UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2021

 

Or

 

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

 

For the transition period from              to              

 

Commission File Number 001-37503

 

 

 

B. RILEY FINANCIAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-0223495

(State or Other Jurisdiction of
Incorporation or Organization)

  (I.R.S. Employer
Identification No.)

 

11100 Santa Monica Blvd., Suite 800
Los Angeles, CA

 

90025

(Address of Principal Executive Offices)   (Zip Code)

 

(310) 966-1444
(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   RILY   Nasdaq Global Market
Depositary Shares, each representing a 1/1000th
fractional interest in a 6.875% share of Series A
Cumulative Perpetual Preferred Stock
  RILYP   Nasdaq Global Market
Depositary Shares, each representing a 1/1000th
fractional interest in a 7.375% share of Series B
Cumulative Perpetual Preferred Stock
  RILYL   Nasdaq Global Market
7.25% Senior Notes due 2027   RILYG   Nasdaq Global Market
6.50% Senior Notes due 2026   RILYN   Nasdaq Global Market
6.375% Senior Notes due 2025   RILYM   Nasdaq Global Market
6.75% Senior Notes due 2024   RILYO   Nasdaq Global Market
7.375% Senior Notes due 2023   RILYH   Nasdaq Global Market
6.875% Senior Notes due 2023   RILYI   Nasdaq Global Market
6.00% Senior Notes due 2028   RILYT   Nasdaq Global Market
5.50% Senior Notes due 2026   RILYK   Nasdaq Global Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No

 

As of April 27, 2021, there were 27,194,909 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

B. Riley Financial, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2021

 

Table of Contents

 

        Page
PART I. FINANCIAL INFORMATION    
     
Item 1.   Financial Statements   1
    Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020   1
    Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020   2
   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020

  3
    Condensed Consolidated Statements of Equity for the three months ended March 31, 2021 and 2020   4
    Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020   5
    Notes to Unaudited Condensed Consolidated Financial Statements   6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   33
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   47
Item 4.   Controls and Procedures   48
         
PART II. OTHER INFORMATION    
     
Item 1.   Legal Proceedings   49
Item 1A.   Risk Factors   50
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   50
Item 3.   Defaults Upon Senior Securities   50
Item 4.   Mine Safety Disclosures   50
Item 5.   Other Information   50
Item 6.   Exhibits   50
         
SIGNATURES   52

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

   March 31,   December 31, 
   2021   2020 
   (Unaudited)       
Assets          
Assets:          
Cash and cash equivalents  $237,590   $103,602 
Restricted cash   8,532    1,235 
Due from clearing brokers   416,925    7,089 
Securities and other investments owned, at fair value   1,166,704    777,319 
Securities borrowed   1,313,635    765,457 
Accounts receivable, net   62,425    46,518 
Due from related parties   1,079    986 
Advances against customer contracts   200    200 
Loans receivable, at fair value (includes $202,618 and $295,809 from related parties at March 31, 2021 and December 31, 2020, respectively)   294,085    390,689 
Prepaid expenses and other assets   92,812    87,262 
Operating lease right-of-use assets   60,518    48,799 
Property and equipment, net   15,295    11,685 
Goodwill   233,807    227,046 
Other intangible assets, net   205,439    190,745 
Deferred tax assets, net   2,765    4,098 
Total assets  $4,111,811   $2,662,730 
           
Liabilities and Equity          
Liabilities:          
Accounts payable  $7,487   $2,722 
Accrued expenses and other liabilities   267,164    168,478 
Deferred revenue   68,515    68,651 
Deferred tax liabilities, net   101,270    34,248 
Due to related parties and partners   1,503    327 
Due to clearing brokers       13,672 
Securities sold not yet purchased   288,058    10,105 
Securities loaned   1,307,069    759,810 
Mandatorily redeemable noncontrolling interests   4,514    4,700 
Operating lease liabilities   73,630    60,778 
Notes payable   6,908    37,967 
Loan participations sold   11,230    17,316 
Term loan   69,543    74,213 
Senior notes payable, net   1,139,100    870,783 
Total liabilities   3,345,991    2,123,770 
           
Commitments and contingencies (Note 13)   
 
    
 
 
           
B. Riley Financial, Inc. stockholders’ equity:          
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 3,971 shares issued and outstanding as of March 31, 2021 and December 31, 2020; and liquidation preference of $99,260 as of March 31, 2021 and December 31,2020.   
    
 
Common stock, $0.0001 par value; 100,000,000 shares authorized; 27,194,909 and 25,777,796 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.   3    3 
Additional paid-in capital   380,543    310,326 
Retained earnings   352,910    203,080 
Accumulated other comprehensive loss   (1,459)   (823)
Total B. Riley Financial, Inc. stockholders’ equity   731,997    512,586 
Noncontrolling interests   33,823    26,374 
Total equity   765,820    538,960 
Total liabilities and equity  $4,111,811   $2,662,730 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share data)

 

   Three Months Ended
March 31,
 
   2021   2020 
Revenues:        
Services and fees  $289,469   $159,381 
Trading income (losses) and fair value adjustments on loans   266,942    (182,442)
Interest income - Loans and securities lending   36,920    21,851 
Sale of goods   6,828    1,004 
Total revenues   600,159    (206)
Operating expenses:          
Direct cost of services   11,322    19,952 
Cost of goods sold   5,326    769 
Selling, general and administrative expenses   191,344    87,744 
Impairment of tradenames       4,000 
Interest expense - Securities lending and loan participations sold   19,189    8,473 
Total operating expenses   227,181    120,938 
Operating income (loss)   372,978    (121,144)
Other income (expense):          
Interest income   49    246 
Gain (loss) from equity investments   875    (236)
Interest expense   (19,786)   (15,654)
Income (loss) before income taxes   354,116    (136,788)
(Provision) benefit for income taxes   (97,518)   37,539 
Net income (loss)   256,598    (99,249)
Net income (loss) attributable to noncontrolling interests   1,942    (584)
Net income (loss) attributable to B. Riley Financial, Inc.  $254,656   $(98,665)
Preferred stock dividends   1,749    1,055 
Net income (loss) available to common shareholders  $252,907   $(99,720)
           
Basic income (loss) per common share  $9.38   $(3.83)
Diluted income (loss) per common share  $8.81   $(3.83)
           
Weighted average basic common shares outstanding   26,972,275    26,028,613 
Weighted average diluted common shares outstanding   28,710,368    26,028,613 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended
March 31,
 
   2021   2020 
Net income (loss)  $256,598   $(99,249)
Other comprehensive income (loss):          
Change in cumulative translation adjustment   (636)   (1,220)
Other comprehensive loss, net of tax   (636)   (1,220)
Total comprehensive income (loss)   255,962    (100,469)
Comprehensive income (loss) attributable to noncontrolling interests   1,942    (584)
Comprehensive income (loss) attributable to B. Riley Financial, Inc.  $254,020   $(99,885)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(Unaudited)

(Dollars in thousands, except share data)

 

                   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, 2021   3,971   $
    25,777,796   $3   $310,326   $203,080   $(823)  $26,374   $538,960 
Common stock issued, net of offering costs   
    
    1,413,045    
    64,713    
    
    
    64,713 
Vesting of restricted stock and other, net of shares withheld for employer taxes       
    4,068    
    (22)   
    
    
    (22)
Share based payments       
        
    5,526    
    
    
    5,526 
Dividends on common stock ($3.50 per share)       
        
    
    (103,077)   
    
    (103,077)
Dividends on preferred stock       
        
    
    (1,749)   
    
    (1,749)
Net income       
        
    
    254,656    
    1,942    256,598 
Distributions to noncontrolling interests       
        
    
    
    
    (11,257)   (11,257)
Contributions from noncontrolling interests       
        
    
    
    
    3,722    3,722 
Acquisition of noncontrolling interests       
        
    
    
    
    13,042    13,042 
Other comprehensive loss       
        
    
    
    (636)   
    (636)
Balance, March 31, 2021   3,971   $
    27,194,909   $3   $380,543   $352,910   $(1,459)  $33,823   $765,820 
                                              
Balance, January 1, 2020   2,349   $
    26,972,332   $3   $323,109   $39,536   $(1,988)  $29,591   $390,251 
Preferred stock issued   182    
        
    4,630    
    
    
    4,630 
Vesting of restricted stock, net of shares withheld for employer taxes       
    38,298    
    (520)   
    
    
    (520)
Common stock repurchased and retired   
    
    (1,022,065)   
    (24,068)   
    
    
    (24,068)
Share based payments       
        
    5,321    
    
    
    5,321 
Dividends on common stock ($0.35 per share)       
        
    
    (10,048)   
    
    (10,048)
Dividends on preferred stock       
        
    
    (1,055)   
    
    (1,055)
Net loss       
        
    
    (98,665)   
    (584)   (99,249)
Distributions to noncontrolling interests       
        
    
    
    
    (1,021)   (1,021)
Other comprehensive loss       
        
    
    
    (1,220)   
    (1,220)
Balance, March 31, 2020   2,531   $    25,988,565   $3   $308,472   $(70,232)  $(3,208)  $27,986   $263,021 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended
March 31,
 
   2021   2020 
Cash flows from operating activities:          
Net income (loss)  $256,598   $(99,249)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:          
Depreciation and amortization   6,759    4,956 
Provision for doubtful accounts   402    724 
Share-based compensation   5,526    5,322 
Fair value adjustments, non-cash   (10,726)   17,926 
Non-cash interest and other   (4,375)   (2,827)
Effect of foreign currency on operations   (726)   179 
(Income) loss from equity investments   (875)   236 
Dividends from equity investments   305    589 
Deferred income taxes   62,696    (4,254)
Impairment of intangibles and gain on disposal of fixed assets       4,046 
Loss (gain) on extinguishment of debt   919    (1,556)
Gain on equity investment   (3,544)    
Income allocated for mandatorily redeemable noncontrolling interests   130    175 
Change in operating assets and liabilities:          
Due from clearing brokers   (416,038)   12,939 
Securities and other investments owned   (235,504)   125,061 
Securities borrowed   (548,178)   140,168 
Accounts receivable and advances against customer contracts   (3,885)   15,674 
Prepaid expenses and other assets   (5,629)   (37,151)
Accounts payable, accrued expenses and other liabilities   30,505    (22,097)
Amounts due to/from related parties and partners   1,083    752 
Securities sold, not yet purchased   277,446    (27,522)
Deferred revenue   (3,042)   6,589 
Securities loaned   547,259    (139,636)
Net cash (used in) provided by operating activities   (42,894)   1,044 
Cash flows from investing activities:          
Purchases of loans receivable   (75,669)   (115,328)
Repayments of loans receivable   87,476    42,128 
Sale of loan receivable to related party       1,800 
Repayment of loan participations sold   (6,086)   (244)
Acquisition of business, net of $34,924 cash acquired
   (260)   
 
