B. Riley Financial, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in millions of dollars unless stated otherwise. The filing identifies the registrant as B. Riley Financial, Inc.
Business context
B. Riley provided capital markets, auction and liquidation, and valuation and appraisal services. On July 1, 2016, after quarter-end, it completed its acquisition of United Online, Inc. (UOL), adding a communications segment.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $20.3 | $45.5 | $40.2 | $71.5 |
| Operating income | $0.2 | $14.7 | $1.8 | $20.1 |
| Net income (loss) | ($0.03) | $8.6 | $1.3 | $12.0 |
| Net income (loss) attributable to B. Riley | ($0.1) | $8.7 | $0.1 | $11.3 |
| Diluted EPS | ($0.01) | $0.53 | $0.01 | $0.70 |
| Cash provided by operating activities | — | — | $10.3 | $36.8 |
Q2 operating margin was approximately 0.9%, versus 32.3% a year earlier; first-half operating margin was 4.6%, versus 28.2%. For service and fee revenue, reported gross margin was 61.3% in Auction and Liquidation and 54.9% in Valuation and Appraisal in Q2, compared with 70.4% and 58.8%, respectively, in Q2 2015.
Revenue fell 55% in Q2 and 44% for the first half. Management attributed the decline principally to lower capital markets activity and the absence of large 2015 liquidation engagements, including Target Canada and sales of Schoenenreus goods. Q2 capital markets revenue fell 47% and auction and liquidation service revenue fell 70%; valuation and appraisal revenue was broadly flat. Lower SG&A partly offset the revenue decline, but did not prevent a sharp reduction in operating income.
Balance sheet, liquidity and capital
- At June 30, cash and cash equivalents were $48.1 million, restricted cash was $12.1 million, and securities owned were $24.6 million; management reported net investments in securities of $18.7 million.
- Total assets were $169.5 million, total liabilities $35.1 million, and total equity $134.4 million. No borrowings were outstanding under the asset-based credit facility at quarter-end. The company had $11.9 million of standby letters of credit outstanding under that facility.
- Six-month operating cash flow was $10.3 million; investing cash outflow was $12.1 million, mainly reflecting a $12.0 million increase in restricted cash. Financing cash inflow was $19.8 million, primarily including $22.8 million of net proceeds from a May common-stock offering. Cash increased by $18.1 million to $48.1 million.
- The company said cash, available credit and expected operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months. It also noted that facility advances are at the lender’s discretion and are generally repaid within 180 days.
Material changes, outlook and notable items
- Q2 net loss attributable to B. Riley was $0.1 million, compared with net income of $8.7 million in Q2 2015. First-half attributable income was $0.1 million, versus $11.3 million. Management linked the deterioration primarily to weaker capital markets and auction and liquidation segment results.
- The company raised $23.0 million gross through a May offering of 2,420,980 shares at $9.50 per share; net proceeds were $22.8 million. Shares outstanding increased to 19,043,072 at June 30, from 16,448,119 at year-end 2015.
- For the Hancock Fabrics liquidation, the company had borrowed $56.3 million and issued $10.8 million of letters of credit in April to fund its minimum guarantee. The $56.3 million borrowing was repaid during Q2; the liquidation concluded in July, with related revenue expected in Q3.
- UOL was acquired for $11 per share, approximately $169.4 million in aggregate consideration; the company estimated approximately $50 million of cash consideration after accounting for UOL’s cash balance at closing. The purchase-price allocation was not yet available. Management cited its acquisition strategy, but provided no quantitative earnings or synergy guidance.
- The board approved a $0.03-per-share dividend on August 4, payable around September 8, 2016. Future dividends remain discretionary.
- A lawsuit related to an auction engagement seeks approximately $9.7 million. Some claims were dismissed, others remain, and the company said the financial impact, if any, could not be estimated; it intends to defend the matter.
Risks and investor verification points
- Verify the sustainability of revenue and profitability after unusually strong 2015 liquidation comparisons, and whether Hancock-related revenue was recognized as expected in Q3.
- Assess UOL integration, acquisition funding and realized benefits; the filing highlights declining dial-up and DSL accounts, intense competition, regulatory and privacy exposure, service interruptions, and potential undiscovered liabilities.
- Monitor liquidity and contingent funding needs, including restricted cash, letters of credit, lender-discretionary advances and the terms of the asset-based facility.
- Track the outcome and potential exposure of the $9.7 million auction-related lawsuit; the filing does not provide a clear estimate of any probable loss.
- Consider dilution from the stock offering and equity awards, and the company’s ability to maintain dividends given volatile engagement-driven results.