UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 

 

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to        

 

Commission File Number 001-37503

 

 

 

B. RILEY FINANCIAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-0223495

(State or Other Jurisdiction of

Incorporation or Organization)

  (I.R.S. Employer
Identification No.)
     

21255 Burbank Boulevard, Suite 400

Woodland Hills, CA

  91367
(Address of Principal Executive Offices)   (Zip Code)

 

(818) 884-3737

(Registrant’s telephone number, including area code)
 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   RILY   Nasdaq Global Market
7.25% Senior Notes due 2027   RILYG   Nasdaq Global Market
7.50% Senior Notes due 2027   RILYZ   Nasdaq Global Market
7.375% Senior Notes due 2023   RILYH   Nasdaq Global Market
6.875% Senior Notes due 2023   RILYI   Nasdaq Global Market
7.50% Senior Notes due 2021   RILYL   Nasdaq Global Market
6.75% Senior Notes due 2024   RILYO   Nasdaq Global Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of July 30, 2019, there were 26,965,312 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

B. Riley Financial, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2019

Table of Contents

 

    Page
     
PART I. FINANCIAL INFORMATION 1
   
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 1
     
  Condensed Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018 2
     
  Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 3
     
  Condensed Consolidated Statements of Equity for the three and six months ended June 30, 2019 and 2018 4
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 6
     
  Notes to Unaudited Condensed Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
     
Item 4. Controls and Procedures 49
     
PART II. OTHER INFORMATION 50
   
Item 1. Legal Proceedings 50
     
Item 1A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosures 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 52
     
SIGNATURES 54

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

   June 30,   December 31, 
   2019   2018 
   (Unaudited)     
Assets        
Assets:        
Cash and cash equivalents  $55,609   $179,440 
Restricted cash   2,635    838 
Due from clearing brokers   29,245    37,738 
Securities and other investments owned, at fair value   270,290    273,577 
Securities borrowed   759,921    931,346 
Accounts receivable, net   56,450    42,123 
Due from related parties   4,318    1,729 
Advances against customer contracts   5,322     
Loans receivable   250,521    38,794 
Prepaid expenses and other assets   140,817    79,477 
Operating lease right-of-use assets   50,943     
Property and equipment, net   13,997    15,523 
Goodwill   220,181    223,368 
Other intangible assets, net   82,765    91,358 
Deferred income taxes   35,969    42,399 
Total assets  $1,978,983   $1,957,710 
Liabilities and Equity          
Liabilities:          
Accounts payable  $2,136   $5,646 
Accrued expenses and other liabilities   93,832    108,662 
Deferred revenue   68,097    69,066 
Due to related parties and partners   1,563    2,428 
Securities sold not yet purchased   42,754    37,623 
Securities loaned   759,109    930,522 
Mandatorily redeemable noncontrolling interests   4,224    4,633 
Operating lease liabilities   65,499     
Notes payable   1,193    1,550 
Term loan   80,916    79,166 
Senior notes payable   582,482    459,754 
Total liabilities   1,701,805    1,699,050 
           
Commitments and contingencies (note 15)          
B. Riley Financial, Inc. stockholders’ equity:          
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued        
Common stock, $0.0001 par value; 100,000,000 shares authorized; 26,919,941 and 26,603,355 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively.   3    2 
Additional paid-in capital   255,865    258,638 
Retained earnings   22,424    1,579 
Accumulated other comprehensive loss   (1,824)   (2,161)
Total B. Riley Financial, Inc. stockholders’ equity   276,468    258,058 
Noncontrolling interests   710    602 
Total equity   277,178    258,660 
Total liabilities and equity  $1,978,983   $1,957,710 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Revenues:                
Services and fees  $154,859   $118,882   $286,712   $207,331 
Interest income - Securities lending   7,665    6,591    16,995    13,882 
Sale of goods   2,160    28    3,105    66 
Total revenues   164,684    125,501    306,812    221,279 
Operating expenses:                    
Direct cost of services   24,232    13,925    42,769    25,577 
Cost of goods sold   1,805    49    2,924    90 
Selling, general and administrative expenses   87,338    76,723    177,881    144,821 
Restructuring charge   1,552    1,602    1,699    1,819 
Interest expense - Securities lending   5,502    4,724    12,306    9,892 
Total operating expenses   120,429    97,023    237,579    182,199 
Operating income   44,255    28,478    69,233    39,080 
Other income (expense):                    
Interest income   331    166    968    294 
(Loss) income from equity investments   (1,400)   4,893    (5,162)   4,221 
Interest expense   (11,588)   (10,359)   (22,358)   (14,586)
Income before income taxes   31,598    23,178    42,681    29,009 
Provision for income taxes   (9,289)   (5,377)   (12,393)   (6,366)
Net income   22,309    17,801    30,288    22,643 
Net income attributable to noncontrolling interests   152    804    108    1,143 
Net income attributable to B. Riley Financial, Inc.  $22,157   $16,997   $30,180   $21,500 
                     
Basic income per share  $0.84   $0.67   $1.15   $0.83 
Diluted income per share  $0.82   $0.64   $1.13   $0.80 
                     
Weighted average basic shares outstanding   26,278,352    25,424,178    26,247,952    25,799,077 
Weighted average diluted shares outstanding   26,896,573    26,397,513    26,770,922    26,785,169 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Net income  $22,309   $17,801   $30,288   $22,643 
Other comprehensive income (loss):                    
Change in cumulative translation adjustment   167    (865)   337    (1,085)
Other comprehensive income (loss), net of tax   167    (865)   337    (1,085)
Total comprehensive income   22,476    16,936    30,625    21,558 
Comprehensive income attributable to noncontrolling interests   152    804    108    1,143 
Comprehensive income attributable to B. Riley Financial, Inc.  $22,324   $16,132   $30,517   $20,415 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(Unaudited)

(Dollars in thousands, except share data)

 

Three months ended June 30, 2019 and 2018

 

 

                   Accumulated         
                   Additional       Other         
   Preferred Stock   Common Stock   Paid-in   Retained   Comprehensive   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Capital   Earnings   Loss   Interests   Equity 
Balance, April 1, 2019      $    26,525,216   $2   $257,888   $7,468   $(1,991)  $558   $263,925 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes           425,436    1    (1,578)               (1,577)
Common stock repurchased and retired           (30,711)       (602)               (602)
Common stock warrants repurchased                   (2,777)               (2,777)
Share based payments                   2,934                2,934 
Dividends on common stock ($0.26 per share)                       (7,201)           (7,201)
Net income for the three months ended June 30, 2019                       22,157        152    22,309 
Foreign currency translation adjustment                           167        167 
Balance, June 30, 2019      $    26,919,941   $3   $255,865   $22,424   $(1,824)  $710   $277,178 
                                              
Balance, April 1, 2018      $    26,677,422   $2   $261,413   $10,882   $(754)  $122   $271,665 
Vesting of restricted stock, net of shares withheld for employer taxes           342,743        (2,445)               (2,445)
Common stock repurchased and retired           (950,000)       (17,338)               (17,338)
Share based payments                   3,001                3,001 
Dividends on common stock ($0.12 per share)                       (7,471)           (7,471)
Net income for the three months ended June 30, 2018                       16,997        732    17,729 
Foreign currency translation adjustment                           (865)       (865)
Balance, June 30, 2018      $    26,070,165   $2   $244,631   $20,408   $(1,619)  $854   $264,276 

 

4

 

 

Six months ended June 30, 2019 and 2018

 

 

                   Accumulated         
                   Additional       Other         
   Preferred Stock   Common Stock   Paid-in   Retained   Comprehensive   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Capital   Earnings   Loss   Interests   Equity 
Balance, January 1, 2019      $    26,603,355   $2   $258,638   $1,579   $(2,161)  $602   $258,660 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes           504,347    1    (2,292)               (2,291)
Common stock repurchased and retired           (187,761)       (3,252)               (3,252)
Common stock warrants repurchased                   (2,777)               (2,777)
Share based payments                   5,548                5,548 
Dividends on common stock ($0.34 per share)                       (9,335)           (9,335)
Net income for the six months ended June 30, 2019                       30,180        108    30,288 
Foreign currency translation adjustment                           337        337 
Balance, June 30, 2019      $    26,919,941   $3   $255,865   $22,424   $(1,824)  $710   $277,178 
                                              
Balance, January 1, 2018      $    26,569,462   $2   $259,980   $6,582   $(534)  $(184)  $265,846 
Vesting of restricted stock, net of shares withheld for employer taxes           450,703        (3,570)               (3,570)
Common stock repurchased and retired           (950,000)       (17,338)               (17,338)
Share based payments                   5,559                5,559 
Dividends on common stock ($0.28 per share)                       (7,674)           (7,674)
Net income for the six months ended June 30, 2018                       21,500        1,038    22,538 
Foreign currency translation adjustment                           (1,085)       (1,085)
Balance, June 30, 2018      $    26,070,165   $2   $244,631   $20,408   $(1,619)  $854   $264,276 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   Six Months Ended June 30, 
   2019   2018 
Cash flows from operating activities:        
Net income  $30,288   $22,643 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Depreciation and amortization   9,744    6,670 
Provision for doubtful accounts   1,067    648 
Share-based compensation   5,548    5,559 
Non-cash interest and other   (3,144)   1,870 
Effect of foreign currency on operations   339    (582)
Loss (income) from equity investments   5,162    (4,221)
Deferred income taxes   6,430    7 
Impairment of leaseholds and intangibles, lease loss accrual and gain on disposal of fixed assets   (344)   1,403 
Income allocated and fair value adjustment for mandatorily redeemable noncontrolling interests   446    543 
Change in operating assets and liabilities:          
Due from clearing brokers   8,493    (3,763)
Securities and other investments owned   3,287    (15,180)
Securities borrowed   171,425    (206,899)
Accounts receivable and advances against customer contracts   (22,420)   (208,658)
Prepaid expenses and other assets   (45,500)   (16,108)
Accounts payable, accrued payroll and related expenses, accrued expenses and other liabilities   1,143    5,320 
Amounts due to/from related parties and partners   (3,454)   3,362 
Securities sold, not yet purchased   5,131    (10,708)
Deferred revenue   (790)   459 
Securities loaned   (171,413)   208,869 
Net cash provided by (used in) operating activities   1,438    (208,766)
Cash flows from investing activities:          
Purchases of loans receivable   (225,072)    
Repayments of loans receivable   17,640     
Purchases of property, equipment and intangible assets   (2,514)   (1,836)
Proceeds from sale of property, equipment and intangible assets   503    37 
Equity investments   (25,183)   (3,575)
Proceeds from sale of division of magicJack   6,196     
Dividends from equity investments   854    1,695 
Net cash used in investing activities   (227,576)   (3,679)
Cash flows from financing activities:          
Proceeds from asset based credit facility       300,000 
Repayment of asset based credit facility       (194,460)
Proceeds from notes payable       51,020 
Repayment of notes payable   (357)   (357)
Proceeds from term loan   10,000     
Repayment of term loan   (8,305)    
Proceeds from issuance of senior notes   123,935    132,123 
Payment of debt issuance costs   (2,039)   (4,936)
Payment of employment taxes on vesting of restricted stock   (2,291)   (3,570)
Dividends paid   (9,991)   (9,549)
Repurchase of common stock   (3,252)   (17,338)
Repurchase of warrants   (2,777)    
Distribution to noncontrolling interests   (856)   (782)
Net cash provided by financing activities   104,067    252,151 
(Decrease) increase in cash, cash equivalents and restricted cash   (122,071)   39,706 
Effect of foreign currency on cash, cash equivalents and restricted cash   37    (499)
Net (decrease) increase in cash, cash equivalents and restricted cash   (122,034)   39,207 
Cash, cash equivalents and restricted cash, beginning of  year   180,278    152,534 
Cash, cash equivalents and restricted cash, end of period  $58,244   $191,741 
           