Purchases of property, equipment and other   (101)   (438)
Proceeds from sale of property, equipment and intangible assets       1 
Purchase of equity investments   (4,698)    
Net cash provided by (used in) investing activities   662    (72,081)
Cash flows from financing activities:          
Repayment of asset based credit facility       (37,096)
Repayment of notes payable   (37,610)   (357)
Repayment of term loan   (4,750)   (4,810)
Proceeds from issuance of senior notes   402,404    171,078 
Redemption of senior notes   (128,156)   (1,829)
Payment of debt issuance costs   (7,510)   (2,724)
Payment for contingent consideration   (75)    
Payment of employment taxes on vesting of restricted stock   (22)   (505)
Common dividends paid   (95,183)   (9,609)
Preferred dividends paid   (1,749)   (1,055)
Repurchase of common stock       (24,068)
Distribution to noncontrolling interests   (11,571)   (1,323)
Contribution from noncontrolling interests   3,722     
Proceeds from issuance of common stock   64,713     
Proceeds from issuance of preferred stock       4,630 
Net cash provided by financing activities   184,213    92,332 
Increase in cash, cash equivalents and restricted cash   141,981    21,295 
Effect of foreign currency on cash, cash equivalents and restricted cash   (696)   (1,332)
Net increase in cash, cash equivalents and restricted cash   141,285    19,963 
Cash, cash equivalents and restricted cash, beginning of period   104,837    104,739 
Cash, cash equivalents and restricted cash, end of period  $246,122   $124,702 
           
Supplemental disclosures:          
Interest paid  $36,725   $21,785 
Taxes paid  $53   $574 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data)

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS OPERATIONS

 

B. Riley Financial, Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate, institutional and high net worth clients, and asset disposition, financial consulting, appraisal and capital advisory services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional services firms throughout the United States, Australia, Canada, and Europe and consumer Internet access and cloud communication services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”) and magicJack VocalTec Ltd. (“magicJack”). The Company acquired a majority ownership interest in BR Brands Holding, LLC (“BR Brands” or “Brands”), which provides licensing of trademarks.

 

On February 25, 2021, the Company completed the acquisition of all of the outstanding shares of National Holdings Corporation (“National”) not already owned by the Company. The total cash consideration for the approximately 55% of National outstanding shares that the Company did not previously own and settlement of outstanding share based awards amounted to $35,184. The Company used the acquisition method of accounting for this acquisition. The acquisition expands the Company’s investment banking, wealth management and financial planning offerings by adding National’s brokerage, insurance, tax preparation and advisory services. As a result of the National acquisition, the Company realigned its segment reporting structure in the first quarter of 2021 to reflect organizational management changes for its wealth management business. Under the new structure, the wealth management business previously reported in the Capital Markets segment are now reported in the Wealth Management segment. In conjunction with the new reporting structure, the Company recast its segment presentation for all periods presented.

 

The Company operates in six operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities lending, restructuring, research, sales and trading services to corporate and institutional clients; (ii) Wealth Management, through which the Company provides wealth management and tax services to corporate, institutional and high net worth clients; (iii) Auction and Liquidation, through which the Company provides auction and liquidation services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property; (iv) Financial Consulting, through which the Company provides bankruptcy, financial advisory, forensic accounting, real estate consulting and valuation and appraisal services; (v) Principal Investments - United Online and magicJack, through which the Company provides consumer Internet access and related subscription services from United Online and cloud communication services primarily through the magicJack devices; and (vi) Brands, which is focused on generating revenue through the licensing of trademarks.

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. During the first quarter 2021, the full impact of the COVID-19 outbreak continues to evolve. As the U.S. economy recovers, aided by additional stimulus packages and positive momentum in the domestic vaccine rollout, countries across the world continue to manage repeated waves of the pandemic amid uneven progress toward vaccination. The impact of the COVID-19 outbreak on the Company’s results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions and the success of vaccines in slowing or halting the pandemic. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, the Company’s results of operations, financial position and cash flows may be materially adversely affected.

 

6

 

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Principles of Consolidation and Basis of Presentation

 

The condensed consolidated financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries. The condensed consolidated financial statements also include the accounts of (a) Great American Global Partners, LLC which is controlled by the Company as a result of its ownership of a 50% member interest, appointment of two of the three executive officers and significant influence over the funding of operations, and (b) National Asset Management, Inc. (“NAM”), a federally-registered investment adviser providing asset management advisory services to retail clients for a fee based upon a percentage of assets managed. NAM has a majority voting interest in Innovation X Management, LLC (“Innovation X”), which together serve as the investment manager of an investment fund (see Variable Interest Entities below). Because NAM has the majority voting interest in Innovation X, the results of operations of Innovation X are included in the Company’s consolidated financial statements, and the amount attributable to the other investor is recorded as a non-controlling interest. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

(b) Use of Estimates

 

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items such as valuation of securities and loan receivables, allowance for doubtful accounts, the fair value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share based arrangements, accounting for income tax valuation allowances, recovery of contract assets, sales returns and allowances and contingencies. Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

(c) Interest Expense — Securities Lending Activities and Loan Participations Sold

 

Interest expense from securities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interest expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Company and totaled $18,721 and $7,921 for the three months ended March 31, 2021 and 2020, respectively. Loan participations sold as of March 31, 2021 and 2020 totaled $11,230 and $12,405, respectively. Interest expense from loan participations sold totaled $468 and $552 for the three months ended March 31, 2021 and 2020, respectively.

 

(d) Concentration of Risk

 

Revenues in the Capital Markets, Financial Consulting, Wealth Management, Brands and Principal Investments — United Online and magicJack segments are currently primarily generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States, Australia, Canada and Europe.

 

The Company’s activities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers and secured creditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors. The Company seeks to control its credit risk and potential risk concentration through risk management activities that limit the Company’s exposure to losses on any one specific liquidation services contract or concentration within any one specific industry. To mitigate the exposure to losses on any one specific liquidations services contract, the Company sometimes conducts operations with third parties through collaborative arrangements.

 

7

 

 

The Company maintains cash in various federally insured banking institutions. The account balances at each institution periodically exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. The Company also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributed to parties in accordance with the collaborative arrangements.

 

(e) Advertising Expenses

 

The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $578 and $841 for the three months ended March 31, 2021 and 2020, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

(f) Share-Based Compensation

 

The Company’s share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated with the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed consolidated statements of operations over the requisite service or performance period the award is expected to vest.

 

In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchase common stock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offering period. In accordance with the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. For the three months ended March 31, 2021 and 2020, the Company recognized compensation expense of $227 and $165, respectively, related to the Purchase Plan.

 

(g) Income Taxes

 

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.

 

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

 

(h) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

(i) Restricted Cash

 

As of March 31, 2021, restricted cash included $1,508 of cash collateral for foreign exchange contracts and leases, $471 related to one of the Company’s telecommunication suppliers and $6,553 related to a loan taken out by National under the Paycheck Protection Program Loan (“PPP”). Upon completion of the acquisition of National, in accordance with the provisions of the Small Business Administration regarding changes of ownership of an entity that has received PPP funds, the Company was required to place $6,553 of cash in a restricted cash account with the PPP lender. As of December 31, 2020, restricted cash included $764 of cash collateral for foreign exchange contracts and $471 related to one of the Company’s telecommunication suppliers.

 

8

 

 

(j) Securities Borrowed and Securities Loaned

 

Securities borrowed and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained, or excess collateral recalled, when deemed appropriate.

 

The Company accounts for securities lending transactions in accordance with ASC “Topic 210: Balance Sheet,” which requires companies to report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed consolidated balance sheets.

 

(k) Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Property and equipment held under finance leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $873 and $932 for the three months ended March 31, 2021 and 2020, respectively.

 

(l) Loans Receivable

 

The Company adopted the new credit loss standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized cost. Under the fair value option, loans receivable are measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the consolidated statements of operations. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to the consolidated financial statements.

 

Loans receivable, at fair value totaled $294,085 and $390,689 at March 31, 2021 and December 31, 2020, respectively. The loans have various maturities through March 2027. As of March 31, 2021 and December 31, 2020, the historical cost of loans receivable accounted for under the fair value option was $297,786 and $405,064, respectively, which included principal balances of $306,967 and $416,401, respectively, and unamortized costs, origination fees, premiums and discounts, totaling $9,181 and $11,337, respectively. During the three months ended March 31, 2021 and 2020, the Company recorded unrealized gains (losses) of $10,726 and ($17,926), respectively, on the loans receivable, at fair value, which is included in trading income (losses) and fair value adjustments on loans on the consolidated statements of operations.

 

The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending clients. At March 31, 2021, the Company has outstanding limited guarantees with respect to Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 13. In accordance with the new credit loss standard, the Company evaluates the need to record an allowance for credit losses for these loan guarantees since they have off-balance sheet credit exposures. At March 31, 2021, the Company has not recorded any provision for credit losses on the B&W guarantees since the underlying guaranteed loans are senior to most of the outstanding debt of B&W and the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure. The maximum amount of credit exposure related to these limited guarantees is approximately $80,000.

 

Interest income on loans receivable is recognized based on the stated interest rate of the loan on the unpaid principal balance plus the amortization of any costs, origination fees, premiums and discounts and is included in interest income - loans and securities lending on the consolidated statements of operations. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology.

 

(m) Securities and Other Investments Owned and Securities Sold Not Yet Purchased

 

Securities owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.

 

9

 

 

As of March 31, 2021 and December 31, 2020, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:

 

   March 31,
2021
   December 31,
2020
 
Securities and other investments owned:          
Equity securities  $1,006,019   $697,288 
Corporate bonds   41,754    3,195 
Other fixed income securities   5,165    1,913 
Partnership interests and other   113,766    74,923 
   $1,166,704   $777,319 
           
Securities sold not yet purchased:          
Equity securities  $285,898   $4,575 
Corporate bonds   1,236    4,288 
Other fixed income securities   924    1,242 
   $288,058   $10,105 

 

(n) Fair Value Measurements

 

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

The Company’s securities and other investments owned and securities sold and not yet purchased are comprised of common and preferred stocks and warrants, corporate bonds, and investments in partnerships. Investments in common stocks that are based on quoted prices in active markets are included in Level 1 of the fair value hierarchy. The Company also holds loans receivable valued at fair value, nonpublic common and preferred stocks and warrants for which there is little or no public market and fair value is determined by management on a consistent basis. For investments where little or no public market exists, management’s determination of fair value is based on the best available information which may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments in partnership interests include investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lending funds. The Company also invests in priority investment funds and the underlying securities held by these funds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. The Company’s partnership and investment fund interests are valued based on the Company’s proportionate share of the net assets of the partnerships and funds; the value for these investments are derived from the most recent statements received from the general partner or fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) in accordance with ASC “Topic 820: Fair Value Measurements.”

