Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “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. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the caption “Risk Factors.”
Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to risks related to: volatility in our revenues and results of operations; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; 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, including increasing inflation and actions by the Federal Reserve to address inflation; the continuing effects of the COVID-19 pandemic, or other pandemics or severe public health crises, and other related impacts including supply chain disruptions, labor shortages and increased labor costs; 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 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; the intense competition to which our brand investment portfolio is subject; and the effect of geopolitical instability, including wars, conflicts and terrorist attacks, including the impacts of Russia’s invasion of Ukraine. 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 Quarterly Report to the “Company,” “B. Riley,” “B. Riley Financial,” “we,” “us” or “our” refer to the combined business of B. Riley Financial, Inc. and all of its subsidiaries.
Overview
General
B. Riley Financial, Inc. (NASDAQ: RILY) (“B. Riley” or the “Company”) is a diversified financial services platform and opportunistically invests in companies or assets with attractive risk-adjusted return profiles to benefit its shareholders. Through its affiliated subsidiaries, B. Riley provides a full suite of investment banking, corporate finance research, sales, and trading, as well as advisory, valuation, and wealth management, services. The Company’s major business lines include:
• B. Riley Securities, a leading, full service investment bank that provides corporate finance, lending, research, securities lending and sales and trading services to corporate, institutional, and high net worth individual clients. It
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is nationally recognized for its proprietary small and mid-cap equity research. B. Riley Securities was established from the merger of B. Riley & Co, LLC and FBR Capital Markets & Co. in 2017.
• B. Riley Wealth Management, which provides comprehensive wealth management and brokerage services to individuals and families, corporations and non-profit organizations, including qualified retirement plans, trusts, foundations, and endowments. The firm was formerly known as Wunderlich Securities, Inc., which the Company acquired in July 2017.
• National Holdings Corporation (“National”), which provides wealth management, brokerage, insurance brokerage, tax preparation and advisory services, was acquired in February 2021.
• B. Riley Capital Management, which is a Securities and Exchange Commission (“SEC”) registered investment advisor, that includes B. Riley Asset Management, an advisor to and/or manager of certain private funds.
• B. Riley Advisory Services, which provides expert witness, bankruptcy, financial advisory, forensic accounting, valuation and appraisal, and operations management services to companies, financial institutions, and the legal community. B. Riley Advisory Services is primarily comprised of the bankruptcy and restructuring, forensic accounting, litigation support, and appraisal and valuation practices.
• B. Riley Retail Solutions, which is a leading provider of asset disposition, liquidation, and auction solutions to a wide range of retail and industrial clients.
• B. Riley Real Estate, which advises companies, financial institutions, investors, family offices and individuals on real estate projects worldwide. A core focus of B. Riley Real Estate, LLC is the restructuring of lease obligations in both distressed and non-distressed situations, both inside and outside of the bankruptcy process, on behalf of corporate tenants.
• B. Riley Principal Investments, which identifies attractive investment opportunities and seeks to control or influence the operations of our portfolio company investments to deliver financial and operational improvements that will maximize the Company’s free cash flow, and therefore, shareholder returns. The team concentrates on opportunities presented by distressed companies or divisions that exhibit challenging market dynamics. Representative transactions include recapitalization, direct equity investment, debt investment, active minority investment and buyouts.
• Communications consist of United Online, Inc. (“UOL” or “United Online”), which was acquired in July 2016, magicJack VocalTec Ltd. (“magicJack”), which was acquired in November 2018, Lingo Management, LLC (“Lingo”) in which the Company increased its ownership interest from 40% to 80% in May 2022, and a mobile virtual network operator business (“Marconi Wireless”), which was acquired in October 2021. The following briefly describes each such business:
◦ UOL is a communications company that offers consumer subscription services and products, consisting of Internet access services and devices under the NetZero and Juno brands.
◦ magicJack is a Voice over IP (“VoIP”) cloud-based technology and services and wireless mobile communications provider.
◦ Lingo is a global cloud/unified communications (“UC”) and managed service provider.
◦ Marconi Wireless is a mobile virtual network operator business that provides mobile phone voice, text, and data services and devices.
• BR Brand Holding (“BR Brands”), in which the Company owns a majority interest, provides licensing of certain brand trademarks. BR Brands owns the assets and intellectual property related to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore as well as investments in the Hurley and Justice brands with Bluestar Alliance LLC (“Bluestar”), a brand management company.
We are headquartered in Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston, Atlanta, Dallas, Memphis, Metro Washington D.C., West Palm Beach, and Boca Raton.
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For financial reporting purposes we classify our businesses into six operating segments: (i) Capital Markets, (ii) Wealth Management, (iii) Auction and Liquidation, (iv) Financial Consulting, (v) Principal Investments – Communications and Other and (vi) Brands.
Capital Markets Segment. Our Capital Markets segment provides a full array of investment banking, corporate finance, financial advisory, research, securities lending and sales and trading services to corporate, institutional, and individual clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our Capital Markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors. This segment also includes the results of operations of FocalPoint Securities, LLC ("FocalPoint") from the date of acquisition on January 19, 2022.
Wealth Management Segment . Our Wealth Management segment provides wealth management and tax services to corporate and high net worth clients. We offer comprehensive wealth management services for corporate businesses that include investment strategies, executive services, retirement plans, lending & liquidity resources, and settlement solutions. Our wealth management services for individual client services provide investment management, education planning, retirement planning, risk management, trust coordination, lending & liquidity solutions, legacy planning, and wealth transfer. In addition, we supply market insights to provide unbiased guidance to make important financial decisions. Wealth management resources include market views from our investment strategists and B. Riley Securities’ proprietary equity research.
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. Our scale and pool of resources allow us to offer our services across North America as well as parts of Europe, Asia, and Australia. Our Auction and Liquidation segment operates through two main divisions, retail store liquidations and wholesale and industrial assets dispositions. Our wholesale and industrial assets dispositions division operates through limited liability companies that are controlled by us.
Financial Consulting Segment. Our Financial Consulting segment provides services to law firms, corporations, financial institutions, lenders, and private equity firms. These services primarily include bankruptcy, financial advisory, forensic accounting, litigation support, operations management consulting, real estate consulting, and valuation and appraisal services. Our Financial Consulting segment operates through limited liability companies that are wholly owned or majority owned by us.
Principal Investments - Communications and Other Segment. Our Principal Investments - Communications and Other segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes, among other investments, UOL, through which we provide consumer Internet access, magicJack, through which we provide VoIP communication and related product and subscription services, and Marconi Wireless, through which we provide mobile phone services and devices. This segment also includes the results of operations of Lingo from the date of acquisition on May 31, 2022.
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 Brands.
Recent Developments
On May 31, 2022, our ownership interest in Lingo increased from 40% to 80% as a result of the conversion of $17.5 million of existing debt owed by Lingo to equity. As a result of the consolidation of Lingo, the pre-existing equity investment was remeasured at fair value resulting in the recognition of a gain of $6.8 million, which is included in trading (losses) income and fair value adjustments on loans in the condensed consolidated statement of operations for the three and six months ended June 30, 2022. In accordance with ASC 805, we used the acquisition method of accounting. The total fair value of the assets of Lingo was $115.8 million and the fair value of the 20% noncontrolling interest was $8.0 million at May 31, 2022. Goodwill of $32.0 million and other intangible assets of $65.2 million were recorded as a result of the
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acquisition. The acquisition is expected to expand the services offered in our Principal Investments - Communications and Other segment.
