Business context and reporting period
The supplied filing is B. Riley Financial, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, filed March 28, 2016. It is not a filing for “BRC Group Holdings, Inc.” and reports an annual period, with unaudited quarterly results included. B. Riley Financial provides capital markets and wealth-management services, asset auctions and liquidations, and valuation and appraisal services.
Financial results and liquidity
Unless stated otherwise, amounts below are in millions of dollars. The filing’s financial statements were audited by Marcum LLP, which issued an unqualified opinion.
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $112.5 | $77.1 |
| Operating income (loss) | $22.1 | $(7.4) |
| Net income (loss) attributable to B. Riley Financial | $11.8 | $(5.8) |
| Basic and diluted EPS | $0.73 | $(0.60) |
| Cash from (used in) operating activities | $31.7 | $(23.0) |
| Cash and cash equivalents at year-end | $30.0 | $21.6 |
Revenue increased 45.9%. Operating margin was 19.6% and net income attributable to the company was 10.5% of revenue. Service and fee revenue was $101.9 million; goods sales were $10.6 million. Auction and liquidation contributed $19.3 million of segment income, valuation and appraisal $8.3 million, and capital markets $4.4 million.
At year-end, total assets were $132.4 million, current assets $73.0 million and current liabilities $22.0 million. Total liabilities were $23.1 million and equity $109.3 million. The company had $25.5 million of securities owned and $0.7 million of securities sold but not yet purchased. It reported $0.3 million outstanding under its revolving credit facility and no borrowings or letters of credit under its $100 million asset-based facility. The balance sheet also included $2.4 million of contingent consideration, of which $1.2 million was current. Cash from investing activities was $4.9 million and cash used in financing was $28.1 million.
Material changes versus comparable periods
- Revenue rose $35.4 million from 2014. Capital markets service revenue increased $15.8 million, in part because 2015 included a full year of B. Riley & Co. results and the acquisition of MK Capital; auction and liquidation service revenue increased $18.5 million, including $13.9 million from the Target Canada liquidation. Valuation and appraisal service revenue was broadly stable.
- The company returned to profitability from a 2014 loss. The improvement primarily reflected higher auction and liquidation segment income and the absence of the 2014 restructuring charge of $2.5 million and a $6.1 million accrual for a loss-making liquidation engagement.
- Goods-sale gross margin improved to $7.5 million (71.0%) from a loss of $4.2 million (negative 42.8%) in 2014. The 2014 result included impairment and inventory valuation charges.
- Operating cash flow improved by $54.7 million year over year. Management attributed this to improved earnings and changes in operating assets and liabilities, including collection and contract-advance movements.
- Capital markets and wealth management expanded through the B. Riley & Co. acquisition in 2014 and MK Capital in February 2015. MK Capital contributed $1.8 million of revenue and $0.5 million of pretax income from acquisition through year-end. The first contingent payment installment was paid in February 2016.
Outlook, risks and unusual items
Management gave no specific revenue or earnings guidance. It stated that cash, borrowing availability and expected operating cash flows should fund working capital and capital expenditure needs for at least 12 months. Future dividends are discretionary; the company paid $0.32 per share in 2015, totaling $5.2 million.
- Results are volatile and depend on timing and size of transactions and liquidation engagements; most client mandates are short term. One retailer’s liquidation contract represented 12.4% of 2015 revenue.
- Guarantee-based and outright-purchase liquidations expose the company to losses if asset valuations or sale proceeds fall short. Liquidity and lender approval are important to funding these engagements.
- Market, trading and investment exposures include potential losses and valuation uncertainty; $2.1 million of year-end securities were classified as Level 3 fair value assets.
- A lawsuit arising from a 2012 auction sought approximately $9.7 million. In March 2016, the court dismissed two claims but allowed others to proceed. The company said it would defend the action; the filing stated the financial impact, if any, could not be estimated.
- GAGEE filed for Chapter 7 in January 2015 and was deconsolidated; the bankruptcy case closed in June, and management reported no remaining company investment or obligation for GAGEE liabilities.
- A $4.5 million related-party note from Riley Investment Partners, whose ownership included the CEO, was repaid in May 2015. Interest and success-fee expense was $0.2 million; disinterested directors approved the note.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2015. The auditor did not attest to internal controls.
Important facts for investors to verify
- Confirm the issuer identity: the provided metadata names BRC Group Holdings, Inc., while the filing itself is for B. Riley Financial, Inc. (NASDAQ: RILY).
- Review the full audited statements and notes for cash-flow drivers, contingent consideration, securities valuation, and tax assets; the filing says net operating loss utilization may be limited under Section 382.
- Track the unresolved auction lawsuit, any subsequent developments, and the company’s assessment of potential exposure.
- Assess the sustainability of 2015 earnings and cash flow given transaction-driven revenue, the Target Canada contribution, and quarterly volatility; fourth-quarter 2015 included an operating loss of $1.3 million.
- Check subsequent filings for the second MK Capital contingent payment, future dividends, and changes in borrowing availability or liquidity.