		14,627			6.9	%
Other income (expense):
Interest income		736			0.2	%		358			0.2	%
Income (loss) from equity investment		5,049			1.6	%		(157	)		(0.1	%)
Interest expense		(23,926	)		(7.5	%)		(5,195	)		(2.5	%)
Income before income taxes		33,777			10.5	%		9,633			4.5	%
(Provision for) benefit from income taxes		(8,412	)		(2.6	%)		7,753			3.7	%
Net income		25,365			7.9	%		17,386			8.2	%
Net income (loss) attributable to noncontrolling interests		1,051			0.3	%		(283	)		(0.1	%)
Net income attributable to B. Riley Financial, Inc.	$	24,314			7.6	%	$	17,669			8.3	%

Revenues

The table below and the discussion that follows are based on how we analyze our business.

	Nine Months Ended					Nine Months Ended
	September 30, 2018					September 30, 2017					Change
	Amount		%			Amount		%			Amount			%
Revenues - Services and fees:
Capital Markets segment	$	191,621		59.7	%	$	96,181		45.4	%	$	95,440			99.2	%
Auction and Liquidation segment		44,812		14.0	%		43,179		20.4	%		1,633			3.8	%
Valuation and Appraisal segment		27,383		8.5	%		24,799		11.7	%		2,584			10.4	%
Principal Investments - United Online segment		34,170		10.7	%		38,504		18.2	%		(4,334	)		-11.3	%
Subtotal		297,986		92.9	%		202,663		95.6	%		95,323			47.0	%

Revenues - Sale of goods:
Auction and Liquidation segment		48		0.0	%		1		0.0	%		47			n/m
Principal Investments - United Online segment		90		0.0	%		220		0.1	%		(130	)		-59.1	%
Subtotal		138		0.0	%		221		0.1	%		(83	)		-37.6	%

Interest income - Securities lending:
Capital Markets segment		22,836		7.1	%		9,115		4.3	%		13,721			150.5	%
Total revenues	$	320,960		100.0	%	$	211,999		100.0	%	$	108,961			51.4	%

n/m - Not applicable or not meaningful.

Total revenues increased $109.0 million to $321.0 million during the nine months ended September 30, 2018 from $212.0 million during the nine months ended September 30, 2017. The increase in revenues of $109.0 million during the nine months ended September 30, 2018 was primarily due to an increase in revenues from services and fees of $95.3 million and an increase in revenues from interest income – securities lending of $13.7 million. The increase in revenues from services and fees of $95.3 million in 2018 was primarily due to an increase in revenues of $95.4 million in the Capital Markets segment, $2.6 million in the Valuation and Appraisal segment, and $1.6 million in the Auction and Liquidation segment, offset by a decrease in revenues of $4.3 million in the Principal Investments – United Online segment.

Revenues from services and fees in the Capital Markets segment increased $95.4 million, to $191.6 million during the nine months ended September 30, 2018 from $96.2 million during the nine months ended September 30, 2017. The increase in revenues was due to an increase in revenue of $38.2 million from investment banking fees primarily due to operations of FBR that we acquired on June 1, 2017, an increase of $35.1 million from wealth management services as a result of the acquisition of Wunderlich on July 3, 2017, an increase of $11.5 million from commissions and fees, an increase of $5.1 million from consulting fees as a result of the acquisition of GlassRatner on July 31, 2018, and an increase of $8.5 million in other income as a result of the acquisitions of Wunderlich and FBR, offset by a decrease in revenues of $3.0 million from sales and trading.

Revenues from services and fees in the Valuation and Appraisal segment increased $2.6 million, to $27.4 million during the nine months ended September 30, 2018 from $24.8 million during the nine months ended September 30, 2017. The increase in revenues was primarily due to $2.2 million increase related to appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors, and $0.7 million increase related to appraisal engagements where we perform valuations of intellectual property and business valuations, offset $0.3 million decrease related to appraisal engagements where we perform valuations of machinery and equipment.

Revenues from services and fees in the Auction and Liquidation segment increased $1.6 million, to $44.8 million during the nine months ended September 30, 2018 from $43.2 million during the nine months ended September 30, 2017. The increase in revenues of $1.6 million was primarily due to an increase in revenues of $1.8 million from services and fees in our wholesale and industrial auction division, offset by a decrease in revenues of $0.2 million from services and fees from retail liquidation engagements.

Revenues from services and fees in the Principal Investments - United Online segment decreased $4.3 million, to $34.2 million during the nine months ended September 30, 2018 from $38.5 million during the nine months ended September 30, 2017. The decrease in revenues was primarily due to lower paid subscribers to our services and lower advertising impressions as a result of a decline in active accounts. Services revenues primarily from customer paid accounts related to our Internet access and related subscription services decreased $2.5 million to $27.3 million during the nine months ended September 30, 2018 from $29.8 million during the nine months ended September 30, 2017. Advertising revenues from Internet display advertising and search related to our email and Internet access services decreased $1.8 million to $6.9 million during the nine months ended September 30, 2018 from $8.7 million during the nine months ended September 30, 2017. Over the past several years revenues from paid subscription services have declined year over year as a result of a decline in the number of paid subscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL. Management expects revenues in the Principal Investments - United Online segment to continue to decline year over year.

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, 2018 and 2017 are as follows:

	Nine Months Ended September 30, 2018											Nine Months Ended September 30, 2017
							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	$	44,812		$	27,383		$	34,170				$	43,179		$	24,799		$	38,504
Direct cost of services		12,263			12,388			9,082		$	33,733		25,482			11,031			9,711		$	46,224
Gross margin on services and fees	$	32,549		$	14,995		$	25,088				$	17,697		$	13,768		$	28,793
Gross margin percentage		72.6	%		54.8	%		73.4	%				41.0	%		55.5	%		74.8	%

Total direct costs of services decreased approximately $12.5 million to $33.7 million during the nine months ended September 30, 2018 from $46.2 million during the nine months ended September 30, 2017. Direct costs of services decreased by ~~$1.0~~$13.2 million in the ~~auction~~Auction and ~~liquidation~~Liquidation segment and ~~$1.9~~$0.6 million in the ~~principal investments~~Principal Investments - United Online segment, offset by an increase of ~~$0.2~~$1.4 million in the ~~valuation~~Valuation and ~~appraisal~~Appraisal segment. The decrease in direct costs in the ~~auction~~Auction and ~~liquidation~~Liquidation segment was primarily due to ~~a decrease in~~mix of engagement types performed during the ~~number larger fee and commission retail liquidation engagements in 2017~~nine months ended September 30, 2018 as compared to the same ~~period of 2016.~~2017 period. The decrease in direct costs in the ~~principal investments~~Principal Investments – United Online was primarily due to a decrease in costs to support the lower number of subscribers for dial-up ~~internet~~Internet service in ~~2017~~2018 as compared to the same period in ~~2016.~~2017. The increase in direct costs of services in the ~~valuation~~Valuation and ~~appraisal~~Appraisal segment was primarily due to an increase in payroll and related expenses in ~~2017~~2018 as compared to the same period in ~~2016.~~2017.

Gross margin in the ~~auction~~Auction and ~~liquidation~~Liquidation segment for services and fees increased 31.6% to 72.6% of revenues during the nine months ended September 30, 2018, as compared to 41.0% of revenues during the nine months ended September 30, 2017. The increase in margin in the Auction and Liquidation segment is due to the mix of engagement types between guarantee and commission and fees engagements performed during the nine months ended September 30, 2018 as compared to the same 2017 period.

Gross margin in the Valuation and Appraisal segment for services and fees decreased 0.7% to ~~54.1%~~54.8% of revenues during the ~~three~~nine months ended September 30, ~~2017, as compared to 74.4%~~2018, from 55.5% of revenues during the ~~three~~nine months ended September 30, ~~2016.~~2017. The decrease ~~was~~in margin in the Valuation and Appraisal segment is primarily due to increase in payroll and related expenses in 2018 as compared to the ~~impact of the revenues and margin 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~~same 2017 ~~we did not have any similar large retail liquidation engagements that were completed which resulted in lower gross margins from retail liquidation engagements.~~period.

Gross margin in the ~~valuation and appraisal~~Principal Investments – United Online segment for services and fees ~~increased~~decreased 1.4% to ~~58.2%~~73.4% during the nine months ended September 30, 2018, from 74.8% of revenues during the ~~three~~nine months ended September 30, 2017, from 53.9% of revenues during the three months ended September 30, 2016. The increase in gross margin 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 2016.2017.

