B. Riley Financial(RILY) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the company's unaudited condensed consolidated financial statements and related notes Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, cash flows, and detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | Metric | Sep 30, 2022 (Unaudited) ($ thousands) | Dec 31, 2021 ($ thousands) | | :--------------------------------- | :------------------------------------- | :------------------------- | | Total assets | $5,833,987 | $5,851,919 | | Total liabilities | $5,077,534 | $4,801,718 | | Total equity | $577,694 | $705,201 | - Total assets slightly decreased, total liabilities increased, and total equity decreased from December 31, 2021, to September 30, 2022[9] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations | Metric | 3 Months Ended Sep 30, 2022 ($ thousands) | 3 Months Ended Sep 30, 2021 ($ thousands) | 9 Months Ended Sep 30, 2022 ($ thousands) | 9 Months Ended Sep 30, 2021 ($ thousands) | | :------------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total revenues | $340,363 | $381,522 | $588,652 | $1,318,451 | | Operating income (loss) | $103,561 | $96,746 | $(50,476) | $579,869 | | Net income (loss) attributable to B. Riley Financial, Inc. | $47,837 | $50,550 | $(102,384) | $380,882 | | Net income (loss) available to common shareholders | $45,835 | $48,621 | $(108,390) | $375,415 | | Basic income (loss) per common share | $1.62 | $1.76 | $(3.86) | $13.75 | | Diluted income (loss) per common share | $1.53 | $1.69 | $(3.86) | $13.07 | - For the nine months ended September 30, 2022, total revenues decreased significantly, operating income turned into a loss, and net income attributable to B. Riley Financial, Inc. shifted to a substantial loss compared to the prior year[12] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | 3 Months Ended Sep 30, 2022 ($ thousands) | 3 Months Ended Sep 30, 2021 ($ thousands) | 9 Months Ended Sep 30, 2022 ($ thousands) | 9 Months Ended Sep 30, 2021 ($ thousands) | | :------------------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net income (loss) | $52,645 | $51,658 | $(93,139) | $383,356 | | Other comprehensive loss, net of tax | $(2,842) | $(1,029) | $(5,646) | $(1,384) | | Total comprehensive income (loss) | $49,803 | $50,629 | $(98,785) | $381,972 | | Comprehensive income (loss) attributable to B. Riley Financial, Inc. | $43,616 | $49,521 | $(109,536) | $379,498 | - Total comprehensive income (loss) for the nine months ended September 30, 2022, shifted from a significant gain in 2021 to a substantial loss[14] Condensed Consolidated Statements of Equity Condensed Consolidated Statements of Equity | Equity Component | Balance, Jan 1, 2022 ($ thousands) | Net Income (Loss) ($ thousands) | Dividends on Common Stock ($ thousands) | Dividends on Preferred Stock ($ thousands) | Other Comprehensive Loss ($ thousands) | Balance, Sep 30, 2022 ($ thousands) | | :------------------------- | :--------------------------------- | :------------------------------ | :-------------------------------------- | :----------------------------------------- | :------------------------------------- | :---------------------------------- | | Additional Paid-in Capital | $413,486 | - | - | - | - | $473,420 | | Retained Earnings | $248,862 | $(102,384) | $(93,128) | $(6,006) | - | $46,916 | | Accumulated Other Comprehensive Loss | $(1,080) | - | - | - | $(5,646) | $(6,726) | | Noncontrolling Interests | $43,930 | $10,751 | - | - | - | $64,081 | | Total Equity | $705,201 | $(91,633) | $(93,128) | $(6,006) | $(5,646) | $577,694 | - Retained earnings decreased significantly from $248,862k at January 1, 2022, to $46,916k at September 30, 2022, primarily due to net loss and common stock dividends[20] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2022 ($ thousands) | 9 Months Ended Sep 30, 2021 ($ thousands) | | :--------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net cash used in operating activities | $(72,814) | $(166,652) | | Net cash provided by (used in) investing activities | $41,746 | $(416,662) | | Net cash used in (provided by) financing activities | $(8,822) | $859,364 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(46,477) | $274,295 | - Net cash used in operating activities decreased, while net cash from investing activities shifted from a significant outflow to an inflow[23][24] - Net cash from financing activities shifted from a large inflow to an outflow, resulting in an overall decrease in cash, cash equivalents, and restricted cash for the nine months ended September 30, 2022[23][24] Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1 — ORGANIZATION AND NATURE OF BUSINESS OPERATIONS - B. Riley Financial, Inc. operates in six