 

10

 

 

Securities and other investments owned also include investments in nonpublic entities that do not have a readily determinable fair value and do not report NAV per share. These investments are accounted for using a measurement alternative under which they are measured at cost and adjusted for observable price changes and impairments. Observable price changes result from, among other things, equity transactions for the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. For these transactions to be considered observable price changes of the same issuer, we evaluate whether these transactions have similar rights and obligations, including voting rights, distribution preferences, conversion rights, and other factors, to the investments we hold. Any investments adjusted to their fair value by applying the measurement alternative are disclosed as nonrecurring fair value measurements, including the level in the fair value hierarchy that was used. We had no investments measured at fair value on a nonrecurring basis for the three months ended March 31, 2021 and 2020. As of March 31, 2021 and December 31, 2020, investments in nonpublic entities valued using a measurement alternative of $37,348 and $26,948, respectively, are included in securities and other investments owned in the accompanying consolidated balance sheets.

 

The fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.

 

The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.

 

   Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis at March 31, 2021 Using
 
   Fair value at
March 31,
2021
   Quoted prices in
active markets for
identical assets
(Level 1)
   Other
observable inputs
(Level 2)
   Significant
unobservable inputs
(Level 3)
 
Assets:                
Securities and other investments owned:                    
Equity securities  $968,671   $796,701   $   $171,970 
Corporate bonds   41,754        41,754     
Other fixed income securities   5,165        5,165     
Total securities and other investments owned   1,015,590    796,701    46,919    171,970 
Loans receivable, at fair value   294,085            294,085 
Total assets measured at fair value  $1,309,675   $796,701   $46,919   $466,055 
                     
Liabilities:                    
Securities sold not yet purchased:                    
Equity securities  $285,898   $285,898   $   $ 
Corporate bonds   1,236        1,236     
Other fixed income securities   924        924     
Total securities sold not yet purchased   288,058    285,898    2,160     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,514            4,514 
Total liabilities measured at fair value  $292,572   $285,898   $2,160   $4,514 

 

11

 

 

   Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis at December 31, 2020 Using
 
   Fair value at
December 31
2020
   Quoted prices in
active markets for
identical assets
(Level 1)
   Other
observable inputs
(Level 2)
   Significant
unobservable inputs
(Level 3)
 
Assets:                
Securities and other investments owned:                    
Equity securities  $670,340   $521,048   $   $149,292 
Corporate bonds   3,195        3,195     
Other fixed income securities   1,913        1,913     
Total securities and other investments owned   675,448    521,048    5,108    149,292 
Loans receivable, at fair value   390,689            390,689 
Total assets measured at fair value  $1,066,137   $521,048   $5,108   $539,981 
                     
Liabilities:                    
Securities sold not yet purchased:                    
Equity securities  $4,575   $4,575   $   $ 
Corporate bonds   4,288        4,288     
Other fixed income securities   1,242        1,242     
Total securities sold not yet purchased   10,105    4,575    5,530     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,700            4,700 
Total liabilities measured at fair value  $14,805   $4,575   $5,530   $4,700 

 

As of March 31, 2021 and December 31, 2020, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $466,055 and $539,981, respectively, or 11.3% and 20.3%, respectively, of the Company’s total assets. In determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable, over-the-counter market trading activity.

 

12

 

 

The following table summarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities by category of investment and valuation technique as of March 31, 2021:

 

   Fair value at
March 31,
2021
   Valuation Technique  Unobservable Input  Range   Weighted
Average
 
Assets:                     
Equity securities  $171,970   Market approach  Multiple of EBITDA   5.75x - 15.00x    8.00x 
           Multiple of PV-10   0.62x    0.62x 
           Multiple of Sales   1.40x    1.40x 
           Market price of related security   $0.83 - $4.00   $
3.72
 
        Option pricing model  Annualized volatility   0.05 - 1.23    0.83 
Loans receivable at fair value   294,085   Discounted cash flow  Market interest rate   4.9% - 37.5%    14.9% 
Total level 3 assets measured at fair value  $466,055                 
                      
Liabilities:                     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003  $4,514   Market approach  Operating income multiple   6.0x    6.0x 

 

The changes in Level 3 fair value hierarchy during the three months ended March 31, 2021 and 2020 are as follows:

 

   Level 3   Level 3 Changes During the Period   Level 3 
   Balance at
Beginning of
Year
   Fair Value Adjustments   Relating to
Undistributed Earnings
   Purchases,
Sales and
Settlements
   Transfer in
and/or out
of Level 3
   Balance at
End of
Period
 
Three Months Ended March 31, 2021                        
Equity securities  $149,292   $21,600   $
   $6,473   $(5,395)  $171,970 
Loans receivable at fair value   390,689    10,726    2,082    (109,412)   
    294,085 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,700    
    (186)   
    
    4,514 
Three Months Ended March 31, 2020                              
Equity securities  $109,251   $(15,135)  $
   $1,000   $
   $95,116 
Loans receivable at fair value   43,338    (17,926)   1,289    73,750    225,848    326,299 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,616    
    (108)   
    
    4,508 

 

The Company adopted ASU 2016-13 and its amendment ASU 2019-05 effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were measured at amortized cost as of December 31, 2019. The loans receivable, at fair value are included in transfers into level 3 fair value assets in the above table.

 

The amount reported in the table above for the three months ended March 31, 2021 and 2020 includes the amount of undistributed earnings attributable to the noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported in the condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value based on the short-term maturity of these instruments.

 

13

 

 

As of March 31, 2021 and December 31, 2020, the senior notes payable had a carrying amount of $1,139,100 and $870,783, respectively, and fair value of $1,190,847 and $898,606, respectively. The carrying amount of the term loan approximates fair value because the effective yield of such instrument is consistent with current market rates of interest for instruments of comparable credit risk.

 

During the three months ended March 31, 2021 and 2020, except for the impact of the intangible impairment charge in 2020 as described in Note 6 - Goodwill and Intangible Assets, there were no assets or liabilities measured at fair value on a non-recurring basis.

 

(o) Derivative and Foreign Currency Translation

 

The Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain loans receivable and Auction and Liquidation engagements with operations outside the United States. As of March 31, 2021 and December 31, 2020, forward exchange contracts in the amount of 6,000 Euros were outstanding.

 

The forward exchange contracts were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and a loan receivable. The net gain from forward exchange contracts was $310 during the three months ended March 31, 2021. There was no forward exchange contract activity during the three months ended March 31, 2020. This amount is reported as a component of selling, general and administrative expenses in the consolidated statements of operations.

 

The Company transacts business in various foreign currencies. In countries where the functional currency of the underlying operations has been determined to be the local country’s currency, revenues and expenses of operations outside the United States are translated into United States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. Transaction gains were $555 and $949 during the three months ended March 31, 2021 and 2020, respectively. These amounts are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

(p) Equity Investment

 

At March 31, 2021 and December 31, 2020, equity investments of $44,221 and $54,953, respectively, are included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.

 

bebe stores, inc.

 

At March 31, 2021 and December 31, 2020, the Company had a 39.5% ownership interest in bebe stores, inc. (“bebe”). On November 10, 2020, the Company purchased an additional 1,500,000 shares of newly issued common stock of bebe for $7,500 and increased its’ ownership interest increased from 31.5% to 39.5%. The equity ownership in bebe is accounted for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed consolidated balance sheets.

 

As of March 31, 2021, the carrying value of the Company’s equity investment in bebe exceeded the fair value based on the quoted market prices. In consideration of these facts, the Company evaluated its investment for impairment. The Company did not utilize bright-line tests in the evaluation. Based on the available facts and information regarding the operating results of bebe, the Company’s ability and intent to hold the investments until recovery, the relative amount of the declines, and the length of time that the fair values were less than the carrying values, the Company concluded that recognition of impairment losses in earnings was not required. However, the Company will continue to monitor the investment and it is possible that impairment losses will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.

 

National Holdings Corporation

 

As of December 31, 2020, the Company owned approximately 45% of the commons stock of National which is included in prepaid expenses and other assets in the condensed consolidated balance sheets. The equity ownership in National is accounted for under the equity method of accounting for periods prior to February 25, 2021.

 

14

 

 

On February 25, 2021, the Company completed the acquisition of National by acquiring the 55% of common stock not previously owned by the Company pursuant to an agreement and plan of merger dated January 10, 2021, following the successful completion of a tender offer commenced by us on January 27, 2021. The cash consideration for the purchase of the 55% of common stock not previously owned by the Company and settlement of outstanding share based awards was $35,184. National’s operating results subsequent to February 25, 2021 are included in the Company’s condensed consolidated financial statements.

 

Other Equity Investments

 

The Company has other equity investments, the largest being a 40% ownership interest in Lingo Management, LLC (“Lingo”) which was purchased in November 2020. The equity ownership in these other investments is accounted for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed consolidated balance sheets.

 

(q) Loan Participations Sold

 

As of March 31, 2021, the Company has sold investments (“Loan Participations Sold”) to third parties (“Participants”) that are accounted for as secured borrowings under ASC Topic 860, Transfers and Servicing. Under ASC Topic 860, a partial loan transfer does not qualify for sale accounting in order for sale treatment to be allowed. A participation or other partial loan transfer that meets the definition of a participating interest is classified as loan receivable and the portion transferred is recorded as a secured borrowing under loan participations sold in the condensed consolidated balance sheet. The Participants are entitled to payments made by the borrower of the related loan equal to the current Loan Participations Sold outstanding at the interest rates for the respective investment. In the event that the borrower defaults, the Participants have rights to payments from such borrower, but do not have recourse to the Company. The terms of the Loan Participations Sold are commensurate with the terms of the related loan.

 

As of March 31, 2021 and December 31, 2020, the Company had entered into participation agreements for a total of $11,230 and $17,316, respectively. In addition, the interest income and interest expense related to the Loan Participations Sold resulted in interest income and interest expense which is presented gross on the condensed consolidated statements of operations.

 

(r) Supplemental Non-cash Disclosures

 

During the three months ended March 31, 2021, non-cash investing activities included the repayment of a loan receivable in full in the amount of $64,754 with equity securities. In addition, $35,000 of loans receivable were exchanged for $35,000 of newly issued debt securities. During the three months ended March 31, 2020, non-cash investing activities included $4,633 non-cash conversion of an equity method investment.