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the ~~three~~nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 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 %

	Nine Months Ended					Nine Months Ended
	September 30, 2018					September 30, 2017					Change
	Amount		%			Amount		%			Amount			%
Capital Markets segment	$	172,987		79.9	%	$	89,920		67.7	%	$	83,067			92.4	%
Auction and Liquidation segment		7,810		3.6	%		6,577		5.0	%		1,233			18.7	%
Valuation and Appraisal segment		7,297		3.4	%		6,525		4.9	%		772			11.8	%
Principal Investments - United Online segment		11,361		5.2	%		13,849		10.4	%		(2,488	)		(18.0	%)
Corporate and Other segment		17,148		7.9	%		15,965		12.0	%		1,183			7.4	%
Total selling, general & administrative expenses	$	216,603		100.0	%	$	132,836		100.0	%	$	83,767			63.1	%

Total selling, general and administrative expenses increased ~~$48.2~~$83.8 million, to ~~$71.0~~$216.6 million during the ~~three~~nine months ended September 30, ~~2017~~2018 from ~~$22.7~~$132.8 million for the ~~three~~nine months ended September 30, ~~2016.~~2017. The increase was primarily due to an increase in selling, general and administrative expenses of ~~$46.5~~$83.1 million in the ~~capital markets~~Capital Markets segment, ~~$3.4 million in corporate and other segment, $0.2~~$1.2 million in the ~~principal investments – United Online~~Auction and Liquidation segment, ~~and $0.1~~approximately $1.1 million in the ~~valuation~~Corporate and ~~appraisal~~Other segment and $0.8 million in the Valuation and Appraisal segment, offset by a decrease of ~~$2.0~~approximately $2.4 million in the ~~auction and liquidation~~Principal Investments – United Online segment.

Capital Markets

Selling, general and administrative expenses in the ~~capital markets~~Capital Markets segment increased by ~~$46.5~~$83.1 million to ~~$55.6~~$173.0 million during the ~~three~~nine months ended September 30, ~~2017~~2018 from ~~$9.1~~$89.9 million during the ~~three~~nine months ended September 30, ~~2016.~~2017. The increase in expenses was primarily due to the acquisitions of Wunderlich on July 3, 2017, FBR on June 1, 2017 and GlassRatner on July 31, 2018. Of the $83.1 million increase in expenses, $39.4 million was due to the acquisition of Wunderlich and $3.8 million was due to the acquisition of GlassRatner. The increase in expenses was primarily due to an increase in (a) payroll and related expenses of ~~$15.2~~$58.7 million, ~~from the acquisition of Wunderlich on July 3, 2017 and $10.3 million from the acquisition of FBR on June 1, 2017,~~ (b) ~~$11.7 million of operating expenses related to the acquisition of FBR and $5.2 million of operating expenses related to the acquisition of Wunderlich, (c) payroll and related~~occupancy expenses of ~~$2.6~~$6.9 million, ~~primarily related to an increases in incentive compensation as a result~~(c) legal and professional fees of ~~the increase in revenues from investment banking fees in 2017 as compared to the same period in 2016,~~$2.2 million, (d) depreciation and ~~(d)~~amortization of expense of $2.3 million, (e) market data and other ~~operating~~communication expenses of ~~$1.5~~$8.3 million, (f) share-based compensation of $2.4 million, and (g) other administrative expenses of $2.3 million.

Auction and Liquidation

Selling, general and administrative expenses in the ~~auction~~Auction and ~~liquidation~~Liquidation segment ~~decreased $2.0~~increased $1.2 million, ~~or 50.6%,~~ to ~~$2.0~~$7.8 million during the ~~three~~nine months ended September 30, ~~2017~~2018 from ~~$4.0~~$6.6 million for the ~~three~~nine months ended September 30, ~~2016.~~2017. The ~~decrease~~increase in expenses was primarily due to ~~a decrease~~an increase in (a) payroll and related expenses in the amount of ~~$1.3~~$1.5 million, (b) bad debt expense of $0.5 million, (c) legal and professional fees of ~~$0.5~~$0.1 million, and ~~(c)~~(d) other ~~administrative~~ expenses of $0.2 million, offset by a decrease in transaction losses from foreign currency translation adjustment of $1.1 million.

Valuation and Appraisal

Selling, general and administrative expenses in the ~~valuation~~Valuation and ~~appraisal~~Appraisal segment ~~were $2.3~~increased $0.8 million, ~~and $2.2~~to $7.3 million during the ~~three~~nine months ended September 30, ~~2017~~2018 from $6.5 million for the nine months ended September 30, 2017. The increase of $0.8 million during the nine months ended September 30, 2018 was primarily due to an increase in payroll and ~~2016, respectively.~~related expenses.

Principal Investments - United Online

Selling, general and administrative expenses in the ~~principal investments~~Principal Investments - United Online segment ~~increased $0.2~~decreased approximately $2.4 million, ~~or 4.9%,~~ to ~~$4.1~~$11.4 million during the ~~three~~nine months ended September 30, ~~2017~~2018 from ~~$3.9~~$13.8 million during the ~~three~~nine months ended September 30, ~~2016.~~2017. For the ~~three~~nine months ended September 30, 2018, these expenses include $3.0 million of technology and development expenses, $0.8 million of sales and marketing expenses, $3.7 million of general and administrative expenses and $3.9 million of amortization of intangibles. For the nine months ended September 30, 2017, these expenses include ~~$1.1~~$3.6 million of technology and development expenses, ~~$0.3~~$0.9 million of sales and marketing expenses, ~~$1.5~~$5.2 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$4.1 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~~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.

Corporate and Other

Selling, general and administrative expenses ~~for corporate~~in the Corporate and ~~other~~Other segment increased ~~$3.4~~approximately $1.1 million, to ~~$7.0~~$17.1 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, 2018 from $16.0 million for the nine months ended September 30, 2017. The increase of expenses in the Corporate and Other segment for the nine months ended September 30, 2018 is primarily due to an increase of $4.9 million in payroll and related expenses and an increase of $1.5 million in legal and professional fees, offset by a decrease of $2.3 million in other general expenses and a decrease of $3.0 million primarily related to the fair value adjustment and insurance recovery from key man life insurance related to one of our executives in our appraisal segment.

Restructuring Charge.During the ~~three~~nine months ended September 30, 2018, we incurred a restructuring charge of $2.2 million, which was primarily comprised of lease loss accruals for the planned consolidation of office space and severance expense related to operations in the Capital Markets segment.During the nine months ended September 30 2017, we incurred a restructuring charge of ~~$4.9 million. In second and third quarters of 2017, we implemented~~$11.5 million primarily related to 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~~workforce for some of the corporate executives of FBR and Wunderlich and a restructuring to integrate ~~FBR~~FBR’s and Wunderlich’s operations with our ~~operations. These initiatives resulted in a restructuring charge of $4.7 million~~operations 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.Capital Market’s segment.

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 $1.0 million during the three months ended September 30, 2016. The increase in interest expense during the three months ended September 30, 2017 was primarily due to interest expense of $2.0 million incurred in 2017 from the issuance of senior notes due in 2021 and 2027.

~~Income (Loss) Before Income Taxes.~~ Income before income taxes decreased $15.7 million to loss before income taxes of $1.2 million during the three months ended September 30, 2017 from an income before income taxes of $14.5 million during the three months ended September 30, 2016. The decrease in income before income taxes was primarily due to (a) an increase in corporate and other expenses of $4.4 million, which includes an increase in restructuring charges of $1.0 million, (b) a decrease in operating income of $11.0 million in our auction and liquidation segment, (c) a decrease in operating income of $1.2 million in our capital markets segment, (d) 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.

~~Benefit from (Provision for) Income Taxes.~~ Benefit from income taxes was $1.4 million during the three months ended September 30, 2017 compared to provision for income taxes of $6.1 million during the three months ended September 30, 2016. The effective income tax rate was a benefit of 109.9% for the three months ended September 30, 2017 as compared to a provision of 42.1% for the three months ended September 30, 2016.

~~Net Loss Attributable to Noncontrolling Interest.~~ Net loss attributable to noncontrolling interests represents the proportionate share of net income generated by Great American Global Partners, LLC, in which we have a 50% membership interest that we do not own. The net loss attributable to noncontrolling interests was $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.

~~Net Income Attributable to the Company.~~ Net income attributable to the Company for the three months ended September 30, 2017 was $0.4 million, a decrease of net income of $8.6 million, from net income attributable to the Company of $8.9 million for the three months ended September 30, 2016. Decrease in net income attributable to the Company during the three months ended September 30, 2017 as compared to the same period in 2016 was primarily due to an increase in selling, general and administrate expenses of $48.2 million, offset by an increase in total revenues of $35.5 million and the impact of benefit from taxes as discussed above.

