B. RILEY FINANCIAL, INC. 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," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "future," "intend," "seek," "likely," "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. Except as required by law 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 consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual 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 Annual 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; our exposure to credit risk; 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 or at-the-market offering as necessary; failure to comply with the terms of our credit agreements or senior notes; our ability to meet future capital requirements; our ability to realize the benefits of our completed 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 diversion of management time on acquisition- related issues; the failure of our brand investment portfolio licensees to pay us royalties; and the intense competition to which our brand investment portfolio is subject. 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," "B. Riley Financial ," "we," "us" or "our" refer to the combined business ofB. Riley Financial, Inc. and all of its subsidiaries. Overview General
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providing financial advisory, corporate finance, research, securities lending
and sales and trading services to corporate, institutional and high net worth
individual clients. B. Riley FBR was formed in
of
acquired in
changed to
?
comprehensive wealth management and brokerage services to individuals and
families, corporations and non-profit organizations, including qualified
retirement plans, trusts, foundations and endowments. B. Riley Wealth
Management was formerly
on
55
?
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
private funds,
provide senior secured loans and second lien secured loan facilities to middle
market public and private
?
advisory services firm that provides consulting services to shareholders,
creditors and companies, including due diligence, fraud investigations,
corporate litigation support, crisis management and bankruptcy services. We
acquired GlassRatner on
diverse platform and compliments the restructuring services provided by B.
Riley FBR.
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disposition and auction solutions to a wide range of retail and industrial
clients.
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of appraisal and valuation services for asset based lenders, private equity
firms and corporate clients. We also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics. We acquiredUnited Online, Inc. ("UOL" or "United Online") onJuly 1, 2016 and magicJackVocalTec Ltd. ("magicJack") onNovember 14, 2018 as part of our principal investment strategy.
? UOL is a communications company that offers consumer subscription services and
products, consisting of Internet access services and devices under the
and Juno brands primarily sold in
? magicJack is a Voice over IP ("VoIP") cloud-based technology and services
communications provider.
BR Brand, in which the company owns a majority interest, provides licensing of a brand investment portfolio. BR Brand owns the assets and intellectual property related to licenses of six brands:Catherine Malandrino , English Laundry,Joan Vass , Kensie Girl,Limited Too andNanette Lepore .
We are headquartered in
For financial reporting purposes we classify our businesses into five operating segments: (i) Capital Markets, (ii) Auction and Liquidation, (iii) Valuation and Appraisal, (iv) Principal Investments - United Online and magicJack and (v) Brands. Capital Markets Segment. OurCapital Markets segment provides a full array of investment banking, corporate finance, consulting, financial advisory, research, securities lending, wealth management and 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. OurCapital 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 ofEurope ,Asia andAustralia . Our Auction and Liquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions 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. 56
Principal Investments - United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, through which we provide consumer Internet access, and magicJack, through which we provide VoIP communication and related product and subscription services. Brands Segment.Our Brands segment consists of our brand investment portfolio that is focused on generating revenue through the licensing of trademarks and is held by BR Brand. Recent Developments Securities Offerings Preferred Stock Offering OnOctober 7, 2019 , we closed our underwritten public offering of Depositary Shares, each representing 1/1000th of a share of Series A Preferred Stock. The liquidation preference of each share of Series A Preferred Stock is$25,000 ($25.00 per Depositary Share). At the closing, we issued 2,000 shares of Series A Preferred Stock represented by 2,000,000 Depositary Shares issued. The offering was conducted pursuant to an underwriting agreement, datedOctober 2, 2019 , by and among us and B. Riley FBR, as representative of the several underwriters named therein. OnOctober 11, 2019 , we closed on the issuance of an additional 300,000 additional Depositary Shares pursuant to the full exercise of the underwriters' over-allotment option. The Depositary Shares were offered pursuant to ourSeptember 2019 Shelf Registration.
OnDecember 5, 2019 , we entered into theDecember 2019 Sales Agreement with B. Riley FBR, pursuant to which the Company may offer and sell, from time to time, up to$100,000,000 ofDecember 2019 Offered Securities . Sales of theDecember 2019 Offered Securities pursuant to the Sales Agreement, if any, may be made in transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. B. Riley FBR is not required to sell any specific number of theDecember 2019 Offered Securities , but B. Riley FBR will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between B. Riley FBR and the Company. Under theDecember 2019 Sales Agreement, B. Riley FBR will be entitled to compensation of up to 2.0% of the gross proceeds of allDecember 2019 Offered Securities sold through it as the Company's agent. 6.375 Senior Notes due 2025 OnFebruary 12, 2020 , we closed our underwritten public offering of$132,250,000 aggregate principal amount of 2025 Notes, which included$17.25 million of notes issued pursuant to the full exercise by the underwriters of their overallotment option. The offering was conducted pursuant to an underwriting agreement, datedFebruary 10, 2020 , by and among us and B. Riley FBR, as representative of the several underwriters named therein. The 2025 Notes were offered pursuant to theSeptember 2019 Shelf Registration and the Company's registration statement on Form S-3 (Registration No. 333-236347) filed with theSEC and effective onFebruary 10, 2020 .
OnFebruary 14, 2020 , we filed theFebruary 2020 Registration Statement, which was declared effective by theSEC onFebruary 24, 2020 . Contemporaneously, we entered into theFebruary 2020 Sales Agreement with B. Riley FBR, pursuant to which the Company may offer and sell, from time to time, up to$150,000,000 ofFebruary 2020 Offered Securities . Sales of theFebruary 2020 Offered Securities pursuant to theFebruary 2020 Sales Agreement, if any, may be made in transactions that are deemed to be "at the market offerings" as defined in Rule 415 under the Securities Act. B. Riley FBR is not required to sell any specific number of theFebruary 2020 Offered Securities , butFebruary 2020 will make all sales using commercially reasonable efforts consistent with its normal trading and sales practices on mutually agreed terms between B. Riley FBR and the Company. Under theFebruary 2020 Sales Agreement, B. Riley FBR will be entitled to compensation of up to 2.0% of the gross proceeds of allFebruary 2020 Offered Securities sold through it as the Company's agent. 57
Acquisition of Majority Interest in BR Brand
OnOctober 28, 2019 , the Company and the B. Riley Member completed the acquisition of a majority equity interest in BR Brand in exchange for (i) aggregate consideration of$116.5 million in cash and (ii) the issuance by the Company to Bluestar, an affiliate of the manager of BR Brand, of a warrant to purchase up to 200,000 shares of the Company's Common Stock, par value$0.0001 per share, at an exercise price per share equal to$26.24 . One-third of the shares of common stock issuable under the Warrant vested and became exercisable immediately upon its issuance at the Closing, and the remaining two-thirds of such shares of common stock will vest and become exercisable following the first and/or second anniversaries of the closing, subject to BR Brand's (or another related joint venture with Bluestar) satisfaction of specified financial performance targets. In connection with the closing, the manager of BR Brand caused the transfer to BR Brand of certain trademarks, domain names, license agreements and related assets from existing brand owners. Each of theB. Riley Member and the manager of BR Brand is, as applicable, subject to certain post-closing obligations to indemnify BR Brand for breaches of representations or warranties, covenants certain tax liabilities certain pre-closing liabilities. Results of Operations
The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.
Year Ended
Consolidated Statements of Income
(Dollars in thousands)
Year Ended Year Ended
December 31, 2019 December 31, 2018 Change
Amount % Amount % Amount %
Revenues:
Services and fees $ 566,956 86.9 % $ 384,076 90.8 % $ 182,880 47.6 %
Interest income - Loans and
securities lending 77,221 11.8 % 38,277 9.0 % 38,944 101.7 %
Sale of goods 7,935 1.2 % 638 0.2 % 7,297 n/m
Total revenues 652,112 100.0 % 422,991 100.0 % 229,121 54.2 %
Operating expenses:
Direct cost of services 58,824 9.0 % 34,754 8.2 % 24,070 69.3 %
Cost of goods sold 7,575 1.2 % 800 0.2 % 6,775 846.9 %
Selling, general and
administrative expenses 385,219 59.1 % 310,508 73.4 % 74,711 24.1 %
Restructuring charge 1,699 0.3 % 8,506 2.0 % (6,807 ) (80.0 )%
Interest expense - Securities
lending and loan participations
sold 32,144 4.9 % 23,039 5.4 % 9,105 39.5 %
Total operating expenses 485,461 74.5 % 377,607 89.2 % 107,854 28.6 %
Operating income 166,651 25.6 % 45,384 10.7 % 121,267 267.2 %
Other income (expense):
Interest income 1,577 0.2 % 1,326 0.3 % 251 18.9 %
(Loss) income on equity
investments (1,431 ) (0.2 )% 7,986 1.9 % (9,417 ) (117.9 )%
Interest expense (50,205 ) (7.7 )% (33,393 ) (7.9 )% (16,812 ) 50.3 %
Income before income taxes 116,592 17.9 % 21,303 5.0 % 95,289 447.3 %
Provision for income taxes (34,644 ) (5.3 )% (4,903 ) (1.2 )% (29,741 ) 606.6 %
Net income 81,948 12.6 % 16,400 3.9 % 65,548 399.7 %
Net income attributable to
noncontrolling interests 337 0.1 % 891 0.2 % (554 ) (62.2 )%
Net income attributable to B.
Riley Financial, Inc. 81,611 12.5 % 15,509 3.7 % 66,102 426.2 %
Preferred stock dividends 264 0.0 % - 0.0 % 264 n/m
Net income available to common
shareholders $ 81,347 12.5 % $ 15,509 3.7 % $ 65,838 424.5 %
n/m - Not applicable or not meaningful.
58
Revenues
The table below and the discussion that follows are based on how we analyze our
business.
Year Ended Year Ended
December 31, 2019 December 31, 2018 Change
Amount % Amount % Amount %
Revenues - Services and
fees:
Capital Markets segment $ 408,637 62.7 % $ 236,789 56.0 % $ 171,848 72.6 %
Auction and Liquidation
segment 18,296 2.8 % 54,923 13.0 % (36,627 ) (66.7 )%
Valuation and Appraisal
segment 38,821 6.0 % 38,705 9.2 % 116 0.3 %
Principal Investments -
United Online and magicJack
segment 97,147 14.9 % 53,659 12.7 % 43,488 81.0 %
Brands 4,055 0.6 % - 0.0 % 4,055 n/m
Subtotal 566,956 86.9 % 384,076 90.8 % 182,880 47.6 %
Revenues - Sale of goods
Auction and Liquidation
segment 4,220 0.6 % 63 0.0 % 4,157 n/m
Principal Investments -
United Online and magicJack
segment 3,715 0.6 % 575 0.1 % 3,140 n/m
Subtotal 7,935 1.2 % 638 0.2 % 7,297 n/m
Interest income - Loans and
securities lending:
Capital Markets segment 77,221 11.8 % 38,277 9.0 % 38,944 101.7 %
Total revenues $ 652,112 100.0 % $ 422,991 100.0 % $ 229,121 54.2 %
n/m - Not applicable or not meaningful.