On January 19, 2022, we acquired FocalPoint, an independent investment bank headquartered in Los Angeles, California. The purchase price consideration totaled $124.5 million, which consisted of $64.2 million in cash, $20.3 million in issuance of our common stock, and $39.9 million in deferred cash and contingent consideration payable over the next three years. We used the acquisition method of accounting for this acquisition. Goodwill of $110.5 million and other intangible assets of $10.8 million that was recorded as a result of the acquisition will be deductible for tax purposes. The acquisition is expected to expand B. Riley Securities’ mergers and acquisitions (“M&A”) advisory business and enhance its debt capital markets and financial restructuring capabilities.
There continues to be widespread impact from COVID-19, which the World Health Organization classified as a pandemic in March 2020. There has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel, and government activities and functions; however, the full impact of the COVID-19 outbreak continues to evolve with the emergence of new variant strains and breakthrough infections. The continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, Russia's invasion of Ukraine, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. These developments and the impact on the financial markets and the overall economy continue to be highly uncertain and cannot be predicted. If the financial markets and/or the overall economy continue to be impacted, our results of operations, financial position, and cash flows may be materially adversely affected.
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Results of Operations
The following period to period comparisons of our financial results and our interim results are not necessarily indicative of future results.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Condensed Consolidated Statements of Operations
(Dollars in thousands)
Three Months Ended June 30, Change
2022 2021 Amount %
Revenues:
Services and fees $ 200,905 $ 266,143 $ (65,238) (24.5) %
Trading (losses) income and fair value adjustments on loans (223,927) 32,679 (256,606) n/m
Interest income - Loans and securities lending 63,835 25,491 38,344 150.4 %
Sale of goods 1,887 12,457 (10,570) (84.9) %
Total revenues 42,700 336,770 (294,070) (87.3) %
Operating expenses:
Direct cost of services 17,785 12,094 5,691 47.1 %
Cost of goods sold 1,994 3,626 (1,632) (45.0) %
Selling, general and administrative expenses 167,136 199,922 (32,786) (16.4) %
Interest expense - Securities lending and loan participations sold 14,544 10,983 3,561 32.4 %
Total operating expenses 201,459 226,625 (25,166) (11.1) %
Operating (loss) income (158,759) 110,145 (268,904) n/m
Other income (expense):
Interest income 500 56 444 n/m
Change in fair value of financial instruments and other 4,321 6,509 (2,188) (33.6) %
Loss from equity investments (3,399) (852) (2,547) n/m
Interest expense (31,764) (20,856) (10,908) 52.3 %
(Loss) income before income taxes (189,101) 95,002 (284,103) n/m
Benefit from (provision for) income taxes 52,513 (19,902) 72,415 n/m
Net (loss) income (136,588) 75,100 (211,688) n/m
Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests 3,571 (576) 4,147 n/m
Net (loss) income attributable to B. Riley Financial, Inc. (140,159) 75,676 (215,835) n/m
Preferred stock dividends 2,002 1,789 213 11.9 %
Net (loss) income available to common shareholders $ (142,161) $ 73,887 $ (216,048) n/m
n/m - Not applicable or not meaningful.
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Revenues
The table below and the discussion that follows are based on how we analyze our business.
Three Months Ended June 30, Change
2022 2021 Amount %
Revenues - Services and fees:
Capital Markets segment $ 67,426 $ 125,997 $ (58,571) (46.5) %
Wealth Management segment 60,861 87,444 (26,583) (30.4) %
Auction and Liquidation segment 2,488 5,534 (3,046) (55.0) %
Financial Consulting segment 24,310 23,735 575 2.4 %
Principal Investments - Communications and Other segment 40,646 18,932 21,714 114.7 %
Brands segment 5,174 4,501 673 15.0 %
Subtotal 200,905 266,143 (65,238) (24.5) %
Revenues - Sale of goods:
Auction and Liquidation segment — 11,743 (11,743) (100.0) %
Principal Investments - Communications and Other segment 1,887 714 1,173 164.3 %
Subtotal 1,887 12,457 (10,570) (84.9) %
Trading (losses) income and fair value adjustments on loans
Capital Markets segment (225,455) 29,897 (255,352) n/m
Wealth Management segment 1,528 2,865 (1,337) (46.7) %
Brands segment — (83) 83 (100.0) %
Subtotal (223,927) 32,679 (256,606) n/m
Interest income - Loans and securities lending:
Capital Markets segment 62,399 25,491 36,908 144.8 %
Auction and Liquidation segment 1,436 — 1,436 100.0 %
Subtotal 63,835 $ 25,491 38,344 150.4 %
Total revenues $ 42,700 $ 336,770 $ (294,070) (87.3) %
_______________________________________________
n/m - Not applicable or not meaningful.
Total revenues decreased approximately $294.1 million to $42.7 million during the three months ended June 30, 2022 from $336.8 million during the three months ended June 30, 2021. The decrease in revenues during the three months ended June 30, 2022 was primarily due to decreases in the fair value of the portfolio of securities and other investments owned and fair value adjustments on loans of $256.6 million, which is included in trading (losses) income and fair value adjustments on loans above, services and fees of $65.2 million and sale of goods of $10.6 million, partially offset by an increase in interest income from loans and securities lending of $38.3 million. The decrease in the fair value of the portfolio of securities and other investments owned as of June 30, 2022 was primarily due to the decrease in overall values in the stock market. The decrease in revenue from services and fees in the three months ended June 30, 2022 consisted of decreases in revenue of $58.6 million in the Capital Markets segment, $26.6 million in the Wealth Management segment and $3.0 million in the Auction and Liquidation segment, partially offset by increases in revenues of $21.7 million in the Principal Investments — Communications and Other segment, $0.7 million in the Brands segment, and $0.6 million in the Financial Consulting segment.
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Revenues from services and fees in the Capital Markets segment decreased $58.6 million to $67.4 million during the three months ended June 30, 2022 from $126.0 million during the three months ended June 30, 2021. The decrease in revenues was primarily due to decreases in revenue of $71.8 million from corporate finance, consulting, and investment banking fees, partially offset by increases of $7.7 million in dividends, $2.9 million in other income, and $1.9 million in interest income.
Revenues from services and fees in the Wealth Management segment decreased $26.6 million to $60.9 million during the three months ended June 30, 2022 from $87.4 million during the three months ended June 30, 2021. The decrease in revenues was primarily due to decreases in revenue of $14.8 million in commission fees and $13.7 million in wealth and asset management fees, partially offset by an increase of $2.0 million in other income.
Revenues from services and fees in the Auction and Liquidation segment decreased $3.0 million to $2.5 million during the three months ended June 30, 2022 from $5.5 million during the three months ended June 30, 2021. The decrease in revenues was primarily due to fewer large retail fee liquidation engagements.
Revenues from services and fees in the Financial Consulting segment increased $0.6 million to $24.3 million during the three months ended June 30, 2022 from $23.7 million during three months ended June 30, 2021.