~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~

~~Condensed Consolidated Statements of Operations~~

~~(Dollars in thousands)~~

Nine Months
September 30, 2017

Nine Months
September 30, 2016

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~~

~~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 %

~~n/m - Not applicable or not meaningful.~~

��

~~Total revenues increased $114.8 million to $212.0~~$0.7 million during the nine months ended September 30, 2018 compared to $0.4 million during the same 2017 ~~from $97.2~~period. Interest expense was $23.9 million during the nine months ended September 30, ~~2016. The increase in revenues during the nine months ended September 30, 2017 was primarily due~~2018 as compared to an increase in revenues from services and fees of $111.8 million and revenues from interest income – securities lending of $9.4, offset by a decrease in revenues from the sale of goods of $6.4 million. The increase in revenues 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~~$5.2 million during the nine months ended September 30, ~~2017 from $22.8 million~~during the nine months ended September 30, 2016. The increase in revenues was primarily due to an increase in revenues of $33.3 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 number of investment banking transactions where we acted as an advisor in 2017 as compared to the same period in 2016. Of the $33.3 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, 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 $12.9 millioninterest expense 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 increased $13.8 million, to $43.2~~$18.7 million during the nine months ended September 30, ~~2017~~2018 was primarily due to an increase in interest expense of $13.0 million from ~~$29.4~~the issuances of senior notes due in 2021, 2023 and 2027 and $6.6 million interest expense incurred during the nine months ended September 30, 2018 related to one of our valuation and appraisal engagements, offset by a decrease in other interest expense. Other income during the nine months ended September 30, 2018 included $5.0 million income on equity investments compared to loss on equity investments of $0.2 million during the same period in 2017.

Income Before Income Taxes. Income before income taxes increased approximately $24.2 million to income before income taxes of $33.8 million during the nine months ended September 30, ~~2016.~~2018 from an income before income taxes of $9.6 million during the nine months ended September 30, 2017. The increase in ~~revenues~~income before income taxes of ~~$13.8~~$24.2 million was primarily due to an increase in revenues of ~~$15.7~~$109.0 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~~income from equity investments of ~~fee~~$5.2 million, and ~~commission based retail liquidation engagements for store closings~~an increase in interest income of $0.4 million, offset by an increase in operating expenses of approximately $71.7 million and ~~going-out-of-business sales~~an increase 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~~interest expense of ~~wholesale and industrial auction engagements in 2017 as compared to the same period in 2016.~~$18.7 million.

~~Revenues from services and fees in the valuation and appraisal segment increased $1.9 million, or 8.5%, to $24.8~~Provision for Income Taxes. Provision for income taxes was $8.4 million during the nine months ended September 30, 2017 from $22.9 million during the nine months ended September 30, 2016. The increase in revenues was primarily due to increases of (a) $1.1 million related to appraisal engagements where we perform valuations~~for the monitoring of collateral for financial institutions, lenders, and private equity investors;~~(b) $0.2 million related to appraisal engagements where we perform valuations of machinery and equipment, and (c) $0.6 million related to appraisal engagements where we perform valuations of intellectual property and business valuations.

Revenues from services and fees in the principal investments - United Online segment increased $23.0 million to $38.5 million during the nine months ended September 30, 2017 from $15.5 million during the nine months ended September 30, 2016. The increase was as a result of the acquisition of UOL on July 1, 2016. For the nine months ended September 30, 2017, the revenues include $29.8 million in 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 as a result of a decline in the number of paid subscribers for our services. Management believes the decline in paid subscriber accounts is primarily attributable to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL. Management expects revenues in the principal investments - United Online segment to continue to decline year over year.

~~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, 2017 and 2016 are 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 %

~~n/m - Not applicable or not meaningful.~~

Total direct costs increased $21.1 million, to $46.2 million during the nine months ended September 30, 2017 from $25.1 million during the nine months ended September 30, 2016. Direct costs of services increased by (a) $15.6 million in the auction and liquidation segment, (b) $0.7 million in the valuation and appraisal segment, and (c) $4.8 million in the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016. The increase in direct costs in the auction and liquidation segment was primarily due to an increase in the number of fee and commission type engagements in 20172018 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 due to an increase headcount 2017 as compared to the same period in 2016.

Gross margin in the auction and liquidation segment for services and fees decreased to 41.0% of revenues during the nine months ended September 30, 2017, as compared to 66.4% of revenues during the nine months ended September 30, 2016. The decrease in gross margin in 2017 is primarily due to the increase in the number of fee and commission type retail liquidation engagements as compared to the same period in 2016.

Gross margin in the valuation and appraisal segment for services and fees increased to 55.5% of revenues during the nine months ended September 30, 2017, as compared to 55.0% of revenues during the nine months ended September 20, 2016.

~~Selling, General and Administrative Expenses.~~ ~~Selling, general and administrative expenses during the nine months ended June, 2017 and 2016 were comprised of the following:~~

~~Selling, General and Administrative Expenses~~

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 $84.0 million, to $132.9 million during the nine months ended September 30, 2017~~a benefit from $48.8 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in selling, general and administrative expenses of (a) $67.0 million in the capital markets segment, (b) $9.9 million in the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016, (c) $7.3 million in corporate and other, and (d) $0.1 million in the valuation and appraisal segment, offset by a decrease of $0.3 million in the auction and liquidation segment.

~~Capital Markets~~

Selling, general and administrative expenses in the capital markets segment increased by $67.0 million, or 292.0% to $90.0 million during the nine months ended September 30, 2017 from $22.9 million during the nine months ended September 30, 2016. The increase in expenses was primarily due to (a) payroll and related expenses of $15.2 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.

~~Auction and Liquidation~~

Selling, general and administrative expenses in the auction and liquidation segment were $6.6 million and $6.9 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 $6.5 million during the nine months ended September 30, 2017, consistent with the same 2016 period.~~

~~Principal Investments - United Online~~

Selling, general and administrative expenses in the principal investments - United Online segment increased $9.9 million, or 251.4%, to $13.8 million during the nine months ended September 30, 2017 from $3.9 million during the nine months ended September 30, 2016 as a result of the acquisition of UOL on July 1, 2016. For the nine months ended September 30, 2017, these expenses include $3.6 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. For 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 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.

~~Corporate and Other~~

Selling, general and administrative expenses for corporate and other increased $7.3 million, to $16.0 million during the nine months ended September 30, 2017 from $8.6 million for the nine months ended September 30 2016. The increase was primarily due to an increase in (a)~~fair value adjustment 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.~~ ~~During the nine months ended September 30 2017, we incurred a restructuring charge of $11.5 million.~~In the second and third quarters 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 million in the second and third quarter 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 million during the nine months ended September 30, 2017 and less than $0.1 million during the nine months ended September 30, 2016. Interest expense was $5.2 million during the nine months ended September 30, 2017 as compared to $1.4 million during the nine months ended September 30, 2016. The increase in interest expense during the nine months ended September 30, 2017 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 million incurred on borrowing under our asset based credit facility for retail liquidation engagements; and (c) interest expense of $3.6 million incurred in 2017 from the issuance of senior notes.

~~Income Before Income Taxes.~~ ~~Income before~~ income taxes decreased $6.3 million to $9.6 million during the nine months ended September 30, 2017 from $15.9 million during the nine months ended September 30, 2016. The decrease in income before income taxes was primarily due to (a) an increase in corporate and other expenses of $10.5 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 million and (d) loss on equity investment of $0.2 million, offset by (a) an increase in operating income of $10.8 million in our principal investments – United Online segment as 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 increase in interest income of $0.3 million.

~~Benefit from (Provision for) Income Taxes.~~ ~~Benefit from taxes was~~ $7.8 million during the nine months ended September 30, ~~2017 compared to~~2017. The effective income tax rate was a provision ~~for taxes~~ of ~~$6.2 million during~~24.9% for the nine months ended September 30, ~~2016.~~2018 as compared to a benefit of 80.5% for the nine months ended September 30, 2017. The benefit for income taxes during the nine months ended September 30, 2017 ~~included~~includes 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 910 in the condensed consolidated financial statements. The tax provision during the nine months ended September 30, 2017 also includes 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.~~

Net Income (Loss) ~~Income~~ Attributable to Noncontrolling Interest. Net income (loss) attributable to noncontrolling interests represents the proportionate share of net income (loss) generated by Great American Global Partners, LLC, in which we have a 50% membership interest that we do not own. The net income attributable to noncontrolling interests was $1.1 million during the nine months ended September 30, 2018 compared to net loss attributable to noncontrolling interests ~~was~~of $0.3 million during the nine months ended September 30, ~~2017 compared to net income attributable to noncontrolling interests of $0.6 million during the nine months ended September 30, 2016.~~2017.