Supplemental disclosures:          
Interest paid  $31,604   $21,868 
Taxes paid  $891   $2,306 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data)

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS OPERATIONS

 

B. Riley Financial, Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate, institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional services firms throughout the United States, Australia, Canada, and Europe and with the acquisitions of United Online, Inc. (“UOL”) on July 1, 2016 and magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018, provide consumer Internet access and cloud communication services.

 

The Company operates in four operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities lending, restructuring, consulting, research, sales and trading and wealth management services to corporate, institutional and high net worth clients; (ii) Auction and Liquidation, through which the Company provides auction and liquidation services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property; (iii) Valuation and Appraisal, through which the Company provides valuation and appraisal services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs; and (iv) Principal Investments — United Online and magicJack, through which the Company provides consumer Internet access and related subscription services from United Online and cloud communication services primarily through the magicJack devices.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a) Principles of Consolidation and Basis of Presentation

 

The condensed consolidated financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries. The condensed consolidated financial statements also include the accounts of (a) Great American Global Partners, LLC which is controlled by the Company as a result of its ownership of a 50% member interest, appointment of two of the three executive officers and significant influence over the funding of operations, and (b) GA Retail Investments, L.P. which is controlled by the Company as a result of its ownership of a 50% partnership interest, appointment of executive officers and significant influence over the operations. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 6, 2019. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

(b) Use of Estimates

 

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items such as valuation of securities, allowance for doubtful accounts, the fair value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share based arrangements and accounting for income tax valuation allowances. Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

(c) Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on our condensed consolidated financial statements. The new revenue standard was applied prospectively in the Company’s condensed consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods was revised and will continue to be reported under the accounting standards in effect during those historical periods.

 

7

 

 

Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the goods or services.

 

There have been no material changes to the Company’s revenue recognition accounting policy set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. See Note 12 for information on revenue from contracts with customers.

 

(d) Direct Cost of Services

 

Direct cost of services relates to service and fee revenues. The costs consist of employee compensation and related payroll benefits, travel expenses, the cost of consultants assigned to revenue-generating activities and direct expenses billable to clients in the Valuation and Appraisal segment. Direct costs of services include participation in profits under collaborative arrangements in which the Company is a majority participant. Direct costs of services also include the cost of consultants and other direct expenses related to Auction and Liquidation contracts pursuant to commission and fee based arrangements in the Auction and Liquidation segment. Direct cost of services in the Principal Investments — United Online and magicJack segment include cost of telecommunications and data center costs, personnel and overhead-related costs associated with operating the Company’s networks, servers and data centers, sales commissions associated with multi-year service plans, depreciation of network computers and equipment, amortization expense, third party advertising sales commissions, license fees, costs related to providing customer support, costs related to customer billing and processing of customer credit cards and associated bank fees. Direct cost of services does not include an allocation of the Company’s overhead costs.

 

(e) Interest Expense — Securities Lending Activities

 

Interest expense from securities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interest expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Company.

 

(f) Concentration of Risk

 

Revenues in the Capital Markets, Valuation and Appraisal and Principal Investments — United Online and magicJack segments are currently primarily generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States, Australia, Canada and Europe.

 

The Company’s activities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers and secured creditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors. The Company seeks to control its credit risk and potential risk concentration through risk management activities that limit the Company’s exposure to losses on any one specific liquidation services contract or concentration within any one specific industry. To mitigate the exposure to losses on any one specific liquidation services contract, the Company sometimes conducts operations with third parties through collaborative arrangements.

 

The Company maintains cash in various federally insured banking institutions. The account balances at each institution periodically exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. The Company also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributed to parties in accordance with the collaborative arrangements.

 

(g) Advertising Expenses

 

The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $584 and $1,192 for the three months ended June 30, 2019 and 2018, respectively, and $946 and $1,285 for the six months ended June 30, 2019 and 2018, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

 

(h) Share-Based Compensation

 

The Company’s share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated with the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed consolidated statements of income over the requisite service or performance period the award is expected to vest. The fair value of the liability-classified award will be subsequently remeasured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

 

8

 

 

In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchase common stock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offering period. In accordance with the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. For the three and six months ended June 30, 2019, the Company recognized compensation expense of $74 and $195, respectively, related to the Purchase Plan. At June 30, 2019, there were 625,055 shares reserved for issuance under the Purchase Plan.

 

(i) Income Taxes

 

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.

 

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

 

(j) Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

(k) Restricted Cash

 

As of June 30, 2019, restricted cash balance of $2,635 included $470 cash collateral for one of the Company’s telecommunication suppliers, $365 certificate of deposits collateral for certain letters of credit and $1,800 of cash collateral related to a retail liquidation engagement. As of December 31, 2018, restricted cash balance of $838 included $469 cash collateral for one of the Company’s telecommunication suppliers and $369 certificate of deposits collateral for certain letters of credit.

 

(l) Securities Borrowed and Securities Loaned

 

Securities borrowed and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained, or excess collateral recalled, when deemed appropriate.

 

The Company accounts for securities lending transactions in accordance with ASC “Topic 210: Balance Sheet,” which requires companies to report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed consolidated balance sheets.

 

(m) Due from/to Brokers, Dealers, and Clearing Organizations

 

The Company clears all of its proprietary and customer transactions through other broker-dealers on a fully disclosed basis. The amount receivable from or payable to the clearing brokers represents the net of proceeds from unsettled securities sold, the Company’s clearing deposit and amounts receivable for commissions less amounts payable for unsettled securities purchased by the Company and amounts payable for clearing costs and other settlement charges. This amount also includes the cash collateral received for securities loaned less cash collateral for securities borrowed. Any amounts payable would be fully collateralized by all of the securities owned by the Company and held on deposit at the clearing broker.

 

9

 

 

(n) Accounts Receivable

 

Accounts receivable represents amounts due from the Company’s Auction and Liquidation, Valuation and Appraisal, Capital Markets and Principal Investments — United Online and magicJack customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management utilizes a specific customer identification methodology. Management also considers historical losses adjusted for current market conditions and the customers’ financial condition and the current receivables aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The Company’s bad debt expense and changes in the allowance for doubtful accounts for the three and six months ended June 30, 2019 and 2018 are included in Note 6.

 

(o) Leases

 

The Company determines if an arrangement is, or contains, a lease at the inception date. Operating leases are included in right-of-use assets, with the related liabilities included in operating lease liabilities in the condensed consolidated balance sheet.

 

Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate in determining the present value of lease payments. Variable components of the lease payments such as fair market value adjustments, utilities, and maintenance costs are expensed as incurred and not included in determining the present value. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components which are accounted for as a single lease component. See Note 8 for additional information on leases.

 

(p) Property and Equipment

 

Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was $1,487 and $1,187 for the three months ended June 30, 2019 and 2018, respectively, and $3,023 and $2,364 for the six months ended June 30, 2019 and 2018, respectively.

 

(q) Loans Receivable

 

Loans receivable are measured at historical cost and reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and for purchased loans, net of any unamortized premiums or discounts. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology. As of June 30, 2019 and December 31, 2018, total loans receivable have a carrying value of $250,521 and $38,794, respectively. The loans receivable carried at cost have various maturity dates ranging from May 2020 to June 2022.

 

(r) Securities and Other Investments Owned and Securities Sold Not Yet Purchased

 

Securities owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.

 

10

 

 

As of June 30, 2019 and December 31, 2018, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:

 

   June 30,   December 31, 
   2019   2018 
Securities and other investments owned:        
Common and preferred stocks and warrants  $180,089   $193,459 
Corporate bonds   23,170    18,825 
Fixed income securities   5,767    3,825 
Loans receivable at fair value   41,847    33,731 
Partnership interests and other   19,417    23,737 
   $270,290   $273,577 
           
Securities sold not yet purchased:          
Common stocks  $15,855   $11,130 
Corporate bonds   21,158    16,338 
Fixed income securities   5,741    10,155 
   $42,754   $37,623 

 

(s) Fair Value Measurements

 

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

The Company’s securities and other investments owned and securities sold and not yet purchased are comprised of common and preferred stocks and warrants, corporate bonds, loans receivable valued at fair value and investments in partnerships. Investments in common stocks that are based on quoted prices in active markets are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic common and preferred stocks and warrants for which there is little or no public market and fair value is determined by management on a consistent basis. For investments where little or no public market exists, management’s determination of fair value is based on the best available information which may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments in partnership interests include investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lending funds. The Company also invests in priority investment funds and the underlying securities held by these funds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. The Company’s partnership and investment fund interests are valued based on the Company’s proportionate share of the net assets of the partnerships and funds; the value for these investments are derived from the most recent statements received from the general partner or fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) in accordance with ASC “Topic 820: Fair Value Measurements.”

