Business context and reporting period
The supplied filing is B. Riley Financial, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017—not a filing identified as BRC Group Holdings, Inc. The distinction should be verified. B. Riley reported four segments: Capital Markets, Auction and Liquidation, Valuation and Appraisal, and Principal Investments—United Online. United Online (UOL), acquired July 1, 2016, contributed results in the 2017 quarter but not the 2016 comparison.
Financial performance and position
Unless otherwise noted, amounts are in U.S. dollars; financial statement figures are in millions.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $52.9 | $19.9 |
| Operating income | $10.7; 20.2% margin | $1.7; 8.3% margin |
| Income before taxes | $10.1 | $1.5 |
| Income tax benefit (provision) | $3.8 benefit | $0.2 provision |
| Net income attributable to B. Riley | $14.0 | $0.2 |
| Diluted EPS | $0.71 | $0.01 |
| Cash flow from operations | $(38.9) | $(1.0) |
Revenue increased 165.2%, reflecting UOL’s inclusion and higher Capital Markets and Auction and Liquidation activity. UOL contributed $13.4 million in revenue and $4.2 million in segment income. Capital Markets revenue rose to $17.7 million from $5.6 million; Auction and Liquidation revenue increased to $14.0 million from $6.9 million, while its segment income declined to $1.8 million from $2.2 million. Valuation and Appraisal revenue was $7.8 million, with segment income of $2.0 million, broadly stable year over year.
The $3.8 million tax benefit included an $8.4 million benefit from electing taxable treatment for the UOL acquisition; reported earnings therefore include a significant tax-related item. Operating cash use was driven in part by a $24.5 million increase in securities and other investments and outflows from operating liabilities and related-party balances. Cash and cash equivalents fell to $71.5 million from $112.1 million at year-end.
At March 31, total assets were $254.9 million, total liabilities $92.9 million, and equity $162.0 million. Senior notes payable were $27.8 million carrying value; no borrowings were outstanding under the asset-based facility. Cash was $71.5 million, restricted cash $0.5 million, and securities and other investments owned $41.1 million, against $1.7 million of securities sold not yet purchased. The company paid $5.0 million in dividends during the quarter; cash dividends per share were $0.26.
Changes, outlook, risks and unusual items
- Growth comparisons are affected by the UOL acquisition. Capital Markets gains reflected more investment banking transactions, trading income, and fees and commissions. Retail liquidation activity increased, but Auction and Liquidation gross margin on services and fees fell to 26.2% from 50.5%, partly due to engagement mix and hurdles not achieved until Q2.
- Management expected UOL subscription revenue to continue declining year over year, citing consumers’ shift from dial-up to higher-speed internet. The filing provides no consolidated earnings or revenue guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- On April 21, 2017, the asset-based facility limit was increased from $100 million to $200 million and maturity extended to April 2022. On April 13, UOL entered into a separate revolving facility of up to $20 million, subject to scheduled reductions and covenants. These are post-quarter developments, not March 31 borrowings.
- The proposed FBR merger was pending shareholder approvals and other conditions; management anticipated a Q2 2017 close and estimated issuance of approximately 5.3 million shares, valued at about $93 million using the February 17 share price. The filing also reports an April 2017 acquisition of Dialectic fund-management rights for $2.8 million in cash and stock.
- Contingencies include a lawsuit seeking approximately $9.7 million related to alleged contamination during an auction, which the company is defending; a UOL appraisal-rights case for 943,769 shares, with $10.4 million of acquisition consideration payable recorded and approximately $0.5 million accrued interest; and an investigation concerning a former UOL subsidiary, for which potential liability could not be estimated. Management said it believed available liquidity was sufficient for at least the next 12 months.
- Management identified volatility in revenues and financial markets, engagement and guarantee-related losses, investment illiquidity, acquisition execution and integration, and credit-facility availability and covenant compliance among relevant risks. Disclosure controls were assessed as effective at a reasonable-assurance level; no material change in internal control was reported.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing names B. Riley Financial, Inc., while the request metadata names BRC Group Holdings, Inc.
- Assess earnings excluding the $8.4 million UOL-related tax benefit and distinguish UOL acquisition contributions from underlying year-over-year growth.
- Review the drivers and sustainability of the $38.9 million operating cash outflow, including securities purchases and changes in operating liabilities.
- Track UOL’s subscriber and revenue declines, Auction and Liquidation margins, and the timing of engagement-related fees and hurdles.
- Monitor the FBR transaction, subsequent credit-facility terms and use, and the outcomes and potential costs of the disclosed legal matters.