Net Income Attributable to the Company. Net income attributable to the Company for the nine months ended September 30, ~~2017~~2018 was ~~$17.7~~$24.3 million, an increase of ~~$8.6~~net income of $6.6 million, from ~~$9.1~~net income attributable to the Company of $17.7 million for the nine months ended September 30, ~~2016.~~2017. The increase in net income attributable to the Company of $6.6 million during the nine months ended September 30, ~~2017~~2018 as compared to the same period in ~~2016~~2017 was primarily due to ~~(a) operating~~an increase in revenues of $109.0 million, an increase in income from ~~the principal~~equity investments ~~- United Online segment as a result~~ of ~~the acquisition~~$5.2 million, and an increase in interest income of ~~UOL on July 1, 2016 as discussed above, (b)~~$0.4 million, offset by an increase in operating ~~income in the valuation and appraisal segment; (c)~~expenses of approximately $71.7 million, an increase in ~~operating income~~interest expense of $18.7 million, an increase in ~~the capital markets segment; and (d) the impact of the benefit from~~provision for income taxes ~~as discussed above.~~of $16.2 million and an increase in net income attributable to noncontrolling interests of $1.3 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, credit facility and special purposes financing arrangements. On May 10, 2016, we completed a secondary offering of 2,420,980 shares of common stock at a price to the public of $9.50 per share. The net proceeds from the offering were $22.8 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~~second half of 2017, we issued an additional ~~$5.3~~$6.5 million of 2021 ~~Notes pursuant to~~Notes. During the nine months ended September 30, 2018, we issued an ~~At The Market Issuance Sales Agreement (the “Sales Agreement”) as further discussed below.~~additional $11.2 million of 2021 Notes. Interest on the 2021 Notes ~~are~~is payable quarterly at ~~7.5%~~7.50% commencing January 31, 2017. The 2021 Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuance of the 2021 Notes, ~~on November 2, 2016,~~ we received net proceeds of ~~$27.7~~$45.5 million (after underwriting commissions, fees and other issuance costs of $1.1 million). In connection with the issuance of the 2021 Notes in 2017 pursuant to the Sales Agreement, we received net proceeds of $5.4 million (after premium less underwriting commissions, fees and other issuance costs of $0.1$0.9 million). On May 31, 2017, we issued $60.4 million of Senior Notes due in May 2027 (the ~~“2027~~“7.50% 2027 Notes”), and during the ~~third quarter~~second half of 2017, we issued an additional ~~$23.7~~$32.1 million of the 7.50% 2027 ~~Notes pursuant to~~Notes. During the ~~Sales Agreement. Interests are~~nine months ended September 30, 2018, we issued an additional $14.9 million of 7.50% 2027 Notes. Interest is payable quarterly at ~~7.5%~~7.50% commencing July 31, 2017. The 2027 Notes are unsecured and due and payable in full on ~~July~~May 31, 2027. In connection with the issuance of the 7.50% 2027 Notes, we received net proceeds of ~~$82.3~~approximately $105.6 million (after ~~premium,~~ underwriting commissions, fees and other issuance costs of $1.8 million). In December 2017, we issued $80.5 million of Senior Notes due in December 2027 (the “7.25% 2027 Notes”). During the nine months ended September 30, ~~2017~~2018, we issued an additional $19.9 million of 7.25% 2027 Notes. Interest is payable quarterly at 7.25% commencing January 31, 2018. The 7.25% 2027 Notes are unsecured and ~~year ended~~due and payable in full on December 31, ~~2016,~~2027. In connection with the issuance of the 7.25% 2027 Notes, we ~~generated~~received net ~~income~~proceeds of ~~$17.7~~$97.8 million (after underwriting commissions, fees and ~~$21.5~~other issuance costs of $2.6 million). In May 2018, we issued approximately $100.1 million ~~respectively. Our cash flows~~of Senior Notes due in May 2023 (the “May 2023 Notes”). During the second and ~~profitability~~third quarter of 2018, we issued an additional $9.1 million of May 2023 Notes. Interest is payable quarterly at 7.375% commencing July 31, 2018. The May 2023 Notes are ~~impacted by~~unsecured and due and payable in full on May 31, 2023. In connection with the ~~number~~issuance of the May 2023 Notes, we received net proceeds of $107.2 million (after underwriting commissions, fees and ~~size~~other issuance costs of ~~retail liquidation~~$1.9 million). In September 2018, we issued approximately $100.1 million of Senior Notes due in September 2023 (the “September 2023 Notes”). Interest is payable quarterly at 6.875% commencing October 31, 2018. The September 2023 Notes are unsecured and ~~capital markets engagements performed~~due and payable in full on ~~a quarterly~~September 30, 2023. In connection with the issuance of the September 2023 Notes, we received net proceeds of $98.6 million (after underwriting commissions, fees and ~~annual basis.~~other issuance costs of $1.4 million).

As of September 30, ~~2017,~~2018, we had ~~$102.4~~$233.9 million of unrestricted cash ~~$9.3~~and cash equivalents, $0.5 million of restricted cash, $222.5 million of investments in securities and other investments, $37.1 million of ~~$96.0 million,~~loans receivable, and ~~$117.9~~$457.5 million of borrowings outstanding. The borrowings outstanding of ~~approximately $117.9~~$457.5 million at September 30, ~~2017~~2018 included (a) ~~$33.2~~$45.9 million of borrowings from the issuance of the 2021 Notes, (b) ~~$82.4~~$105.9 million of borrowings from the issuance of the 7.50% 2027 Notes, (c) $98.0 million of borrowings from the issuance of the 7.25% 2027 Notes, (d) $107.4 million of borrowings from the issuance of the May 2023 Notes, (e) $98.6 million of borrowings from the issuance of the September 2023 Notes, and ~~(c) other~~(f) $1.7 million of notes ~~payable of $2.4 million.~~payable. 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 November 5, 2018, the Company declared a regular dividend of $0.08 per share and a special dividend of $0.08 per share which will be paid by the Company on or about November 30, 2018 to stockholders of record as of November 16, 2018. On August 2, 2018, the Company declared a regular dividend of $0.08 per share and a special dividend of $0.22 per share which was paid by the Company on August 29, 2018 to stockholders of record as of August 16, 2018. On May 7, 2018, the Company declared a regular dividend of $0.08 per share and a special dividend of $0.04 per share which was paid by the Company on June 5, 2018 to stockholders of record as of May 21, 2018. On March 7, 2018, the Company declared a regular dividend of $0.08 per share and a special dividend of $0.08 per share which was paid by the Company on April 3, 2018. During the nine months ended September 30, ~~2017~~2018 and the year ended December 31, ~~2016,~~2017, we paid cash dividends of ~~$11.6~~$16.1 million and ~~$5.3~~$14.9 million ~~respectively,~~ on our common ~~stock.~~stock, respectively. While it is the Board’s current intention to make regular dividend payments of $0.08 per share each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends or repurchases of our common stock will be made at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board of Directors.

Our principal sources of liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds available under revolving credit facilities and special purpose financing arrangements.

Cash Flow Summary

Nine Months Ended
September 30,
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,
	2018			2017
	(Dollars in thousands)
Net cash (used in) provided by:
Operating activities	$	(78,895	)	$	(48,779	)
Investing activities		(46,549	)		(17,119	)
Financing activities		208,092			58,719
Effect of foreign currency on cash		(796	)		3,458
Net increase (decrease) in cash, cash equivalents and restricted cash	$	81,852		$	(3,721	)

Cash used in operating activities was $78.9 million for the nine months ended September 30, 2018, an increase of $30.1 million, from cash used in operating activities of $48.8 million for the nine months ended September 30, ~~2017, an increase of $76.7 million, from cash provided by operating activities of $27.9 million for the nine months ended September 30, 2016.~~2017. Cash used in operating activities for the nine months ended September 30, ~~2017 includes~~2018 included net income of ~~$17.4~~$25.4 million adjusted for noncash items and changes in operating assets and liabilities.The increase in cash used in operating activities of ~~$76.7~~$30.1 million was primarily due to ~~(a)~~changes inoperating assets and liabilities that resulted in a decrease of $122.1 million in cash flows from operations during the nine months ended September 30, 2018,offset by (a) an increase in net income of $8.0 million to $25.4 million during the nine months ended September 30, 2018 from $17.4 million during the nine months ended September 30, 2017, and (b) an increase in non-cash charges and other items of ~~$1.3~~$17.8 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, depreciation and amortization of ~~$7.7~~$9.8 million, share-based compensation ~~$7.7~~of $8.7 million, income ~~allocated and fair value adjustment~~on equity investments of $5.0 million, provision for ~~mandatorily redeemable noncontrolling interests~~doubtful accounts of ~~$10.8~~$0.8 million, ~~and~~ impairment of leaseholds, lease loss accrual and loss on disposal of fixed assets of ~~$2.8 and $0.3~~$1.7 million, income allocated for ~~non-cash interest~~mandatorily redeemable noncontrolling interests of $0.8 million and other non-cash items and ~~(b) changes in operating assets and liabilities that resulted in adecrease~~effects of ~~$64.9 millionin cash flows from~~foreign currency on operations ~~during the nine months ended September 30, 2017, offset by an increase in net income~~ of ~~$7.7 million to $17.4 million during the nine months ended September 30, 2017, from $9.7 million during the comparable period in 2016.~~$1.0 million.