 

(s) Reclassifications

 

Certain amounts reported in the Capital Markets segment for the period ended March 31, 2020 have been reclassified and reported in the Financial Consulting segment for the period ended March 31, 2020 as a result of the organizational changes that created the new Financial Consulting segment in the fourth quarter of 2020.

 

For the three months ended March 31, 2020, $589 of dividends received from equity method investments that were previously included in cash flows from investing activities have been reclassified and included in cash flows from operating activities to conform to the 2021 presentation. 

 

(t) Variable Interest Entities

 

In 2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. The Partnership is a variable interest entity (“VIE”) since the unaffiliated limited partners do not have substantive kick- out or participating rights to remove the Company’s subsidiary that is the general partner managing the Partnership. The Company has determined that it is not the primary beneficiary due to the fact that its fee arrangements are considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in the Partnership that are considered to be more than insignificant. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.

 

15

 

 

In November 2020, the Company invested in Lingo Management, LLC (“Lingo”), a joint venture with an unaffiliated third party. On March 10, 2021, the Company also extended a promissory note to Lingo Communications, LLC (a wholly owned subsidiary of Lingo). Lingo is a VIE because the entity does not have enough equity at risk to finance its activities without additional subordinated financial support. The Company has determined that it is not the primary beneficiary because it does not have the power to direct the activities of the VIE that most significantly impact the entity’s financial performance. The Company’s variable interests in Lingo include loans receivable at fair value and an equity investment accounted for under the equity method of accounting.

 

The Company, through its newly acquired subsidiary, National, has entered into agreements to provide investment banking and advisory services to numerous investment funds (the “Funds”) that are considered variable interest entities (“VIEs”) under the accounting guidance. These Funds are established primarily to make and manage investments in equity or convertible debt securities of privately held companies that the Company, as investment advisor to the Funds, believes possess innovative or disruptive technologies and present opportunities for an initial public offering (“IPO”) or other similar liquidity event within approximately one to five years from the date of investment. The Funds intend to hold the investments until an IPO or other similar liquidity event and then to make distributions to its investors when contractually permitted, estimated at approximately six months following such IPO or liquidity event.

 

The Company earns fees from the Funds in the form of placement agent fees and carried interest. For placement agent fees, the Company receives a cash fee of generally 7% to 10% of the amount of raised capital for the Funds and the fee is recognized at the time the placement services occurred. The Company receives carried interest as a percentage allocation (8% to 15%) of the profits of the Funds as compensation for asset management services provided to the Funds and it is recognized under the ownership model of ASC 323 as an equity method investment with changes in allocation recorded currently in the results of operations. Once fund investors have received distributions in an amount equal to one hundred percent (100%) of their total capital contributions, the Company as the manager of the Funds will be entitled to share in any profits of the Funds to the extent of the carried interest. As the fee arrangements under such agreements are arm's length and contain customary terms and conditions and represent compensation that is considered fair value for the services provided, the fee arrangements are not considered variable interests and accordingly, the Company does not consolidate such VIEs.

 

Placement agent fees attributable to such arrangements from acquisition date through March 31, 2021 were $11,360 and are included in services and fees in the condensed consolidated statements of operations.

 

The carrying value of the Company’s investments in the VIE that was not consolidated is shown below.

 

   March 31,
2021
 
Partnership investments  $23,515 
Due from related party   71,515 
Maximum exposure to loss  $95,030 

 

(u) Recent Accounting Standards

 

Not yet adopted

 

In March 2020, FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)” (“ASU 2020-04”), which provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate (“LIBOR”). The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently assessing the potential impacts the adoption of ASU 2020-04 may have on its consolidated results of operations, cash flows, financial position or disclosures.

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This Update addresses issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. In addressing the complexity, the Board focused on amending the guidance on convertible instruments and the guidance on the derivatives scope exception for contracts in an entity’s own equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. In addition to eliminating certain accounting models, the ASU also provides guidance to enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance. Additionally, the ASU amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, and to amend the related EPS guidance. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial condition and results of operations.

 

16

 

 

Recently adopted

 

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes on investments, performing intra-period allocations, and calculating income taxes in interim periods. The ASU also adds guidance to reduce the complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The revised guidance will be applied prospectively and is effective for SEC filers for annual periods or interim periods with fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual periods for which financial statements have not been issued. The Company adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.

 

In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in this Update clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The Update is intended to clarify the Codification and make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments in this update are effective for public business entities for fiscal periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. The Company adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.

 

In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The Update contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the Amendments arose because the Board provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option was only included in the Other Presentation Matters Section (Section 45) of the Codification. The option to disclose information in the notes to financial statements should have been codified in the Disclosure section as well as the Other Presentation Matters Section (or other Section of the Codification in which the option to disclose in the notes to financial statements appears). These amendments are not expected to change current practice but are intended to improve the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is included in the Disclosure Section of the Codification, thus reducing the likelihood that the disclosure requirement would be missed. The Board does not anticipate that the amendments will result in any changes to current GAAP. The amendments in the Update are effective for annual periods beginning after December 15, 2020, for public business entities. Early application of the amendments is permitted for public business entities for any annual or interim period for which financial statements have not been issued. The amendments in the Update should be applied retrospectively. The Company adopted the ASU effective January 1, 2021. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position and disclosures.

 

NOTE 3— RESTRUCTURING CHARGE

 

The Company did not record any restructuring charges for the three months ended March 31, 2021 and 2020.

 

The following tables summarize the changes in accrued restructuring charge during the three months ended March 31, 2021 and 2020:

 

   Three Months Ended
March 31,
 
   2021   2020 
Balance, beginning of period  $727    1,600 
Restructuring charge   
    
 
Cash paid   (28)   (316)
Non-cash items   3    
 
Balance, end of period  $702   $1,284 

 

17

 

 

NOTE 4— SECURITIES LENDING

 

The following table presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of March 31, 2021 and December 31, 2020:

 

   Gross amounts recognized   Gross amounts offset in the consolidated balance sheets(1)   Net amounts included in the consolidated balance sheets   Amounts not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default(2)    Net amounts 
As of March 31, 2021                          
Securities borrowed  $1,313,635   $
   $1,313,635   $ 1,313,635    $
 
Securities loaned  $1,307,069   $
   $1,307,069   $ 1,307,069    $
 
As of December 31, 2020                
Securities borrowed  $765,457   $
   $765,457   $ 765,457    $
 
Securities loaned  $759,810   $
   $759,810   $ 759,810    $
 

 

 
(1)Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.

(2)Includes the amount of cash collateral held/posted.

 

NOTE 5— ACCOUNTS RECEIVABLE

 

The components of accounts receivable, net, include the following:

 

   March 31,
2021
   December 31,
2020
 
Accounts receivable  $36,994   $33,604 
Investment banking fees, commissions and other receivables   22,575    10,316 
Unbilled receivables   6,382    5,712 
Total accounts receivable   65,951    49,632 
Allowance for doubtful accounts   (3,526)   (3,114)
Accounts receivable, net  $62,425   $46,518 

 

Unbilled receivables represent the amount of contractual reimbursable costs and fees for services performed in connection with fee and service based auction and liquidation contracts.

 

Additions and changes to the allowance for doubtful accounts consist of the following:

 

   Three Months Ended
March 31,
 
   2021   2020 
Balance, beginning of period  $3,599    1,514 
Add: Additions to reserve   402    1,141 
Less: Write-offs   (501)   (417)
Less: Recovery   26     
Balance, end of period  $3,526   $2,238 

  

18

 

 

NOTE 6— GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill was $233,807 and $227,046 at March 31, 2021 and December 31, 2020, respectively.

 

The changes in the carrying amount of goodwill for the three months ended March 31, 2021 were as follows:

 

   Capital
Markets
Segment
   Wealth
Management
Segment
   Auction and
Liquidation
Segment
   Financial
Consulting
Segment
   Principal
Investments-
United Online
and magicJack
Segment
   Total 
Balance as of December 31, 2020   50,806    28,396    1,975    23,680    122,189    227,046 
Goodwill acquired during the period:                              
Acquisition of business   
    6,761    
    
    
    6,761 
Balance as of March 31, 2021  $50,806   $35,157   $1,975   $23,680   $122,189   $233,807 

 

Intangible assets consisted of the following:

 

      As of March 31, 2021   As of December 31, 2020 
   Useful Life  Gross
Carrying
Value
   Accumulated
Amortization
   Intangibles
Net
   Gross
Carrying
Value
   Accumulated
Amortization
   Intangibles
Net
 
Amortizable assets:                                 
Customer relationships  0.1 to 13 Years  $116,858   $45,622   $71,236   $98,898   $40,281   $58,617 
Domain names  7 Years   235    157    78    235    148    87 
Advertising relationships  8 Years   100    59    41    100    56    44 
Internally developed software and other intangibles  0.5 to 5 Years   11,775    7,335    4,440    11,775    6,913    4,862 
Trademarks  7 to 10 Years   5,469    1,100    4,369    2,850    991    1,859 
Total      134,437    54,273    80,164    113,858    48,389    65,469 
                                  
Non-amortizable assets:                                 
Tradenames      125,275    
    125,275    125,276    
    125,276 
Total intangible assets     $259,712   $54,273   $205,439   $239,134   $48,389   $190,745 

 

Amortization expense was $5,886 and $4,024 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, estimated future amortization expense was $15,295, $17,193, $14,686, $10,745 and $7,519 for the years ended December 31, 2021 (remaining nine months), 2022, 2023, 2024 and 2025, respectively. The estimated future amortization expense after December 31, 2025 was $14,726.

 

In the first quarter of 2020, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, the Company made a qualitative assessment of the impact of the COVID-19 outbreak on goodwill and other intangible assets. The Company determined that the COVID-19 outbreak was a triggering event for testing the indefinite-lived tradenames in the Brands segment and made a determination that the indefinite-lived tradenames in the Brands segment were impaired. In the three months ended March 31, 2020, the Company recognized an impairment charge of $4,000 for the indefinite-lived tradenames in the Brands segment. The Company also determined that there was a further triggering event for testing the indefinite-lived tradenames in the Brands segment in the second quarter of 2020 and made a determination that the indefinite-lived tradenames in the Brands segment were impaired and an additional impairment charge of $8,500 was recorded in the second quarter of 2020. There have been no triggering events subsequent to the second quarter of 2020 for testing indefinite-lived tradenames in the Brands segment. The Company will continue to monitor the impacts of the COVID-19 outbreak in future quarters. Changes in our forecasts could cause the book values of indefinite-lived tradenames to exceed fair values which may result in additional impairment charges in future periods.