Total revenues increased approximately$229.1 million to$652.1 million during the year endedDecember 31, 2019 from$423.0 million during the year endedDecember 31, 2018 . The increase in revenues during the year endedDecember 31, 2019 was primarily due to an increase in revenue from services and fees of$182.9 million , an increase in revenue from interest income - loans and securities lending of$38.9 million and increase in revenue from sale of goods of$7.3 million . The increase in revenue from services and fees of$182.9 million in 2019 was primarily due to an increase in revenue of$171.8 million in the Capital Markets segment,$0.1 million in the Valuation and Appraisal segment,$43.5 million in the Principal Investments - United Online and magicJack segment and$4.1 million in the Brands segment, partially offset by a decrease of$36.6 million in the Auction and Liquidation segment,. Revenues from services and fees in the Capital Markets segment increased approximately$171.8 million , to$408.6 million during the year endedDecember 31, 2019 from$236.8 million during the year endedDecember 31, 2018 . The increase in revenues was primarily due to an increase in revenue of$115.0 million from trading gains, an increase in revenue of$24.8 million from consulting fees primarily as a result of the acquisition of GlassRatner onAugust 1, 2018 , an increase in investment banking fees of$24.2 million and an increase in asset management fees and carried interest of$10.3 million . The$115.0 million increase in trading gains includes realized and unrealized amounts earned on investments made in our proprietary trading account. Investments made in our proprietary trading account has increased from$273.6 million atDecember 31, 2018 to$451.6 million atDecember 31, 2019 . Revenues from services and fees in the Auction and Liquidation segment decreased$36.6 million , to$18.3 million during the year endedDecember 31, 2019 from$54.9 million during the year endedDecember 31, 2018 . The decrease in revenues of$36.6 million was primarily due to a decrease in revenues of$31.8 million from services and fees related to retail liquidation engagements and a decrease in revenues of$2.5 million from services and fees in our wholesale and industrial auction division. The$31.8 million decrease in revenues from retail liquidation engagements was caused by a retail engagement loss incurred for a contract entered into during the fourth quarter of 2019 to liquidate the assets of a retailer where the funds advanced exceed the expected recovery. Revenues from services and fees in the Valuation and Appraisal segment increased$0.1 million , to$38.8 million during the year endedDecember 31, 2019 from$38.7 million during the year endedDecember 31, 2018 . The increase in revenues in the Valuation and Appraisal segment is primarily due to an increase in revenues for appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors. Revenues from services and fees in the Principal Investments - United Online and magicJack segment increased$43.5 million to$97.1 million year endedDecember 31, 2019 from$53.7 million during the year endedDecember 31, 2018 . The increase in revenues from services and fees is a result of the acquisition of magicJack onNovember 14, 2018 in the segment for the full year endedDecember 31, 2019 which increased revenue$53.3 million from the year endedDecember 31, 2018 . This increase was partially offset by a decrease in services and fees revenue from UOL of$9.8 million . Management expects revenues from UOL continue to decline year over year. The primary source of revenue included in this segment is subscription services revenue and some advertising and other revenues. 59
Revenues from services and fees in the Brands segment were$4.1 million for the year endedDecember 31, 2019 . We established the Brands segment in 2019 following the acquisition of a majority interest in BR Brands onOctober 28, 2019 . The primary source of revenue included in this segment is the licensing of trademarks.
Interest income - loans and securities lending increased$38.9 million , to$77.2 million during the year endedDecember 31, 2019 from$38.3 million during the year endedDecember 31, 2018 . Interest income from securities lending was$40.2 million and$31.8 million during the year endedDecember 31, 2019 and 2018, respectively. Interest income from loans was$34.6 million and$6.5 million during the year endedDecember 31, 2019 and 2018, respectively. The increase in interest income on loans was primarily due to the increase in lending activities in our Capital Markets segment which included an increase in loans receivable to$225.8 million atDecember 31, 2019 from$38.8 million
atDecember 31, 2018 .
Sale of Goods, Cost of Goods Sold and Gross Margin
Year Ended December 31, 2019 Year Ended December 31, 2018
Principal Principal
Investments - Investments -
Auction and United Online Auction and United Online
Liquidation and magicJack Liquidation and magicJack
Segment Segment Total Segment Segment Total
Revenues - Sale of Goods $ 4,220 $ 3,715 $ 7,935 $ 63 $ 575 $ 638
Cost of goods sold 4,016 3,559 7,575 41 759 800Gross margin on sale of goods $ 204 $ 156$ 360 $ 22$ (184 ) $ (162 ) Gross margin percentage 4.8 % 4.2 %
4.5 % 34.9 % (32.0 )% (25.4 )%
Revenues from the sale of goods increased $7.3 million , to $7.9 million during
the year ended December 31, 2019 from $0.6 million during the year ended
December 31, 2018 . The increase in revenues from sale of goods were primarily
attributable to $4.2 million of goods sold as part of our retail liquidation
engagements and $3.1 million of sales of magicJack devices that are sold in
connection with VoIP services and, to a lesser extent, sale of mobile broadband
devices from UOL that are sold in connection with the mobile broadband services.
Cost of goods sold for the year ended December 31, 2019 was $7.6 million ,
resulting in a gross margin of 4.5%.
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
year ended
Year Ended December 31, 2019 Year Ended December 31, 2018
Principal Principal
Investments - Investments -
Auction and United Online Auction and United Online
Liquidation and magicJack Liquidation and magicJack
Segment Segment Total Segment Segment TotalRevenues - Services and fees $ 18,296$ 97,147 $ 54,923$ 53,659 Direct cost of services 33,296 25,529$ 58,825 19,627 15,127$ 34,754 Gross margin on services and fees $ (15,000 )$ 71,618 $ 35,296$ 38,532 Gross margin percentage -82.0 % 73.7 % 64.3 % 71.8 % Total direct costs increased$24.1 million , to$58.8 million during the year endedDecember 31, 2019 from$34.8 million during the year endedDecember 31, 2018 . Direct costs of services increased by$13.7 million in the Auction and Liquidation segment and$10.4 million in the Principal Investments - United Online and magicJack segment. The increase in direct costs in the Auction and Liquidation segment was primarily due to mix of engagement types performed during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The increase in direct costs in the Principal Investments - United Online and magicJack segment was primarily as a result of the acquisition of magicJack onNovember 14, 2018 . Auction and Liquidation Gross margin in the Auction and Liquidation segment for services and fees decreased to a loss of 82.0% of revenues during the year endedDecember 31, 2019 , as compared to 64.3% of revenues during the year endedDecember 31, 2018 . The decrease in margin in the Auction and Liquidation segment is due to a retail engagement loss incurred for a contract entered into during the fourth quarter of 2019 to liquidate the assets of a retailer where the funds advanced exceed the expected recovery. 60
Principal Investments - United Online and magicJack
Gross margins in the Principal Investments - United Online and magicJack segment increased to 73.7% of revenues year endedDecember 31, 2019 as compared to 71.8% of revenues during the year endedDecember 31, 2018 . The increase in margin in the Principal Investments - United Online and magicJack segment is primarily due to the mix of revenues of services and fees and as a result of the acquisition of magicJack onNovember 14, 2018 .
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the year ended
Selling, General and Administrative Expenses
Year Ended Year Ended
December 31, 2019 December 31, 2018 Change
Amount % Amount % Amount %
Capital Markets segment $ 274,469 71.2 % $ 233,497 75.1 % $ 40,972 17.5 %
Auction and Liquidation
segment 10,737 2.8 % 8,305 2.7 % 2,432 29.3 %
Valuation and Appraisal
segment 28,584 7.4 % 27,608 8.9 % 976 3.5 %
Principal Investments -
United Online and magicJack
segment 36,914 9.6 % 18,563 6.0 % 18,351 98.9 %
Brands 1,388 0.4 % - 0.0 % 1,388 n/m
Corporate and Other segment 33,127 8.6 % 22,535 7.3 % 10,592 47.0 % Total selling, general & administrative expenses$ 385,219 100.0 %$ 310,508 100.0 %$ 74,711 24.1 %
Total selling, general and administrative expenses increased$74.7 million to$385.2 million during the year endedDecember 31, 2019 from$310.5 million for the year endedDecember 31, 2018 . The increase of$74.7 million in selling, general and administrative expenses was due to an increase of$41.0 million in the Capital Markets segment, an increase of$2.4 million in the Auction and Liquidation segment, an increase of$1.0 million in the Valuation and Appraisal segment, an increase of$18.4 million in the Principal Investments - United Online and magicJack segment an increase of$1.4 million in the Brands segment and an increase of$10.6 million in the Corporate and Other segment. Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by$41.0 million to$274.5 million during the year endedDecember 31, 2019 from$233.5 million during the year endedDecember 31, 2018 . The increase was primarily due to an increase of$14.6 million in payroll and related expenses primarily as a result of the acquisition of GlassRatner onAugust 1, 2018 . Selling, general and administrative expenses in the Capital Markets segment also increased during the year endedDecember 31, 2019 by$13.3 million in professional advisory fees incurred in connection with the management of certain investments that are included in securities and other investments owned. Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment increased by$2.4 million to$10.7 million during the year endedDecember 31, 2019 from$8.3 million during the year endedDecember 31, 2018 . The increase in selling, general and administrative expenses in the Auction and Liquidation segment was primarily due to an increase of$2.0 million in payroll and related expenses. Valuation and Appraisal
Selling, general and administrative expenses in the Valuation and Appraisal segment increased by$1.0 million to$28.6 million during the year endedDecember 31, 2019 from$27.6 million during the year endedDecember 31, 2018 . The increase in selling, general and administrative expenses in the Valuation and Appraisal segment was primarily due to an increase of$0.5 million in payroll and related expenses and an increase in general operating expenses.