Cash used in investing activities was ~~$22.9~~$46.5 million during the nine months ended September 30, ~~2017~~2018 compared to cash used in investing activities of ~~$111.9~~$17.1 million for the nine months ended September 30, ~~2016.~~2017. During the nine months ended September 30, 2018, cash used in investing activities consisted of cash used to purchase loans receivable of $35.1 million, cash use for equity investments of $6.9 million, cash use of $4.0 million to acquire a business and cash use of $2.3 million for purchases of property and equipment, offset by $1.7 million dividends received from equity investment. 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)~~(c) cash use of $1.0 million for an equity investment, and (e) cash use of ~~$0.5~~$0.6 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 $208.1 million during the nine months ended September 30, 2018 compared to cash provided by financing activities of $58.7 million during the nine months ended September 30, ~~2017 compared to $80.4 million during~~2017. During the nine months ended September 30, ~~2016.~~2018, cash provided by financing activities primarily consisted of (a) $255.3 million proceeds from issuance of senior notes, (b) $300.0 million proceeds from our asset based credit facility, and (c) $51.0 million proceeds from notes payable, offset by (a) $300.0 million used for repayment of borrowings from our asset based credit facility, (b) $51.6 million repayment of notes payable, (c) $17.9 million used to pay cash dividends, (d) $17.3 million used to repurchase our common stock, (e) $6.4 million used for payment of debt issuance costs, (f) $4.1 million used for payment of employment taxes on vesting of restricted stock, and (g) $0.9 million distribution to noncontrolling interests. During the nine months ended September 30, 2017, cash provided by financing activities primarily consisted of (a) $66.0 million proceeds from asset based credit facility and (b) $89.3 million proceeds from issuance of senior notes, offset by (a) $66.0 million used to repay the asset based credit facility, (b) $13.5 million used to pay cash dividends, (c) $8.2 million used to repay other notes payable in connection with the acquisition of Wunderlich, (d) $2.9 million distributions to noncontrolling interests, (e) $2.0 million used for debt issuance costs, (f) $1.3 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) $23.0 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) $0.3 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.

~~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 ~~credit agreement (as amended, the “Credit Agreement”)~~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. On April 19, 2018, the Company entered into an amended and restated consent to the Credit Agreement, pursuant to which Wells Fargo Bank increased the maximum borrowing limit solely for the purposes of the Bon-Ton Transactions from $200.0 million to $300.0 million and reverted back to $200.0 million upon repayment of the amounts borrowed in connection with the Bon-Ton Transactions. The amounts borrowed in connection with the Bon Ton Transaction were fully repaid as of September 30, 2018 and the maximum borrowing limit under the Credit Agreement reverted back to $200.0 million. 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 $300.0 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.At ~~September 30, 2017 and~~ December 31, ~~2016,~~2017, there ~~were no borrowings or~~was $18.5 million of letters of ~~credits~~credit outstanding under the credit facility.

On April 13, 2017, UOL, in the capacity as borrower, entered into a credit agreement (the “UOL Credit Agreement”) with the Banc of California, N.A. in the capacity as agent and lender. The UOL Credit Agreement provides for a revolving credit facility under which UOL may borrow (or request the issuance of letters of credit) up to $20.0 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, 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.At September 30, 2018 and December 31, 2017, there ~~were~~was no ~~borrowings or letters of credits~~ outstanding balances under ~~this credit facility.~~the UOL Credit Agreement.

Senior Note Offerings

On November 2, 2016, we issued $28.8 million ~~of 2021~~Senior Notes (the “2021 Notes”) and during the ~~three months ended September 30,~~second half of 2017, we issued an additional ~~$5.3~~$6.5 million of the 2021 Notes pursuant to the At the Market Issuance Sales Agreement (the “Sales Agreement”) as further discussed below. IDuring the nine months ended September 30, 2018, we issued an additional $11.2 million of the 2021 Notes.~~nterest is payable quarterly at 7.5% commencing January 31, 2017.~~ The 2021 Notes are unsecured and due and payable in full on October 31, 2021.In connection with the issuance of the 2021 Notes, we received net proceeds of ~~$33.1~~$45.5 million (after ~~premium,~~ underwriting commissions, fees and other issuance costs of ~~$1.0~~$0.9 million). The outstanding balance of the 2021 Notes was ~~$33.2~~$45.9 million (net of unamortized debt issue costs and premiums of ~~$0.9~~$0.5 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.~~ 2018.

On May 31, 2017, we issued $60.4 million of Senior Notes (the “7.50% 2027 ~~Notes,~~Notes”) and during the ~~three months ended September 30,~~second half of 2017, we issued an additional ~~$23.7~~$32.1 million of the 7.50% 2027 Notes pursuant to the Sales ~~Agreement as further discussed below. Interest is payable quarterly at 7.5% commencing July 31, 2017.~~Agreement. During the nine months ended September 30, 2018, we issued an additional $14.9 million of the 7.50% 2027 Notes. The 7.50% 2027 Notes are unsecured and due and payable in full on May 31, 2027. In connection with the issuance of the 7.50% 2027 Notes, we received net proceeds of ~~$82.3~~$105.6 million (after underwriting commissions, fees and other issuance costs of $1.8 million). The outstanding balance of the 7.50% 2027 Notes was ~~$82.4~~$105.9 million (net of unamortized debt issue costs and premium of ~~$1.7~~$1.6 million) at September 30, ~~2017.~~2018.

In December 2017, we issued $80.5 million of the 7.25% 2027 Notes and during the nine months ended September 30, 2018, we issued an additional $19.9 million of the 7.25% 2027 Notespursuant to the Sales Agreement. The 7.25% 2027 Notes are unsecured and due and payable in full on December 31, 2027. In connection with the issuance of the 7.25% 2027 Notes, we received net proceeds of $97.8 million (after underwriting commissions, fees and other issuance costs of $2.6 million). The outstanding balance of the 7.25% 2027 Notes was $98.0 million (net of unamortized debt issue costs and premium of $2.4 million) at September 30, 2018.

~~On June 28, 2017,~~In May 2018, we ~~entered into~~issued approximately $100.1 million of the May 2023 Notes and during the second and third quarter of 2018, we issued approximately an additional $9.1 million of the May 2023 Notespursuant to the Sales Agreement. The May 2023 Notes are unsecured and due and payable in full on May 31, 2023. In connection with the issuance of the May 2023 Notes, we received net proceeds of $107.2 million (after underwriting commissions, fees and other issuance costs of $1.9 million). The outstanding balance of the May 2023 Notes was $107.4 million (net of unamortized debt issue costs and premium of $1.8 million) at September 30, 2018.

In September 2018, we issued approximately $100.1 million of the September 2023 Notes. The September 2023 Notes are unsecured and due and payable in full on September 30, 2023. In connection with the issuance of the September 2023 Notes, we received net proceeds of $98.6 million (after underwriting commissions, fees and other issuance costs of $1.4 million). The outstanding balance of the September 2023 Notes was $98.6 million (net of unamortized debt issue costs and premium of $1.4 million) at September 30, 2018.

On June 5, 2018, we filed a prospectus supplement pursuant to which we may sell from time to time, at our option up to an aggregate of ~~$39.6~~$50.0 million, including notes offered pursuant to the prior prospectus supplement, of the 2021 Notes, orthe 7.50% 2027 Notes, the 7.25% 2027 Notes and the 2023 Notes. We previously entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) on December 19, 2017 with B. Riley FBR, pursuant to which we may offer to sell, from time to time, the 2021 Notes, the 7.50% 2027 Notes and the 7.25% 2027 Notes. As of June 5, 2018, we sold Notes having an aggregate offering price of $6.3 million under the prior prospectus supplement dated April 25, 2018, leaving up to $43.7 million available for offer and sale pursuant to the June 5, 2018 prospectus. The Notes sold pursuant to the Sales Agreement on or following June 5, 2018 will be issued pursuant to a prospectus dated ~~March 29, 2017,~~April 6, 2018, as supplemented by a prospectus supplement dated June ~~28, 2017,~~5, 2018, in each case filed with the ~~Securities and Exchange Commission~~SEC pursuant to ~~our~~the Company’s effective Registration Statement on Form S-3 (File No. ~~333-216763)~~333-223789), which was declared effective by the ~~Securities~~SEC on April 6, 2018. As of September 30, 2018, the Company sold Notes pursuant to the June 5, 2018 prospectus having an aggregate offering price of $36.9 million (inclusive of the $6.3 million sold under the April 25, 2018 prospectus supplement), leaving up to $13.1 million available for offer and ~~Exchange Commission on March 29, 2017.~~sale pursuant to the June 5, 2018 prospectus. 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.Indenture. Future sales of the 2021 Notes, 7.50% 2027 Notes, 7.25% 2027 Notes and ~~2027~~the May 2023 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 ~~our~~the Company’s capital needs.During the three months ended September 30, 2017, we issued $5.3 million of 2021 Notes and $23.7 million of 2027 Notes. At September 30, 2017, we have an additional $10.6 million of 2021 Notes or 2027 Notes that may be sold pursuant to the Sales Agreement.There can be no assurance we will be successful in consummating future sales based on prevailing market conditions or in the quantities or at the prices that we may deem appropriate.