 

19

 

 

NOTE 7— NOTES PAYABLE

 

Asset Based Credit Facility

 

On April 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $100,000 to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom. Such facility allows the Company to borrow up to 50,000 British Pounds. Any borrowings on the UK Credit Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. Cash advances and the issuance of letters of credit under the credit facility are made at the lender’s discretion. The letters of credit issued under this facility are furnished by the lender to third parties for the principal purpose of securing minimum guarantees under liquidation services contracts more fully described in Note 2(c) in the Annual Report on Form 10-K. All outstanding loans, letters of credit, and interest are due on the expiration date which is generally within 180 days of funding. The credit facility is secured by the proceeds received for services rendered in connection with liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract. The Company paid Wells Fargo Bank a closing fee in the amount of $500 in connection with the April 2017 amendment to the Credit Agreement. The interest rate for each revolving credit advance under the Credit Agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation engagements funded under the Credit Agreement as set forth therein. Interest expense totaled $108 and $277 for the three months ended March 31, 2021 and 2020, respectively. There was no outstanding balance on this credit facility at March 31, 2021 or December 31, 2020. At March 31, 2021, there were no open letters of credit outstanding.

 

We are in compliance with all financial covenants in the asset based credit facility at March 31, 2021.

 

Paycheck Protection Program

 

On April 10, 2020, NSC (a subsidiary of National) entered into a Promissory Note (the “NSC Note”) with Axos Bank as the lender (the “Lender”), pursuant to which the Lender agreed to make a loan to NSC under the Paycheck Protection Program (the “NSC Loan”) offered by the U.S. Small Business Administration (the “SBA”) pursuant to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to qualified small businesses (the “PPP”) in a principal amount of $5,524. On April 15, 2020, WEC (another subsidiary of National) also entered into a Promissory Note (the “WEC Note” and together with the NSC Note, the “PPP Notes”) with the Lender, pursuant to which the Lender agreed to make a loan to WEC under the PPP (the “WEC Loan” and together with the NSC Loan, the “PPP Loans”) in a principal amount of $973.

 

The interest rate on each PPP Note is a fixed rate of 1% per annum. Interest is calculated by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. The applicable borrower is required to make monthly payments commencing on the first day of the first full calendar month following the end of a statutorily defined deferral period (the “Deferral Period”), and such payments shall continue to be due and payable on the first day of each calendar month thereafter until the date that is two years following the funding date (the “Maturity Date”), or April 13, 2022 in the case of the NSC Note and April 16, 2022 in the case of the WEC Note. Monthly payment amounts are based on repayment of interest accrued during the Deferral Period, interest accruing until and including the Maturity Date, and full amortization of the outstanding principal balance. The PPP loans are included in notes payable in the condensed consolidated balance sheets.

 

According to the terms of the PPP, all or a portion of loans under the PPP may be forgiven if certain conditions set forth in the CARES Act and the rules of the SBA are met. In order to be forgiven, the proceeds of each PPP Loan are to be used to pay for payroll costs, continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; rent; utilities; and interest on certain other outstanding debt; however, 60% of the proceeds of each PPP Loan must be used for payroll purposes.

 

At its option, each of NSC and WEC may prepay all or a portion of its PPP Loan without penalty.

 

Each PPP Note includes events of default, the occurrence and continuation of which would provide the Lender with the right to exercise remedies against NSC or WEC, as applicable, including the right to declare the entire unpaid principal balance under the applicable PPP Note and all accrued unpaid interest immediately due. Upon completion of the acquisition of National, in accordance with the provisions of the Small Business Administration regarding changes of ownership of an entity that has received PPP funds, the Company was required to place $6,553 of cash in a restricted cash account with the PPP lender.

 

20

 

 

Other Notes Payable

 

Notes payable include notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at the prime rate plus 2.0% (5.25% at March 31, 2021) payable annually, maturing January 31, 2022. At March 31, 2021 and December 31, 2020, the outstanding balance for the notes payable was $357 and $714, respectively. Interest expense was $7 and $15 for the three months ended March 31, 2021 and 2020, respectively.

 

Also included in notes payable at December 31, 2020, was a $37,253 note payable to Garrison TNCI LLC which was assumed as part of the Company’s investment in Lingo Management LLC. The note accrued interest at 12.5% per annum and had a maturity date of March 31, 2021. During the three months ended March 31, 2021, interest expense on the note was $238. The note was paid in full in January 2021.

 

NOTE 8 — TERM LOAN

 

On December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacity as borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with the Banc of California, N.A. in the capacity as agent (the “Agent”) and lender and with the other lenders party thereto (the “Closing Date Lenders”). Certain of the Borrowers’ U.S. subsidiaries are guarantors of all obligations under the BRPAC Credit Agreement and are parties to the BRPAC Credit Agreement in such capacity (collectively, the “Secured Guarantors”; and together with the Borrowers, the “Credit Parties”). In addition, the Company and B. Riley Principal Investments, LLC, the parent corporation of BRPAC and a subsidiary of the Company, are guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares outstanding membership interests of BRPAC are pledged as collateral.

 

The obligations under the BRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in, substantially all of the assets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties, (b) 65% of the equity interests in United Online Software Development (India) Private Limited, a private limited company organized under the laws of India; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the laws of Israel. Such security interests are evidenced by pledge, security and other related agreements.

 

The BRPAC Credit Agreement contains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires the Credit Parties to maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and cross defaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the outstanding BRPAC Credit Agreement.

 

Under the BRPAC Credit Agreement, the Company borrowed $80,000 due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, the Company may request additional optional term loans in an aggregate principal amount of up to $10,000 at any time prior to the first anniversary of the agreement date (the “Option Loan”) with a final maturity date of December 19, 2023. On February 1, 2019, the Credit Parties, the Closing Date Lenders, the Agent and City National Bank, as a new lender (the “New Lender”), entered into the First Amendment to the Credit Agreement and Joinder (the “First Amendment”) pursuant to which, among other things, (i) New Lender became a party to the BRPAC Credit Agreement, (ii) the New Lender extended to Borrowers the Option Loan in the amount of $10,000, (iii) the aggregate outstanding principal amount of the term loans was increased from $80,000 to $90,000; and (iv) the amortization schedule under the BRPAC was amended as set forth in the First Amendment. Additionally, in connection with the Option Loan, the Borrowers executed a term note in favor of New Lender dated February 1, 2019 in the amount of $10,000.

 

On December 31, 2020, the Borrowers, the Secured Guarantors, the Agent and the Lenders, entered into the Second Amendment to Credit Agreement (the “Second Amendment”) pursuant to which, among other things, (i) the Lenders agreed to make a new $75,000 term loan to the Borrowers, the proceeds of which the Borrowers’ used to repay the outstanding principal amount of the existing Terms Loans and Optional Loans and will use for other general corporate purposes, (ii) the Borrowers were permitted to make a one-time Permitted Distribution (as defined in the Second Amendment) in the amount of $30,000 on the date of the Second Amendment, (iii) the maturity date of the new Term Loans was set at five (5) years from the date of the Second Amendment, (iv) the interest rate margin was increased by 25 basis points as set forth in the Second Amendment, (v) the Borrowers agreed to make mandatory prepayments of the Term Loans from a portion of the Consolidated Excess Cash Flow (as defined in the Credit Agreement), (vi) the maximum Consolidated Total Funded Debt Ratio (as defined in the Credit Agreement) was increased as set forth in the Second Amendment and (vii) the Company and B. Riley Principal Investments, LLC entered into a reaffirmation of their guarantees of the Borrowers’ obligations under the Credit Agreement. Additionally, the Borrowers paid a commitment fee and an arrangement fee, each based on a percentage of the aggregate commitments, in each case upon the closing of the Second Amendment. Borrowings under the BRPAC Credit Agreement bear interest at a rate equal to (a) the LIBOR rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from 2.75% to 3.25% per annum, based upon the Borrowers’ ratio of consolidated funded indebtedness to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the preceding four fiscal quarters or other applicable period. At March 31, 2021, the interest rate on the BRPAC Credit Agreement was at 3.36%.

 

21

 

 

Amounts outstanding under the Amended BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2021. Quarterly installments from June 30, 2021 to December 31, 2021 are in the amount of $4,750 per quarter, from March 31, 2022 to December 31, 2022 are in the amount of $4,250 per quarter, from March 31, 2023 to December 31, 2023 are in the amount of $3,750 per quarter, from March 31, 2024 to December 31, 2024 are in the amount of $3,250 per quarter, and from March 31, 2025 to December 31, 2025 are in the amount of $2,750 per quarter.

 

As of March 31, 2021 and December 31, 2020, the outstanding balance on the term loan was $69,543 (net of unamortized debt issuance costs of $707) and $74,213 (net of unamortized debt issuance costs of $787), respectively. Interest expense on the term loan during the three months ended March 31, 2021, and 2020, was $714 (including amortization of deferred debt issuance costs of $80) and $829 (including amortization of deferred debt issuance costs of $76), respectively.

 

We are in compliance with all financial covenants in the BRPAC Credit Agreement at March 31, 2021.

 

NOTE 9—SENIOR NOTES PAYABLE

 

Senior notes payable, net, are comprised of the following:

 

   March 31,
2021
   December 31,
2020
 
7.500% Senior notes due May 31, 2027
  $   $128,156 
7.250% Senior notes due December 31, 2027
   122,793    122,793 
7.375% Senior notes due May 31, 2023   137,454    137,454 
6.875% Senior notes due September 30, 2023   115,219    115,168 
6.750% Senior notes due May 31, 2024
   111,171    111,170 
6.500% Senior notes due September 30, 2026
   136,494    134,657 
6.375% Senior notes due February 28, 2025   132,099    130,942 
6.000% Senior notes due January 31, 2028   239,813     
5.500% Senior notes due March 31, 2026   159,493     
    1,154,536    880,340 
Less: Unamortized debt issuance costs   (15,436)   (9,557)
   $1,139,100   $870,783 

 

During the three months ended March 31, 2021, the Company issued $12,858 of senior notes due with maturity dates ranging from May 2023 to January 2028 pursuant to At the Market Issuance Sales Agreements with B. Riley Securities, Inc. which governs the program of at-the-market sales of the Company’s senior notes. A series of prospectus supplements were filed by the Company with the SEC in respect of the Company’s offerings of these senior notes.

 

On January 25, 2021, the Company issued $230,000 of senior notes due in January 2028 (“6.0% 2028 Notes”) pursuant to a prospectus supplement dated February 12, 2020. Interest on the 6.0% 2028 Notes is payable quarterly at 6.0%. The 6.0% 2028 Notes are unsecured and due and payable in full on January 31, 2028. In connection with the issuance of the 6.0% 2028 Notes, the Company received net proceeds of $225,723 (after underwriting commissions, fees and other issuance costs of $4,277). The Notes bear interest at the rate of 6.0% per annum.