Principal Investments - United Online and magicJack
Selling, general and administrative expenses in the Principal Investments - United Online and magicJack segment increased by$18.4 million to$36.9 million for the year endedDecember 31, 2019 from$18.6 million for the year endedDecember 31, 2018 . The increase in selling, general and administrative expenses in the Principal Investments - United Online and magicJack segment is due to the acquisition of magicJack onNovember 14, 2018 . magicJack's selling, general and administrative expenses included in the segment for the year ended December
31, 2019 was$22.3 million . 61 Brands Selling, general and administrative expenses in the Brands segment was$1.4 million for the year endedDecember 31, 2019 . We established the Brands segment in 2019 following the acquisition of a majority equity interest in
BR Brands onOctober 28, 2019 . Corporate and Other Selling, general and administrative expenses for the Corporate and Other segment increased$10.6 million to$33.1 million during the year endedDecember 31, 2019 from$22.5 million for the year endedDecember 31, 2018 . The increase of expenses in the Corporate and Other segment for the year endedDecember 31, 2019 was primarily due to an increase of$9.2 million in payroll and related expenses. Restructuring Charge. Restructuring charge decreased$6.8 million to$1.7 million for the year endedDecember 31, 2019 . The restructuring charges during the year endedDecember 31, 2019 were primarily related to severance costs for magicJack employees from a reduction in workforce and lease termination costs in the Principal Investments - United Online and magicJack segment. The restructuring charge of$8.5 million during the year endedDecember 31, 2018 was primarily related to severance costs and lease loss accruals for the planned consolidation of office space related to operations in the Capital Markets segment and the impairment of tradename for the rebranding of B. Riley Wealth Management. Other Income (Expense).Other income included interest income of$1.6 million during the year endedDecember 31, 2019 compared to$1.3 million during the year endedDecember 31, 2018 . Loss on equity investments was$1.4 million during the year endedDecember 31, 2019 compared to income of$8.0 million during the year endedDecember 31, 2018 . Interest expense was$50.2 million during the year endedDecember 31, 2019 compared to$33.4 million during the year endedDecember 31, 2018 . The increase in interest expense during the year endedDecember 31, 2019 was primarily due to an increase in interest expense of$18.4 million from the issuance of senior notes, and an increase in interest expense of$4.2 million from the term loan datedDecember 2018 , offset by a decrease in interest expense on our asset based credit facility and other borrowings in connection with retail liquidation engagements of$6.4 million . Income Before Income Taxes. Income before income taxes increased$95.3 million to income before income taxes of$116.6 million during the year endedDecember 31, 2019 from an income before income taxes of$21.3 million during the year endedDecember 31, 2018 . The increase in income before income taxes was primarily due to an increase in revenues of approximately$229.1 million offset by an increase in operating expenses of$107.9 million , and a decrease in income from equity investments of$9.4 million and an increase in interest expense
of$16.8 million . Provision for Income Taxes. Provision for income taxes was$34.6 million during the year endedDecember 31, 2019 compared to provision for income taxes of$4.9 million during the year endedDecember 31, 2018 . The effective income tax rate was a provision of 29.7% for the year endedDecember 31, 2019 as compared to a provision of 23.0% for the year endedDecember 31, 2018 . Net Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interests represents the proportionate share of net income generated by BR Brand, 20% of the membership interest of which we do not own andGreat American Global Partners, LLC , 50% of the membership interest of which we do not own. The net income attributable to noncontrolling interests was$0.3 million during the year endedDecember 31, 2019 compared to$0.9 million during the year endedDecember 31, 2018 . Net Income Attributable to the Company. Net income attributable to the Company for the year endedDecember 31, 2019 was$81.6 million , an increase of net income of$66.1 million , from net income attributable to the Company of$15.5 million for the year endedDecember 31, 2018 . Increase in net income attributable to the Company during the year endedDecember 31, 2019 as compared to the same period in 2018 was primarily due to an increase in operating income of$121.3 million , offset by an increase in interest expense of approximately$16.8 million , a decrease in income from equity investments of$9.4 million and an increase in provision for income taxes of$29.7 million . Preferred Stock Dividends. OnOctober 7, 2019 , the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value$0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the$25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to$1,718.75 or$1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. OnOctober 15, 2019 , the Company declared a cash dividend of$0.3 million representing$0.11458333 per Depositary Share. The dividend was paid onOctober 31, 2019 to holders of record as of the close of business onOctober 21, 2019 . OnJanuary 9, 2020 , the Company declared a cash dividend representing$0.4296875 per Depositary Share, which was paid onJanuary 31, 2019 to holders of record as of the close of business onJanuary 21, 2019 .
Net Income Available to Common Shareholders. Net income available to common shareholders for the year endedDecember 31, 2019 was$81.3 million , an increase of$65.8 million , from net income available to common shareholders of$15.5 million for the year endedDecember 31, 2018 . The increase in net income available to common shareholders during the year endedDecember 31, 2019 as compared to the same period in 2018 was primarily due to an increase in operating income of$121.3 million , offset by an increase in interest expense of approximately$16.8 million , a decrease in income from equity investments of$9.4 million and an increase in provision for income taxes of$29.7 million . 62
Year Ended
Consolidated Statements of Income
(Dollars in thousands)
Year Ended Year Ended
December 31, 2018 December 31, 2017 Change
Amount % Amount % Amount %
Revenues:
Services and fees $ 384,076 90.8 % $ 302,113 93.8 % $ 81,963 27.1 %
Interest income - Loans and
securities lending 38,277 9.0 % 19,756 6.1 % 18,521 93.7 %
Sale of goods 638 0.2 % 307 0.1 % 331 107.8 %
Total revenues 422,991 100.0 % 322,176 100.0 % 100,815 31.3 %
Operating expenses:
Direct cost of services 34,754 8.2 % 40,625 12.6 % (5,871 ) (14.5 )%
Cost of goods sold 800 0.2 % 398 0.1 % 402 101.0 %
Selling, general and
administrative expenses 310,508 73.4 % 227,884 70.7 % 82,624 36.3 %
Restructuring charge 8,506 2.0 % 12,374 3.8 % (3,868 ) (31.3 )%
Interest expense -
Securities lending and loan
participations sold 23,039 5.4 % 12,051 3.7 % 10,988 91.2 %
Total operating expenses 377,607 89.2 % 293,332 90.9 % 84,275 28.7 %
Operating income 45,384 10.7 % 28,844 9.0 % 16,540 57.3 %
Other income (expense):
Interest income 1,326 0.3 % 420 0.1 % 906 215.7 %
Income (loss) on equity
investments 7,986 1.9 % (437 ) (0.1 )% 8,423 n/m
Interest expense (33,393 ) (7.9 )% (8,382 ) (2.6 )% (25,011 ) 298.4 %Income before income taxes 21,303 5.0 % 20,445 6.4 % 858 4.2 % Provision for income taxes (4,903 ) (1.2 )% (8,510 ) (2.6 )% 3,607 (42.4 )% Net income 16,400 3.9 % 11,935 3.7 % 4,465 37.4 % Net income attributable to noncontrolling interests 891 0.2 % 379 0.1 % 512 135.1 % Net income attributable to B. Riley Financial, Inc.$ 15,509 3.7 %$ 11,556 3.6 %$ 3,953 34.2 %
n/m - Not applicable or not meaningful.
Revenues
The table below and the discussion that follows are based on how we analyze our
business.
Year Ended Year Ended
December 31, 2018 December 31, 2017 Change
Amount % Amount % Amount %
Revenues - Services and
fees:
Capital Markets segment $ 236,789 56.0 % $ 169,967 52.8 % $ 66,822 39.3 %
Auction and Liquidation
segment 54,923 13.0 % 47,376 14.7 % 7,547 15.9 %
Valuation and Appraisal
segment 38,705 9.2 % 33,331 10.3 % 5,374 16.1 %
Principal Investments -
United Online and magicJack
segment 53,659 12.7 % 51,439 16.0 % 2,220 4.3 %
Subtotal 384,076 90.8 % 302,113 93.8 % 81,963 27.1 %
Revenues - Sale of goods
Auction and Liquidation
segment 63 0.0 % 3 0.0 % 60 n/m
Principal Investments -
United Online and magicJack
segment 575 0.1 % 304 0.1 % 271 n/m
Subtotal 638 0.2 % 307 0.1 % 331 n/m
Interest income - Loans and
securities lending:
Capital Markets segment 38,277 9.0 % 19,756 6.1 % 18,521 93.7 %
Total revenues $ 422,991 100.0 % $ 322,176 100.0 % $ 100,815 31.3 %
n/m - Not applicable or not meaningful.
63
Total revenues increased $100.8 million to $423.0 million during the year ended
December 31, 2018 from $322.2 million during the year ended December 31, 2017 .
The increase in revenues during the year ended December 31, 2018 was primarily
due to an increase in revenue from services and fees of $82.0 million , an
increase in revenue from interest income - loans and securities lending of $18.5
million and increase in revenue from sale of goods of $0.3 million . The increase
in revenue from services and fees of $82.0 million in 2018 was primarily due to
an increase in revenue of $66.8 million in the Capital Markets segment, $7.5
million in the Auction and Liquidation segment, $5.4 million in the Valuation
and Appraisal segment and $2.2 million in the Principal Investments - United
Online and magicJack segment.
Revenues from services and fees in the Capital Markets segment increased $66.8
million , or 39.3% to $236.8 million during the year ended December 31, 2018 from
$170.0 million during the year ended December 31, 2017 . The increase in revenues
was primarily due to an increase in revenue of $25.4 million from investment
banking fees, an increase in revenue of $33.9 million from wealth management
services, an increase in revenue of $12.8 million from consulting fees as a
result of the acquisition of GlassRatner on August 1, 2018 , an increase of $13.5
million from commissions and fees revenue from research, sales and trading and
an increase of $7.4 million of other revenues, offset by a decrease in revenues
of $23.1 million from trading gains. Included in the revenue from the Capital
Markets segment during the year ended December 31, 2018 is full year revenue of
FBR and Wunderlich, which the company acquired on June 1, 2017 and July 2 ,2017, respectively. Revenues from services and fees in the Auction and Liquidation segment increased$7.5 million , or 15.9%, to$54.9 million during the year endedDecember 31, 2018 from$47.4 million during the year endedDecember 31, 2017 . The increase in revenues of$7.5 million was primarily due to an increase in revenues of$5.8 million from services and fees from retail liquidation engagements and an increase in revenues of$1.7 million from services and fees in our wholesale and industrial auction division. Revenues from services and fees in the Valuation and Appraisal segment increased$5.4 million , or 16.1%, to$38.7 million during the year endedDecember 31, 2018 from$33.3 million during the year endedDecember 31, 2017 . The increase in revenues was primarily due to$3.9 million increase related to appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors,$1.3 million increase related to appraisal engagements where we perform valuations of intellectual property and business valuations, and$0.2 million increase related to appraisal engagements where we perform valuations of machinery and equipment. Revenues from services and fees in the Principal Investments - United Online and magicJack segment increased$2.2 million to$53.7 million during the year endedDecember 31, 2018 from$51.4 million during the year endedDecember 31, 2017 . Revenues from services and fees as a result of the acquisition of magicJack included in the segment for the period fromNovember 14, 2018 (acquisition date) throughDecember 31, 2018 were$8.8 million . UOL services revenues primarily from customer paid accounts related to our Internet access and related subscription services decreased approximately$3.8 million to$35.4 million during the year endedDecember 31, 2018 from$39.2 million during the year endedDecember 31, 2017 . Advertising revenues from Internet display advertising and search related to our email and Internet access services decreased$2.7 million to$9.5 million during the year endedDecember 31, 2018 from$12.2 million during the year endedDecember 31, 2017 . Over the past several years revenues from UOL 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 UOL 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 from UOL continue to decline year over year.
