B. Riley Financial
B. Riley Financial, Inc. (Form: 10-Q, Received: 05/10/2017 16:44:32)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

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

 

For the quarterly period ended March 31, 2017

Or

 

o 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 000-54010

 

 

 

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)

 

 

 

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  x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  x No  o

 

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 x
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  x

 

As of May 8, 2017, there were 19,465,492 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 March 31, 2017

Table of Contents

 

    Page
     
PART I. FINANCIAL INFORMATION  
Item 1. Unaudited Financial Statements 3
  Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 3
  Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 4
  Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 5
  Condensed Consolidated Statements of Equity for the three months ended March 31, 2017 and 2016 6
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 7
  Notes to Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 37
Item 6. Exhibits 37
  Signatures 38

 

  2  

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

    March 31,     December 31,  
    2017     2016  
    (Unaudited)        
Assets                
Current assets:                
Cash and cash equivalents   $ 71,541     $ 112,105  
Restricted cash     518       3,294  
Securities and other investments owned, at fair value     41,093       16,579  
Accounts receivable, net     18,022       18,989  
Due from related parties     4,267       3,009  
Advances against customer contracts     1,474       427  
Prepaid expenses and other current assets     3,592       3,578  
Total current assets     140,507       157,981  
Property and equipment, net     5,409       5,785  
Goodwill     48,903       48,903  
Other intangible assets, net     39,239       41,166  
Deferred income taxes     18,894       8,619  
Other assets     1,981       2,164  
Total assets   $ 254,933     $ 264,618  
Liabilities and Equity                
Current liabilities:                
Accounts payable   $ 2,498     $ 2,703  
Accrued payroll and related expenses     6,159       15,738  
Accrued value added tax payable     169       6,371  
Income taxes payable     15,260       9,691  
Accrued expenses and other liabilities     18,389       18,505  
Deferred revenue     3,815       4,130  
Due to related parties and partners     416       10,037  
Securities sold not yet purchased     1,659       846  
Acquisition consideration payable     10,381       10,381  
Mandatorily redeemable noncontrolling interests     3,850       4,019  
Contingent consideration- current portion           1,242  
Total current liabilities     62,596       83,663  
Other liabilities     2,578       2,863  
Senior notes payable     27,754       27,700  
Total liabilities     92,928       114,226  
Commitments and contingencies                
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; 40,000,000 shares authorized; 19,307,008 and 19,140,342 issued and outstanding as of March 31, 2017 and December 31, 2016, respectively     2       2  
Additional paid-in capital     143,228       141,170  
Retained earnings     18,888       9,887  
Accumulated other comprehensive loss     (1,067 )     (1,712 )
Total B. Riley Financial, Inc. stockholders' equity     161,051       149,347  
Noncontrolling interests     954       1,045  
Total equity     162,005       150,392  
Total liabilities and equity   $ 254,933     $ 264,618  

 

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

 

  3  

 

 

B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except share data)

 

    Three Months Ended
March 31,
 
    2017     2016  
             
Revenues:                
Services and fees   $ 52,818     $ 19,944  
Sale of goods     79       2  
Total revenues     52,897       19,946  
Operating expenses:                
Direct cost of services     17,601       6,683  
Cost of goods sold     59       2  
Selling, general and administrative expenses     24,152       11,596  
Restructuring charge     374        
Total operating expenses     42,186       18,281  
Operating income     10,711       1,665  
Other income (expense):                
Interest income     132       3  
Interest expense     (791 )     (132 )
Income before income taxes     10,052       1,536  
Benefit (provision) for income taxes     3,849       (166 )
Net income     13,901       1,370  
Net (loss) income attributable to noncontrolling interests     (120 )     1,122  
Net income attributable to B. Riley Financial, Inc.   $ 14,021     $ 248  
                 
Basic income per share   $ 0.73     $ 0.02  
Diluted income per share   $ 0.71     $ 0.01  
                 
Cash dividends per share   $ 0.26     $ 0.00  
                 
Weighted average basic shares outstanding     19,181,749       16,490,178  
Weighted average diluted shares outstanding     19,626,574       16,553,953  

 

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

 

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B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

 

    Three Months Ended March 31,  
    2017     2016  
             
Net income   $ 13,901     $ 1,370  
Other comprehensive income:                
Change in cumulative translation adjustment     645       65  
Other comprehensive income, net of tax     645       65  
Total comprehensive income     14,546       1,435  
Comprehensive (loss) income attributable to noncontrolling interests     (120 )     1,122  
Comprehensive income attributable to B. Riley Financial, Inc.   $ 14,666     $ 313  

 

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

 

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B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Equity

(Unaudited)

(Dollars in thousands)

 

                                        Accumulated              
                            Additional     Retained     Other              
    Preferred Stock     Common Stock     Paid-in     Earnings     Comprehensive     Noncontrolling     Total  
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Loss     Interests     Equity  
                                                       
Balance, January 1, 2016         $       16,448,119     $ 2     $ 116,799     $ (6,305 )   $ (1,058 )   $ (118 )   $ 109,320  
Issuance of common stock for acquisition of MK Capital, LLC - contigent equity consideration on February 2, 2016                 166,667                                      
Share based compensation                             437                         437  
Net income for the three months ended March 31, 2016                                   248             1,122       1,370  
Foreign currency translation adjustment                                         65             65  
Balance, March 31, 2016         $       16,614,786     $ 2     $ 117,236     $ (6,057 )   $ (993 )   $ 1,004     $ 111,192  
                                                                         
Balance, January 1, 2017         $       19,140,342     $ 2     $ 141,170     $ 9,887     $ (1,712 )   $ 1,045     $ 150,392  
Issuance of common stock for acquisition of MK Capital, LLC - contingent equity consideration on February 2, 2017                 166,666             1,151                         1,151  
Share based compensation                             907                         907  
Dividends paid                                   (5,020 )                 (5,020 )
Net income (loss) for the three months ended March 31, 2017                                   14,021             (91 )     13,930  
Foreign currency translation adjustment                                         645             645  
Balance, March 31, 2017         $       19,307,008     $ 2     $ 143,228     $ 18,888     $ (1,067 )   $ 954     $ 162,005  

 

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

 

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B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

    Three Months Ended
March 31,
 
    2017     2016  
Cash flows from operating activities:                
Net income   $ 13,901     $ 1,370  
Adjustments to reconcile net income to net cash used in operating activities:                
Depreciation and amortization     2,042       203  
Provision (recoveries) for doubtful accounts     325       (20 )
Share based compensation     907       437  
Non-cash interest and other     15       31  
Effect of foreign currency on operations     (1,167 )      
Deferred income taxes     (9,124 )     152  
Income allocated and fair value adjustment for mandatorily redeemable noncontrolling interests     402       425  
Change in operating assets and liabilities:                
Accounts receivable and advances against customer contracts     (347 )     6,442  
Securities and other investments owned     (24,514 )     (67 )
Goods held for sale or auction           2  
Prepaid expenses and other assets     242     (2,060 )
Accounts payable, accrued payroll and related expenses, accrued value added tax payable and other accrued expenses     (11,127 )     (6,643 )
Amounts due to (from) related parties and partners     (10,908 )     (1,556 )
Securities sold, not yet purchased     813       239  
Deferred revenue     (315 )        
Net cash used in operating activities     (38,855 )     (1,045 )
Cash flows from investing activities:                
Purchases of property and equipment     (191 )     (18 )
Proceeds from sales of property and equipment     6        
Proceeds from sale of intangible assets     453        
Decrease (increase) in restricted cash     2,852       (1 )
Net cash provided by (used in) investing activities     3,120       (19 )
Cash flows from financing activities:                
Repayment of revolving line of credit           (272 )
Payment of contingent consideration     (1,250 )     (1,250 )
Dividends paid     (5,020 )      
Distribution to noncontrolling interests     (571 )     (665 )
Net cash used in financing activities     (6,841 )     (2,187 )
Decrease in cash and cash equivalents     (42,576 )     (3,251 )
Effect of foreign currency on cash     2,012       25  
Net decrease in cash and cash equivalents     (40,564 )     (3,226 )
Cash and cash equivalents, beginning of period     112,105       30,012  
Cash and cash equivalents, end of period   $ 71,541     $ 26,786  
Supplemental disclosures:                
Interest paid   $ 1,386     $ 7  
Taxes paid   $ 71     $ 369  

 

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

 

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B. RILEY FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data)

 

NOTE 1—ORGANIZATION, BUSINESS OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of 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 acquisition of United Online, Inc. (“UOL”) on July 1, 2016, provide consumer Internet access and related subscription services.

 

With the acquisition of UOL, the Company now operates in four operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, restructuring, 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, through which the Company provides consumer Internet access and related subscription services.

 

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. All intercompany accounts and transactions have been eliminated upon consolidation. 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. 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 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, 2016, filed with the Securities and Exchange Commission on March 10, 2017. The results of operations for the three months ended March 31, 2017 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 Generally Accepted Accounting Principles (“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, reserves for accounts receivable and slow moving goods held for sale or auction, the carrying value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share based arrangements, fair value of contingent consideration in business combination’s 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

 

Revenues are recognized in accordance with the accounting guidance when persuasive evidence of an arrangement exists, the related services have been provided, the fee is fixed or determinable, and collection is reasonably assured.

 

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Revenues in the Capital Markets segment are primarily comprised of (i) fees earned from corporate finance, investment banking, restructuring and wealth management services; and (ii) revenues from sales and trading activities.

 

Fees earned from corporate finance and investment banking services are derived from debt, equity and convertible securities offerings in which the Company acted as an underwriter or placement agent and from financial advisory services rendered in connection with client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. Fees from underwriting activities are recognized in earnings when the services related to the underwriting transaction are completed under the terms of the engagement and when the income was determined and is not subject to any other contingencies.

 

Fees earned from wealth management services consist primarily of investment management fees that are recognized over the period the services are provided. Investment management fees are primarily comprised of fees for investment management services and are generally based on the dollar amount of the assets being managed.

 

Revenues from sales and trading includes (i) commissions resulting from equity securities transactions executed as agent or principal and are recorded on a trade date basis, (ii) related net trading gains and losses from market making activities and from the commitment of capital to facilitate customer orders, (iii) fees paid for equity research and (iv) principal transactions which include realized and unrealized net gains and losses resulting from our principal investments in equity and other securities for the Company’s account.

 

Revenues in the Auction and Liquidation segment are comprised of (i) commissions and fees earned on the sale of goods at auctions and liquidations; (ii) revenues from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation; (iii) revenue from the sale of goods that are purchased by the Company for sale at auction or liquidation sales events; (iv) fees earned from real estate services and the origination of loans; (v) revenues from financing activities is recorded over the lives of related loans receivable using the interest method; and (vi) revenues from contractual reimbursable expenses incurred in connection with auction and liquidation contracts.

 

Commission and fees earned on the sale of goods at auction and liquidation sales are recognized when evidence of an arrangement exists, the sales price has been determined, title has passed to the buyer and the buyer has assumed the risks of ownership, and collection is reasonably assured. The commission and fees earned for these services are included in revenues in the accompanying condensed consolidated statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs which totaled $10,610 and $3,018 for the three months ended March 31, 2017 and 2016, respectively.

 

Revenues earned from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation are recognized based on proceeds received. The Company records proceeds received from these types of engagements first as a reduction of contractual reimbursable expenses, second as a recovery of its guarantee and thereafter as revenue, subject to such revenue meeting the criteria of having been fixed or determinable. Contractual reimbursable expenses and amounts advanced to customers for minimum guarantees are initially recorded as advances against customer contracts in the accompanying condensed consolidated balance sheets. If, during the auction or liquidation sale, the Company determines that the proceeds from the sale will not meet the minimum guaranteed recovery value as defined in the auction or liquidation services contract, the Company accrues a loss on the contract in the period that the loss becomes known.

 

The Company also evaluates revenue from auction and liquidation contracts in accordance with the accounting guidance to determine whether to report Auction and Liquidation segment revenue on a gross or net basis. The Company has determined that it acts as an agent in a substantial majority of its auction and liquidation services contracts and therefore reports the auction and liquidation revenues on a net basis.

 

Revenues from the sale of goods are recorded gross and are recognized in the period in which the sale of goods held for sale or auction are completed, title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the transaction. These revenues are primarily the result of the Company acquiring title to merchandise with the intent of selling the items at auction or for augmenting liquidation sales. For liquidation contracts where we take title to retail goods, our net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances and are recorded net of sales or value added tax.

 

Revenues in the Valuation and Appraisal segment are primarily comprised of fees for valuation and appraisal services. Revenues are recognized upon the delivery of the completed services to the related customers and collection of the fee is reasonably assured. Revenues in the Valuation and Appraisal segment also include contractual reimbursable costs which totaled $665 and $679 for the three months ended March 31, 2017 and 2016, respectively.

 

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Revenues in the Principal Investments - United Online segment are primarily comprised of services revenues, which are derived primarily from fees charged to pay accounts; advertising and other revenues; and products revenues, which are derived primarily from the sale mobile broadband service devices, including the related shipping and handling fees.

 

Service revenues are derived primarily from fees charged to pay accounts and are recognized in the period in which fees are fixed or determinable and the related services are provided to the customer. The Company’s pay accounts generally pay in advance for their services by credit card, PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance payments from pay accounts are recorded in the condensed consolidated balance sheet as deferred revenue. In circumstances where payment is not received in advance, revenues are only recognized if collectability is reasonably assured.

 

Advertising revenues consist primarily of amounts from the Company’s Internet search partner that are generated as a result of users utilizing the partner’s Internet search services and amounts generated from display advertisements. The Company recognizes such advertising revenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the related performance criteria are met. In determining whether an arrangement exists, the Company ensures that a written contract is in place, such as a standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided performance data to the contractual performance obligation and to internal or third-party performance data in circumstances where that data is available.

 

(d) Direct Cost of Services

 

Direct cost of services relate 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 segment include cost of telecommunications and data center costs, personnel and overhead-related costs associated with operating the Company’s networks and data centers, depreciation of network computers and equipment, 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) Concentration of Risk

 

Revenues from one liquidation service contract to a retailer represented 12.2% of total revenues during the three months ended March 31, 2017. Revenues in the Capital Markets, Auction and Liquidation, Valuation and Appraisal and Principal Investments - United Online 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.

 

(f) Advertising Expenses

 

The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $176 and $193 for the three months ended March 31, 2017 and 2016, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.

 

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(g) Share-Based Compensation

 

The Company’s share based payment awards principally consist of grants of restricted stock and restricted stock units. 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 statement of operations 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.

 

(h) 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.

 

(i) 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.

 

(j) Restricted Cash

 

As of March 31, 2017, restricted cash included $518 of cash segregated in a special bank accounts for the benefit of customers related to our broker dealer subsidiary and collateral for one of our telecommunication suppliers. As of December 31, 2016, restricted cash included $1,440 of cash collateral related to a retail liquidation engagement in Australia, $1,320 of cash collateral for foreign exchange contracts and $534 cash segregated in a special bank accounts for the benefit of customers related to our broker dealer subsidiary and collateral for one of our telecommunication suppliers.

 

(k) Accounts Receivable

 

Accounts receivable represents amounts due from the Company’s auction and liquidation, valuation and appraisal, capital markets and principal investments - United Online 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. Bad debt expense and changes in the allowance for doubtful accounts for the three months ended March 31, 2017 and 2016 are included in Note 4.

 

(l) Advances Against Customer Contracts

 

Advances against customer contracts represent advances of contractually reimbursable expenses incurred prior to, and during the term of the auction and liquidation services contract. These advances are charged to expense in the period that revenue is recognized under the contract.

 

  11  

 

 

(m) 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 was $520 and $91 for the three months ended March 31, 2017 and 2016, respectively.

 

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

 

Securities and other investments owned consist of marketable securities and investments in partnership interests, loans receivable 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.

 

As of March 31, 2017 and December 31, 2016, the Company’s securities and other investments owned owned and securities sold not yet purchased at fair value consisted of the following securities:

 

    March 31,     December 31,  
    2017     2016  
Securities and other investments owned                
Common stocks   $ 7,273     $ 2,084  
Corporate bonds     1,771       1,025  
Loans receivable     11,831       -  
Partnership interests     20,218       13,470  
    $ 41,093     $ 16,579  
                 
Securities sold not yet purchased                
Common stocks   $ 105     $ -  
Corporate bonds     1,554       846  
                 
    $ 1,659     $ 846  

 

(o) 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.

 

  12  

 

 

The Company’s securities owned and securities sold and not yet purchased are comprised of common stocks, corporate bonds and investments in partnerships and loans receivable. Investments in common stocks are based on quoted prices in active markets which are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic common 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’s partnership interests are valued based on the Company’s proportionate share of the net assets of the partnership which is derived from the most recent statements received from the general partner which are included in Level 2 of the fair value hierarchy. Loans receivable are valued at fair value based on the market yield of similar second lien loans collateralized by inventory and other assets of the borrower and included in Level 3 of the fair value hierarchy.

  

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.

 

The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of March 31, 2017 and December 31, 2016.

 

    Financial Assets and Liabilities Measured at Fair Value  
    on a Recurring Basis at March 31, 2017, Using  
          Quoted prices in     Other     Significant  
    Fair Value at     active markets for     observable     unobservable  
    March 31,     identical assets     inputs     inputs  
    2017     (Level 1)     (Level 2)     (Level 3)  
Assets:                                
Securities owned                                
Common stocks   $ 7,273     $ 7,272     $ -     $ 1  
Corporate bonds     1,771       -       1,611       160  
Loan receivable     11,831       -       -       11,831  
Partnership interests     20,218       4,403       44       15,771  
Total assets measured at fair value   $ 41,093     $ 11,675     $ 1,655     $ 27,763  
                                 
Liabilities:                                
Securities sold not yet purchased                                
Common stocks   $ 105     $ -     $ 105     $ -  
Corporate bonds     1,554       -       1,554       -  
Total securities sold not yet purchased     1,659       -       1,659       -  
                                 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003     3,190       -       -       3,190  
Total liabilities measured at fair value   $ 4,849     $ -     $ 1,659     $ 3,190  

 

    Financial Assets and Liabilities Measured at Fair Value  
    on a Recurring Basis at December 31, 2016, Using  
          Quoted prices in     Other     Significant  
    Fair Value at     active markets for     observable     unobservable  
    December 31,     identical assets     inputs     inputs  
    2016     (Level 1)     (Level 2)     (Level 3)  
Assets:                                
Securities owned                                
Common stocks   $ 2,084     $ 1,785     $ -     $ 299  
Corporate bonds     1,025       -       865       160  
Partnership interests     13,470       -       44       13,426  
Total assets measured at fair value   $ 16,579     $ 1,785     $ 909     $ 13,885  
                                 
Liabilities:                                
Securities sold not yet purchased                                
Corporate bonds   $ 846     $ -     $ 846     $ -  
                                 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   $ 3,214     $ -     $ -     $ 3,214  
                                 
Contingent consideration   $ 1,242     $ -     $ -     $ 1,242  
Total liabilities measured at fair value   $ 5,302     $ -     $ 846     $ 4,456  

 

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The changes in Level 3 fair value hierarchy during the three months ended March 31, 2017 and 2016 is as follows:

 

    Level 3     Level 3 Changes During the Year     Level 3  
    Balance at     Fair     Relating to     Purchases,     Transfer in     Balance at  
    Beginning of     Value     Undistributed     Sales and     and/or out     End of  
    Period     Adjustments     Earnings     Settlements     of Level 3     Period  
                                     
Three Months Ended March 31, 2017                                                
Common stocks   $ 299     $ 87     $ -     $ (385 )   $ -     $ 1  
Corporate bonds     160       -       -       -       -       160  
Loan receivable     -       -       -       11,831       -       11,831  
Partnership interests     13,426       2,061       -       284       -       15,771  
Mandatorily redeemable noncontrolling interests issued after November 5, 2003     3,214       -       (24 )     -       -       3,190  
Contingent consideration     1,242       8       -       (1,250 )     -       -  
                                                 
Three Months Ended March 31, 2016                                                
Common stocks   $ 290     $ (80 )   $ -     $ -     $ -     $ 210  
Partnership interests     1,766       65       (15 )     -       -       1,816  
Mandatorily redeemable noncontrolling interests issued after November 5, 2003     2,330       -       (99 )     -       -       2,231  
Contingent consideration     2,391       31       -       (1,250 )     -       1,172  

  

The fair value adjustment for contingent consideration of $8 and $31 represents imputed interest for the three months ended March 31, 2017 and 2016, respectively. The amount reported in the table above for the three months ended March 31, 2017 and 2016 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, restricted cash, accounts receivable, accounts payable, accrued payroll and related, accrued value added tax, income taxes payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturity of these instruments.