Other Borrowings

~~In August 2016, we formedGA Retail Investments, L.P., a Delaware limited partnership, (~~the “Partnership”) which required us to contribute $15.4 million. The Partnership borrowed $80.0 million Australian dollars from a third party investor in connection with its formation 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 engagement we entered into to liquidate the Masters Home Improvement stores. The $80.0 million Australian dollar participating noteNotes 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~~our broker dealers.The notes payable accrue interest at rates set at each anniversary date, ranging from ~~the~~ prime rate plus 0.25% to 2.0% ~~(4.5%~~(5.25% to ~~6.25%~~6.50% at September 30, ~~2017)~~ 2018). Interest ispayable annually. The principal payments on the notes payable are due annually in the amount of ~~$0.1~~$0.4 million on ~~October~~January 31, $0.2 million on September 30, and ~~$0.4~~$0.1 million on ~~January~~October 31. The notes payable mature at various dates from ~~January 31,~~September 30, 2018 through January 31, 2022. At September 30, ~~2017,~~2018 the outstanding balance for the notes payable was $1.7 million.

On April 19, 2018, we borrowed approximately $51.0 million from GACP II, L.P., a direct lending fund managed by Great American Capital Partners, LLC, a wholly owned subsidiary of the Company. In accordance with the note payable, we were ~~$2.4~~advanced $50.0 million and the note payable included an origination fee of $1.0 million that increased the face value of the note payable to $51.0 million. Interest accrued at the three-month LIBOR rate plus 9%. The note payable was due in September 2018 and was fully repaid in August 2018. The note was collateralized by the proceeds generated from the joint venture liquidation of inventory and real estate related to a retail liquidation agreement.

Off-Balance Sheet Arrangements

We have no 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 of other entities or entered into any options on non-financial assets.

~~New~~Recent Accounting ~~Standards~~Pronouncements

In ~~February 2016,~~August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13:Fair Value Measurement (Topic 820)(“ASU 2018-13”). The amendments in this update change the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The Company early adopted ASU 2018-13 in the third quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05:Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this update provide guidance on when to record fand disclose provisional amounts for certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. This ASU also discusses required disclosures that an entity must make with regard to the Tax Reform Act. This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company has adopted this standard and will continue to evaluate indicators that may give rise to a change in our tax provision as a result of the Tax Reform Act. See Note10 to our condensed consolidated financial statements for additional information on the Tax Reform Act.

In February 2016, the FASB issued ASU No. 2016-02:Leases (Topic 842) (“ASU 2016-02”). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. In July 2018, the FASB issued ASU 2018-10:Codification Improvements to Topic 842, Leases, which provides narrow-scope improvements to the lease standard. ASU 2016-02 and ASU 2018-10 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~~these updates on the consolidated financial statements.

In ~~May 2014,~~February 2018, the FASB issued ASU ~~No. 2014-09,~~ 2018-02,~~Revenue~~Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from ~~Contracts with Customers (Topic 606)~~Accumulated Other Comprehensive Income~~. Under this ASU~~ that provides for the reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Reform Act. The accounting update is effective for the fiscal year beginning after December 15, 2018 and ~~subsequently issued amendments, revenue are recognized at~~early adoption is permitted. The accounting update should be applied either in the ~~time when goods~~period of adoption or ~~services are transferred~~retrospectively to ~~customers~~each period 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~~effect of 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~~change in the ~~first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to adoption. The Company believes~~U.S. federal corporate income tax rate in the ~~adoption of this standard may impact engagements that contain performance-based arrangements in which a success or completion fee~~Tax Reform Act is ~~earned when and if certain predefined outcomes occur and engagements and contracts where services~~recognized. We are ~~provided under fixed-fees arrangements that have multiple performance obligations. The Company has not completed an assessment and has not yet determined whether~~currently evaluating the impact of the accounting update, but the adoption ~~of this standard~~is not expected to have a material impact on ~~the~~our 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 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.statements.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019, but early application is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.

In January 2017, the FASB issued ASU 2017-04,Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet adopted this update and currently evaluating the effect this new standard will have on its financial condition and results of operations

On January 1, 2018, we adopted ASU 2016-18 –Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) using the retrospective method which requires adjustment to prior periods in the statement of cash flows. ASU 2016-18 clarifies how restricted cash should be presented on the statement of cash flows and requires companies to include restricted cash with cash and cash equivalents when reconciling the beginning of period and end of period totals on the statement of cash flows. Restricted cash previously classified under investing activities is now included in the reconciliation of beginning and ending cash on the statement of cash flows. The adoption of ASU 2016-18 did not have a material impact on the Company’s financial condition and results of operations.

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 –Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on our consolidated financial statements. The new revenue standard was applied prospectively in our condensed consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. See Note 9 for additional information on the adoption of this standard.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~Not applicable.~~B. Riley’s primary exposure to market risk consists of risk related to changes in interest rates. B. Riley has not used derivative financial instruments for speculation or trading purposes.

Interest Rate Risk

Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable and credit facilities to fund costs and expenses incurred in connection with our acquisitions and retail liquidation engagements. Borrowings under our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floating rate of interest. In our portfolio of securities owned we invest in loans receivable that primarily bear interest at a floating rate 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, loans receivable and investments in partnership interests. Our cash and cash equivalents through September 30, 2018 included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activities in convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities.

Foreign Currency Risk

The majority of our operating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled $1.3 million for the nine months ended September 30, 2018 or less than 1% of our total revenues of $321.0 million during the nine months ended September 30, 2018. The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive income (loss). Transaction gains (losses), which were included in our consolidated statements of income, amounted to a gain of $0.8 million and a loss of $0.9 million during the nine months ended September 30, 2018 and 2017, respectively. We may be exposed to foreign currency risk; however, our operating results during the nine months ended September 30, 2018 included $1.3 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 approximately $0.1 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 approximately $0.1 million for the nine months ended September 30, 2018.

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 ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoing evaluation, our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and our Chief Financial Officer concluded that as of September 30, ~~2017~~2018 our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes to our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on Effectiveness of Controls

Our management, including our ~~Chief~~Co-Chief Executive ~~Officer~~Officers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

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 January~~5,2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately $151.0 million. The plaintiffs seek unspecified compensatory damages and reimbursement of certain costs and expenses.In August 2017, the Court granted Defendant’s Motion to Dismiss on Section 12 claims and found that the plaintiffs had not sufficiently alleged a corrective disclosure prior to August 6, 2015, when an SEC civil action was announced. ~~Defendant’s~~Defendants’ answer was filed on September 25, 2017. Plaintiffs have filed motions for class certification and to remand the case to state court following a positive ruling in an unrelated case by the U.S. Supreme Court. Although MLV is contractually entitled to be indemnified by Miller in connection with this lawsuit, Miller filed for bankruptcy in October 2015 and this likely will decrease or eliminate the value of the indemnity that MLV receives from Miller.

In February 2017, certain former employees filed an arbitration claim with FINRA against WSI alleging misrepresentations in the recruitment of claimants to join WSI. Claimants also allege that WSI failed to support their mortgage trading business resulting in the loss of opportunities during their employment with WSI. Claimants are seeking $10.0 million in damages. WSI has counterclaimed alleging that claimants misrepresented 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.

In ~~April~~July 2017, ~~two purported shareholders~~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 ~~FBR filed a putative class action against FBR and the members~~WSI) of ~~its board~~certain assets of ~~directors~~Dominick & Dominick LLC in 2015. The Claimants allege 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 allegedrespondents overvalued WIC so 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 aspurchase price paid to the ~~named plaintiffs only, without prejudice as~~Claimants in shares of WIC stock was artificially inflated. The Statement of Claim includes claims for common law fraud, negligent misrepresentation, and breach of contract. Claimants are seeking damages of approximately $8.0 million plus unspecified punitive damages. Respondents believe the claims are meritless and intend to vigorously defend the ~~class. In August 2017, a mootness fee was paid and the case was dismissed.~~action.

In September 2017, Frontier State Bank (“Frontier”) filed a ~~statement~~lawsuit against Wunderlich Loan Capital Corp., a subsidiary of ~~claim was filed in a FINRA arbitration naming FBRCM and other underwriters related to the underwriting~~WIC (“WLCC”), seeking rescission of the ~~now-bankrupt, Quantum Fuel Systems Technologies Worldwide, Inc.~~purchase a residential mortgage in the amount of $1.3 million. Vanguard Funding, LLC (“~~Quantum”~~Vanguard”)~~. 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~~ sold the ~~other underwriters requesting~~mortgage to WLCC who then assigned its rights to Frontier. Shortly after closing, Frontier was advised that the ~~claim be dismissed on~~mortgage had been previously pledged to another lender. In the ~~grounds that~~lawsuit against WLCC, it is ~~improper under FINRA Rules 12204~~alleged that WLCC did not deliver the mortgage to Frontier with clear title. In September 2018, the matter was settled 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.general releases were exchanged.

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,~~2017, filed with the Securities and Exchange Commission on March ~~10, 2017.~~14, 2018. 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, ~~2016~~2017 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~~Except as set forth below, 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.~~2017 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.

Changes in tax laws or regulations, or to interpretations of existing tax laws or regulations, to which we are subject could adversely affect our financial condition and cash flows.