 

The fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.

 

11

 

 

The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.

 

   Financial Assets and Liabilities Measured at Fair Value 
   on a Recurring Basis at June 30, 2019 Using 
   Fair value at June 30,   Quoted prices in active markets for identical assets   Other observable inputs   Significant unobservable inputs 
   2019   (Level 1)   (Level 2)   (Level 3) 
Assets:                
Securities and other investments owned:                
Common and preferred stocks and warrants  $180,089   $147,434   $   $32,655 
Corporate bonds   23,170        23,170     
Fixed income securities   5,767        5,767     
Loans receivable at fair value   41,847            41,847 
Total   250,873   $147,434   $28,937   $74,502 
Investment funds valued at net asset value (1)   19,417                
Total assets measured at fair value  $270,290                
                     
Liabilities:                    
Securities sold not yet purchased:                    
Common stocks  $15,855   $15,855   $   $ 
Corporate bonds   21,158        21,158     
Fixed income securities   5,741        5,741     
Total securities sold not yet purchased   42,754    15,855    26,899     
                     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,224            4,224 
Total liabilities measured at fair value  $46,978   $15,855   $26,899   $4,224 

 

   Financial Assets and Liabilities Measured at Fair Value 
   on a Recurring Basis at December 31, 2018 Using 
   Fair value at
December 31
   Quoted prices in active markets for identical assets   Other observable inputs   Significant unobservable inputs 
   2018   (Level 1)   (Level 2)   (Level 3) 
Assets:                
Securities and other investments owned:                
Common and preferred stocks and warrants  $193,459   $168,882   $   $24,577 
Corporate bonds   18,825        18,825     
Fixed income securities   3,825        3,825     
Loans receivable at fair value   33,731            33,731 
Total   249,840   $168,882   $22,650   $58,308 
Investment funds valued at net asset value(1)   23,737                
Total assets measured at fair value  $273,577                
                     
Liabilities:                    
Securities sold not yet purchased:                    
Common stocks  $11,130   $11,130   $   $ 
Corporate bonds   16,338        16,338     
Fixed income securities   10,155        10,155     
Total securities sold not yet purchased   37,623    11,130    26,493     
                     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,633            4,633 
Total liabilities measured at fair value  $42,256   $11,130   $26,493   $4,633 

 

(1)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy in accordance with ASC “Topic 820 Fair Value Measurements.” The fair value amounts presented in the tables above for investment funds valued at net asset value are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.

12

 

 

As of June 30, 2019 and December 31, 2018, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $74,502 and $58,308, respectively, or 3.8% and 3.0%, respectively, of the Company’s total assets. In determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable, over-the-counter market trading activity.

 

The following table summarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities by category of investment and valuation technique as of June 30, 2019:

 

   Fair value at               
   June 30,             Weighted 
   2019   Valuation Technique  Unobservable Input  Range   Average 
Assets:                     
Common and preferred stocks and warrants  $32,655   Market approach  Over-the-counter trading activity   $11.00/share   $11.00 
           Market price of related security   $0.34/share   $0.34 
           Recent transaction   $1,515.15/share   $1,515.15 
        Yield analysis  Market yield   13.0%    13.0%
        Option pricing model  Annualized volatility   26% - 67%    48%
        Discounted cash flow  Cost of capital   12.1%    12.1%
Loans receivable at fair value   41,847   Discounted cash flow  Market interest rate   6.0% - 18.0%    12.7%
        Market approach  Market price of related security   $11.51-$1,515.15/share    $792.73 
Total level 3 assets measured at fair value  $74,502                 
                      
Liabilities:                     
Mandatorily redeemable noncontrolling interests issued after November 5, 2003  $4,224   Market approach  Operating income multiple   6.0x    6.0x 

 

The changes in Level 3 fair value hierarchy during the six months ended June 30, 2019 and 2018 are as follows:

 

   Level 3   Level 3 Changes During the Period   Level 3 
   Balance at   Fair   Relating to   Purchases,   Transfer in   Balance at 
   Beginning of   Value   Undistributed   Sales and   and/or out   End of 
   Year   Adjustments   Earnings   Settlements   of Level 3   Period 
Six Months Ended June 30, 2019                        
Common and preferred stocks and warrants  $24,577   $5,267   $1,360   $1,451   $   $32,655 
Loans receivable at fair value   33,731    8,619    475    (978)       41,847 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,633        (409)           4,224 
Six Months Ended June 30, 2018                              
Common stocks and warrants  $28,346   $(3,246)  $578   $544   $   $26,222 
Loans receivable at fair value   33,713    (2)       (16,882)       16,829 
Partnership interests and other   26,104    968    (685)   18,279        44,666 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,478        (240)           4,238 

 

The amount reported in the table above for the six months ended June 30, 2019 and 2018 includes the amount of undistributed earnings attributable to the noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported in the condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value based on the short-term maturity of these instruments.

 

The carrying amount of the senior notes payable and term loan approximate fair value because the contractual interest rates or effective yields of such instruments are consistent with current market rates of interest for instruments of comparable credit risk.

 

During the six months ended June 30, 2019 and 2018, there were no assets or liabilities measured at fair value on a non-recurring basis.

 

13

 

 

(t) Derivative and Foreign Currency Translation

 

The Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain Auction and Liquidation engagements with operations outside the United States. The Company did not use any derivative contracts during the six months ended June 30, 2019. During the six months ended June 30, 2018, the Company’s use of derivatives consisted of the purchase of forward exchange contracts (a) in the amount of $54,406 Canadian dollars, that were settled during the six months ended June 30, 2018 and (b) $1,500 Euro’s that settled in March 2018.

 

The net loss from forward exchange contracts was $121 and $91 during the three months and six months ended June 30, 2018, respectively. This amount is reported as a component of selling, general and administrative expenses in the condensed consolidated statements of income.

 

The Company transacts business in various foreign currencies. In countries where the functional currency of the underlying operations has been determined to be the local country’s currency, revenues and expenses of operations outside the United States are translated into United States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into United States dollars using year-end exchange rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. Transaction (loss) gains were ($139) and $756 during the three months ended June 30, 2019 and 2018, respectively, and ($325) and $894 during the six months ended June 30, 2019 and 2018, respectively. These amounts are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income.

 

(u) Common Stock Warrants

 

The common stock warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at a price of $17.50 per share (the “Exercise Price”), subject to, among other matters, the proper completion of an exercise notice and payment. The Exercise Price and the number of shares of Company common stock issuable upon exercise are subject to customary anti-dilution and adjustment provisions, which include stock splits, subdivisions or reclassifications of the Company’s common stock. The common stock warrants expire on July 3, 2022. As of December 31, 2018, warrants to purchase 821,816 shares of common stock were outstanding. On May 16, 2019, the Company repurchased 638,311 warrants for $2,777 ($4.35 per warrant) which is included in common stock warrants repurchased in the condensed consolidated statements of equity. As of June 30, 2019, warrants to purchase 183,505 shares of common stock were outstanding.

 

(v) Equity Investment

 

bebe stores, inc.

 

At June 30, 2019, the Company had a 30.5% ownership interest in bebe stores, inc. (“bebe”). The equity ownership in bebe is accounted for under the equity method of accounting, and is included in prepaid expenses and other assets in the condensed consolidated balance sheets.

 

National Holdings Corporation

 

On November 14, 2018, the Company entered into an agreement to acquire shares of National Holdings Corporation (“National Holdings”), a Nasdaq-listed issuer, from Fortress Biotech, Inc. for an aggregate purchase price totaling approximately $22.9 million. The transaction was completed in two tranches. In the first tranche, which was completed in the fourth quarter of 2018, the Company acquired shares representing 24% of the total outstanding shares of National Holdings. The second tranche was completed in the first quarter of 2019. As of June 30, 2019, the Company had purchased 6,159,550 shares of National Holdings’ common stock, representing 48.8% of National Holdings’ outstanding shares, at $3.25 per share. The carrying value for the National Holdings investment is included in prepaid expenses and other assets in the condensed consolidated balance sheets. The equity ownership in National Holdings is accounted for under the equity method of accounting.

 

(w) Statements of Cash Flows – Supplemental Non-cash Disclosures

 

During the six months ended June 30, 2018, non-cash investing activities included the conversion of a loan receivable in the amount of $16,867 and accrued interest receivable of $51 into an equity investment in bebe that totaled $16,918.

 

(x) Variable Interest Entity

 

In January 2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. The Company’s investment in the Partnership is a variable interest entity (“VIE”) since the unaffiliated limited partners do not have substantive kick-out or participating rights to remove the Company’s subsidiary that is the general partner managing the Partnership. The Company has determined that it is not the primary beneficiary due to the fact that its fee arrangements are considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in the Partnership that are considered to be more than insignificant. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.

 

14

 

 

The carrying value of the Company’s investments in the VIE that was not consolidated is shown below.

 

   June 30,
2019
 
Partnership investments  $3,437 
Due from related party   283 
Maximum exposure to loss  $3,720 

 

(y) Recent Accounting Pronouncements

 

Not yet adopted

 

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively and is effective for calendar year-end SEC filers for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has not yet adopted this update and currently evaluating the effect this new standard will have on its financial condition and results of operations.

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This standard requires an allowance to be recorded for all expected credit losses for certain financial assets. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments. ASU 2016-13 is effective for public companies for interim and annual period beginning December 15, 2019. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has not yet adopted this update and is currently evaluating the effect this new standard will have on its financial condition and results of operations.

 

Recently adopted

 

In February 2016, FASB issued ASU. 2016-02: Leases (Topic 842) which requires a lessee to recognize a right-of-use (ROU) asset and lease liability on the balance sheet for all leases with a contract term longer than 12 months and provide enhanced disclosures. The Company adopted the new standard effective January 1, 2019 using the modified retrospective method. The Company elected the ‘package of practical expedients,’ which permits the Company not to reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs. Upon adoption of ASC 842 on January 1, 2019, the Company recognized $67,519 operating lease liabilities with corresponding operating lease right-of-use assets. See Note 8 to the accompanying financial statements for additional information on leases.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income that provides for the reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Reform Act. The accounting update should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The accounting update is effective for the fiscal year beginning after December 15, 2018. The adoption of this standard did not have a material impact to the Company’s financial condition and results of operations.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for us in our first quarter of fiscal year 2019. The adoption of this standard did not have a material impact to the Company’s financial condition and results of operations.