segments: Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments - Communications and Other, and Brands[26] - Recent acquisitions in 2022 include Atlantic Coast Fibers, LLC ($27.5 million), BullsEye Telecom ($64.9 million), increased ownership in Lingo Management, LLC (40% to 80%), and FocalPoint Securities, LLC ($124.5 million), expanding services in various segments[28][29][31][33] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Level 3 Financial Assets Measured at Fair Value | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :------------------------------------------------ | :------------------------- | :------------------------- | | Financial assets measured at fair value (Level 3) | $1,154,071 | $1,250,735 | | % of Total Assets | 20.0% | 21.4% | - The company elected the fair value option for all outstanding loans receivable, measuring them at exit value with unrealized gains/losses recorded in operations[51] - Recent accounting standards ASU 2022-04 (Supplier Finance Programs) and ASU 2022-03 (Equity Securities Sale Restrictions) are being evaluated for future impact, while ASU 2021-08 (Business Combinations) and ASU 2020-04/2021-01 (Reference Rate Reform) were adopted with immaterial impact[98][99][100][101][102] NOTE 3 — RESTRUCTURING CHARGE Restructuring Charges (3 & 9 Months Ended Sep 30, 2022) | Metric | 3 Months Ended Sep 30, 2022 ($ thousands) | 9 Months Ended Sep 30, 2022 ($ thousands) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total Restructuring Charge | $8,016 | $8,016 | | Wealth Management Segment | $4,107 | $4,107 | | Principal Investments - Communications and Other Segment | $3,909 | $3,909 | - Restructuring charges were primarily related to workforce reductions, facility closures, and intangible impairments in the Wealth Management and Principal Investments - Communications and Other segments[104] NOTE 4 — SECURITIES LENDING Securities Borrowed and Loaned Balances | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :------------------ | :------------------------- | :------------------------- | | Securities borrowed | $2,243,306 | $2,090,966 | | Securities loaned | $2,239,250 | $2,088,685 | NOTE 5 — ACCOUNTS RECEIVABLE Accounts Receivable, Net | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :---------------------- | :------------------------- | :------------------------- | | Accounts receivable, net | $64,707 | $49,673 | | Allowance for doubtful accounts | $(3,595) | $(3,658) | - Accounts receivable, net, increased by $15,034k from December 31, 2021, to September 30, 2022[109] NOTE 6 — PREPAID EXPENSES AND OTHER ASSETS Prepaid Expenses and Other Assets | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | | Prepaid expenses and other assets | $355,875 | $463,502 | | Funds held in trust account | $173,216 | $345,024 | | Equity investments | $42,560 | $39,190 | - Funds held in trust account decreased by $171,808k from December 31, 2021, to September 30, 2022[110] NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and Intangible Assets | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :-------------------------- | :------------------------- | :------------------------- | | Goodwill | $429,187 | $250,568 | | Total intangible assets, net | $296,346 | $207,651 | - Goodwill increased by $178,619k during the nine months ended September 30, 2022, primarily due to acquisitions of FocalPoint, Lingo, and BullsEye[111] - Amortization expense for intangible assets was $23,146k for the nine months ended September 30, 2022[112] NOTE 8 — NOTES PAYABLE Other Notes Payable Outstanding Balance | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :----------------------- | :------------------------- | :------------------------- | | Other notes payable | $25,075 | $357 | - The outstanding balance for other notes payable significantly increased from $357k at December 31, 2021, to $25,075k at September 30, 2022, primarily due to deferred cash consideration for the FocalPoint acquisition[115] NOTE 9 — TERM LOANS AND REVOLVING CREDIT FACILITY Term Loans and Revolving Credit Facility Outstanding Balances (Sep 30, 2022) | Facility | Outstanding Balance (net) ($ thousands) | | :-------------------------- | :-------------------------------------- | | Pathlight Credit Agreement | $144,584 | | Lingo Credit Agreement | $51,595 | | Nomura Term Loan Facility | $290,448 | | Nomura Revolving Credit Facility | $74,700 | | BRPAC Credit Agreement | $71,408 | - New term loans were entered into with Pathlight ($148.2 million) for the 2022 Badcock Receivable and Lingo ($52.5 million) for the BullsEye acquisition during the third quarter of 2022[116][121] NOTE 10 — SENIOR NOTES PAYABLE Senior Notes Payable | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | | Total senior notes outstanding, net | $1,661,191 | $1,606,560 | | Weighted average interest rate | 5.70% | 5.69% | | Interest expense (9 months ended Sep 30, 2022) | $74,221 | $60,010 | - The company issued $51,321k in senior notes during the nine months ended September 30, 2022, with maturities ranging from May 2024 to August 2028[143] NOTE 11 — ACCRUED EXPENSES AND OTHER LIABILITIES Accrued Expenses and Other Liabilities | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :-------------------------------- | :------------------------- | :------------------------- | | Accrued expenses and other liabilities | $278,889 | $343,750 | | Accrued payroll and related expenses | $79,532 | $107,904 | | Contingent consideration | $29,578 | $0 | - Contingent consideration increased significantly to $29,578k as of September 30, 2022, from zero at December 31, 2021[146] NOTE 12 — REVENUE FROM CONTRACTS WITH CUSTOMERS Total Revenues from Contracts with Customers by Segment (9 Months Ended Sep 30, 2022) | Segment | Revenue (9 Months Ended Sep 30, 2022) ($ thousands) | | :--------------------------------------- | :-------------------------------------------------- | | Capital Markets | $158,855 | | Wealth Management | $179,724 | | Auction and Liquidation | $10,342 | | Financial Consulting | $73,081 | | Principal Investments - Communications and Other | $153,093 | | Brands | $14,754 | | Total | $589,849 | Deferred Revenue and Expected Recognition | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | | :---------------- | :------------------------- | :------------------------- | | Deferred revenue | $89,157 | $69,507 | Expected Recognition of Deferred Revenue (Sep 30, 2022): | Period | Amount ($ thousands) | | :---------------- | :------------------- | | Remaining 2022 | $57,058 | | 2023 | $13,519 | | 2024 | $8,637 | | 2025 | $4,496 | | 2026 | $2,105 | | After 2026 | $3,342 | NOTE 13 — INCOME TAXES - The effective income tax rate for the nine months ended September 30, 2022, was a benefit of 30.0%, compared to a provision of 26.8% in the prior year[160] Net Operating Loss Carryforwards (Sep 30, 2022) | Type | Amount ($ thousands) | | :-------------------------------- | :------------------- | | Federal net operating loss carryforwards | $48,869 | | State net operating loss carryforwards | $52,548 | - A valuation allowance of $65,900k has been provided against capital loss carryforwards[163] NOTE 14 — EARNINGS PER SHARE Earnings Per Share (9 Months Ended Sep 30) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :--------------------------------------- | :----------------- | :----------------- | | Net income (loss) available to common shareholders | $(108,390) | $375,415 | | Basic income (loss) per common share | $(3.86) | $13.75 | | Diluted income (loss) per common share | $(3.86) | $13.07 | - Net income available to common shareholders shifted to a loss of $108,390k for the nine months ended September 30, 2022, resulting in negative basic and diluted EPS[167] NOTE 15 — COMMITMENTS AND CONTINGENCIES - The company provides guarantees for Babcock & Wilcox (B&W) obligations, including a $110,000k guaranty for debt financing and indemnities for payment and performance bonds of $29,970k and €30,000[170][171][172] - The company is subject to various legal and other claims in the ordinary course of business but does not believe the outcomes will have a material effect on its financial position or results of operations[169] NOTE 16 — SHARE-BASED PAYMENTS - Share-based compensation expense for the nine months ended September 30, 2022, was $45,397k, primarily from restricted stock units[174] - The company repurchased 571 shares of common stock for $27k during the nine months ended September 30, 2022[176] - Preferred stock dividends paid for Series A and Series B preferred stock totaled $6,006k for the nine months ended September 30, 2022[12] NOTE 17 — NET CAPITAL REQUIREMENTS Net Capital for Broker-Dealer Subsidiaries (Sep 30, 2022) | Subsidiary | Net Capital ($ thousands) | Required Minimum ($ thousands) | Excess Net Capital ($ thousands) | | :---------------------- | :------------------------ | :----------------------------- | :------------------------------- | | B. Riley Securities (BRS) | $153,244 | $6,526 | $146,718 | | B. Riley Wealth Management (BRWM) | $14,915 | $2,500 | $12,415 | NOTE 18 — RELATED PARTY TRANSACTIONS - Amounts due from related parties were $814k as of September 30, 2022, primarily from affiliated funds for management fees and operating expenses[182] - The company earned $41,885k in incentive fees and $9,632k in underwriting/financial advisory fees from the Faze Clan business combination during the three months ended September 30, 2022[191] - A subsidiary acquired Targus Cayman Holdco Limited on October 18, 2022, for approximately $250 million, paid with