We are subject to taxation in the United States and in some foreign jurisdictions. Our financial condition and cash flows are impacted by tax policy implemented at each of the federal, state, local and international levels. We cannot predict whether any changes to tax laws or regulations, or to interpretations of existing tax laws or regulations, will be implemented in the future or whether any such changes would have a material adverse effect on our financial condition and cash flows. However, future changes to tax laws or regulations, or to interpretations of existing tax laws or regulations, could increase our tax burden or otherwise adversely affect our financial condition and cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed as part of this Quarterly Report are ~~listed in~~set forth on the ~~index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.~~Exhibit Index.

Exhibit Index

Incorporated by Reference
Exhibit
No.

Description

Form
Exhibit
Filing Date

3.1
Amended and Restated Certificate of Incorporation, as amended, dated as of August 17, 2015
10-Q 3.1 8/3/2018

4.1 Base Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee 8-K 4.1 11/2/2016

4.2
First Supplemental Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee
8-K 4.2 11/2/2016

4.3 Form of 7.50% Senior Note due 2021 8-K 4.2 11/2/2016

4.4
Second Supplemental Indenture, dated as of May 31, 2017, by and between the registrant and U.S. Bank National Association, as Trustee
8-K 4.1 5/31/2017

4.5 Form of 7.50% Senior Note due 2027 8-K 4.1 5/31/2017

4.6 Third Supplemental Indenture, dated as of December 13, 2017, by and between the registrant and U.S. Bank National Association, as Trustee 8-K 4.1 12/13/2017

4.7 Form of 7.25% Senior Note due 2027 8-K 4.1 12/13/2017

4.8

Fourth Supplemental Indenture, dated as of May 17, 2018, by and between the Company and U.S. Bank National Association, as Trustee
8-K 4.1 5/17/2018

4.9 Form of 7.375% Senior Note due 2023 8-K 4.2 5/17/2018

4.10
Fifth Supplemental Indenture, dated as of September 11, 2018, by and between the Company and U.S. Bank National Association, as Trustee
8-K 4.1 9/11/2018

4.11 Form of 6.875% Senior Note due 2023 8-K Exhibit A to Exhibit 4.1 9/11/2018

10.1
2018 Employee Stock Purchase Plan
8-K 10.1 7/31/2018

10.2#
Employment Agreement, dated as of July 10, 2018, by and between the Company and Kenneth M. Young
8-K 10.1 7/16/2018

10.3#
Employment Agreement, dated as of July 10, 2018, by and between B. Riley FBR, Inc. and Andrew Moore
8-K 10.2 7/16/2018

10.4#
Amendment No. 1 to Employment Agreement, dated as of July 10, 2018, by and between the registrant and Bryant R. Riley
8-K 10.3 7/16/2018
10.5#
Amendment No. 1 to Employment Agreement, dated as of July 10, 2018, by and between the registrant and Thomas Kelleher
8-K 10.4 7/16/2018
31.1* Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
31.2* Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
31.3* Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
32.1** Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
** Furnished herewith.
# Management contract or compensatory plan or arrangement

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.

Date: November 5, 2018 B. Riley Financial, Inc.

~~Date: November 9, 2017~~ By:
/s/ PHILLIP J. AHN
Name: Phillip J. Ahn
Title: Chief Financial Officer and Chief Operating Officer

(Principal Financial Officer)

52
64

~~Exhibit Index~~
~~Exhibit No.~~ ~~Description~~
~~4.1(1)~~ ~~Base Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee~~
~~4.2(1)~~ ~~First Supplemental Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee~~
~~4.3(2)~~ ~~Second Supplemental Indenture, dated as of May 31, 2017, by and between the registrant and U.S. Bank National Association, as Trustee~~
~~4.4(2)~~ ~~Form of 7.50% Senior Note due 2027~~
~~4.5(1)~~ ~~Form of 7.50% Senior Note due 2021~~
~~10.1(3)~~ ~~Warrant Agreement, dated as of July 3, 2017, by and between the registrant and Continental Stock Transfer & Trust Company~~
~~10.2(3)#~~ ~~Employment Agreement, dated as of May 17, 2017, by and among the registrant, Wunderlich Investment Company, Inc. and Gary K. Wunderlich, Jr.~~
~~10.3(3)~~ ~~Registration Rights Agreement, dated as of July 3, 2017, by and among the registrant and the persons listed on the signature pages thereto~~
~~10.4(4)~~ ~~Consulting Services Agreement, dated as of July 3, 2017, by and between Richard J. Hendrix and FBR Capital Markets & Co.~~
~~10.5(4)#~~ ~~Severance Agreement and General Release, dated as of July 3, 2017, by and among the registrant, Richard J. Hendrix, FBR Capital Markets & Co. and B. Riley & Co., LLC~~
31.1* ~~Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934~~
31.2* ~~Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934~~
~~32.1*†~~ ~~Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
~~32.2*†~~ ~~Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
101.INS* ~~XBRL Instance Document~~
101.SCH* ~~XBRL Taxonomy Extension Schema Document~~
101.CAL* ~~XBRL Taxonomy Extension Calculation Linkbase Document~~
101.LAB* ~~XBRL Taxonomy Extension Label Linkbase Document~~
101.PRE* ~~XBRL Taxonomy Extension Presentation Linkbase Document~~
101.DEF* ~~XBRL Taxonomy Extension Definition Linkbase Document~~
* ~~Filed herewith.~~
† These exhibits are being “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.
# ~~Management contract or compensatory plan or arrangement.~~
~~(1)~~ ~~Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on November 2, 2016.~~
~~(2)~~ ~~Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on May 31, 2017.~~
~~(3)~~ ~~Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on July 5, 2017.~~
~~(4)~~ ~~Incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2017.~~

Delaware	27-0223495
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

21255 Burbank Boulevard, Suite 400 Woodland Hills, CA	91367
(Address of Principal Executive Offices)	(Zip Code)

Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☐
Emerging growth ~~company☐~~	company ☐

			Page

PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017	3

	Condensed Consolidated Statements of ~~Operations~~Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	4

	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	5

	Condensed Consolidated Statements of Equity for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3239

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4958

Item 4.	Controls and Procedures	4958

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	5060

Item 1A.	Risk Factors	5061

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5161

Item 3.	Defaults Upon Senior Securities	5161

Item 4.	Mine Safety Disclosures	5161

Item 5.	Other Information	5161

Item 6.	Exhibits	5161

	Signatures	5264

	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,
	2018			2017
	(Unaudited)
Assets
Assets
Cash and cash equivalents	$	233,918		$	132,823
Restricted cash		468			19,711
Due from clearing brokers		54,891			31,479
Securities and other investments owned, at fair value		222,521			145,360
Securities borrowed		1,042,295			807,089
Accounts receivable, net		38,958			20,015
Due from related parties		9,921			5,689
Advances against customer contracts		21,405			5,208
Loans receivable		37,147			—
Prepaid expenses and other assets		50,193			22,605
Property and equipment, net		11,143			11,977
Goodwill		120,129			98,771
Other intangible assets, net		51,011			56,948
Deferred income taxes		26,901			29,229
Total assets	$	1,920,901		$	1,386,904
Liabilities and Equity
Liabilities
Accounts payable	$	2,278		$	2,650
Accrued expenses and other liabilities		87,901			71,685
Deferred revenue		3,205			3,141
Due to partners		1,428			1,578
Securities sold not yet purchased		59,672			28,291
Securities loaned		1,035,408			803,371
Mandatorily redeemable noncontrolling interests		4,409			4,478
Notes payable		1,671			2,243
Senior notes payable		455,783			203,621
Total liabilities		1,651,755			1,121,058

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; 100,000,000 shares authorized; 26,526,445 and 26,569,462 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		2			2
Additional paid-in capital		255,236			259,980
Retained earnings		14,842			6,582
Accumulated other comprehensive loss		(1,696	)		(534	)
Total B. Riley Financial, Inc. stockholders’ equity		268,384			266,030
Noncontrolling interests		762			(184	)
Total equity		269,146			265,846
Total liabilities and equity	$	1,920,901		$	1,386,904

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

																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, 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
Distribution 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

Balance, January 1, 2018		—	$	—		26,569,462		$	2	$	259,980		$	6,582		$	(534	)	$	(184	)	$	265,846
Issuance of common stock for acquisition of GlassRatner Advisory & Capital Group LLC		—		—		405,817			—		8,050			—			—			—			8,050
Vesting of restricted stock, net of shares withheld for employer taxes		—		—		522,399			—		(4,106	)		—			—			—			(4,106	)
Common shares cancelled - resolution of escrow claim		—		—		(21,233	)		—		—			—			—			—			—
Stock repurchased and retired		—		—		(950,000	)		—		(17,338	)		—			—			—			(17,338	)
Share based payments		—		—		—			—		8,650			—			—			—			8,650
Dividends on common stock		—		—		—			—		—			(16,054	)		—			—			(16,054	)
Net income for the nine months ended September 30, 2018		—		—		—			—		—			24,314			—			946			25,260
Foreign currency translation adjustment		—		—		—			—		—			—			(1,162	)		—			(1,162	)
Balance, September 30, 2018		—	$	—		26,526,445		$	2	$	255,236		$	14,842		$	(1,696	)	$	762		$	269,146

