B. Riley Financial, Inc. — FY 2014 Form 10-K
Filing identity and period: The supplied filing identifies the registrant as B. Riley Financial, Inc. (formerly Great American Group, Inc.), not BRC Group Holdings, Inc. It is an annual report for the fiscal year ended December 31, 2014, filed March 30, 2015—not a standalone fourth-quarter filing. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
The company operated in three segments: capital markets; auction and liquidation solutions; and valuation and appraisal services. It acquired B. Riley & Co. and related entities during 2014, adding investment banking, research, sales and trading, and asset-management activities. Capital-markets results include the acquired business only from the acquisition dates in June and August 2014. The company changed its name and ticker to B. Riley Financial and RILY in November 2014.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $77.1 million | $76.1 million |
| Operating income (loss) | $(7.4) million | $4.1 million |
| Net income (loss) attributable to B. Riley | $(5.8) million | $1.1 million |
| Basic and diluted EPS | $(0.60) | $0.74 basic; $0.71 diluted |
| Cash from operating activities | $(23.0) million | $(2.5) million |
- Revenue rose 1.3% year over year: services and fees increased 12.2% to $67.3 million, while goods-sale revenue fell 39.0% to $9.9 million. FY 2014 included $19.4 million of capital-markets revenue from the acquired B. Riley operations.
- Auction and liquidation revenue fell 47.0% to $27.0 million, including a $6.1 million loss accrual on a guaranteed retail liquidation. Valuation and appraisal revenue increased 11.3% to $30.7 million. Capital markets contributed $19.4 million from its partial-year consolidation.
- Operating expenses rose to $84.5 million from $72.0 million, including $44.5 million of SG&A and a $2.5 million restructuring charge. Auction and liquidation segment income fell to a $7.7 million loss from $11.2 million of income; valuation and appraisal segment income was $6.8 million and capital markets segment income was $5.0 million.
- Goods-sale gross margin was negative 42.8%, versus positive 28.8% in 2013, reflecting $4.7 million of impairment and inventory valuation charges. Service-and-fee gross margin in auction and liquidation declined to 37.6% from 65.7%; valuation and appraisal improved to 58.4% from 52.7%.
- FY 2014 cash use from operations included $16.0 million invested in securities for the trading portfolio and a $15.2 million increase in accounts receivable and customer-contract advances. Financing activities provided $29.5 million, primarily from the equity placement, offset by debt repayments.
- At December 31, 2014, unrestricted cash was $21.6 million, restricted cash $7.7 million, and securities owned $18.0 million. Borrowings included $18.5 million under the asset-based facility, $0.1 million under a receivables line, and $6.6 million of notes payable. Total liabilities were $41.9 million; total equity was $97.1 million. The $6.6 million note was associated with the oil-rig subsidiary that later entered Chapter 7.
- The $100 million asset-based facility matures July 2018, but advances and letters of credit are subject to lender discretion, transaction limits and covenants. At year-end, $8.6 million of letters of credit supported two retail liquidation engagements. Management said available cash, borrowing capacity and expected operating cash flow should cover requirements for at least 12 months.
Fourth-quarter snapshot: Unaudited Q4 2014 revenue was $19.8 million, operating loss $3.7 million, net loss attributable to B. Riley $2.8 million, and diluted loss per share $0.18. Losses were reported in all four quarters of 2014.
Material changes, outlook and risks
- The June 2014 private placement raised net proceeds of $51.2 million. The company used $30.2 million to retire related-party debt with a $48.8 million face amount; the $18.8 million discount was recorded as a capital contribution. The remaining related-party notes were repaid by August 2014. Issued shares increased substantially, so per-share comparisons are affected by the equity issuance and the June reverse stock split.
- Management restructured European operations, reduced staff and closed offices in the United Kingdom and Deerfield, Illinois, recording $2.5 million of restructuring expense. It expected European revenue to decline substantially. No quantified earnings or revenue guidance was provided.
- Subsequent events include the February 2015 acquisition of MK Capital, with $2.5 million cash and 333,333 shares paid at closing plus contingent payments subject to revenue targets; and a March 2015 $4.5 million related-party note from Riley Investment Partners, bearing 10% interest and a transaction-related success fee subject to a stated cap.
- GAGEE filed for Chapter 7 on January 11, 2015. Its year-end assets were $6.6 million and liabilities $6.6 million, principally five oil rigs and the secured note. Management did not expect a material consolidated impact, but the subsidiary’s assets and liabilities would no longer be consolidated after the filing.
- New or ongoing liquidation exposures included a $14.0 million letter of credit for the 2015 Target Canada engagement, as well as minimum guarantees for Alco Stores and CACHE. Final Alco proceeds were expected to be determined in Q2 2015. These engagements can produce losses if proceeds fall short of guarantees.
- A 2015 lawsuit sought damages of up to $10 million; the company was defending it and said the financial impact, if any, could not be estimated. It reported no other ordinary-course legal claims expected to materially affect results.
- Other notable risks include volatile, short-term engagement revenue; concentrated customer and market exposure; valuation and inventory markdown risk; financing and letter-of-credit availability; securities trading and illiquid investment losses; competition, regulation and key-person dependence. The 2014 equity issuance triggered an ownership change under Section 382, potentially limiting use of net operating losses; management recorded no valuation allowance based on expected future utilization.
- The company paid a $0.03-per-share dividend in December 2014; future dividends are discretionary. Management reported effective disclosure controls and internal control over financial reporting at year-end; the auditor did not attest to internal controls.
Most important facts for investors to verify
- Confirm the issuer identity and period: the filing is B. Riley Financial’s FY 2014 10-K, despite the request metadata naming BRC Group Holdings and “2014 Q4.”
- Review the full audited statements and notes for the drivers of the $23.0 million operating cash outflow, the $6.1 million guaranteed-engagement loss and $4.7 million inventory impairments.
- Assess the collectability and recovery prospects for GAGEE’s oil rigs and receivables, and the potential impact of its bankruptcy and the related secured debt.
- Check utilization, collateral, covenants and lender discretion under the credit facilities, alongside the company’s liquidity needs for concurrent guaranteed liquidations and the $14.0 million Target Canada letter of credit.
- Evaluate the related-party nature and terms of the B. Riley acquisition, debt retirement and March 2015 Riley Investment Partners note, including the executive ownership interests disclosed.
- Monitor the up-to-$10 million lawsuit, Section 382 limits on tax attributes, and completion economics of Alco, Target Canada, CACHE and other subsequent liquidation engagements.