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, brokerage, wealth management, asset management, direct lending, business advisory, valuation, and asset disposition services to a broad client base spanning public and private companies, financial sponsors, investors, financial institutions, legal and professional services firms, and individuals. The Company also has a portfolio of communication related businesses that provide consumer Internet access and cloud communication services and consumer related businesses that consist of a brands portfolio, which provides licensing of trademarks and brand investments, and Targus Cayman Holdco Limited (“Targus”), which designs and sells laptop and computer accessories.
The Company operates in six reportable 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 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) Communications, through which the Company provides consumer Internet access and related subscription services, cloud communication services, and mobile phone voice, text, and data services and devices; and (vi) Consumer, including brands, which generates revenue through the licensing of trademarks, and Targus, which generates revenue through sales of laptop and computer accessories.
During the fourth quarter of 2022, the Company realigned its segment reporting structure to reflect organizational changes from recent acquisitions and the manner in which capital is allocated. The Consumer segment includes the previously reported Brands segment and Targus, which the Company acquired in the fourth quarter of 2022. The Company has also re-aligned its previously reported Principal Investments - Communications and Other segment into the Communications segment and the All Other category that is reported with Corporate and Other.
NOTE 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In connection with the preparation of the consolidated financial statements for the year ended December 31, 2022, the Company identified a classification error of dividend income and realized and unrealized gains (losses) on certain investments within revenue. The following tables summarize the effects of the correction of the classification error on the Company’s restated condensed consolidated statements of operations for the three months ended March 31, 2022. The classification error had no impact on the Company's condensed consolidated balance sheet, condensed consolidated statements of equity, cash flows, net income, or earnings per share.
The following tables present the corrections by financial statement line item within the condensed consolidated statement of operations for all periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| As Previously
Reported | | Restatement Adjustments | | Restatement Reference | | As Restated |
| Statement of Operations | | | | | | | |
| Revenues: | | | | | | | |
| Services and fees | $ | 210,675 | | | $ | (7,861) | | | (a) | | $ | 202,814 | |
| Trading (loss) income and fair value adjustments on loans | (68,390) | | | 49,112 | | | (b) | | (19,278) | |
| Interest income - Loans and securities lending | 61,426 | | | — | | | | | 61,426 | |
| Sale of goods | 1,878 | | | — | | | | | 1,878 | |
| Total revenues | 205,589 | | | 41,251 | | | | | 246,840 | |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Direct cost of services | 11,651 | | | — | | | | | 11,651 | |
| Cost of goods sold | 2,251 | | | — | | | | | 2,251 | |
| Selling, general and administrative expenses | 175,199 | | | — | | | | | 175,199 | |
| | | | | | | |
| | | | | | | |
| Interest expense - Securities lending and loan participations sold | 11,766 | | | — | | | | | 11,766 | |
| Total operating expenses | 200,867 | | | — | | | | | 200,867 | |
| Operating income | 4,722 | | | 41,251 | | | | | 45,973 | |
| | | | | | | |
| Other income (expense): | | | | | | | |
| Interest income | 67 | | | — | | | | | 67 | |
| Dividend income | — | | | 7,861 | | | (a) | | 7,861 | |
| Realized and unrealized gains (losses) on investments | — | | | (49,112) | | | (b) | | (49,112) | |
| Change in fair value of financial instruments and other | 5,981 | | | — | | | | | 5,981 | |
| Income from equity method investments | 6,775 | | | — | | | | | 6,775 | |
| Interest expense | (30,436) | | | — | | | | | (30,436) | |
| Loss before income taxes | (12,891) | | | — | | | | | (12,891) | |
| Provision for income taxes | 3,695 | | | — | | | | | 3,695 | |
| Net loss | (9,196) | | | — | | | | | (9,196) | |
| Net income attributable to noncontrolling interests and redeemable noncontrolling interests | 866 | | | — | | | | | 866 | |
| Net loss attributable to B. Riley Financial, Inc. | (10,062) | | | — | | | | | (10,062) | |
| Preferred stock dividends | 2,002 | | | — | | | | | 2,002 | |
| Net loss available to common shareholders | $ | (12,064) | | | $ | — | | | | | $ | (12,064) | |
| | | | | | | |
| Basic loss per common share | $ | (0.43) | | | | | | | $ | (0.43) | |
| Diluted loss per common share | $ | (0.43) | | | | | | | $ | (0.43) | |
| | | | | | | |
| Weighted average basic common shares outstanding | 27,855,033 | | | | | | | 27,855,033 | |
| Weighted average diluted common shares outstanding | 27,855,033 | | | | | | | 27,855,033 | |
(a) To reclassify dividends received from investments from Services and fees to Dividend income.
(b) To reclassify realized and unrealized gains (losses) on investments from Trading income (loss) and fair value on loans to Realized and unrealized gains (losses) on investments.
NOTE 3 — 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 and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated upon consolidation.
The Company consolidates all entities that it controls through a majority voting interest. In addition, the Company performs an analysis to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity (“VIE”) including ongoing reassessments of whether it is the primary beneficiary of a VIE. See Note 3(o) for further discussion.
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 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, 2022, filed with the SEC on March 16, 2023. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.
(b) Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items such as valuation of securities, allowance for doubtful accounts, the fair value of loans receivables, intangible assets and goodwill, share based arrangements, contingent consideration, and accounting for income tax valuation allowances, recovery of contract assets and sales returns and allowances. Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.
(c) Interest Expense — Securities Lending Activities
Interest expense from securities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interest expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Company and totaled $32,424 and $11,766 during the three months ended March 31, 2023 and 2022, respectively.
(d) Concentration of Risk
Revenues in the Capital Markets, Financial Consulting, Wealth Management, and Communications segments are primarily generated in the United States. Revenues in the Auction and Liquidation segment and Consumer segment are primarily generated in the United States, Australia, Canada, and Europe.
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.
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.
(e) Advertising Expenses
The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $5,121 and $1,763 during the three months ended March 31, 2023 and 2022, respectively. Advertising expense was included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
(f) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
(g) Restricted Cash
As of March 31, 2023 and December 31, 2022, restricted cash included $2,351 and $2,308 of cash collateral for leases, respectively.
Cash, cash equivalents and restricted cash consist of the following:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Cash and cash equivalents | $ | 209,971 | | | $ | 268,618 | |
| Restricted cash | 2,351 | | | 2,308 | |
| Total cash, cash equivalents and restricted cash | $ | 212,322 | | | $ | 270,926 | |
(h) Loans Receivable
Under ASC 326 - Financial Instruments – Credit Losses, 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 receivables are measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the condensed consolidated statements of 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.
Loans receivable, at fair value totaled $772,085 and $701,652 as of March 31, 2023 and December 31, 2022, respectively. The loans have various maturities through March 2027. As of March 31, 2023 and December 31, 2022, the historical cost of loans receivable accounted for under the fair value option was $795,996 and $769,022, respectively, which included principal balances of $799,616 and $772,873 respectively, and unamortized costs, origination fees, premiums and discounts, totaling $3,620 and $3,851, respectively. During the three months ended March 31, 2023 and 2022, the Company recorded net unrealized gains of $43,459 and $10,937, respectively, on the loans receivable at fair value, which was included in trading income (losses) and fair value adjustments on loans on the condensed consolidated statements of operations. Loans receivable, at fair value on non-accrual was $39,552 and $7,153 as of March 31, 2023 and December 31, 2022, respectively, which represented approximately 5.1% and 1.0% of total loans receivable, at fair value as of March 31, 2023 and December 31, 2022, respectively.
The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending clients. As of March 31, 2023, the Company has outstanding limited guarantee arrangements with respect to Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 17. 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. As of March 31, 2023, the Company has not recorded any provision for credit
losses on the B&W guarantees since the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure.
Interest income on loans receivable is recognized based on the stated interest rate of the loan on the unpaid principal balance plus the amortization of any costs, origination fees, premiums and discounts and is included in interest income - loans and securities lending on the condensed consolidated 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.
Badcock Loan Receivable
On December 20, 2021, the Company entered into a Master Receivables Purchase Agreement with W.S. Badcock Corporation, a Florida corporation (“WSBC”), an indirect wholly owned subsidiary of Franchise Group, Inc., a Delaware corporation (“FRG”). The Company paid $400,000 in cash to WSBC for the purchase of certain consumer credit receivables of WSBC. On September 23, 2022, the Company's subsidiary, B Riley Receivables II, LLC (“BRRII”), a Delaware limited liability company, entered into a Master Receivables Purchase Agreement (“2022 Badcock Receivable”) with WSBC. This purchase of $168,363 consumer credit receivables of WSBC was partially financed by a $148,200 term loan discussed in Note 11. During the three months ended March 31, 2023, BRRII entered into Amendment No. 2 and No. 3 to the 2022 Badcock Receivable with WSBC for a total of $145,278 in additional consumer credit receivables. The accounting for these transactions resulted in the Company recording a loan receivable from WSBC with the recognition of interest income at an imputed rate based on the cash flows expected to be received from the collection of the consumer receivables that serve as collateral for the loan. The loan receivable was measured at fair value on the condensed consolidated balance sheets.
In connection with these loans, the Company entered into a Servicing Agreement with WSBC pursuant to which WSBC will provide to the Company certain customary servicing and account management services in respect of the receivables purchased by the Company under the Receivables Purchase Agreement. In addition, subject to certain terms and conditions, FRG has agreed to guarantee the performance by WSBC of its obligations under the Master Receivables Purchase Agreements and the Servicing Agreement.
As of March 31, 2023 and December 31, 2022, loans receivable to WSBC in the Company's condensed consolidated balance sheets included loans measured at fair value in the amount of $324,328 and $318,109, respectively.
(i) Securities and Other Investments Owned and Securities Sold Not Yet Purchased
Securities and other investments owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.
As of March 31, 2023 and December 31, 2022, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Securities and other investments owned: | | | |
| Equity securities | $ | 929,582 | | | $ | 1,046,710 | |
| Corporate bonds | 65,470 | | | 8,539 | |
| Other fixed income securities | 5,248 | | | 3,956 | |
| Partnership interests and other | 48,930 | | | 70,063 | |
| $ | 1,049,230 | | | $ | 1,129,268 | |
| | | |
| Securities sold not yet purchased: | | | |
| Equity securities | $ | 6,122 | | | $ | 4,466 | |
| Corporate bonds | 480 | | | 1,162 | |
| Other fixed income securities | 1,204 | | | 269 | |
| $ | 7,806 | | | $ | 5,897 | |
The Company owns certain equity securities that are accounted for under the fair value option where the Company would otherwise use the equity method of accounting. Investments become subject to the equity method of accounting when the Company possesses the ability to exercise significant influence, but not control, over the operating and financial policies of the investee. The ability to exercise significant influence is presumed when the Company possesses more than 20% of the voting interests of the investee. However, the Company may have the ability to exercise significant influence over the investee when the Company owns less than 20% of the voting interests of the investee depending on the facts and circumstances that demonstrate that the ability to exercise influence is present, such as when the Company has representation on the board of directors of such investee.