 

On January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on the Company’s consolidated financial statements. The new revenue standard was applied prospectively in the Company’s consolidated financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods. See Note 12 to the financial statements for additional information on the adoption of this standard.

 

15

 

 

In August 2018, the FASB issued ASU No. 2018-13: Fair Value Measurement (Topic 820) (“ASU 2018-13”). The amendments in this update change the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The Company early adopted ASU 2018-13 in the third quarter of 2018 and the adoption did not have a material impact on our consolidated financial statements.

 

In March 2018, the FASB issued ASU 2018-05: Income Taxes (Topic 740) — Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendments in this update provide guidance on when to record and disclose provisional amounts for certain income tax effects of the Tax Reform Act. The amendments also require any provisional amounts or subsequent adjustments to be included in net income from continuing operations. This ASU also discusses required disclosures that an entity must make with regard to the Tax Reform Act. This ASU is effective immediately as new information is available to adjust provisional amounts that were previously recorded. The Company has adopted this standard and will continue to evaluate indicators that may give rise to a change in the Company’s tax provision as a result of the Tax Reform Act. See Note 13 to the accompanying financial statements for additional information on the Tax Reform Act.

 

On January 1, 2018, the Company adopted ASU 2016-18 — Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) using the retrospective method which requires adjustment to prior periods in the statement of cash flows. ASU 2016-18 clarifies how restricted cash should be presented on the statement of cash flows and requires companies to include restricted cash with cash and cash equivalents when reconciling the beginning of period and end of period totals on the statement of cash flows. Restricted cash previously classified under investing activities is now included in the reconciliation of beginning and ending cash on the statement of cash flows. The adoption of ASU 2016-18 did not have a material impact on the Company’s financial condition and results of operations.

 

NOTE 3—ACQUISITIONS

 

Acquisition of magicJack VocalTec Ltd

 

On November 9, 2017, the Company entered into an Agreement and Plan of Merger (the “magicJack Merger Agreement”) with B. R. Acquisition Ltd., an Israeli corporation and wholly-owned subsidiary of the Company (“Merger Sub”), and magicJack VocalTec Ltd., an Israeli corporation (“magicJack”), pursuant to which Merger Sub would merge with and into magicJack, with magicJack continuing as the surviving corporation and as an indirect subsidiary of the Company. Pursuant to the magicJack Merger Agreement, customary closing conditions were satisfied, and the acquisition was completed on November 14, 2018. Subject to the terms and conditions of the Agreement and Plan of Merger, each outstanding share of magicJack converted into the right to receive $8.71 in cash without interest, representing approximately $143,115 in aggregate merger consideration.

 

The assets and liabilities of magicJack, both tangible and intangible, were recorded at their estimated fair values as of the November 14, 2018, acquisition date for magicJack. The application of the purchase method of accounting resulted in goodwill of $106,158 which represents the benefits from synergies with the Company’s existing business and acquired workforce. The purchase accounting for the acquisition has been accounted for as a stock purchase with all of the recognized goodwill is expected to be non-deductible for tax purposes.

 

The preliminary purchase price allocation was as follows:

 

Consideration paid by B. Riley:    
Number of magicJack shares outstanding at November 14, 2018   16,248,299 
Cash merger consideration per share  $8.71 
Total cash consideration for magicJack common shares   141,523 
Cash consideration for magicJack stock options and accelerated vesting of restricted stock awards   1,592 
Total consideration  $143,115 

 

16

 

 

Tangible assets acquired and assumed:    
Cash and cash equivalents  $53,875 
Restricted cash   369 
Accounts receivable   3,103 
Inventory   2,033 
Prepaid expenses and other assets   4,961 
Property and equipment   2,922 
Deferred taxes   16,769 
Accounts payable   (2,313)
Contract liabilities   (66,489)
Accrued payroll and related expenses   (1,989)
Accrued expenses and other liabilities   (20,934)
Developed technology   6,400 
Tradename   1,750 
Customer list   34,500 
Process-know-how   2,000 
Goodwill   106,158 
Total  $143,115 

 

Pro Forma Financial Information

 

The unaudited pro-forma financial information in the table below summarizes the combined results of operations of the Company and MagicJack as though the acquisitions had occurred as of January 1, 2018. The pro-forma financial information presented includes the effects of adjustments related to the amortization charges from the acquired intangible assets and the elimination of certain activities excluded from the transaction and transaction related costs. The pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented, nor does it intend to be a projection of future results.

 

   Pro Forma (Unaudited) 
   Three Months Ended   Six
Months Ended
 
   June 30,
2018
   June  30,
2018
 
Revenues  $144,742   $259,754 
Net income attributable to B. Riley Financial, Inc.  $19,430   $25,041 
           
Basic earnings per share  $0.76   $0.97 
Diluted earnings per share  $0.74   $0.93 
           
Weighted average basic shares outstanding   25,424,178    25,799,077 
Weighted average diluted shares outstanding   26,397,513    26,785,170 

 

NOTE 4—RESTRUCTURING CHARGE

 

The Company recorded restructuring charges in the amount of $1,552 and $1,602 for the three months ended June 30, 2019 and 2018, respectively, and $1,699 and $1,819 for the six months ended June 30, 2019 and 2018, respectively.

 

The restructuring charges during the three and six months ended June 30, 2019 were primarily related to severance costs for magicJack employees from a reduction in workforce and lease termination costs in the Principal Investments – United Online and magicJack segment.

 

The restructuring charges during the three and six months ended June 30, 2018 were primarily related to the planned consolidation of office space related to operations in the Capital Markets segment.

 

17

 

 

The following tables summarize the changes in accrued restructuring charge during three and six months ended June 30, 2019 and 2018:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Balance, beginning of period  $3,384   $1,576   $3,855   $2,600 
Restructuring charge   1,552    1,602    1,699    1,819 
Cash paid   (2,411)   (1,229)   (3,047)   (2,450)
Non-cash items   117    (122)   135    (142)
Balance, end of period  $2,642   $1,827   $2,642   $1,827 

 

The following tables summarize the restructuring activities by reportable segment during the three and six months ended June 30, 2019 and 2018:

 

   Three Months Ended June 30, 
   2019   2018 
       Principal               Principal         
       Investments -               Investments -         
   Capital   United Online           Capital   United Online         
   Markets   and magicJack   Corporate   Total   Markets   and magicJack   Corporate   Total 
Restructuring charge (recovery):                                
Employee termination costs  $   $1,418   $   $1,418    682   $   $   $682 
Facility closure and consolidation   25    109        134    1,092        (172)   920 
Total restructuring charge  $25   $1,527   $   $1,552    1,774   $   $(172)  $1,602 

 

   Six Months Ended June 30, 
   2019   2018 
       Principal               Principal         
       Investments -               Investments -         
   Capital   United Online           Capital   United Online         
   Markets   and magicJack   Corporate   Total   Markets   and magicJack   Corporate   Total 
Restructuring charge (recovery):                                
Employee termination costs  $   $1,594   $   $1,594    653   $   $   $653 
Facility closure and consolidation   (4)   109        105    1,376        (210)   1,166 
Total restructuring charge  $(4)  $1,703   $   $1,699    2,029   $   $(210)  $1,819 

 

NOTE 5—SECURITIES LENDING

 

The following table presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of June 30, 2019 and December 31, 2018:

 

   Gross amounts recognized   Gross amounts offset in the consolidated balance
sheets (1)
   Net amounts included
in the consolidated balance sheets
   Amounts not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default(2)   Net amounts 
As of June 30, 2019                    
Securities borrowed  $759,921   $   $759,921   $759,921   $ 
Securities loaned  $759,109   $   $759,109   $759,109   $ 
As of December 31, 2018                         
Securities borrowed  $931,346   $   $931,346   $931,346   $ 
Securities loaned  $930,522   $   $930,522   $930,522   $ 

 

(1)Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.
(2)Includes the amount of cash collateral held/posted.

18

 

 

NOTE 6—ACCOUNTS RECEIVABLE

 

The components of accounts receivable, net, include the following:

 

   June 30,   December 31, 
   2019   2018 
Accounts receivable  $27,344   $12,594 
Investment banking fees, commissions and other receivables   17,757    26,581 
Unbilled receivables   12,709    3,644 
Total accounts receivable   57,810    42,819 
Allowance for doubtful accounts   (1,360)   (696)
Accounts receivable, net  $56,450   $42,123 

 

Additions and changes to the allowance for doubtful accounts consist of the following:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Balance, beginning of period  $766   $661   $696   $800 
Add: Additions to reserve   834    343    1,067    648 
Less: Write-offs   (219)   (208)   (382)   (652)
Less: Recovery   (21)       (21)    
Balance, end of period  $1,360   $796   $1,360   $796 

 

Unbilled receivables represent the amount of contractual reimbursable costs and fees for services performed in connection with fee and service based auction and liquidation contracts.

 

NOTE 7—GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill was $220,181 and $223,368 at June 30, 2019 and December 31, 2018, respectively. During the six months ended June 30, 2019, goodwill decreased by $3,187. The decrease in goodwill included a decrease of $3,213 as a result the allocation of goodwill related to the sale of a division of magicJack offset by an increase in goodwill of $26 from magicJack’s purchase price allocation adjustments during the six months ended June 30, 2019. At June 30, 2019, goodwill was comprised of $95,820 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment, and $118,673 in the Principal Investments – United Online and magicJack segment. At December 31, 2018, goodwill was comprised of $95,820 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment, and $121,860 in the Principal Investments – United Online and magicJack segment.