 

The carrying amount of the senior notes payable approximates 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.

 

(p) Contingent Consideration

 

In connection with the acquisition of MK Capital Advisors , LLC (“MK Capital”) on February 2, 2015, the purchase agreement required the payment of contingent consideration to the former members of MK Capital in the form of future cash payments of $1,250 and issuance of 166,667 shares of common stock on the first anniversary date of the closing (February 2, 2016) and a final cash payment of $1,250 and issuance of 166,666 shares of common stock on the second anniversary date of the closing (February 2, 2017). The contingent cash consideration was classified as a liability in the condensed balance sheets in accordance with ASC 805, “Business Combination” (“ASC 805”). The fair value of the contingent cash consideration was discounted at 8.0%. The balance of the contingent consideration liability in the condensed consolidated balance sheet was $1,242 (discount of $8) at December 31, 2016. Imputed interest expense totaled $8 and $31 for the three months ended March 31, 2017 and 2016, respectively. The fair value of the contingent stock consideration was classified as equity in accordance with ASC 805.

 

The contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second anniversary periods and the contingent cash consideration and contingent stock consideration for the first anniversary period was paid and issued on February 2, 2016 and for the second anniversary period was paid and issued on February 2, 2017. Upon the payment of the contingent stock consideration on February 2, 2017, the Company recorded a deferred tax benefit and an increase to additional paid-in capital in the amount of $1,151 in accordance with ASC 805.

 

(q) 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. During the three months ended March 31, 2017, the Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of $25,000 Australian dollars that was settled on January 31, 2017.  The Company did not use any derivative contracts during the three months ended March 31, 2016.  The forward exchange contract was entered into to improve the predictability of cash flows related to a retail store liquidation engagement that was completed in December 2016.  The net loss from forward exchange contracts was $70 during the three months ended March 31, 2017. This amount is reported as a component of selling, general and administrative expenses in the condensed consolidated financial statements of operations.

 

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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 losses were $324 and $145 during the three months ended March 31, 2017 and 2016, respectively. These amounts are included in selling, general and administrative expenses in our condensed consolidated statements of operations.

 

(r) Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02:   Leases (Topic 842)   (“ASU 2016-02”) . The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company in fiscal year 2019, but early application is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09,   Revenue from Contracts with Customers (Topic 606) .     Under this ASU and subsequently issued amendments, revenue are recognized at the time when goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. This standard sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance.  This standard is effective in the first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to adoption.  The Company believes the adoption of this standard may impact engagements that contain performance-based arrangements in which a success or completion fee is earned when and if certain predefined outcomes occur and engagements and contracts where services are provided under fixed-fees arrangements that have multiple performance obligations. The Company has not completed an assessment and has not yet determined whether the impact of the adoption of this standard on the consolidated financial statements will be material. The Company will adopt this standard on January 1, 2018 but have not concluded on a transition approach. The Company expects to complete the assessment process, including selecting a transition method for adoption during third quarter of 2017.

 

In March 2016, the FASB issued ASU No. 2016-08,   Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . The amendments in this update do not change the core principle of the guidance as noted above at ASU No. 2014-09. The amendments clarify the implementation guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU No. 2014-09. The Company has not yet adopted this update and is currently evaluating the impact it may have on its 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 , but early application is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.

 

In January 2017, the FASB issued 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.

 

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NOTE 3— ACQUISITIONS

 

On May 4, 2016, the Company entered into a definitive agreement and plan of merger to acquire all of the outstanding common stock of UOL, a provider of consumer Internet access and related subscription services, for $11.00 per share, or approximately $169,354 in aggregate merger consideration. The consideration includes $10,381 that remains payable at March 31, 2017, which is included in acquisition consideration payable in the condensed consolidated balance sheet, pending the outcome of the legal matter more fully described in Note 10.  The shareholders of UOL approved the acquisition on June 29, 2016 and customary closing conditions were satisfied and the acquisition was completed on July 1, 2016. The acquisition of UOL allows the Company to benefit from the expected cash flows of UOL due in part to planned synergies from the elimination of duplicate overhead functions with the Company. The acquisition of UOL is accounted for using the purchase method of accounting.

 

The assets and liabilities of UOL, both tangible and intangible, were recorded at their estimated fair values as of the July 1, 2016 acquisition date for UOL. The application of the purchase method of accounting resulted in goodwill of $14,375 which represents expected overhead synergies and acquired workforce. The revenue and earnings of UOL included in our condensed consolidated financial statements for the three months ended March 31, 2017 was $13,382 and $4,202, respectively.

 

Pro Forma Financial Information

 

The unaudited financial information in the table below summarizes the combined results of operations of the Company and UOL, as though it had occurred as of January 1, 2016. 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. 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  
    March 31,  
    2016  
       
Revenues   $ 38,382  
Net loss attributable to B. Riley Financial, Inc.   $ (2,132 )
         
Basic loss per share   $ (0.13 )
Diluted loss per share   $ (0.13 )
         
Weighted average basic shares outstanding     16,490,178  
Weighted average diluted shares outstanding     16,490,178  

 

NOTE 4— ACCOUNTS RECEIVABLE

 

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

 

    March 31,     December 31,  
    2017     2016  
             
Accounts receivable   $ 14,662     $ 16,610  
Investment banking fees, commissions and other receivables     807       576  
Unbilled receivables     3,109       2,058  
Total accounts receivable     18,578       19,244  
Allowance for doubtful accounts     (556 )     (255 )
Accounts receivable, net   $ 18,022     $ 18,989  

 

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

 

    Three Months Ended  
    March 31,  
    2017     2016  
             
Balance, beginning of period   $ 255     $ 89  
Add: Additions to reserve     325       5  
Less: Write-offs     (24 )     -  
Less: Recoveries     -       (25 )
Balance, end of period   $ 556     $ 69  

 

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 5— GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill of $48,903 at March 31, 2017 and December 31, 2016 is comprised of $28,840 in the Capital Markets segment, $1,975 in the Auction and Liquidation segment, $3,713 in the Valuation and Appraisal segment, and $14,375 in the Principal Investments - United Online segment. There were no changes in goodwill during the three months ended March 31, 2017.

 

Intangible assets consisted of the following:

 

        March 31, 2017     December 31, 2016  
        Gross                 Gross              
        Carrying     Accumulated     Intangibles     Carrying     Accumulated     Intangibles  
    Useful Life   Value     Amortization     Net     Value     Amortization     Net  
                                         
Amortizable assets:                                                    
Customer relationships    4 to 13 Years   $ 37,300     $ 4,290     $ 33,010     $ 37,300     $ 3,100     $ 34,200  
Domain names   7 Years     967       104       863       1,419       101       1,318  
Advertising relationships    8 Years     100       9       91       100       6       94  
Internally developed software   0.5 to 4 Years     3,333       795       2,538       3,333       550       2,783  
Trademarks    8 Years     1,100       103       997       1,100       69       1,031  
                                                     
Non-amortizable assets:                                                    
Tradenames         1,740       -       1,740       1,740       -       1,740  
Total intangible assets       $ 44,540     $ 5,301     $ 39,239     $ 44,992     $ 3,826     $ 41,166  

 

Amortization expense was $1,522 and $112 for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, estimated future amortization expense is $4,386, $5,592, $5,487, $5,105 and $4,723 for the years ended December 31, 2017 (remaining nine months), 2018, 2019, 2020 and 2021, respectively. The estimated future amortization expense after December 31, 2021 is $12,206.

 

NOTE 6— CREDIT FACILITIES

 

Credit facilities consist of the following arrangements:

 

(a) $200,000 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. The 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 recent 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 $27 and $23 for the three months ended March 31, 2017 and 2016, respectively. There was no outstanding balance under this credit facility at March 31, 2017 and December 31, 2016.

 

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The Credit Agreement governing the credit facility contains certain covenants, including covenants that limit or restrict the Company’s ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. Upon the occurrence of an event of default under the Credit Agreement, the lender may cease making loans, terminate the Credit Agreement and declare all amounts outstanding under the Credit Agreement to be immediately due and payable. The Credit Agreement specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, nonpayment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults.

 

(b) $20,000 UOL Line of Credit

 

On April 13, 2017, UOL, in the capacity as borrower, entered into a credit agreement (the “UOL Credit Agreement”) with the Banc of California, N.A. in the capacity as agent and lender. The UOL Credit Agreement provides for a revolving credit facility under which UOL may borrow (or request the issuance of letters of credit) up to $20,000 which amount is reduced by $1,500 commencing on June 30, 2017 and on the last day of each calendar quarter thereafter. The final maturity date is April 13, 2020.  The proceeds of the UOL Credit Agreement can be used (a) for working capital and general corporate purposes and/or (b) to pay dividends or permitted tax distributions to its parent company, subject to the terms of the UOL Credit Agreement. Borrowings under the UOL Credit Agreement will bear interest at a rate equal to (a) (i) the base rate (the greater of the federal funds rate plus one half of one percent (0.5%), or the prime rate) for U.S. dollar loans or (ii) at UOL’s option, the LIBOR Rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two percent (2%) to three and one-half percent (3.5%) per annum, based upon UOL’s ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the preceding four (4) fiscal quarters. Interest payments are to be made each one, three or six months for Eurodollar loans, and quarterly for U.S. dollar loans.

 

UOL paid a commitment fee equal to 1.00% of the aggregate commitments upon the closing of the UOL Credit Agreement. The UOL Credit Agreement also provides for an unused line fee payable quarterly, in arrears, in an amount equal to: (a) 0.50% per annum times the amount of the unused revolving commitment that is less than or equal to the amount of the cash maintained in accounts with the agent (as depositary bank); plus (b) 1.00% per annum times the amount of the unused revolving commitment that is greater than the amount of the cash maintained in accounts with the agent (as depositary bank). Any amounts outstanding under the UOL Credit Facility are due at maturity.

 

Each of UOL’s U.S. subsidiaries is a guarantor of all obligations under the UOL Credit Agreement and are parties to the UOL Credit Agreement in such capacity (collectively, the “Secured Guarantors”). In addition, the Company and B. Riley Principal Investments, LLC, the parent corporation of UOL and a subsidiary of the Company, are guarantors of the obligations under the UOL Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares of outstanding capital stock of UOL are pledged as collateral. The obligations under the UOL Credit Agreement are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of UOL and the Secured Guarantors, including a pledge of (a) 100% of the equity interests of the Secured Guarantors and (b) 65% of the equity interests in United Online Software Development (India) Private Limited, a private limited company organized under the laws of India. Such security interests are evidenced by pledge, security and other related agreements.

 

The UOL Credit Agreement contains certain negative covenants, including those limiting UOL’s and its 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 UOL Credit Agreement requires UOL and its subsidiaries to maintain certain financial ratios.

  

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NOTE 7—NOTES PAYABLE

 

(a) $28,750 Senior Note Payable

 

On November 2, 2016, the Company issued $28,750 of Senior Notes Payable (“Senior Notes”) due in 2021, interest payable quarterly at 7.5% commencing January 31, 2017. The Senior Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuance of the Senior Notes the Company received net proceeds of $27,664 (after underwriting commissions, fees and other issuance costs of $1,086). The outstanding balance of the Senior Notes was $27,754 (net of unamortized debt issue costs of $996) and $27,700 (net of unamortized debt issue costs of $1,050) at March 31, 2017 and December 31, 2016, respectively. In connection with the offering of $28,750 of Senior Notes, certain members of management and the Board of Directors of the Company purchased $2,731 or 9.5% of the Senior Notes offered by the Company.   Interest expense on the Senior Notes totaled $593 for the three months ended March 31, 2017.

 

(b) Australian Dollar $80,000 Note Payable

 

In August 2016, the Company formed GA Retail Investments, L.P., a Delaware limited partnership, (the “Partnership”) which required the Company to contribute $15,350. The Partnership borrowed $80,000 Australian dollars from a third party investor in connection with its formation and the $80,000 Australian dollars was exchanged for a 50% special limited partnership interest in the Partnership. The Partnership was formed to provide funding for the retail liquidation engagement the Company entered into to liquidate the Masters Home Improvement stores. The $80,000 Australian dollar participating note payable was non-interest bearing, shares in 50% of the all of the profits and losses of the Partnership and was subject to repayment upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. Although the terms of the participating note payable included the issuance of a 50% equity interest in the Partnership, sharing in all profits and losses of the Partnership, and no repayment until certain events occur, in accordance with ASC 480 Distinguishing Liabilities From Equity, this financial instrument was classified as a participating note payable. The $80,000 Australian dollar participating note payable was repaid in December 2016 upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. At March 31, 2017 and December 31, 2016, $416 and $10,037, respectively, was payable in accordance with the participating note payable share of profits and is included in amounts due to related parties and partners in the condensed consolidated financial statements.

 

NOTE 8— INCOME TAXES

 

The Company’s effective income tax rate was a benefit of 38.3% for the three months ended March 31, 2017. The Company’s income tax rate was 10.8% for the three months ended March 31, 2016. During the three months ended March 31, 2017, the Company elected to treat the acquisition of UOL as a taxable business combination for income tax purposes in accordance with Internal Revenue Code Section 338(g) (“IRS Code Section 338(g)”). This resulted in the Company foregoing the income tax attributes of UOL that existed at the acquisition date which included net operating loss carryforwards, capital loss carryforwards and foreign tax credits. The income tax election in accordance with IRS Code Section 338(g) provides the Company with a tax step-up in the basis of the intangible assets and goodwill acquired for tax purposes. In accordance with ASC 740, the impact of the election in accordance with IRS Code Section 338(g) on deferred income taxes resulted in the recording of a tax benefit in the amount of $8,389 during the three months ended March 31, 2017. The effective income tax rate for the three months ended March 31, 2016 was lower than the statutory federal and state income tax rate due to the tax differential on net income attributable to noncontrolling interests.

 

As of March 31, 2017, the Company had federal net operating loss carry forwards of $7,600 and state net operating loss carry forwards of $11,800. The Company’s federal net operating loss carry forwards will expire in the tax year ending December 31, 2034, the state net operating loss carry forwards will expire in 2032, and the foreign tax credit carry forwards will expire in 2023.

 

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 and tax credit carry forwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carry forward period, and other circumstances. As a result of the common stock offering by the Company that was completed on June 5, 2014, the Company had a more than 50% ownership shift 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 March 31, 2017, the Company believes that the net operating loss that existed as of the more than 50% ownership shift will be utilized in future tax periods before the loss carry forwards 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 an allowance.

 

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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 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, 2013 to 2016.

 

NOTE 9— 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 66,000 common shares that are held in escrow and subject to forfeiture as a result of the failure to achieve certain performance targets specified in connection with the transaction with   Alternative Asset Management Acquisition Corp. in 2009 (the “Acquisition”).   The 66,000 common shares issued to the former members of Great American Group, LLC are subject to forfeiture upon the final settlement of claims for goods held for sale in connection with the Acquisition. 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 for goods held for sale in connection with the Acquisition was satisfied at the end of the respective periods.

 

Basic and diluted earnings per share was calculated as follows:

 

    Three Months Ended  
    March 31,  
    2017     2016  
             
Net income attributable to B. Riley Financial, Inc.   $ 14,021     $ 248  
                 
Weighted average shares outstanding:                
Basic     19,181,749       16,490,178  
Effect of dilutive potential common shares:                
 Restricted stock units and non-vested shares     400,058       19,113  
 Contingently issuable shares     44,767       44,662  
Diluted     19,626,574       16,553,953  
                 
Basic income per share   $ 0.73     $ 0.02  
Diluted income per share   $ 0.71     $ 0.01  

 

NOTE 10— COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

The Company is subject to certain legal and other claims that arise in the ordinary course of its business. The Company does not believe that the results of these claims are likely to have a material effect on its condensed consolidated financial position or results of operations.

 

In January 2015, the Company was served with a lawsuit that seeks to assert claims of breach of contract and other matters in connection with auction services provided to a debtor.  The proceeding in the United States Bankruptcy Court for the District of Delaware (“Bankruptcy Court”) is pending in the bankruptcy case of the debtor and its affiliates (the “Debtor”).  In the lawsuit, a former landlord of the Debtor generally alleges that the Company and a joint venture partner were responsible for contamination while performing services in connection with the auction of certain assets of the Debtor and is seeking approximately $10,000 in damages.  The Company filed a motion to dismiss the lawsuit and in March 2016 the Bankruptcy Court issued its opinion dismissing some claims while denying the motion with respect to other claims.  In April 2016, the Company filed an answer with the Bankruptcy Court denying the allegations in the complaint. In December 2016, the parties exchanged initial disclosures.  In January 2017, the parties filed a proposed scheduling order with the Bankruptcy Court. Discovery in the action is currently proceeding. The Company is vigorously defending this lawsuit. This lawsuit is in the initial stages, and the financial impact to the Company, if any, cannot be estimated.

 

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On July 5, 2016, Quadre Investments LP (“Quadre”) filed a petition with the Delaware Court of Chancery (the “Court”) seeking a determination of fair value for 943,769 shares of common stock of UOL in connection with the acquisition of UOL by the Company. Such transaction gave rise to appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware. As a result, Quadre is entitled to petition the Court to receive fair value as determined by the Court. The Company does not believe that the fair value of each share exceeds $11.00 per share, the acquisition consideration paid to UOL stockholders pursuant to the agreement to acquire UOL, and the Company intends to contest the petition. Discovery in the case has commenced. As of March 31, 2017 and December 31, 2016, the Company has recorded $10,381 of acquisition consideration payable in connection with the Quadre petition. Interest expense accrued on the acquisition consideration payable amounted to $457 and $306 at March 31, 2017 and December 31, 2016, respectively.

 

On March 10, 2017, UOL received a letter from PeopleConnect, Inc., the successor entity to Classmates, Inc., a former subsidiary of UOL (“PeopleConnect”), regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of four California counties (“California DAs”).  The California DAs suggest that PeopleConnect may be in violation of California codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices (the “Claims”).  PeopleConnect asserts that the Claims are indemnifiable claims under the purchase agreement between UOL and the buyer of Classmates, Inc.   At the present time, any potential liability and damages cannot be estimated.

