B. Riley Financial(RILY) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents B. Riley Financial's unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2021 and 2020, including Balance Sheets, Statements of Operations, Comprehensive Income, Equity, and Cash Flows with detailed notes Condensed Consolidated Balance Sheets As of September 30, 2021, total assets increased to approximately $5.05 billion from $2.66 billion, driven by cash and securities, while total liabilities rose to $3.95 billion and equity grew to $747.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 (Unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $378,205 | $103,602 | | Securities and other investments owned, at fair value | $1,352,100 | $777,319 | | Securities borrowed | $1,347,656 | $765,457 | | Total assets | $5,046,851 | $2,662,730 | | Liabilities | | | | Securities sold not yet purchased | $419,211 | $10,105 | | Securities loaned | $1,345,825 | $759,810 | | Senior notes payable, net | $1,362,847 | $870,783 | | Total liabilities | $3,954,644 | $2,123,770 | | Total equity | $747,207 | $538,960 | Condensed Consolidated Statements of Operations Q3 2021 total revenues increased to $381.5 million with net income of $51.7 million, while nine-month revenues surged to $1.32 billion with net income of $383.4 million, significantly up from 2020 Q3 2021 vs Q3 2020 Performance (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Total revenues | $381,522 | $226,253 | | Operating income | $96,746 | $83,501 | | Net income | $51,658 | $48,892 | | Diluted income per common share | $1.69 | $1.75 | Nine Months 2021 vs 2020 Performance (in thousands, except per share data) | Metric | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | | Total revenues | $1,318,451 | $492,515 | | Operating income | $579,869 | $93,697 | | Net income | $383,356 | $32,172 | | Diluted income per common share | $13.07 | $1.14 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities was $166.7 million, investing activities used $416.7 million, and financing activities provided $859.4 million, driven by debt and IPO proceeds Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(166,652) | $87,902 | | Net cash used in investing activities | $(416,662) | $(126,065) | | Net cash provided by financing activities | $859,364 | $104,103 | | Net increase in cash, cash equivalents and restricted cash | $274,295 | $66,347 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail the company's financial status, including the February 2021 National Holdings acquisition, segment realignment into six core businesses, significant accounting policies, fair value measurements, debt, revenue recognition, and segment data - On February 25, 2021, the Company completed the acquisition of National Holdings Corporation, expanding its investment banking and wealth management offerings, leading to a realignment of segment reporting with a dedicated Wealth Management segment[29][203] - The company operates across six segments: Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments (United Online and magicJack), and Brands[30] - In Q3 2021, the company identified a non-material error related to the consolidation of certain Variable Interest Entities (VIEs), resulting in a revision of prior period financial statements and a gross-up of the balance sheet[34][209] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q3 and nine months ended September 30, 2021, analyzing revenue and expense drivers across its six segments, liquidity, capital resources, and debt management activities Overview and Recent Developments B. Riley Financial operates across six segments, with recent developments including the February 2021 National Holdings acquisition, active debt management through redemptions and new issuances, and ongoing monitoring of the COVID-19 pandemic's impact - The company operates through six segments: Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments – United Online and magicJack, and Brands[220] - Completed the acquisition of National Holdings Corporation on February 25, 2021, expanding wealth management, brokerage, insurance, and advisory services[218] - Recent debt management includes redeeming 7.25% notes due 2027 and 7.375% notes due 2023, while issuing $316.3 million of 5.25% notes due 2028[227][228][229] Results of Operations Q3 2021 total revenues increased 68.6% to $381.5 million, driven by services and fees, while nine-month revenues grew 167.7% to $1.32 billion, with operating expenses rising due to acquisitions and increased activity Revenue by Type - Q3 2021 vs Q3 2020 (in thousands) | Revenue Type | Q3 2021 | Q3 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Services and fees | $301,497 | $144,823 | 108.2% | | Trading income and fair value adjustments | $18,197 | $31,753 | (42.7)% | | Sale of goods | $34,959 | $23,651 | 47.8% | | Total revenues | $381,522 | $226,253 | 68.6% | Revenue by Type - Nine Months 2021 vs 2020 (in thousands) | Revenue Type | Nine Months 2021 | Nine Months 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Services and fees | $857,109 | $429,799 | 99.4% | | Trading income (losses) and fair value adjustments | $317,818 | $(36,142) | n/m | | Sale of goods | $54,244 | $26,475 | 104.9% | | Total revenues | $1,318,451 | $492,515 | 167.7% | - The increase in services and fees revenue for Q3 2021 was driven by a $79.0 million increase in the Capital Markets segment and a $100.3 million increase in the Wealth Management segment, primarily due to the National acquisition[238][239][240] - Selling, general and administrative expenses for Q3 2021 increased 151.4% to $244.2 million, largely due to the National acquisition adding $90.3 million in SG&A for Wealth Management and a $34.0 million increase in Capital Markets payroll expenses[250][253][254] Liquidity and Capital Resources As of September 30, 2021, the company maintained strong liquidity with $378.2 million in cash and $1.35 billion in securities, funding operations through debt and equity offerings, and maintaining an active dividend policy - As of September 30, 2021, the company held $378.2 million in unrestricted cash and cash equivalents and $1,352.1 million in securities and other investments owned at fair value[308] - In June 2021, the company entered into a new credit agreement with Nomura for a four-year $200 million secured term loan and an $80 million secured revolving credit facility[127][317] - The company has an active dividend policy, declaring a regular dividend of $1.00 per share (increased from $0.50) and a special dividend of $3.00 per share on October 28, 2021[309] Financing Activities - Nine Months Ended Sep 30, 2021 (in millions) | Activity | Amount | | :--- | :--- | | Proceeds from issuance of senior notes | $890.6 | | Proceeds from initial public offering of subsidiaries | $345.0 | | Proceeds from term loan | $200.0 | | Redemption of senior notes | $(390.5) | | Common dividends paid | $(236.6) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on floating-rate instruments, partially mitigated by fixed-rate notes, with limited foreign currency risk impacting operating income by approximately $0.9 million for a 10% fluctuation - Primary market risk is interest rate risk, impacting floating-rate borrowings under credit facilities and floating-rate loans receivable[363] - Foreign currency risk is limited, with foreign subsidiary revenues of $48.8 million (3.7% of total) for the nine months ended Sep 30, 2021, and a 10% currency fluctuation impacting operating income by about $0.9 million[365] Controls and Procedures Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at the reasonable assurance level[367] - No changes were made to the internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[368] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including a settled class action related to Miller Energy Resources and ongoing FINRA arbitrations against its subsidiary NSC concerning pre-acquisition GPB Capital Holdings investments - The company has agreed to settle the Gaynor v. Miller et al. class action lawsuit related to Miller Energy Resources offerings, with an accrual for the settlement included in the financial statements[174][373] - Subsidiary National Securities Corporation (NSC) is defending several FINRA arbitration claims from investors related to GPB Capital Holdings investments, which predate the acquisition by B. Riley[175][374] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes have occurred to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[375] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - None[376] Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - None[377] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[378] Other Information No other information was reported for the period - None[379] Exhibits This section lists exhibits filed with the Quarterly Report, including CEO and CFO certifications and Inline XBRL data files - The report includes certifications from the Co-Chief Executive Officers and the Chief Financial Officer as required by Rules 13a-14, 15d-14, and Section 906 of the Sarbanes-Oxley Act[383] - Inline XBRL Instance, Schema, Calculation, Definition, Label, and Presentation documents are filed as exhibits[383]