 

Intangible assets consisted of the following:

 

      As of June 30, 2019   As of December 31, 2018 
      Gross           Gross         
      Carrying   Accumulated   Intangibles   Carrying   Accumulated   Intangibles 
   Useful Life  Value   Amortization   Net   Value   Amortization   Net 
Amortizable assets:                           
Customer relationships  4 to 16 Years  $90,330   $21,672   $68,658   $92,330   $16,608   $75,722 
Domain names  7 Years   233    100    133    237    85    152 
Advertising relationships  8 Years   100    38    62    100    31    69 
Internally developed software and other intangibles  0.5 to 5 Years   11,733    3,618    8,115    11,773    2,436    9,337 
Trademarks  7 to 10 Years   4,600    1,043    3,557    4,600    762    3,838 
Total      106,996    26,471    80,525    109,040    19,922    89,118 
                                  
Non-amortizable assets:                                 
Tradenames      2,240        2,240    2,240        2,240 
Total intangible assets     $109,236   $26,471   $82,765   $111,280   $19,922   $91,358 

 

19

 

 

Amortization expense was $3,344 and $2,146 for the three months ended June 30, 2019 and 2018, respectively, and $6,721 and $4,306 for the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019, estimated future amortization expense is $6,616, $12,849, $12,467, $12,447, and $12,203 for the years ended December 31, 2019 (remaining six months), 2020, 2021, 2022 and 2023, respectively. The estimated future amortization expense after December 31, 2023 is $23,943.

 

NOTE 8—LEASING ARRANGEMENTS

 

The Company’s operating lease assets primarily represent the lease of office space where the Company conducts its operations with the weighted average lease term of 8.2 years. The operating leases have lease terms ranging from one month to twelve years. The weighted average discount rate used to calculate the present value of lease payments was 5.58% at June 30, 2019. For the three and six months ended June 30, 2019, total operating lease expense was $3,192 and $6,294, respectively. Of the $3,192 and $6,294 operating lease expense for the three and six months ended June 30, 2019, respectively, $262 and $579 were attributable to variable lease expenses. Operating lease expense is included in selling, general and administrative expenses in the condensed consolidated statements of income.

 

For the six months ended June 30, 2019, cash payments against operating lease liabilities totaled $6,211 and non-cash transactions totaled $1,871 to recognize operating lease right-of-use assets and operating lease liabilities. Cash flows from operating leases are classified as net cash flows from operating activities in the accompanying condensed consolidated statements of cash flows.

 

As of June 30, 2019, maturities of operating lease liabilities were as follows:

 

   Operating 
   Leases 
Year ending December 31:    
2019 (remaining six months)  $6,544 
2020   12,024 
2021   10,443 
2022   9,611 
2023   9,041 
Thereafter   33,888 
Total lease payments   81,551 
Less: imputed interest   (16,052)
Total operating lease liability  $65,499 

 

At June 30, 2019, the Company did not have any significant leases executed but not yet commenced.

 

NOTE 9—ASSET BASED CREDIT FACILITY

 

On April 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $100,000 to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom. Such facility allows the Company to borrow up to 50 million British Pounds. Any borrowings on the UK Credit Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. Cash advances and the issuance of letters of credit under the credit facility are made at the lender’s discretion. The letters of credit issued under this facility are furnished by the lender to third parties for the principal purpose of securing minimum guarantees under liquidation services contracts more fully described in Note 2(c). All outstanding loans, letters of credit, and interest are due on the expiration date which is generally within 180 days of funding. The credit facility is secured by the proceeds received for services rendered in connection with liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract. The Company paid Wells Fargo Bank a closing fee in the amount of $500 in connection with the April 2017 amendment to the Credit Agreement. The interest rate for each revolving credit advance under the Credit Agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation engagements funded under the Credit Agreement as set forth therein. Interest expense totaled $104 and $3,242 for the three months ended June 30, 2019 and 2018, respectively, and $586 and $3,329 for the six months ended June 30, 2019 and 2018, respectively. There was no outstanding balance on this credit facility at June 30, 2019 and December 31, 2018. At June 30, 2019, there were no open letters of credit outstanding.

 

We are in compliance with all financial covenants in the asset based credit facility at June 30, 2019.

 

20

 

 

NOTE 10—TERM LOAN

 

On December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of the Company, in the capacity as borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with the Banc of California, N.A. in the capacity as agent (the “Agent”) and lender and with the other lenders party thereto (the “Closing Date Lenders”). Certain of the Borrowers’ U.S. subsidiaries are guarantors of all obligations under the BRPAC Credit Agreement and are parties to the BRPAC Credit Agreement in such capacity (collectively, the “Secured Guarantors”; and together with the Borrowers, the “Credit Parties”). In addition, the Company and B. Riley Principal Investments, LLC, the parent corporation of BRPAC and a subsidiary of the Company, are guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares outstanding membership interests of BRPAC are pledged as collateral.

 

The obligations under the BRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in, substantially all of the assets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties, (b) 65% of the equity interests in United Online Software Development (India) Private Limited, a private limited company organized under the laws of India; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the laws of Israel. Such security interests are evidenced by pledge, security and other related agreements.

 

The BRPAC Credit Agreement contains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires the Credit Parties to maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and cross defaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the outstanding BRPAC Credit Agreement.

 

Under the BRPAC Credit Agreement, the Company borrowed $80,000 due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, the Company may request additional optional term loans in an aggregate principal amount of up to $10,000 at any time prior to the first anniversary of the agreement date (the “Option Loan”) with a final maturity date of December 19, 2023. On February 1, 2019, the Credit Parties, the Closing Date Lenders, the Agent and City National Bank, as a new lender (the “New Lender”), entered into the First Amendment to the Credit Agreement and Joinder (the “First Amendment”) pursuant to which, among other things, (i) New Lender became a party to the BRPAC Credit Agreement, (ii) the New Lender extended to Borrowers the Option Loan in the amount of $10,000, (iii) the aggregate outstanding principal amount of the term loans was increased from $80,000 to $90,000; and (iv) the amortization schedule under the BRPAC was amended as set forth in the First Amendment. Additionally, in connection with the Option Loan, the Borrowers executed a term note in favor of New Lender dated February 1, 2019 in the amount of $10,000. Borrowings under the BRPAC Credit Agreement bear interest at a rate equal to (a) the LIBOR rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two and one-half percent (2.5%) to three percent (3.0%) per annum, based upon the Borrowers’ ratio of consolidated funded indebtedness to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the preceding four fiscal quarters or other applicable period. At June 30, 2019 interest rate on the BRPAC Credit Agreement was at 5.49%. Interest payments are to be made each one, three or six months. Amounts outstanding under the BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at maturity. For the $80,000 loan, quarterly installments from June 30, 2019 to December 31, 2022 are in the amount of $4,244 per quarter and from March 31, 2023 to December 31, 2023 are $2,122 per quarter. For the $10,000 loan, quarterly installments from June 30, 2019 to December 31, 2022 are $566 per quarter and from March 31, 2023 to December 31, 2023 are $265 per quarter. As of June 30, 2019 and December 31, 2018, the outstanding balance on the term loan was $80,916 (net of unamortized debt issuance costs of $779) and $79,166 (net of unamortized debt issuance costs of $834), respectively. Interest expense on the term loan during the three and six months ended June 30, 2019 was $1,257 (including amortization of deferred debt issuance costs of $93) and $2,535 (including amortization of deferred debt issuance costs of $181), respectively.

 

We are in compliance with all financial covenants in the BRPAC Credit Agreement at June 30, 2019.

 

21

 

 

NOTE 11—NOTES PAYABLE

 

Senior Notes Payable

 

Senior notes payable, net, is comprised of the following as of June 30, 2019 and December 31, 2018:

 

   June 30,   December 31, 
   2019   2018 
7.50% Senior notes due October 31, 2021  $52,154   $46,407 
7.50% Senior notes due May 31, 2027   110,028    108,792 
7.25% Senior notes due December 31, 2027   110,567    100,441 
7.375% Senior notes due May 31, 2023   114,827    111,528 
6.875% Senior notes due September 30, 2023   103,527    100,050 
6.75% Senior notes due May 31, 2024   100,050     
    591,153    467,218 
Less: Unamortized debt issuance costs   (8,671)   (7,464)
   $582,482   $459,754 

 

(a) $52,154 Senior Notes Payable due October 31, 2021

 

At June 30, 2019, the Company had $52,154 senior notes due in 2021 (“7.50% 2021 Notes”), interest payable quarterly at 7.50%. On November 2, 2016, the Company issued $28,750 of the 7.50% 2021 Notes and as of December 31, 2018, the Company issued additional $17,657 of the 7.50% 2021 Notes pursuant to the Sales Agreements, as further discussed below. During the six months ended June 30, 2019, the Company issued an additional $5,747 of the 7.50% 2021 Notes pursuant to the December 2018 Sales Agreement, as discussed below. The 7.50% 2021 Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuance of the 7.50% 2021 Notes, the Company received net proceeds of $51,289 (after premium, underwriting commissions, fees and other issuance costs of $865). At June 30, 2019 and December 31, 2018, the outstanding balance of the 2021 Notes was $51,772 (net of unamortized debt issue costs and premiums of $382) and $45,914 (net of unamortized debt issue costs and premiums of $493), respectively. Interest expense on the 7.50% 2021 Notes totaled $988 and $771 for the three months ended June 30, 2019 and 2018, respectively, and $1,917 and $1,482 for the six months ended June 30, 2019 and 2018, respectively.

 

(b) $110,028 Senior Notes Payable due May 31, 2027

 

At June 30, 2019, the Company had $110,028 senior notes due in 2027 (“7.50% 2027 Notes”), interest payable quarterly at 7.50%. On May 31, 2017, the Company issued $60,375 of the 7.50% 2027 Notes and as of December 31, 2018, the Company issued additional $48,417 of the 7.50% 2027 Notes pursuant to the Sales Agreements. During the six months ended June 30, 2019, the Company issued an additional $1,236 of the 7.50% 2027 Notes pursuant to the December 2018 Sales Agreement, as discussed below. The 2027 Notes are unsecured and due and payable in full on May 31, 2027. In connection with the issuance of the 7.50% 2027 Notes, the Company received net proceeds of $108,173 (after premium, underwriting commissions, fees and other issuance costs of $1,855). At June 30, 2019 and December 31, 2018, the outstanding balance of the 7.50% 2027 Notes was $108,550 (net of unamortized debt issue costs and premium of $1,478) and $107,256 (net of unamortized debt issuance costs and premium of $1,536), respectively. Interest expense on the 7.50% 2027 Notes totaled $2,100 and $1,860 for the three months ended June 30, 2019 and 2018, respectively, and $4,186 and $3,638 for the six months ended June 30, 2019 and 2018, respectively

 

(c) $110,567 Senior Notes Payable due December 31, 2027

 

At June 30, 2019, the Company had $110,567 senior notes due in December 2027 (“7.25% 2027 Notes”), interest payable quarterly at 7.25%. In December 2017, the Company issued $80,500 of the 7.25% 2027 Notes and as of December 31, 2018, the Company issued additional $19,941 of the 7.25% 2027 Notes pursuant to the Sales Agreements. During the six months ended June 30, 2019, the Company issued an additional $10,126 of the 7.25% 2027 Notes pursuant to the December 2018 Sales Agreement, as discussed below. The 7.25% 2027 Notes are unsecured and due and payable in full on December 31, 2027. In connection with the issuance of the 7.25% 2027 Notes, the Company received net proceeds of $107,863 (after underwriting commissions, fees and other issuance costs of $2,704). At June 30, 2019 and December 31, 2018, the outstanding balance of the 7.25% 2027 Notes was $108,256 (net of unamortized debt issue costs and premium of $2,311) and $98,073 (net of unamortized debt issue costs and premiums of $2,368), respectively. Interest expense on the 7.25% 2027 Notes totaled $1,913 and $1,751 for the three months ended June 30, 2019 and 2018, respectively, and $3,799 and $3,285 for the six months ended June 30, 2019 and 2018, respectively.