 

NOTE 11— SHARE BASED PAYMENTS

 

During the three months ended March 31, 2017, the Company granted restricted stock units representing 47,438 shares of common stock with a total fair value of $916 to certain employees of the Company. During the year ended December 31, 2016, the Company granted restricted stock units representing 544,605 shares of common stock with a total fair value of $5,301 to certain employees and directors of the Company. Share based compensation expense for the restricted stock units was $907 and $437 for the three months ended March 31, 2017 and 2016, 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 March 31, 2017, the expected remaining unrecognized share based compensation expense of $5,483 will be expensed over a weighted average period of 2.0 years.

 

A summary of equity incentive award activity for the periods indicated was as follows:

 

          Weighted  
          Average  
    Shares     Fair Value  
             
Nonvested at December 31, 2016     680,135     $ 9.74  
Granted     47,438       19.30  
Vested     -       -  
Forfeited     -       -  
Nonvested at March 31, 2017     727,573     $ 10.36  
                 

 

The per-share weighted average grant-date fair value of restricted stock units was $19.30 during the three months ended March 31, 2017. There were no restricted stock units that vested during the three months ended March 31, 2017.

 

NOTE 12— NET CAPITAL REQUIREMENTS

 

B. Riley & Co., LLC (“BRC”), a subsidiary of the Company, is a registered broker-dealer and, accordingly, is subject to the SEC Uniform Net Capital Rule (Rule 15c3-1) which requires BRC to maintain minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1.  As of March 31, 2017, BRC had net capital of $8,045 (an excess of $7,482).  BRC’s net capital ratio for March 31, 2017 was 1.05 to 1.

 

NOTE 13— RELATED PARTY TRANSACTIONS

 

At March 31, 2017, amounts due from related parties include $3,170 from GACP I, L.P. for management fees, incentive fees and other operating expenses and $1,097 from CA Global Partners, LLC (“CA Global”). At December 31, 2016, amounts due from related parties include $2,050 from GACP I, L.P. for management fees, incentive fees and other operating expenses and $959 from CA Global Partners, LLC (“CA Global”). Great American Capital Partners, LLC, a subsidiary of the Company, is the general partner of GACP I, L.P. CA Global is one of the members of Great American Global Partners, LLC (“GA Global Ptrs”). The amounts receivable and payable from CA Global are comprised of amounts due to and due from CA Global in connection with certain auctions of wholesale and industrial machinery and equipment that they were managed by CA Global on behalf of GA Global Ptrs.

 

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In connection with the offering of $28,750 of Senior Notes as more fully described in Note 7, certain members of management and the Board of Directors of the Company purchased $2,731 or 9.5% of the Senior Notes offered by the Company.

 

NOTE 14— BUSINESS SEGMENTS

 

The Company’s operating segments reflect the manner in which the business is managed and how the Company allocates resources and assesses performance internally. The Company has several operating subsidiaries through which it delivers specific services. The Company provides investment banking, corporate finance, restructuring, research, wealth management, sales and trading services to corporate, institutional and high net worth clients. The Company also 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 and valuation and appraisal services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs. As a result of the acquisition of UOL on July 1, 2016, the Company provides consumer services and products over the Internet.

 

The Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment and Principal Investments - United Online 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  
    March 31,  
    2017     2016  
Capital markets reportable segment:                
Revenues - Services and fees   $ 17,723     $ 5,564  
Selling, general, and administrative expenses     (10,969 )     (6,174 )
Depreciation and amortization     (127 )     (21 )
Segment (loss) income     6,627       (631 )
Auction and Liquidation reportable segment:                
Revenues - Services and fees     13,996       6,907  
Revenues - Sale of goods     -       2  
Total revenues     13,996       6,909  
Direct cost of services     (10,334 )     (3,418 )
Cost of goods sold     -       (2 )
Selling, general, and administrative expenses     (1,850 )     (1,225 )
Depreciation and amortization     (5 )     (41 )
Segment income     1,807       2,223  
Valuation and Appraisal reportable segment:                
Revenues - Services and fees     7,796       7,473  
Direct cost of services     (3,672 )     (3,265 )
Selling, general, and administrative expenses     (2,080 )     (2,119 )
Depreciation and amortization     (44 )     (29 )
Segment income     2,000       2,060  
Principal Investments - United Online segment:                
Revenues - Services and fees     13,303       -  
Revenues - Sale of goods     79       -  
Total revenues     13,382       -  
Direct cost of services     (3,595 )     -  
Cost of goods sold     (59 )     -  
Selling, general, and administrative expenses     (3,312 )     -  
Depreciation and amortization     (1,840 )     -  
Restructuring costs     (374 )     -  
Segment income     4,202       -  
Consolidated operating income from reportable                
segments     14,636       3,652  
Corporate and other expenses     (3,925 )     (1,987 )
Interest income     132       3  
Interest expense     (791 )     (132 )
                 
Income before income taxes     10,052       1,536  
Benefit (provision) for income taxes     3,849       (166 )
                 
Net income     13,901       1,370  
Net (loss) income attributable to noncontrolling interests     (120 )     1,122  
                 
Net income attributable to B. Riley Financial, Inc.   $ 14,021     $ 248  

 

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The following table presents revenues by geographical area:

 

    Three Months Ended March 31,  
    2017     2016  
Revenues:                
Revenues - Services and fees:                
North America   $ 51,062     $ 19,938  
Australia     940       -  
Europe     816       6  
Total Revenues - Services and fees   $ 52,818     $ 19,944  
                 
Revenues - Sale of goods                
North America   $ 79     $ 2  
Australia     -       -  
Europe     -       -  
Total Revenues - Sale of goods   $ 79     $ 2  
                 
Total Revenues:                
North America   $ 51,141     $ 19,940  
Australia     940       -  
Europe     816       6  
Total Revenues - Services and fees   $ 52,897     $ 19,946  

 

The following table presents long-lived assets, which consists of property and equipment and other assets, by geographical area:

 

    As of     As of  
    March 31,     December 31,  
    2017     2016  
Long-lived Assets - Property and Equipment,net:                
North America   $ 5,409     $ 5,785  
Australia     -       -  
Europe     -       -  
Total   $ 5,409     $ 5,785  

 

Segment assets are not reported to, or used by, the Company's CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

 

NOTE 15— SUBSEQUENT EVENTS

 

Acquisition of Rights to Manage Dialectic Hedge Funds

 

On April 13, 2017, the Company entered into an Asset Purchase and Assignment Agreement with Dialectic Capital Management, L.P., Dialectic Capital, LLC and John Fichthorn (collectively “Dialectic”), pursuant to which Dialectic assigned and transferred the rights to manage certain hedge funds to the Company (the “Dialectic Acquisition”). In addition to obtaining the rights to manage certain hedge funds previously managed by Dialectic, the Company hired all of the employees that were previously employed by the management company that managed the Dialectic hedge funds and assumed Dialectic’s office lease. In connection with Dialectic Acquisition the Company paid the Dialectic parties $700 in cash consideration and 158,484 shares of common stock which has a fair value of approximately $2,125 for total purchase consideration of $2,825. The purchase and assignment of the rights to manage certain hedge funds of Dialectic is expected to result in the recognition of intangible assets and goodwill in the amount of $2,825.

 

Acquisition of FBR & Co.

 

On February 17, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FBR & Co. (“FBR”), pursuant to which FBR will merge with and into the Company (or a subsidiary of the Company), with the Company (or its subsidiary) as the surviving corporation (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of FBR common stock, par value $0.001 per share (“FBR Common Stock”), excluding certain specified shares, will be converted into the right to receive 0.671 of a share of the Company’s common stock, par value $0.0001 per share. In addition, prior to the closing of the Merger, the board of directors of FBR may declare and pay a cash dividend (the “Pre-Closing Dividend”) to holders of FBR Common Stock and FBR equity awards. The Pre-Closing Dividend on a per share basis will be equal to the value of cash and certain specified investments on FBR’s balance sheet in excess of $33,500 and certain transaction expenses divided by the total number of fully diluted shares of FBR Common Stock outstanding (subject to certain adjustments if the Pre-Closing Dividend would be equal to or more than $8.50 per fully diluted share of FBR Common Stock).

 

On May 1, 2017, the Company and FBR filed a registration statement for the planned Merger. Consummation of the Merger is subject to certain closing conditions, as set forth in the Merger Agreement, including the approval of the Merger by our shareholders and the shareholders of FBR. The shareholders of the Company and FBR are scheduled to vote on the on Merger on June 1, 2017. It is anticipated that the Merger will close during the second quarter of 2017.

 

Dividends

 

On May 10, 2017, the Company’s Board of Directors approved a regular quarterly dividend of $0.08 per share and a special dividend of $0.08 per share, which will be paid on or about May 31, 2017 to stockholders of record on May 23, 2017.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Annual Report to conform such statements to actual results or to changes in our expectations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the caption “Risk Factors”.

 

Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; the short term nature of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities as necessary; failure to comply with the terms of our credit agreements; our ability to meet future capital requirements; our ability to realize the benefits of our completed and proposed acquisitions, including our ability to achieve anticipated opportunities and operating cost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frame expected by management or at all   ;   the possibility that our proposed acquisition of FBR & Co, Inc. (“FBR”) does not close when expected or at all; our ability to promptly and effectively integrate our business with that of FBR if such transaction closes; the reaction to the FBR acquisition of our and FBR’s customers, employees and counterparties; and the diversion of management time on acquisition-related issues. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Except as otherwise required by the context, references in this Annual Report to “the “Company,” “B. Riley,” “we,” “us” or “our” refer to the combined business of B. Riley Financial, Inc. and all of its subsidiaries.

 

Overview

 

B. Riley Financial, Inc. and its subsidiaries (NASDAQ: RILY) provide collaborative financial services and solutions through several subsidiaries, including:

 

· B. Riley & Co., LLC (“BRC”), a mid-sized, full service investment bank providing financial advisory, corporate finance, research, and sales & trading services to corporate, institutional and high net worth individual clients;

 

· B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registered investment advisor, which includes:

 

o B. Riley Asset Management, an advisor to certain private funds and to institutional and high net worth investors;
o B. Riley Wealth Management (formerly MK Capital Advisors), a multi-family office practice and wealth management firm focused on the needs of ultra-high net worth individuals and families; and
o Great American Capital Partners, LLC (“GACP”), the general partner of a private fund, GACP I, L.P. a direct lending fund that provides senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies.

 

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· Great American Group, LLC, a leading provider of asset disposition and auction solutions to a wide range of retail and industrial clients;

 

· Great American Group Advisory and Valuation Services, LLC, a leading provider of appraisal and valuation services for asset based lenders, private equity firms and corporate clients; and

 

We also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics. On July 1, 2016, we acquired United Online, Inc.(“UOL”) as part of our principal investment strategy.

 

· UOL is a communications company that offers subscription services and products, consisting of Internet access services and devices under the NetZero and Juno brands primarily sold in the United States.

 

We are headquartered in Los Angeles with offices in major financial markets throughout the United States and Europe.

 

For financial reporting purposes we classify our businesses into four segments: (i) capital markets, (ii) auction and liquidation, (iii) valuation and appraisal and (vi) principal investments – United Online.

 

Capital Markets Segment . Our capital markets segment provides a full array of investment banking, corporate finance, research, wealth management, sales and trading services to corporate, institutional and high net worth clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements.  In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our capital markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors.

 

Auction and Liquidation Segment . Our auction and liquidation segment utilizes our significant industry experience, a scalable network of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North American as well as parts of Europe, Asia and Australia. Our auction and liquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets disposition division operates through limited liability companies that are controlled by us.

 

Valuation and Appraisal Segment . Our valuation and appraisal segment provides valuation and appraisal services to financial institutions, lenders, private equity firms and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our valuation and appraisal segment operates through limited liability companies that are majority owned by us.

 

Principal Investments – United Online Segment . Our principal investments - United Online segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, a company that offers consumer subscription services consisting of Internet access under the NetZero and Juno brands. Internet access includes paid dial-up, mobile broadband and DSL subscription services. We also offer email, Internet security, web hosting services, and other services.

 

Recent Developments

 

On February 17, 2017, we entered into an agreement and plan of merger (the “Merger Agreement”) to acquire FBR, an investment banking and brokerage firm that provides investment banking, M&A advisory, institutional brokerage, and research services, pursuant to which FBR will merge with and into us (or a subsidiary of us), with us (or our subsidiary) as the surviving corporation (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of FBR common stock, excluding certain specified shares, will be converted into the right to receive 0.671 of a share of our common stock. We currently estimate that approximately 5.3 million shares of our common stock will be issued in connection with this transaction, with an assumed value of approximately $93.0 million based on the closing price of our common stock on February 17, 2017. In addition, prior to the closing of the Merger, the board of directors of FBR may declare and pay a cash dividend to holders of FBR Common Stock and FBR equity awards. Such dividend on a per share basis will be equal to the value of cash and certain specified investments on FBR’s balance sheet in excess of $33.5 million divided by the total number of fully diluted shares of FBR Common Stock outstanding (subject to certain adjustments if such dividend would be equal to or more than $8.50 per fully diluted share of FBR Common Stock).

 

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The Merger Agreement further provides that, at or prior to the effective time of the Merger, the number of directors comprising our full Board of Directors will be increased by one, with Richard J. Hendrix, Chairman, President and Chief Executive Officer of FBR, being appointed to fill the new seat in accordance with the terms of the employment agreement described below. In connection with the execution of the Merger Agreement, on February 17, 2017, BRC and we entered into an employment agreement with Mr. Hendrix, which provides that, following the closing of the Merger, Mr. Hendrix will become President and Chief Executive Officer of the combined business of FBR and BRC and will be appointed to our Board of Directors, contingent on Mr. Hendrix remaining employed by FBR through the closing of the Merger. In addition, on February 17, 2017, certain officers and directors of FBR entered into voting agreements with us with respect to shares of FBR common stock held by such officers or directors, and certain of our officers and directors entered into voting agreements with FBR with respect to shares of our common stock held by such officers or directors, which generally require each stockholder party thereto in his or her capacity as a stockholder, to vote all of the shares of common stock over which such party has voting control in favor of adoption of the Merger Agreement and certain related matters and against alternative transactions and generally prohibit them from transferring their shares of common stock, subject to certain exceptions.

 

On May 1, 2017, the Company and FBR filed a registration statement for the Merger. Consummation of the Merger is subject to certain closing conditions, as set forth in the Merger Agreement, including the approval of the Merger by our shareholders and the shareholders of FBR. The shareholders of the Company and FBR are scheduled to vote on the on Merger on June 1, 2017. It is anticipated that the Merger will close during the second quarter of 2017. If the Merger is consummated, we anticipate that FBR’s operations will be included in our capital markets segment.

 

Critical Accounting Policies

 

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our condensed consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, reserves for accounts receivable and slow moving goods held for sale or auction, the carrying value of goodwill and other intangible assets, fair value measurements, share based compensation and accounting for income tax valuation allowances can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes to the policies noted above as of this quarterly report on Form 10-Q for the period ended March 31, 2017.

 

Results of Operations

 

The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.

 

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Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

Condensed Consolidated Statements of Operations

(Dollars in thousands)

 

    Three Months
March 31, 2017
    Three Months
March 31, 2016
 
    Amount     %     Amount     %  
Revenues:                                
Services and fees   $ 52,818       99.9 %   $ 19,944       100.0 %
Sale of goods     79       0.1 %     2       0.0 %
Total revenues     52,897       100.0 %     19,946       100.0 %
                                 
Operating expenses:                                
Direct cost of services     17,601       33.3 %     6,683       33.5 %
Cost of goods sold     59       0.1 %     2       0.0 %
Selling, general and administrative expenses     24,152       45.7 %     11,596       58.1 %
Restructuring costs     374       0.7 %     -       0.0 %
Total operating expenses     42,186       79.8 %     18,281       91.7 %
Operating income     10,711       20.2 %     1,665       8.3 %
Other income (expense):                                
Interest income     132       0.2 %     3       0.0 %
Interest expense     (791 )     -1.4 %     (132 )     -0.7 %
Income before income taxes     10,052       19.0 %     1,536       7.7 %
Benefit (provision) for income taxes     3,849       7.3 %     (166 )     -0.8 %
Net income     13,901       26.3 %     1,370       6.9 %
Net (loss) income attributable to noncontrolling interests     (120 )     -0.2 %     1,122       5.6 %
Net income attributable to B. Riley Financial, Inc.   $ 14,021       26.5 %   $ 248       1.2 %

 

Revenues.

 

The table below and the discussion that follows are based on how we analyze our business.

 

    Three Months Ended
March 31, 2017
    Three Months Ended
March 31, 2016
    Change  
    Amount     %     Amount     %     Amount     %  
                                     
Revenues - Serivces and Fees:                                                
Capital Markets segment   $ 17,723       33.5 %   $ 5,564       27.9 %   $ 12,159       218.5 %
Auction and Liquidation segment     13,996       26.5 %     6,907       34.6 %     7,089       102.6 %
Valuation and Appraisal segment     7,796       14.7 %     7,473       37.5 %     323       4.3 %
Principal Investments - United Online segment     13,303       25.1 %     -       n/m       13,303       n/m  
Subtotal     52,818       99.9 %     19,944       100.0 %     32,874       164.8 %
                                                 
Revenues - Sale of goods                                                
Auction and Liquidation     -       n/m       2       0.0 %     (2 )     n/m  
Principal Investments - United Online segment     79       0.1 %     -       n/m       79       n/m  
Subtotal     79       0.1 %     2       0.0 %     77       n/m  
                                                 
Total revenues   $ 52,897       100.0 %   $ 19,946       100.0 %   $ 32,951       165.2 %

 

 

n/m - Not applicable or not meaningful.

 

Total revenues increased $33.0 million to $52.9 million during the three months ended March 31, 2017 from $19.9 million during the three months ended March 31, 2016. The increase in revenues during the three months ended March 31, 2017 was primarily due to an increase in revenues from services and fees of $32.9 million and an increase in revenues from the sale of goods of $0.1 million. The increase in revenues from services and fees of $32.9 million in 2017 was primarily due to an increase in revenues of (a) $12.2 million in the capital markets segment, (b) $7.1 million in the auction and liquidation segment, (c) $0.3 million in the valuation and appraisal segment, and (d) $13.3 million in the principal investments - United Online segment from the acquisition of UOL on July 1, 2016. The increase in revenues from sale of goods of $0.1 million was primarily due to sale of certain products in the principal investments - United Online segment.

 

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Revenues from services and fees in the capital markets segment increased $12.2 million, to $17.7 million during the three months ended March 31, 2017 from $5.6 million during the three months ended March 31, 2016. The increase in revenues was primarily due to an increase in revenues of $7.4 million from investment banking fees, $2.6 million from commissions, fees and other income primarily earned from research, sales and trading, and wealth management services and $2.1 million from trading income. The increase in revenues from investment banking fees was primarily due to an increase in the number of investment banking transactions where we acted as an advisor in 2017 as compared to the same period in 2016. The increase in revenues from commissions, fees and other income primarily earned from research, sales and trading, and wealth management services was primarily due to an increase in fees and commissions earned from research, sales and trading and incentive management fees earned from our various funds we manage. The increase in revenues from trading income in 2017 was primarily due to an increase in income we earned from trading activities in our propriety trading account.

