B. Riley Financial(RILY) - 2020 Q4 - Annual Report

Part I Business B. Riley Financial is a diversified financial services company operating five segments, including capital markets, auction, and financial consulting, with recent strategic acquisitions - The company operates through five main segments: Capital Markets, Auction and Liquidation, Financial Consulting, Principal Investments – United Online and magicJack, and Brands[17] - In Q4 2020, the company realigned its segment reporting structure, moving valuation, appraisal, bankruptcy, and other advisory businesses into the Financial Consulting segment[16] - In February 2021, the company completed the acquisition of National Holdings Corporation, a full-service investment banking and asset management firm, adding approximately 900 registered representatives and over $30 billion in assets[25] - In November 2020, the company closed a recapitalization transaction with Lingo Management, LLC, acquiring a 40% equity interest with the ability to acquire an additional 40%[29] Business Segments Overview This section outlines the core services and focus areas of each of B. Riley Financial's five distinct business segments - Capital Markets: Offers investment banking, corporate finance, wealth management, and sales/trading services[18] - Auction and Liquidation: Provides asset disposition services for retail, wholesale, and industrial clients[19] - Financial Consulting: Delivers bankruptcy, forensic accounting, valuation, and real estate consulting services[20] - Principal Investments - United Online and magicJack: Consists of acquired businesses for investment returns, currently including consumer Internet access (UOL) and VoIP services (magicJack)[21] - Brands: Manages a brand investment portfolio focused on generating revenue through trademark licensing[22] Competition The company faces intense competition across all its business lines, from investment banking to retail solutions and internet services - The company faces intense competition across all service areas. In Capital Markets, competitors include other investment banks, bank holding companies, and specialty securities firms. Industry consolidation has increased the capital base and reach of many competitors[88][89] - In its other business lines (Retail Solutions, Real Estate), the company competes with traditional and online liquidators, large accounting and consulting firms, and real estate brokerage firms[91][92] - The United Online (UOL) business competes with major broadband, wireless, and dial-up providers like AT&T, Verizon, AOL, and EarthLink[93] - The magicJack business competes with traditional telephone companies, cable companies, wireless providers, and other VoIP services like Vonage and Skype[94][95] Regulation The company is subject to extensive regulation by U.S. federal and state agencies, including the SEC, FINRA, and FCC, across its diverse operations - The company is subject to extensive regulation by U.S. federal and state agencies. Its broker-dealer subsidiaries, B. Riley Securities and B. Riley Wealth Management, are regulated by the SEC and FINRA[98][100] - The broker-dealer subsidiaries must comply with the SEC's Uniform Net Capital Rule (Rule 15c3-1), which sets minimum liquid net capital levels and may limit capital withdrawals[101] - The asset management subsidiaries are SEC-registered investment advisers and are subject to the Investment Advisers Act of 1940[103] - The magicJack business is subject to regulation by the Federal Communications Commission (FCC) and various state and local authorities[105] Human Capital The company employs 996 full-time staff, fostering an entrepreneurial culture with pay-for-performance compensation and comprehensive benefits - As of December 31, 2020, the company had 996 full-time employees[106] - The company fosters an entrepreneurial and collaborative culture, empowering individual growth through mentorship and leadership development programs like its Ambassador program[107][108] - Compensation philosophy is based on pay-for-performance to align employee interests with long-term growth. Benefits include healthcare, wellness, retirement, and flexible work arrangements[110] - During the COVID-19 pandemic, the company adopted a work-from-home policy to safeguard employee health without disrupting client service[111] Risk Factors The company faces diverse risks including revenue volatility, market conditions, legal and regulatory exposure, potential losses from investments, intense competition, significant indebtedness, and concentrated insider ownership - Revenues and results of operations are volatile and difficult to predict due to the singular nature of investment banking engagements and variability in the Auction and Liquidation business[115][117] - The company has significant exposure to credit risk through its lending activities and may incur losses from "guarantee" based engagements in its Auction and Liquidation segment[115][173][180] - Principal investments in high-risk, illiquid assets with leveraged capital structures could result in the loss of some or all of the invested capital[115][170] - The company's significant level of indebtedness, including multiple series of senior notes, could adversely affect operations and liquidity[115][310] - Executive