Revenues from services and fees in the Principal Investments - Communications and Other segment increased $21.7 million to $40.6 million during the three months ended June 30, 2022 from $18.9 million during the three months ended June 30, 2021. The increase in revenues was primarily due to an increase in subscription services of $12.4 million from the acquisition of Marconi Wireless in the fourth quarter of 2021 and $10.7 million from the acquisition of an additional equity interest in Lingo in the second quarter of 2022 and an increase in advertising licensing and other revenue of $1.2 million, partially offset by a decrease of $2.5 million in subscription services for UOL and magicJack. We expect the UOL and magicJack subscription revenues to continue to decline year over year.
Revenues from services and fees in the Brands segment increased $0.7 million to $5.2 million during the three months ended June 30, 2022 from $4.5 million during the three months ended June 30, 2021. The primary source of revenue included in this segment is the licensing of trademarks.
Trading (losses) income and fair value adjustments on loans decreased $256.6 million to a loss of $223.9 million during the three months ended June 30, 2022 compared to income of $32.7 million during the three months ended June 30, 2021. This decrease was primarily due to decreases of $255.4 million in the Capital Markets segment and $1.3 million in the Wealth Management segment. The loss of $223.9 million during the three months ended June 30, 2022 was primarily due to realized and unrealized losses on investments made in our proprietary trading accounts of $219.8 million and unrealized loss on our loans receivable, at fair value of $11.0 million, partially offset by a realized gain on disposal of an equity method investment of $6.8 million.
Interest income – loans and securities lending increased $38.3 million to $63.8 million during the three months ended June 30, 2022 from $25.5 million during the three months ended June 30, 2021. Interest income from securities lending was $18.7 million and $13.9 million during the three months ended June 30, 2022 and 2021, respectively. Interest income from loans was $45.1 million and $11.6 million during the three months ended June 30, 2022 and 2021, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods decreased $10.6 million to $1.9 million during the three months ended June 30, 2022 from $12.5 million during three months ended June 30, 2021. Revenues from sale of goods were attributable to a decrease of $11.7 million from sales of retail goods related to retail liquidation engagements in Europe that ended, partially offset by an increase of $1.4 million from sales of retail goods due to the acquisition of Marconi Wireless in the fourth quarter of 2021. Cost of goods sold for three months ended June 30, 2022 was $2.0 million, resulting in a negative gross margin of 5.7%.
Operating Expenses
Direct Cost of Services
Direct cost of services increased $5.7 million to $17.8 million during the three months ended June 30, 2022 from $12.1 million during the three months ended June 30, 2021. The activity is primarily driven by an increase of $11.9 million from
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the Principal Investments — Communications and Other segment, partially offset by a decrease of $6.2 million from the Auction and Liquidation segment. The increase in the Principal Investments — Communications and Other segment was primarily due to increases of $7.5 million from the acquisition of Lingo in the second quarter of 2022 and $5.2 million from the acquisition Marconi Wireless in the fourth quarter of 2021. The decrease in the Auction and Liquidation segment was primarily due to retail liquidation engagements in Europe that ended.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the three months ended June 30, 2022 and 2021 were comprised of the following:
Three Months Ended June 30, 2022 Three Months Ended
June 30, 2021 Change
Amount % Amount % Amount %
Capital Markets segment $ 48,069 28.7 % $ 65,720 33.0 % $ (17,651) (26.9) %
Wealth Management segment 69,702 41.8 % 91,042 45.5 % (21,340) (23.4) %
Auction and Liquidation segment 2,177 1.3 % 3,077 1.5 % (900) (29.2) %
Financial Consulting segment 20,026 12.0 % 19,560 9.8 % 466 2.4 %
Principal Investments -Communications and Other segment 16,403 9.8 % 7,296 3.6 % 9,107 124.8 %
Brands segment 1,401 0.8 % 1,405 0.7 % (4) (0.3) %
Corporate and Other segment 9,358 5.6 % 11,822 5.9 % (2,464) (20.8) %
Total selling, general & administrative expenses $ 167,136 100.0 % $ 199,922 100.0 % $ (32,786) (16.4) %
____________________________________
n/m - Not applicable or not meaningful.
Total selling, general and administrative expenses decreased approximately $32.8 million to $167.1 million during the three months ended June 30, 2022 from $199.9 million during the three months ended June 30, 2021. The decrease was primarily due to decreases of $21.3 million in the Wealth Management segment, $17.7 million in the Capital Markets segment, $2.5 million in the Corporate and Other segment, and $0.9 million in the Auction and Liquidation segment partially offset by increases of $9.1 million in the Principal Investments — Communications and Other segment and $0.5 million in the Financial Consulting segment.
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment decreased by $17.7 million to $48.1 million during the three months ended June 30, 2022 from $65.7 million during the three months ended June 30, 2021. The decrease was primarily due to decreases of $14.8 million in consulting expenses and $12.1 million in payroll and related expenses investment banking deal expenses, partially offset by increases of $4.9 million from the settlement of a regulatory matter, $2.0 in depreciation and amortization expenses, $1.1 million gain from foreign currency exchange, and $1.1 million in business development expenses.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment decreased by $21.3 million to $69.7 million during the three months ended June 30, 2022 from $91.0 million during the three months ended June 30, 2021. The decrease was primarily due to a decrease in payroll and related expenses of $27.8 million, partially offset by an increase of $4.9 million from the settlement of a regulatory matter.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment decreased $0.9 million to $2.2 million during the three months ended June 30, 2022 from $3.1 million during the three months ended June 30, 2021.
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The decrease was primarily due to decreases of $0.4 million in business development expenses and $0.2 million in payroll and related expenses.
Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $0.5 million to $20.0 million during the three months ended June 30, 2022 from $19.6 million during the three months ended June 30, 2021.
Principal Investments — Communications and Other
Selling, general and administrative expenses in the Principal Investments — Communications and Other segment increased $9.1 million to $16.4 million for the three months ended June 30, 2022 from $7.3 million for the three months ended June 30, 2021. The increase was primarily due to increases of $4.1 million from the acquisition of additional equity interest in Lingo in the second quarter of 2022, $1.6 million in transaction costs, $1.3 million in payroll and related expenses, $1.1 million in depreciation and amortization, $0.7 million in communications expenses, $0.2 million in software and equipment expenses, and $0.2 million business development expenses.
Brands
Selling, general and administrative expenses in the Brands segment remained flat at $1.4 million during the three months ended June 30, 2022 and 2021.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment decreased approximately $2.5 million to $9.4 million during the three months ended June 30, 2022 from $11.8 million during the three months ended June 30, 2021. The decrease was primarily due to decreases of $4.5 million change in the fair value of contingent consideration, $2.2 million in loss from foreign currency exchange, partially offset by increases of $3.9 million in payroll and related expenses.
Other Income (Expense). Other income included interest income of $0.5 million and $0.1 million during the three months ended June 30, 2022 and 2021, respectively. Change in fair value of financial instruments and other in the amount of $4.3 million during the three months ended June 30, 2022 was primarily due to the change in fair value of warrant liabilities and the forgiveness of a Paycheck Protection Program loan issued to FocalPoint prior to its acquisition by the Company in the first quarter of 2022. Interest expense was $31.8 million during the three months ended June 30, 2022 compared to $20.9 million during the three months ended June 30, 2021. The increase in interest expense was primarily due to increases in interest expense of $5.0 million from the issuance of senior notes and $4.5 million and $1.2 million from the Nomura term loan and revolving credit facility, respectively, entered into during the second quarter of 2021. During the three months ended June 30, 2022, loss from equity investments was $3.4 million compared to $0.9 million during the three months ended June 30, 2021. The increase was primarily due to the $3.7 million loss recognized from the conversion of debt to equity in the acquisition of Lingo during the second quarter of 2022.