 

Revenues from services and fees in the auction and liquidation solutions increased $7.1 million, to $14.0 million during the three months ended March 31, 2017 from $6.9 million during the three months ended March 31, 2016. The increase in revenues of $7.1 million was primarily due to an increase in revenues of $9.6 million from services and fees from retail liquidation engagements, offset by a decrease in revenues of $2.5 million from services and fees in our wholesale and industrial auction division. The increase in revenues from services and fees from retail liquidation engagements was primarily due to an increase in the number of fee and commission based retail liquidation engagements for store closings and going-out-of-business sales in 2017 as compared to the same period in 2016. The decrease in revenues from services and fees in our wholesale and industrial division was primarily due to a decrease in the number of wholesale and industrial auction engagements in 2017 as compared to the same period in 2016.

 

Revenues from services and fees in the valuation and appraisal segment increased $0.3 million, or 4.3%, to $7.8 million during the three months ended March 31, 2017 from $7.5 million during the three months ended March 31, 2016. The increase in revenues was primarily due to increases of (a) $0.2 million related to appraisal engagements where we perform valuations of machinery and equipment and (b) $0.1 million related to appraisal engagements where we perform valuations of intellectual property and business valuations.

 

Revenues from services and fees in the principal investments - United Online segment of $13.3 million during the three months ended March 31, 2017 were the result of the acquisition of UOL on July 1, 2016.  These revenues include $10.7 million in services and fees primarily from customer paid accounts related to our Internet access and related subscription services and $2.6 million in advertising revenues from Internet display advertising and search related to our email and Internet access services. Over the past several years revenues from paid subscription services have declined year over year as a result of a decline in the number of paid subscribers for our services.  Management believes the decline in paid subscriber accounts is primarily attributable to the industry trends of consumers switching from dial-up Internet access to high speed Internet access such as cable and DSL.  Management expects revenues in the principal investments - United Online segment to continue to decline year over year.

 

Operating Expenses

 

Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment during the three months ended March 31, 2017 and 2016 are as follows:

 

    Three Months Ended March 31, 2017     Three Months Ended March 31, 2016  
                Principal                       Principal        
    Auction and     Valuation and     Investments -           Auction and     Valuation and     Investments -        
    Liquidation     Appraisal     United Online           Liquidation     Appraisal     United Online        
    Segment     Segment     Segment     Total     Segment     Segment     Segment     Total  
                                                 
Revenues - Services and fees   $ 13,996     $ 7,796     $ 13,303             $ 6,907     $ 7,473     $ -          
Direct cost of services     10,334       3,672       3,595     $ 17,601       3,418       3,265       -     $ 6,683  
                                                                 
Gross margin on services and fees   $ 3,662     $ 4,124     $ 9,708             $ 3,489     $ 4,208     $ -          
                                                                 
Gross margin percentage     26.2 %     52.9 %     73.0 %             50.5 %     56.3 %     n/m          

 

 

n/m - Not applicable or not meaningful.

 

 

Total direct costs increased $10.9 million, to $17.6 million during the three months ended March 31, 2017 from $6.7 million during the three months ended March 31, 2016. Direct costs of services increased by (a) $6.9 million in the auction and liquidation segment, (b) $0.4 million in the valuation and appraisal segment, and (c) $3.6 million in the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016. The increase in direct costs in the auction and liquidation segment was primarily due to an increase in the number of fee and commission type engagements in 2017 and compared to the same period in 2016. The increase in direct costs of services in the valuation and appraisal segment was primarily due to an increase in payroll and related expenses due to an increase headcount 2017 as compared to the same period in 2016.

 

Gross margin in the auction and liquidation segment for services and fees decreased to 26.2% of revenues during the three months ended March 31, 2017, as compared to 50.5% of revenues during the three months ended March 31, 2016. The decrease in the gross margin during the three months ended March 31, 2017 was primarily due to a change in the mix of fee and commission type engagements. The decrease in fee and commission income was primarily due to some of the fee and commission type engagements included certain hurdles that were not achieved until the second quarter of 2017.

 

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Gross margin in the valuation and appraisal segment for services and fees decreased to 52.9% of revenues during the three months ended March 31, 2017, as compared to 56.3% of revenues during the three months ended March 31, 2016. The decrease in gross margin is primarily due to an increase in payroll and related expenses during the three months ended March 31, 2017 as compared to same period in 2016.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the three months ended March 31, 2017 and 2016 were comprised of the following:

 

Selling, General and Administrative Expenses

 

    Three Months Ended
March 31, 2017
    Three Months Ended
March 31, 2016
    Change  
    Amount     %     Amount     %     Amount     %  
                                     
Capital Markets segment   $ 11,096       45.9 %   $ 6,195       53.5 %   $ 4,901       79.1 %
Auction and Liquidation segment     1,855       7.7 %     1,266       10.9 %     589       46.5 %
Valuation and Appraisal segment     2,124       8.8 %     2,148       18.5 %     (24 )     -1.1 %
Principal Investments - United Online segment     5,152       21.3 %     -       n/m       5,152       n/m  
Corporate and Other segment     3,925       16.3 %     1,987       17.1 %     1,938       97.5 %
Total selling, general & administrative expenses   $ 24,152       100.0 %   $ 11,596       100.0 %   $ 12,556       108.3 %

 

Total selling, general and administrative expenses increased $12.6 million, to $24.2 million during the three months ended March 31, 2017 from $11.6 million for the three months ended March 31, 2016. The increase was primarily due to an increase in selling, general and administrative expenses of (a) $4.9 million in the capital markets segment, (b) $0.6 million in the auction and liquidation segment, (c) $5.2 million in the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016, and (d) $1.9 million in corporate and other.

 

Capital Markets

 

Selling, general and administrative expenses in the capital markets segment increased by $4.9 million, or 79.1% to $11.1 million during the three months ended March 31, 2017 from $6.2 million during the three months ended March 31, 2016. The increase in expenses was primarily due to an increase in (a) payroll and related expenses of $4.6 million that included an additional increase in incentive compensation as a result of the increase in revenues from investment banking fees in 2017 as compared to the same period in 2016 discussed above, and (b) other general and administrative expenses of $0.3 million.

 

Auction and Liquidation

 

Selling, general and administrative expenses in the auction and liquidation segment increased $0.6 million, or 46.5%, to $1.9 million during the three months ended March 31, 2017 from $1.3 million for the three months ended March 31, 2016. The increase in expenses was primarily due to an increase in (a) bad debt expense in the amount of $0.2 million, (b) losses on foreign currency translation amounts in the amount of $0.3 million related to our Australian and European operations, and (c) other general and administrative expenses of $0.1 million.

 

Valuation and Appraisal

 

Selling, general and administrative expenses in the valuation and appraisal segment were $2.1 million during each of the three month periods ended March 31, 2017 and 2016.

 

Principal Investments - United Online

 

Selling, general and administrative expenses in the principal investments - United Online segment of $5.2 million during the three months ended March 31, 2017 were the result of the acquisition of UOL on July 1, 2016. These expenses include $1.3 million of technology and development expenses, $0.3 million of sales and marketing expenses, $2.2 million of general and administrative expenses and $1.4 million of amortization of intangibles. Technology and development expenses include expenses for product development, maintenance of existing software, technology and websites. Sales and marketing expenses include expenses associated personnel and overhead-related expenses for marketing, customer service, and advertising sales personnel to acquire and retain paid subscribers. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. General and administrative expenses consist of personnel-related expenses for management in the principal investments - United Online segment, facilities, internal customer support personnel and personnel associated with operating our corporate systems. Amortization of intangibles includes amortization expense related to customer lists, advertising relationships, domain names and internally developed software.

 

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Corporate and Other

 

Selling, general and administrative expenses for corporate and other increased $1.9 million, to $3.9 million during the three months ended March 31, 2017 from $2.0 million for the three months ended March 31, 2016. The increase was primarily due to an increase in (a) payroll and related expenses of $0.8 million in 2017 as compared to the same period in 2016, (b) an increase in professional fees and other general corporate expenses of $0.3 million, and (c) transactions costs of $0.9 million incurred for professional fees that primarily related to the pending acquisition of FBR during the three months ended March 31, 2017 as discussed in note 15 to our condensed consolidated financial statements.

 

Restructuring Charge.  During the three months ended March 31, 2017, we incurred a restructuring charge of $0.4 million. There was no restructuring charge during the three months ended March 31, 2016. The restructuring charge in 2017 was primarily comprised of employee termination costs related to a reduction in personnel in the principal investments – United Online segment of our operations.

 

Other Income (Expense). Other income included interest income of $0.1 million during the three months ended March 31, 2017 and less than $0.1 million during the three months ended March 31, 2016.   Interest expense was $0.8 million during the three months ended March 31, 2017 as compared to $0.1 million during the three months ended March 31, 2016. The increase in interest expense during the three months ended March 31, 2017 was primarily due to (a) interest expense of $0.2 million incurred on the acquisition consideration payable related to our acquisition of UOL on July 1, 2016 as a result of the Quadre Litigation and (b) interest expense of $0.6 million incurred in 2016 from the issuance of senior notes in November 2016.

 

Income Before Income Taxes. Income before income taxes increased $8.5 million, to $10.0 million during the three months ended March 31, 2017 from $1.5 million during the three months ended March 31, 2016. The increase in income before income taxes was primarily due to an increase in operating income of (a) $6.0 million in our capital markets segment and (b) $4.2 million of income generated from our principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016, offset by (a) a decrease in operating income of $0.4 million in our auction and liquidation segment and $0.1 million in our valuation and appraisal segment, (b) an increase in corporate overhead of $2.0 million, and (c) an increase in net interest expense of $0.5 million.

 

Benefit (Provision) For Income Taxes. Benefit for taxes was $3.8 million during the three months ended March 31, 2017 compared to a provision for income taxes $0.2 million during the three months ended March 31, 2016. The benefit for income taxes during the three months ended March 31, 2017 included a tax benefit of $8.4 million related to the Company’s election to treat the acquisition of UOL as a taxable business combination for income tax purposes in accordance with Internal Revenue Code Section 338(g) as more fully discussed in note 8 in the condensed consolidated financial statements. The effective income tax rate was a benefit of 38.3% for the three months ended March 31, 2017 as compared to a provision for income taxes at a income tax rate of 10.8% for the three months ended March 31, 2016.

 

Net (Loss) Income Attributable to Noncontrolling Interest. Net (loss) income attributable to noncontrolling interests represents the proportionate share of net (loss) income generated by Great American Global Partners, LLC, in which the Company has a 50% membership interest, that we do not own. The net loss attributable to noncontrolling interests was $0.1 million during the three months ended March 31, 2017 compared to net income attributable to noncontrolling interests of $1.1 million during the three months ended March 31, 2016.

 

Net Income Attributable to the Company. Net income attributable to the Company for the three months ended March 31, 2017 was $14.0 million, an increase of $13.8 million, from net income attributable to the Company of $0.2 million for the three months ended March 31, 2016. The increase in net income during the three months ended March 31, 2017 as compared to the same period in 2016 was primarily due to (a) an increase in operating income in the capital markets segment, (b) operating income from the principal investments - United Online segment as a result of the acquisition of UOL on July 1, 2016 as discussed above, and (c) the impact of the benefit from income taxes as discussed above.

 

Liquidity and Capital Resources

 

Our operations are funded through a combination of existing cash on hand, cash generated from operations, proceeds from the issuance of common stock, and borrowings under our senior notes payable, credit facility and special purposes financing arrangements.  On May 10, 2016, we completed a secondary offering of 2,420,980 shares of common stock at a price to the public of $9.50 per share.  The net proceeds from the offering were $22.8 million after deducting underwriting commissions and other offering expenses.  On November 2, 2016, the Company issued $28.75 million of Senior Notes, interest payable quarterly at 7.5% commencing January 31, 2017. The Senior Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuance of the Senior Notes, the Company received net proceeds of $27.7 million (after underwriting commissions and fees of $1.1 million). During the three months ended March 31, 2017 and year ended December 31, 2016 we generated net income of $14.0 million and $21.5 million, respectively. Our cash flows and profitability are impacted by the number and size of retail liquidation and capital markets engagements performed on a quarterly and annual basis.

 

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As of March 31, 2017, we had $71.5 million of unrestricted cash, $0.5 million of restricted cash, net investments in securities of $39.4 million, and $27.8 million of borrowings outstanding from the issuance of our Senior Notes Payable in November 2016. We believe that our current cash and cash equivalents, funds available under our asset based credit facility and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.

 

From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. During the three months ended March 31, 2017 and year ended December 31, 2016, we paid cash dividends of $5.0 million and $5.3 million, respectively, on our common stock.  While it is the Board’s current intention to make regular dividend payments of $0.08 per share each quarter and special dividend payments dependent upon exceptional circumstances from time to time, o ur Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends or repurchases of our common stock will be made at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant by our Board of Directors.

 

Our principal sources of liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds available under revolving credit facilities and special purpose financing arrangements.

 

Cash Flow Summary

 

    Three Months Ended  
    March 31,  
    2017     2016  
    (Dollars in thousands)  
Net cash provided by (used in):                
Operating activities   $ (38,855 )   $ (1,045 )
Investing activities     3,120       (19 )
Financing activities     (6,841 )     (2,187 )
Effect of foreign currecy on cash     2,012       25  
Net decrease in cash and cash equivalents   $ (40,564 )   $ (3,226 )

 

Cash used in operating activities was $38.9 million for the three months ended March 31, 2017, an increase of $37.9 million, from cash used in operating activities of $1.0 million for the three months ended March 31, 2016. Cash used in operating activities for the three months ended March 31, 2017 includes net income of $13.9 million adjusted for noncash items and changes in operating assets and liabilities. The increase in cash used in operating activities of $37.9 million was primarily due to (a) non-cash charges and other items of $6.6 million which included depreciation and amortization of $2.0 million, sh are based compensation $0.9 million and deferred income taxes of $(9.1) million, and (b) changes in operating assets and liabilities that resulted in a decrease of $46.2 million in cash flows from operations during the three months ended March 31, 2017 as compared to the same period in 2016, offset by an increase in net income of $12.5 million to $13.9 million during the three months ended March 31, 2017, from $1.4 million during the comparable period in 2016.

 

Cash provided by investing activities was $3.1 million during the three months ended March 31, 2017 compared to cash used in investing activities of less than $0.1 million for the three months ended March 31, 2016. During the three months ended March 31, 2017, cash provided by investing activities consisted of (a) a decrease in restricted cash of $2.8 million that primarily related to a retail liquidation engagement we completed in December 2016 in Australia and (b) proceeds of $0.5 million from the sale of intangible assets, offset by the use of $0.2 million of cash to purchase of property and equipment. During the three months ended March 31, 2016, cash used in investing activities was primarily comprised of the purchase of property and equipment.

 

Cash used in financing activities was $6.8 million during the three months ended March 31, 2017 compared to $2.2 million during the three months ended March 31, 2016. During the three months ended March 31, 2017, cash used in financing activities primarily consisted of (a) $1.3 million payment for the second anniversary of contingent consideration in connection with the acquisition of MK Capital, (b) $5.0 of dividends paid on our common stock, and (c) $0.6 million of distributions to noncontrolling interests. During the three months ended March 31, 2016, cash used in financing activities consisted of (a) $1.3 million payment for the first anniversary of contingent consideration in connection with the acquisition of MK Capital, (b) $0.3 million used to repay a revolving line of credit, and (c) $0.7 million of distributions to noncontrolling interests.

 

  31  

 

 

Contingent Consideration

 

In connection with the acquisition of MK Capital on February 2, 2015 for a total purchase price of $9.4 million, at closing $2.5 million of the purchase price was paid in cash and 333,333 newly issued shares of our common stock with a fair value of $2.7 million were issued to the former members of MK Capital. The purchase agreement also required the payment of contingent consideration in the form of future cash payments with a fair value of $2.2 million and the issuance of shares of common stock with a fair value of $2.0 million. The contingent cash consideration of $2.2 million payable to the former members of MK Capital represents the fair value of the contingent cash consideration of $1.25 million due on the first anniversary date of the closing (February 2, 2016) and a final cash payment of $1.25 million due on the second anniversary date of the closing (February 2, 2017), with imputed interest expense calculated at 8% per annum. The contingent stock consideration of $2.0 million was comprised of the issuance of 166,667 shares of common stock on the first anniversary date of the closing (February 2, 2016) and 166,666 shares of common stock on the second anniversary date of the closing (February 2, 2017). The contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second anniversary periods. The contingent cash consideration for such first anniversary period of $1.25 million was paid and contingent stock consideration for such first anniversary period of 166,667 common shares was issued to the former members of MK Capital on February 2, 2016. The contingent cash consideration for such second anniversary period of $1.25 million was paid and contingent stock consideration for such second anniversary period of 166,666 common shares was issued to the former members of MK Capital on February 2, 2017.

 

Credit Agreements

 

On April 21, 2017, we amended the credit agreement governing our asset based credit facility with Wells Fargo Bank, National Association to increase the maximum borrowing limit from $100.0 million to $200.0 million. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. From time to time, we utilize this credit facility  to fund costs and expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue letters of credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets, we are permitted to borrow up to $200.0 million under the credit facility, less the aggregate principal amount borrowed under the UK Credit Agreement (if in effect). Borrowings under the credit facility are only made at the discretion of the lender and are generally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related 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. On March 19, 2014, we entered into a separate credit agreement (a “UK Credit Agreement”) with an affiliate of Wells Fargo Bank, National Association which provides for the financing of transactions in the United Kingdom. The facility allows us to borrow up to 50.0 million British Pounds. Any borrowings on the UK Credit Agreement reduce the availability on the asset based $200.0 million credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the credit agreement governing the credit facility. On October 5, 2016 we amended the Credit Agreement to add our Canadian subsidiary in order to facilitate borrowings to fund retail liquidation transactions in Canada. The credit facility is secured by the proceeds received for services rendered in connection with the 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, if any. 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 liquidation engagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowings on an engagement-by- engagement basis. The credit agreement governing the credit facility contains certain covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. At March 31, 2017 and December 31, 2016, there were no borrowings or letters of credits outstanding under the credit facility.

 

On April 13, 2017, UOL, in the capacity as borrower entered into a credit agreement (the “UOL Credit Agreement”) with the Banc of California, N.A. in the capacity as agent and lender. The UOL Credit Agreement provides for a revolving credit facility under which UOL may borrow (or request the issuance of letters of credit) up to $20.0 million which amount is reduced by $1.5 million commencing on June 30, 2017 and on the last day of each calendar quarter thereafter. The final maturity date is April 13, 2020.  The proceeds of the UOL Credit Agreement can be used (a) for working capital and general corporate purposes and/or (b) to pay dividends or permitted tax distributions to its parent company, subject to the terms of the UOL Credit Agreement. Borrowings under the UOL Credit Agreement will bear interest at a rate equal to (a) (i) the base rate (the greater of the federal funds rate plus one half of one percent (0.5%), or the prime rate) for U.S. dollar loans or (ii) at UOL’s option, the LIBOR Rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two percent (2%) to three and one-half percent (3.5%) per annum, based upon UOL’s ratio of funded indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the preceding four (4) fiscal quarters. Interest payments are to be made each one, three or six months for Eurodollar loans, and quarterly for U.S. dollar loans.

 

  32  

 

 

UOL paid a commitment fee equal to 1.00% of the aggregate commitments upon the closing of the UOL Credit Agreement. The UOL Credit Agreement also provides for an unused line fee payable quarterly, in arrears, in an amount equal to: (a) 0.50% per annum times the amount of the unused revolving commitment that is less than or equal to the amount of the cash maintained in accounts with the agent (as depositary bank); plus (b) 1.00% per annum times the amount of the unused revolving commitment that is greater than the amount of the cash maintained in accounts with the agent (as depositary bank). Any amounts outstanding under the UOL Credit Facility are due at maturity.