 

22

 

 

(d) $114,827 Senior Notes Payable due May 31, 2023

 

At June 30, 2019, the Company had $114,827 senior notes due in May 2023 (“7.375% 2023 Notes”), interest payable quarterly at 7.375%. In May 2018, the Company issued $100,050 of the 7.375% 2023 Notes and as of December 31, 2018, the Company issued an additional $11,478 of the 7.375% 2023 Notes pursuant to the Sales Agreements. During the six months ended June 30, 2019, the Company issued an additional $3,299 of the 7.375% 2023 Notes pursuant to the December 31, 2018 Sales Agreement. The 7.375% 2023 Notes are unsecured and due and payable in full on May 31, 2023. In connection with the issuance of the 7.375% 2023 Notes, the Company received net proceeds of $112,996 (after premium, underwriting commissions, fees and other issuance costs of $1,831). At June 30, 2019 and December 31, 2018, the outstanding balance of the 7.375% 2023 Notes was $113,425 (net of unamortized debt issue costs and premium of $1,402) and $109,872 (net of unamortized debt issuance costs and premium of $1,656), respectively. Interest expense on the 7.375% 2023 Notes totaled $2,178 and $976 for the three months ended June 30, 2019 and 2018, respectively, and $4,333 and $976 for the six months ended June 30, 2019 and 2018, respectively.

 

(e) $103,527 Senior Notes Payable due September 30, 2023

 

At June 30, 2019, the Company had $103,527 senior notes due in September 2023 (“6.875% 2023 Notes”), interest payable quarterly at 6.875%. In September 2018, the Company issued $100,050 of the 6.875% 2023 Notes and during the six months ended June 30, 2019, the Company issued an additional $3,477 of the 6.875% 2023 Notes pursuant to the December 2018 Sales Agreement. The 6.875% 2023 Notes are unsecured and due and payable in full on September 30, 2023. In connection with the issuance of the 6.875% 2023 Notes, the Company received net proceeds of $102,047 (after underwriting commissions, fees and other issuance costs of $1,480). At June 30, 2019 and December 31, 2018, the outstanding balance of the 6.875% 2023 Notes was $102,286 (net of unamortized debt issuance costs and premium of $1,241) and $98,639 (net of unamortized debt issuance costs and premium of $1,411), respectively. Interest expense on the 6.875% 2023 Notes totaled $1,823 and $3,622 for the three and six months ended June 30, 2019, respectively.

 

(f) $100,050 Senior Notes Payable due May 31, 2024

 

On May 7, 2019, the Company issued $100,050 senior notes due in May 2024 (“6.75% 2024 Notes”) pursuant to the prospectus supplement dated May 2, 2019. Interest on the 6.75% 2024 Notes is payable quarterly at 6.75%. The 6.75% 2024 Notes are unsecured and due and payable in full on May 31, 2024. In connection with the issuance of the 6.75% 2024 Notes, the Company received net proceeds of $98,137 (after underwriting commissions, fees and other issuance costs of $1,913). At June 30, 2019, the outstanding balance of the 6.75% 2024 Notes was $98,193 (net of unamortized debt issue costs of $1,857). Interest expense on the 6.75% 2024 Notes totaled $1,013 for the period from May 7, 2019 (inception) to June 30, 2019.

 

(g) At Market Issuance Sales Agreement to Issue Up to Aggregate of $75,000 of 6.875% 2023 Notes, 7.375% 2023 Notes, 7.25% 2027 Notes, 7.50% 2027 Notes or 7.50% 2021 Notes.

 

During 2017 and 2018, the Company entered into a series of related At the Market Issuance Sales Agreements (the “Sales Agreements”) with B. Riley FBR, Inc. governing an ongoing program of at-the-market sales of the Company’s senior notes. The Company filed prospectus supplements under which the Company sold the senior notes on June 28, 2017, December 19, 2017, April 25, 2018, June 5, 2018 and December 18, 2018. Each of these prospectus supplements was filed pursuant to an effective Registration Statement on Form S-3. The Company’s most recent Sales Agreement was entered into on December 18, 2018 (the “December 2018 Sales Agreement”), and under the related prospectus supplement, the Company may offer and sell up to $75,000 of the senior notes. As of June 30, 2019, the Company had $ 51,115 remaining availability under the December 2018 Sales Agreement.

 

Other Notes Payable

 

Notes payable include notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at rates set at each anniversary date ranging from the prime rate plus 0.25% to 2.0% (5.25% to 6.50% at June 30, 2019) payable annually. The principal payments on the notes payable are due annually in the amount of $357 on January 31 and $121 on October 31. The notes payable mature at various dates from October 31, 2019 through January 31, 2020. At June 30, 2019 and December 31, 2018, the outstanding balance for the notes payable was $1,193 and $1,550, respectively. Interest expense was $22 and $29 for the three months ended June 30, 2019 and 2018, respectively, and $45 and $57 for the six months ended June 30, 2019 and 2018, respectively.

 

23

 

 

NOTE 12—REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenue from contracts with customers by reportable segment for the three and six months ended June 30, 2019 and 2018 is as follows:

 

   Three Months Ended June 30, 2019 
   Reportable Segment 
               Principal     
       Auction and   Valuation and   Investments -     
   Capital Markets   Liquidation   Appraisal  

United Online

and magicJack

   Total 
                     
Corporate finance, consulting and investment banking fees  $39,597   $   $   $   $39,597 
Wealth and asset management fees   18,509                18,509 
Commissions, fees and reimbursed expenses   10,376    27,466    9,742        47,584 
Subscription services               21,071    21,071 
Service contract revenues       6,274            6,274 
Advertising and other       1,176        4,707    5,883 
Total revenues from contracts with customers   68,482    34,916    9,742    25,778    138,918 
                          
Interest income - Securities lending   7,665                7,665 
Trading gain on investments   3,755                3,755 
Other   14,346                14,346 
Total revenues  $94,248   $34,916   $9,742   $25,778   $164,684 

 

   Three Months Ended June 30, 2018 
   Reportable Segment 
               Principal     
       Auction and   Valuation and   Investments -     
   Capital Markets   Liquidation   Appraisal  

United Online

and magicJack

   Total 
                     
Corporate finance, consulting and investment banking fees  $28,059   $   $   $   $28,059 
Wealth and asset management fees   18,587                18,587 
Commissions, fees and reimbursed expenses   10,324    24,479    9,459        44,262 
Subscription services               9,044    9,044 
Service contract revenues       2,357            2,357 
Advertising and other               2,377    2,377 
Total revenues from contracts with customers   56,970    26,836    9,459    11,421    104,686 
                          
Interest income - Securities lending   6,591                6,591 
Trading gain on investments   8,410                8,410 
Other   5,814                5,814 
Total revenues  $77,785   $26,836   $9,459   $11,421   $125,501 

 

24

 

 

   Six Months Ended June 30, 2019 
   Reportable Segment 
               Principal     
               Investments -     
       Auction and   Valuation and   United Online     
   Capital Markets   Liquidation   Appraisal   and magicJack   Total 
Revenue from contracts with customers:                    
Corporate finance, consulting and investment banking fees  $57,433   $   $   $   $57,433 
Wealth and asset management fees   36,044                36,044 
Commissions, fees and reimbursed expenses   21,273    35,099    18,325        74,697 
Subscription services               43,469    43,469 
Service contract revenues       19,350            19,350 
Advertising and other       1,176        9,844    11,020 
Total revenues from contracts with customers   114,750    55,625    18,325    53,313    242,013 
                          
Interest income - Securities lending   16,995                16,995 
Trading gain on investments   27,136                27,136 
Other   20,668                20,668 
Total revenues  $179,549   $55,625   $18,325   $53,313   $306,812 

 

   Six Months Ended June 30, 2018 
   Reportable Segment 
               Principal     
               Investments -     
       Auction and   Valuation and   United Online     
   Capital Markets   Liquidation   Appraisal   and magicJack   Total 
Revenue from contracts with customers:                    
Corporate finance, consulting and investment banking fees  $49,025   $   $   $   $49,025 
Wealth and asset management fees   37,757                37,757 
Commissions, fees and reimbursed expenses   21,013    30,813    17,979        69,805 
Subscription services               18,185    18,185 
Service contract revenues       11,540            11,540 
Advertising and other               4,648    4,648 
Total revenues from contracts with customers   107,795    42,353    17,979    22,833    190,960 
                          
Interest income - Securities lending   13,882                13,882 
Trading gain on investments   4,911                4,911 
Other   11,526                11,526 
Total revenues  $138,114   $42,353   $17,979   $22,833   $221,279 

 

Contract Balances

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Receivables related to revenues from contracts with customers totaled $56,450 and $42,123 at June 30, 2019 and December 31, 2018, respectively. The Company had no significant impairments related to these receivables during the three and six months ended June 30, 2019. The Company’s deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment banking advisory engagements, asset management agreements, Valuation and Appraisal engagements and subscription services where the performance obligation has not yet been satisfied. Deferred revenue at June 30, 2019 and December 31, 2018 was $68,097 and $69,066, respectively. During the three and six months ended June 30, 2019, the Company recognized revenue of $11,932 and $25,166 that was recorded as deferred revenue at the beginning of the respective year. During the three and six months ended June 30, 2018, the Company recognized revenue of $2,491 and $4,466, respectively, that was recorded as deferred revenue at the beginning of the year.