The following tables contain summarized financial information with respect to two of the Company's individually greater than 20% investments, where the Company has a voting interest in each investee of 41% and 43%, respectively, which has been aggregated and included below for purposes of the disclosure a quarter in arrears (for balance sheet information the period ended December 31, 2022 and September 30, 2022 correspond to the period ended March 31, 2023 and December 31, 2022, respectively, of the Company and for income statement information the three months ended December 31, 2022 and 2021 correspond to the three months ended March 31, 2023 and 2022, respectively, of the Company), which is the period in which the most recent financial information is available:
| | | | | | | | | | | |
| December 31, 2022 | | September 30, 2022 |
| Total assets | $ | 197,101 | | | $ | 202,520 | |
| Total liabilities | $ | 6,789 | | | $ | 5,737 | |
| Equity attributable to investee | $ | 190,312 | | | $ | 196,783 | |
| | | | | | | | | | | |
| For the three months ended December 31, |
| 2022 | | 2021 |
| Revenues | $ | 27,971 | | | $ | 27,209 | |
| Net income (loss) attributable to investees | $ | 11,808 | | | $ | 12,882 | |
The following tables contain summarized financial information with respect to B&W, where the Company owns a 31% voting interest, included below for purposes of the disclosure a quarter in arrears (for balance sheet information the period ended December 31, 2022 and September 30, 2022 correspond to the period ended March 31, 2023 and December 31, 2022, respectively, of the Company and for income statement information the three months ended December 31, 2022 and 2021 correspond to the three months ended March 31, 2023 and 2022, respectively, of the Company), which is the period in which the most recent financial information is available:
| | | | | | | | | | | |
| December 31,
2022 | | September 30,
2022 |
| Total assets | $ | 942,655 | | | $ | 881,567 | |
| Total liabilities | $ | 944,744 | | | $ | 898,695 | |
| Equity attributable to investee | $ | (2,089) | | | $ | (17,128) | |
| | | | | | | | | | | |
| For the three months ended December 31, |
| 2022 | | 2021 |
| Revenues | $ | 249,877 | | | $ | 192,295 | |
| Net income attributable to investees | $ | 2,021 | | | $ | 25,874 | |
As of March 31, 2023 and December 31, 2022, the fair value of these equity securities totaled $370,502 and $371,948, respectively, and are included in securities and other investments owned, at fair value in the condensed consolidated balance sheets.
(j) 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 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 is 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 820 - Fair Value Measurements. As of March 31, 2023 and December 31, 2022, partnership and investment fund interests valued at NAV of $48,930 and $70,063, respectively, are included in securities and other investments owned in the accompanying condensed consolidated balance sheets.
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. As of March 31, 2023 and December 31, 2022, investments in nonpublic entities valued using a measurement alternative of $86,920 and $94,109, respectively, are included in securities and other investments owned in the accompanying condensed consolidated balance sheets.
The Company measures certain assets at fair value on a nonrecurring basis. These assets include equity method investments when they are deemed to be other-than-temporarily impaired, investments adjusted to their fair value by applying the measurement alternative, assets acquired and liabilities assumed in an acquisition or in a nonmonetary exchange, and property, plant and equipment and intangible assets that are written down to fair value when they are held for sale or determined to be impaired. The Company did not have any material assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition as of March 31, 2023 and December 31, 2022.
As of March 31, 2023 and December 31, 2022, funds held in trust represents amounts invested in a mutual fund that invests in U.S. Treasury securities that were purchased with funds raised through the initial public offering of B. Riley Principal 250 Merger Corporation (“BRPM 250”), which is a consolidated special purpose acquisition corporation (“SPAC”). As of March 31, 2023 and December 31, 2022, the Company had $176,182 and $174,437, respectively, of funds held in trust related to the SPAC. The funds raised are held in a trust account that is restricted for use and may only be used for purposes of completing an initial business combination or redemption of the class A public common shares of the SPAC as set forth in the trust agreement. The funds held in trust are included within Level 1 of the fair value hierarchy and included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.
The Company has warrant liabilities related to warrants of the SPAC that are held by investors in BRPM 250. The warrants are accounted for as liabilities in accordance with ASC 815 - Derivatives and Hedging and are measured at fair value at inception and on a recurring basis using quoted prices in over-the-counter markets. Warrant liabilities are included in Level 1 of the fair value hierarchy and included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets in the amount of $381 and $173 for BRPM 250 as of March 31, 2023 and December 31, 2022, respectively. Changes in fair value of warrants are included within change in fair value of financial instruments and other as part of other income (expense) in the consolidated statements of operations. 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, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of March 31, 2023 Using |
| Fair value as of March 31, 2023 | | Quoted prices in active markets
for identical assets
(Level 1) | | Other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) |
| Assets: | | | | | | | |
| Funds held in trust account | $ | 176,182 | | | $ | 176,182 | | | $ | — | | | $ | — | |
| Securities and other investments owned: | | | | | | | |
| Equity securities | 842,662 | | | 483,621 | | | — | | | 359,041 | |
| Corporate bonds | 65,470 | | | 53,716 | | | 11,754 | | | — | |
| Other fixed income securities | 5,248 | | | — | | | 5,248 | | | — | |
| Total securities and other investments owned | 913,380 | | | 537,337 | | | 17,002 | | | 359,041 | |
| Loans receivable, at fair value | 772,085 | | | — | | | — | | | 772,085 | |
| Total assets measured at fair value | $ | 1,861,647 | | | $ | 713,519 | | | $ | 17,002 | | | $ | 1,131,126 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Securities sold not yet purchased: | | | | | | | |
| Equity securities | $ | 6,122 | | | $ | 6,122 | | | $ | — | | | $ | — | |
| Corporate bonds | 480 | | | — | | | 480 | | | — | |
| Other fixed income securities | 1,204 | | | — | | | 1,204 | | | — | |
| Total securities sold not yet purchased | 7,806 | | | 6,122 | | | 1,684 | | | — | |
| | | | | | | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,654 | | | — | | | — | | | 4,654 | |
| Warrant liabilities | 381 | | | 381 | | | — | | | — | |
| Contingent consideration | 28,884 | | | — | | | — | | | 28,884 | |
| Total liabilities measured at fair value | $ | 41,725 | | | $ | 6,503 | | | $ | 1,684 | | | $ | 33,538 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2022 Using |
| Fair value at December 31, 2022 | | Quoted prices in active markets
for identical assets
(Level 1) | | Other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) |
| Assets: | | | | | | | |
| Funds held in trust account | $ | 174,437 | | | $ | 174,437 | | | $ | — | | | $ | — | |
| Securities and other investments owned: | | | | | | | |
| Equity securities | 952,601 | | | 584,136 | | | — | | | 368,465 | |
| Corporate bonds | 8,539 | | | — | | | 8,539 | | | — | |
| Other fixed income securities | 3,956 | | | — | | | 3,956 | | | — | |
| Total securities and other investments owned | 965,096 | | | 584,136 | | | 12,495 | | | 368,465 | |
| Loans receivable, at fair value | 701,652 | | | — | | | — | | | 701,652 | |
| Total assets measured at fair value | $ | 1,841,185 | | | $ | 758,573 | | | $ | 12,495 | | | $ | 1,070,117 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Securities sold not yet purchased: | | | | | | | |
| Equity securities | $ | 4,466 | | | $ | 4,466 | | | $ | — | | | $ | — | |
| Corporate bonds | 1,162 | | | — | | | 1,162 | | | — | |
| Other fixed income securities | 269 | | | — | | | 269 | | | — | |
| Total securities sold not yet purchased | 5,897 | | | 4,466 | | | 1,431 | | | — | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,648 | | | — | | | — | | | 4,648 | |
| Warrant liabilities | 173 | | | 173 | | | — | | | — | |
| Contingent consideration | 31,046 | | | — | | | — | | | 31,046 | |
| Total liabilities measured at fair value | $ | 41,764 | | | $ | 4,639 | | | $ | 1,431 | | | $ | 35,694 | |
As of March 31, 2023 and December 31, 2022, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $1,131,126 and $1,070,117, respectively, or 17.1% and 17.5%, respectively, of the Company’s total assets. In determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable, over-the-counter market trading activity.
The following table summarizes the significant unobservable inputs in the fair value measurement of Level 3 financial assets and liabilities by category of investment and valuation technique as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value at March 31, 2023 | | Valuation
Technique | | Unobservable
Input | | Range | | Weighted
Average |
| Assets: | | | | | | | | | |
| Equity securities | $ | 297,136 | | | Market approach | | Multiple of EBITDA | | 1.5x - 16.0x | | 6.3x |
| | | | | Multiple of Sales | | 3.8x | | 3.8x |
| | | | | Market price of related security | | $0.01 - $14.05 | | $7.33 |
| 57,974 | | | Discounted cash flow | | Market interest rate | | 23.8% | | 23.8% |
| 3,931 | | | Option pricing model | | Annualized volatility | | 30.0% - 510.0% | | 80.0% |
| Loans receivable at fair value | 744,018 | | | Discounted cash flow | | Market interest rate | | 9.7% - 35.6% | | 18.1% |
| 28,067 | | | Market approach | | Market price of related security | | $13.25 | | $13.25 |
| Total level 3 assets measured at fair value | $ | 1,131,126 | | | | | | | | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ | 4,654 | | | Market approach | | Operating income multiple | | 6.0x | | 6.0x |
| Contingent consideration | 28,884 | | | Discounted cash flow | | EBITDA volatility | | 75% | | 75% |
| | | | | Asset volatility | | 69.0% | | 69.0% |
| | | | | Market interest rate | | 8.5% | | 8.5% |
| | | | | Revenue volatility | | 5.1% | | 5.1% |
| Total level 3 liabilities measured at fair value | $ | 33,538 | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value at December 31,
2022 | | Valuation Technique | | Unobservable Input | | Range | | Weighted
Average |
| Assets: | | | | | | | | | |
| Equity securities | $ | 304,172 | | | Market approach | | Multiple of EBITDA | | 1.5x - 10.5x | | 6.0x |
| | | | | | | | | |
| | | | | Multiple of Sales | | 3.0x | | 3.0x |
| | | | | Market price of related security | | $10.01 - $18.88 | | $16.91 |
| 57,267 | | | Discounted cash flow | | Market interest rate | | 23.8% | | 23.8% |
| 7,026 | | | Option pricing model | | Annualized volatility | | 0.3% - 26.1% | | 70.0% |
| Loans receivable at fair value | 694,499 | | | Discounted cash flow | | Market interest rate | | 6.0% - 83.5% | | 23.9% |
| 7,153 | | | Market approach | | Multiple of EBITDA | | 4.5x | | 4.5x |
| Total level 3 assets measured at fair value | $ | 1,070,117 | | | | | | | | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | $ | 4,648 | | | Market approach | | Operating income multiple | | 6.0x | | 6.0x |
| Contingent consideration | 31,046 | | | Discounted cash flow | | EBITDA volatility | | 80.0% | | 80.0% |
| | | | | Asset volatility | | 69.0% | | 69.0% |
| | | | | Market interest rate | | 8.5% | | 8.5% |
| Total level 3 liabilities measured at fair value | $ | 35,694 | | | | | | | | | |
The changes in Level 3 fair value hierarchy during the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 3
Balance at
Beginning of
Year | | Level 3 Changes During the Period | | Level 3
Balance at
End of
Period |
| Fair
Value
Adjustments | | Relating to
Undistributed
Earnings | | Purchases,
Sales and
Settlements | | Transfer in
and/or out
of Level 3 | |
| Three Months Ended March 31, 2023 | | | | | | | | | | | |
| Equity securities | $ | 368,465 | | | $ | (9,016) | | | $ | — | | | $ | 6,487 | | | $ | (6,895) | | | $ | 359,041 | |
| Loans receivable at fair value | 701,652 | | | 43,459 | | | 231 | | | 26,743 | | | — | | | 772,085 | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,648 | | | — | | | 308 | | | (302) | | | — | | | 4,654 | |
| Contingent consideration | 31,046 | | | (3,447) | | | — | | | 1,285 | | | — | | | 28,884 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | | | | | | | | | | |
| Equity securities | $ | 377,549 | | | $ | (4,543) | | | $ | — | | | $ | 19,912 | | | $ | (4,254) | | | $ | 388,664 | |
| Loans receivable at fair value | 873,186 | | | 10,937 | | | 3,238 | | | (4,970) | | | — | | | 882,391 | |
| Mandatorily redeemable noncontrolling interests issued after November 5, 2003 | 4,506 | | | — | | | 247 | | | (251) | | | — | | | 4,502 | |
| Contingent consideration | — | | | — | | | — | | | 22,464 | | | — | | | 22,464 | |
The amount reported in the table above as of March 31, 2023 and December 31, 2022 included 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.