 

On March 29, 2021, the Company issued $159,493 of senior notes due in March 2026 (“5.5% 2026 Notes”) pursuant to a prospectus supplement dated January 28, 2021. Interest on the 5.5% 2026 Notes is payable quarterly at 5.5%. The 5.5% 2026 Notes are unsecured and due and payable in full on March 31, 2026. In connection with the issuance of the 5.5% 2026 Notes, the Company received net proceeds of $156,260 (after underwriting commissions, fees and other issuance costs of $3,233). The Notes bear interest at the rate of 5.5% per annum.

 

On March 31, 2021, the Company exercised its option for early redemption at par $128,156 of senior notes due in May 2027 (“7.50% 2027 Notes”) pursuant to the second supplemental indenture dated May 31, 2017. The total redemption payment included $1,602 in accrued interest.

 

At March 31, 2021 and December 31, 2020, the total senior notes outstanding was $1,139,100 (net of unamortized debt issue costs of $15,436) and $870,783 (net of unamortized debt issue costs of $9,557) with a weighted average interest rate of 6.49% and 6.95%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $18,706 and $14,392 for the three months ended March 31, 2021 and 2020, respectively.

 

Sales Agreement Prospectus to Issue Up to $150,000 of Senior Notes

 

The most recent sales agreement prospectus was filed by us with the SEC on April 6, 2021 (the “April 2021 Sales Agreement Prospectus”) supplementing the prospectus filed with the SEC on January 28, 2021 (the “January 2021 Sales Agreement Prospectus”). This program provides for the sale by the Company of up to $150,000 of certain of the Company’s senior notes. As of March 31, 2021, the Company had $137,142 remaining availability under the January 2021 Sales Agreement.

 

22

 

 

NOTE 10—REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenue from contracts with customers by reportable segment for the three months ended March 31, 2021 and 2020 is as follows:

 

   Capital
Markets
Segment
   Wealth
Management
Segment
   Auction and
Liquidation
Segment
   Financial
Consulting
Segment
   Principal
Investments -
United Online
and magicJack
Segment
   Brands
Segment
   Total 
Revenues for the three months ended March 31, 2021                                   
Corporate finance, consulting and investment banking fees  $147,069   $   $
   $13,427   $
   $
   $160,496 
Wealth and asset management fees   2,883    50,511    
    
    
    
    53,394 
Commissions, fees and reimbursed expenses   15,544    13,468    7,057    7,982    
    
    44,051 
Subscription services   
    
    
    
    17,244    
    17,244 
Service contract revenues   
    
    301    
    
    
    301 
Advertising, licensing and other (1)
   
    
    6,092    
    3,285    4,388    13,765 
Total revenues from contracts with customers   165,496    63,979    13,450    21,409    20,529    4,388    289,251 
                                    
Interest income - Loans and securities lending   36,920    
    
    
    
    
    36,920 
Trading gains on investments   253,777    2,356    
    
    
    83    256,216 
Fair value adjustment on loans   10,726    
    
    
    
    
    10,726 
Other   5,483    1,563    
    
    
    
    7,046 
Total revenues  $472,402   $67,898   $13,450   $21,409   $20,529   $4,471   $600,159 
                                    
(1) Includes sale of goods of $6,092 in Auction and Liquidation and $736 in Principal Investments - United Online and magicJack.
 
Revenues for the three months ended March 31, 2020                                   
Corporate finance, consulting and investment banking fees  $55,889   $
   $
   $11,493   $
   $
   $67,382 
Wealth and asset management fees   1,662    18,658    
    
    
    
    20,320 
Commissions, fees and reimbursed expenses   14,470    
    16,178    8,788    
    
    39,436 
Subscription services   
    
    
    
    18,833    
    18,833 
Service contract revenues   
    
    4,483    
    
    
    4,483 
Advertising, licensing and other (1)   
    
    
    
    3,889    3,801    7,690 
Total revenues from contracts with customers   72,021    18,658    20,661    20,281    22,722    3,801    158,144 
                                    
Interest income - Loans and securities lending   21,851    
    
    
    
    
    21,851 
Trading losses on investments   (164,089)   (427)   
    
    
    
    (164,516)
Fair value adjustment on loans   (17,926)   
    
    
    
    
    (17,926)
Other   1,579    229    
    433    
    
    2,241 
Total revenues  $(86,564)  $18,460   $20,661   $20,714   $22,722   $3,801   $(206)

 

(1)Includes sale of goods of $1,004 in Principal Investments - United Online and magicJack.

 

23

 

 

Contract Balances

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligation(s) are satisfied. Receivables related to revenues from contracts with customers totaled $62,425 and $46,518 at March 31, 2021 and December 31, 2020, respectively. The Company had no significant impairments related to these receivables during the three months ended March 31, 2021 and 2020, respectively. The Company also has $6,382 and $5,712 of unbilled receivables at March 31, 2021 and December 31, 2020, respectively, and advances against customer contracts of $200 at March 31, 2021 and December 31, 2020. The Company’s deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment banking advisory engagements, asset management agreements, financial consulting engagements, subscription services where the performance obligation has not yet been satisfied and license agreements with guaranteed minimum royalty payments and advertising/marketing fees with additional royalty revenue based on a percentage of defined sales. Deferred revenue at March 31, 2021 and December 31, 2020 was $68,515 and $68,651, respectively. The Company expects to recognize the deferred revenue of $68,515 at March 31, 2021 as service and fee revenues when the performance obligation is met during the years December 31, 2021 (remaining nine months), 2022, 2023, 2024 and 2025 in the amount of $39,000, $11,395, $7,104, $4,777, and $2,860, respectively. The Company expects to recognize the deferred revenue of $3,379 after December 31, 2025.

 

During the three months ended March 31, 2021 and 2020, the Company recognized revenue of $17,279 and $13,987 that was recorded as deferred revenue at the beginning of the respective year.

 

Contract Costs

 

Contract costs include: (1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the revenue is recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where the revenue is recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack contracts which are recognized ratably over the contract term and third party support costs for magicJack and related equipment purchased by customers which are recognized ratably over the service period.

 

The capitalized costs to fulfill a contract were $257 and $279 at March 31, 2021 and December 31, 2020, respectively, and are recorded in prepaid expenses and other assets in the condensed consolidated balance sheets. For the three months ended March 31, 2021 and 2020, the Company recognized expenses of $57 and $72 related to capitalized costs to fulfill a contract, respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the three months ended March 31, 2021 and 2020.

 

Remaining Performance Obligations and Revenue Recognized from Past Performance

 

The Company does not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at March 31, 2021. 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 March 31, 2021.

 

NOTE 11— INCOME TAXES

 

The Company’s effective income tax rate was 27.5% and 27.4% for the three months ended March 31, 2021 and 2020, respectively.

 

As of March 31, 2021, the Company had federal net operating loss carryforwards of $60,422 and state net operating loss carryforwards of $72,058. The Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2031 through December 31, 2038. The state net operating loss carryforwards will expire in the tax years commencing in December 31, 2025.

 

24

 

 

The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As of March 31, 2021, the Company believes that the existing net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided a valuation allowance. The Company does not believe that it is more likely than not that the Company will be able to utilize the benefits related to capital loss carryforwards and has provided a valuation allowance in the amount of $61,315 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, 2017 to 2020.

 

NOTE 12— EARNINGS PER SHARE

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 387,365 common shares in 2020 that were held in escrow and subject to forfeiture. The 387,365 common shares held in escrow were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations and warranties and related claims pursuant to a related acquisition agreement. Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were 727,994 and 1,820,178 for the three months ended March 31, 2021 and 2020, respectively, because to do so would have been anti-dilutive.

 

Basic and diluted earnings per share were calculated as follows:

 

   Three Months Ended
March 31,
 
   2021   2020 
Net income (loss) attributable to B. Riley Financial, Inc.  $254,656   $(98,665)
Preferred stock dividends   (1,749)   (1,055)
Net income (loss) applicable to common shareholders  $252,907   $(99,720)
           
Weighted average common shares outstanding:          
Basic   26,972,275    26,028,613 
Effect of dilutive potential common shares:          
Restricted stock units and warrants   1,738,093    
 
Diluted   28,710,368    26,028,613 
           
Basic income (loss) per common share  $9.38   $(3.83)
Diluted income (loss) per common share  $8.81   $(3.83)

 

25

 

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

(a) Legal Matters

 

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

 

On January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”) and National Securities Corporation, each an indirect broker-dealer subsidiary of the Company, as defendants 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 Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the Circuit Court for Morgan County, 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. A Court ordered mediation before a federal magistrate took place on August 6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020, the Company agreed to settle this matter, subject to court approval which is expected in 2021.  An accrual for the settlement is included in the accompanying condensed consolidated financial statements.

 

On July 3, 2019, a lawsuit was filed against National Securities Corporation, (“NSC”) National Asset Management, Inc., National, National’s current board members and certain former board members, certain officers of National, John Does 1–10, and the National as a nominal defendant, in the United States District Court for the Southern District of New York, captioned Kay Johnson v. National Securities Corporation, et al., Case No. 1:19-cv-06197-LTS. The complaint presents three purported derivative causes of action on behalf of the Company, and five causes of action by the plaintiff directly. As part of the derivative claims, the complaint generally alleges that certain of the individual defendants failed to establish and maintain adequate internal controls to ensure that the Board acted in accordance with its fiduciary duties to prevent and uncover alleged legal and regulatory misconduct and wrongdoing on the part of a National officer. As part of its claims brought directly by the plaintiff, the complaint generally alleges that certain individual and corporate defendants wrongfully terminated the employment of the plaintiff in violation of the Dodd-Frank Act and applicable common law, or conspired to do so. The complaint further alleges that certain corporate defendants violated the Equal Pay Act with regards to the plaintiff’s compensation. The complaint seeks monetary damages in favor of the Company, an order directing the Company’s board members to take actions to enhance the Company’s governance, compensatory and punitive damages in favor of the plaintiff, and attorneys’ fees and costs. On February 2, 2020, the plaintiff filed an amended complaint presenting additional causes of action. The Company has notified its insurer of the lawsuit and believes it has valid defenses to the asserted claims of the complaint. On March 18, 2020, the defendants filed a motion to dismiss the amended complaint. The plaintiff filed an opposition to the defendants’ motion to dismiss on April 15, 2020, and the defendants filed a reply in further support of the motion to dismiss on May 6, 2020. On August 20, 2020, the parties entered into mediation with a private mediator in an attempt to settle the action and, on January 15, 2021, as a result of the mediation, a settlement was reached. In March 2021, a settlement agreement and release was executed by the parties and all claims have been dismissed.