	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

	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

	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

	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 September 30, 2018 Using
											Quoted prices in		Other		Significant
									Fair value at		active markets for		observable		unobservable
	Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2016, Using								September 30,		identical assets		inputs		inputs
	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)		2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities and other investments owned:
Common stocks	$	2,084	$	1,785	$	—	$	299
Common stocks and warrants									$	106,317	$	72,153	$	25,207	$	8,957
Corporate bonds		1,025		—		865		160		18,909		—		18,909		—
Partnership interests		13,470		—		44		13,426
Fixed income securities										4,467		—		4,467		—
Loans receivable										36,587		—		—		36,587
Partnership interests and other										54,114		1,280		10		52,824
Total assets measured at fair value	$	16,579	$	1,785	$	909	$	13,885	$	220,394	$	73,433	$	48,593	$	98,368

Liabilities:
Securities sold not yet purchased:	$	846	$	—	$	846	$	—
Common stocks									$	47,929	$	47,929	$	—	$	—
Corporate bonds										6,381		—		6,381
Fixed income securities										598		—		598		—
Partnership interests and other										4,764		4,764		—		—
Total securities sold not yet purchased										59,672		52,693		6,979		—

Mandatorily redeemable noncontrolling interests issued after November 5, 2003		3,214		—		—		3,214		4,409		—		—		4,409

Contingent consideration		1,242		—		—		1,242
Total liabilities measured at fair value	$	5,302	$	—	$	846	$	4,456	$	64,081	$	52,693	$	6,979	$	4,409

	Financial Assets and Liabilities Measured at Fair Value
	on a Recurring Basis at December 31, 2017 Using
			Quoted prices in		Other		Significant
	Fair value at		active markets for		observable		unobservable
	December 31,		identical assets		inputs		inputs
	2017		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities and other investments owned:
Common stocks and warrants	$	67,306	$	38,960	$	—	$	28,346
Corporate bonds		6,539		—		6,539		—
Fixed income securities		2,329		—		2,329		—
Loans receivable		33,713		—		—		33,713
Partnership interests and other		31,883		686		5,093		26,104
Total assets measured at fair value	$	141,770	$	39,646	$	13,961	$	88,163

Liabilities:
Securities sold not yet purchased:
Common stocks	$	19,145	$	19,145	$	—	$	—
Corporate bonds		1,175		—		1,175		—
Fixed income securities		699		—		699		—
Partnership interests and other		7,272		7,272		—		—
Total securities sold not yet purchased		28,291		26,417		1,874		—

Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,478		—		—		4,478
Total liabilities measured at fair value	$	32,769	$	26,417	$	1,874	$	4,478


	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

	September 30, 2018
Partnership investments	$	5,179
Due from related party		1,071
Maximum exposure to loss	$	6,250

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

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

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

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

	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

	Pro Forma (Unaudited)
	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Revenues	$	92,461		$	320,546
Net (loss) income attributable to B. Riley Financial, Inc.	$	(42	)	$	11,785

Basic (loss) earnings per share	$	(0.00	)	$	0.46
Diluted (loss) earnings per share	$	(0.00	)	$	0.43

Weighted average basic shares outstanding		26,094,000			25,888,446
Weighted average diluted shares outstanding		26,094,000			27,137,419

																	Amounts not
							Amounts not										offset in the
							offset in the										consolidated balance
							consolidated balance						Gross amounts		Net amounts		sheets but eligible
			Gross amounts		Net amounts		sheets but eligible						offset in the		included in the		for offsetting
			offset in the		included in the		for offsetting				Gross amounts		consolidated		consolidated		upon counterparty
	Gross amounts		consolidated		consolidated		upon counterparty				recognized		balance sheets⁽¹⁾		balance sheets		default⁽²⁾		Net amounts
	recognized		balance sheets⁽¹⁾		balance sheets		default⁽²⁾		Net amounts
As of September 30, 2017
As of September 30, 2018
Securities borrowed	$	730,022	$	—	$	730,022	$	730,022	$	—	$	1,042,295	$	—	$	1,042,295	$	1,042,295	$	—
Securities loaned	$	728,201	$	—	$	728,201	$	728,201	$	—	$	1,035,408	$	—	$	1,035,408	$	1,035,408	$	—
As of December 31, 2017
Securities borrowed											$	807,089	$	—	$	807,089	$	807,089	$	—
Securities loaned											$	803,371	$	—	$	803,371	$	803,371	$	—

⁽¹⁾	Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
⁽²⁾	Includes the amount of cash collateral held/posted.

		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

	Three Months Ended September 30, 2018
	Reportable Segment
								Principal
				Auction and		Valuation and		Investments -
	Capital Markets			Liquidation		Appraisal		United Online		Total
Revenues from contracts with customers:
Corporate finance, consulting and investment banking fees	$	35,902		$	—	$	—	$	—	$	35,902
Wealth and asset management fees		19,171			—		—		—		19,171
Commissions, fees and reimbursed expenses		10,533			2,399		9,404		—		22,336
Subscription services		—			—		—		9,151		9,151
Service contract revenues		—			108		—		—		108
Advertising and other		—			—		—		2,276		2,276
Total revenues from contracts with customers		65,606			2,507		9,404		11,427		88,944

Other sources of revenue:
Interest income - Securities lending		8,954			—		—		—		8,954
Trading loss on investments		(3,462	)		—		—		—		(3,462	)
Other		5,245			—		—		—		5,245
Total revenues	$	76,343		$	2,507	$	9,404	$	11,427	$	99,681

				Weighted					Weighted
				Average					Average
	Shares			Fair Value		Shares			Fair Value
Nonvested at December 31, 2016		680,135		$	9.74
Nonvested at January 1, 2018							792,264		$	13.30
Granted		486,049			15.91		424,235			20.87
Vested		(193,626	)		10.32		(304,599	)		13.17
Forfeited		(29,724	)		10.49		(9,057	)		12.49
Nonvested at September 30, 2017		942,834		$	12.78
Nonvested at September 30, 2018							902,843		$	16.91


	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, 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	%

	Nine Months September 30, 2017						Nine Months September 30, 2016
	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	%


	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	%

		Incorporated by Reference
Exhibit No.	Description	Form	Exhibit	Filing Date

3.1	Amended and Restated Certificate of Incorporation, as amended, dated as of August 17, 2015	10-Q	3.1	8/3/2018

4.1	Base Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee	8-K	4.1	11/2/2016

4.2	First Supplemental Indenture, dated as of November 2, 2016, by and between the registrant and U.S. Bank National Association, as Trustee	8-K	4.2	11/2/2016

4.3	Form of 7.50% Senior Note due 2021	8-K	4.2	11/2/2016

4.4	Second Supplemental Indenture, dated as of May 31, 2017, by and between the registrant and U.S. Bank National Association, as Trustee	8-K	4.1	5/31/2017

4.5	Form of 7.50% Senior Note due 2027	8-K	4.1	5/31/2017

4.6	Third Supplemental Indenture, dated as of December 13, 2017, by and between the registrant and U.S. Bank National Association, as Trustee	8-K	4.1	12/13/2017

4.7	Form of 7.25% Senior Note due 2027	8-K	4.1	12/13/2017

4.8	Fourth Supplemental Indenture, dated as of May 17, 2018, by and between the Company and U.S. Bank National Association, as Trustee	8-K	4.1	5/17/2018

4.9	Form of 7.375% Senior Note due 2023	8-K	4.2	5/17/2018

4.10	Fifth Supplemental Indenture, dated as of September 11, 2018, by and between the Company and U.S. Bank National Association, as Trustee	8-K	4.1	9/11/2018

4.11	Form of 6.875% Senior Note due 2023	8-K	Exhibit A to Exhibit 4.1	9/11/2018

10.1	2018 Employee Stock Purchase Plan	8-K	10.1	7/31/2018

10.2#	Employment Agreement, dated as of July 10, 2018, by and between the Company and Kenneth M. Young	8-K	10.1	7/16/2018

10.3#	Employment Agreement, dated as of July 10, 2018, by and between B. Riley FBR, Inc. and Andrew Moore	8-K	10.2	7/16/2018

10.4#	Amendment No. 1 to Employment Agreement, dated as of July 10, 2018, by and between the registrant and Bryant R. Riley	8-K	10.3	7/16/2018

10.5#	Amendment No. 1 to Employment Agreement, dated as of July 10, 2018, by and between the registrant and Thomas Kelleher	8-K	10.4	7/16/2018

31.1*	Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2*	Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.3*	Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1**	Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**	Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.
**	Furnished herewith.
#	Management contract or compensatory plan or arrangement

Date: November 5, 2018		B. Riley Financial, Inc.

~~Date: November 9, 2017~~	By:	/s/ PHILLIP J. AHN
		Name: Phillip J. Ahn
		Title: Chief Financial Officer and Chief Operating Officer
		(Principal Financial Officer)