As of March 31, 2023 and December 31, 2022, the senior notes payable had a carrying amount of $1,722,977 and $1,721,751, respectively, and fair value of $1,258,532 and $1,431,787, respectively. The carrying amount of the term loans approximates fair value because the effective yield of such instruments are consistent with current market rates of interest for instruments of comparable credit risk.
The investments in nonpublic entities that do not report NAV are measured at cost, adjusted for observable price changes and impairments, with changes recognized in trading income (losses) and fair value adjustments on loans on the condensed consolidated statements of operations. These investments are evaluated on a nonrecurring basis based on the observable price changes in orderly transactions for the identical or similar investment of the same issuer. Further adjustments are not made until another observable transaction occurs. Therefore, the determination of fair values of these investments in nonpublic entities that do not report NAV does not involve significant estimates and assumptions or subjective and complex judgments. Investments in nonpublic entities that do not report NAV are subject to a qualitative assessment for indicators of impairment. If indicators of impairment are present, the Company is required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
The following table presents information on the assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022. These investments were measured due to an observable price change or impairment during the periods below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurement Using |
| Total | | Quoted prices in active markets
for identical assets
(Level 1) | | Other observable inputs
(Level 2) | | Significant unobservable inputs
(Level 3) |
| As of March 31, 2023 | | | | | | | |
| Investments in nonpublic entities that do not report NAV | $ | 4,271 | | | $ | — | | | $ | — | | | $ | 4,271 | |
| As of December 31, 2022 | | | | | | | |
| Investments in nonpublic entities that do not report NAV | $ | 20,251 | | | $ | — | | | $ | 18,659 | | | $ | 1,592 | |
(k) 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, 2023 and December 31, 2022, there were no forward exchange contracts 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 zero and $68 during the three months ended March 31, 2023 and 2022, respectively. This amount was reported as a component of selling, general and administrative expenses in the condensed 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 losses were $234 and gains were $296 during the three months ended March 31, 2023 and 2022, respectively. These amounts were included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.
As disclosed in Note 3(o) below, the Company has consolidated a VIE, BRPM 250, which has outstanding warrants that were issued in its initial public offerings. The warrants have been recorded as a liability since the warrants contain a provision to be settled in cash in the event of a qualifying cash tender offer for BRPM 250, which is outside the control of the Company. The outstanding warrants are considered derivative instruments with the warrant liability measured at fair value at each reporting date until exercised or upon expiration, with changes in fair value reported in other income in the condensed consolidated statements of operations. As of March 31, 2023 and December 31, 2022, the warrant liability for BRPM 250 totaled $381 and $173, respectively, which was included in accrued expenses and other liabilities in the condensed consolidated balance sheet.
(l) Redeemable Noncontrolling Interests in Equity of Subsidiaries
The Company records redeemable noncontrolling interests in equity of subsidiaries to reflect the economic interests of the class A ordinary shareholders in the BRPM 250 sponsored SPAC and the 20% noncontrolling interest of Lingo Management, LLC (“Lingo”), which on February 24, 2023, the Company acquired, increasing its ownership interest in Lingo to 100%. These interests are presented as redeemable noncontrolling interests in equity of subsidiaries within the condensed consolidated balance sheet, outside of the permanent equity section. The class A ordinary shareholders of BRPM 250 have redemption rights that are considered to be outside of the Company’s control. Remeasurements to the redemption value of the redeemable noncontrolling interest in equity of subsidiaries are recorded within retained earnings (accumulated deficit). The operating agreement with Lingo has provisions which result in the noncontrolling interest being accounted for as temporary equity. Net income (losses) are reflected in net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in the condensed consolidated statement of operations.
Changes to redeemable noncontrolling interest consist of the following:
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, 2023 |
| Balance, December 31, 2022 | | | | | $ | 178,622 | |
| Net loss | | | | | (146) | |
| Purchase of Lingo minority interest | | | | | (11,190) | |
| Remeasurement adjustments for Lingo and BRPM 250 | | | | | 7,681 | |
| Balance, March 31, 2023 | | | | | $ | 174,967 | |
(m) Equity Investment
As of March 31, 2023 and December 31, 2022, equity investments of $41,816 and $41,298, respectively, were included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. The Company’s share of earnings or losses from equity method investees was included in income from equity investments in the accompanying condensed consolidated statements of operations.
bebe stores, inc.
As of March 31, 2023 and December 31, 2022, the Company had a 41.3% and 40.1% ownership interest in bebe stores, inc. (“bebe”), respectively. The equity ownership in bebe was accounted for under the equity method of accounting and was included in prepaid expenses and other assets in the condensed consolidated balance sheets. The common stock of bebe is publicly traded. The fair value of bebe as of March 31, 2023 and December 31, 2022 was $22,573 and $25,423, respectively. The carrying value of the investment in bebe as of March 31, 2023 and December 31, 2022 was $40,937 and $40,383, respectively.
As of March 31, 2023, the carrying value of the Company’s equity method investment in bebe exceeded the fair value based on the quoted market prices. In consideration of these facts, the Company evaluated its investment for other than temporary impairment under ASC 323. 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.
Other Equity Investments
The Company had other equity method investments over which the Company exercises significant influence but that did not meet the requirements for consolidation, the largest ownership interest being a 40% ownership interest in Lingo, which was acquired in November 2020. On May 31, 2022, the Company's ownership increased to 80% and Lingo's operating results were consolidated with the Company. On February 24, 2023, the Company acquired the remaining 20% ownership in Lingo, increasing the Company's ownership interest from 80% to 100%. The equity ownership in these other investments was accounted for at the applicable times under the equity method of accounting and was included in prepaid expenses and other assets in the condensed consolidated balance sheets.
(n) Supplemental Non-cash Disclosures
During the three months ended March 31, 2023, non-cash investing activities included $15,000 of a convertible note receivable which was included in loans receivable, at fair value, that converted into an equity security, $1,190 of loans receivable, at fair value, was credited to the consideration paid for the purchase of the Lingo noncontrolling interest, and $2,111 of common stock issued as part of the purchase price consideration for a business acquisition. During the three months ended March 31, 2023, non-cash financing activities included $7,000 in seller financing related to the purchase of the Lingo noncontrolling interest. During the three months ended March 31, 2022, non-cash investing activities included $20,320 in issuance of the Company's common stock as part of the purchase price consideration from the FocalPoint acquisition and $22,661 in seller financing for deferred cash consideration.
(o) Variable Interest Entities
The Company holds interests in various entities that meet the characteristics of a VIE but are not consolidated as the Company is not the primary beneficiary. Interests in these entities are generally in the form of equity interests, loans receivable, or fee arrangements.
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.
The Company, has entered into agreements to provide investment banking and advisory services to numerous investment funds (the “Funds”) that are considered variable interest entities under the accounting guidance.
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 - Investments – Equity Method and Joint Ventures as an equity method investment with changes in allocation recorded currently in the results of operations. 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 during the three months ended March 31, 2023 and 2022 were zero and $12,051, respectively, and were included in services and fees in the condensed consolidated statements of operations.
The carrying value of the Company’s investments in the VIEs that were not consolidated is shown below.
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Securities and other investments owned, at fair value | $ | 35,383 | | | $ | 33,743 | |
| Loans receivable, at fair value | 58,611 | | | 46,700 | |
| Other assets | 2,570 | | | 3,755 | |
| Maximum exposure to loss | $ | 96,564 | | | $ | 84,198 | |
B. Riley Principal 150 and 250 Merger Corporations
In 2021, the Company along with BRPM 150 and BRPM 250, both newly formed special purpose acquisition companies incorporated as Delaware corporations, consummated the initial public offerings of 17,250,000 units of BRPM 150 and 17,250,000 units of BRPM 250. Each Unit of BRPM 150 and BRPM 250 consisted of one share of class A common stock and one-third of one redeemable warrant, each whole warrant entitling the holder thereof to purchase one share of BRPM 150 or BRPM 250 class A common stock at an exercise price of $11.50 per share. The BRPM 150 and BRPM 250 Units were each sold at a price of $10.00 per unit, generating gross proceeds to BRPM 150 of $172,500 and BRPM 250 of $172,500. These proceeds which totaled $345,000 were deposited in a trust account established for the benefit of the BRPM 150 and BRPM 250 class A public shareholders and was included in prepaid expenses and other assets in the condensed balance sheet. These proceeds are invested only in U.S. treasury securities in accordance with the governing documents of BRPM 150 and BRPM 250. Under the terms of the BRPM 150 and BRPM 250 initial public offerings, BRPM 150 and BRPM 250 are required to consummate a business combination transaction within 24 months (or 27 months under certain circumstances) of the completion of their respective initial public offerings.
In connection with the completion of the initial public offerings of BRPM 150 and BRPM 250, the Company invested in the private placement units of BRPM 150 and BRPM 250. Both BRPM 150 and BRPM 250 are determined to be VIE’s because each of the entities do not have enough equity at risk to finance their activities without additional subordinated financial support. The Company has determined that the class A shareholders of BRPM 150 and BRPM 250 do not have
substantive rights as shareholders of BRPM 150 and BRPM 250 since these equity interests are determined to be temporary equity. As such, the Company has determined that it is the primary beneficiary of BRPM 150 and BRPM 250 as it has the right to receive benefits or the obligation to absorb losses of each of the entities, as well as the power to direct a majority of the activities that significantly impact BRPM 150 and BRPM 250’s economic performance. Since the Company is determined to be the primary beneficiary, BRPM 150 and BRPM 250 are consolidated into the Company’s financial statements.
On July 19, 2022, BRPM 150 completed a business combination with FaZeClan Holdings, Inc. (“Faze Holdings”) in a reverse merger transaction resulting in BRPM 150 no longer being a VIE of the Company and no longer being included in the consolidated group of the Company. In connection with the de-consolidation of BRPM 150, among other items, prepaid expenses and other assets decreased by $172,584 related to funds held in a trust account and redeemable noncontrolling interests in equity of subsidiaries decreased by $172,500. During the year ended December 31, 2022, the Company recognized incentive fees of $41,885, which was included in services and fees in the consolidated statement of operations.
