B. Riley Financial, Inc. — Q1 2020 Form 10-Q
Entity note: The filing identifies B. Riley Financial, Inc. (Nasdaq: RILY) as the registrant; this differs from the request metadata naming BRC Group Holdings, Inc. The quarter ended March 31, 2020, with comparisons to Q1 2019. Financial figures below are in USD millions unless noted.
Business context and reporting period
B. Riley provides capital markets and investment banking, auction and liquidation, valuation and appraisal, principal investment, consumer communications, and brand-licensing services. It reports five segments: Capital Markets; Auction and Liquidation; Valuation and Appraisal; Principal Investments—United Online and magicJack; and Brands.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenues | $(0.2) million | $142.1 million |
| Services and fees | $159.4 million | $103.9 million |
| Trading losses and loan fair-value adjustments | $(182.4) million | $25.9 million income |
| Operating loss | $(121.1) million | $25.0 million income |
| Net loss attributable to B. Riley | $(98.7) million | $8.0 million income |
| Net loss available to common shareholders; EPS | $(99.7) million; $(3.83) | $8.0 million; $0.31 basic |
| Operating cash flow | $0.5 million | $8.9 million |
| Investing / financing cash flow | $(71.5) million / $92.3 million | $(26.5) million / $8.2 million |
| Cash and restricted cash at quarter end | $124.7 million | $170.9 million at March 31, 2019 |
| Total assets / total equity | $2,130.9 million / $263.0 million | $2,318.2 million / $390.3 million at Dec. 31, 2019 |
| Senior notes, carrying amount / term loan | $853.5 million / $61.9 million | $688.1 million / $66.7 million at Dec. 31, 2019 |
Management reports $939.7 million of borrowings outstanding in its liquidity discussion; the balance sheet presents debt-related carrying amounts on separate lines, including notes payable and loan participations. The filing reports a 6.94% weighted-average rate on senior notes. A conventional consolidated profit margin is not meaningful because reported total revenue was negative due to trading and fair-value losses.
Material changes versus the prior comparable period
- Services and fees rose 53.4% to $159.4 million, led by Capital Markets, up $56.4 million, including a $49.5 million increase in corporate finance, consulting, and investment banking fees. Brands contributed $3.8 million following its 2019 acquisition.
- Trading and loan fair-value results swung by $208.3 million, from $25.9 million of income to $182.4 million of losses. The 2020 loss included $164.5 million on proprietary investments and $17.9 million of unrealized loan fair-value losses.
- Capital Markets reported a $120.5 million segment loss versus $13.9 million of segment income in Q1 2019. Auction and Liquidation income declined to $4.3 million from $11.5 million, with management citing engagement mix and lower service gross margin. Valuation and Appraisal income rose to $1.9 million from $1.4 million; Principal Investments income rose to $8.5 million from $7.9 million.
- Cash provided by operations fell to $0.5 million. Financing provided $92.3 million, principally from senior-note issuance; investing used $71.5 million, including net loan purchases.
- Senior notes increased, including issuance of $132.3 million of 6.375% notes due 2025. The company also repurchased $3.4 million face value of notes for $1.8 million, recording a $1.6 million gain.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management said the pandemic’s effects were uncertain and could materially adversely affect results, financial position, and cash flows. Restrictions temporarily limited auctions and liquidations; market volatility affected securities and investment valuations. The company recorded a $4.0 million impairment of Brands’ indefinite-lived tradenames and warned that further impairment could occur.
- Outlook: No quantified company-wide earnings or revenue guidance is provided. Management expects United Online and magicJack revenues to continue declining year over year and says results are volatile and not necessarily indicative of the full year. It believes cash, investments, credit-facility availability, and expected operating cash flows should fund needs for at least 12 months from issuance of the statements.
- Liquidity and distributions: The $200 million asset-based facility had no balance or open letters of credit at March 31, 2020; the company said it complied with facility and term-loan covenants. The company declared a $0.25-per-share quarterly common dividend in May, while stating the board may reduce or discontinue future dividends. It repurchased $24.1 million of common stock during the quarter.
- Guarantees and commitments: The company guaranteed up to $50 million of certain Franchise Group loan obligations and up to $125 million under a separate CIBC facility. It also committed to a potential $100 million asset-based facility for Franchise Group; that commitment was extended on May 1, 2020. For Babcock & Wilcox, it provided $30 million of additional loans and had a backstop commitment covering a potential shortfall in $200 million of refinancing financing; negotiations contemplated up to $70 million of additional lending and a limited guaranty.
- Legal matters: An arbitration panel issued an $11.4 million award against a subsidiary and an individual on April 7, 2020; the company accrued a loss in Q1 and petitioned to vacate the award on May 5. Other disclosed matters include securities litigation and an FCC inquiry involving magicJack. The company said it could not estimate potential liability for some matters.
- Controls: Management concluded disclosure controls and procedures were not effective as of March 31, 2020, due to a material weakness previously identified at year-end concerning related-party disclosures. Remediation was underway, with completion expected before year-end 2020, subject to testing.
- Fair-value and credit risk: $421.4 million of recurring fair-value assets were Level 3 at quarter end, including $326.3 million of loans receivable. Valuations rely on significant unobservable inputs and management estimates.
Most important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for B. Riley Financial, Inc., not BRC Group Holdings, Inc.
- Review the composition and realizability of the $182.4 million trading and loan fair-value losses, particularly Level 3 valuations and loan exposures.
- Reconcile the $939.7 million borrowings figure in MD&A with balance-sheet carrying amounts, and assess senior-note maturities, interest costs, covenants, and refinancing capacity.
- Track exposure under Franchise Group and Babcock & Wilcox guarantees, commitments, and lending arrangements, including subsequent developments after quarter end.
- Monitor COVID-19 effects, potential additional intangible impairments, the $11.4 million arbitration award and other contingencies, and remediation of the disclosed controls weakness.