 

Senior Note Offering

 

On November 2, 2016, we issued $28.75 million of Senior Notes, interest payable quarterly at 7.5% commencing January 31, 2017. The Senior Notes are unsecured and due and payable in full on October 31, 2021. In connection with the issuance of the Senior Notes, we received net proceeds of $27.7 million (after underwriting commissions and fees of $1.1 million). In connection with the offering of the Senior Notes, members of our management and Board of Directors purchased $2.7 million or 9.5% of the Senior Notes we offered.

 

Other Borrowings

 

In August 2016, we formed GA Retail Investments, L.P., a Delaware limited partnership, ( the “Partnership”) which required us to contribute $15.4 million. The Partnership borrowed $80.0 million Australian dollars from a third party investor in connection with its formation and the $80.0 million Australian dollars was exchanged for a 50% special limited partnership interest in the Partnership. The Partnership was formed to provide funding for the retail liquidation engagement we entered into to liquidate the Masters Home Improvement stores. The $80.0 million Australian participating note payable was non-interest bearing, shares in 50% of the all of the profits and losses of the Partnership and the principal amount was repaid in December 2016 upon the completion of the going-out-of-business sale of Masters Home Improvement stores as defined in the partnership agreement. At March 31, 2017 and December 31, 2016, $0.4 million and $10.0 million, respectively, was payable in accordance with the participating note payable share of profits and is included net income attributable to noncontrolling interests and amounts due to related parties and partners in the condensed consolidated financial statements.

 

Off Balance Sheet Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements and do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, established for the purpose of facilitating off-balance sheet arrangements. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

 

Contractual Obligations

 

On February 17, 2017, we entered into the Merger Agreement to acquire FBR pursuant to the Merger. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of FBR common stock, excluding certain specified shares, will be converted into the right to receive 0.671 of a share of our common stock. We currently estimate that approximately 5.3 million shares of our common stock will be issued in connection with this transaction, with an assumed value of approximately $93.0 million based on the closing price of our common stock on February 17, 2017. It is anticipated that the Merger will close during the second quarter of 2017.

 

New Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02:   Leases (Topic 842)   (“ASU 2016-02”) . The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company in fiscal year 2019, but early application is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

 

  33  

 

 

In May 2014, the FASB issued ASU No. 2014-09,   Revenue from Contracts with Customers (Topic 606) .     Under this ASU and subsequently issued amendments, revenue are recognized at the time when goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. This standard sets forth a five-step revenue recognition model which replaces the current revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance.  This standard is effective in the first quarter of 2018 for public companies and requires either a retrospective or a modified retrospective approach to adoption.  The Company believes the adoption of this standard may impact engagements that contain performance-based arrangements in which a success or completion fee is earned when and if certain predefined outcomes occur and engagements and contracts where services are provided under fixed-fees arrangements that have multiple performance obligations. The Company has not completed an assessment and has not yet determined whether the impact of the adoption of this standard on the consolidated financial statements will be material. The Company will adopt this standard on January 1, 2018 but have not concluded on a transition approach. The Company expects to complete the assessment process, including selecting a transition method for adoption during third quarter of 2017.

 

In March 2016, the FASB issued ASU No. 2016-08,   Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . The amendments in this update do not change the core principle of the guidance as noted above at ASU No. 2014-09. The amendments clarify the implementation guidance on principal versus agent considerations. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU No. 2014-09. The Company has not yet adopted this update and is currently evaluating the impact it may have on its 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 , but early application is permitted. The Company has not yet adopted this update and is currently evaluating the impact it may have on its financial condition and results of operations.

 

In January 2017, the FASB issued 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

  34  

 

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoing evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2017 our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes to our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitation on Effectiveness of Controls

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

  35  

 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we are involved in litigation which arises in the normal course of our business operations. Except as set forth below, we believe that we are not currently a party to any proceedings the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on our financial position or results of operations:

 

On January 19, 2015, a complaint (the “Complaint”) was filed against Great American Group, LLC, in the United States Bankruptcy Court for the District of Delaware (“Court”), adversary proceeding 15-50057 (MFW), by 9586 LLC asserting claims arising out of the Great American Group, LLC’s activities with respect to an auction of equipment in Colorado in October 2012.  This proceeding is pending in the bankruptcy cases of Abound Solar Manufacturing, LLC and certain of its affiliates (the “Debtors”), case no. 12-11974.  The Complaint asserts claims for breach of contract, negligence, fraud, unjust enrichment, negligent misrepresentation, nuisance, and violations of the Colorado Consumer Protection Act (“CCPA”).  In the Complaint, the plaintiff, a former landlord of the Debtors, generally alleges that Great American Group, LLC and a joint venture partner were responsible for contamination while performing services in connection with an auction of solar machinery, and is seeking approximately $9.7 million in damages.  Great American Group, LLC filed a Motion to Dismiss the Complaint and on March 1, 2016, the Court issued its Opinion on Great American Group, LLC’s Motion to Dismiss dismissing the unjust enrichment claim and the CCPA claim, but denied the motion with respect to the other claims. In April 2016, Great American Group, LLC filed an answer with the Court denying the allegations in the complaint. In December 2016, the parties exchanged initial disclosures.  In January 2017, the parties filed a proposed scheduling order with the Court. Discovery in the action is currently proceeding. We intend to continue to vigorously defend this action which we consider to be meritless. An adverse judgment in this matter could materially and adversely affect the Company and its financial condition.

 

On July 5, 2016, Quadre Investments LP (“Quadre”) filed a petition with the Delaware Court of Chancery (the “Chancery Court”) seeking a determination of fair value for 943,769 shares of common stock of UOL in connection with the acquisition of UOL by the Company (the “Quadre Litigation”). Such transaction gave rise to appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware. As a result, Quadre is entitled to petition the Chancery Court to receive fair value as determined by the Chancery Court. We do not believe that the fair value of each share exceeds $11.00 per share, the merger consideration paid to UOL stockholders pursuant to the merger agreement in such acquisition, and we intend to contest the petition. Discovery in the case has commenced. As of March 31, 2017, we have recorded approximately $10.4 million of acquisition consideration payable and approximately $0.5 million of accrued interest payable in connection with the Quadre Litigation.

 

On March 10, 2017, UOL received a letter from PeopleConnect, Inc., the successor entity to Classmates, Inc., a former subsidiary of UOL (“PeopleConnect”), regarding a notice of investigation received from the Consumer Protection Divisions of the District Attorneys’ offices of four California counties (“California DAs”).  The California DAs suggest that PeopleConnect may be in violation of California codes relating to unfair competition, false or deceptive advertising, and auto-renewal practices (the “Claims”).  PeopleConnect asserts that the Claims are indemnifiable claims under the purchase agreement between UOL and the buyer of Classmates, Inc.   At the present time, any potential liability and damages cannot be estimated.

 

Item 1A. Risk Factors.

 

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 10, 2017. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in the Annual Report on Form 10-K for the year ended December 31, 2016 could materially affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. There were no material changes to the risk factors during the three months ended March 31, 2017, compared to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

  36  

 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits filed as part of this Quarterly Report are listed in the index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.

 

  37  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     
    B. Riley Financial, Inc.
   
Date: May 10, 2017 By:

/ s / PHILLIP J. AHN

    Name: Phillip J. Ahn
    Title: Chief Financial Officer and Chief Operating Officer
    (Principal Financial Officer)

 

  38  

 

 

Exhibit Index

 

Exhibit No.   Description
     
  2.1(1)+   Agreement and Plan of Merger, dated February 17, 2017, by and between the registrant and FBR & Co.
31.1*   Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
31.2*   Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934
32.1*   Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification required by 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.1*   Credit Agreement, dated as of April 13, 2017, by and among United Online, Inc., the subsidiaries of United Online, Inc. from time to time party thereto and Banc of California, N.A.
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document

 

* Filed herewith.

These exhibits are being “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

+ Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedules to the Securities and Exchange Commission upon request.

(1) Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the SEC on February 21, 2017.

 

 

 

 

Exhibit 10.1

 

 

 

 

 

CREDIT AGREEMENT

 

among

 

UNITED ONLINE, INC. ,

as the Borrower,

 

THE SUBSIDIARIES OF THE BORROWER FROM TIME TO TIME PARTY HERETO ,

as the Secured Guarantors,

 

BANC OF CALIFORNIA, N.A. ,

as Sole Lead Arranger and Sole Book Manager
and as Administrative Agent, Swingline Lender and L/C Issuer,

 

and

 

THE LENDERS PARTY HERETO

 

Dated as of April 13, 2017

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
ARTICLE I  DEFINITIONS AND ACCOUNTING TERMS 1
1.01 Defined Terms 1
1.02 Other Interpretive Provisions 32
1.03 Accounting Terms 33
1.04 Rounding 34
1.05 Times of Day 34
1.06 Letter of Credit Amounts 34
1.07 UCC Terms 34
1.08 Rates 35
     
ARTICLE II  COMMITMENTS AND CREDIT EXTENSIONS 35
2.01 Revolving Borrowings 35
2.02 Borrowings, Conversions and Continuations of Loans 35
2.03 Letters of Credit 37
2.04 Swingline Loans 45
2.05 Optional Prepayments 48
2.06 Termination or Reduction of Commitments 48
2.07 Repayment of Loans 49
2.08 Interest and Default Rate 49
2.09 Fees 50
2.10 Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate 51
2.11 Evidence of Debt 51
2.12 Payments Generally; Administrative Agent’s Clawback 52
2.13 Sharing of Payments by Lenders 54
2.14 Cash Collateral 55
2.15 Defaulting Lenders 56
     
ARTICLE III  TAXES, YIELD PROTECTION AND ILLEGALITY 58
3.01 Taxes 58
3.02 Illegality 62
3.03 Inability to Determine Rates 63
3.04 Increased Costs; Reserves on Eurodollar Rate Loans 63
3.05 Compensation for Losses 65
3.06 Designation of a Different Lending Office 66
3.07 Survival 66
     
ARTICLE IV  CONDITIONS PRECEDENT TO CREDIT EXTENSIONS 66
4.01 Conditions of Initial Credit Extension 66
4.02 Conditions to all Credit Extensions 69
     
ARTICLE V  REPRESENTATIONS AND WARRANTIES 69
5.01 Existence, Qualification and Power 69
5.02 Authorization; No Contravention 70
5.03 Governmental Authorization; Other Consents 70
5.04 Binding Effect 70

 

  i

 

 

5.05 Financial Statements; No Material Adverse Effect 70
5.06 Litigation 71
5.07 No Default 71
5.08 Ownership of Property 71
5.09 Environmental Compliance 71
5.10 Insurance 72
5.11 Taxes 72
5.12 ERISA Compliance 72
5.13 Margin Regulations; Investment Company Act. 73
5.14 Disclosure 73
5.15 Compliance with Laws 74
5.16 Solvency 74
5.17 Casualty, Etc. 74
5.18 Sanctions Concerns 74
5.19 Responsible Officers 74
5.20 Subsidiaries; Equity Interests; Loan Parties 74
5.21 Collateral Representations 75
5.22 [Reserved] 76
5.23 [Reserved] 77
5.24 Intellectual Property; Licenses, Etc. 77
5.25 Labor Matters 77
     
ARTICLE VI  AFFIRMATIVE COVENANTS 77
6.01 Financial Statements 77
6.02 Certificates; Other Information 79
6.03 Notices 81
6.04 Payment of Obligations 82
6.05 Preservation of Existence, Etc. 82
6.06 Maintenance of Properties 82
6.07 Maintenance of Insurance 83
6.08 Compliance with Laws 83
6.09 Books and Records 83
6.10 Inspection Rights 83
6.11 Use of Proceeds 84
6.12 Material Contracts 84
6.13 Covenant to Guarantee Obligations 84
6.14 Covenant to Give Security 85
6.15 Further Assurances 86
6.16 [Reserved] 86
6.17 Compliance with Terms of Leaseholds 86
6.18 Compliance with Environmental Laws 86
     
ARTICLE VII  NEGATIVE COVENANTS 87
7.01 Liens 87
7.02 Indebtedness 88
7.03 Investments 89
7.04 Fundamental Changes 90
7.05 Dispositions 90

 

  ii

 

 

7.06 Restricted Payments 91
7.07 Change in Nature of Business 92
7.08 Transactions with Affiliates 92
7.09 Burdensome Agreements 92
7.10 Use of Proceeds 93
7.11 Financial Covenants 93
7.12 [Reserved] 94
7.13 Amendments of Organization Documents; Fiscal Year; Legal Name, State of Formation; Form of Entity and Accounting Changes 94
7.14 Sale and Leaseback Transactions 94
7.15 Prepayments, Etc. of Indebtedness 95
7.16 [Reserved] 95
7.17 [Reserved] 95
7.18 Sanctions 95
     
ARTICLE VIII  EVENTS OF DEFAULT AND REMEDIES 95
8.01 Events of Default 95
8.02 Remedies upon Event of Default 97
8.03 Application of Funds 98
     
ARTICLE IX  ADMINISTRATIVE AGENT 99
9.01 Appointment and Authority 99
9.02 Rights as a Lender 100
9.03 Exculpatory Provisions 100
9.04 Reliance by Administrative Agent 101
9.05 Delegation of Duties 101
9.06 Resignation of Administrative Agent 102
9.07 Non-Reliance on Administrative Agent and Other Lenders 103
9.08 No Other Duties, Etc. 103
9.09 Administrative Agent May File Proofs of Claim; Credit Bidding 103
9.10 Collateral and Guaranty Matters 104
9.11 Secured Cash Management Agreements and Secured Hedge Agreements 105
     
ARTICLE X  CONTINUING GUARANTY 106
10.01 Guaranty 106
10.02 Rights of Lenders 106
10.03 Certain Waivers 106
10.04 Obligations Independent 107
10.05 Subrogation 107
10.06 Termination; Reinstatement 107
10.07 Stay of Acceleration 107
10.08 Condition of Borrower 108
10.09 Appointment of Borrower 108
10.10 Right of Contribution 108
10.11 Keepwell 108
     
ARTICLE XI  MISCELLANEOUS 109
11.01 Amendments, Etc. 109
11.02 Notices; Effectiveness; Electronic Communications 111

 

  iii

 

 

11.03 No Waiver; Cumulative Remedies; Enforcement 113
11.04 Expenses; Indemnity; Damage Waiver 114
11.05 Payments Set Aside 116
11.06 Successors and Assigns 116
11.07 Treatment of Certain Information; Confidentiality 120
11.08 Right of Setoff 122
11.09 Interest Rate Limitation 122
11.10 Counterparts; Integration; Effectiveness 122
11.11 Survival of Representations and Warranties 123
11.12 Severability 123
11.13 Replacement of Lenders 123
11.14 Governing Law; Jurisdiction; Etc. 124
11.15 Waiver of Jury Trial 125
11.16 Subordination 127
11.17 No Advisory or Fiduciary Responsibility 127
11.18 Electronic Execution of Assignments and Certain Other Documents 128
11.19 USA PATRIOT Act Notice 128

 

  iv

 

 

BORROWER PREPARED SCHEDULES

 

Schedule 1.01(c) Responsible Officers
Schedule 5.10 Insurance
Schedule 5.12 Pension Plans
Schedule 5.20(a) Subsidiaries, Joint Ventures, Partnerships and Other Equity Investments
Schedule 5.20(b) Loan Parties
Schedule 5.21(b)(i) Intellectual Property
Schedule 5.21(b)(ii) Internet Domain Names
Schedule 5.21(c) Documents, Instrument, and Tangible Chattel Paper
Schedule 5.21(d)(i) Deposit Accounts & Securities Accounts
Schedule 5.21(d)(ii) Electronic Chattel Paper & Letter-of-Credit Rights
Schedule 5.21(e) Commercial Tort Claims
Schedule 5.21(f) Pledged Equity Interests
Schedule 5.21(g)(i) Other Properties
Schedule 5.21(h) Material Contracts
Schedule 7.01 Existing Liens
Schedule 7.02 Existing Indebtedness
Schedule 7.03 Existing Investments
Schedule 7.05(j) Dormant or Immaterial Subsidiaries
Schedule 7.05(k) Domain Names Subject to Disposition
Schedule 7.08 Affiliate Transactions
Schedule 11.06(b) Non-Assignment Persons

 

ADMINISTRATIVE AGENT PREPARED SCHEDULES

 

Schedule 1.01(a) Certain Addresses for Notices
Schedule 1.01(b) Initial Commitments and Applicable Percentages

 

EXHIBITS

 

Exhibit A Form of Administrative Questionnaire
Exhibit B Form of Assignment and Assumption
Exhibit C Form of Compliance Certificate
Exhibit D Form of Joinder Agreement
Exhibit E Form of Loan Notice
Exhibit F [Reserved]
Exhibit G Form of Revolving Note
Exhibit H Form of Secured Party Designation Notice
Exhibit I Form of Solvency Certificate
Exhibit J Form of Swingline Loan Notice
Exhibit K [Reserved]
Exhibit L Form of Officer’s Certificate
Exhibit M Forms of U.S. Tax Compliance Certificates
Exhibit N Form of Funding Indemnity Letter
Exhibit O Form of Landlord Waiver
Exhibit P Form of Financial Condition Certificate
Exhibit Q Form of Authorization to Share Insurance Information
Exhibit R Form of Notice of Loan Prepayment

 

  v

 

 

CREDIT AGREEMENT

 

This CREDIT AGREEMENT is entered into as of April 13, 2017, among UNITED ONLINE, INC., a Delaware corporation (the “ Borrower ”), the Secured Guarantors (defined herein), the Lenders (defined herein), and BANC OF CALIFORNIA, N.A., as Administrative Agent, Swingline Lender and L/C Issuer.

 

PRELIMINARY STATEMENTS

 

WHEREAS , the Loan Parties (as hereinafter defined) have requested that the Lenders, the Swingline Lender and the L/C Issuer make loans and other financial accommodations to the Loan Parties in an aggregate amount of up to $20,000,000.

 

WHEREAS , the Lenders, the Swingline Lender and the L/C Issuer have agreed to make such loans and other financial accommodations to the Loan Parties on the terms and subject to the conditions set forth herein.

 

NOW THEREFORE , in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:

 

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

 

1.01          Defined Terms .

 

As used in this Agreement, the following terms shall have the meanings set forth below:

 

Acquisition ” means the acquisition, whether through a single transaction or a series of related transactions, of (a) a majority of the Voting Stock or other controlling ownership interest in another Person (including the purchase of an option, warrant or convertible or similar type security to acquire such a controlling interest at the time it becomes exercisable by the holder thereof), whether by purchase of such equity or other ownership interest or upon the exercise of an option or warrant for, or conversion of securities into, such equity or other ownership interest, or (b) assets of another Person which constitute all or substantially all of the assets of such Person or of a division, line of business or other business unit of such Person.

 

Additional Secured Obligations ” means (a) all obligations arising under Secured Cash Management Agreements and Secured Hedge Agreements and (b) all reasonable and documented out-of-pocket costs and expenses incurred in connection with enforcement and collection of the foregoing, including the reasonable and documented fees, charges and disbursements of external counsel, in each case whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding; provided that Additional Secured Obligations of a Loan Party shall exclude any Excluded Swap Obligations with respect to such Loan Party.

 

 

 

 

Administrative Agent ” means Banc of California in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.