On April 21, 2023, the Board of Directors of BRPM 250 approved a plan to redeem all of the outstanding shares of Class A common stock of BRPM 250, effective as of May 4, 2023. On May 4, 2023, the funds held in trust in the amount of $176,182 which is included in prepaid expenses and other assets will be distributed to pay income taxes and redeem the $174,967 of the redeemable noncontrolling interest in equity of subsidiaries that is included in the condensed consolidated balance sheet as of March 31, 2023.
(p) Recent Accounting Standards
Not yet adopted
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820). This update clarifies that a contractual restriction on the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security’s unit of account. Therefore, a contractual sale restriction should not be considered when measuring an equity security’s fair value. The update also prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. Specific disclosures related to equity securities subject to contractual sale restrictions are required and include the fair value of such equity securities on the balance sheet, the nature and remaining duration of the corresponding restrictions, and any circumstances that could cause a lapse in the restrictions. The amendments in this update are effective for the Company for fiscal periods beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. Investment companies as defined by Topic 946 should apply the amendments in this update to an equity security with a contract containing a sale restriction that was executed or modified on or after the date of adoption. For an equity security with a contract containing a sale restriction that was executed before the date of adoption, investment companies should continue to account for the equity security under their historical accounting policy for measuring such securities until the contractual restrictions expire or are modified. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial position and results of operations.
Recently adopted
In September 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations to enhance transparency about an entity’s use of supplier finance programs. Under the ASU, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. An entity should also consider whether the existence of a supplier finance program changes the appropriate presentation of the payables in the program from trade payables to borrowings. The Company adopted the ASU effective January 1, 2023. The ASU had no impact on the consolidated results of operations, cash flows, and financial position and was immaterial to the financial statement disclosures.
NOTE 4 — ACQUISITIONS
2022 Acquisitions
Acquisition of Targus
On October 18, 2022, the Company acquired all of the issued and outstanding shares of Targus in a transaction pursuant to a purchase agreement among Targus, the sellers identified therein, and the other parties thereto. The purchase price consideration totaled $247,546, which consisted of cash in the amount of $112,686, seller financing of $54,000, the issuance of $59,016 in 6.75% senior notes due 2024, the issuance of $15,328 of the Company’s common stock and stock options, and deferred payments of $6,515. In accordance with ASC 805, the Company used the acquisition method of accounting for this acquisition. Goodwill of $78,519 and other intangible assets of $89,000 were recorded as a result of the acquisition. The acquisition complements the Company’s existing investments and offers potential growth to the Company’s operations in the Consumer segment.
The assets and liabilities of Targus, both tangible and intangible, were recorded at their estimated fair values as of the October 18, 2022 acquisition date. Acquisition related costs, such as legal, accounting, valuation and other professional fees related to the acquisition of Targus, were charged against earnings in the amount of $1,921 and included in selling, general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2022. Targus goodwill recognized subsequent to the acquisition will be non-deductible for tax purposes.
The fair value of acquisition consideration and preliminary purchase price allocation was as follows:
| | | | | | | | |
| Consideration paid: | | |
| Cash | | $ | 112,686 | |
| Fair value of seller financing | | 54,000 | |
Fair value of 2,400,000 RILYO shares issued in senior notes at $24.59 per share | | 59,016 | |
Fair value of 227,491 B. Riley common shares issued at $42.11 per share | | 9,580 | |
Fair value of 215,876 stock options attributable to service period prior to acquisition | | 5,749 | |
| Fair value of deferred payments | | 6,515 | |
| Total consideration | | $ | 247,546 | |
| | |
| Assets acquired and liabilities assumed: | | |
| Cash and cash equivalents | | $ | 18,810 | |
| Accounts receivable | | 91,039 | |
| Prepaid and other assets | | 90,289 | |
| Right-of-use assets | | 7,665 | |
| Property and equipment | | 8,320 | |
| Other intangible assets | | 89,000 | |
| | |
| Accounts payable | | (54,553) | |
| Accrued expenses and other liabilities | | (61,677) | |
| Deferred income taxes | | (9,989) | |
| Contingent consideration | | (2,212) | |
| Lease liability | | (7,665) | |
| Net tangible assets acquired and liabilities assumed | | 169,027 | |
| Goodwill | | 78,519 | |
| Total | | $ | 247,546 | |
During the three months ended March 31, 2023, goodwill for Targus changed by $2,766 related to certain purchase price accounting adjustments.
The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets:
| | | | | | | | | | | | | | |
| Category | | Useful life | | Fair Value |
| Customer relationships | | 9 years | | $ | 50,000 | |
| Internally developed software and other intangibles | | 1 to 3 years | | 4,000 | |
| Tradenames | | N/A | | 35,000 | |
| Total | | | | $ | 89,000 | |
Unaudited Pro Forma Information
Acquisition of Targus
The following unaudited pro forma financial information is presented to illustrate the estimated effects of the acquisition of Targus as if it had occurred on January 1, 2021. The pro forma amounts include the historical operating results of the Targus prior to the acquisition, with adjustments directly attributable to the acquisition. The pro forma results include adjustments and consequential tax effects to reflect incremental depreciation and amortization expense to be incurred based on preliminary fair values of the identifiable intangible assets acquired, the incremental interest expense associated with the issuance of debt to finance the acquisition, and the adjustments to exclude acquisition related costs incurred during the year ended December 31, 2022 and to recognize these costs during the year ended December 31, 2021 as if incurred on January 1, 2021. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations of the combined company were, nor does it reflect the expected realization of any synergies or cost savings associated with the acquisition.
| | | | | | | | |
| | Pro Forma (unaudited) |
| | Three Months Ended March 31, 2022 |
| | |
| Revenues | | $ | 341,287 | |
| Net loss | | $ | (7,313) | |
| Net loss attributable to B. Riley Financial, Inc. | | $ | (8,179) | |
| Net loss attributable to common shareholders | | $ | (10,181) | |
These pro forma results do not necessarily represent the results of operations that would have been achieved if the acquisition had taken place on January 1, 2021, nor are they indicative of the results of operations for future periods.
Other Acquisitions
During the year ended December 31, 2022, the Company converted $17,500 of a loan receivable with Lingo into equity and the Company's ownership interest in Lingo increased from 40% to 80%. This resulted in the consolidation of Lingo and the pre-existing equity method investment was remeasured at fair value resulting in the recognition of a gain of $6,790, which is included in trading (losses) income and fair value adjustments on loans in the consolidated statements of operations. Upon the consolidation of Lingo on May 31, 2022, the total fair value of the assets of Lingo was $116,500 and the fair value of the 20% noncontrolling interest was $8,021. As part of the acquisition, the Company assumed liabilities in the amount of $32,172 and recorded goodwill of $34,412 and other intangible assets of $63,000 were recorded in the accompanying consolidated balance sheet.
The Company also completed the acquisitions of BullsEye Telecom (“BullsEye”), FocalPoint Securities, LLC (“FocalPoint”), and Atlantic Coast Fibers, LLC (“ACR”) (and related businesses), and other immaterial business. In accordance with ASC 805, the Company used the acquisition method of accounting for these acquisitions, which were not material to our consolidated financial statements. The aggregate purchase price consideration consisted of $145,987 in cash, $20,320 in issuance of common stock of the Company, $52,969 in assumed debt and other consideration payable. The purchase price allocation consisted of $151,925 in goodwill, $52,860 in intangible assets, and $2,522 in net assets acquired. The results of operations of the acquisitions which were not material have been included in our consolidated financial statements from the date of purchase. In February 2023, certain working capital holdback provisions in the
BullsEye purchase agreement were finalized resulting in the Company receiving $1,101 of cash which reduced goodwill from $151,925 to $150,824.
Valuation Assumptions for Purchase Price Allocation
Our valuation assumptions used to value the acquired assets and assumed liabilities require significant estimates, especially with respect to intangible assets, inventories, property and equipment, and deferred income taxes. In determining the fair value of intangible assets acquired, the Company must make assumptions about the future performance of the acquired businesses, including among other things, the forecasted revenue growth attributable to the asset groups and projected operating expenses inclusive of expected synergies, future cost savings, and other benefits expected to be achieved by combining the businesses acquired with the Company. The intangible assets acquired are primarily comprised of customer relationships, trade names and trademarks, developed technology, and backlog. The Company utilized widely accepted income-based, market-based, and cost-based valuation approaches to perform the preliminary purchase price allocations. The estimated fair value of the customer relationships and backlog are determined using the multi-period excess earnings method and the estimated fair value of the trade names and trademarks and developed technology are determined using the relief from royalty method. Both methods require forward looking estimates that are discounted to determine the fair value of the intangible asset using a risk-adjusted discount rate that is reflective of the level of risk associated with future estimates associated with the asset group that could be affected by future economic and market conditions.
NOTE 5 — RESTRUCTURING CHARGE
The Company had $93 and no restructuring charges during the three months ended March 31, 2023 and 2022, respectively. The restructuring charges during the three months ended March 31, 2023 were primarily related to reorganization and consolidation activities in the Wealth Management segment and the Communications segment. Reorganization and consolidation activities consisted of reductions in workforce and facility closures.
The following tables summarize the changes in accrued restructuring charge during the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Balance, beginning of period | $ | 2,335 | | | $ | 624 | | | | | |
| Restructuring charge | 93 | | | — | | | | | |
| Cash paid | (438) | | | (27) | | | | | |
| Non-cash items | 6 | | | 2 | | | | | |
| Balance, end of period | $ | 1,996 | | | $ | 599 | | | | | |
The following table summarizes the restructuring activities by reportable segment during the three months ended March 31, 2023. There were no restructuring charges during the three months ended March 31, 2022.
| | | | | | | | | | | | | | | | | |
| Wealth Management | | Communications | | Total |
| Restructuring charges for the three months ended March 31, 2023: | | | | | |
| Employee termination | $ | — | | | $ | 60 | | | $ | 60 | |
| Facility closure and consolidation | 33 | | | — | | | 33 | |
| Total restructuring charge | $ | 33 | | | $ | 60 | | | $ | 93 | |
NOTE 6 — 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, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2023 | | | | | | | | | |
| Securities borrowed | $ | 2,942,843 | | | $ | — | | | $ | 2,942,843 | | | $ | 2,942,843 | | | $ | — | |
| Securities loaned | $ | 2,937,982 | | | $ | — | | | $ | 2,937,982 | | | $ | 2,937,982 | | | $ | — | |
As of December 31, 2022 | | | | | | | | | |
| Securities borrowed | $ | 2,343,327 | | | $ | — | | | $ | 2,343,327 | | | $ | 2,343,327 | | | $ | — | |
| Securities loaned | $ | 2,334,031 | | | $ | — | | | $ | 2,334,031 | | | $ | 2,334,031 | | | $ | — | |
_________________________
(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 7 — ACCOUNTS RECEIVABLE
The components of accounts receivable, net, include the following:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Accounts receivable | $ | 116,411 | | | $ | 144,120 | |
| Investment banking fees, commissions and other receivables | 10,766 | | | 8,654 | |
| Total accounts receivable | 127,177 | | | 152,774 | |
| Allowance for doubtful accounts | (6,324) | | | (3,664) | |
| Accounts receivable, net | $ | 120,853 | | | $ | 149,110 | |
Additions and changes to the allowance for doubtful accounts consist of the following:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Balance, beginning of period | $ | 3,664 | | | $ | 3,658 | | | | | |
| Add: Additions to reserve | 3,173 | | | 405 | | | | | |
| Less: Write-offs | (488) | | | (960) | | | | | |
| Less: Recovery | (25) | | | — | | | | | |
| Balance, end of period | $ | 6,324 | | | $ | 3,103 | | | | | |
NOTE 8 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Funds held in trust account for BRPM 250 to redeem noncontrolling interests in equity of subsidiaries | $ | 176,182 | | | $ | 174,437 | |
| Inventory | 113,107 | | | 101,675 | |
| Equity method investments | 41,816 | | | 41,298 | |
| Prepaid expenses | 23,699 | | | 17,623 | |
| Unbilled receivables | 14,857 | | | 14,144 | |
| | | |
| Other receivables | 67,902 | | | 66,403 | |
| Other assets | 54,309 | | | 45,116 | |
| Prepaid expenses and other assets | $ | 491,872 | | | $ | 460,696 | |
Unbilled receivables represent the amount of contractual reimbursable costs and fees for services performed in connection with fee and service based contracts in the Auction and Liquidation segment, mobile handsets in the Communications segment, and consulting related engagements in the Financial Consulting segment.
NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $523,997 and $512,595 as of March 31, 2023 and December 31, 2022, respectively.
The changes in the carrying amount of goodwill for the three months ended March 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital
Markets
Segment | | Wealth
Management
Segment | | Auction and
Liquidation
Segment | | Financial
Consulting
Segment | | Communications
Segment | | Consumer Segment | | All Other | | Total |
Balance as of December 31, 2022 | $ | 162,018 | | | $ | 51,195 | | | $ | 1,975 | | | $ | 23,680 | | | $ | 193,195 | | | $ | 75,753 | | | $ | 4,779 | | | $ | 512,595 | |
| | | | | | | | | | | | | | | |
| Acquisition of other business | — | | | — | | | — | | | 7,273 | | | — | | | — | | | 2,428 | | | 9,701 | |
| Other | — | | | — | | | — | | | 36 | | | (1,101) | | | 2,766 | | | — | | | 1,701 | |
Balance as of March 31, 2023 | $ | 162,018 | | | $ | 51,195 | | | $ | 1,975 | | | $ | 30,989 | | | $ | 192,094 | | | $ | 78,519 | | | $ | 7,207 | | | $ | 523,997 | |
During the three months ended March 31, 2023, the changes in goodwill included $36 of foreign currency translation amounts, $(1,101) of working capital settlements as described in Note 4, and $2,766 related to certain purchase price accounting adjustments.
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2023 | | As of December 31, 2022 |
| Useful Life | | Gross Carrying Value | | Accumulated Amortization | | Intangibles Net | | Gross Carrying Value | | Accumulated Amortization | | Intangibles Net |
| Amortizable assets: | | | | | | | | | | | | | |
| Customer relationships | 1.0 to 16 Years | | $ | 270,511 | | | $ | (94,872) | | | $ | 175,639 | | | $ | 268,253 | | | $ | (87,049) | | | $ | 181,204 | |
| Domain names | 7 years | | 185 | | | (176) | | | 9 | | | 185 | | | (169) | | | 16 | |
| Advertising relationships | 8 years | | 100 | | | (84) | | | 16 | | | 100 | | | (81) | | | 19 | |
| Internally developed software and other intangibles | 0.5 to 5 Years | | 28,295 | | | (14,522) | | | 13,773 | | | 28,295 | | | (12,714) | | | 15,581 | |
| Trademarks | 3 to 10 Years | | 21,532 | | | (5,185) | | | 16,347 | | | 23,309 | | | (6,307) | | | 17,002 | |
| Total | | | 320,623 | | | (114,839) | | | 205,784 | | | 320,142 | | | (106,320) | | | 213,822 | |
| | | | | | | | | | | | | |
| Non-amortizable assets: | | | | | | | | | | | | | |
| Tradenames | | | 160,276 | | | — | | | 160,276 | | | 160,276 | | | — | | | 160,276 | |
| Total intangible assets | | | $ | 480,899 | | | $ | (114,839) | | | $ | 366,060 | | | $ | 480,418 | | | $ | (106,320) | | | $ | 374,098 | |
Amortization expense was $10,473 and $6,816 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, estimated future amortization expense was $23,998, $26,786, $22,198, $18,897, and $26,132 for the three months ended March 31, 2023 (remaining nine months), 2024, 2025, 2026 and 2027, respectively. The estimated future amortization expense after December 31, 2027 was $87,773.
NOTE 10 — NOTES PAYABLE
Asset Based Credit Facility
The Company is party to a credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) with a maximum borrowing limit of $200,000 and a maturity date of April 20, 2027. 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. 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 interest rate for each revolving credit advance under the Credit Agreement is subject to certain terms and conditions, equal to the Secured Overnight Financing Rate (“SOFR”) 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 provides for success fees in the amount of 1.0% to 10.0% of the net profits, if any, earned on the liquidation engagements funded under the Credit Agreement as set forth therein. The credit facility also provides for funding fees in the amount of 0.05% to 0.20% of the aggregate principal amount of all credit advances and letters of credit issued in connection with a liquidation sale. Interest expense totaled $18 and $108 during the three months ended March 31, 2023 and 2022, respectively. There was no outstanding balance on this credit facility as of March 31, 2023 and December 31, 2022. As of March 31, 2023, there were no open letters of credit outstanding.
The Company is in compliance with all financial covenants in the asset based credit facility as of March 31, 2023.
Other Notes Payable
As of March 31, 2023 and December 31, 2022, the outstanding balance for the other notes payable was $19,882 and $25,263, respectively. Interest expense was $174 and $232 during the three months ended March 31, 2023 and 2022, respectively. Notes payable primarily consisted of additional deferred cash consideration owed to the sellers of FocalPoint and a promissory note related to the Lingo minority interest purchase as of March 31, 2023. Notes payable to a clearing organization for one of the Company’s broker dealers, which accrued interest at the prime rate plus 2.0%, matured on January 31, 2022 and was repaid during December 31, 2022.
NOTE 11 — TERM LOANS AND REVOLVING CREDIT FACILITY
Targus Credit Agreement
On October 18, 2022, the Company's subsidiary, Tiger US Holdings, Inc. (the “Borrower”), a Delaware corporation, among others, entered into a credit agreement (“Targus Credit Agreement”) with PNC Bank, National Association (“PNC”), as agent and security trustee for a five-year $28,000 term loan and a five-year $85,000 revolver loan, which was used to finance part of the acquisition of Targus.
The Targus Credit Agreement contains certain covenants, including those limiting the Borrower’s 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. The Targus 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 outstanding under the Targus Credit Agreement. The Company is in compliance with all financial covenants in the Targus Credit Agreement as of March 31, 2023.
The term loan bears interest on the outstanding principal amount equal to the term SOFR rate plus an applicable margin of 3.75%. The revolver loan consists of base rate loans that bear interest on the outstanding principal amount equal to the base rate plus an applicable margin of 1.00% to 1.75% and term rate loans that bear interest on the outstanding principal amount equal to the revolver SOFR rate plus an applicable margin of 2.00% to 2.75%.
Principal outstanding is due in quarterly installments starting on December 31, 2022. Quarterly installments from June 30, 2023 to September 30, 2027 are in the amount of $1,400 per quarter and the remaining principal balance is due at final maturity on October 18, 2027.
As of March 31, 2023 and December 31, 2022, the outstanding balance on the term loan was $24,678 (net of unamortized debt issuance costs of $522) and $26,021 (net of unamortized debt issuance costs of $580), respectively, and the outstanding balance on the revolver loan was $62,463 and $52,978, respectively. Interest expense on these loans during the three months ended March 31, 2023 was $1,689 (including amortization of deferred debt issuance costs and unused commitment fees of $173). The interest rate on the term loan was 8.66% and 8.43% and the interest rate on the revolver loan ranged between 6.66% and 9.75% and between 6.03% to 9.25% as of March 31, 2023 and December 31, 2022, respectively.
Pathlight Credit Agreement
On September 23, 2022, the Company's subsidiary, B. Riley Receivables II, LLC, a Delaware limited liability company (the “Borrower”), entered into a credit agreement (the “Pathlight Credit Agreement”) by and among PLC Agent, LLC in the capacity as administrative agent and Pathlight Capital Fund I LP, Pathlight Capital Fund II LP, and Pathlight Capital Fund III LP as the lenders (collectively, “Pathlight”) for a five-year $148,200 term loan. On January 12, 2023, Amendment No. 2 to the Pathlight Credit Agreement increased the term loan by an additional $78,296. On March 31, 2023, Amendment No. 3 to the Pathlight Credit Agreement increased the term loan by an additional $49,890. The term loan bears interest on the outstanding principal amount equal to the term SOFR rate plus an applicable margin of 6.50%. As of March 31, 2023 and December 31, 2022, the interest rate on the Pathlight Credit Agreement was 11.40% and 11.01%, respectively.
The Pathlight Credit Agreement contains certain covenants, including those limiting the Borrower’s 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. The Pathlight 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 Pathlight Credit Agreement. The Company is in compliance with all financial covenants in the Pathlight Credit Agreement as of March 31, 2023.
Principal outstanding under the Pathlight Credit Agreement is repaid based on collections of the 2022 Badcock Receivable less other application of payments as defined in the Pathlight Credit Agreement and the remaining principal balance is due at final maturity on September 23, 2027. As of March 31, 2023 and December 31, 2022, the outstanding balance on the term loan was $184,358 (net of unamortized debt issuance costs of $3,837) and $118,437 (net of unamortized debt issuance costs of $2,377), respectively. Interest expense on the term loan during the three months ended March 31, 2023 was $6,430 (including amortization of deferred debt issuance costs of $1,744).
Lingo Credit Agreement
On August 16, 2022, the Company's subsidiary, Lingo (the “Borrower”), entered into a credit agreement (the “Lingo Credit Agreement”) by and among the Borrower, the Company as the secured guarantor, and Banc of California, N.A. in its capacity as administrative agent and lender, for a five-year $45,000 term loan. This loan was used to finance part of the purchase of Bullseye by Lingo. On September 9, 2022, Lingo entered into the First Amendment to the Lingo Credit Agreement with Grasshopper Bank (the “New Lender”) for an incremental term loan of $7,500, increasing the principal balance of the term loan to $52,500. On November 10, 2022, Lingo entered into the Second Amendment to the Lingo Credit Agreement with KeyBank National Association for an incremental term loan of $20,500, increasing the principal balance of the term loan to $73,000.
The term loan bears interest on the outstanding principal amount equal to the term SOFR rate plus a margin of 3.00% to 3.75% per annum, depending on the consolidated total funded debt ratio as defined in the Lingo Credit Agreement, plus applicable spread adjustment. As of March 31, 2023 and December 31, 2022, the interest rate on the Lingo Credit Agreement was 8.48% and 7.89%, respectively.
The Lingo Credit Agreement contains certain covenants, including those limiting the Borrower’s ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of its businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Lingo Credit Agreement requires the Borrower to maintain certain financial ratios. The Lingo 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 Lingo Credit Agreement. The Company is in compliance with all financial covenants in the Lingo Credit Agreement as of March 31, 2023.
Principal outstanding is due in quarterly installments. Quarterly installments from June 30, 2023 to December 31, 2023 are in the amount of $2,281 per quarter, from March 31, 2024 to December 31, 2024 are in the amount of $2,738 per quarter, from March 31, 2025 to June 30, 2027 are in the amount of $3,650, and the remaining principal balance is due at final maturity on August 16, 2027.
