B. Riley Financial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The company provides capital markets, auction and liquidation, and valuation and appraisal services. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $19.9 | $26.0; down 23.4% |
| Operating income | $1.7 | $5.5; operating margin 8.4% vs. 21.0% |
| Net income | $1.4 | $3.4 |
| Net income attributable to B. Riley | $0.25; diluted EPS $0.01 | $2.7; diluted EPS $0.17 |
| Cash from operating activities | $(1.0) | $17.3 |
| Cash and cash equivalents at period-end | $26.8 | $30.0 at Dec. 31, 2015 |
| Total assets / total liabilities | $126.1 / $15.0 | $132.4 / $23.1 at Dec. 31, 2015 |
- Services and fees revenue was $19.9 million, down 7.6%; goods-sale revenue was just $0.002 million versus $4.4 million a year earlier.
- Segment results: Capital Markets recorded a $0.6 million loss versus $2.6 million income; Auction and Liquidation income fell to $2.2 million from $3.1 million; Valuation and Appraisal income rose to $2.1 million from $1.8 million.
- Direct costs of services were $6.7 million. Reported service gross margins improved in Auction and Liquidation to 50.5% from 30.0%, and in Valuation and Appraisal to 56.3% from 56.0%.
- Q1 cash decreased by $3.2 million. Investing used $0.02 million and financing used $2.2 million, including a $1.25 million MK Capital contingent-consideration payment and $0.7 million of distributions to noncontrolling interests.
- At March 31, the company had no borrowings under its $100 million asset-based facility and no balance on its terminated receivables line. The facility is subject to lender discretion and supports liquidation engagements. Net securities owned, after securities sold short, were approximately $24.7 million.
Changes, outlook and risks
- Revenue and earnings fell substantially year over year. Management attributed the Capital Markets decline chiefly to $5.2 million less investment-banking fees, reflecting fewer advisory transactions. The goods-sale comparison was affected by the 2015 sale of Schoenenreus retail inventory. A large energy-equipment auction supported Auction and Liquidation service revenue in Q1 2016.
- Management said cash, available facility capacity and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months, based on conditions at the reporting date. No specific earnings or revenue guidance was provided; management cautioned that quarterly results are not necessarily indicative of full-year results.
- Subsequent financing and engagement: In April, the company borrowed $56.3 million and issued $10.8 million of letters of credit under the asset-based facility for the Hancock Fabrics liquidation, expected to run through June or July 2016. These were not outstanding at March 31.
- Proposed acquisition: On May 4, the company agreed to acquire United Online for $11 per share, approximately $170 million of aggregate consideration, with about $48 million of expected cash funding after taking account of United Online’s projected cash. Closing was anticipated in Q3 2016, subject to conditions including a United Online shareholder vote. The company completed a May 10 share offering of 2,420,980 shares at $9.50, generating approximately $23 million before expenses. The filing said additional acquisition debt was expected and warned of financing, integration, closing and debt-service risks.
- Contingency: A former landlord seeks approximately $9.7 million in a lawsuit related to alleged contamination associated with an auction. Some claims were dismissed; others remain. The company is defending the case and said any financial impact could not be estimated. It stated that ordinary-course claims were not expected to materially affect results or financial position.
- Other relevant risks include volatile engagement-driven revenue, market conditions, valuation and guarantee-related losses, liquidity and access to financing, and potential losses or illiquidity in proprietary investments. The company reported effective disclosure controls and no material changes to internal control during the quarter.
Important facts for investors to verify
- Whether the decline in investment-banking fees and parent-attributable earnings persists, and how segment performance develops.
- Actual cash use, borrowing and letter-of-credit exposure from the Hancock Fabrics engagement, including its completion and recovery relative to the guarantee.
- United Online closing conditions, final cash requirement, financing terms and resulting leverage and debt-service capacity.
- Developments and potential exposure in the approximately $9.7 million lawsuit.
- Liquidity and facility availability under lender-discretionary terms; the company’s 12-month liquidity assessment predates the subsequent engagement financing and proposed acquisition.