Filing summary
Entity and period: The supplied filing is B. Riley Financial, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2015—not a filing identified as BRC Group Holdings, Inc. The company provides capital markets, auction and liquidation, and valuation and appraisal services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $21.3 million | $20.7 million | $92.8 million | $57.3 million |
| Operating income (loss) | $3.3 million | $(1.3) million | $23.4 million | $(3.6) million |
| Net income (loss) attributable to company | $1.5 million | $(0.9) million | $12.8 million | $(3.0) million |
| Diluted EPS | $0.09 | $(0.05) | $0.79 | $(0.40) |
| Operating cash flow | Not separately stated | Not separately stated | $44.0 million | $(5.8) million |
- Revenue increased 2.9% year over year in Q3 and 62.0% for the nine-month period. The nine-month comparison reflects B. Riley & Co.’s acquisition in June 2014 and MK Capital’s acquisition in February 2015, as well as unusually large liquidation engagements; it is not a like-for-like comparison.
- Q3 operating margin was 15.4%, versus a 6.1% operating loss margin a year earlier; nine-month operating margin was 25.2%, versus a 6.2% operating loss margin. Nine-month net income attributable to the company was 13.8% of revenue.
- Q3 revenue growth was led by Auction and Liquidation services and fees, up $2.3 million. Capital Markets revenue fell $2.0 million, including lower investment banking fees and trading results; management attributed weaker trading to a weak equities market. For nine months, Auction and Liquidation services revenue included $13.0 million from the Target Canada liquidation joint venture.
- At September 30, cash and cash equivalents were $45.9 million; restricted cash was $0.1 million. Current assets were $86.2 million and current liabilities $28.2 million. Total assets were $142.4 million, total liabilities $29.4 million, and total equity $113.0 million.
- Debt was low at quarter-end: $70,000 outstanding on the receivables line and none on the $100 million asset-based facility. The latter is subject to lender discretion, engagement-related limits and covenants. The company repaid $18.5 million on that facility during the nine months. The $4.5 million related-party note borrowed in March was repaid in May.
- Operating cash flow included a $13.2 million favorable change in receivables and customer-contract advances and $5.4 million in deferred income tax adjustments. Investing cash flow was $4.9 million, including a $7.5 million decrease in restricted cash; financing cash flow was a use of $24.6 million, including debt repayment and dividends.
Changes, outlook and risks
- MK Capital was acquired for a stated purchase price of $9.4 million, expanding the company into wealth management. Its reported revenue from acquisition through September 30 was $1.3 million. The acquisition includes contingent cash and stock consideration, conditional on revenue thresholds.
- Management stated that cash, expected operating cash flow and available asset-based credit were expected to cover working capital and capital expenditure needs for at least the next 12 months. The filing gives no specific earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Management described results as dependent on the timing and size of liquidation and capital markets engagements. Key risks include market volatility, variable transaction activity, guarantee-based liquidation losses, investment valuation and liquidity, competition, client and counterparty credit, access to borrowing, regulatory requirements, and retention of key personnel.
- A former landlord sought $10 million in a lawsuit alleging contamination related to auction services. The company is defending the claim; its financial impact, if any, was not estimable in the filing. The company reported no other legal matters expected to have a material effect.
- GAGEE, a subsidiary holding oil-rig assets and related debt, filed for Chapter 7 in January 2015; its case closed in June. The company said it had no remaining investment or obligations for GAGEE’s liabilities and did not expect a material consolidated impact.
- The company paid $4.2 million in dividends during the nine months. After quarter-end, the board approved a further $0.06-per-share dividend, payable in December 2015. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts to verify
- Confirm the issuer: the source identifies B. Riley Financial, Inc., whereas the request names BRC Group Holdings, Inc.
- Assess how much of the nine-month growth and operating cash flow is repeatable, given acquisition timing, major liquidation engagements and working-capital movements.
- Review the $10 million lawsuit, the contingent consideration terms for MK Capital, and the discretionary availability and covenants of the asset-based facility.
- Check the performance and valuation of securities and other investments, including Level 3 assets, and the company’s ability to sustain dividends amid volatile engagement revenue.