As of March 31, 2023 and December 31, 2022, the outstanding balance on the term loan was $69,778 (net of unamortized debt issuance costs of $940) and $71,985 (net of unamortized debt issuance costs of $1,016), respectively. Interest expense on the term loan during the three months ended March 31, 2023 was $1,561 (including amortization of deferred debt issuance costs of $75).
Nomura Credit Agreement
On June 23, 2021, the Company, and its wholly owned subsidiaries, BR Financial Holdings, LLC (the “Primary Guarantor”), and BR Advisory & Investments, LLC (the “Borrower”) entered into a credit agreement (as amended, the “Credit Agreement”) with Nomura Corporate Funding Americas, LLC, as administrative agent (the “Administrative Agent”), and Wells Fargo Bank, N.A., as collateral agent (the “Collateral Agent”), for a four-year $200,000 secured term loan credit facility (the “Term Loan Facility”) and a four-year $80,000 secured revolving loan credit facility (the “Revolving Credit Facility”).
On December 17, 2021 (the “Amendment Date”), the Company, the Primary Guarantor, and the Borrower entered into a Second Incremental Amendment to Credit Agreement, pursuant to which the Borrower established an incremental facility in an aggregate principal amount of $100,000 (the “Incremental Facility” and the incremental term loans made thereunder,
the “Incremental Term Loans”) of secured term loans under the Credit Agreement on terms identical to those applicable to the Term Loan Facility. The Borrower borrowed the full amount of the Incremental Term Loans on the Amendment Date. The Term Loan Facility, Revolving Credit Facility, and Incremental Facility (together, the “Credit Facilities”), mature on June 23, 2025, subject to acceleration or prepayment.
SOFR rate loans under the Credit Facilities accrue interest at the term SOFR rate plus a term SOFR adjustment determined by the selected interest period and an applicable margin of 4.50%. Base rate loans accrue interest at the Base Rate plus an applicable margin of 3.50%. In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, the Company is required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by the average utilization of the facility for the immediately preceding fiscal quarter.
Subject to certain eligibility requirements, the assets of certain subsidiaries of the Company that hold credit assets, private equity assets, and public equity assets are placed into a borrowing base, which serves to limit the borrowings under the Credit Facilities. If borrowings under the facilities exceed the borrowing base, the Company is obligated to prepay the loans in an aggregate amount equal to such excess. The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit the Company’s, the Primary Guarantor’s, the Borrower’s, and the Borrower’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends or to make other distributions or redemptions/repurchases in respect of their respective equity interests. In addition, the Credit Agreement contains a financial covenant that requires the Company to maintain operating earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $135,000 and the Primary Guarantor to maintain net asset value of at least $1,100,000. The Credit Agreement contains customary events of default, including with respect to a failure to make payments under the credit facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events. The Company is in compliance with all financial covenants in the Credit Agreement as of March 31, 2023.
Commencing on September 30, 2022, the Term Loan Facility and Incremental Facility began to amortize in equal quarterly installments of 1.25% of the aggregate principal amount of the term loan as of the closing date with the remaining balance due at final maturity on June 23, 2025. Quarterly installments from June 30, 2023 to March 31, 2025 are in the amount of $3,750 per quarter.
As of March 31, 2023 and December 31, 2022, the outstanding balances on the Term Loan Facility and Incremental Facility were $283,739 (net of unamortized debt issuance costs of $5,011) and $286,962 (net of unamortized debt issuance costs of $5,538), respectively. Interest on the term loan during the three months ended March 31, 2023 and 2022 was $7,300 (including amortization of deferred debt issuance costs of $527) and $4,102 (including amortization of deferred debt issuance costs of $509, respectively. The interest rate on the term loan as of March 31, 2023 and December 31, 2022 was 9.59% and 9.23%, respectively.
The Company had an outstanding balance of $77,000 and $74,700 under the Revolving Credit Facility as of March 31, 2023 and December 31, 2022, respectively. Interest on the revolving facility during the three months ended March 31, 2023 and 2022 was $1,956 (including amortization of deferred financing costs of $150) and $1,100 (including amortization of deferred financing costs of $143). The interest rate on the revolving facility as of March 31, 2023 and December 31, 2022 was 9.69% and 9.23%, respectively.
BRPAC Credit Agreement
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 BRPAC Credit Agreement. The Company is in compliance with all financial covenants in the BRPAC Credit Agreement as of March 31, 2023.
Through a series of amendments, including the most recent Fourth Amendment to the BRPAC Credit Agreement (the “Fourth Amendment”) on June 21, 2022, the Borrowers, the Secured Guarantors, the Agent and the Closing Date Lenders agreed to the following, 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) a new applicable margin level of 3.50% was established as set forth from the date of the Fourth Amendment, (iii) Marconi Wireless Holdings, LLC (“Marconi Wireless”) was added to the Borrowers, (iv) the maturity date of the term loan was set to June 30, 2027, and (v) the Borrowers were permitted to make certain distributions to the parent company of the Borrowers.
The borrowings under the amended BRPAC Credit Agreement bear interest equal to the term SOFR rate plus a margin of 2.75% to 3.50% per annum, depending on the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC Credit Agreement. As of March 31, 2023 and December 31, 2022, the interest rate on the BRPAC Credit Agreement was 8.23% and 7.65%, respectively.
Principal outstanding under the Amended BRPAC Credit Agreement is due in quarterly installments. Quarterly installments from June 30, 2023 to December 31, 2023 are in the amount of $4,688 per quarter, from March 31, 2024 to December 31, 2026 are in the amount of $3,750 per quarter, on March 31, 2027 is in the amount of $2,813, and the remaining principal balance is due at final maturity on June 30, 2027.
As of March 31, 2023 and December 31, 2022, the outstanding balance on the term loan was $64,061 (net of unamortized debt issuance costs of $627) and $68,674 (net of unamortized debt issuance costs of $701), respectively. Interest expense on the term loan during the three months ended March 31, 2023 and 2022 was $1,443 (including amortization of deferred debt issuance costs of $74) and $502 (including amortization of deferred debt issuance costs of $72), respectively.
NOTE 12 — SENIOR NOTES PAYABLE
Senior notes payable, net, are comprised of the following:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| | | |
| | | |
| | | |
6.750% Senior notes due May 31, 2024 | $ | 199,232 | | | $ | 199,232 | |
6.500% Senior notes due September 30, 2026 | 180,532 | | | 180,532 | |
6.375% Senior notes due February 28, 2025 | 146,432 | | | 146,432 | |
6.000% Senior notes due January 31, 2028 | 266,058 | | | 266,058 | |
5.500% Senior notes due March 31, 2026 | 217,440 | | | 217,440 | |
5.250% Senior notes due August 31, 2028 | 405,483 | | | 405,483 | |
5.000% Senior notes due December 31, 2026 | 324,714 | | | 324,714 | |
| 1,739,891 | | | 1,739,891 | |
| Less: Unamortized debt issuance costs | (16,914) | | | (18,140) | |
| $ | 1,722,977 | | | $ | 1,721,751 | |
During the three months ended March 31, 2023 and 2022, the Company issued zero and $20,073, respectively, of senior notes with maturity dates ranging from May 2024 to August 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.
As of March 31, 2023 and December 31, 2022, the total senior notes outstanding was $1,722,977 (net of unamortized debt issue costs of $16,914) and $1,721,751 (net of unamortized debt issue costs of $18,140) with a weighted average interest rate of 5.75% and 5.75%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $26,227 and $24,409 during the three months ended March 31, 2023 and 2022, respectively.
Sales Agreement Prospectus to Issue Up to $250,000 of Senior Notes
The most recent sales agreement prospectus was filed by the Company with the SEC on January 5, 2022 (the “Sales Agreement Prospectus”). This program provides for the sale by the Company of up to $250,000 of certain of the Company’s senior notes. As of March 31, 2023 and December 31, 2022, the Company had $70 remaining availability under the Sales Agreement Prospectus.
NOTE 13 — ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Accrued payroll and related expenses | $ | 60,141 | | | $ | 86,798 | |
| Dividends payable | 18,360 | | | 33,923 | |
| Income taxes payable | 12,100 | | | 14,760 | |
| Other tax liabilities | 19,617 | | | 23,426 | |
| Contingent consideration | 28,884 | | | 31,046 | |
| Accrued expenses | 79,520 | | | 68,180 | |
| Other liabilities | 44,713 | | | 64,841 | |
| Accrued expenses and other liabilities | $ | 263,335 | | | $ | 322,974 | |
Other tax liabilities primarily consist of uncertain tax positions, sales and VAT taxes payable, and other non-income tax liabilities. Accrued expenses primarily consist of accrued trade payables, investment banking payables and legal settlements. Other liabilities primarily consist of interest payables, customer deposits, and accrued legal fees.