 

Contract Costs

 

Contract costs include: (1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the revenue is recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where the revenue is recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack contracts which are recognized ratably over the contract term and third party support costs for magicJack and related equipment purchased by customers which are recognized ratably over the service period.

 

25

 

 

The capitalized costs to fulfill a contract were $2,078 and $2,920 at June 30, 2019 and December 31, 2018, respectively, and are recorded in prepaid expenses and other assets in the condensed consolidated balance sheets. For the three and six months ended June 30, 2019, the Company recognized expenses of $430 and $1,031 related capitalized costs to fulfill a contract, respectively. For the three and six months ended June 30, 2018, the Company recognized expenses and related capitalized costs to fulfill a contract of $147 and $602, respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the six months ended June 30, 2019 and 2018.

 

Remaining Performance Obligations and Revenue Recognized from Past Performance

 

The Company does not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2019. Corporate finance and investment banking fees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at June 30, 2019.

 

NOTE 13—INCOME TAXES

 

The Company’s effective income tax rate was a provision of 29.0% and 21.9% for the six months ended June 30, 2019 and 2018, respectively.

 

As of June 30, 2019, the Company had federal net operating loss carryforwards of $60,637 and state net operating loss carryforwards of $61,930. The Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2029 through December 31, 2034. The state net operating loss carryforwards will expire in the tax years commencing in December 31, 2029.

 

The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As of June 30, 2019, the Company believes that the existing net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided a valuation allowance. The Company does not believe that it is more likely than not that the Company will be able to utilize the benefits related to capital loss carryforwards and has provided a valuation allowance in the amount of $61,127 against these deferred tax assets.

 

The Company files income tax returns in the U.S., various state and local jurisdictions, and certain other foreign jurisdictions. The Company is currently under audit by certain federal, state and local, and foreign tax authorities. The audits are in varying stages of completion. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, case law developments and closing of statutes of limitations. Such adjustments are reflected in the provision for income taxes, as appropriate. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the calendar years ended December 31, 2015 to 2018.

 

NOTE 14—EARNINGS PER SHARE

 

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 387,365 common shares in 2019 and 453,365 common shares in 2018 that are held in escrow and subject to forfeiture. The common shares held in escrow includes 387,365 common shares that are subject to forfeiture to indemnify the Company for certain representations and warranties in connection with the acquisition of Wunderlich, and in 2018 excluded 66,000 common shares held in escrow issued to the former members of Great American Group, LLC that were subject to forfeiture upon the final settlement of claims for goods held for sale in connection with the transaction with Alternative Asset Management Acquisition Corp. in 2009. In August 2018, the shares held in escrow issued to the former members of Great American Group, LLC were released and 21,233 of the 66,000 shares held in escrow were cancelled to satisfy the resolution of escrow claims. The shares that remain in escrow are subject to forfeiture upon the final settlement of claims as more fully described in the related escrow instructions. Dilutive common shares outstanding includes contingently issuable shares that are currently in escrow and subject to release if the conditions for the final settlement of claims in accordance with the escrow instructions were satisfied at the end of the respective years. Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were 1,104,198 and 1,760,703 for the three months ended June 30, 2019 and 2018, respectively, and 1,528,533 and 1,797,563 for the six months ended June 30, 2019 and 2018, respectively, because to do so would have been anti-dilutive.

 

26

 

 

Basic and diluted earnings per share was calculated as follows:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Net income attributable to B. Riley Financial, Inc.  $22,157   $16,997   $30,180   $21,500 
                     
Weighted average shares outstanding:                    
Basic   26,278,352    25,424,178    26,247,952    25,799,077 
Effect of dilutive potential common shares:                    
Restricted stock units and warrants   543,442    734,149    448,191    746,906 
Contingently issuable shares   74,779    239,186    74,779    239,186 
Diluted   26,896,573    26,397,513    26,770,922    26,785,169 
                     
Basic income per share  $0.84   $0.67   $1.15   $0.83 
Diluted income per share  $0.82   $0.64   $1.13   $0.80 

 

NOTE 15—COMMITMENTS AND CONTINGENCIES

 

(a) Letters of Credit

 

At June 30, 2019, there were letters of credit outstanding totaling $835 related to the Principal Investments — United Online and magicJack segment.

 

(b) Legal Matters

 

The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from the Company’s securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding the Company’s business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial position or results of operations.

 

On June 17, 2018, B. Riley Financial, Inc. (the “Company” or “B. Riley”) entered into certain agreements pursuant to which B. Riley agreed to provide certain debt and equity funding and other support in connection with the acquisition (the “Acquisition”) by Vintage Rodeo Parent, LLC (the “Vintage Parent”), of Rent-A-Center, Inc. (“Rent-A-Center”), contemplated by that certain merger agreement dated as of June 17, 2018, by and among Vintage Parent, Vintage Rodeo Acquisition, Inc. a wholly owned subsidiary of Vintage Parent (the “Merger Sub” or the “Borrower”), and Rent-A-Center (the “Merger Agreement”).

 

In connection with the Merger Agreement, B. Riley and Vintage RTO, L.P., an affiliate of Vintage Parent (“Vintage Merger Guarantor”), entered into a Limited Guarantee dated as of June 17, 2018 (the “Limited Guarantee”), in favor of Rent-A-Center, pursuant to which B. Riley and Vintage Merger Guarantor (together, the “Merger Guarantors”) agreed to guarantee, jointly and severally, to Rent-A-Center the payment, performance and discharge of all of the liabilities and obligations of Vintage Parent and Merger Sub under the Merger Agreement when required in accordance with the Merger Agreement (the “Guaranteed Obligations”), including without limitation, (i) termination fees in the amount of $126,500 due to Rent-A-Center if the Merger Agreement is properly terminated (the “Termination Fee”); and (ii) reimbursement and indemnification obligations when required (collectively, the “Guarantee Obligations”), provided, that the liability under the Limited Guarantee shall not exceed $128,500.

 

27

 

 

On December 18, 2018, Rent-A-Center purported to terminate the Merger Agreement because the end date of the agreement was allegedly not extended prior to December 17, 2018 by Vintage Parent. Rent-A-Center delivered notice of such termination to Vintage Parent, and notified Vintage Parent of its obligation under the terms of the Merger Agreement to pay Rent-A-Center the Termination Fee within three business days. On December 18, 2018, Vintage Capital Management, LLC, an affiliate of Vintage Parent (“Vintage Capital”), delivered a letter to Rent-A-Center stating that Rent-A-Center’s purported termination of the Merger Agreement is invalid, that it believes the Merger Agreement remains in effect.  On December 21, 2018, Vintage Capital filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) challenging Rent-A-Center’s purported termination of the Merger Agreement and demand for payment of the Termination Fee. The relief sought by Vintage Capital includes declaratory judgements that the Merger Agreement has not been terminated and remains in full force and effect, that Rent-A-Center has breached its obligations under the Merger Agreement and is not excused from failing to comply with its obligations thereunder and that the Termination Fee is an unenforceable penalty.

 

On December 18, 2018, Rent-A-Center purported to terminate the Merger Agreement because the end date of the agreement was allegedly not extended prior to December 17, 2018 by Vintage Parent. On December 21, 2018, Vintage Capital Management, LLC, an affiliate of Vintage Parent (“Vintage Capital”) filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) challenging Rent-A-Center’s purported termination of the Merger Agreement and demand for payment of the Termination Fee. On March 14, 2019, the Court issued its Opinion concluding that Rent-A-Center’s termination of the merger agreement was valid and did not rule on the enforceability of the payment of the Termination Fee. The parties submitted supplemental briefs as well as reply briefs on that issue. As previously disclosed, on April 22, 2019, the parties announced an agreement in principal to settle the matter and on April 25, 2019 signed a settlement agreement including a release of claims. The Company is not obligated to make any financial contribution in connection with such settlement.

 

On August 11, 2017, a putative class action lawsuit titled Freedman v. magicJack VocalTec Ltd. et al., Case 9-17-cv-80940, was filed against magicJack and its Board of Directors in the United States District Court for the Southern District of Florida (Case No: 9:17-cv-80940-RLR). The Company’s brief in opposition was filed on April 19, 2019. and a mandatory mediation subsequently took place with no resolution. A decision is expected at the end of 2019. The Company cannot estimate the amount of potential liability, if any, that could arise from this matter.

 

In June 2018, Galilee Acquisition LLC f/k/a Sutton View Acquisition LLC (“GAL”) filed a complaint, served the following month, (case No.:50-2018-CA-007976-XXXX-MB) in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida against magicJack Vocaltec Ltd. alleging a claim for negligent misrepresentation. On April 4, 2019, the plaintiff’s counsel advised the court that it intended to file an amended complaint, and the court gave the plaintiff 30 days from that date to file such amended complaint. However, the plaintiff failed to file the amended complaint within the Court appointed time and has filed a request for an extension of time to file the amended complaint which the court is likely to grant. A case management conference was held with the Court during the week of July 8. The Company cannot estimate the amount of potential liability, if any, that could arise from this matter.

 

On January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately $151,000. The Court has ordered mediation before a federal magistrate which is scheduled for August 6, 2019.

 

In February 2017, certain former employees filed an arbitration claim with FINRA against WSI alleging misrepresentations in the recruitment of claimants to join WSI. Claimants also allege that WSI failed to support their mortgage trading business resulting in the loss of opportunities during their employment with WSI. Claimants are seeking $10,000 million in damages. WSI has counterclaimed alleging that claimants misrepresented their process for doing business, particularly their capital needs, resulting in substantial losses to WSI. Arbitration hearings were held in April 2019 and all claims were dismissed. The parties may elect to file a motion to vacate by no later than August 15, 2019.