Sale of Goods, Cost of Goods Sold and Gross Margin
Year Ended December 31, 2018 Year Ended December 31, 2017
Principal Principal
Investments - Investments -
United Online United Online
Auction and and Auction and and
Liquidation magicJack Liquidation magicJack
Segment Segment Total Segment Segment Total
Revenues - Sale of Goods $ 63 $ 575 $ 638 $ 3 $ 304 $ 307
Cost of goods sold 41 759 800 2 396 398
Gross margin on sale of goods $ 22 $ (184 ) $ (162 ) $ 1 $ (92 )$ (91 ) Gross margin percentage 34.9 % (32.0 )% (25.4 )% 33.3 % (30.3 )% (29.6 )% Revenues from the sale of goods increased$0.3 million , to$0.6 million during the year endedDecember 31, 2018 from$0.3 during the year endedDecember 31, 2017 . Revenues from sale of goods was primarily attributable to the sale of mobile broadband devices from UOL that are sold in connection with the mobile broadband services and the sale of magicJack devices that are sold in connection with VoIP services. Cost of goods sold for the year endedDecember 31, 2018 was$0.8 million , resulting in a gross margin of($0.2) million or (25.4%). Cost of goods sold in 2017 was$0.4 million resulting in a gross margin of($0.1) million or (29.6%) during the year endedDecember 31, 2017 . 64 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
year ended
Year Ended December 31, 2018 Year Ended December 31, 2017
Principal Principal
Investments - Investments -
United Online United Online
Auction and and Auction and and
Liquidation magicJack Liquidation magicJack
Segment Segment Total Segment Segment TotalRevenues - Services and fees $ 54,923$ 53,659 $ 47,376$ 51,439 Direct cost of services 19,627 15,127$ 34,754 27,841 12,784$ 40,625 Gross margin on services and fees $ 35,296$ 38,532
$ 19,535$ 38,655 Gross margin percentage 64.3 % 71.8 % 41.2 % 75.1 %
Total direct costs decreased$5.9 million , to$34.8 million during the year endedDecember 31, 2018 from$40.6 million during the year endedDecember 31, 2017 . Direct costs of services decreased by$8.2 million in the Auction and Liquidation segment, offset by an increase of$2.3 million in the Principal Investments - United Online and magicJack segment. The decrease in direct costs in the Auction and Liquidation segment was primarily due to mix of engagement types performed during the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The increase in direct costs in the Principal Investments - United Online and magicJack segment was primarily as a result of the acquisition of magicJack onNovember 14, 2018 . Auction and Liquidation Gross margin in the Auction and Liquidation segment for services and fees increased to 64.3% of revenues during the year endedDecember 31, 2018 , as compared to 41.2% of revenues during the year endedDecember 31, 2017 . The increase in margin in the Auction and Liquidation segment is due to the mix of engagement types between guarantee and commission and fees engagements performed during the year endedDecember 31, 2018 as compared to the prior year period.
Principal Investments - United Online and magicJack
Gross margins in the Principal Investments-United Online and magicJack segment decreased to 71.8% of revenues during the year endedDecember 31, 2018 as compared to 75.1% of revenues during the year endedDecember 31, 2017 . The decrease in margin in the Principal Investments - United Online and magicJack segment is primarily due to the mix of revenues of services and fees and as a result of the acquisition of magicJack onNovember 14, 2018 .
Selling, General and Administrative Expenses. Selling, general and
administrative expenses during the year ended
Selling, General and Administrative Expenses
Year Ended Year Ended
December 31, 2018 December 31, 2017 Change
Amount % Amount % Amount %
Capital Markets segment $ 233,497 75.1 % $ 153,886 67.5 % $ 79,611 51.7 %
Auction and Liquidation
segment 8,305 2.7 % 8,350 3.7 % (45 ) (0.5 )%
Valuation and Appraisal
segment 27,608 8.9 % 23,618 10.4 % 3,990 16.9 %
Principal Investments -
United Online and magicJack
segment 18,563 6.0 % 18,337 8.0 % 226 1.2 %
Corporate and Other segment 22,535 7.3 % 23,693 10.4 % (1,158 ) (4.9 )% Total selling, general & administrative expenses$ 310,508 100.0 %$ 227,884 100.0 %$ 82,624 36.3 %
Total selling, general and administrative expenses increased$82.6 million , or 36.3%, to$310.5 million during the year endedDecember 31, 2018 from$227.9 million for the year endedDecember 31, 2017 . The increase of$82.6 million in selling, general and administrative expenses was due to an increase of$79.6 million in the Capital Markets segment,$4.0 million in the Valuation and Appraisal segment, and$0.2 million in the Principal Investments - United Online and magicJack segment, offset by a decrease in selling, general and administrative expenses of$1.2 million in the Corporate and Other segment.
65
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment increased by$79.6 million , or 51.7% to$233.5 million during the year endedDecember 31, 2018 from$153.9 million during the year endedDecember 31, 2017 . The increase in expenses was primarily due to an increase of$58.7 million in payroll and related expenses, an increase of$3.5 million in market data and other communication expenses, an increase of$2.7 million in share based payments, an increase of$2.5 million in rent, occupancy and related expenses, an increase of$2.6 million in clearing charges, an increase of$1.3 million in amortization expense, an increase of$2.0 million in business development expenses, an increase of$1.2 million in professional fees and an increase of$5.1 million in other expenses. The selling, general and administrative expenses in the Capital Markets segment for the year endedDecember 31, 2018 included full year expenses of FBR and Wunderlich, which we acquired onJune 1, 2017
andJuly 3, 2017 , respectively. Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation
segment was
Valuation and Appraisal
Selling, general and administrative expenses in the Valuation and Appraisal segment increased$4.0 million , or 16.9%, to$27.6 million during year endedDecember 31, 2018 from$23.6 million for the year endedDecember 31, 2017 . The increase of$4.0 million was primarily due to an increase of$2.7 million in payroll and related expenses, an increase of$0.6 million in professional fees and an increase of$0.7 million in other expenses.
Principal Investments - United Online and magicJack
Selling, general and administrative expenses in the Principal Investments - United Online and magicJack segment increased$0.2 million , or 1.2%, to$18.6 million for the year endedDecember 31, 2018 from$18.3 million for the year endedDecember 31, 2017 . magicJack's selling, general and administrative expenses included in the segment for the period fromNovember 14, 2018 (acquisition date) toDecember 31, 2018 was$2.4 million . Corporate and Other Selling, general and administrative expenses for the Corporate and Other segment decreased$1.2 million , or 4.9%, to$22.5 million during the year endedDecember 31, 2018 from$23.7 million for the year endedDecember 31, 2017 . The decrease of expenses in the Corporate and Other segment for year endedDecember 31, 2018 was primarily due a decrease of$3.0 million primarily related to the fair value adjustment and insurance recovery from key man life insurance in the prior year related to one of our executives in our appraisal segment and decrease in other general administrative expenses of$2.0 million , offset by an increase in payroll and related expenses of$3.8 million . Restructuring Charge. During the year endedDecember 31, 2018 , we incurred restructuring charges of$8.5 million compared to restructuring charges of$12.4 million during the year endedDecember 31, 2017 . Restructuring charges of$8.5 million during the 2018 period was primarily related to severance costs and lease loss accruals for the planned consolidation of office space related to operations in the Capital Markets segment and the impairment of tradename for the rebranding of B. Riley Wealth Management. During the year endedDecember 31, 2017 , we implemented costs savings measures taking into account the planned synergies as a result of the acquisitions of Wunderlich and FBR which included a reduction in force for some of the corporate executives of Wunderlich and FBR and a restructuring to integrate Wunderlich and FBR's operations with our operations. These initiatives resulted in a restructuring charge of$11.7 million during the year endedDecember 31, 2017 . The restructuring charges included$3.3 million related to severance and accelerated vesting of restricted stock awards to former corporate executives of Wunderlich and FBR and$5.0 million of severance, accelerated vesting of stock awards to employees and$3.4 million of lease loss accruals for the planned consolidation of office space related to operations. The restructuring charge in 2017 also included employee termination costs of$0.7 million related to a reduction in personnel in the Principal Investments - United Online and magicJack segment of our operations. Other Income (Expense).Other income included$8.0 million income on equity investments during the year endedDecember 31, 2018 compared to a loss on equity investment of$0.4 million during the same period in 2017. Other income included interest income of$1.3 million during the year endedDecember 31, 2018 as compared to$0.4 million during the year endedDecember 31, 2017 . Interest expense was$33.4 million during the year endedDecember 31, 2018 as compared to$8.4 million during the year endedDecember 31, 2017 . The increase in interest expense of$25.0 million during the year endedDecember 31, 2018 compared to the same period in 2017 was primarily due to an increase in interest expense of$19.0 million from the issuances of senior notes due in 2021, 2023 and 2027; and approximately$6.6 million interest expense related to borrowings in connection with retail liquidation engagements, offset by a decrease in other interest