(Loss) Income Before Income Taxes . Loss before income taxes was $189.1 million during the three months ended June 30, 2022 compared to income of $95.0 million during the three months ended June 30, 2021. The change was primarily due to a decrease in revenue of $294.1 million, increase in interest expense of $10.9 million, increase in loss from equity investments of $2.5 million, and a decrease in change in fair value of financial instruments and other of $2.2 million, partially offset by a decrease in operating expenses of approximately $25.2 million and an increase in interest income of $0.4 million.
Benefit from (Provision for) Income Taxes. Benefit from income taxes was $52.5 million during the three months ended June 30, 2022 compared to a provision of $19.9 million during the three months ended June 30, 2021. The effective income tax rate was 27.8% for the three months ended June 30, 2022 as compared to 20.9% for the three months ended June 30, 2021.
Net Income (Loss) Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests . Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests represents the proportionate share of net income generated by membership interests of partnerships that we do not own. The net income attributable to
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noncontrolling interests and redeemable noncontrolling interests was $3.6 million during the three months ended June 30, 2022 compared to a net loss of $0.6 million during the three months ended June 30, 2021.
Net (Loss) Income Attributable to the Company . Net loss attributable to the Company was $140.2 million during the three months ended June 30, 2022 compared to net income attributable to the Company of $75.7 million during the three months ended June 30, 2021. The change was primarily due to a change from operating income to loss of $268.9 million, increase in interest expense of $10.9 million, increase in net income attributable to noncontrolling interests and redeemable noncontrolling interests of $4.1 million, increase in loss from equity investments of $2.5 million, and a decrease in change in fair value of financial instruments and other of $2.2 million, partially offset by a change from provision for to benefit from income taxes of $72.4 million and an increase in interest income of $0.4 million.
Preferred Stock Dividends . 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 are payable quarterly in arrears. On January 10, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends are payable quarterly in arrears. On January 10, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Net (Loss) Income Available to Common Shareholders . Net loss available to common shareholders was $142.2 million during the three months ended June 30, 2022 compared to net income available to common shareholders of $73.9 million during the three months ended June 30, 2021. The change was primarily due to a change from operating income to loss of $268.9 million, increase in interest expense of $10.9 million, increase in net income attributable to noncontrolling interests and redeemable noncontrolling interests of $4.1 million, increase in loss from equity investments of $2.5 million, decrease in change in fair value of financial instruments and other of $2.2 million, and an increase in preferred stock dividends of $0.2 million, partially offset by a change from provision for to benefit from income taxes of $72.4 million and an increase in interest income of $0.4 million.
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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Condensed Consolidated Statements of Operations
(Dollars in thousands)
Six Months Ended June 30, Change
2022 2021 Amount %
Revenues:
Services and fees $ 411,580 $ 555,612 $ (144,032) (25.9) %
Trading (losses) income and fair value adjustments on loans (292,317) 299,621 (591,938) (197.6) %
Interest income - Loans and securities lending 125,261 62,411 62,850 100.7 %
Sale of goods 3,765 19,285 (15,520) (80.5) %
Total revenues 248,289 936,929 (688,640) (73.5) %
Operating expenses:
Direct cost of services 29,436 23,416 6,020 25.7 %
Cost of goods sold 4,245 8,952 (4,707) (52.6) %
Selling, general and administrative expenses 342,335 391,266 (48,931) (12.5) %
Interest expense - Securities lending and loan participations sold 26,310 30,172 (3,862) (12.8) %
Total operating expenses 402,326 453,806 (51,480) (11.3) %
Operating (loss) income (154,037) 483,123 (637,160) (131.9) %
Other income (expense):
Interest income 567 105 462 n/m
Change in fair value of financial instruments and other 10,302 6,509 3,793 58.3 %
Income from equity investments 3,376 23 3,353 n/m
Interest expense (62,200) (40,642) (21,558) 53.0 %
(Loss) income before income taxes (201,992) 449,118 (651,110) (145.0) %
Benefit from (provision for) income taxes 56,208 (117,420) 173,628 (147.9) %
Net (loss) income $ (145,784) 331,698 (477,482) (144.0) %
Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests 4,437 1,366 3,071 n/m
Net (loss) income attributable to B. Riley Financial, Inc. $ (150,221) $ 330,332 $ (480,553) (145.5) %
Preferred stock dividends 4,004 3,538 466 13.2 %
Net (loss) income available to common shareholders $ (154,225) $ 326,794 $ (481,019) (147.2) %
n/m - Not applicable or not meaningful.
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Revenues
The table below and the discussion that follows are based on how we analyze our business.
Six Months Ended June 30, Change
2022 2021 Amount %
Revenues - Services and fees:
Capital Markets segment $ 136,510 $ 296,976 $ (160,466) (54.0) %
Wealth Management segment 137,818 152,986 (15,168) (9.9) %
Auction and Liquidation segment 5,843 12,892 (7,049) (54.7) %
Financial Consulting segment 50,246 45,144 5,102 11.3 %
Principal Investments - Communications and Other segment 71,432 38,725 32,707 84.5 %
Brands segment 9,731 8,889 842 9.5 %
Subtotal 411,580 555,612 (144,032) (25.9) %
Revenues - Sale of goods:
Auction and Liquidation segment — 17,835 (17,835) (100.0) %
Principal Investments - Communications and Other segment 3,765 1,450 2,315 159.7 %
Subtotal 3,765 19,285 (15,520) (80.5) %
Trading (losses) income and fair value adjustments on loans
Capital Markets segment (294,367) 294,400 (588,767) n/m
Wealth Management segment 2,050 5,221 (3,171) (60.7) %
Subtotal (292,317) 299,621 (591,938) (197.6) %
Interest income - Loans and securities lending:
Capital Markets segment 123,825 62,411 61,414 98.4 %
Auction and Liquidation segment 1,436 — 1,436 100.0 %
125,261 62,411 62,850 100.7 %
Total revenues $ 248,289 $ 936,929 $ (688,640) (73.5) %
_______________________________________________
n/m - Not applicable or not meaningful.
Total revenues decreased approximately $688.6 million to $248.3 million during the six months ended June 30, 2022 from $936.9 million during the six months ended June 30, 2021. The decrease in revenues during the six months ended June 30, 2022 was primarily due to decreases in the fair value of the portfolio of securities and other investments owned and fair value adjustments on loans of $591.9 million, which is included in trading (losses) income and fair value adjustments on loans above, services and fees of $144.0 million, and sale of goods of $15.5 million, partially offset by an increase in interest income from loans and securities lending of $62.9 million. The decrease in the fair value of the portfolio of securities and other investments owned as of June 30, 2022 was primarily due to the decrease in overall values in the stock market. The decrease in revenue from services and fees in the six months ended June 30, 2022 consisted of decreases in revenue of $160.5 million in the Capital Markets segment, $15.2 million in the Wealth Management segment, and $7.0 million in the Auction and Liquidation segment, partially offset by increases in revenues of $32.7 million in the Principal Investments — Communications and Other segment, $5.1 million in the Financial Consulting segment, and $0.8 million in the Brands segment.