 

Administrative Agent’s Office ” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 1.01(a) , or such other address or account as the Administrative Agent may from time to time notify the Borrower and the Lenders.

 

Administrative Questionnaire ” means an Administrative Questionnaire in substantially the form of Exhibit A or any other form approved by the Administrative Agent.

 

Affiliate ” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

 

Aggregate Commitments ” means the Commitments of all the Lenders.

 

Agreement ” means this Credit Agreement.

 

Applicable Percentage ” means in respect of the Revolving Facility, with respect to any Revolving Lender at any time, the percentage (carried out to the ninth decimal place) of the Revolving Facility represented by such Revolving Lender’s Revolving Commitment at such time, subject to adjustment as provided in Section 2.15. If the Commitment of all of the Revolving Lenders to make Revolving Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02, or if the Revolving Commitments have expired, then the Applicable Percentage of each Revolving Lender in respect of the Revolving Facility shall be determined based on the Applicable Percentage of such Revolving Lender in respect of the Revolving Facility most recently in effect, giving effect to any subsequent assignments. The Applicable Percentage of each Lender is set forth opposite the name of such Lender on Schedule 1.01(b) or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto.

 

Applicable Rate ” means, for any day, the rate per annum set forth below opposite the applicable Level then in effect (based on the Consolidated Total Funded Debt Ratio), it being understood that the Applicable Rate for (a) Revolving Loans that are Base Rate Loans shall be the percentage set forth under the column “Base Rate”, (b) Revolving Loans that are Eurodollar Rate Loans shall be the percentage set forth under the column “Eurodollar Rate & Letter of Credit Fee”, and (c) the Letter of Credit Fee shall be the percentage set forth under the column “Eurodollar Rate & Letter of Credit Fee”:

 

Applicable Rate
Level   Consolidated Total
Funded Debt Ratio
  Eurodollar Adjusted Rate
& Letter of Credit Fee
    Base Rate  
1   ˃ 0.50:1.00     3.50 %     2.50 %
2   ≤ 0.50:1.00     3.00 %     2.00 %

 

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Any increase or decrease in the Applicable Rate resulting from a change in the Consolidated Total Funded Debt Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b); provided , however , that if a Compliance Certificate is not delivered when due in accordance with such Section, then, upon the request of the Required Lenders, Pricing Level 1 shall apply, in each case as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and in each case shall remain in effect until the first Business Day following the date on which such Compliance Certificate is delivered.

 

Notwithstanding anything to the contrary contained in this definition, (a) the determination of the Applicable Rate for any period shall be subject to the provisions of Section 2.10(b) and (b) the initial Applicable Rate shall be set forth in Level 1 until the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b) for the second full fiscal quarter to occur following the Closing Date to the Administrative Agent. Any adjustment in the Applicable Rate shall be applicable to all Credit Extensions then existing or subsequently made or issued.

 

Applicable Revolving Percentage ” means with respect to any Revolving Lender at any time, such Revolving Lender’s Applicable Percentage in respect of the Revolving Facility at such time.

 

Appropriate Lender ” means, at any time, (a) with respect to any Facility, a Lender that has a Commitment with respect to such Facility or holds a Loan under such Facility at such time, (b) with respect to the Letter of Credit Sublimit, (i) the L/C Issuer and (ii) if any Letters of Credit have been issued pursuant to Section 2.03, the Revolving Lenders and (c) with respect to the Swingline Sublimit, (i) the Swingline Lender and (ii) if any Swingline Loans are outstanding pursuant to Section 2.04(a), the Revolving Lenders.

 

Approved Fund ” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

 

Arranger ” means Banc of California, in its capacity as sole lead arranger and sole book manager.

 

Assignment and Assumption ” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 11.06(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit B or any other form (including electronic documentation generated by MarkitClear or other electronic platform) approved by the Administrative Agent.

 

Attributable Indebtedness ” means, on any date, (a) in respect of any Capitalized Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease or other agreement or instrument were accounted for as a Capitalized Lease.

 

Audited Financial Statements ” means the audited Consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal year ended December 31, 2015, and the related Consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year of the Borrower and its Subsidiaries, including the notes thereto.

 

Authorization to Share Insurance Information ” means the authorization substantially in the form of Exhibit Q (or such other form as required by each of the Loan Party’s insurance companies).

 

Availability Period ” means in respect of the Revolving Facility, the period from and including the Closing Date to the earliest of (i) the Maturity Date for the Revolving Facility, (ii) the date of termination of the Revolving Commitments pursuant to Section 2.06, and (iii) the date of termination of the Commitment of each Revolving Lender to make Revolving Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02.

 

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Banc of California ” means Banc of California, N.A., and its successors and assigns.

 

Base Rate ” for any day, a rate per annum equal to the greater of (x) the Federal Funds Effective Rate in effect on such day plus ½ of 1% per annum, and (y) the rate of interest per annum as published as the “Prime Rate” for U.S. banks in The Wall Street Journal as of such date; provided that, if the Base Rate shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement. The Base Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. The Lenders may make commercial loans or other loans at rates of interest at, above or below the Base Rate. If, for any reason, the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (x) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Federal Funds Effective Rate or the “Prime Rate”, as the case may be, shall be effective on the effective date of such change in the Federal Funds Effective Rate or the “Prime Rate,” as applicable.

 

Base Rate Loan ” means a Revolving Loan that bears interest based on the Base Rate.

 

Board of Directors ” means, as to any Person, the board of directors (or comparable managers) of such Person, or any committee thereof duly authorized to act on behalf of the board of directors (or comparable managers).

 

Borrower ” has the meaning specified in the introductory paragraph hereto.

 

Borrower Materials ” has the meaning specified in Section 6.02.

 

Borrowing ” means a Revolving Borrowing or a Swingline Borrowing, as the context may require.

 

Business Day ” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state of California and, if such day relates to any Eurodollar Rate Loan, means any such day that is also a London Banking Day.

 

Capital Expenditures ” means, with respect to any Person for any period, any expenditure in respect of the purchase or other acquisition of any fixed or capital asset (excluding normal replacements and maintenance which are properly charged to current operations).

 

Capitalized Leases ” means all leases that have been or should be, in accordance with GAAP, recorded as capitalized leases; provided, that notwithstanding any change in GAAP after the Closing Date that would require lease obligations that would be treated as operating leases as of the Closing Date to be classified and accounted for as capital leases or otherwise reflected on any Person’s balance sheet, such obligations shall be treated in the same manner as operating leases are treated as of the Closing Date.

 

Cash at Bank ” means the amount of unrestricted cash and Cash Equivalents held by the Borrower at the Administrative Agent or any of its Affiliates.

 

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Cash Collateralize ” means, to pledge and deposit with or deliver to the Administrative Agent, for the benefit of one or more of the L/C Issuers or the Lenders, as collateral for L/C Obligations, the Obligations, or obligations of the Revolving Lenders to fund participations in respect of L/C Obligations, (a) cash or deposit account balances, (b) backstop letters of credit entered into on terms, from issuers and in amounts satisfactory to the Administrative Agent and the applicable L/C Issuer, and/or (c) if the Administrative Agent and the applicable L/C Issuer shall agree, in their sole discretion, other credit support, in each case, in Dollars and pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent and such L/C Issuer. “ Cash Collateral ” shall have a meaning correlative to the foregoing and shall include the proceeds of such Cash Collateral and other credit support.

 

Cash Equivalents ” means any of the following types of Investments, to the extent owned by the Borrower or any of its Subsidiaries free and clear of all Liens (other than Permitted Liens):

 

(a)          readily marketable securities issued by or directly, unconditionally and fully guaranteed or insured by the United States or any agency or instrumentality thereof having maturities of not more than three hundred sixty-five days (365) days from the date of acquisition thereof; provided that the full faith and credit of the United States is pledged in support thereof;

 

(b)          any readily marketable direct obligations issued by any other agency of the United States, any state of the United States or any political subdivision of any such state or any public instrumentality thereof having maturities of not more than three hundred sixty-five days (365) from the date of acquisition thereof, in each case having a rating of at least “A-1” from S&P or at least “P-1” from Moody’s;

 

(c)          any dollar-denominated time deposits, insured certificates of deposit, overnight bank deposits or bankers’ acceptances of, any (i) Lender or commercial bank that is (x) organized under the laws of the United States, any state thereof or the District of Columbia, (y) “adequately capitalized” (as defined in the regulations of its primary federal banking regulators) and (z) has Tier 1 capital (as defined in such regulations) in excess of $250,000,000 (ii) having maturities of not more than three hundred sixty-five (365) days;

 

(d)          commercial paper issued by any Person organized under the laws of any state of the United States and rated at least “P-1” (or the then equivalent grade) by Moody’s or at least “A-1” (or the then equivalent grade) by S&P, in each case with maturities of not more than one hundred eighty (180) days from the date of acquisition thereof; and

 

(e)          Investments, classified in accordance with GAAP as current assets of the Borrower or any of its Subsidiaries, in money market investment programs registered under the Investment Company Act of 1940, which are administered by financial institutions that have the highest rating obtainable from either Moody’s or S&P, and the portfolios of which are limited solely to Investments of the character, quality and maturity described in clauses (a), (b), (c) and (d) of this definition.

 

Cash Management Agreement ” means any agreement that is not prohibited by the terms hereof to provide treasury or cash management services, including deposit accounts, overnight draft, credit cards, debit cards, p-cards (including purchasing cards and commercial cards), funds transfer, automated clearinghouse, zero balance accounts, returned check concentration, controlled disbursement, lockbox, account reconciliation and reporting and trade finance services and other cash management services.

 

Cash Management Bank ” means Banc of California or one of its Affiliates.

 

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CFC ” means a Person that is a controlled foreign corporation under Section 957 of the Code.

 

Change in Law ” means the occurrence, after the Closing Date, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.

 

Change of Control ” means an event or series of events by which:

 

(a)          during any period of 24 consecutive months commencing on or after the Closing Date, the occurrence of a change in the composition of the Board of Directors of any Loan Party such that a majority of the members of such Board of Directors of such Loan Party are not Continuing Directors;

 

(b)          Ultimate Parent fails to own and control, directly or indirectly, 100% of the Equity Interests of Parent;

 

(c)          Parent fails to own and control, directly or indirectly, 100% of the Equity Interests of Borrower; or

 

(d)          Except as permitted by the terms of Section 7.04 of this Agreement, Borrower fails to own and control, directly or indirectly, 100% of the Equity Interests of each other Loan Party.

 

Closing Date ” means the date hereof.

 

Code ” means the Internal Revenue Code of 1986.

 

Collateral ” means all of the “ Collateral ” referred to in the Collateral Documents and all of the other property that is or is intended under the terms of the Collateral Documents to be subject to Liens in favor of the Administrative Agent for the benefit of the Secured Parties; provided, however, that Collateral shall not include any Excluded Property.

 

Collateral Documents ” means, collectively, the Security Agreement, each Joinder Agreement, each of the security agreements, pledge agreements or other similar agreements delivered to the Administrative Agent pursuant to Section 6.14, and each of the other agreements, instruments or documents that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties.

 

Commitment ” means a Revolving Commitment.

 

Commodity Exchange Act ” means the Commodity Exchange Act (7 U.S.C. § 1 et seq .).

 

Compliance Certificate ” means a certificate substantially in the form of Exhibit C .

 

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Connection Income Taxes ” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

 

Consolidated ” means, when used with reference to financial statements or financial statement items of the Borrower and its Subsidiaries or any other Person, such statements or items on a consolidated basis in accordance with the consolidation principles of GAAP.

 

Consolidated Adjusted EBITDA ” means, for any period, the sum of the following determined on a Consolidated basis, without duplication, for the Borrower and its Subsidiaries in accordance with GAAP,

 

(a)  net income for the most recently completed Measurement Period, plus

 

(b)  the following for the most recently completed Measurement Period to the extent deducted in calculating such net income (without duplication):

 

(i) Consolidated Interest Charges,

 

(ii) the provision for federal, state, local and foreign income taxes payable,

 

(iii) depreciation and amortization expense,

 

(iv) non-cash charges and losses (excluding any such non-cash charges or losses to the extent (A) there were cash charges with respect to such charges and losses in past accounting periods or (B) there is a reasonable expectation that there will be cash charges with respect to such charges and losses in future accounting periods),

 

(v) closing, restructuring and integration expenses incurred in connection with the negotiation, documentation or closing of this Agreement or otherwise on or before the first anniversary of the Closing Date in an aggregate amount not to exceed $500,000,

 

(vi) any extraordinary, unusual or non-recurring non-cash losses, charges and expenses,

 

(vii) any extraordinary, unusual or non-recurring cash losses, charges and expenses not to exceed $500,000 in the aggregate, or such amounts in excess of $500,000 as may be approved by the Required Lenders in writing,

 

(viii) any contingent or deferred payment obligations (including, without limitation, severance, retention, non-complete payments and consulting payments) in an amount not to exceed $3,000,000 in the aggregate,

 

(ix) non-cash compensation expense (including deferred non-cash compensation expenses),

 

(x) unrealized losses on Master Agreements and swaps,

 

(xi) Litigation or Dispute Settlement Charges or Gains in an amount not to exceed $1,500,000 in the aggregate,

 

(xii) Transaction-Related Costs in an amount not to exceed $1,500,000 in the aggregate, and

 

(xiii) the amount of all fees, costs and expenses incurred in connection with any amendment, modification or supplement of any Loan Document, including, without limitation, any consent or waiver fees payable in connection therewith in an amount not to exceed $750,000 in the aggregate.

 

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less

 

(c) without duplication and to the extent reflected as a gain or otherwise included in the calculation of net income for such period (i) non-cash gains (excluding any such non-cash gains to the extent (A) there were cash gains with respect to such gains in past accounting periods or (B) there is a reasonable expectation that there will be cash gains with respect to such gains in future accounting periods).

 

Consolidated Fixed Charge Coverage Ratio ” means, as of any date of determination, the ratio of (a) (i) Consolidated Adjusted EBITDA less (iii) the aggregate amount of all non-financed cash Capital Expenditures (iii) the aggregate amount of federal, state, local and foreign income taxes paid in cash, in each case, of or by the Borrower and its Subsidiaries for the most recently completed Measurement Period to (b) the sum of (i) Consolidated Interest Charges to the extent paid in cash, but excluding any such payments to the extent refinanced through the incurrence of additional Indebtedness otherwise expressly permitted under Section 7.02, plus (ii) the Implied Amortization Amount for the most recently completed Measurement Period.

 

Consolidated Funded Indebtedness ” means, as of any date of determination, for the Borrower and its Subsidiaries on a Consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all purchase money Indebtedness; (c) the maximum amount available to be drawn under issued and outstanding letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments; (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business); (e) all Attributable Indebtedness; (f) all obligations to purchase, redeem, retire, defease or otherwise make any payment prior to the Maturity Date in respect of any Equity Interests or any warrant, right or option to acquire such Equity Interest, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (g) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (f) above of Persons other than the Borrower or any Subsidiary; and (h) all Indebtedness of the types referred to in clauses (a) through (g) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Borrower or such Subsidiary.

 

Consolidated Interest Charges ” means, for any Measurement Period, the sum of (a) all interest, premium payments, debt discount, fees, charges and related expenses in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, (b) all interest paid or payable with respect to discontinued operations and (c) the portion of rent expense under Capitalized Leases that is treated as interest in accordance with GAAP, in each case, of or by the Borrower and its Subsidiaries on a Consolidated basis for the most recently completed Measurement Period.

 

Consolidated Total Funded Debt Ratio ” means, as of any date of determination, the ratio of (a) Consolidated Funded Indebtedness as of such date to (b) Consolidated Adjusted EBITDA for the most recently completed Measurement Period.

 

Contractual Obligation ” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

 

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Continuing Director ” means (a) any member of the Board of Directors who was a director (or comparable manager) of a Loan Party on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was approved, appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of the applicable Loan Party and whose initial assumption of office resulted from such contest or the settlement thereof.

 

Control ” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “ Controlling ” and “ Controlled ” have meanings correlative thereto. Without limiting the generality of the foregoing, a Person shall be deemed to be Controlled by another Person if such other Person possesses, directly or indirectly, power to vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors, managing general partners or the equivalent.

 

Cost of Acquisition ” means, with respect to any Acquisition, as at the date of entering into any agreement therefor, the sum of the following (without duplication): (a) the value of the Equity Interests of Borrower or any Subsidiary to be transferred in connection with such Acquisition, (b) the amount of any cash and fair market value of other property (excluding property described in clause (a) and the unpaid principal amount of any debt instrument) given as consideration in connection with such Acquisition, (c) the amount (determined by using the face amount or the amount payable at maturity, whichever is greater) of any Indebtedness incurred, assumed or acquired by Borrower or any Subsidiary in connection with such Acquisition, (d) all additional purchase price amounts in the form of earnouts and other contingent obligations that should be recorded on the financial statements of Ultimate Parent and its Subsidiaries in accordance with GAAP in connection with such Acquisition, (e) all amounts paid in respect of covenants not to compete and consulting agreements that should be recorded on the financial statements of Borrower and its Subsidiaries in accordance with GAAP, and other affiliated contracts in connection with such Acquisition, and (f) the aggregate fair market value of all other consideration given by Ultimate Parent or any Subsidiary in connection with such Acquisition. For purposes of determining the Cost of Acquisition for any transaction, the Equity Interests of Borrower shall be valued in accordance with GAAP.

 

Credit Extension ” means each of the following: (a) a Borrowing and (b) an L/C Credit Extension.

 

Cure Notice ” has the meaning given to such term in Section 7.11(c)(i).

 

Debtor Relief Laws ” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.

 

Default ” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.

 

Default Rate ” means (a) with respect to any Obligation for which a rate is specified, a rate per annum equal to two percent (2%) in excess of the rate otherwise applicable thereto and (b) with respect to any Obligation for which a rate is not specified or available, a rate per annum equal to the Base Rate plus the Applicable Rate for Revolving Loans that are Base Rate Loans plus two percent (2%), in each case, to the fullest extent permitted by applicable Law.

 

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Defaulting Lender ” means, subject to Section 2.15(b), any Lender that (a) has failed to (i) fund all or any portion of its Loans within two (2) Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable Event of Default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, the L/C Issuer, the Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within two (2) Business Days of the date when due, (b) has notified the Borrower or the Administrative Agent, the L/C Issuer or the Swingline Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable Event of Default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three (3) Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder ( provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above, and the effective date of such status, shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.15(b)) as of the date established therefor by the Administrative Agent in a written notice of such determination, which shall be delivered by the Administrative Agent to the Borrower, the L/C Issuer, the Swingline Lender and each other Lender promptly following such determination.

 

Designated Jurisdiction ” means any country or territory to the extent that such country or territory is the subject of any Sanction.

 

Disposition ” or “ Dispose ” means the sale, transfer, license, lease or other disposition (including any Sale and Leaseback Transaction) of any property by any Loan Party or Subsidiary (or the granting of any option or other right to do any of the foregoing), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith, but excluding any Involuntary Disposition.

 

Dollar ” and “ $ ” mean lawful money of the United States.

 

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Domestic Subsidiary ” means any Subsidiary that is organized under the laws of any political subdivision of the United States.

 

Eligible Assignee ” means any Person that meets the requirements to be an assignee under Section 11.06 (subject to such consents, if any, as may be required under Section 11.06(b)(iii)).

 

Environmental Laws ” means any and all federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.

 

Environmental Liability ” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

 

Environmental Permit ” means any permit, approval, identification number, license or other authorization required under any Environmental Law.