expense of$0.6 million . 66 Income Before Income Taxes. Income before income taxes increased$0.9 million to$21.3 million during the year endedDecember 31, 2018 from$20.4 million during the year endedDecember 31, 2017 . The increase in income before income taxes of$0.9 million was due to an increase in revenues of$100.8 million , an increase in income from equity investments of$8.4 million and an increase in interest income of$0.9 million , offset by an increase in operating expenses of$84.2 million and an increase in interest expense of$25.0 million . Provision for Income Taxes. Provision for income tax was$4.9 million during the year endedDecember 31, 2018 , a decrease of$3.6 million , from$8.5 million during the year endedDecember 31, 2017 . The effective income tax rate was 23.0% during the year endedDecember 31, 2018 and 41.6% during the year endedDecember 31, 2017 . The provision for income taxes during the year endedDecember 31, 2017 included (a) tax expense of$13.1 million primarily related to revaluation of deferred tax assets at 21.0% as a result of theU.S. Tax Cuts and Jobs Act enacted onDecember 22, 2017 ; and (b) a tax benefit of$8.4 million related to our 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 14 in the consolidated financial statements. The tax provision during the year endedDecember 31, 2017 also includes a tax benefit due to a non-taxable insurance recovery in the amount of$6.0 million that was received in the second quarter of 2017. Net Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interests represents the proportionate share of net income generated byGreat American Global Partners, LLC , in which we have a 50% membership interest that we do not own. The net income attributable to noncontrolling interests was$0.9 million during the year endedDecember 31, 2018 compared to net income attributable to noncontrolling interests of$0.4 million during the year endedDecember 31, 2017 . Net Income Attributable to the Company. Net income attributable to the Company for the year endedDecember 31, 2018 was$15.5 million , an increase of$3.9 million , from$11.6 million during the year endedDecember 31, 2017 . The increase in net income attributable to the Company during the year endedDecember 31, 2018 of$3.9 million was primarily due to an increase in total revenues of$100.8 million , an increase in income from equity investments of$8.4 million , an increase in interest income of$0.9 million and a decrease in provision for income taxes of$3.6 million , offset by an increase in operating expenses of$84.3 million , an increase in interest expense of$25.0 million and an increase in net income attributable to noncontrolling interest of$0.5 million
Liquidity and Capital Resources
Our operations are funded through a combination of existing cash on hand, cash generated from operations, borrowings under our senior notes payable, term loan and credit facility, issuances of common and preferred stock and special purposes financing arrangements. During the years endedDecember 31, 2019 and 2018, we generated net income attributable to the Company of$81.6 million and$15.5 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. As ofDecember 31, 2019 , we had$104.3 million of unrestricted cash and cash equivalents,$0.5 million of restricted cash,$451.6 million of securities and other investments held at fair value,$225.8 million of loans receivable, and$814.9 million of borrowings outstanding. The borrowings outstanding of$814.9 million atDecember 31, 2019 included (a)$118.0 million of borrowings from the issuance of the 7.50% 2027 Notes, (b)$120.1 million of borrowings from the issuance of the 7.25% 2027 Notes, (c)$122.1 million of borrowings from the issuance of the 7.375% 2023 Notes, (d)$106.0 million of borrowings from the issuance of the 6.875% 2023 Notes, (e)$106.6 million of borrowings from the issuance of the 6.75% 2024 Notes, (f)$124.2 million of borrowings from the issuance of the 6.50% 2026 Notes, (g)$67.2 million term loan borrowed pursuant to the BRPAC Credit Agreement discussed below, (h)$38.2 million of notes payable, and (i)$12.5 million of loan participations sold. We believe that our current cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility, and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan. 67 Cash Flow Summary Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Net cash (used in) provided by: Operating activities$ (30,392 ) $ (104,814 ) $ (81,790 ) Investing activities (295,396 ) (151,441 ) (17,836 ) Financing activities 250,176 284,859 134,094 Effect of foreign currency on cash 73 (860 ) 2,667 Net (decrease) increase in cash, cash equivalents and restricted cash$ (75,539 ) $ 27,744 $ 37,135
Year Ended
Cash used in operating activities was$30.4 million during the year endedDecember 31, 2019 compared to cash used in operating activities of$104.8 million during the year endedDecember 31, 2018 . Cash used in operating activities for the year endedDecember 31, 2019 included net income of$81.9 million adjusted for noncash items of$38.0 million and changes in operating assets and liabilities of$150.3 million . Noncash items of$38.0 million include (a) depreciation and amortization of$19.0 million , (b) share-based compensation of$15.9 million , (c) loss on equity investments of$1.4 million , (d) provision for doubtful accounts of$2.1 million , (e) income allocated for mandatorily redeemable noncontrolling interests of$1.2 million , (f) other noncash interest and other of$12.3 million , (g) deferred income taxes of$10.9 million , and (h) impairment of leaseholds, intangibles and lease loss accrual and gain on disposal of fixed assets of$0.3 million . Cash used in investing activities was$295.4 million during the year endedDecember 31, 2019 compared to cash used in investing activities of$151.4 million for the year endedDecember 31, 2018 . During the year endedDecember 31, 2019 , cash used in investing activities consisted of cash used for loans receivable of$343.8 million , cash used for equity investments of$33.4 million , repayments of loan participations sold of$18.9 million , cash used for purchase of a majority equity interest in BR Brands, net of cash acquired of$114.9 million and cash used for purchases of property and equipment and intangible assets of$3.5 million , offset by proceeds from sale of division of magicJack of$6.2 million , cash received from loans receivable repayment of$159.2 million , loan participations sold of$31.8 million , dividends and distributions from equity investments of$21.4 million and proceeds from sale of property, equipment and intangible assets of$0.5 million . During the year endedDecember 31, 2018 , cash used in investing activities consisted of cash used to purchase loans receivable of$38.8 million , cash used for the acquisition of magicJack, net of cash acquired of$89.2 million , cash use for equity investments of$16.6 million , cash used of$4.0 million to acquire a business and cash use of$5.4 million for purchases of property and equipment, offset by$2.6 million dividends received from one of our equity investments. Cash provided by financing activities was$250.2 million during the year endedDecember 31, 2019 compared to cash provided by financing activities of$284.9 million during the year endedDecember 31, 2018 . During the year endedDecember 31, 2019 , cash provided by financing activities primarily consisted of$10.0 million proceeds from our term loan,$281.9 million proceeds from issuance of senior notes,$140.4 million proceeds from our asset based credit facility$56.6 million proceeds from our offering of preferred stock, offset by (a)$103.3 million used for repayment of our asset based credit facility, (b)$41.1 million used to pay dividends on our common shares, (c)$22.7 million used for repayment on our term loan, (d)$7.1 million used to repurchase our common stock and warrants, (e)$4.3 million used for payment of participating note payable and contingent consideration; (f)$3.4 million used to pay debt issuance costs, (g)$2.0 million used for payment of employment taxes on vesting of restricted stock, (h)$2.0 million distribution to noncontrolling interests, and (i)$0.5 million used to repay our other notes payable. During the year endedDecember 31, 2018 , cash provided by financing activities primarily consisted of (a)$300.0 million proceeds from asset based credit facility, (b)$259.0 million proceeds from issuance of senior notes, (c)$80.0 million proceeds from our term loan and (d)$51.0 million in proceeds from notes payable, offset by (a)$300.0 million used to repay the asset based credit facility, (b)$22.7 million used to pay cash dividends, (c)$51.7 million used to repay other notes payable, (d)$1.1 million distributions to noncontrolling interests, (e)$7.3 million used for debt issuance costs, (f)$18.7 million used to repurchase common stock, and (g)$3.7 million used for the payment of employment taxes on vesting of restricted stock.
