Filing summary
Entity note: The request identifies BRC Group Holdings, Inc., but the supplied Form 10-Q is for B. Riley Financial, Inc. and subsidiaries (Nasdaq: RILY). This summary reflects the filing provided. Reporting period: quarter ended March 31, 2021; unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
B. Riley provides investment banking, wealth management, asset disposition, financial consulting, principal investment, and brand licensing services. It reports six segments: Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments—United Online and magicJack, and Brands. Following its February 25, 2021 acquisition of the remaining National Holdings shares, the company realigned segment reporting; comparative segment figures were recast.
Financial and operating metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $600.2 | $(0.2); $600.4 improvement |
| Services and fees | $289.5 | $159.4; up 81.6% |
| Trading income and loan fair-value adjustments | $266.9 gain | $182.4 loss |
| Operating income (loss) | $373.0 | $(121.1) |
| Net income (loss) | $256.6 | $(99.2) |
| Net income attributable to B. Riley | $254.7 | $(98.7) |
| Net income available to common shareholders | $252.9 | $(99.7) |
| Basic / diluted EPS | $9.38 / $8.81 | $(3.83) / $(3.83) |
| Operating cash flow | $(42.9) | $1.0 |
| Investing cash flow | $0.7 | $(72.1) |
| Financing cash flow | $184.2 | $92.3 |
The quarter’s profit improvement was driven chiefly by the reversal from substantial prior-year trading and loan valuation losses to gains. Trading gains included $256.2 million on investments and $10.7 million of unrealized loan fair-value gains. Thus, the revenue and earnings comparison was unusually sensitive to market movements, not solely to recurring fee growth. Operating margin was approximately 62% of reported revenue, but this ratio also reflects the large trading gains.
At March 31, cash and cash equivalents were $237.6, restricted cash $8.5, securities and other investments $1,166.7, and loans receivable at fair value $294.1. Total assets were $4,111.8 and total equity $765.8. Senior notes payable, net, were $1,139.1; the term loan was $69.5; notes payable were $6.9; and loan participations sold were $11.2. Management’s liquidity discussion reports total borrowings of approximately $1,226.8. The asset-based credit facility had no balance outstanding, and the company reported compliance with its financial covenants.
Operating cash use reflected substantial movements in trading-related assets and liabilities, including securities borrowed and amounts due from clearing brokers. The company ended the quarter with $246.1 of cash, cash equivalents, and restricted cash combined. Q1 financing included $402.4 of senior-note proceeds and $64.7 of common-stock proceeds; cash uses included $95.2 of common dividends and $128.2 to redeem senior notes.
Material changes versus the prior comparable period
- Trading income and loan fair-value adjustments swung by $449.4, from a $182.4 million loss to a $266.9 million gain.
- Services and fees rose $130.1 million. Capital Markets fees increased $97.4 million, including greater investment banking activity and National-related revenue; Wealth Management fees increased $46.7 million, substantially reflecting National.
- National was acquired for $35.2 million of cash consideration for the approximately 55% not previously owned. It added brokerage, insurance, tax, advisory, and wealth management operations; its results are included from the acquisition date.
- Selling, general and administrative expense rose $103.6 million to $191.3 million, mainly from higher Capital Markets and Wealth Management expenses, including National-related costs.
- Senior notes payable, net, increased to $1,139.1 million from $870.8 million at year-end. The company issued $230.0 million of 6.0% notes due 2028 and $159.5 million of 5.5% notes due 2026, and redeemed $128.2 million of 7.5% notes due 2027. Weighted-average senior-note interest rate was 6.49%, versus 6.95% at December 31, 2020.
- Common shares outstanding increased to 27.2 million from 25.8 million, including a January equity issuance that generated $64.7 million net proceeds. The company paid a $3.50-per-share common dividend during the quarter, comprising $0.50 regular and $3.00 special.
Outlook, commentary, risks, and unusual items
- Management stated that cash, investments, available credit facilities, and expected operating cash generation should be sufficient for working capital and capital expenditure needs for at least 12 months from issuance of the statements. No formal earnings or revenue guidance was provided. Management expects United Online and magicJack revenues to continue declining year over year.
- The board increased the regular quarterly common dividend to $0.50 per share. On May 3, 2021, after quarter-end, the company declared a $0.50 regular dividend and a $2.50 special dividend, subject to board discretion and the company’s financial condition.
- Management described COVID-19 effects on markets and the economy as uncertain and potentially materially adverse. Other stated risks include volatile trading results, investment and loan valuation uncertainty, credit exposure, acquisition integration, financing and covenant risks, and the possibility of reduced liquidity in proprietary investments.
- Fair-value assets classified as Level 3 totaled $466.1 million, or 11.3% of total assets, including $294.1 million of loans receivable. These valuations rely on significant unobservable inputs and management judgment.
- The company disclosed several FINRA arbitrations involving National and investments in GPB Capital; it could not determine the ultimate resolution and stated adverse aggregate judgments could materially affect the company. A separate Miller Energy securities class-action settlement accrual was recorded. National also paid a $3.0 million cybersecurity fine on April 14, 2021.
- B. Riley’s Babcock & Wilcox exposure included loans and senior notes, a limited credit guaranty, and an indemnity relating to a bond. The filing states the maximum exposure on certain limited loan guarantees was approximately $80 million; the separate bond indemnity relates to a bond of approximately $30 million. These arrangements warrant review alongside the related-party relationship disclosures.
- Income tax provision was $97.5 million at a 27.5% effective rate. Deferred tax expense included a significant noncash component. The company reported federal and state net operating loss carryforwards and noted that use is subject to limitations and tax audits.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc.
- Assess how much Q1 earnings depended on proprietary trading gains and fair-value estimates, and whether those results are repeatable.
- Review National’s post-acquisition contribution, integration costs, and the basis for comparing recast segment results.
- Reconcile debt maturities, interest costs, note issuances and redemptions, and the company’s capacity to sustain common and preferred dividends.
- Evaluate operating cash flow and liquidity needs given the large trading-related balance-sheet movements and securities-lending activity.
- Review Level 3 valuation assumptions, related-party lending and investment exposures, Babcock & Wilcox guarantees, and the potential outcomes of GPB-related arbitrations and other legal matters.