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Revenues from services and fees in the Capital Markets segment decreased $160.5 million to $136.5 million during the six months ended June 30, 2022 from $297.0 million during the six months ended June 30, 2021. The decrease in revenues was primarily due to decreases in revenue of $177.2 million from corporate finance, consulting, and investment banking fees and $3.4 million from commission fees, partially offset by increases of $14.6 million in dividends, $4.0 million in other income, and $2.0 million in interest income.
Revenues from services and fees in the Wealth Management segment decreased $15.2 million to $137.8 million during the six months ended June 30, 2022 from $153.0 million during the six months ended June 30, 2021. The decrease in revenues was primarily due to a decrease in revenue of $15.4 million from commission fees.
Revenues from services and fees in the Auction and Liquidation segment decreased $7.0 million to $5.8 million during the six months ended June 30, 2022 from $12.9 million during the six months ended June 30, 2021. The decrease in revenues was primarily due to fewer large retail fee liquidation engagements.
Revenues from services and fees in the Financial Consulting segment increased $5.1 million to $50.2 million during the six months ended June 30, 2022 from $45.1 million during six months ended June 30, 2021. The increase in revenues was primarily due to increases of $1.8 million within our Advisory Services divisions and $3.3 million within our Real Estate division.
Revenues from services and fees in the Principal Investments - Communications and Other segment increased $32.7 million to $71.4 million during the six months ended June 30, 2022 from $38.7 million during the six months ended June 30, 2021. The increase in revenues was primarily due to an increase in subscription services of $24.8 million from the acquisition of Marconi Wireless in the fourth quarter of 2021 and $10.7 million from the acquisition of an additional equity interest in Lingo in the second quarter of 2022 and an increase in advertising licensing and other revenue of $1.6 million, partially offset by a decrease of $4.3 million in subscription services for UOL and magicJack. We expect the UOL and magicJack subscription revenues to continue to decline year over year.
Revenues from services and fees in the Brands segment increased $0.8 million to $9.7 million during the six months ended June 30, 2022 from $8.9 million during the six months ended June 30, 2021. The primary source of revenue included in this segment is the licensing of trademarks.
Trading (losses) income and fair value adjustments on loans decreased $591.9 million to a loss of $292.3 million during the six months ended June 30, 2022 compared to income of $299.6 million during the six months ended June 30, 2021. This decrease was primarily due to decreases of $588.8 million in the Capital Markets segment and $3.2 million in the Wealth Management segment. The loss of $292.3 million during the six months ended June 30, 2022 was primarily due to realized and unrealized losses on investments made in our proprietary trading accounts of $299.1 million, partially offset by realized gain on disposal of equity method investment of $6.8 million.
Interest income – loans and securities lending increased $62.9 million to $125.3 million during the six months ended June 30, 2022 from $62.4 million during the six months ended June 30, 2021. Interest income from securities lending was $33.7 million and $36.8 million during the six months ended June 30, 2022 and 2021, respectively. Interest income from loans was $91.5 million and $25.6 million during the six months ended June 30, 2022 and 2021, respectively.
Revenues – Sale of Goods
Revenues from the sale of goods decreased $15.5 million to $3.8 million during the six months ended June 30, 2022 from $19.3 million during six months ended June 30, 2021. Revenues from sale of goods were attributable to a decrease of $17.8 million from sales of retail goods related to retail liquidation engagements in Europe that ended, partially offset by an increase of $2.6 million from sales of retail goods due to the acquisition of Marconi Wireless in the fourth quarter of 2021. Cost of goods sold for six months ended June 30, 2022 was $4.2 million, resulting in a negative gross margin of 12.7%.
Operating Expenses
Direct Cost of Services
Direct cost of services increased $6.0 million to $29.4 million during the six months ended June 30, 2022 from $23.4 million during the six months ended June 30, 2021. The increase in direct cost of services was primarily driven by an increase of $16.5 million in the Principal Investments — Communications and Other segment, partially offset by a decrease of $10.5 million in the Auction and Liquidation segment. The increase in the Principal Investments —
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Communications and Other segment was primarily due to increases of $10.4 million from the acquisition Marconi Wireless in the fourth quarter of 2021 and $7.5 million from the acquisition of Lingo in the second quarter of 2022. The decrease in the Auction and Liquidation segment was primarily due to retail liquidation engagements in Europe that ended.
Selling, General and Administrative Expenses
Selling, general and administrative expenses during the six months ended June 30, 2022 and 2021 were comprised of the following:
Six Months Ended
June 30, 2022 Six Months Ended
June 30, 2021 Change
Amount % Amount % Amount %
Capital Markets segment $ 84,079 24.5 % $ 152,625 39.0 % $ (68,546) (44.9) %
Wealth Management segment 157,277 45.9 % 154,913 39.6 % 2,364 1.5 %
Auction and Liquidation segment 3,997 1.2 % 4,566 1.2 % (569) (12.5) %
Financial Consulting segment 41,050 12.0 % 37,647 9.6 % 3,403 9.0 %
Principal Investments -Communications and Other segment 28,656 8.4 % 14,700 3.8 % 13,956 94.9 %
Brands segment 2,740 0.8 % 2,795 0.7 % (55) (2.0) %
Corporate and Other segment 24,536 7.2 % 24,020 6.1 % 516 2.1 %
Total selling, general & administrative expenses $ 342,335 100.0 % $ 391,266 100.0 % $ (48,931) (12.5) %
____________________________________
n/m - Not applicable or not meaningful.
Total selling, general and administrative expenses decreased approximately $48.9 million to $342.3 million during the six months ended June 30, 2022 from $391.3 million during the six months ended June 30, 2021. The decrease was primarily due to decrease of $68.5 million in the Capital Markets segment and $0.6 million in the Auction and Liquidation segment, partially offset by increases of $14.0 million in the Principal Investments — Communications and Other segment, $3.4 million in the Financial Consulting segment, $2.4 million in the Wealth Management segment, and $0.5 million in the Corporate and Other segment.
Capital Markets
Selling, general and administrative expenses in the Capital Markets segment decreased by $68.5 million to $84.1 million during the six months ended June 30, 2022 from $152.6 million during the six months ended June 30, 2021. The decrease was primarily due to decreases of $43.2 million in consulting expenses and $36.2 million in payroll and related expenses, partially offset by increases of $4.9 million from the settlement of a regulatory matter, $3.1 million in depreciation and amortization, $1.9 million in other expenses and $1.3 million in business development expenses.
Wealth Management
Selling, general and administrative expenses in the Wealth Management segment increased by $2.4 million to $157.3 million during the six months ended June 30, 2022 from $154.9 million during the six months ended June 30, 2021. The increase was primarily due to an increase of $4.9 million from the settlement of a regulatory matter, partially offset by decreases of $1.6 million in depreciation and amortization and $0.2 million in consulting expenses.
Auction and Liquidation
Selling, general and administrative expenses in the Auction and Liquidation segment decreased $0.6 million to $4.0 million during the six months ended June 30, 2022 from $4.6 million during the six months ended June 30, 2021. The decrease was primarily due to business development and other expenses.