Year Ended
Cash used in operating activities was$104.8 million for the year endedDecember 31, 2018 , an increase of$23.0 million , from cash used by operating activities of$81.8 million for the year endedDecember 31, 2017 . Cash used in operating activities for the year endedDecember 31, 2018 included net income of$16.4 million adjusted for noncash items and changes in operating assets and liabilities. The increase in cash used in operating activities of$104.8 million was primarily due to changes in operating assets and liabilities that resulted in a decrease of$151.9 million in cash flows from operations during the year endedDecember 31, 2018 , offset by (a) an increase in net income of$4.5 million to$16.4 million during the year endedDecember 31, 2018 from$11.9 million during the year endedDecember 31, 2017 , and (b) an increase in non-cash charges and other items of$30.7 million , which included depreciation and amortization of$13.8 million , share-based compensation of$13.0 million , income on equity investments of$8.0 million , deferred income taxes of$2.0 million , provision for doubtful accounts of$1.3 million , impairment of leaseholds and intangibles, lease loss accrual and loss on disposal of fixed assets of$4.1 million , income allocated for mandatorily redeemable noncontrolling interests of$1.2 million and other non-cash items and effects of foreign currency on operations of$0.9 million . 68
Cash used in investing activities was$151.4 million during the year endedDecember 31, 2018 compared to cash used in investing activities of$17.8 million during for the year endedDecember 31, 2017 . During the year endedDecember 31, 2018 , cash used in investing activities consisted of cash used to purchase loans receivable of$38.8 million , cash use for the acquisition of magicJack, net of cash acquired of$89.2 million , cash use for equity investments of$16.6 million , cash use of$4.0 million to acquire a business and cash use of$5.4 million for purchases of property and equipment, offset by$2.6 million dividends received from one of our equity investments. During the year endedDecember 31, 2017 , cash used in investing activities consisted of (a) cash used to purchase Wunderlich and United Online in the amounts of approximately$25.4 million and$10.4 million , respectively, (b) cash use of$2.1 million for the acquisition of other businesses, (c) cash use of$1.7 million for an equity investment, and (d) cash use of$0.8 million for purchases of property and equipment, offset by (a) cash acquired from the acquisition of FBR of$15.7 million , (b) proceeds from key man life insurance of$6.0 million , and (c) proceeds from sale of property, equipment and other intangibles of$0.8 million . Cash provided by financing activities was$284.9 million during the year endedDecember 31, 2018 compared to$134.1 million during the year endedDecember 31, 2017 . During the year endedDecember 31, 2018 , cash provided by financing activities primarily consisted of (a)$259.0 million proceeds from issuance of senior notes, (b)$80.0 million proceeds from term loan borrowings; (c)$300.0 million proceeds from our asset based credit facility, and (d)$51.0 million proceeds from notes payable, offset by (a)$300.0 million used for repayment of borrowings from our asset based credit facility, (b)$51.7 million repayment of notes payable, (c)$22.7 million used to pay cash dividends, (d)$18.7 million used to repurchase our common stock, (e)$7.3 million used for payment of debt issuance costs, (f)$3.7 million comprised of ESPP shares and payment of employment taxes on vesting of restricted stock, and (g)$1.1 million distribution to noncontrolling interests. During the year endedDecember 31, 2017 , cash provided by financing activities primarily consisted of (a)$66.0 million proceeds from asset based credit facility and (b)$179.5 million proceeds from issuance of senior notes, offset by (a)$66.0 million used to repay the asset based credit facility, (b)$16.8 million used to pay cash dividends, (c) $8.3 million used to repay other notes payable in connection with the acquisition of Wunderlich, (d)$11.3 million distributions to noncontrolling interests, (e)$4.3 million used for debt issuance costs, (f)$1.3 million used for the payment of contingent consideration, and (g)$3.5 million used for the payment of employment taxes on vesting of restricted stock. Credit Agreements
OnApril 21, 2017 , we amended the asset based credit facility agreement (as amended, the "Credit Agreement") withWells Fargo Bank 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 fromJuly 15, 2018 toApril 21, 2022 . The Credit Agreement continues to allow for borrowings under a separate credit agreement (a "UK Credit Agreement") datedMarch 19, 2015 with an affiliate ofWells Fargo Bank which provides for the financing of transactions in theUnited Kingdom with borrowings up to50.0 million British Pounds . Any borrowing on theUK Credit Agreement reduces the availability of the asset based$200.0 million credit facility. TheUK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. The Credit Agreement continues to include the addition of our Canadian subsidiary, from theOctober 5, 2016 amendment to the Credit Agreement, to facilitate borrowings to fund retail liquidation transactions inCanada . 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 theUK 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. 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 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. The outstanding balance on this credit facility was$37.1 million and$0 million atDecember 31, 2019 andDecember 31, 2018 , respectively. AtDecember 31, 2019 , there were no letters of credit outstanding under this credit facility. We are in compliance with all financial covenants in the asset based credit facility atDecember 31, 2019 . 69
OnDecember 19, 2018 ,BRPI Acquisition Co LLC ("BRPAC"), aDelaware limited liability company, UOL, andYMAX Corporation ,Delaware corporations (collectively, the "Borrowers"), indirect wholly owned subsidiaries of the Company, in the capacity of borrowers, entered into a credit agreement withBanc of California, N.A. in the capacity as agent and lender and with the other lenders party thereto (the "BRPAC Credit Agreement"). Under the BRPAC Credit Agreement, we borrowed$80.0 million dueDecember 19, 2023 . Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregate principal amount of up to$10.0 million at any time prior to the first anniversary of the agreement date. OnFebruary 1, 2019 , the Borrowers entered into the First Amendment to Credit Agreement and Joinder withCity National Bank as a new lender in which the new lender extended to Borrowers the additional$10.0 million as further discussed in Note 11 to the accompanying financial statements. The borrowings under the BRPAC Credit Agreement bear interest equal to the LIBOR plus a margin of 2.50% to 3.00% depending on the Borrowers' consolidated total funded debt ratio as defined in the BRPAC Credit Agreement. Borrowings under the BRPAC Credit Agreement are due in quarterly installments commencing onMarch 31, 2019 with any remaining amounts outstanding due at maturity. For the$80.0 million loan, quarterly installments fromDecember 31, 2019 toDecember 31, 2022 are$4.2 million per quarter and fromMarch 31, 2023 toDecember 31, 2023 , the quarterly installments are$2.1 million per quarter. For the$10.0 million loan, quarterly installments fromDecember 31, 2019 toDecember 31, 2022 are$0.6 million per quarter and fromMarch 31, 2023 toDecember 31, 2023 , the quarterly installments are$0.3 million per quarter. AtDecember 31, 2019 andDecember 31, 2018 , the outstanding balance of the term loan was$66.7 million (net of unamortized debt issuance costs of$0.6 million ) and$79.2 million (net of unamortized debt issuance costs of$0.8 million ), respectively. We are in compliance with all financial covenants in the BRPAC Credit Agreement atDecember 31, 2019 . Preferred stock offering OnOctober 7, 2019 , the Company closed its public offering of depositary shares, each representing 1/1000th of a share of Series A Preferred Stock. The liquidation preference of each share of Series A Preferred Stock is$25,000 ($25.00 per Depositary Share). At the closing, the Company issued 2,000 shares of Series A Preferred Stock represented by 2,000,000 Depositary Shares issued. OnOctober 11, 2019 , the Company completed the sale of an additional 300,000 Depositary Shares, pursuant to the underwriters' full exercise of their over-allotment option to purchase additional Depositary Shares. The offering of the 2,300,000 Depository Shares generated$57,500 of gross proceeds. Senior Note Offerings Senior notes payable, net, is comprised of the following as ofDecember 31, 2019 and 2018: December 31, December 31, 2019 2018 7.50% Senior notes due October 31, 2021 $ - $
46,407
7.50% Senior notes dueMay 31, 2027 117,954
108,792
7.25% Senior notes dueDecember 31, 2027 120,126
100,441
7.375% Senior notes dueMay 31, 2023 122,140
111,528
6.875% Senior notes dueSeptember 30, 2023 105,952
100,050
6.75% Senior notes dueMay 31, 2024 106,589
-
6.50% Senior notes dueSeptember 30, 2026 124,226
-
696,987 467,218
Less: Unamortized debt issuance costs (8,875 ) (7,464 )
$ 688,112 $ 459,754 During the years endedDecember 31, 2019 and 2018, we issued$66.9 million and$58.9 million of senior notes due with maturities dates ranging fromOctober 2021 toDecember 2027 pursuant to At the Market Issuance Sales Agreements withB. Riley FBR, Inc. which governs the program of at-the-market sales of our senior notes. OnMay 7, 2019 , we issued$100.05 million of senior notes due inMay 2024 ("6.75% 2024 Notes") pursuant to the prospectus supplement datedMay 2, 2019 . Interest on the 6.75% 2024 Notes is payable quarterly at 6.75%. The 6.75% 2024 Notes are unsecured and due and payable in full onMay 31, 2024 . In connection with the issuance of the 6.75% 2024 Notes, we received net proceeds of$98.1 million (after underwriting commissions, fees and other issuance costs of$2.0 million ). OnSeptember 23, 2019 , we issued$115.0 million of senior notes due inSeptember 2026 ("6.50% 2026 Notes") pursuant to the prospectus supplement datedSeptember 18, 2019 . Interest on the 6.50% 2026 Notes is payable quarterly at 6.50%. The 6.50% 2026 Notes are unsecured and due and payable in full onSeptember 30, 2026 . In connection with the issuance of the 6.50% 2026 Notes, we received net proceeds of$112.6 million (after underwriting commissions, fees and other issuance costs of$2.4 million ). 70
On
InMay 2018 , we issued approximately$100.1 million of the 7.375% 2023 Notes. Interest on the 7.375% 2023 Notes is payable quarterly at 7.375%. The 7.375% 2023 Notes are unsecured and due and payable in full onMay 31, 2023 . In connection with the issuance of the 7.375% 2023 Notes, we received net proceeds of$98.0 million (after underwriting commissions, fees and other issuance costs of$2.0 million ). InSeptember 2018 , we issued approximately$100.1 million of the 6.875% 2023 Notes. Interest on the 6.875% 2023 Notes is payable quarterly at 6.875%. The 6.875% 2023 Notes are unsecured and due and payable in full onSeptember 30, 2023 . In connection with the issuance of the 6.875% 2023 Notes, we received net proceeds of$98.6 million (after underwriting commissions, fees and other issuance costs of$1.4 million ). AtDecember 31, 2019 andDecember 31, 2018 , the total senior notes outstanding was$688.1 million (net of unamortized debt issue costs of$8.9 million ) and$459.8 million (net of unamortized debt issue costs of$7.5 million ) with a weighted average interest rate of 7.05% and 7.28%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled$43.8 million ,$25.4 million and$6.4 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. OnDecember 5, 2019 , we entered into a new At the Market Issuance Sales Agreement (the "December 2019 Sales Agreement") withB. Riley FBR, Inc. governing a program of at-the-market sales of certain of our senior notes and common stock. Under this program we may sell up to$100,000 of certain of our senior notes and common stock, pursuant to an effective Registration Statement on Form S-3. As ofDecember 31, 2019 , we had$60.8 million remaining availability under theDecember 2019 Sales Agreement.
Off Balance Sheet Arrangements
As part of our investment banking and financial services activities, from time to time we enter into guaranties of debt, commitments of other entities, and similar transactions that may be considered off-balance sheet arrangements.
B&W Credit Agreement and Backstop
OnJanuary 31, 2020 , the Company provided Babcock & Wilcox Enterprises, Inc. ("B&W")$30 million of additional Tranche A-4 last out term loans pursuant to Amendment No. 20 ("Amendment No. 20") to the Credit Agreement, datedMay 11, 2015 (as amended to date, the "B&W Credit Agreement") withBank of America, N.A ., as administrative agent and lender, and the other lenders party thereto. The Company is a lender with respect to B&W's existing last out term loans under the Credit Agreement.Kenneth Young , our President, is the Chief Executive Officer of B&W. Pursuant to Amendment No. 20, B&W and the lenders, including the Company, also agreed upon a term sheet pursuant to which B&W would undertake a refinancing transaction on or prior toMay 11, 2020 (the "Refinancing") and B&W and the lenders, including the Company, would amend and restate the Credit Agreement on the terms specified therein. As part of the Refinancing, the size of B&W's board of directors may also be reduced to 5 members, with the Company retaining the ability to appoint 2 members. OnJanuary 31, 2020 , B&W also entered into a letter agreement with the Company (the "Backstop Commitment Letter") pursuant to which the Company agreed to fund any shortfall in the$200 million of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties on the same terms contemplated by the Refinancing.
