B. Riley Financial, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for B. Riley Financial, Inc. (formerly Great American Group, Inc.), not BRC Group Holdings, Inc. This summary reflects the registrant named in the filing.
Business context and reporting period
The unaudited filing covers the three months ended March 31, 2015, with comparisons to the three months ended March 31, 2014. The company operates in Capital Markets, Auction and Liquidation, and Valuation and Appraisal. B. Riley & Co. was acquired in June 2014; wealth manager MK Capital was acquired on February 2, 2015.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $26.0 million | $21.7 million |
| Operating income (loss) | $5.5 million | $(1.3) million |
| Net income (loss) attributable to B. Riley | $2.7 million | $(1.3) million |
| Basic and diluted EPS | $0.17 | $(0.93) |
| Cash provided by operating activities | $17.3 million | $5.3 million |
- Revenue increased 20.2%. Services and fees rose $9.2 million, primarily reflecting the acquired Capital Markets business; goods-sale revenue fell $4.8 million.
- Operating margin was approximately 21.0%, versus an operating loss margin of 5.8% in Q1 2014. Goods-sale gross margin was $3.5 million, or 80.0%, versus $0.2 million, or 2.2%, a year earlier; the different engagement mix materially affected the comparison.
- Capital Markets reported $9.2 million in revenue and $2.6 million in segment income. Auction and Liquidation reported $9.6 million in revenue and $3.1 million in segment income; Valuation and Appraisal reported $7.3 million in revenue and $1.8 million in segment income.
- At March 31, 2015, cash and cash equivalents were $10.3 million and restricted cash was $25.7 million. Total assets were $135.9 million, current assets $75.6 million, and total liabilities $30.8 million.
- Reported borrowings included $4.5 million under the asset-based facility, $1.9 million under the receivables revolver, and a $4.5 million related-party note. The related-party note was repaid May 4, 2015. Letters of credit outstanding under the asset-based facility were $25.5 million.
- Operating cash flow was partly offset by $20.6 million of investing outflows, including an $18.0 million increase in restricted cash and $2.5 million paid for MK Capital. Financing used $8.0 million, including $14.0 million of asset-based facility repayments, offset by $4.5 million of related-party borrowing and $1.8 million of revolving-credit proceeds. Cash declined by $11.3 million during the quarter.
Material changes versus the prior period
- Results shifted from a quarterly loss to profit. The filing attributes the improvement to income across all three operating segments, lower corporate overhead and reduced interest expense.
- Capital Markets contributed $9.2 million of service and fee revenue in Q1 2015; there was no comparable segment revenue in Q1 2014 because B. Riley & Co. had not yet been acquired.
- SG&A increased 65.7% to $12.9 million, mainly reflecting the acquired Capital Markets operations. Cost reductions in the other segments and corporate functions partly offset that increase.
- Asset-based facility borrowings declined from $18.5 million at December 31, 2014 to $4.5 million at March 31, 2015, while restricted cash increased from $7.7 million to $25.7 million, largely for engagement-related collateral.
- The company issued 333,333 shares for MK Capital. The acquisition’s $9.4 million purchase price included cash, issued shares, and contingent cash and stock consideration.
Outlook, commentary, risks and unusual items
- Management said cash, available asset-based facility capacity, and expected operating cash generation should be sufficient for working capital and capital expenditures for at least the next 12 months. Results are not necessarily indicative of full-year performance; the filing gives no numerical earnings or revenue guidance.
- Management emphasized quarter-to-quarter volatility in auction and liquidation activity and investment banking transactions. Risks include engagement timing and size, estimates and guarantees on liquidation contracts, market and trading volatility, access to credit and letters of credit, and competition.
- GAGEE, a wholly owned special-purpose subsidiary holding oil rigs and related debt, filed for Chapter 7 bankruptcy in January 2015. Its assets and liabilities were deconsolidated; management did not expect a material effect on the consolidated financial position.
- A 2015 lawsuit seeks damages of up to $10 million for alleged breach of contract and other claims. The company is defending the matter; its financial impact could not be estimated.
- In April 2015 the company committed $5.0 million for a 5% interest in a newly formed direct-lending fund. On May 4, 2015, the board declared a $0.06-per-share dividend, payable on or about June 12, 2015 to holders of record May 22.
- The $4.5 million March borrowing was from Riley Investment Partners, an entity with executive affiliations; the filing describes board approval by disinterested directors and subsequent repayment on May 4. The filing also reports a $14.0 million letter of credit for a Target Canada liquidation engagement, returned after the sale was completed in April.
- Disclosure controls were assessed as effective at the reasonable-assurance level, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing names B. Riley Financial, Inc., not BRC Group Holdings, Inc.
- Review the mix, repeatability, and margins of Capital Markets and liquidation revenues, including the effect of acquisitions and one-off goods sales.
- Reconcile unrestricted and restricted cash, facility borrowings, letters of credit, and the timing and terms of engagement funding needs.
- Assess the outcome and potential exposure of the lawsuit, the GAGEE bankruptcy, and contingent MK Capital consideration.
- Check the post-quarter repayment of the related-party note, the $5.0 million fund commitment, and the declared dividend against subsequent filings and cash availability.