B. Riley Financial, Inc. — FY2019 Form 10-K
Period and issuer: Fiscal year ended December 31, 2019; filed March 9, 2020. The request identifies “BRC Group Holdings, Inc.,” but the filing is for B. Riley Financial, Inc. (Nasdaq: RILY). This is an annual report, not a standalone fourth-quarter filing.
Business context
B. Riley provides investment banking, wealth and asset management, securities trading and lending, auctions and liquidations, valuation, consumer internet/VoIP services, and trademark licensing. It reports five operating segments: Capital Markets; Auction and Liquidation; Valuation and Appraisal; Principal Investments—United Online and magicJack; and Brands. In October 2019, it acquired a majority interest in BR Brand for $116.5 million cash plus warrants.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $652.1 million | $423.0 million |
| Operating income | $166.7 million; 25.6% margin | $45.4 million; 10.7% margin |
| Net income attributable to B. Riley | $81.6 million | $15.5 million |
| Net income available to common shareholders | $81.3 million | $15.5 million |
| Diluted EPS | $2.95 | $0.58 |
| Cash from operating activities | $(30.4) million | $(104.8) million |
| Cash from investing activities | $(295.4) million | $(151.4) million |
| Cash from financing activities | $250.2 million | $284.9 million |
- Revenue rose 54.2%. Capital Markets services and fees increased 72.6% to $408.6 million, including a $115.0 million increase in trading gains; loan and securities-lending interest income more than doubled to $77.2 million.
- Principal Investments revenue increased to $100.9 million, principally because magicJack was included for a full year; United Online revenue continued to decline. Brands contributed $4.1 million after its acquisition.
- Auction and Liquidation revenue fell 66.7% to $22.5 million. A fourth-quarter retail liquidation contract generated a loss because advances exceeded expected recovery; the segment recorded a $25.5 million loss versus $27.0 million income in 2018.
- Valuation and Appraisal revenue was nearly flat at $38.8 million; segment income declined to $10.2 million from $11.1 million. Capital Markets segment income increased to $179.3 million from $10.2 million, with trading performance a major driver.
- Interest expense rose to $50.2 million from $33.4 million, while the effective tax rate increased to 29.7% from 23.0%. Revenue and earnings therefore benefited materially from trading gains and were partly offset by higher financing costs and taxes.
Balance sheet, debt, and liquidity
- At year-end, cash and cash equivalents were $104.3 million, down from $179.4 million; total assets were $2.32 billion, total liabilities $1.93 billion, and equity $390.3 million.
- Securities and other investments at fair value totaled $451.6 million, including $152.6 million of Level 3 assets. Loans receivable were $225.8 million, including $157.1 million from related parties.
- Management disclosed $814.9 million of borrowings outstanding and stated that cash, investments, available credit facilities, and expected operating cash flows should cover working capital and capital expenditures for at least 12 months. Senior notes, net of issuance costs, were $688.1 million, with a 7.05% weighted-average rate; the term loan was $66.7 million. The asset-based facility had $37.1 million outstanding at year-end. The filing’s borrowings summary and balance-sheet classifications should be reconciled when evaluating total debt.
- Operating cash flow remained negative despite substantially higher net income. The company attributed the 2019 operating cash use in part to changes in operating assets and liabilities; investing cash outflow included substantial loan originations and the BR Brand acquisition.
- Contractual obligations totaled $1.16 billion, including $984.8 million of senior-note payments and interest. The company paid $41.1 million in common dividends in 2019; the board may change or discontinue future dividends.
Outlook, material items, and risks
- Management expects United Online revenues to continue declining. The filing gives no consolidated revenue or earnings guidance and emphasizes that results can fluctuate with markets, transaction timing, proprietary trading, and liquidation engagements.
- In February 2020, the company issued $132.25 million of 6.375% senior notes due 2025. It also entered into further at-the-market issuance agreements. These financing actions occurred after year-end.
- Subsequent commitments included a $100 million potential asset-based facility for Franchise Group, a guarantee capped at $50 million for a lender to Franchise Group, and a separate guarantee capped at $125 million for CIBC obligations. The company also provided Babcock & Wilcox $30 million in additional loans and agreed to backstop up to $200 million of financing shortfalls for its refinancing. These exposures warrant review, particularly given existing debt and related-party connections.
- Key risks include volatile markets and trading results, credit and investment valuation risk, leverage and refinancing needs, losses on guaranteed liquidation contracts, declining United Online subscriptions, regulatory and litigation exposure, and cybersecurity and operational risks. The filing identifies $109.1 million carrying value of Babcock & Wilcox loans and other sizeable borrower exposures.
- The independent auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Management and the auditor identified a material weakness in controls over identification and disclosure of related-party transactions. Management said remediation was underway and expected completion before the end of fiscal 2020.
- The company reported ongoing legal proceedings, including a magicJack class action for which potential liability could not be estimated and securities offering litigation involving a broker-dealer subsidiary. Management did not believe the claims were likely to materially affect financial position or results, but outcomes remain uncertain.
Most important facts for investors to verify
- How much of 2019 earnings came from realized versus unrealized trading gains, and whether those gains are repeatable.
- The economics, expected recovery, and remaining exposure from the loss-making fourth-quarter liquidation engagement.
- Reconciliation of total borrowings, debt maturities, interest costs, credit-facility availability, and post-year-end financing and guarantees.
- Credit quality, collateral, valuation methods, and related-party status of the $225.8 million loan portfolio, especially the $157.1 million related-party balance and Babcock & Wilcox exposure.
- Progress and independent testing of remediation for the related-party disclosure control weakness.
- United Online’s subscriber and revenue decline, BR Brand licensing performance, and the sustainability of dividends amid negative operating cash flow.