Franchise Group Commitment Letter and Loan Participant Guaranty
Commitment Letter OnFebruary 14, 2020 , affiliates of Franchise Group, Inc. (collectively with all of its affiliates, "FRG") entered into an ABL Credit Agreement (the "Franchise Credit Agreement"), withGACP Finance Co., LLC ("GACP Finance") as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided an asset based credit facility to FRG in an aggregate principal amount of$100.0 million . In connection with the Franchise Credit Agreement, the Company entered into a commitment letter, dated as ofFebruary 14, 2020 (the "Commitment Letter"), pursuant to which the Company committed to provide a$100.0 million asset based lending facility to FRG, onApril 14, 2020 if, on or before such date, the obligations under the Franchise Credit Agreement are not refinanced in full. 71
The Loan Participant Guaranty
OnFebruary 14, 2020 FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the "Term Loan Credit Agreement"), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principal amount of$575.0 million . OnFebruary 19, 2020 , the Company entered into a limited guaranty the ("Loan Participant Guaranty") to one of the lenders under the Term Loan Credit Agreement (the "Loan Participant") pursuant to which the Company guaranteed the payment when due of certain obligations, including principal, interest, and other amounts payable to the Loan Participant under the Term Loan Credit Agreement in an amount not to exceed$50.0 million plus certain expenses of the Loan Participant and certain protective advances related to such guaranteed obligations (the "Loan Participant Guaranteed Obligations"). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant to the Term Loan Credit Agreement. The Loan Participant Guaranty remains in effect until the date that the Loan Participant Guaranteed Obligations have been paid in full. The Loan Participant Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company's other existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectively subordinated in right of payment to all of the Company's existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company's subsidiaries, including trade payables. CIBC Guaranty OnFebruary 14, 2020 , the Company entered into a limited guaranty (the "CIBC Guaranty") in favor ofCIBC Bank USA ("CIBC"), pursuant to which the Company guaranteed the payment when due of certain obligations, including all principal, interest, and other amounts that shall be at any time payable by FRG under FRG's credit agreement with CIBC and the lenders party thereto, dated as ofMay 16, 2019 , as amended (the "CIBC Credit Agreement") in an amount not to exceed$125.0 million plus certain expenses of CIBC related to such guaranteed obligations (the "CIBC Guaranteed Obligations"). CIBC may require payment of the CIBC Guaranteed Obligations by the Company upon the occurrence of either (a) the failure of FRG to pay any principal of any loan or any reimbursement obligation in respect of any letter of credit disbursement or (b) the failure of FRG to pay any interest on any loan or on any reimbursement obligation in respect of any letter of credit disbursement within five business days of the date due, in each case pursuant to the CIBC Credit Agreement. The CIBC Guaranty remains in effect until the earlier of (a) the date that the CIBC Guaranteed Obligations have been paid in full and (b)June 30, 2020 . The CIBC Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company's other existing and future unsecured and unsubordinated indebtedness. The CIBC Guaranteed Obligations are effectively subordinated in right of payment to all of the Company's existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company's subsidiaries, including trade payables.
Except as disclosed above, we have no material 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.
Dividends From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. OnMarch 3, 2020 , we declared a regular dividend of$0.25 per share and special dividend of$0.10 per share that will be paid on or aboutMarch 31, 2020 to stockholders of record as ofMarch 17, 2020 . During the years endedDecember 31, 2019 and 2018, we paid cash dividends on our common stock of$41.1 million and$22.7 million , respectively. OnAugust 1, 2019 , the Board of Directors announced an increase to the regular quarterly dividend from$0.08 per share to$0.175 per share. While it is the Board's current intention to make regular dividend payments of$0.175 per share each quarter and special dividend payments dependent upon exceptional circumstances from time to time, our Board of Directors may reduce or discontinue the payment of dividends at any time for any reason it deems relevant. The declaration and payment of any future dividends or repurchases of our common stock will be made at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, cash flows, capital expenditures, and other factors that may be deemed relevant
by
our Board of Directors.
72
A summary of dividend activity for the years ended December 31, 2019 and 2018
was as follows:
Regular Special Total
Stockholder Dividend Dividend Dividend
Date Declared Date Paid Record Date Amount Amount AmountOctober 30, 2019 November 26, 2019 November 14, 2019$ 0.175
$ 0.475 $ 0.650 August 1, 2019 August 29, 2019 August 15, 2019 0.175 0.325 0.500 May 1, 2019 May 29, 2019 May 15, 2019 0.08 0.18 0.26 March 5, 2019 March 26, 2019 March 19, 2019 0.08 0.00 0.08
November 5, 2018 November 27, 2018 November 16, 2018 0.08
0.08 0.16
August 2, 2018 August 29, 2018 August 16, 2018 0.08 0.22 0.30
May 7, 2018 June 5, 2018 May 21, 2018 0.08 0.04 0.12
March 7, 2018 April 3, 2018 March 20, 2018 0.08 0.08 0.16
Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the$25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to$1,718.75 or$1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. OnOctober 15, 2019 , the Company declared a cash dividend representing$0.11458333 per Depositary Share. The dividend was paid onOctober 31, 2019 to holders of record as of the close of business onOctober 21, 2019 . As ofDecember 31, 2019 , dividends in arrears in respect of the Depositary Shares were$673 . OnJanuary 9, 2020 , the Company declared a cash dividend$0.4296875 per Depositary Share, which was paid onJanuary 31, 2019 to holders of record as of the close of business onJanuary 21, 2019 . Contractual Obligations The following table sets forth aggregate information about our contractual obligations as ofDecember 31, 2019 and the periods in which payments are due: Payments due by period Less Than More Than Total One Year 1-3 Years 4-5 Years 5 years (Dollars in thousands) Contractual Obligations Operating lease obligations$ 75,885 $ 12,646 $ 20,634 $ 17,886 $ 24,719 Notes payable 38,255 37,509 746 - - Term loan 64,597 19,270 36,592 8,735 - Senior notes payable, including interest 984,832 49,117 98,234 409,265 428,216 Total$ 1,163,569 $ 118,542 $ 156,206 $ 435,886 $ 452,935 We anticipate that cash generated from operations and existing borrowing arrangements under our credit facility to fund costs and expenses incurred in connection with liquidation engagements should be sufficient to meet our cash requirements for at least the next twelve months. However, our future capital requirements will depend on many factors, including the success of our businesses in generating cash from operations, continued compliance with financial covenants contained in our credit facility, the timing of principal payments on our long-term debt and the Capital Markets in general, among other factors. 73
Critical Accounting Policies
Our financial statements and the notes thereto contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, management's estimates are adjusted accordingly. Actual results may vary from these estimates and assumptions under different and/or future circumstances. Management considers an accounting estimate to be critical if:
? it requires assumptions to be made that were uncertain at the time the estimate
was made; and
? changes in the estimate, or the use of different estimating methods that could
have been selected, could have a material impact on results of operations or
financial condition.
Use of Estimates.The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as valuation of securities, reserves for accounts receivable, the carrying value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, accounting for income tax valuation allowances, recovery of contract assets and sales returns and 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. Our significant accounting policies are described in Note 2 to the consolidated financial statements included elsewhere in this Annual Report. Management believes that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our financial statements. Revenue Recognition.OnJanuary 1, 2018 , we adopted Accounting Standards Codification ("ASC") 606 - Revenue from Contracts with Customers using the modified retrospective method and the impact was determined to be immaterial on our consolidated financial statements. The new revenue standard was applied prospectively in our consolidated financial statements fromJanuary 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will continue to be reported under the accounting standards in effect during those historical periods.
Revenues are recognized when control of the promised goods or performance obligations for services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services.
Revenues from contracts with customers in the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment, Principal Investments - United Online and magicJack segment and Brands segment are primarily comprised of the following:
Capital Markets Segment - 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. Fees
from underwriting activities are recognized as revenues when the performance
obligation for the services related to the underwriting transaction is satisfied
under the terms of the engagement and is not subject to any other contingencies.
Fees are also earned from financial advisory and consulting services rendered in
connection with client mergers, acquisitions, restructurings, recapitalizations
and other strategic transactions. The performance obligation for financial
advisory services is satisfied over time as work progresses on the engagement
and services are delivered to the client. The performance obligation for
financial advisory services may also include success and performance based fees
which are recognized as revenue when the performance obligation is no longer
constrained and it is not probable that the revenue recognized would be subject
to significant reversal in a future period. Generally, it is probable that the
revenue recognized is no longer subject to significant reversal upon the closing
of the investment banking transaction.
Fees from wealth and asset management services consist primarily of investment
management fees that are recognized over the period the performance obligation
for 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 are recognized when the performance obligation
is satisfied and include commissions resulting from equity securities
transactions executed as agent or principal and are recorded on a trade date
basis and fees paid for equity research.
Revenues from other sources in the Capital Markets segment is primarily
comprised of (i) interest income from loans receivable and securities lending
activities, (ii) related net trading gains and losses from market making
activities, the commitment of capital to facilitate customer orders, (iii)
trading activities from our Principal Investments in equity and other securities
for the Company's account, and (iv) other income.
74
Interest income from securities lending activities consists of interest income
from equity and fixed income securities that are borrowed from one party and
loaned to another. The Company maintains relationships with a broad group of
banks and broker-dealers to facilitate the sourcing, borrowing and lending of
equity and fixed income securities in a "matched book" to limit the Company's
exposure to fluctuations in the market value or securities borrowed and
securities loaned.
Other revenues include (i) net trading gains and losses from market making
activities in our fixed income group, (ii) carried interest from our asset
management recognized as earnings from financial assets within the scope of ASC
323 - Investments - Equity Method and Joint Ventures , and therefore will not be
in the scope of ASC 606 - Revenue from Contracts with Customers. In accordance
with ASC 323 - Investments - Equity Method and Joint Ventures , the Company will
record equity method income (losses) as a component of investment income based
on the change in our proportionate claim on net assets of the investment fund,
including performance-based capital allocations, assuming the investment fund
was liquidated as of each reporting date pursuant to each fund's governing
agreements, and (iii) other miscellaneous income
Auction and Liquidation segment - Commission and fees earned on the sale of
goods at Auction and Liquidation sales are recognized when evidence of a
contract or arrangement exists, the transaction price has been determined, and
the performance obligation has been satisfied when control of the product and
risks of ownership has been transferred to the buyer. The commission and fees
earned for these services are included in revenues in the accompanying
consolidated statements of income. Under these types of arrangements, revenues
also include contractual reimbursable costs.
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 over time when the performance obligation is
satisfied. We generally use the cost-to-cost measure of progress for our
contracts because it best depicts the transfer of services to the customer which
occurs as we incur costs on our contracts. Under the cost-to-cost measure of
progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs at completion of
the performance obligation. Revenues, including estimated fees or profits, are
recorded proportionally as costs are incurred. Costs to fulfill the contract
include labor and other direct costs incurred by the Company related to the
contract. Due to the nature of the guarantees and performance obligations under
these contracts, the estimation of revenue that is ultimately earned is complex
and subject to many variables and requires significant judgment. It is common
for these contracts to contain provisions that can either increase or decrease
the transaction price upon completion of our performance obligations under the
contract. Estimated amounts are included in the transaction price at the most
likely amount it is probable that a significant reversal of revenue will not
occur. Our estimates of variable consideration and determination of whether or
not to include estimated amounts in the transaction price are based on an
assessment of our anticipated performance under the contract taking into
consideration all historical, current and forecasted information that is
reasonably available to us. Costs that directly relate to the contract and
expected to be recoverable are capitalized as an asset and included in advances
against customer contracts in the accompanying consolidated balance sheets.
