Business context and reporting period
This is B. Riley Financial, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies the registrant as B. Riley Financial, Inc., not BRC Group Holdings, Inc.; confirm that this is the intended filing. The company operates in capital markets, auction and liquidation, valuation and appraisal, United Online and magicJack, and brands. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $266.5 | $164.7 | $266.3 | $306.8 |
| Operating income | $131.3 | $44.3 | $10.2 | $69.2 |
| Net income (loss) | $82.5 | $22.3 | $(16.7) | $30.3 |
| Net income (loss) attributable to B. Riley | $83.8 | $22.2 | $(14.8) | $30.2 |
| Net income (loss) available to common shareholders | $82.8 | $22.2 | $(17.0) | $30.2 |
| Basic EPS | $3.23 | $0.84 | $(0.66) | $1.15 |
- Q2 revenue increased 61.8%, driven largely by $118.6 million in realized and unrealized proprietary investment trading gains; fair-value loan losses of $4.0 million partly offset those gains. Q2 operating margin was about 49%, versus 27% a year earlier.
- Six-month revenue fell 13.2%. Trading and loan fair-value results swung to a $67.9 million loss from $31.5 million of income in 2019, including $45.9 million of investment losses and $22.0 million of loan fair-value losses. Six-month operating margin was about 4%, versus 23%.
- Services and fees rose 16.9% for the first half, with Capital Markets up $71.6 million; Auction and Liquidation fell $26.6 million, and United Online/magicJack fell $9.0 million. Management expects United Online/magicJack revenue to continue declining year over year.
- Q2 direct costs of services were $8.0 million, down from $19.7 million; SG&A rose 15.9% to $106.6 million. The filing does not provide a single consolidated gross-margin measure applicable across its varied businesses.
- Cash from operations was $13.4 million for the first half, compared with $1.4 million in 2019. Investing used $82.6 million, principally reflecting loan purchases; financing provided $71.8 million. Cash, cash equivalents and restricted cash ended at $106.7 million.
- At June 30, total assets were $2.30 billion, liabilities $1.96 billion and equity $336.2 million. Unrestricted cash was $106.3 million; securities and other investments were $399.0 million; loans receivable at fair value were $325.5 million.
- Borrowings were approximately $926.0 million: $854.0 million senior notes, $57.2 million term loan, $0.7 million other notes and $14.1 million loan participations sold. Senior notes carried a 6.94% weighted-average rate; their reported fair value was $772.7 million versus $854.0 million carrying value. Interest expense rose to $32.2 million for the first half from $22.4 million.
- Management said available cash, investments, credit-facility availability and expected operating cash flows should cover working capital and capital needs for at least 12 months from issuance of the statements. The asset-based facility had no balance outstanding at quarter-end; the company reported compliance with financial covenants on that facility and its term loan.
Material changes, outlook and risks
- COVID-19 delayed or temporarily stopped some retail liquidation engagements, contributing to lower Auction and Liquidation revenue. Some engagements resumed in June as stores reopened. The company warned that prolonged pandemic and market effects could materially adversely affect results, financial position and cash flows.
- The company recorded $12.5 million of Brands tradename impairment in the first half, including $8.5 million in Q2, citing COVID-19 effects; further impairments may result if forecasts weaken. Brands generated $7.0 million of first-half revenue but had an $8.1 million segment loss.
- Effective January 1, 2020, the company elected fair-value accounting for loans previously carried at amortized cost. The $22.0 million first-half fair-value loss was recorded in earnings; adoption’s initial impact was described as immaterial.
- Senior notes payable increased from $688.1 million at year-end 2019 to $854.0 million at June 30, 2020, partly following issuance of $132.3 million of 6.375% notes due 2025 and additional at-the-market notes. A further $148.4 million remained available under a senior-note sales agreement.
- Credit and contingent exposures warrant attention. The filing describes a $100 million FRG asset-based lending commitment, a guarantee capped at $50 million for a FRG term-loan lender, and a separate $125 million CIBC guarantee that terminated June 30, 2020. It also reports B&W loans, future lending commitments of up to $40 million beginning November 2020, and a limited guarantee; the precise maximum exposure under that guarantee is not clear in the provided text. The company states total maximum exposure on specified FRG and B&W loan guarantees is approximately $255 million.
- Related-party lending and transactions are significant: $233.4 million of June 30 fair-value loans were due from related parties. The filing also describes a proposed $50 million equity backstop for a business combination by BRPM II; completion was subject to definitive agreements.
- Unusual and legal items include a $5 million FCC payment and changes to magicJack products and marketing under a consent decree; a $10.15 million cash settlement of a FINRA arbitration claim; and a Miller Energy securities case settlement subject to court approval. The filing says ordinary-course claims are not expected to materially affect the company, but outcomes are uncertain.
- No numerical full-year earnings or revenue guidance is provided. The board announced a regular quarterly common dividend increase to $0.30 per share and a $0.05 special dividend after quarter-end; future dividends remain discretionary. The filing states disclosure controls were effective and that remediation of a previously reported internal-control material weakness was completed during Q2.
Key facts for investors to verify
- Confirm the registrant identity: the supplied filing is for B. Riley Financial, Inc., despite the request metadata naming BRC Group Holdings, Inc.
- Assess the sustainability and valuation sensitivity of Q2’s large trading gains, the first-half investment and loan fair-value losses, and the substantial Level 3 asset balance ($433.3 million).
- Review debt maturities, interest costs, note-sale capacity, and the effect of dividends and share repurchases on liquidity; reconcile the filing’s differing senior-note descriptions where relevant.
- Evaluate credit quality, collateral and concentration in related-party loans, particularly the B&W and Maven exposures, and quantify contingent guarantees and future lending commitments.
- Track COVID-19 effects on liquidation engagements and Brands valuations, potential further tradename impairment, and the expected decline in United Online/magicJack revenue.
- Verify status and financial consequences of the FCC consent decree, litigation settlements, and proposed BRPM II transaction, and monitor execution of the completed control-remediation measures.