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Financial Consulting
Selling, general and administrative expenses in the Financial Consulting segment increased by $3.4 million to $41.1 million during the six months ended June 30, 2022 from $37.6 million during the six months ended June 30, 2021. The increase was primarily due to increases of $2.7 million in payroll and related expenses and $0.8 million in travel and entertainment expenses.
Principal Investments — Communications and Other
Selling, general and administrative expenses in the Principal Investments — Communications and Other segment increased $14.0 million to $28.7 million for the six months ended June 30, 2022 from $14.7 million for the six months ended June 30, 2021. The increase was primarily due to increases of $4.1 million from the acquisition of an additional equity interest in Lingo in the second quarter of 2022, $3.2 million in payroll and related expenses, $1.8 million in depreciation and amortization, $1.6 million in communications expenses, $1.1 million in transaction costs, $0.7 million in marketing expenses, $0.5 million in software and equipment expenses, $0.4 million in business development expenses, and $0.3 million in other expenses.
Brands
Selling, general and administrative expenses in the Brands segment remained flat at $2.8 million during the six months ended June 30, 2022 and 2021.
Corporate and Other
Selling, general and administrative expenses for the Corporate and Other segment increased approximately $0.5 million to $24.5 million during the six months ended June 30, 2022 from $24.0 million for the six months ended June 30, 2021. The increase was primarily due to increases of $8.3 million in payroll and related expenses, partially offset by decreases of $4.5 million of change in fair value of contingent consideration and $3.4 million in other expenses.
Other Income (Expense). Other income included interest income of $0.6 million and $0.1 million during the six months ended June 30, 2022 and 2021, respectively. Change in fair value of financial instruments and other in the amount of $10.3 million during the six months ended June 30, 2022 was primarily due to the change in fair value of warrant liabilities and the forgiveness of a Paycheck Protection Program loan issued to FocalPoint prior to its acquisition by the Company during the first quarter of 2022. Interest expense was $62.2 million during the six months ended June 30, 2022 compared to $40.6 million during the six months ended June 30, 2021. The increase in interest expense was primarily due to increases in interest expense of $10.7 million from the issuance of senior notes, and $8.6 million and $2.3 million from the Nomura term loan and revolving credit facility, respectively, entered into during the second quarter of 2021. During the six months ended June 30, 2022, income from equity investments was $3.4 million compared to $0.02 million during the six months ended June 30, 2021. The increase was primarily due to $7.0 million in earnings related to the bebe equity method investment, partially offset by $3.7 million loss recognized from the conversion of debt to equity in the acquisition of Lingo during the second quarter of 2022.
(Loss) Income Before Income Taxes . Loss before income taxes was $202.0 million during the six months ended June 30, 2022 compared to income of $449.1 million during the six months ended June 30, 2021. The change was primarily due to a decrease in revenue of $688.6 million and increase in interest expense of $21.6 million, partially offset by a decrease in operating expenses of approximately $51.5 million, increase in change in fair value of financial instruments and other of $3.8 million, increase in income from equity investments of $3.4 million, and an increase in interest income of $0.5 million.
Benefit from (Provision for) Income Taxes. Benefit from income taxes was $56.2 million during the six months ended June 30, 2022 compared to a provision of $117.4 million during the six months ended June 30, 2021. The effective income tax rate was 27.8% for the six months ended June 30, 2022 as compared to 26.1% for the six months ended June 30, 2021.
Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests . Net income attributable to noncontrolling interests and redeemable noncontrolling interests represents the proportionate share of net income generated by membership interests of partnerships that we do not own. The net income attributable to
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noncontrolling interests and redeemable noncontrolling interests was $4.4 million during the six months ended June 30, 2022 compared to $1.4 million during the six months ended June 30, 2021.
Net (Loss) Income Attributable to the Company . Net loss attributable to the Company was $150.2 million during the six months ended June 30, 2022 compared to net income attributable to the Company of $330.3 million during the six months ended June 30, 2021. The change was primarily due to a change from operating income to loss of $637.2 million, increase in interest expense of $21.6 million, and an increase in net income attributable to noncontrolling interests and redeemable noncontrolling interests of $3.1 million, partially offset by a change from provision for to benefit from income taxes of $173.6 million, increase in change in fair value of financial instruments and other of $3.8 million, increase in income from equity investments of $3.4 million, and an increase in interest income of $0.5 million.
Preferred Stock Dividends . 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 are payable quarterly in arrears. On January 10, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends are payable quarterly in arrears. On January 10, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Net (Loss) Income Available to Common Shareholders . Net loss available to common shareholders was $154.2 million during the six months ended June 30, 2022 compared to net income available to common shareholders of $326.8 million during the six months ended June 30, 2021. The change was primarily due to a change from operating income to loss of $637.2 million, increase in interest expense of $21.6 million, increase in net income attributable to noncontrolling interests and redeemable noncontrolling interests of $3.1 million, and an increase in preferred stock dividends of $0.5 million, partially offset by a change from provision for to benefit from income taxes of $173.6 million, increase in change in fair value of financial instruments and other of $3.8 million, increase in income from equity investments of $3.4 million, and an increase in interest income 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 loans and credit facilities, and special purposes financing arrangements. During the six months ended June 30, 2022 and 2021, we generated a net loss of $145.8 million and net income of $331.7 million, respectively. Our net loss of $145.8 million included $292.3 million of losses that primarily related to a decrease in the fair value of our portfolio of securities and other investments owned during the six months ended June 30, 2022. Our cash flows and profitability are impacted by capital market engagements performed on a quarterly and annual basis and amounts realized from the sale of our investments in marketable securities.
As of June 30, 2022, we had $216.1 million of unrestricted cash and cash equivalents, $0.9 million of restricted cash, $1,144.9 million of securities and other investments owned at fair value, $770.8 million of loans receivable, at fair value, and $2,115.8 million of borrowings outstanding. The borrowings outstanding of $2,115.8 million as of June 30, 2022 included $1,644.8 million of borrowings from the issuance of the series of senior notes that are due at various dates ranging from May 31, 2024 to August 31, 2028 with interest rates ranging from 5.00% to 6.75%, $367.8 million in term loans borrowed pursuant to the BRPI Acquisition Co LLC (“BRPAC”) and Nomura Credit Agreements discussed below, $80.0 million of revolving credit under the Nomura Credit Agreement discussed below, and $23.2 million of notes payable.
We believe that our current cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility, funds available under the BRPAC and Nomura term loans, funds available under the Nomura revolving credit facility, and cash expected to be generated from operating activities will be sufficient to meet our working
57
capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.
From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On July 28, 2022, we declared a regular dividend of $1.00 per share that will be paid on or about August 23, 2022 to stockholders of record as of August 11, 2022. On April 28, 2022, we declared a regular dividend of $1.00 per share that was paid on May 20, 2022 to stockholders of record as of May 11, 2022. On February 23, 2022, the Company declared a regular quarterly dividend of $1.00 per share, which was paid on March 23, 2022 to stockholders of record as of March 9, 2022. During the year ended December 31, 2021, we paid cash dividends on our common stock of $347.1 million. While it is the Board’s current intention to make regular dividend payments of $1.00 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.