 

Equity Cure Investment ” has the meaning given to such term in Section 7.11(c)(ii).

 

Equity Cure Right ” has the meaning given to such term in Section 7.11(c).

 

Equity Interests ” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

 

Equity Issuance ” means, any issuance by any Loan Party or any Subsidiary to any Person of its Equity Interests, other than (a) any issuance of its Equity Interests pursuant to the exercise of options or warrants, (b) any issuance of its Equity Interests pursuant to the conversion of any debt securities to equity or the conversion of any class of equity securities to any other class of equity securities, and (c) any issuance of options or warrants relating to its Equity Interests. The term “Equity Issuance” shall not be deemed to include any Disposition.

 

ERISA ” means the Employee Retirement Income Security Act of 1974.

 

ERISA Affiliate ” means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).

 

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ERISA Event ” means (a) a Reportable Event with respect to a Pension Plan; (b) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete withdrawal, within the meaning of Section 4203 of ERISA, or a partial withdrawal, within the meaning of Section 4205 of ERISA, by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing with the PBGC of a notice of intent to terminate under Section 4041(c) of ERISA by the Borrower or any ERISA Affiliate; (e) the institution by the PBGC of proceedings to terminate a Pension Plan but only if the PBGC has notified the Borrower or ERISA Affiliate, as applicable, of the same; (f) the receipt by the Borrower or any ERISA Affiliate from the PBGC of written notice relating to an intention to terminate any Pension Plan ; (g) the determination that any Pension Plan is considered an at-risk plan (within the meaning of Section 430 of the Code or Section 303 of ERISA) or a plan in endangered or critical status (within the meaning of Section 432 of the Code or Section305 of ERISA); (h) the imposition of any liability under Title IV of ERISA other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate; or (i) with respect to any Multiple Employer Plan the provisions of Section 4064 of ERISA apply.

 

Eurodollar Rate ” means: with respect to any Eurodollar Rate Loan for any Interest Period, the rate per annum equal to the rate determined by the Agent and equal to the rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) quoted as (i) the “LIBOR Rate” set forth in the money rates section of the Wall Street Journal for the date that is two Business Days prior to the first day in such Interest Period or (ii) in the event the rate referenced in the preceding clause (i) does not appear on such page or such page shall cease to be available, the rate per annum determined as of approximately 9:00 a.m. two Business Days prior to the first day in such Interest Period by reference to the Intercontinental Exchange Benchmark Administration Ltd. Interest Settlement Rates for deposits in Dollars (as set forth by any service selected by the Agent that has been nominated by the Intercontinental Exchange Benchmark Administration Ltd. (or any successor or substitute agency determined by the Agent) as an authorized information vendor for the purpose of displaying such rates) with a term equivalent to the applicable Interest Period; provided that if the LIBOR Rate shall be less than zero, such rate shall be deemed to be zero for all purposes under this Agreement. Each determination of the LIBOR Rate by the Agent shall be conclusive and binding upon the parties hereto, absent manifest error. Notwithstanding the foregoing, for purposes of this Agreement, the Eurodollar Rate shall in no event be less than zero percent 0.00% at any time.

 

Eurodollar Adjusted Rate ”: with respect to each day during each Interest Period pertaining to a Eurodollar Rate Loan, the rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%):

 

  Eurodollar Rate  
  1.00 - Eurodollar Reserve Requirements  

 

Eurodollar Rate Loan ” means a Revolving Loan that bears interest at the Eurodollar Adjusted Rate.

 

Eurodollar Reserve Requirements ”: for any day as applied to a Eurodollar Rate Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of such Board) maintained by a member bank of such Federal Reserve System.

 

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Event of Default ” has the meaning specified in Section 8.01.

 

Excluded Account ” has the meaning specified in Section 6.14(d).

 

Excluded Property ” means, with respect to any Loan Party, (a) any owned or leased real property which is located outside of the United States, (b) any Intellectual Property for which a perfected Lien thereon is not effected either by filing of a Uniform Commercial Code financing statement or by appropriate evidence of such Lien being filed in either the United States Copyright Office or the United States Patent and Trademark Office, (c)  voting Equity Interests of any CFC, solely to the extent that such Equity Interests represent more than 65% of the outstanding voting Equity Interests of such CFC; (d) any lease, license, franchise, charter or other governmental authorization, or any other contract or agreement to which any Loan Party is a party, and any of its rights or interests thereunder or assets subject thereto, if and to the extent that a Lien in favor of Administrative Agent is prohibited by (i) any applicable Law, or (ii) a term, provision or condition of any such lease, license, charter, governmental authorization, contract or agreement and such prohibition or restriction has not been waived or the consent of the other party to such contract, lease, permit, license, or license agreement has not been obtained ; provided, that, in each case, (A) the foregoing exclusions of this clause (d) shall in no way be construed (1) to apply to the extent that any described prohibition or restriction is ineffective under Section 9-406, 9-407, 9-408, or 9-409 of the Uniform Commercial Code or other applicable Law (including the Debtor Relief Laws) , or (2) to apply to the extent that any consent or waiver has been obtained that would permit Administrative Agent’s security interest or lien to attach notwithstanding the prohibition or restriction on the pledge of such contract, lease, permit, license, or license agreement and (B) the foregoing exclusions of clauses (a) through (d) shall in no way be construed to limit, impair, or otherwise affect any of Administrative Agent’s, any Lender’s continuing security interests in and liens upon any rights or interests of any grantor in or to (1) monies due or to become due under or in connection with any described contract, lease, permit, license, license agreement, or Equity Interests (including any accounts or Equity Interests), or (2) any proceeds from the sale, license, lease, or other dispositions of any such contract, lease, permit, license, license agreement, or Equity Interests) ; (e) “intent-to-use” United States trademark applications to the extent that an amendment to allege use or statement of use has not been filed under 15 U.S.C. §1051(c) or 15 U.S.C. §1051(d), respectively, or if filed, has not been deemed in conformity with 15 U.S.C. §1051(a) or (c), it being agreed that for purposes of this Agreement and the Loan Documents, no Lien granted to Administrative Agent on any “intent-to-use” United States trademark applications is intended to be a present assignment thereof; provided that upon submission and acceptance of an amendment to allege use pursuant to 15 U.S.C. Section 1060(a) (or any successor provision), such intent-to-use trademark application shall be considered Collateral ; provided, in each case, that Excluded Property shall not include any Loan Parties’ rights to proceeds (or right to receive proceeds) of any of the assets described in the foregoing clauses (a) – (i) or any goodwill of any Loan Party’s business associated therewith or attributable thereto.

 

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Excluded Swap Obligation ” means, with respect to any Loan Party, any Swap Obligation if, and to the extent that, all or a portion of the Guaranty of such Loan Party of, or the grant by such Loan Party of a Lien to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act (or the application or official interpretation thereof) by virtue of such Loan Party’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act (determined after giving effect to Section 10.11 and any other “keepwell”, support or other agreement for the benefit of such Loan Party and any and all guarantees of such Loan Party’s Swap Obligations by other Loan Parties) at the time the Guaranty of such Loan Party, or grant by such Loan Party of a Lien, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a Master Agreement governing more than one Swap Contract, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to Swap Contracts for which such Guaranty or Lien is or becomes excluded in accordance with the first sentence of this definition.

 

Excluded Taxes ” means any of the following Taxes imposed on or with respect to any Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 11.13) or (ii) such Lender changes its Lending Office, except in each case to the extent that, pursuant to Section 3.01(a)(ii), (a)(iii) or (c), amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office, (c) Taxes attributable to such Recipient’s failure to comply with Section 3.01(e) and (d) any U.S. federal withholding Taxes imposed pursuant to FATCA.

 

Existing Letter of Credit Obligations ” means that certain Irrevocable Standby Letter of Credit No. SVBF008526 issued to Sprint Spectrum L.P. by Silicon Valley Bank on behalf of and in support of Borrower’s reimbursement obligations to Sprint Spectrum L.P., and the associated cash collateral pledged to Silicon Valley Bank in the amount of $466,443.72 on account thereof.

 

Facility ” means the Revolving Facility.

 

Facility Termination Date ” means the date as of which all of the following shall have occurred: (a) the Aggregate Commitments have terminated, (b) all Obligations have been paid in full (other than contingent indemnification obligations), and (c) all Letters of Credit have terminated or expired (other than Letters of Credit as to which other arrangements with respect thereto satisfactory to the Administrative Agent and the L/C Issuer shall have been made).

 

FASB ASC ” means the Accounting Standards Codification of the Financial Accounting Standards Board.

 

FATCA ” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.

 

Federal Funds Rate ” means, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Banc of California on such day on such transactions as determined by the Administrative Agent.

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Fee Letter ” means the letter agreement, dated as of the Closing Date, between the Borrower and the Administrative Agent.

 

Financial Covenant Cure Amount ” has the meaning given to such term in Section 7.11(c)(i).

 

Financial Covenant Default ” has the meaning given to such term in Section 7.11(c).

 

Foreign Lender ” means (a) if the Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (b) if the Borrower is not a U.S. Person, a Lender that is resident or organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

 

Foreign Subsidiary ” means any Subsidiary that is not a Domestic Subsidiary.

 

FRB ” means the Board of Governors of the Federal Reserve System of the United States.

 

Fronting Exposure ” means, at any time there is a Defaulting Lender that is a Revolving Lender, (a) with respect to the L/C Issuer, such Defaulting Lender’s Applicable Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Revolving Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swingline Lender, such Defaulting Lender’s Applicable Percentage of Swingline Loans other than Swingline Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Revolving Lenders or Cash Collateralized in accordance with the terms hereof.

 

Fund ” means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.

 

Funding Indemnity Letter ” means a funding indemnity letter, substantially in the form of Exhibit N .

 

GAAP ” means generally accepted accounting principles in the United States set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession) including, without limitation, the FASB Accounting Standards Codification, that are applicable to the circumstances as of the date of determination, consistently applied and subject to Section 1.03.

 

Governmental Authority ” means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including , without limitation, and any supra-national bodies such as the European Union or the European Central Bank).

 

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Guarantee ” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of the kind described in clauses (a) through (h) of the definition thereof or other obligation payable or performable by another Person (the “ primary obligor ”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness of the kind described in clauses (a) through (h) of the definition thereof or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed or expressly undertaken by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term “ Guarantee ” as a verb has a corresponding meaning.

 

Guaranteed Obligations ” has the meaning set forth in Section 10.01.

 

Guarantors ” means, collectively, (a) Ultimate Parent, (b) Parent, (c) the Subsidiaries of the Borrower (other than India Subsidiary) as are or may from time to time become parties to this Agreement pursuant to Section 6.13 and (d) with respect to Additional Secured Obligations owing by any Loan Party or any of its Subsidiaries and any Swap Obligation of a Specified Loan Party (determined before giving effect to Sections 10.01 and 10.11) under the Guaranty, the Borrower.

 

Guaranty ” means, collectively, (a) the Guarantee made by the Secured Guarantors under Article X in favor of the Secured Parties, (b) the Ultimate Parent Guaranty, (c) the Parent Guaranty and (d) each other guaranty delivered pursuant to Section 6.13.

 

Hazardous Materials ” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

 

Hedge Bank ” means any Person in its capacity as a party to a Swap Contract that, at the time it enters into a Swap Contract not prohibited under Article VI or VII, is a Lender or an Affiliate of a Lender, in its capacity as a party to such Swap Contract (even if such Person ceases to be a Lender or such Person’s Affiliate ceased to be a Lender); provided , in the case of a Secured Hedge Agreement with a Person who is no longer a Lender (or Affiliate of a Lender), such Person shall be considered a Hedge Bank only through the stated termination date (without extension or renewal) of such Secured Hedge Agreement and provided further that for any of the foregoing to be included as a “Secured Hedge Agreement” on any date of determination by the Administrative Agent, the applicable Hedge Bank (other than the Administrative Agent or an Affiliate of the Administrative Agent) must have delivered a Secured Party Designation Notice to the Administrative Agent prior to such date of determination.

 

Honor Date ” has the meaning set forth in Section 2.03(c).

 

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Implied Amortization Amount ” means, as of any date of determination, the amount set forth below for the applicable Measurement Period ending on such date:

 

Measurement Period ending   Implied Amortization Amount  
June 30, 2017   $ 6,166,666.67  
September 30, 2017   $ 5,666,666.67  
December 31, 2017   $ 5,166,666.67  
March 31, 2018   $ 4,666,666.67  
June 30, 2018   $ 4,166,666.67  
September 30, 2018   $ 3,666,666.67  
December 31, 2018   $ 3,166,666.67  
March 31, 2019   $ 2,666,666.67  
June 30, 2019   $ 2,166,666.67  
September 30, 2019   $ 1,666,666.67  
December 31, 2019   $ 1,166,666.67  

 

Indebtedness ” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:

 

(a)          all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

 

(b)          the maximum amount of all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties and similar instruments;

 

(c)          net obligations of such Person under any Swap Contract;

 

(d)          all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business and not past due for more than sixty (60) days after the date on which such trade account was created);

 

(e)          indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

 

(f)          all Attributable Indebtedness in respect of Capitalized Leases and Synthetic Lease Obligations of such Person and all Synthetic Debt of such Person;

 

(g)          all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person or any warrant, right or option to acquire such Equity Interest, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

 

(h)          all Guarantees of such Person in respect of any of the foregoing.

 

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For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date.

 

Indemnified Taxes ” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in clause (a), Other Taxes.

 

Indemnitees ” has the meaning specified in Section 11.04(b).

 

India Subsidiary ” means United Online Software Development (India) Private Limited, a private limited company organized under the laws of India.

 

Information ” has the meaning specified in Section 11.07.

 

Intellectual Property ” has the meaning set forth in the Security Agreement.

 

Intercompany Debt ” has the meaning specified in Section 7.02.

 

Interest Payment Date ” means, (a) as to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date of the Facility under which such Loan was made; provided , however , that if any Interest Period for a Eurodollar Rate Loan exceeds three (3) months, each day that is at the end of each three-month period within such Interest Period after the first day of such Interest Period and the last day of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan or Swingline Loan, the last Business Day of each March, June, September and December and the Maturity Date of the Facility under which such Loan was made (with Swingline Loans being deemed made under the Revolving Facility for purposes of this definition).

 

Interest Period ” means, as to each Eurodollar Rate Loan,

 

(a) initially, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one (1), three (3) or six (6) months thereafter (in each case, subject to availability), as selected by the Borrower in its Loan Notice; and

 

(b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Rate Loan and ending one (1), three (3) or six (6) months thereafter as available, as selected by the Borrower in its Loan Notice;

 

provided , in each case, that:

 

(i)          any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Business Day;

 

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(ii)         any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and

 

(iii)        no Interest Period shall extend beyond the Maturity Date of the Facility under which such Loan was made.

 

Investment ” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of Equity Interests of another Person, (b) a loan, advance or capital contribution to, Guarantee or assumption of debt of, or purchase or other acquisition of any other debt or interest in, another Person (including any partnership or joint venture interest in such other Person and any arrangement pursuant to which the investor guaranties Indebtedness of such other Person), or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person which constitute all or substantially all of the assets of such Person or of a division, line of business or other business unit of such Person. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.

 

Involuntary Disposition ” means any loss of, damage to or destruction of, or any condemnation or other taking for public use of, any property of any Loan Party or any Subsidiary.

 

IRS ” means the United States Internal Revenue Service.

 

ISP ” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).

 

Issuer Documents ” means with respect to any Letter of Credit, the Letter of Credit Application, and any other document, agreement and instrument entered into by the L/C Issuer and the Borrower (or any Subsidiary) or in favor of the L/C Issuer and relating to such Letter of Credit.

 

Joinder Agreement ” means a joinder agreement substantially in the form of Exhibit D executed and delivered in accordance with the provisions of Sections 6.13 and 6.14.

 

Landlord Waiver ” means a landlord or warehouse waiver substantially in the form of Exhibit O .

 

Laws ” means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.

 

L/C Advance ” means, with respect to each Revolving Lender, such Lender’s funding of its participation in any L/C Borrowing in accordance with its Applicable Revolving Percentage.

 

L/C Borrowing ” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Revolving Borrowing.

 

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L/C Commitment ” means, as to the L/C Issuer, its obligation to issue Letters of Credit to the Borrower pursuant to Section 2.03 in an aggregate principal amount at any one time outstanding not to exceed $750,000, as such amount may be adjusted from time to time in accordance with this Agreement.

 

L/C Credit Extension ” means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof.

 

L/C Issuer ” means Banc of California in its capacity as issuer of Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder.

 

L/C Obligations ” means, as at any date of determination, the aggregate amount available to be drawn under all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts (including all L/C Borrowings). For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06. For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.

 

Lender ” means each of the Persons identified as a “Lender” on the signature pages hereto, each other Person that becomes a “Lender” in accordance with this Agreement and, their successors and assigns and, unless the context requires otherwise, includes the Swingline Lender.

 

Lending Office ” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.

 

Letter of Credit ” means any standby letter of credit issued hereunder.

 

Letter of Credit Application ” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the L/C Issuer.

 

Letter of Credit Expiration Date ” means the day that is seven (7) days prior to the Maturity Date (or, if such day is not a Business Day, the next preceding Business Day).

 

Letter of Credit Fee ” has the meaning specified in Section 2.03(h).

 

Letter of Credit Report ” has the meaning specified in Section 2.03(k).

 

Letter of Credit Sublimit ” means an amount equal to the lesser of (a) $ 100,000 and (b) the Revolving Facility. The Letter of Credit Sublimit is part of, and not in addition to, the Revolving Facility.

 

LIBOR Rate ” has the meaning specified in the definition of Eurodollar Rate.

 

Lien ” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property and any financing lease having substantially the same economic effect as any of the foregoing).

 

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Litigation or Dispute Settlement Charges or Gains ” means charges or gains that include estimated losses for which the Loan Parties have established a reserve in accordance with GAAP, as well as actual settlements, judgments, fines, penalties, assessments or other resolutions against, or in favor of, the Loan Parties related to litigation, arbitration, investigations, disputes or similar matters. Insurance recoveries received by the Loan Parties related to such matters are also included in these adjustments.

 

Loan ” means an extension of credit by a Lender to the Borrower under Article II in the form of a Revolving Loan or a Swingline Loan.

 

Loan Documents ” means, collectively, (a) this Agreement, (b) the Notes, (c) each Guaranty, (d) the Collateral Documents, (e) the Fee Letter, (f) each Issuer Document, (g) each Joinder Agreement, and (h) any agreement creating or perfecting rights in Cash Collateral pursuant to the provisions of Section 2.14 (but specifically excluding any Secured Hedge Agreement or any Secured Cash Management Agreement).

 

Loan Notice ” means a notice of (a) a Borrowing, (b) a conversion of Loans from one Type to the other, or (c) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a), which, if in writing, shall be substantially in the form of Exhibit E .

 

Loan Parties ” means, collectively, the Borrower and each Secured Guarantor.

 

London Banking Day ” means any day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market.

 

Master Agreement ” has the meaning set forth in the definition of “Swap Contract.”

 

Material Adverse Effect ” means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), or condition (financial or otherwise) of the Borrower or the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the rights and remedies of the Administrative Agent or any Lender under any Loan Document, or of the ability of any Loan Party to perform any of its material obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document to which it is a party.