officers, directors, and their affiliates own approximately 27.5% of the outstanding common stock, allowing them to exert significant control over corporate decisions[306] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[341] Properties The company's headquarters are in a leased facility in Los Angeles, California, deemed suitable and adequate for current operations - The company's headquarters are in a leased facility in Los Angeles, California[342] Legal Proceedings The company faces various legal claims, including a specific class action lawsuit, Gaynor v. Miller et al., which was settled in July 2020 - The company is involved in various legal proceedings, lawsuits, and regulatory matters typical for its industry, but does not believe they will have a material effect on its financial position[344] - A specific class action lawsuit, Gaynor v. Miller et al., naming a subsidiary of B. Riley Securities as a defendant, was subject to a settlement agreement in July 2020, with an accrual made in the financial statements[345] Mine Safety Disclosures This item is not applicable to the company - Not applicable[346] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "RILY", with a policy of regular quarterly dividends and significant outperformance against market indices - The company's common stock is traded on the NASDAQ Global Market under the symbol "RILY"[349] Share Performance Comparison (2015-2020) | Year | B. Riley Financial, Inc. | Russell 2000 | Industry Peer Group | | :--- | :--- | :--- | :--- | | 2015 | $100 | $100 | $100 | | 2016 | $192 | $119 | $113 | | 2017 | $196 | $135 | $128 | | 2018 | $160 | $119 | $108 | | 2019 | $302 | $147 | $124 | | 2020 | $563 | $174 | $148 | Selected Financial Data This section presents five-year consolidated financial data, highlighting significant growth in total revenues from $190.4 million in 2016 to $902.7 million in 2020, and total assets to over $2.66 billion Selected Consolidated Statement of Operations Data (2016-2020) | (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $902,721 | $652,112 | $422,991 | $322,176 | $190,351 | | Operating income | $344,765 | $166,651 | $45,384 | $28,844 | $48,725 | | Net income available to common shareholders | $200,438 | $81,347 | $15,509 | $11,556 | $21,526 | | Diluted income per common share | $7.56 | $2.95 | $0.58 | $0.48 | $1.17 | Selected Consolidated Balance Sheet Data (2016-2020) | (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $2,662,730 | $2,318,178 | $1,957,710 | $1,386,904 | $264,618 | | Total liabilities | $2,123,770 | $1,927,927 | $1,699,050 | $1,121,058 | $114,226 | | Total equity | $538,960 | $390,251 | $258,660 | $265,846 | $150,392 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 38.4% revenue increase to $902.7 million and a 106.9% operating income surge to $344.8 million in 2020, driven by strong segment performance and robust liquidity - Total revenues increased by 38.4% to $902.7 million in 2020 from $652.1 million in 2019[387] - Operating income increased by 106.9% to $344.8 million in 2020 from $166.7 million in 2019[387] - Net income attributable to B. Riley Financial increased 151.4% to $205.1 million in 2020[387] Results of Operations This section details the year-over-year financial performance, showing significant revenue and income growth driven by Capital Markets and Auction & Liquidation segments Year-over-Year Financial Comparison (2020 vs. 2019) | (In thousands) | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenues | $902,721 | $652,112 | 38.4% | | Operating income | $344,765 | $166,651 | 106.9% | | Net income attributable to B. Riley Financial, Inc. | $205,148 | $81,611 | 151.4% | | Net income available to common shareholders | $200,438 | $81,347 | 146.4% | - The $250.6 million revenue increase in 2020 was primarily driven by a $206.6 million increase in services and fees, led by a $147.5 million rise in the Capital Markets segment due to higher investment banking fees[391][392] - Auction and Liquidation segment revenues from services and fees grew by $44.8 million in 2020, a 244.9% increase, due to a higher number of fee-related retail liquidation engagements[389][393] - Total selling, general, and administrative (SG&A) expenses increased by 11.2% to $428.5 million in 2020, primarily due to a $27.0 million increase in the Capital Markets segment related to higher payroll and deal expenses[404][406][407] - The company recognized a $12.5 million impairment charge on tradenames in the Brands segment in 2020 due to the economic impact of the COVID-19 outbreak[414] Liquidity and Capital Resources This section analyzes the company's cash flows, capital structure, and financing activities, including debt issuances and contractual obligations Cash Flow Summary (2018-2020) | (In thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) Operating activities | $57,689 | $(27,198) | $(102,186) | | Net cash used in Investing activities | $(128,446) | $(298,590) | $(154,069) | | Net cash provided by Financing activities | $69,544 | $250,176 | $284,859 | - As of December 31, 2020, the company had $103.6 million in cash and cash equivalents, $777.3 million in securities and other investments, and $1.0 billion in total borrowings outstanding[461] - In 2020, the company issued $132.3 million of 6.375% Senior Notes due 2025 