 

(c) Tax Contingencies

 

magicJack believes that it files all required tax returns and pays all required federal, state and municipal taxes (such as sales, excise, utility, and ad valorem taxes), fees and surcharges. magicJack is the subject of inquiries and examinations by various states and municipalities in the normal course of business. In accordance with generally accepted accounting principles, magicJack makes a provision for a liability for taxes when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. magicJack believes any possible claims are without merit and vigorously defends its rights. However, if a government entity were to prevail in any matter, it could have a material adverse effect on magicJack’s financial condition, results of operation and cash flows. In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition to the provisions taken by magicJack.

 

28

 

 

In a letter dated April 23, 2018, magicJack received notice that the Internal Revenue Service (the “IRS”) has selected magicJack’s 2015 United States income tax return for examination. magicJack had an initial meeting with the IRS in June 2018 and has supplied responses for all of the IRS’s document requests to date. magicJack believes that the positions taken in its 2015 return are reasonable and appropriate, however, magicJack cannot be sure of the ultimate outcome of the examination and cannot estimate the likelihood of liability or the amount of potential assessments, if any, that could arise from the examination.

 

Historically, magicJack considered the requirements to collect sales taxes under the auspices of a 1991 Supreme Court case, Quill Corp. v. North Dakota, which established the precedent that a physical presence in the respective state is required for an entity to be subject to a state’s sales and use tax requirements. Accordingly, magicJack had concluded that it did not have nexus for sales tax in those states in which it had no physical presence (i.e., it had no employees regularly and systematically there and it had no property there). On June 21, 2018, via South Dakota v. Wayfair, Inc. (No. 17-494) the U.S. Supreme Court reversed its prior ruling and eliminated the “physical presence” requirement. In consideration of the ruling, magicJack made the decision to start collecting sales tax on direct sales of its magicJack device and access right renewals in states that have adopted similar “Economic Nexus” laws. magicJack began registering for, collecting and remitting sales tax to identified jurisdictions during the third quarter of 2018. The Company will continue to monitor the situation and add additional states if deemed necessary. Though the South Dakota law is to be applied prospectively, it is not certain if other states may try to enact laws on a retrospective basis based on the Wayfair ruling, and the Company cannot estimate the likelihood of liability or the potential amount of assessments that could arise from prior periods if other states tried to apply the ruling on a retrospective basis.

 

NOTE 16—SHARE-BASED PAYMENTS

 

(a) Amended and Restated 2009 Stock Incentive Plan

 

Share-based compensation expense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”) was $1,835 and $1,261 for the three months ended June 30, 2019 and 2018, respectively, and $3,561 and $2,371 for the six months ended June 30, 2019 and 2018, respectively.

 

The restricted stock units generally vest over a period of one to three years based on continued service. In determining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.

 

As of June 30, 2019, the expected remaining unrecognized share-based compensation expense of $14,764 will be expensed over a weighted average period of 2.3 years.

 

A summary of equity incentive award activity for the six months ended June 30, 2019 was as follows:

 

       Weighted 
       Average 
   Shares   Fair Value 
Nonvested at January 1, 2019   896,817   $16.94 
Granted   392,033    19.32 
Vested   (469,216)   15.08 
Forfeited   (3,564)   17.85 
Nonvested at June 30, 2019   816,070   $19.14 

 

The total fair value of shares vested during the six months ended June 30, 2019 was $7,076.

 

29

 

 

(b) Amended and Restated FBR & Co. 2006 Long-Term Stock Incentive Plan

 

In connection with the acquisition of FBR on June 1, 2017, the equity awards previously granted or available for issuance under the FBR & Co. 2006 Long-Term Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan. During the three months ended June 30, 2019, the Company granted restricted stock units representing 125,452 shares of common stock with a total grant date fair value of $2,418 under the FBR Stock Plan. The share-based compensation expense in connection with the FBR Stock Plan restricted stock awards was $1,015 and $1,740 during the three months ended June 30, 2019 and 2018, respectively and $1,782 and $3,188 during the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the expected remaining unrecognized share-based compensation expense of $7,314 will be expensed over a weighted average period of 2.0 years.

 

A summary of equity incentive award activity for the three months ended June 30, 2019 was as follows:

 

       Weighted 
       Average 
   Shares   Fair Value 
Nonvested at January 1, 2019   689,430   $17.64 
Granted   129,996    19.14 
Vested   (147,796)   17.30 
Forfeited   (67,673)   17.17 
Nonvested at June 30, 2019   603,957   $18.10 

 

The per-share weighted average grant-date fair value of restricted stock units was $19.14 during the six months ended June 30, 2019. There were 147,796 restricted stock units with a fair value of $2,558 that vested during the six months ended June 30, 2019 under the FBR Stock Plan.

 

NOTE 17—NET CAPITAL REQUIREMENTS

 

B. Riley FBR, MLV and B. Riley Wealth Management (“BRWM”), the Company’s broker-dealer subsidiaries, are registered with the SEC as broker-dealers and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Company’s broker-dealer subsidiaries are subject to SEC Uniform Net Capital Rule (Rule 15c3-1) which requires the subsidiaries to maintain minimum net capital and that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. As such, they are subject to the minimum net capital requirements promulgated by the SEC. As of June 30, 2019, B. Riley FBR had net capital of $83,071, which was $81,556 in excess of its required net capital of $1,515; MLV had net capital of $700, which was $600 in excess of its required net capital of $100; and BRWM had net capital of $4,096, which was $3,599 in excess of its required net capital of $497.

 

NOTE 18—RELATED PARTY TRANSACTIONS

 

At June 30, 2019, amounts due from related parties of $4,318 includes $167 from GACP I, L.P. (“GACP I”) and $465 from GACP II, L.P. (“GACP II”) for management fees and other operating expenses, $13 due from B. Riley Principal Merger Corp, a company that consummated its initial public offering on April 11, 2019, and our wholly owned subsidiary, B. Riley Principal Sponsor Co. LLC, is the Sponsor, and $3,673 due from John Ahn, President of Great American Partners, LLC, our indirect wholly owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory Note connected with a Transfer Agreement as further discussed below. At June 30, 2019, amounts due to related parties includes $135 due from CA Global Partners (“CA Global”) for operating expenses related to wholesale and industrial liquidation engagements managed by CA Global on behalf of GA Global Ptrs, and is included in due to related parties and partners on the accompanying condensed balance sheets. At December 31, 2018, amounts due from related parties of $1,729 include $194 from GACP I, $724 from GACP II, and $812 from CA Global for management fees, incentive fees and other operating expenses.

 

On April 1, 2019, the Company entered into a Transfer Agreement (the “Transfer Agreement”) with GACP II, a fund managed by GACP, and John Ahn, the President of GACP. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn 55.56% of the Company’s limited partnership interest in GACP II (the “Transferred Interest”), which represents a capital commitment in the aggregate amount of $5,000. In connection with the Transfer Agreement, the Company provided Mr. J. Ahn with a non-recourse, secured line of credit in an aggregate amount of up to $5,003 pursuant to the terms of a Secured Line of Credit Promissory Note (the “Note”) dated April 1, 2019, to fund the purchase price of the Transferred Interest. We also entered into a Security Agreement with Mr. J. Ahn on April 1, 2019, which granted to the Company a security interest in the Transferred Interest to secure Mr. J. Ahn’s obligations under the Note. The Note is subject to an interest rate per annum of 7.00%. As of June 30, 2019 the principal and accrued interest on the Note were $3,610 (amount transferred as of June 30, 2019) and $63, respectively. For the period from April 1, 2019 (inception) to June 30, 2019 interest earned on the note was $63.

 

30

 

 

NOTE 19—BUSINESS SEGMENTS

 

The Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment and Principal Investments — United Online and magicJack segment. These reportable segments are all distinct businesses, each with a different marketing strategy and management structure.

 

The following is a summary of certain financial data for each of the Company’s reportable segments:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Capital Markets segment:                
Revenues - Services and fees  $86,583   $71,194   $162,554   $124,232 
Interest income - Securities lending   7,665    6,591    16,995    13,882 
Total revenues   94,248    77,785    179,549    138,114 
Selling, general and administrative expenses   (63,041)   (57,713)   (126,430)   (111,352)
Restructuring (charge) recovery   (25)   (1,774)   4    (2,029)
Interest expense - Securities lending   (5,502)   (4,724)   (12,306)   (9,892)
Depreciation and amortization   (1,287)   (1,555)   (2,563)   (3,119)
Segment income   24,393    12,019    38,254    11,722 
Auction and Liquidation segment:                    
Revenues - Services and fees   33,740    26,836    54,449    42,353 
Revenues - Sale of goods   1,176        1,176     
Total revenues   34,916    26,836    55,625    42,353 
Direct cost of services   (12,939)   (6,849)   (19,213)   (11,425)
Cost of goods sold   (852)   (16)   (866)   (17)
Selling, general and administrative expenses   (3,295)   (3,617)   (6,210)   (6,498)
Depreciation and amortization   (2)   (8)   (4)   (16)
Segment income   17,828    16,346    29,332    24,397 
Valuation and Appraisal segment:                    
Revenues - Services and fees   9,742    9,459    18,325    17,979 
Direct cost of services   (4,569)   (4,123)   (8,990)   (8,321)
Selling, general and administrative expenses   (2,405)   (2,414)   (5,171)   (4,759)
Depreciation and amortization   (31)   (54)   (64)   (103)
Segment income   2,737    2,868    4,100    4,796 
Principal Investments - United Online and magicJack segment:                    
Revenues - Services and fees   24,794    11,393    51,384    22,767 
Revenues - Sale of goods   984    28    1,929    66 
Total revenues   25,778    11,421    53,313    22,833 
Direct cost of services   (6,724)   (2,953)   (14,566)   (5,831)
Cost of goods sold   (953)   (33)   (2,058)   (73)
Selling, general and administrative expenses   (5,495)   (2,015)   (12,515)   (3,973)
Depreciation and amortization   (3,300)   (1,679)   (6,763)   (3,358)
Restructuring charge   (1,527)       (1,703)    
Segment income   7,779    4,741    15,708    9,598 
Consolidated operating income from reportable segments   52,737    35,974    87,394    50,513 
Corporate and other expenses (including restructuring recovery of $172 and $210 during the three and six months ended June 30, 2018, respectively)   (8,482)   (7,496)   (18,161)   (11,433)
Interest income   331    166    968    294 
(Loss) income on equity investments   (1,400)   4,893    (5,162)   4,221 
Interest expense