A summary of dividend activity for the six months ended June 30, 2022 and the year ended December 31, 2021 was as follows:
Date Declared Date Paid Stockholder
Record Date
Regular
Dividend
Amount
Special
Dividend
Amount
Total
Dividend
Amount
April 28, 2022 May 20, 2022 May 11, 2022 $ 1.000 $ — $ 1.000
February 23, 2022 March 23, 2022 March 9, 2022 1.000 — 1.000
October 28, 2021 November 23, 2021 November 9, 2021 1.000 3.000 4.000
July 29, 2021 August 26, 2021 August 13, 2021 0.500 1.500 2.000
May 3, 2021 May 28, 2021 May 17, 2021 0.500 2.500 3.000
February 25, 2021 March 24, 2021 March 10, 2021 0.500 3.000 3.500
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 thousand 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. As of June 30, 2022, dividends in arrears in respect of the Depositary Shares were $0.8 million. On January 11, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021. On July 8, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021. On October 6, 2021, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on November 1, 2021 to holders of record as of the close of business on October 21, 2021.On January 10, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Holders of Series B Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 7.375% per annum of the $25 thousand liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,843.75 or $1.84375 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July, and October. As of June 30, 2022, dividends in arrears in respect of the Depositary Shares were $0.5 million. On January 11, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on January 29, 2021 to holders of record as of the close of business on January 21, 2021. On April 5, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on April 30, 2021 to holders of record as of the close of business on April 20, 2021. On July 8, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on August 2, 2021 to holders of record as of the close of business on July 21, 2021. On October 6, 2021, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on November 1, 2021 to holders of record as of the close of business on October 21, 2021. On January 10, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid
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January 31, 2022 to holders of record as of the close of business on January 21, 2022. On April 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on April 29, 2022 to holders of record as of the close of business on April 19, 2022. On July 7, 2022, the Company declared a cash dividend $0.4609375 per Depositary Share, which was paid on July 29, 2022 to holders of record as of the close of business on July 19, 2022.
Our principal sources of liquidity to finance our business is our existing cash on hand, cash flows generated from operating activities, funds available under revolving credit facilities and special purpose financing arrangements.
Cash Flow Summary
Six Months Ended
June 30,
2022 2021
(Dollars in thousands)
Net cash (used in) provided by:
Operating activities $ (49,899) $ (147,901)
Investing activities 523 (358,722)
Financing activities (10,431) 701,051
Effect of foreign currency on cash (3,027) (534)
Net (decrease) increase in cash, cash equivalents and restricted cash $ (62,834) $ 193,894
Cash used in operating activities was $49.9 million during the six months ended June 30, 2022 compared to cash used in operating activities of $147.9 million during the six months ended June 30, 2021. Cash used in operating activities for the six months ended June 30, 2022 consisted of the negative impact of net loss of $145.8 million, noncash items of $70.4 million, and changes in operating assets and liabilities of $166.2 million. The negative cash flow impact from noncash items of $70.4 million included deferred income taxes of $95.3 million, fair value adjustments of $13.6 million, gain on equity investment of $6.8 million, income from equity investments of $3.4 million, noncash interest and other of $1.2 million, and gain on extinguishment of loan of $1.1 million, partially offset by share-based compensation of $31.2 million, depreciation and amortization of $15.8 million, dividends from equity investments of $1.9 million, provision for doubtful accounts of $1.3 million, income allocated for mandatorily redeemable noncontrolling interests of $0.4 million, effect of foreign currency of $0.3 million, and loss on disposal of fixed assets of $0.1 million. Cash used in operating activities for the six months ended June 30, 2021 consisted of the positive impact of net income of $331.7 million and noncash items of $50.2 million, partially offset by the negative impact of changes in operating assets and liabilities of $529.8 million. The positive cash flow impact from noncash items of $50.2 million included deferred income taxes of $51.2 million, share-based compensation of $14.1 million, depreciation and amortization of $12.9 million, loss on extinguishment of debt of $0.9 million, provision for doubtful accounts of $0.8 million, dividends from equity investments of $0.6 million, and income allocated for mandatorily redeemable noncontrolling interests of $0.3 million, partially offset by fair value adjustments of $10.0 million, noncash interest and other of $9.1 million, gain on extinguishment of loans of $6.5 million gain on equity investment of $3.5 million, and effect of foreign currency on operations of $1.5 million.
Cash used in investing activities was $0.5 million during the six months ended June 30, 2022 compared to cash used in investing activities of $358.7 million for the six months ended June 30, 2021. During the six months ended June 30, 2022, cash used in investing activities consisted of cash used for purchases of loans receivable of $199.1 million, acquisition of businesses of $38.4 million, purchases of equity and other investments of $2.8 million, and purchases of property and equipment of $0.9 million, partially offset by cash received from loans receivable repayment of $241.7 million. During the six months ended June 30, 2021, cash used in investing activities consisted of cash used to fund a trust account for the future redemption of one of our subsidiaries’ redeemable common stock of $345.0 million, purchases of loans receivable of $87.3 million, repayments of loan participations sold of $10.8 million, purchases of equity and other investments of $10.5 million, acquisition of business of $0.4 million, and purchases of property and equipment of $0.3 million, partially offset by cash received from loans receivable repayment of $95.5 million.
Cash used in financing activities was $10.4 million during the six months ended June 30, 2022 compared to cash provided by financing activities of $701.1 million during the six months ended June 30, 2021. During the six months ended June 30, 2022, cash used in financing activities primarily consisted of $62.0 million used to pay dividends on our common shares, $54.3 million used in the repayment of term loan, $6.4 million used in payment of employment taxes on vesting of restricted stock, $4.0 million used to pay dividends on our preferred shares, $2.4 million in distributions to noncontrolling interests, $0.5 million used in the payment of contingent consideration, $0.5 million used in the payment of debt issuance
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and offering costs, and $0.4 million used to repay our notes payable, partially offset by cash provided by $75.0 million proceeds from borrowings under a term loan, $35.9 million proceeds from issuance of senior notes, $8.5 million contributions from noncontrolling interests, and $0.6 million proceeds from issuance of preferred stock. During the six months ended June 30, 2021, cash provided by financing activities primarily consisted of $475.7 million proceeds from issuance of senior notes, $345.0 million proceeds from initial public offering of subsidiaries, $200.0 million proceeds from the Nomura term loan, $64.7 million proceeds from issuance of common stock, $10.7 million contributions from noncontrolling interests, and $8.3 million net proceeds from offerings of preferred stock, partially offset by $181.3 million used to pay dividends on our common shares, $128.2 million used to repurchase our senior notes, $37.6 million used to repay our notes payable, $15.7 million used to pay debt issuance costs, $14.8 million distributions to noncontrolling interests, $11.5 million used for repayment on the BRPAC term loan, $10.4 million used to pay employment taxes on vesting of restricted stock, and $3.5 million used to pay dividends on our preferred shares.
Credit Agreements
Nomura Credit Agreement
On June 23, 2021, we, and our wholly owned subsidiaries, BR Financial Holdings, LLC (the “Primary Guarantor”), and BR Advisory & Investments, LLC (the “Borrower”) entered into a credit agreement (as amended, the “Credit Agreement”) with Nomura Corporate Funding Americas, LLC, as administrative agent (the “Administrative Agent”) , and Wells Fargo Bank, N.A., as collateral agent (the “Collateral Agent”) , for a four-year $200.0 million secured term loan credit facility (the “Term Loan Facility”) and a four-year $80.0 million revolving loan credit facility (the “Revolving Credit Facility”).