These costs are amortized as the services are transferred to the customer over
the contract period, which generally does not exceed six months, and the expense
is recognized as a component of direct cost of services. If, during the auction
or liquidation sale, the Company determines that the total costs to be incurred
on a performance obligation under a contract exceeds the total estimated
revenues to be earned, a provision for the entire loss on the performance
obligation is recognized in the period the loss is determined.
If the Company determines that the variable consideration used in the initial
determination of the transaction price for the contract is such that the total
recoveries from the auction or liquidation will not exceed the guaranteed
recovery values or advances made in accordance with the contract, the
transaction price will be reduced and a loss or negative revenue could result
from the performance obligation. A provision for the entire loss as negative
revenue on the performance obligation is recognized in the period the lossis determined.
Valuation and Appraisal Segment - Revenues in the Valuation and Appraisal segment are primarily comprised of fees for Valuation and Appraisal services. Revenues are recognized when the performance obligation is completed and is generally at the point in time upon delivery of the report to the customer. Revenues in the Valuation and Appraisal segment also include contractual reimbursable costs.
Principal Investments - United Online and magicJack Segment -Revenues in the
Principal Investments - United Online and magicJack segment are primarily
comprised of services revenue from fees charged to United Online pay accounts;
sales revenue from the sale of the magicJack and related devices and access
rights; revenues from access rights renewals and mobile apps; prepaid minutes
revenues; revenues from access and wholesale charges; service revenue from UCaaS
hosting services; advertising and other revenues; and products revenues from the
sale of magicJack and mobile broadband service devices, including the related
shipping and handling and installation fees, if applicable.
Service revenues from fees charged to United Online pay accounts 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 consolidated balance sheets as
deferred revenue. In circumstances where payment is not received in advance,
revenues are only recognized if collectability is probably.
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Revenues from sales of the magicJack devices and access rights represent
revenues recognized from sales of the magicJack devices to retailers,
wholesalers, or direct to customers, net of returns, over the period associated
with the access right period. Revenues for the device and initial access right
were accounted for as a combined unit of accounting and recognized ratably over
the service term. The transaction price for magicJack devices is allocated
between equipment and service based on stand-alone selling prices. Revenues
allocated to equipment are recognized upon delivery (when control transfers to
the customer), and service revenue is recognized ratably over the service term.
The Company estimates the return of direct sales as part of the transaction
price using a six month rolling average of historical returns. Revenues for
hardware and shipping are recognized at the time of delivery and revenues for
services are recognized ratably over the service. The Company recognizes revenue
for hardware based on delivery terms to the retailer and revenue for service is
deferred for the delay period and recognized ratably over the remaining access
right period.
Revenues from access rights renewals and mobile apps represents revenues from
customers purchasing rights to access our servers beyond the access right period
included in a magicJack device or magicJack service. The extended access right
ranges from one to five years. These fees charged to customers are initially
deferred and recognized as revenue ratably over the extended access right
period. Revenues from access rights granted to users of the magicApp, magicJack
Connect App and magicJack Spark are recognized ratably over the access right
period.
Revenues from the sale of other magicJack related products are revenues
recognized from the sale of other items related to the magicJack devices and
access right renewals the Company offers its customers, including porting fees
charged to customers to port their existing phone number to a magicJack device
or services, fees charged for customer to select a custom, vanity or Canadian
phone number and fees charged to customers to change their existing number.
These revenues are recognized at the time of sale.
Prepaid minutes revenues are primarily from the usage and expiration of international prepaid minutes, net of chargebacks. Revenues from prepaid minutes are recognized as minutes are used.
Revenues from access and wholesale charges are generated from access fees
charged to other telecommunication carriers or providers for Interexchange
Carriers ("IXC") calls terminated to the Company's end-users, and other fees
charged to telecommunication carriers or providers for origination of calls to
their 800-numbers. These revenues are recorded based on rates set forth in the
respective state and federal tariffs or negotiated contract rates, less
provisions for billing adjustments. Revenues from access and wholesale charges
are recognized as calls are terminated to the network.
UCaaS revenues are recurring monthly service revenue from sales of its hosted
services. Customers are billed monthly in advance for these recurring services
and in arrears for one time service charges and other certain usage charges.
UCaaS revenues also includes non-recurring revenue from the sale of hardware and
network equipment. Revenues for recurring monthly service are recorded in the
period the services are provided over the term of the respective customer
agreements and revenue from the sale of hardware and network equipment is
recognized in the period that the equipment is delivered and put into service.
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.
Brands Segment- Revenues are derived from various license agreements that
provide revenue based on guaranteed minimum royalty payments and
advertising/marketing fees with additional royalty revenue based on a percentage
of defined sales. Guaranteed minimum royalty payments and advertising/marketing
revenue are recognized on a straight-line basis over the term of each contract
year, as defined in each license agreement. Royalty payments exceeding the
guaranteed minimum amounts are recognized as income during the period
corresponding to the licensee's sales. Additionally, payments received for
terminating licenses are recognized when termination agreements are entered into
and collectability is probable.
Payments received as consideration for the grant of a license are recorded as
deferred revenue at the time payment is received and recognized ratably as
revenue over the term of the license agreement. Advanced royalty payments are
recorded as deferred revenue at the time payment is received and recognized as
revenue when earned. Revenue is not recognized unless collectability is
probable.
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Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts
for estimated losses inherent in our 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, the amount
of receivables in dispute, 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 bad debt expense is included as a component of selling, general and
administrative expenses in the accompanying consolidated statements of income.
Goodwill and Other Intangible Assets. We account for goodwill and intangible
assets in accordance with the accounting guidance which requires that goodwill
and other intangibles with indefinite lives be tested for impairment annually or
on an interim basis if events or circumstances indicate that the fair value of
an asset has decreased below its carrying value.
Goodwill includes the excess of the purchase price over the fair value of net
assets acquired in business combinations and the acquisition of noncontrolling
interests. The Codification requires that goodwill be tested for impairment at
the reporting unit level (operating segment or one level below an operating
segment). Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting units, and
determining the fair value. The Company operates five reporting units, which are
the same as its reporting segments described in Note 22 to the consolidated
financial statements. Significant judgment is required to estimate the fair
value of reporting units which includes estimating future cash flows,
determining appropriate discount rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment.
When testing goodwill for impairment, we may assess qualitative factors for some
or all of our reporting units to determine whether it is more likely than not
(that is, a likelihood of more than 50 percent) that the fair value of a
reporting unit is less than its carrying amount, including goodwill.
Alternatively, we may bypass this qualitative assessment for some or all of our
reporting units and perform a detailed quantitative test of impairment (step 1).
If we perform the detailed qualitative impairment test and the carrying amount
of the reporting unit exceeds its fair value, we would perform an analysis (step
2) to measure such impairment. In 2019, we performed a qualitative assessment of
the recoverability of our goodwill balances for each of our reporting units in
performing our annual impairment test and concluded that the fair values of each
of our reporting units exceeded their carrying values and no impairments were
identified.
In accordance with the Codification, the Company reviews the carrying value of its intangibles, which is comprised of tradenames and customer lists, and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the asset or asset group, if any, exceeds its fair market value. During the year endedDecember 31, 2019 , the Company recognized no impairment of intangibles. During the year endedDecember 31, 2018 , the Company recognized impairment of intangibles in the amount of$1.1 million related to the tradename ofWunderlich Securities, Inc. InJune 2018 , the Company changed the nameWunderlich Securities, Inc. toB. Riley Wealth Management, Inc. This impairment charge is included in restructuring charge in our consolidated statements of income. Fair Value Measurements.The Company records securities and other investments owned, securities sold not yet purchased, and mandatorily redeemable noncontrolling interests that were issued afterNovember 5, 2003 at fair value with fair value determined in accordance with the Codification. Our mandatorily redeemable noncontrolling interests are measured at fair value on a recurring basis and are categorized using the three levels of fair value hierarchy. 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. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The 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. 77
Investments in partnership interests include investments in private equity
partnerships that primarily invest in equity securities, bonds, and direct
lending funds. We also invest in priority investment funds and the underlying
securities held by these funds are primarily corporate and asset-backed fixed
income securities and restrictions exist on the redemption of amounts invested
by the Company. The Company's partnership and investment fund interests are
valued based on the Company's proportionate share of the net assets of the
partnerships and funds; the value for these investments are derived from the
most recent statements received from the general partner or fund administrator.
These partnership and investment fund interests are valued at net asset value
("NAV") in accordance with ASC "Topic 820: Fair Value Measurements."
The carrying amounts reported in the consolidated financial statements for cash,
restricted cash, accounts receivable, accounts payable and accrued expenses and
other current liabilities approximate fair value based on the short-term
maturity of these instruments. The carrying amounts of the notes payable
(including credit lines used to finance liquidation engagements), long-term debt
and capital lease obligations approximate fair value because the contractual
interest rates or effective yields of such instruments are consistent with
current market rates of interest for instruments of comparable credit risk.
Share-Based Compensation. The Company's share based payment awards principally
consist of grants of restricted stock and restricted stock units. Share based
payment awards also include grants of membership interests in the Company's
majority owned subsidiaries. The grants of membership interests consist of
percentage interests in the Company's majority owned subsidiaries as determined
at the date of grant. In accordance with the accounting guidance share based
payment awards are classified as either equity or a liability. 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 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.
In June 2018 , the Company adopted the 2018 Employee Stock Purchase Plan
("Purchase Plan") which allows eligible employees to purchase common stock
through payroll deductions at a price that is 85% of the market value of the
common stock on the last day of the offering period. In accordance with the
provisions of ASC 718, "Compensation - Stock Compensation" ("ASC 718"), the
Company is required to recognize compensation expense relating to shares offered
under the Purchase Plan.
Income Taxes.The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement 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, the eligible carryforward period, and other circumstances. 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 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 carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. As a result of the common stock offering that was completed onJune 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 ofDecember 31, 2019 , 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 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.
Recent Accounting Pronouncements
See Note 2(ab) to the accompanying financial statements for recent accounting pronouncements we have not yet adopted and recently adopted.
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