and an additional $54.5 million of various senior notes through its at-the-market program[479][480] - In September 2020, the company closed a public offering of Depositary Shares representing its 7.375% Series B Cumulative Perpetual Preferred Stock, raising gross proceeds of approximately $32.5 million[478] Contractual Obligations as of December 31, 2020 | (In thousands) | Total | Less Than One Year | 1-3 Years | 4-5 Years | More Than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $73,688 | $11,775 | $21,340 | $19,492 | $21,081 | | Notes payable | $38,272 | $37,896 | $376 | $— | $— | | Term loan | $75,000 | $19,000 | $32,000 | $24,000 | $— | | Senior notes payable, including interest | $1,091,760 | $47,197 | $340,993 | $294,283 | $409,287 | | Total | $1,278,720 | $115,868 | $394,709 | $337,775 | $430,368 | Critical Accounting Policies This section outlines key accounting policies, including revenue recognition, goodwill impairment, fair value measurements, and the adoption of new credit loss standards - Revenue Recognition (ASC 606): Revenues are recognized when control of goods or services is transferred. The policy details recognition timing for various revenue streams, including investment banking success fees (upon closing), asset management fees (over time), and guaranteed liquidation contracts (using a cost-to-cost measure of progress)[506][507][515] - Goodwill and Other Intangible Assets: Goodwill is tested for impairment annually or when triggering events occur. In 2020, the COVID-19 outbreak was identified as a triggering event, leading to a $12.5 million impairment charge on indefinite-lived tradenames in the Brands segment[531][534] - Fair Value Measurements: The company uses a three-level hierarchy for fair value measurements. Level 3 assets, which use unobservable inputs, require significant judgment and include nonpublic equity securities and certain loans. As of Dec 31, 2020, Level 3 assets measured at fair value were $540.0 million[535][705] - Loans Receivable: Effective January 1, 2020, the company adopted the new credit loss standard (ASC 326) and elected the fair value option for all outstanding loans previously measured at amortized cost. This change means credit losses are now captured through fair value adjustments rather than an allowance[689] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations affecting floating-rate loans and fixed-rate notes, and limited foreign currency exposure, which is managed with forward exchange contracts - The primary market risk is interest rate risk, affecting the value of fixed-rate notes and income from floating-rate loans and credit facilities[548] - Foreign currency risk is considered limited, as revenues from foreign subsidiaries were less than 5.3% of total revenues in 2020[550] - The company uses derivative instruments, such as forward exchange contracts, to manage currency risk on specific international engagements[544] Financial Statements and Supplementary Data This section refers to the consolidated financial statements and supplementary data, located in a separate section starting on page F-1 - The required financial statements and supplementary data are located in a separate section of the Annual Report, starting on page F-1[551] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[552] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2020, but internal control over financial reporting was effective, with a prior material weakness remediated - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020[554] - Despite the issue with disclosure controls, management concluded that internal control over financial reporting was effective as of December 31, 2020[556] - A previously reported material weakness in internal control over financial reporting was remediated during the quarter ended June 30, 2020. The remediation involved enhancing related party policies, procedures, and oversight[558] Other Information The company reports no other information for this item - None[560] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14, covering directors, executive officers, governance, compensation, and security ownership, is incorporated by reference from the 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[563][564][565] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including various agreements, and points to the Consolidated Financial Statements starting on page F-1 - This section provides an index of all exhibits filed with the annual report[572] Financial Statements The consolidated financial statements for B. Riley Financial and its subsidiaries for the three years ended December 31, 2020, show significant growth, with total assets reaching $2.66 billion and total revenues of $902.7 million in 2020 Consolidated Balance Sheet Highlights | (In thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,662,730 | $2,318,178 | | Total Liabilities | $2,123,770 | $1,927,927 | | Total Equity | $538,960 | $390,251 | Consolidated Income Statement Highlights | (In thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenues | $902,721 | $652,112 | $422,991 | | Operating Income | $344,765 | $166,651 | $45,384 | | Net Income Attributable to B. Riley Financial, Inc. | $205,148 | $81,611 | $15,509 | Form 10-K Summary The company reports no Form 10-K summary - None[587]