cash, senior notes, common stock, and seller financing[192] NOTE 19 — BUSINESS SEGMENTS Segment Income (Loss) (9 Months Ended Sep 30, 2022) | Segment | Segment Income (Loss) ($ thousands) | | :--------------------------------------- | :---------------------------------- | | Capital Markets | $(20,317) | | Wealth Management | $(26,906) | | Auction and Liquidation | $228 | | Financial Consulting | $11,900 | | Principal Investments - Communications and Other | $18,397 | | Brands | $10,590 | | Consolidated Operating Income (Loss) | $(6,108) | - Consolidated operating income from reportable segments shifted to a loss of $6,108k for the nine months ended September 30, 2022, with Capital Markets and Wealth Management segments reporting losses[197] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, results of operations, liquidity, capital resources, and recent accounting standards Overview - B. Riley Financial is a diversified financial services platform with major business lines including investment banking, wealth management, asset disposition, financial consulting, principal investments, and brand licensing[204][206] - Recent developments include the acquisition of Targus Cayman Holdco Limited in October 2022 for approximately $250 million, and the Pathlight Credit Agreement for a $148.2 million term loan in September 2022[214][216] - The company's diversified financial platform is affected by macroeconomic factors such as the COVID-19 pandemic, higher inflation, Federal Reserve actions, possibility of recession, Russia's invasion of Ukraine, and rising energy prices[222] Results of Operations Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Key Financial Highlights (3 Months Ended Sep 30) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | Change (Amount) ($ thousands) | Change (%) | | :------------------------------------------------ | :----------------- | :----------------- | :---------------------------- | :--------- | | Total revenues | $340,363 | $381,522 | $(41,159) | (10.8)% | | Services and fees | $266,485 | $301,497 | $(35,012) | (11.6)% | | Trading income and fair value adjustments on loans | $12,154 | $18,197 | $(6,043) | (33.2)% | | Interest income - Loans and securities lending | $57,594 | $26,869 | $30,725 | 114.4% | | Sale of goods | $4,130 | $34,959 | $(30,829) | (88.2)% | | Operating income | $103,561 | $96,746 | $6,815 | 7.0% | | Net income attributable to B. Riley Financial, Inc. | $47,837 | $50,550 | $(2,713) | (5.4)% | | Net income available to common shareholders | $45,835 | $48,621 | $(2,786) | (5.7)% | - Total revenues decreased by $41.2 million, primarily due to decreases in services and fees and sale of goods, partially offset by a significant increase in interest income from loans and securities lending[228] - Operating income increased by 7.0%, but net income attributable to B. Riley Financial, Inc. and net income available to common shareholders both decreased by over 5%[225] Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Key Financial Highlights (9 Months Ended Sep 30) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | Change (Amount) ($ thousands) | Change (%) | | :------------------------------------------------ | :----------------- | :----------------- | :---------------------------- | :--------- | | Total revenues | $588,652 | $1,318,451 | $(729,799) | (55.4)% | | Services and fees | $678,065 | $857,109 | $(179,044) | (20.9)% | | Trading (losses) income and fair value adjustments on loans | $(280,163) | $317,818 | $(597,981) | (188.2)% | | Interest income - Loans and securities lending | $182,855 | $89,280 | $93,575 | 104.8% | | Sale of goods | $7,895 | $54,244 | $(46,349) | (85.4)% | | Operating (loss) income | $(50,476) | $579,869 | $(630,345) | (108.7)% | | Net (loss) income attributable to B. Riley Financial, Inc. | $(102,384) | $380,882 | $(483,266) | (126.9)% | | Net (loss) income available to common shareholders | $(108,390) | $375,415 | $(483,805) | (128.9)% | - Total revenues decreased by $729.8 million, primarily driven by a $598.0 million decrease in trading income and fair value adjustments on loans, which turned into a loss[260] - The company experienced a significant shift from operating income of $579.9 million to an operating loss of $50.5 million, and net income attributable to B. Riley Financial, Inc. turned into a loss of $102.4 million[257] Liquidity and Capital Resources Liquidity and Borrowings (Sep 30, 2022) | Metric | Amount ($ thousands) | | :--------------------------------------- | :------------------- | | Unrestricted cash and cash equivalents | $231,805 | | Restricted cash | $1,578 | | Securities and other investments owned, at fair value | $1,238,613 | | Loans receivable, at fair value | $814,715 | | Total borrowings outstanding | $2,319,000 | | - Senior notes payable | $1,661,200 | | - Term loans | $558,000 | | - Revolving credit facility | $74,700 | | - Notes payable | $25,100 | Cash Flow Summary (9 Months Ended Sep 30) | Cash Flow Activity | 2022 ($ thousands) | 2021 ($ thousands) | | :--------------------------------------- | :----------------- | :----------------- | | Net cash used in operating activities | $(72,814) | $(166,652) | | Net cash provided by (used in) investing activities | $41,746 | $(416,662) | | Net cash used in (provided by) financing activities | $(8,822) | $859,364 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(46,477) | $274,295 | - The Board's current intention is to make regular quarterly dividend payments of $1.00 per share, with special dividends dependent upon exceptional circumstances, but may reduce or discontinue payments at any time[292] Off Balance Sheet Arrangements - Information regarding off-balance sheet arrangements is incorporated by reference from Note 15 to the financial statements[329] Recent Accounting Standards - Information regarding recent accounting standards is incorporated by reference from Note 2(t) to the financial statements[330] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses exposure to market risks, including interest rate and foreign currency risks, and their potential financial impact - The primary exposure to market risk is related to changes in interest rates; a 1% increase in floating rates would have increased interest expense by $3.3 million for the nine months ended September 30, 2022[334] - Foreign currency risk is limited, with revenues from foreign subsidiaries totaling $10.1 million (1.7% of total revenues) for the nine months ended September 30, 2022[336] - A 10% appreciation or depreciation of the U.S. dollar would result in an approximately $0.9 million change in operating income[336] Item 4. Controls and Procedures Confirms effective disclosure controls and procedures with no material changes to internal control over financial reporting - Disclosure controls and procedures were evaluated and concluded to be effective at the reasonable assurance level as of September 30, 2022[338] - There have been no material changes to internal control over financial reporting during the fiscal quarter[339] PART II. OTHER INFORMATION Contains additional disclosures including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings Addresses legal proceedings and claims, not expected to materially affect financial position or results of operations - The company is subject to various legal and other claims arising from its securities business activities[342] - Management does not believe the eventual outcome of pending litigation or other claims is likely to have a material effect on its financial position or results of operations[342] Item 1A. Risk Factors Refers to detailed risk factors in the Annual Report on Form 10-K, with no material changes since filing - A detailed discussion of risk factors is included in the Annual Report on Form 10-K for the year ended December 31, 2021[343] - There have been no material changes to the risk factors set forth in the Annual Report on Form 10-K[343] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on equity securities purchases during the quarter, including shares bought under the repurchase program Equity Securities Purchases (3 Months Ended Sep 30, 2022) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Shares Purchased Under Publicly Announced Plans or Programs | | :-------------------------------- | :--------------------- | :------------------------------- | :-------------------------------------------------------- | | July 1 through July 31, 2022 | — | $— | — | | August 1 through August 31, 2022 | 3,326 | $52.62 | — | | September 1 through September 30, 2022 | 2,822 | $50.31 | 571 | | Total | 6,148 | $51.94 | 571 | - The share repurchase program was reauthorized on October 31, 2022, for up to $50,000k of outstanding common shares, expiring in October 2023[345] Item 3. Defaults Upon Senior Securities Confirms no defaults upon senior securities during the reported period - There were no defaults upon senior securities[346] Item 4. Mine Safety Disclosures Indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[347] Item 5. Other Information States that there is no other information to report - No other information is reported[348] Item 6. Exhibits Provides an index of exhibits filed as part of the Quarterly Report on Form 10-Q - An index of exhibits filed as part of this Quarterly Report is provided[349][350][351] SIGNATURES Contains the official signatures for the Quarterly Report on Form 10-Q - The report was signed by Phillip J. Ahn, Chief Financial Officer and Chief Operating Officer, on November 4, 2022[356]