 

The New York Department of Financial Services (the “Department”) conducted an investigation of NSC’s compliance with the Department’s Cybersecurity Requirements for Financial Services Companies (the “Regulations”). The Regulations establish standards for the cybersecurity programs of entities the Department licenses or otherwise regulates, including NSC. On April 14, 2021, NSC paid the Department a fine of $3,000 as a result of the Department’s finding that NSC violated certain of the Regulations.

 

NSC is a respondent in several Financial Industry Regulatory Authority (“FINRA”) arbitration proceedings filed by investors alleging claims in connection with equity investments in GPB Capital Holdings, LLC (“GPB”) involving matters prior to the Company’s acquisition of National on February 25, 2021. Some of these arbitration claims, among other things, also allege that NSC failed to supervise certain registered representatives. NSC is evaluating each arbitration claim on its own merits. GPB and its affiliates have been the subject of various civil claims and fraud investigations over the past few years and, in February 2021, the U.S. Department of Justice indicted certain individuals affiliated with GPB for material misrepresentations and omissions under the federal securities laws with respect to funds managed by GPB.  At the present time, the Company continues to vigorously defend these actions and is not able to determine the ultimate resolution of these matters. Adverse judgments in these matters in the aggregate could materially and adversely affect the Company and its financial condition.

 

26

 

 

(b) Franchise Group Commitment Letter, Loan Participant Guaranty and CIBC Guarantee

 

PSP Commitment

 

On January 23, 2021, the Company committed up to $400,000 aggregate principal amount of unsecured debt financing, consisting of $100,000 of secured debt financing, and $300,000 of unsecured debt financing, to affiliates of Franchise Group, Inc. (collectively, “FRG”) in connection with FRG’s acquisition of Pet Supplies Plus (“PSP”). FRG consummated the acquisition of PSP in March 2021 and the Company was not required, nor did it provide, any debt financing in connection therewith. At March 31, 2021, there were no further commitments outstanding to FRG.

 

(c) Babcock & Wilcox Commitments and Guarantee

 

On May 14, 2020, the Company entered into an agreement to provide Babcock & Wilcox Enterprises, Inc. (“B&W”) future commitments to loan B&W up to $40,000 at various dates starting in November 2020, of which, at March 31, 2021, no amounts remain available. The Company provided a limited guaranty of B&W’s obligations under B&W’s amended credit facility as more fully described in Note 16 - Related Party Transactions.

 

On August 10, 2020, the Company entered into a project specific indemnity rider (the “Indemnity Rider”) in favor of Berkley Insurance Company and/or Berkley Regional Insurance Company (collectively, “Berkley”) to a general agreement of indemnity made by B&W in favor of Berkley (the Indemnity Agreement”). Pursuant to the Indemnity Rider, the Company agreed to indemnify Berkley in connection with a default by B&W under the Indemnity Agreement relating to a $29,970 payment and performance bond issued by Berkley in connection with a construction project undertaken by B&W. In consideration for providing the Indemnity Rider, B&W paid the Company fees in the amount of $600 on August 26, 2020.

 

(d) Other Commitments

 

On June 19, 2020, the Company participated in a loan facility agreement to provide a total loan commitment up to 33,000 EUROS to a retailer in Europe. The Company made an initial funding of 6,600 EUROS in July 2020. No additional borrowings have been made since the initial funding, leaving unused future commitments available of up to 26,400 EUROS as of March 31, 2021 and December 31, 2020.

 

NOTE 14— SHARE-BASED PAYMENTS

 

(a) Employee Stock Incentive Plans

 

Share-based compensation expense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”) was $5,299 and $5,157 for the three months ended March 31, 2021 and 2020, respectively. During the three months ended March 31, 2021, in connection with employee stock incentive plans, the Company granted 48,714 restricted stock units with a grant date fair value of $2,234 and 1,100,000 performance based restricted stock units with a grant date fair value of $40,876. The restricted stock units generally vest over a period of one to three years based on continued service. Performance based restricted stock units generally vest based on both the employee’s continued service and the achievement of a set threshold of the Company’s common stock price, as defined in the grant, during the three-year period following the grant. In determining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.

 

(b) Employee Stock Purchase Plan

 

In connection with the Company’s Purchase Plan, share based compensation was $227 and $165 for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, there were 502,326 shares reserved for issuance under the Purchase Plan.

 

(c) Common Stock

 

On October 30, 2018, the Company’s Board of Directors authorized a share repurchase program of up to $50,000 of its outstanding common shares. All share repurchases were effected on the open market at prevailing market prices or in privately negotiated transactions. The share repurchase program expired on October 31, 2019. On both October 31, 2019 and 2020, the Company’s Board of Directors authorized share repurchase programs of up to $50,000 of its outstanding common shares. During the year ended December 31, 2020, the Company repurchased 2,165,383 shares of common stock for $48,248. The shares repurchased under the program were retired. During the three months ended March 31, 2021, the Company did not repurchase any shares of its common stock.

 

27

 

 

On January 15, 2021, the Company issued 1,413,045 shares of common stock inclusive of 184,310 shares issued pursuant to the full exercise of the Underwriter’s option to purchase additional shares of common stock at a price of $46.00 per share for net proceeds of approximately $64,713 after underwriting fees and costs.

 

(d) Preferred Stock

 

During the three months ended March 31, 2021, the Company did not issue any depository shares of the Series A Preferred Stock. There were 2,581 shares issued and outstanding as of March 31, 2021 and December 31, 2020. Total liquidation preference for the Series A Preferred Stock at March 31, 2021 and December 31, 2020, was $64,519. Dividends on the Series A preferred paid during the three months ended March 31, 2021, were $0.4296875 per depository share.

 

During the three months ended March 31, 2021, the Company did not issue any depository shares of the Series B Preferred Stock. There were 1,390 shares issued and outstanding as of March 31, 2021 and December 31, 2020. Total liquidation preference for the Series B Preferred Stock at March 31, 2021 and December 31, 2020, was $34,741. Dividends on the Series B preferred paid during the three months ended March 31, 2021, were $0.4609375 per depository share.

 

NOTE 15— NET CAPITAL REQUIREMENTS 

 

B. Riley Securities (“BRS”), B. Riley Wealth Management (“BRWM”), and National Securities Corporation (“NSC”), the Company’s broker-dealer subsidiaries, are registered with the SEC as broker-dealers and 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 maintenance of minimum net capital and requires 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 March 31, 2021, BRS had net capital of $243,991, which was $237,055 in excess of required minimum net capital of $6,936; BRWM had net capital of $8,363, which was $7,627 in excess of required minimum net capital of $736; NSC had net capital of $13,470 which was $12,470 in excess of required minimum net capital of $1,000; Winslow, Evans & Crocker, Inc (“WEC”), a subsidiary of National also subject to Rule 15c3-1, had net capital of $2,127 which was $1,982 in excess of required minimum net capital of $145.

 

NOTE 16— RELATED PARTY TRANSACTIONS

 

At March 31, 2021, amounts due from related parties of $1,079 included $22 from GACP I, L.P. (“GACP I”) and $1,057 from GACP II, L.P. (“GACP II”) for management fees and other operating expenses. At December 31, 2020, amounts due from related parties of $986 included $9 from GACP I, L.P. (“GACP I”) and $544 from GACP II, L.P. (“GACP II”) for management fees and other operating expenses, and $433 due from CA Global Partners (“CA Global”) for operating expenses related to wholesale and industrial liquidation engagements managed by CA Global on behalf of GA Global Partners.

 

At March 31, 2021, the Company had sold loan participations to BRC Partners Opportunity Fund, LP (“BRCPOF”), a private equity fund managed by one of its subsidiaries, in the amount of $6,630, and recorded interest expense of $346 during the three months ended March 31, 2021 related to BRCPOF’s loan participations. The Company also recorded commission income of $330 from introducing trades on behalf of BRCPOF during the three months ended March 31, 2021. Our executive officers and members of our board of directors have a 42.5% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 32.9% in the BRCPOF at March 31, 2021. At March 31, 2021 and December 31, 2020, the Company had outstanding loan to participations to BRCPOF in the amount of $6,630 and $14,816, respectively.

 

On April 1, 2019, the Company entered into a Transfer Agreement (the “Transfer Agreement”) with GACP II, a fund managed by GACP, and John Ahn, who is the brother of Phil Ahn, the Company’s Chief Financial Officer and Chief Operating Officer. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn of 55.56% of the Company’s limited partnership interest in GACP II (the “Transferred Interest”), which represents a capital commitment in the aggregate amount of $5,000. In connection with the Transfer Agreement, the Company provided Mr. J. Ahn with a non-recourse, secured line of credit in an aggregate amount of up to $5,003 pursuant to the terms of a Secured Line of Credit Promissory Note (the “Note”) dated April 1, 2019, to fund the purchase price of the Transferred Interest. We also entered into a Security Agreement with Mr. J. Ahn on April 1, 2019, which granted to the Company a security interest in the Transferred Interest to secure Mr. J. Ahn’s obligations under the Note. The Note is subject to an interest rate per annum of 7.00%. As of December 31, 2019, the principal and accrued interest on the Note were $3,798 and $48, respectively. In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P., a limited partnership controlled by Mr. J. Ahn, (“Whitehawk”). Whitehawk has agreed to provide investment advisory services for GACP I and GACP II. In accordance with the terms of the Note, Mr. J. Ahn surrendered the Transferred Interest to the Company in exchange for the cancellation of the Note. During the three months ended March 31, 2021, management fees paid for investment advisory services by Whitehawk was $1,210.

 

28

 

 

The Company periodically participates in loans and financing arrangements for which the Company has an equity ownership and representation on the board of directors (or similar governing body). The Company may also provide consulting services or investment banking services to raise capital for these companies. These transactions can be summarized as follows:

 

BRPM 150

 

On February 23, 2021, the Company earned $3,366 of underwriting fees from the initial public offering of B. Riley Principal 150 Merger Corp, (“BRPM 150”), which was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “BRPM 150 IPO”). The Company has also agreed to loan BRPM 150 up to $300 for operating expenses. The loan is interest free and there were no amounts outstanding at December 31, 2020. Subsequent to December 31, 2020, the Company loaned BRPM 150 $40 which was repaid in full on March 1, 2021, using proceeds from the BRPM 150 initial public offering.

 

In addition to the above, the Company from time to time participates in commitments, loans and financing arrangements in respect of companies in which the Company has an equity ownership and representation on the board of directors or equivalent body. The Company may also provide consulting services or investment banking services to raise capital for these companies. These transactions can be summarized as follows:

 

Babcock and Wilcox

 

The Company has a last-out term loan receivable due from B&W that is included in loans receivable, at fair value with a fair value of $73,330 and $176,191 at March 31, 2021 and December 31, 2020, respectively. Additionally, the Company holds senior notes from B&W with a fair value of $36,961 at March 31, 2021.