 

Material Contract ” means, with respect to any Person, each contract or agreement (a) to which such Person is a party involving aggregate consideration payable to or by such Person of $1,000,000 or more per fiscal year or (b) otherwise material to the business, condition (financial or otherwise), operations, performance or properties of such Person or (c) any other contract, agreement, permit or license, written or oral, of the Borrower and its Subsidiaries as to which the breach, nonperformance, cancellation or failure to renew by any party thereto, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

 

Maturity Date ” means April 13, 2020; provided , however , that, in each case, if such date is not a Business Day, the Maturity Date shall be the next preceding Business Day.

 

Measurement Period ” means, at any date of determination, the most recently completed four (4) fiscal quarters of the Borrower or, if fewer than four (4) consecutive fiscal quarters of the Borrower have been completed since the Closing Date, the fiscal quarters of the Borrower that have been completed since the Closing Date (or, for purposes of determining Pro Forma Compliance, if financial statements have been delivered pursuant to Section 6.01 for fewer than four (4) consecutive fiscal quarters of the Borrower since the Closing Date, the fiscal quarters of the Borrower for which financial statements have been delivered pursuant to Section 6.01 since the Closing Date).

 

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Minimum Collateral Amount ” means, at any time, (a) with respect to Cash Collateral consisting of cash or deposit account balances provided to reduce or eliminate Fronting Exposure during any period when a Lender constitutes a Defaulting Lender, an amount equal to 105% of the Fronting Exposure of the L/C Issuer with respect to Letters of Credit issued and outstanding at such time, (b) with respect to Cash Collateral consisting of cash or deposit account balances provided in accordance with the provisions of Section 2.14(a)(i), (a)(ii) or (a)(iii), an amount equal to 105% of the Outstanding Amount of all L/C Obligations, and (c) otherwise, an amount determined by the Administrative Agent and the L/C Issuer in their sole discretion.

 

Monthly Reporting Triggering Event ” means any time when one or more of the following conditions have occurred and are continuing on or after April 30, 2017: (a) Revolving Borrowings have been made and remain outstanding on the Revolving Loan; or (b) a Financial Covenant Default has occurred and is continuing.

 

Moody’s ” means Moody’s Investors Service, Inc. and any successor thereto.

 

Multiemployer Plan ” means a Plan which is a multiemployer plan as described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five (5) plan years, has made or been obligated to make contributions.

 

Multiple Employer Plan ” means a Plan which has two or more contributing sponsors (including the Borrower or any ERISA Affiliate) at least two of whom are not under common control, as such a plan is described in Section 4064 of ERISA.

 

Non-Consenting Lender ” means any Lender that does not approve any consent, waiver or amendment that (a) requires the approval of all Lenders or all affected Lenders in accordance with the terms of Section 11.01 and (b) has been approved by the Required Lenders.

 

Non-Defaulting Lender ” means, at any time, each Lender that is not a Defaulting Lender at such time.

 

Note ” means a Revolving Note.

 

Notice of Loan Prepayment ” means a certificate substantially the form of Exhibit R or any other form approved by the Administrative Agent.

 

Obligations ” means (a) all advances to, and debts, liabilities, obligations, covenants and duties of, any Loan Party arising under any Loan Document or otherwise with respect to any Loan, or Letter of Credit and (b) all reasonable and documented out-of-pocket costs and expenses incurred in connection with enforcement and collection of the foregoing, including the reasonable and documented fees, charges and disbursements of external counsel, in each case whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof pursuant to any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding; provided that Obligations of a Loan Party shall exclude any Excluded Swap Obligations with respect to such Loan Party.

 

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OFAC ” means the Office of Foreign Assets Control of the United States Department of the Treasury.

 

Officer’s Certificate ” means a certificate substantially the form of Exhibit L or any other form approved by the Administrative Agent.

 

Organization Documents ” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement or limited liability company agreement (or equivalent or comparable documents with respect to any non-U.S. jurisdiction); (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization (or equivalent or comparable documents with respect to any non-U.S. jurisdiction) and (d) with respect to all entities, any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization (or equivalent or comparable documents with respect to any non-U.S. jurisdiction).

 

Other Connection Taxes ” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

 

Other Taxes ” means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 3.06).

 

Outstanding Amount ” means (a) with respect to Revolving Loans and Swingline Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Revolving Loans and Swingline Loans, as the case may be, occurring on such date; and (b) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts.

 

Parent ” means B. Riley Principal Investments, LLC, a Delaware limited liability company.

 

Parent Guaranty ” means that certain Guaranty and Pledge Agreement dated as of the date hereof executed by Parent in favor of the Administrative Agent, for the benefits of the Secured Parties, in form and substance reasonably satisfactory to the Administrative Agent.

 

Participant ” has the meaning specified in Section 11.06(d).

 

Participant Register ” has the meaning specified in Section 11.06(d).

 

PBGC ” means the Pension Benefit Guaranty Corporation.

 

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Pension Funding Rules ” means the rules of the Code and ERISA regarding minimum required contributions (including any installment payment thereof) to Pension Plans and set forth in Sections 412, 430, 431, 432 and 436 of the Code and Sections 302, 303, 304 and 305 of ERISA.

 

Pension Plan ” means any employee pension benefit plan (including a Multiple Employer Plan or a Multiemployer Plan) that is maintained or is contributed to by ) the Borrower and any ERISA Affiliate and is either covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Code.

 

Permitted Acquisition ” means an Acquisition by a Loan Party (the Person or division, line of business or other business unit of the Person to be acquired in such Acquisition shall be referred to herein as the “ Target ”), in each case that is a type of business (or assets used in a type of business) permitted to be engaged in by the Borrower and its Subsidiaries pursuant to the terms of this Agreement, in each case so long as:

              

(a)           no Default shall then exist or would exist after giving effect thereto;

 

(b)           the Loan Parties shall demonstrate to the reasonable satisfaction of the Administrative Agent that, after giving effect to the Acquisition on a Pro Forma Basis, (i) the Loan Parties are in Pro Forma Compliance and with the financial covenants set forth in Sections 7.11(a) and 7.11(b);

 

(c)           the Administrative Agent, on behalf of the Secured Parties, shall have received (or shall receive in connection with the closing of such Acquisition) a first priority perfected security interest in all property (including, without limitation, Equity Interests) acquired with respect to the target in accordance with the terms of Section 6.14 and the Target, if a Person, shall have executed a Joinder Agreement in accordance with the terms of Section 6.13;

 

(d)           if the Cost of Acquisition is greater than $500,000, the Administrative Agent and the Lenders shall have received not less than thirty (30) days prior to the consummation of any such Acquisition: (i) a description of the material terms of such Acquisition; (ii) audited financial statements (or, if unavailable, management-prepared financial statements) of the Target for its two most recent fiscal years and for any fiscal quarters ended within the fiscal year to date; (iii) consolidated projected income statements of the Borrower and its Subsidiaries (giving effect to such Acquisition); and (iv) not less than one (1) Business Day prior to the consummation of thereof, a certificate, executed by a Responsible Officer of the Borrower certifying that such Permitted Acquisition complies with the requirements of this Agreement;

 

(e)           the acquired business has its primary operations in the United States and the Target shall be organized under the laws of a political subdivision of the United States;

 

(f)           if the Cost of Acquisition is greater than $500,000, the Target shall have Consolidated Adjusted EBITDA for the four (4) fiscal quarter period prior to the acquisition date (determined on a pro forma basis, and with adjustments thereto as to cost synergies, expense reductions and similar benefits) in an amount greater than $0;

 

(g)           such Acquisition shall not be a “ hostile ” Acquisition and shall have been approved by the board of directors (or equivalent) and/or shareholders (or equivalent) of the applicable Loan Party and the Target;

 

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(h)           after giving effect to such Acquisition and any Borrowings made in connection therewith, the Borrower shall have Qualified Cash of at least $2,000,000; and

 

(i)           the Cost of Acquisition paid by the Loan Parties and their Subsidiaries for all Acquisitions made during the term of this Agreement shall not exceed $10,000,000 in the aggregate.

 

Permitted Liens ” has the meaning set forth in Section 7.01.

 

Permitted Distributions ” means, the aggregate cash distributions or dividends by the Borrower to Parent and/or Ultimate Parent, which are, in turn, distributed to the holders of Parent’s and/or Ultimate Parent’s Equity Interests so long as Borrower shall have delivered to Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, evidence that immediately before and after giving effect to such dividends or distributions (i) no Event of Default shall have occurred and be continuing at or result therefrom, (ii) the Loan Parties are in Pro Forma Compliance with each of the financial covenants set forth in Section 7.11 and (iii) the Borrower has at least $2,000,000 of cash on the balance sheet.

 

Permitted Tax Distribution ” means for any taxable year (or portion thereof), the payment of dividends or other distributions by the Borrower to enable the Parent or the Ultimate Parent to pay (1) the Tax liability for each relevant jurisdiction in respect of consolidated, combined, unitary, or affiliated returns filed by or on behalf of the Parent or the Ultimate Parent, provided that such proceeds are limited to the portion of such tax liability attributable to the operations and activities of the Borrower and/or its applicable subsidiaries or (2) franchise taxes and other fees, Taxes, and expenses required to maintain the corporate existence of the Parent or the Ultimate Parent.

 

Permitted Transfers ” means (a) Dispositions of inventory in the ordinary course of business; (b) Dispositions of property to the Borrower or any Subsidiary; provided , that if the transferor of such property is a Loan Party then the transferee thereof must be a Loan Party; (c) Dispositions of accounts receivable in connection with the collection or compromise thereof; (d) licenses, sublicenses, leases or subleases granted to others not interfering in any material respect with the business of the Borrower and its Subsidiaries; (e) the sale or disposition of Cash Equivalents for fair market value; (f) dispositions of worn-out, obsolete of damaged property no longer used or useful in the business; (g) Restricted Payments permitted by this Agreement; and (h) other Dispositions of property of the Borrower and its Subsidiaries of up to $250,000 in the aggregate in any calendar year.

 

Person ” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

 

Plan ” means any “employee benefit plan” within the meaning of Section 3(3) of ERISA (including a Pension Plan) maintained for employees of the Borrower or any ERISA Affiliate or any such Plan to which the Borrower or any ERISA Affiliate is required to contribute on behalf of any of its employees.

 

Platform ” has the meaning specified in Section 6.02.

 

Pledged Equity ” has the meaning specified in the Security Agreement; provided, however, that Equity Interests constituting Excluded Property shall not constitute Pledged Equity; provided, however, further that with respect to (a) Equity Interests issued by a Foreign Subsidiary, no more than 65% of such Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and (b) Equity Interests issued by a disregarded entity that owns a 65% (or higher) voting interest in a CFC, no more than 65% of such Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) shall be Pledged Equity.

 

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Pro Forma Compliance ” means, with respect to any transaction, that such transaction does not cause, create or result in a Default after giving Pro Forma Effect, based upon the results of operations for the most recently completed Measurement Period to (a) such transaction and (b) all other transactions which are contemplated or required to be given Pro Forma Effect hereunder that have occurred on or after the first day of the relevant Measurement Period.

 

Pro Forma Effect ” means, for any Permitted Distribution, Disposition of all or substantially all of a division or a line of business or for any Acquisition, whether actual or proposed, for purposes of determining compliance with the financial covenants set forth in Section 7.11, each such transaction or proposed transaction shall be deemed to have occurred on and as of the first day of the relevant Measurement Period, and the following pro forma adjustments shall be made:

 

(a)          in the case of an actual or proposed Disposition, all income statement items (whether positive or negative) attributable to the line of business or the Person subject to such Disposition shall be excluded from the results of the Borrower and its Subsidiaries for such Measurement Period;

 

(b)          in the case of an actual or proposed Acquisition, income statement items (whether positive or negative) attributable to the property, line of business or the Person subject to such Acquisition shall be included in the results of the Borrower and its Subsidiaries for such Measurement Period;

 

(c)          interest accrued during the relevant Measurement Period on, and the principal of, any Indebtedness repaid or to be repaid or refinanced in such transaction shall be excluded from the results of the Borrower and its Subsidiaries for such Measurement Period; and

 

(d)          any Indebtedness actually or proposed to be incurred or assumed in such transaction shall be deemed to have been incurred as of the first day of the applicable Measurement Period, and interest thereon shall be deemed to have accrued from such day on such Indebtedness at the applicable rates provided therefor (and in the case of interest that does or would accrue at a formula or floating rate, at the rate in effect at the time of determination) and shall be included in the results of the Borrower and its Subsidiaries for such Measurement Period.

 

Public Lender ” has the meaning specified in Section 6.02.

 

Qualified Cash ” means the amount of unrestricted cash and Cash Equivalents of Loan Parties held in deposit accounts or securities accounts, as of any date of determination after the date that is after the date referenced in Section 6.14(d), are subject to the perfected first-priority Lien of Administrative Agent.

 

Qualified ECP Guarantor ” means, at any time, each Loan Party with total assets exceeding $10,000,000 or that qualifies at such time as an “eligible contract participant” under the Commodity Exchange Act and can cause another Person to qualify as an “eligible contract participant” at such time under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.

 

Qualifying Control Agreement ” means an agreement, among a Loan Party, a depository institution or securities intermediary and the Administrative Agent, which agreement is in form and substance reasonably acceptable to the Administrative Agent and which provides the Administrative Agent with “control” (as such term is used in Article 9 of the UCC) over the deposit account(s) or securities account(s) described therein.

 

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Recipient ” means the Administrative Agent, any Lender, the L/C Issuer or any other recipient of any payment to be made by or on account of any obligation of any Loan Party hereunder.

 

Register ” has the meaning specified in Section 11.06(c).

 

Related Parties ” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.

 

Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the thirty (30) day notice period has been waived.

 

Request for Credit Extension ” means (a) with respect to a Borrowing or continuation of Revolving Loans, a Loan Notice, (b) with respect to an L/C Credit Extension, a Letter of Credit Application, and (c) with respect to a Swingline Loan, a Swingline Loan Notice.

 

Required Lenders ” means, at any time, Lenders having Total Credit Exposures representing more than 50% of the Total Credit Exposures of all Lenders. The Total Credit Exposure of any Defaulting Lender shall be disregarded in determining Required Lenders at any time; provided that, the amount of any participation in any Swingline Loan and Unreimbursed Amounts that such Defaulting Lender has failed to fund that have not been reallocated to and funded by another Lender shall be deemed to be held by the Lender that is the Swingline Lender or L/C Issuer, as the case may be, in making such determination.

 

Required Revolving Lenders ” means, at any time, Revolving Lenders having Total Revolving Credit Exposures representing more than 50% of the Total Revolving Credit Exposures of all Revolving Lenders. The Total Revolving Credit Exposure of any Defaulting Lender shall be disregarded in determining Required Revolving Lenders at any time; provided that, the amount of any participation in any Swingline Loan and Unreimbursed Amounts that such Defaulting Lender has failed to fund that have not been reallocated to and funded by another Lender shall be deemed to be held by the Revolving Lender that is the Swingline Lender or L/C Issuer, as the case may be, in making such determination.

 

Resignation Effective Date ” has the meaning set forth in Section 9.06(a).

 

Responsible Officer ” means the chief executive officer, president, chief financial officer, treasurer, assistant treasurer or controller of a Loan Party, solely for purposes of the delivery of incumbency certificates pursuant to Section 4.01, the secretary or any assistant secretary of a Loan Party and, solely for purposes of notices given pursuant to Article II, any other officer of the applicable Loan Party so designated by any of the foregoing officers in a notice to the Administrative Agent. Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party. To the extent requested by the Administrative Agent, each Responsible Officer will provide an incumbency certificate, in form and substance satisfactory to the Administrative Agent.

 

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Restricted Payment ” means (a) any dividend or other distribution (including, without limitation, Permitted Tax Distributions), direct or indirect, on account of any shares (or equivalent) of any class of Equity Interests of the Borrower or any of its Subsidiaries, now or hereafter outstanding, (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares (or equivalent) of any class of Equity Interests of the Borrower or any of its Subsidiaries, now or hereafter outstanding, and (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of Equity Interests of any Loan Party or any of its Subsidiaries, now or hereafter outstanding.

 

Revolving Borrowing ” means a borrowing consisting of simultaneous Revolving Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Revolving Lenders pursuant to Section 2.01.

 

Revolving Commitment ” means, as to each Revolving Lender, its obligation to (a) make Revolving Loans to the Borrower pursuant to Section 2.01, (b) purchase participations in L/C Obligations, and (c) purchase participations in Swingline Loans, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 1.01(b) under the caption “Revolving Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. The Revolving Commitment of all of the Revolving Lenders on the Closing Date shall be $20,000,000.

 

Revolving Exposure ” means, as to any Lender at any time, the aggregate principal amount at such time of its outstanding Revolving Loans and such Lender’s participation in L/C Obligations and Swingline Loans at such time.

 

Revolving Facility ” means, at any time, the aggregate amount of the Revolving Lenders’ Revolving Commitments at such time.

 

Revolving Lender ” means, at any time, (a) so long as any Revolving Commitment is in effect, any Lender that has a Revolving Commitment at such time or (b) if the Revolving Commitments have terminated or expired, any Lender that has a Revolving Loan or a participation in L/C Obligations or Swingline Loans at such time.

 

Revolving Loan ” has the meaning specified in Section 2.01.

 

Revolving Note ” means a promissory note made by the Borrower in favor of a Revolving Lender evidencing Revolving Loans or Swingline Loans, as the case may be, made by such Revolving Lender, substantially in the form of Exhibit G .

 

S&P ” means Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., and any successor thereto.

 

Sale and Leaseback Transaction ” means, with respect to any Loan Party or any Subsidiary, any arrangement, directly or indirectly, with any Person whereby such Loan Party or such Subsidiary shall sell or transfer any property used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property being sold or transferred.

 

Sanction(s) ” means any international economic sanction administered or enforced by the United States Government (including, without limitation, OFAC), the United Nations Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.

 

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SEC ” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

 

Secured Cash Management Agreement ” means any Cash Management Agreement between any Loan Party and any of its Subsidiaries and any Cash Management Bank.

 

Secured Guarantors ” means each Guarantor other than Parent and Ultimate Parent.

 

Secured Hedge Agreement ” means any interest rate, currency, foreign exchange, or commodity Swap Contract permitted under Article VI or VII between any Loan Party and any of its Subsidiaries and any Hedge Bank.

 

Secured Obligations ” means all Obligations and all Additional Secured Obligations.

 

Secured Parties ” means, collectively, the Administrative Agent, the Lenders, the L/C Issuer, the Hedge Banks, the Cash Management Banks, the Indemnitees and each co-agent or sub-agent appointed by the Administrative Agent from time to time pursuant to Section 9.05.

 

Secured Party Designation Notice ” means a notice from any Lender or an Affiliate of a Lender substantially in the form of Exhibit H .

 

Securities Act ” means the Securities Act of 1933, including all amendments thereto and regulations promulgated thereunder.

 

Security Agreement ” means the security and pledge agreement, dated as of the Closing Date, executed in favor of the Administrative Agent by Borrower.

 

Solvency Certificate ” means a solvency certificate in substantially in the form of Exhibit I .

 

Solvent ” and “ Solvency ” mean, with respect to any Person on any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature, (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (e) such Person is able to pay its debts and liabilities, contingent obligations and other commitments as they mature in the ordinary course of business. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.

 

Specified Loan Party ” means any Loan Party that is not then an “eligible contract participant” under the Commodity Exchange Act (determined prior to giving effect to Section 10.11).

 

Subsidiary ” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of Voting Stock is at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Loan Parties.

 

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Swap Contract ” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master