NOTE 14 — REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue from contracts with customers by the Company's six reportable operating segments and the All Other category during the three months ended March 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital
Markets
Segment | | Wealth
Management
Segment | | Auction and
Liquidation
Segment | | Financial
Consulting
Segment | | Communications Segment | | Consumer
Segment | | All Other | | Total |
Revenues for the three months ended March 31, 2023 | | | | | | | | | | | | | | | |
| Corporate finance, consulting and investment banking fees | $ | 39,149 | | | $ | — | | | $ | — | | | $ | 14,515 | | | $ | — | | | $ | — | | | $ | — | | | $ | 53,664 | |
| Wealth and asset management fees | 664 | | | 43,310 | | | — | | | — | | | — | | | — | | | — | | | 43,974 | |
| Commissions, fees and reimbursed expenses | 9,218 | | | 3,928 | | | 5,444 | | | 10,495 | | | — | | | — | | | — | | | 29,085 | |
| Subscription services | — | | | — | | | — | | | — | | | 83,008 | | | — | | | — | | | 83,008 | |
| Sale of goods | — | | | — | | | 216 | | | — | | | 1,867 | | | 65,694 | | | — | | | 67,777 | |
| Advertising, licensing and other | — | | | — | | | — | | | — | | | 2,044 | | | 4,309 | | | 9,273 | | | 15,626 | |
| Total revenues from contracts with customers | 49,031 | | | 47,238 | | | 5,660 | | | 25,010 | | | 86,919 | | | 70,003 | | | 9,273 | | | 293,134 | |
| | | | | | | | | | | | | | | |
| Interest income - Loans and securities lending | 77,186 | | | — | | | — | | | — | | | — | | | — | | | — | | | 77,186 | |
| Trading (loss) gain on investments | 7,020 | | | 1,272 | | | — | | | — | | | — | | | — | | | — | | | 8,292 | |
| Fair value adjustment on loans | 43,276 | | | — | | | — | | | — | | | — | | | — | | | — | | | 43,276 | |
| Other | 8,898 | | | 1,304 | | | — | | | — | | | — | | | — | | | — | | | 10,202 | |
| Total revenues | $ | 185,411 | | | $ | 49,814 | | | $ | 5,660 | | | $ | 25,010 | | | $ | 86,919 | | | $ | 70,003 | | | $ | 9,273 | | | $ | 432,090 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital
Markets
Segment | | Wealth
Management
Segment | | Auction and
Liquidation
Segment | | Financial
Consulting
Segment | | Communications Segment | | Consumer
Segment | | All Other | | Total |
Revenues for the three months ended March 31, 2022 | | | | | | | | | | | | | | | |
| Corporate finance, consulting and investment banking fees | $ | 41,673 | | | $ | — | | | $ | — | | | $ | 16,970 | | | $ | — | | | $ | — | | | $ | — | | | $ | 58,643 | |
| Wealth and asset management fees | 2,400 | | | 64,222 | | | — | | | — | | | — | | | — | | | — | | | 66,622 | |
| Commissions, fees and reimbursed expenses | 12,045 | | | 12,849 | | | 3,355 | | | 8,966 | | | — | | | — | | | — | | | 37,215 | |
| Subscription services | — | | | — | | | — | | | — | | | 27,813 | | | — | | | — | | | 27,813 | |
| Sale of goods | — | | | — | | | — | | | — | | | 1,878 | | | — | | | — | | | 1,878 | |
Advertising, licensing and other | — | | | — | | | — | | | — | | | 2,274 | | | 4,557 | | | 699 | | | 7,530 | |
| Total revenues from contracts with customers | 56,118 | | | 77,071 | | | 3,355 | | | 25,936 | | | 31,965 | | | 4,557 | | | 699 | | | 199,701 | |
| | | | | | | | | | | | | | | |
| Interest income - Loans and securities lending | 61,426 | | | — | | | — | | | — | | | — | | | — | | | — | | | 61,426 | |
| Trading (loss) gain on investments | (30,738) | | | 522 | | | — | | | — | | | — | | | — | | | — | | | (30,216) | |
| Fair value adjustment on loans | 10,938 | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,938 | |
| Other | 5,105 | | | (114) | | | — | | | | | — | | | — | | | — | | | 4,991 | |
| Total revenues | $ | 102,849 | | | $ | 77,479 | | | $ | 3,355 | | | $ | 25,936 | | | $ | 31,965 | | | $ | 4,557 | | | $ | 699 | | | $ | 246,840 | |
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 $120,853 and $149,110 as of March 31, 2023 and December 31, 2022, respectively. The Company had no significant impairments related to these receivables during the three months ended March 31, 2023 and 2022. The Company also has $14,857 and $14,144 of unbilled receivables included in prepaid expenses and other assets as of March 31, 2023 and December 31, 2022, respectively. 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 as of March 31, 2023 and December 31, 2022 was $84,019 and $85,441, respectively. The Company expects to recognize the deferred revenue of $84,019 as of March 31, 2023 as service and fee revenues when the performance obligation is met during the years ended December 31, 2023 (remaining nine months), 2024, 2025, 2026 and 2027 in the amount of $54,839, $13,350, $7,449, $3,552, and $1,780, respectively. The Company expects to recognize the deferred revenue of $3,049 after December 31, 2027.
During the three months ended March 31, 2023 and 2022, the Company recognized revenue of $22,502 and $14,939 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 $7,190 and $5,990 as of March 31, 2023 and December 31, 2022, respectively, and are recorded in prepaid expenses and other assets in the condensed consolidated balance sheets. For the three months ended March 31, 2023 and 2022, the Company recognized expenses of $1,015 and $915 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, 2023 and 2022.
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 as of March 31, 2023. 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 as of March 31, 2023.
NOTE 15 — INCOME TAXES
The Company’s effective income tax rate was a provision of 32.4% during the three months ended March 31, 2023 and a benefit of 28.7% during the three months ended March 31, 2022.
As of March 31, 2023, the Company had federal net operating loss carryforwards of $55,349 and state net operating loss carryforwards of $46,981, respectively. The Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2033 through December 31, 2038. The state net operating loss carryforwards will expire in the tax years commencing in December 31, 2030.
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, 2023, 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 $66,308 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, 2019 to 2022.
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into law. The IR Act provides for, among other things, a new U.S. federal excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of public traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of Treasury has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax. The Company does not expect the IR Act to have a material impact on its financial position and result of operations.
NOTE 16 — EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income (loss) 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. Remeasurements to the carrying value of the redeemable noncontrolling interests in equity of subsidiaries are not deemed to be a dividend (see Note 3(l)). According to ASC 480 - Distinguishing Liabilities from Equity, there is no impact on earnings per share in the computation of basic and diluted earnings per share to common shareholders for changes in the carrying value of the redeemable noncontrolling interests in equity, when such changes in carrying value which in substance approximates fair value.
Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were 1,999,273 and 1,350,062 for the three months ended March 31, 2023 and 2022, 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, | | |
| 2023 | | 2022 | | | | |
| Net income (loss) attributable to B. Riley Financial, Inc. | $ | 17,155 | | | $ | (10,062) | | | | | |
| Preferred stock dividends | (2,012) | | | (2,002) | | | | | |
| Net income (loss) applicable to common shareholders | $ | 15,143 | | | $ | (12,064) | | | | | |
| | | | | | | |
| Weighted average common shares outstanding: | | | | | | | |
| Basic | 28,585,337 | | | 27,855,033 | | | | | |
| Effect of dilutive potential common shares: | | | | | | | |
| Restricted stock units and warrants | 928,098 | | | — | | | | | |
| Diluted | 29,513,435 | | | 27,855,033 | | | | | |
| | | | | | | |
| Basic income (loss) per common share | $ | 0.53 | | | $ | (0.43) | | | | | |
| Diluted income (loss) per common share | $ | 0.51 | | | $ | (0.43) | | | | | |
NOTE 17 — 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.
(b) Babcock & Wilcox Commitments and Guarantees
On June 30, 2021, the Company agreed to guaranty (the “B. Riley Guaranty”) up to $110,000 of obligations that B&W may owe to providers of cash collateral pledged in connection with B&W’s debt financing. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of B&W’s obligations under a reimbursement agreement with respect to such cash collateral. B&W will pay the Company $935 per annum in connection with the B. Riley Guaranty. B&W has agreed to reimburse the Company to the extent the B. Riley Guaranty is called upon. The B. Riley Guaranty was in respect of up to $100,000 of B&W obligations after B&W made paydowns of $10,000 during the year ended December 31, 2022.
On August 10, 2020, the Company entered into a project specific indemnity rider to a general agreement of indemnity made by B&W in favor of one of its sureties. Pursuant to the indemnity rider, the Company agreed to indemnify the surety in connection with a default by B&W under the underlying indemnity agreement relating to a $29,970 payment and performance bond issued by the surety 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.
On December 22, 2021, the Company entered into a general agreement of indemnity in favor of one of B&W’s sureties. Pursuant to this indemnity agreement, the Company agreed to indemnify the surety in connection with a default by B&W under a 30,000€ payment and performance bond issued by the surety in connection with a construction project undertaken by B&W. In consideration for providing the indemnity, B&W paid the Company fees in the amount of $1,694 on January 20, 2022.
(c) Other Commitments
In the normal course of business, the Company enters into commitments to its clients in connection with capital raising transactions, such as firm commitment underwritings, equity lines of credit, or other commitments to provide financing on specified terms and conditions. These commitments require the Company to purchase securities at a specified price or otherwise provide debt or equity financing on specified terms. Securities underwriting exposes the Company to market and credit risk, primarily in the event that, for any reason, securities purchased by the Company cannot be distributed at the anticipated price and to balance sheet risk in the event that debt or equity financing commitments cannot be syndicated.
NOTE 18 — SHARE-BASED PAYMENTS
(a) Employee Stock Incentive Plans
Under the 2021 Stock Incentive Plan (the “2021 Plan”), share-based compensation expense for restricted stock units under the Company’s 2021 Plan was $13,312 and $16,860 during the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, in connection with employee stock incentive plans, the Company granted 502,824 restricted stock units with a grant date fair value of $19,338. During the three months ended March 31, 2022, in connection with employee stock incentive plans, the Company granted 161,559 restricted stock units with a grant date fair value of $11,863 and 65,000 performance based restricted stock units with a grant date fair value of $2,329. The restricted stock units generally vest over a period of one to five 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 two to 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 Employee Stock Purchase Plan ("Purchase Plan"), share based compensation was $298 and $153 for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023 and December 31, 2022, there were 362,986 shares reserved for issuance under the Purchase Plan.
(c) Common Stock
Since October 30, 2018, the Company’s Board of Directors has authorized annual share repurchase programs 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. During the three months ended March 31, 2023 and 2022, the Company repurchased 1,452,831 shares of its common stock for $53,688, which represents an average price of $36.95 per common share and zero shares of its common stock, respectively. The shares repurchased under the program are retired. On October 31, 2022, the share repurchase program was reauthorized by the Board of Directors for share repurchases up to $50,000 of the Company's outstanding common shares and the reauthorized program expires in October 2023.
(d) Preferred Stock
During the three months ended March 31, 2023 and 2022, the Company issued zero and 19 depository shares of the Series A Preferred Stock, respectively. There were 2,834 shares issued and outstanding as of March 31, 2023 and December 31, 2022. Total liquidation preference for the Series A Preferred Stock as of March 31, 2023 and December 31, 2022 was $70,854. Dividends on the Series A preferred paid during the three months ended March 31, 2023 and 2022 were $0.4296875 per depository share, respectively.
During the three months ended March 31, 2023 and 2022, the Company issued 18 and 4 depository shares of the Series B Preferred Stock. There were 1,729 and 1,710 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively. Total liquidation preference for the Series B Preferred Stock as of March 31, 2023 and December 31, 2022 was $43,228 and $42,761, respectively. Dividends on the Series B preferred paid during the three months ended March 31, 2023 and 2022 were $0.4609375 per depository share, respectively.
NOTE 19 — NET CAPITAL REQUIREMENTS
B. Riley Securities (“BRS”) and B. Riley Wealth Management (“BRWM”), 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, 2023, BRS had net capital of $146,827, which was $142,696 in excess of required minimum net capital of $4,131; and BRWM had net capital of $11,105, which was $8,780 in excess of required minimum net capital of $2,325.
As of December 31, 2022, BRS had net capital of $175,503, which was $169,458 in excess of its required minimum net capital of $6,045; and BRWM had net capital of $11,144, which was $8,615 in excess of its required minimum net capital of $2,529.
NOTE 20 — RELATED PARTY TRANSACTIONS
The Company provides asset management and placement agent services to unconsolidated funds affiliated with the Company (the “Funds”). In connection with these services, the Funds may bear certain operating costs and expenses which are initially paid by the Company and subsequently reimbursed by the Funds.
As of March 31, 2023 and December 31, 2022, amounts due from related parties of $372 and $1,081, respectively, were due from the Funds for management fees and other operating expenses.
In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P. (“Whitehawk”), a limited partnership controlled by Mr. J. Ahn, who is the brother of Phil Ahn, the Company’s Chief Financial Officer and Chief Operating Officer. Whitehawk has agreed to provide investment advisory services for two of the funds, GACP I, L.P. and GACP II, L.P. During the three months ended March 31, 2023 and 2022, management fees paid for investment advisory services by Whitehawk was $1,142 and $1,079, respectively.
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:
Babcock and Wilcox
During the three months ended March 31, 2023 and 2022, the Company earned zero and $53, respectively, of underwriting and financial advisory and other fees from B&W in connection with B&W’s capital raising activities.
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. In March 2022, a $1,000 performance fee was approved in accordance with the Executive Consulting Agreement.
