B. Riley Financial, Inc. (formerly Great American Group, Inc.) — Q3 2014 Form 10-Q
Filing identity: The supplied filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc. It covers the quarter and nine months ended September 30, 2014. Financial statement amounts below are in millions of dollars unless otherwise noted.
Business context and reporting period
The company provides auction and liquidation, valuation and appraisal, and capital markets services. It acquired B. Riley & Co. on June 18, 2014, adding investment banking, research, sales and trading; related entities were acquired August 1. The new capital markets business is included only from the acquisition dates, limiting direct comparison with 2013. The company changed its name to B. Riley Financial, Inc. on November 6, 2014.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $20.7 | $21.8 | $57.3 | $57.9 |
| Operating income (loss) | $(1.3) | $0.8 | $(3.6) | $1.2 |
| Net income (loss) attributable to company | $(0.9) | $0.4 | $(3.0) | $0.1 |
| Basic and diluted EPS | $(0.05) | $0.26 basic; $0.24 diluted | $(0.40) | $0.09 basic; $0.08 diluted |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(5.8) | $(2.0) |
Q3 operating margin was approximately -6.1%; nine-month operating margin was approximately -6.2%. Services and fees rose 81.9% in Q3, principally reflecting the acquired capital markets business, while total revenue declined 5.0%. For the nine months, total revenue fell 1.2%; services and fees rose 13.7%, partly offset by lower goods sales.
At September 30, cash and cash equivalents were $25.5, restricted cash $3.6, and total assets $115.8. Current assets were $73.3 and current liabilities $26.4. Total liabilities were $26.4 and equity was $89.3, compared with a $4.2 equity deficit at December 31, 2013. The balance sheet showed $6.6 of notes payable and $0.4 drawn on the receivables line; no long-term debt or asset-based facility borrowings remained. The asset-based facility had $3.5 of letters of credit outstanding. Securities owned were $16.2, offset by $2.8 of securities sold short.
Nine-month cash flows included $0.5 provided by investing activities and $12.1 provided by financing activities. The financing inflow principally reflected $51.2 net proceeds from a June share placement, partly offset by debt repayments and distributions. Cash increased $6.7 to $25.5.
Material changes versus comparable periods
- Q3 revenue declined $1.1 despite $9.3 of services-and-fees growth, as 2013 included $9.3 of oil-rig sales and UK store revenue; Q3 2014 goods sales were only $0.005.
- Nine-month auction and liquidation services revenue fell 31.8%, principally because 2014 lacked a large Fashion Bug liquidation engagement recorded in 2013. Valuation and appraisal revenue increased 13.2%.
- Q3 and nine-month results included a $2.5 restructuring charge. Q3 also included a $1.75 inventory impairment, contributing to negative gross margin on goods sold.
- Debt reduction materially lowered interest expense: $0.05 in Q3 versus $0.57 in Q3 2013, and $1.13 for nine months versus $1.84.
- Equity grew primarily through the $51.2 net private placement, acquisition shares valued at $26.4, and an $18.8 capital contribution recorded when related-party debt was retired at a discount.
Outlook, commentary, risks and unusual items
- Management said cash, facility availability and expected operating cash flows should cover working capital and capital expenditure needs for at least 12 months. This is management’s expectation, not a guarantee.
- Management anticipated a substantial reduction in European revenue following workforce reductions, office closure and restructuring of UK operations, including a strategic alliance for the UK appraisal business.
- The $2.5 restructuring charge included $1.6 payroll and severance, $0.7 office closure, and $0.3 other costs; $0.6 remained accrued at quarter-end.
- A lessee of four oil rigs was in default and $3.567 in arrears. The matter was in binding arbitration; management recorded no reserve, while acknowledging an unfavorable outcome could adversely affect results and financial position.
- The related equipment note payable was $6.57, bore 0% interest under its amended terms, and matured June 30, 2015. The related lease receivable was $7.99; the filing states gross lease payments, including a $4.24 purchase option, were due through December 15, 2014.
- The June placement resulted in an ownership change that may limit use of tax loss carryforwards under Section 382. The company reported approximately $20.9 federal and $22.0 state net operating loss carryforwards and had recorded no valuation allowance.
- Other stated risks include volatile engagement revenues, dependence on capital markets and financial-institution clients, trading and investment losses, guarantee or asset-purchase losses, credit-facility availability, regulatory and litigation exposure, and reliance on key personnel. The broker-dealer reported $13.7 net capital, $13.4 in excess of its minimum, and a 0.33-to-1 net capital ratio.
- After quarter-end, the board approved a $0.03-per-share dividend, payable on or about December 9, 2014, subject to the stated record date. The filing says future dividends remain discretionary.
Important facts for investors to verify
- How the acquired capital markets and asset management businesses perform on a full-period basis, and whether acquisition synergies offset added expenses.
- Whether operating cash use improves and whether management’s 12-month liquidity assessment remains supportable, considering engagement timing and facility conditions.
- The outcome and cash recovery from the oil-rig lease arbitration, including the arrears, purchase option, collateral value and related note maturity.
- Whether European revenue declines as expected and whether restructuring savings are realized without impairing core operations.
- The valuation and saleability of goods held for sale, securities positions, goodwill and acquired intangibles, as well as potential tax limitations on loss carryforwards.
- The terms and governance implications of the related-party acquisition and debt retirement, and the sustainability of the declared dividend.