 

On January 31, 2020, the Company provided B&W with an additional $30,000 of last-out term loans pursuant to new amendments to B&W’s credit agreement. On May 14, 2020, it provided B&W with another $30,000 of last-out term loans pursuant to a further amendment to B&W’s credit agreement which also included future commitments for the Company to loan B&W $40,000 at various dates starting in November 2020, of which, at March 31, 2021, no amounts remain available, and a limited guaranty of B&W’s obligations under the amended credit facility, (the “Amendment Transactions”). In November 2020, an additional $10,000 was funded under the Amendment Transactions. Interest is payable quarterly at the fixed rate of 12.0% per annum in common stock of B&W at $2.28 per common share through December 31, 2020 and in cash thereafter. All of these loans were made to B&W as part of various amendments to B&W’s existing credit agreement with other lenders not related to the Company. As part of the Amendment Transactions, the Company entered into the following agreements: (i) an Amendment and Restatement Agreement, dated as of May 14, 2020, among B&W, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, including us; (ii) a Fee Letter, dated as of May 14, 2020, among B&W and us; (iii) a Fee and Interest Equitization Agreement, dated May 14, 2020, between B&W and us; (iv) a Termination Agreement, dated as of May 14, 2020, among us, B&W and acknowledged by Bank of America, N.A. with respect to the Backstop Commitment Letter described below (the “Termination Agreement”); and (v) a Limited Guaranty Agreement, dated as of May 14, 2020, among B&W, Bank of America, N.A and the Company.

 

On January 31, 2020, the Company also entered into a letter agreement with B&W (the “Backstop Commitment Letter”) pursuant to which it agreed to fund any shortfall in the $200,000 of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties on the same terms contemplated by the Refinancing. On May 14, 2020, the Company provided B&W with another $30,000 of last-out term loans pursuant to further amendments to B&W’s credit agreement, which also included future commitments from the Company to loan B&W $40,000 on various dates starting in November 2020 and a limited guaranty of B&W’s obligations under the amended credit facility. The Backstop Commitment Letter terminated pursuant to the Termination Agreement.

 

In connection with making the loan to B&W, in April 2019 the Company received warrants to purchase 1,666,667 shares of common stock of B&W with an exercise price of $0.01 per share. The option to exercise the warrants expires on April 5, 2022.

 

On February 12, 2021, B&W issued the Company an aggregate $35,000 in principal amount of 8.125% senior notes due 2026 in consideration for the cancellation or deemed prepayment of $35,000 principal amount of the existing Tranche A Term Loans made by the Company to B&W.

 

During the three months ended March 31, 2021, the Company earned $10,638 of underwriting and financial advisory and other fees from B&W in connection with B&W’s capital raising activities.

 

29

 

 

One of the Company’s wholly owned subsidiaries entered into a services agreement with B&W that provided for the President of the Company to serve as the Chief Executive Officer of B&W until November 30, 2020 (the “Executive Consulting Agreement”), unless terminated by either party with thirty days written notice. The agreement was extended through December 31, 2023. Under this agreement, fees for services provided are $750 per annum, paid monthly. In addition, subject to the achievement of certain performance objectives as determined by B&W’s compensation committee of the board, a bonus or bonuses may also be earned and payable to the Company.

 

The Company is also a party to an Indemnity Rider with B&W, as disclosed above in Note 13 – Commitments and Contingencies and other limited guarantees as disclosed above in Note 2(l) – Loans Receivable.

 

Maven

 

The Company has loans receivable due from the Maven, Inc. (“Maven”) that are included in loans receivable, at fair value of $59,240 and $56,552 at March 31, 2021 and December 31, 2020, respectively. Interest on these loans is payable at 12.0% to 15.0% per annum with maturity dates through December 2022.

 

On October 28, 2020, in connection with a capital raise by Maven, the Company converted $3,367 of Maven notes receivable into 3,367 shares of Maven Series K Preferred stock. In November 2020, the Company earned $441 of financial advisory fees from Maven in connection with providing services with their capital raising activities. On December 30, 2020, the Company converted loans receivable with a principal value of $9,991 and accrued but unpaid interest of $2,698 into 38,376,090 shares of Maven common stock at an average price of $0.33 per share.

 

Lingo

 

The Company has a loan receivable due from Lingo Management LLC (“Lingo”) included in loans receivable at fair value with a fair value of $55,483 and $55,066 at March 31, 2021 and December 31, 2020, respectively. The term loan bears interest at 16.0% per annum with a maturity date of December 1, 2022. The term loan has a conversion feature under which $17,500 will convert to additional equity ownership upon receipt of certain regulatory approval. If those regulatory approvals are received, the conversion would increase the Company’s ownership interest in Lingo from 40% to 80%. On March 10, 2021, the Company also extended a promissory note to Lingo Communications, LLC (a wholly owned subsidiary of Lingo) in the amount of $1.1 million. The note bears interest at 6% per annum with a maturity date of March 31, 2022.

 

bebe

 

The Company has a loan receivable due from bebe Stores, Inc. included in loans receivable at fair value with a fair value of $8,000 at March 31, 2021 and December 31, 2020. The term loan bears interest at 16.0% per annum with a maturity date of November 10, 2021.

 

Other

 

The Company has loans receivable due from Dash Holding Company, Inc. with a fair value of $3,000 and Rumble On, Inc. with a fair value of $2,500 included in loans receivable at fair value at March 31, 2021. On March 2, 2021, the Company purchased a $2,400 minority equity interest in Dash Medical Holdings, LLC (“Dash”). The Company also loaned Dash Holding Company, Inc. (together with Dash Medical Holdings, LLC, “Dash”), $3,000 pursuant to that certain Subordinated Working Capital Promissory Note (the “Note”) and Subordination Agreement that was entered into on March 2, 2021. The note bears interest at 12.0% per annum with a maturity date of March 1, 2027. Dash is controlled by a member of our Board of Directors. On March 12, 2021, the Company loaned Rumble On, Inc. $2,500, a Company in which two senior executives are on the board, which bears interest at 12% and is due on September 30, 2021.

 

NOTE 17— BUSINESS SEGMENTS

 

The Company’s business is classified into the Capital Markets segment, Wealth Management segment, Auction and Liquidation segment, Financial Consulting segment, Principal Investments — United Online and magicJack segment, and Brands segment. These reportable segments are all distinct businesses, each with a different marketing strategy and management structure.

 

As a result of the National acquisition, the Company realigned its segment reporting structure in the first quarter of 2021 to reflect organizational management changes for its wealth management business. Under the new structure, the wealth management business previously reported in the Capital Markets segment are now reported in the Wealth Management segment. Under the new structure, there is a new segment for Wealth Management. In conjunction with the new reporting structure, the Company recast its segment presentation for all periods presented.

 

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

 

   Three Months Ended
March 31,
 
   2021   2020 
Capital Markets segment:        
Revenues - Services and fees  $170,979   $73,600 
Trading income (losses) and fair value adjustments on loans   264,503    (182,015)
Interest income - Loans and securities lending   36,920    21,851 
Total revenues   472,402    (86,564)
Selling, general and administrative expenses   (86,140)   (28,301)
Interest expense - Securities lending and loan participations sold   (19,189)   (8,473)
Depreciation and amortization   (765)   (596)
Segment income (loss)   366,308    (123,934)
Wealth Management segment:          
Revenues - Services and fees   65,542    18,887 
Trading income (losses) and fair value adjustments on loans   2,356    (427)
Total revenues   67,898    18,460 
Selling, general and administrative expenses   (61,472)   (17,548)
Depreciation and amortization   (2,399)   (483)
Segment income   4,027    429 
Auction and Liquidation segment:          
Revenues - Services and fees   7,358    20,661 
Revenues - Sale of goods   6,092     
Total revenues   13,450    20,661 
Direct cost of services   (6,580)   (14,816)
Cost of goods sold   (4,474)   (29)
Selling, general and administrative expenses   (1,489)   (1,526)
Depreciation and amortization       (1)
Segment income   907    4,289 
Financial Consulting segment:          
Revenues - Services and fees   21,409    20,714 
Selling, general and administrative expenses   (17,989)   (15,729)
Depreciation and amortization   (98)   (67)
Segment income   3,322    4,918 
Principal Investments - United Online and magicJack segment:          
Revenues - Services and fees   19,793    21,718 
Revenues - Sale of goods   736    1,004 
Total revenues   20,529    22,722 
Direct cost of services   (4,742)   (5,136)
Cost of goods sold   (852)   (740)
Selling, general and administrative expenses   (4,870)   (5,463)
Depreciation and amortization   (2,534)   (2,879)
Segment income   7,531    8,504 
Brands segment:          
Revenues - Services and fees   4,388    3,801 
Trading income and fair value adjustments on loans   83    
 
Total revenues   4,471    3,801 
Selling, general and administrative expenses   (676)   (904)
Depreciation and amortization   (714)   (714)
Impairment of tradenames   
    (4,000)
Segment income (loss)   3,081    (1,817)
Consolidated operating income (loss) from reportable segments   385,176    (107,611)
           
Corporate and other expenses (including (loss) gain on extinguishment of debt of ($919) and $1,556 during the three months ended March 31, 2021 and 2020, respectively.)   (12,198)   (13,533)
Interest income   49    246 
Income (loss) on equity investments   875    (236)
Interest expense   (19,786)   (15,654)
Income (loss) before income taxes   354,116    (136,788)
(Provision) benefit for income taxes   (97,518)   37,539 
Net income (loss)   256,598    (99,249)
Net income (loss) attributable to noncontrolling interests   1,942    (584)
Net income (loss) attributable to B. Riley Financial, Inc.   254,656    (98,665)
Preferred stock dividends   1,749    1,055 
Net income (loss) available to common shareholders  $252,907   $(99,720)

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The following table presents revenues by geographical area:

 

   Three Months Ended
March 31,
 
   2021   2020 
Revenues:        
Revenues - Services and fees:        
North America  $288,984   $158,466 
Australia   
    664 
Europe   485    251 
Total Revenues - Services and fees  $289,469   $159,381 
           
Trading income (losses) and fair value adjustments on loans          
North America  $266,942   $(182,442)
           
Revenues - Sale of goods          
North America  $6,828   $1,004 
           
Revenues - Interest income - Loans and securities lending:          
North America  $36,920   $21,851 
           
Total Revenues:          
North America  $599,674   $(1,121)
Australia   
    664 
Europe   485    251 
Total Revenues  $600,159   $(206)

 

During the three months ended March 31, 2021 and December 31, 2020 long-lived assets, which consist of property and equipment and other assets, of $15,295 and $11,685, respectively, were located in North America.

 

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.

 

32

 

 

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 diff