The Company is also a party to indemnification agreements for the benefit of B&W, and the B. Riley Guaranty, each as disclosed above in Note 17 – Commitments and Contingencies.
The Arena Group Holdings, Inc. (fka the Maven, Inc.)
The Company has loans receivable due from the Arena Group Holdings, Inc. (fka the Maven, Inc.) ("Arena") included in loans receivable, at fair value of $97,062 and $98,729 as of March 31, 2023 and December 31, 2022, respectively. Interest on these loans is payable at 10% per annum with maturity dates through December 2023. During the three months ended March 31, 2023 and 2022, the Company earned zero and $2,021 underwriting and financial advisory and other fees from Arena in connection with Arena's capital raising activities, respectively.
California Natural Resources Group, LLC
On November 1, 2021, the Company extended a $34,393 bridge promissory note bearing interest at up to 10.0% per annum to California Natural Resources Group, LLC (“CalNRG”). On January 3, 2022, CalNRG repaid the promissory note using proceeds from a new credit facility with a third party bank (the “CalNRG Credit Facility”). The Company has guaranteed CalNRG’s obligations, up to $10,375, under the CalNRG Credit Facility.
Faze Clan
On March 9, 2022, the Company loaned $10,000 to Faze Clan, Inc. (“Faze”) pursuant to a bridge credit agreement (the “Bridge Agreement”). On April 25, 2022, the Company loaned an additional $10,000 pursuant to the Bridge Agreement. All principal and accrued interest pursuant to the Bridge Agreement was repaid upon closing of Faze’s business combination (the “Business Combination”) with BRPM 150, which following the Business Combination changed its name to Faze Holdings. As a result of the Business Combination, BRPM 150 is no longer a VIE of the Company. On July 19, 2022, in connection with the Business Combination, the Company purchased 5,342,500 shares of Faze Holdings Class A common stock for $10.00 per share. During the year ended December 31, 2022, the Company earned $41,885 of incentive fees for the de-consolidation of BRPM 150 and $9,632 of underwriting and financial advisory fees from Faze and BRPM 150 in connection with the Business Combination and capital raising activities.
Lingo
On May 31, 2022, the Company converted $17,500 of a loan receivable with Lingo into equity and the Company's ownership interest in Lingo increased from 40% to 80%. On February 24, 2023, the Company acquired the remaining 20% ownership in Lingo, increasing the Company's ownership interest to 100%.
Targus
On October 18, 2022, the Company acquired all of the issued and outstanding shares of Targus for total purchase consideration of $247,546 as more fully discussed in Note 4. At the time of the acquisition, the chief executive officer of Targus was also a member of the Company’s board of directors. Upon closing the acquisition, the individual resigned from the Company’s board of directors and continues to serve as the chief executive officer of Targus.
Other
During the three months ended March 31, 2023, the Company sold a loan receivable including accrued interest in the amount of $7,600 to two related parties. BRC Partners Opportunity Fund, LP (“BRCPOF”) purchased $3,519 of the loan receivable including accrued interest and 272 Capital L.P. (“272LP”) purchased $4,081 of the loan receivable including accrued interest, both of the partnerships are private equity funds managed by one of the Company’s subsidiaries. Our executive officers and members of our board of directors have 70.4% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 41.0% in the BRCPOF as of March 31, 2023. Our executive officers and members of our board of directors have a 13.6% financial interest in the 272LP as of March 31, 2023.
The Company often provides consulting or investment banking services to raise capital for companies in which the Company has significant influence through equity ownership, representation on the board of directors (or similar governing body), or both. During the three months ended March 31, 2023 and 2022, the Company earned $784 and $1,880 of fees related to these services, respectively.
NOTE 21 — BUSINESS SEGMENTS
The Company’s business is classified into six reportable operating segments: the Capital Markets segment, Wealth Management segment, Auction and Liquidation segment, Financial Consulting segment, Communications segment, and Consumer segment. These reportable segments are all distinct businesses, each with a different marketing strategy and management structure. During the fourth quarter of 2022, the Company realigned its segment reporting structure to reflect organizational changes from recent acquisitions and the manner in which capital is allocated. The Consumer segment includes the previously reported Brands segment and Targus, which the Company acquired in the fourth quarter of 2022. The Company has also re-aligned its previously reported Principal Investments - Communications and Other segment into the Communications segment and the All Other category that is reported with Corporate and Other below.
The following is a summary of certain financial data for each of the Company’s reportable segments:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Capital Markets segment: | | | (As Restated) | | | | |
| Revenues - Services and fees | $ | 57,929 | | | $ | 61,223 | | | | | |
| Trading income (loss) and fair value adjustments on loans | 50,296 | | | (19,800) | | | | | |
| Interest income - Loans and securities lending | 77,186 | | | 61,426 | | | | | |
| Total revenues | 185,411 | | | 102,849 | | | | | |
| Selling, general and administrative expenses | (65,711) | | | (34,117) | | | | | |
| | | | | | | |
| Interest expense - Securities lending and loan participations sold | (32,424) | | | (11,766) | | | | | |
| Depreciation and amortization | (1,256) | | | (1,893) | | | | | |
| Segment income | 86,020 | | | 55,073 | | | | | |
| Wealth Management segment: | | | | | | | |
| Revenues - Services and fees | 48,542 | | | 76,957 | | | | | |
| Trading income and fair value adjustments on loans | 1,272 | | | 522 | | | | | |
| Total revenues | 49,814 | | | 77,479 | | | | | |
| | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | (47,322) | | | (85,742) | | | | | |
| Restructuring charge | (33) | | | — | | | | | |
| Depreciation and amortization | (1,086) | | | (1,833) | | | | | |
| Segment income (loss) | 1,373 | | | (10,096) | | | | | |
| Auction and Liquidation segment: | | | | | | | |
| Revenues - Services and fees | 5,444 | | | 3,355 | | | | | |
| Revenues - Sale of goods | 216 | | | — | | | | | |
| Total revenues | 5,660 | | | 3,355 | | | | | |
| Direct cost of services | (3,128) | | | (2,335) | | | | | |
| Cost of goods sold | (52) | | | — | | | | | |
| Selling, general and administrative expenses | (2,280) | | | (1,820) | | | | | |
| | | | | | | |
| | | | | | | |
| Segment income (loss) | 200 | | | (800) | | | | | |
| Financial Consulting segment: | | | | | | | |
| Revenues - Services and fees | 25,010 | | | 25,936 | | | | | |
| | | | | | | |
| Selling, general and administrative expenses | (21,149) | | | (20,943) | | | | | |
| | | | | | | |
| Depreciation and amortization | (78) | | | (81) | | | | | |
| Segment income | 3,783 | | | 4,912 | | | | | |
| Communications segment: | | | | | | | |
| Revenues - Services and fees | 85,052 | | | 30,087 | | | | | |
| Revenues - Sale of goods | 1,867 | | | 1,878 | | | | | |
| Total revenues | 86,919 | | | 31,965 | | | | | |
| Direct cost of services | (44,733) | | | (9,316) | | | | | |
| Cost of goods sold | (2,168) | | | (2,251) | | | | | |
| Selling, general and administrative expenses | (22,544) | | | (8,245) | | | | | |
| Restructuring charge | (60) | | | — | | | | | |
| Depreciation and amortization | (6,631) | | | (3,184) | | | | | |
| Segment income | 10,783 | | | 8,969 | | | | | |
| Consumer segment: | | | | | | | |
| Revenues - Services and fees | 4,309 | | | 4,557 | | | | | |
| Revenues - Sale of goods | 65,694 | | | — | | | | | |
| | | | | | | |
| Total revenues | 70,003 | | | 4,557 | | | | | |
| Cost of goods sold | (45,406) | | | — | | | | | |
| Selling, general and administrative expenses | (20,112) | | | (756) | | | | | |
| Depreciation and amortization | (2,839) | | | (583) | | | | | |
| | | | | | | |
| Segment income | 1,646 | | | 3,218 | | | | | |
| Consolidated operating income from reportable segments | 103,805 | | | 61,276 | | | | | |
| All Other: | | | | | | | |
| Revenues - Services and fees | 9,273 | | | 699 | | | | | |
| Direct cost of services | (6,536) | | | — | | | | | |
| Corporate and other expenses | (21,619) | | | (16,002) | | | | | |
| Interest income | 2,574 | | | 67 | | | | | |
| Dividend income | 13,204 | | | 7,861 | | | | | |
| Realized and unrealized losses on investments | (28,442) | | | (49,112) | | | | | |
| Change in fair value of financial instruments and other | (209) | | | 5,981 | | | | | |
| (Loss) income on equity investments | (10) | | | 6,775 | | | | | |
| Interest expense | (47,561) | | | (30,436) | | | | | |
| | | | | | | | | | | | | | | |
| Income (loss) before income taxes | 24,479 | | | (12,891) | | | | | |
| (Provision for) benefit from income taxes | (7,919) | | | 3,695 | | | | | |
| Net income (loss) | 16,560 | | | (9,196) | | | | | |
| Net (loss) income attributable to noncontrolling interests and redeemable noncontrolling interests | (595) | | | 866 | | | | | |
| Net income (loss) attributable to B. Riley Financial, Inc. | 17,155 | | | (10,062) | | | | | |
| Preferred stock dividends | 2,012 | | | 2,002 | | | | | |
| Net income (loss) available to common shareholders | $ | 15,143 | | | $ | (12,064) | | | | | |
The following table presents revenues by geographical area:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| | | (As Restated) | | | | |
| Revenues: | | | | | | | |
| Revenues - Services and fees: | | | | | | | |
| North America | $ | 234,930 | | | $ | 200,861 | | | | | |
| | | | | | | |
| Europe | 629 | | | 1,953 | | | | | |
| Total Revenues - Services and fees | 235,559 | | | 202,814 | | | | | |
| | | | | | | | |
| Trading income (loss) and fair value adjustments on loans | | | | | | | |
| North America | 51,568 | | | (19,278) | | | | | |
| | | | | | | |
| Revenues - Sale of goods | | | | | | | |
| North America | 37,947 | | | 1,878 | | | | | |
| Australia | 3,459 | | | — | | | | | |
| Europe, Middle East, and Africa | 17,428 | | | — | | | | | |
| Asia | 6,224 | | | — | | | | | |
| Latin America | 2,719 | | | — | | | | | |
| Total Revenues - Sale of goods | 67,777 | | | 1,878 | | | | | |
| | | | | | | |
| Revenues - Interest income - Loans and securities lending: | | | | | | | |
| North America | 77,186 | | | 61,426 | | | | | |
| | | | | | | |
| Total Revenues: | | | | | | | |
| North America | 401,631 | | | 244,887 | | | | | |
| | | | | | | |
| Australia | 3,459 | | | — | | | | | |
| Europe, Middle East, and Africa | 18,057 | | | 1,953 | | | | | |
| Asia | 6,224 | | | — | | | | | |
| Latin America | 2,719 | | | — | | | | | |
| Total Revenues | $ | 432,090 | | | $ | 246,840 | | | | | |
The following table presents long-lived assets, which consists of property and equipment, net, by geographical area:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Long-lived Assets - Property and Equipment, net: | | | |
| North America | $ | 26,770 | | | $ | 26,276 | |
| Europe | 532 | | | 577 | |
| Asia Pacific | 165 | | | 162 | |
| Australia | 110 | | | 126 | |
| Total | $ | 27,577 | | | $ | 27,141 | |
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.