On December 17, 2021 (the “Amendment Date”), we, the Primary Guarantor, and the Borrower entered into a Second Incremental Amendment to Credit Agreement, pursuant to which the Borrower established an incremental facility in an aggregate principal amount of $100.0 million (the “Incremental Facility” and the incremental term loans made thereunder, the “Incremental Term Loans”) of secured term loans under the Credit Agreement on terms identical to those applicable to the Term Loan Facility. The Borrower borrowed the full amount of the Incremental Term Loans on the Amendment Date. The Term Loan Facility, Revolving Credit Facility, and Incremental Facility (together, the “Credit Facilities”), mature on June 23, 2025, subject to acceleration or prepayment.
Eurodollar loans under the Credit Facilities accrue interest at the Eurodollar Rate plus an applicable margin of 4.50%. Base rate loans accrue interest at the Base Rate plus an applicable margin of 3.50%. In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, we are required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by the average utilization of the Revolving Credit Facility for the immediately preceding fiscal quarter.
Subject to certain eligibility requirements, the assets of certain subsidiaries of ours that hold credit assets, private equity assets, and public equity assets are placed into a borrowing base, which serves to limit the borrowings under the Credit Facilities. If borrowings under the Credit Facilities exceed the borrowing base, we are obligated to prepay the loans in an aggregate amount equal to such excess. The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type that, among other things, limit our, the Primary Guarantor’s, the Borrower’s, and the Borrower’s subsidiaries’ ability to incur additional indebtedness or liens, to dispose of assets, to make certain fundamental changes, to enter into restrictive agreements, to make certain investments, loans, advances, guarantees and acquisitions, to prepay certain indebtedness and to pay dividends or to make other distributions or redemptions/repurchases in respect of their respective equity interests. In addition, the Credit Agreement contains a financial covenant that requires us to maintain operating earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of at least $135.0 million and the Primary Guarantor to maintain net asset value of at least $1,100.0 million. The Credit Agreement contains customary events of default, including with respect to a failure to make payments under the credit facilities, cross-default, certain bankruptcy and insolvency events and customary change of control events.
Commencing on September 30, 2022, the Term Loan Facility and Incremental Facility will amortize in equal quarterly installments of 1.25% of the aggregate principal amount of the term loan as of the closing date with the remaining balance due at final maturity. Quarterly installments from September 30, 2022 to March 31, 2025 are in the amount of $3.8 million per quarter.
As of June 30, 2022 and December 31, 2021, the outstanding balances on the Term Loan Facility and Incremental Facility were $293.7 million (net of unamortized debt issuance costs of $6.3 million) and $292.7 million (net of
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unamortized debt issuance costs of $7.4 million), respectively. Interest on the term loan during the three months ended June 30, 2022 and 2021 was $4.7 million (including amortization of deferred debt issuance costs of $0.5 million) and $0.2 million (including amortization of deferred debt issuance costs of $0.03 million), respectively. Interest on the term loan during the six months ended June 30, 2022 and 2021 was $8.8 million (including amortization of deferred debt issuance costs of $1.0 million) and $0.2 million (including amortization of deferred debt issuance costs of $0.03 million), respectively. The interest rate on the term loan as of June 30, 2022 and December 31, 2021 was 6.65% and 4.72%, respectively.
We had an outstanding balance of $80.0 million under the Revolving Credit Facility as of June 30, 2022 and December 31, 2021. Interest on the revolving facility during the three and six months ended June 30, 2022 was $1.2 million (including amortization of deferred financing costs of $0.1 million) and $2.3 million (including amortization of deferred financing costs of $0.3 million), respectively. The unused commitment fee on the revolving facility for the three and six months ended June 30, 2021 was $0.03 million (including amortization of deferred financing costs of $0.01 million). The interest rate on the Revolving Credit Facility as of June 30, 2022 and December 31, 2021 was 6.13% and 4.67%, respectively.
We are in compliance with all financial covenants in the Credit Agreement as of June 30, 2022.
Wells Fargo Credit Agreement
We are party to a credit agreement (as amended, the “Credit Agreement”) governing our asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) with a maximum borrowing limit of $200.0 million and a maturity date of April 20, 2027. Cash advances and the issuance of letters of credit under the credit facility are made at the lender’s discretion. The letters of credit issued under this facility are furnished by the lender to third parties for the principal purpose of securing minimum guarantees under liquidation services contracts more fully described in Note 2(d) in the Annual Report on Form 10-K. All outstanding loans, letters of credit, and interest are due on the expiration date which is generally within 180 days of funding. The credit facility is secured by the proceeds received for services rendered in connection with liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract. The interest rate for each revolving credit advance under the related credit agreement is, subject to certain terms and conditions, equal to the Secured Overnight Financing Rate (“SOFR”) 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 provides for success fees in the amount of 1.0% to 10.0% 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. The credit facility also provides for funding fees in the amount of 0.05% to 0.20% of the aggregate principal amount of all credit advances and letters of credit issued in connection with a liquidation sale. There was no outstanding balance on this credit facility as of June 30, 2022 and December 31, 2021. As of June 30, 2022 and December 31, 2021, there were no open letters of credit outstanding.
We are in compliance with all financial covenants in the asset based credit facility as of June 30, 2022.
BRPAC Credit Agreement
On December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, Delaware corporations (collectively, the “Borrowers”), indirect wholly owned subsidiaries of ours, in the capacity of borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with Banc of California, N.A. in its capacity as agent (the “Agent”) and lender and with the other lenders party (the “Closing Date Lenders”).
Through a series of amendments, including the most recent Fourth Amendment to the BRPAC Credit Agreement (the “Fourth Amendment”) on June 21, 2022, the Borrowers, the Secured Guarantors, the Agent and the Closing Date Lenders agreed to the following, among other things: (i) the Lenders agreed to make a new $75.0 million term loan to the Borrowers, the proceeds of which the Borrowers’ used to repay the outstanding principal amount of the existing terms loans and optional loans and will use for other general corporate purposes, (ii) a new applicable margin level of 3.50% was established as set forth from the date of the Fourth Amendment, (iii) Marconi Wireless Holdings, LLC was added to the Borrowers, (iv) the maturity date of the term loan was set to June 30, 2027, and (v) the Borrowers were permitted to make certain distributions to the parent company of the Borrowers.
The borrowings under the amended BRPAC Credit Agreement bear interest equal to the SOFR rate plus a margin of 2.75% to 3.50% per annum, depending on the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC
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Credit Agreement. As of June 30, 2022 and December 31, 2021, the interest rate on the amended BRPAC Credit Agreement was at 4.66% and 3.17%, respectively.
Principal outstanding under the amended BRPAC Credit Agreement is due in quarterly installments. Quarterly installments from September 30, 2022 to December 31, 2022 are in the amount of $2.8 million per quarter, from March 31, 2023 to December 31, 2023 are in the amount of $4.7 million per quarter, from March 31, 2024 to December 31, 2026 are in the amount of $3.8 million per quarter, on March 31, 2027 is in the amount of $2.8 million, and the remaining principal balance is due at final maturity on June 30, 2027 .
As of June 30, 2022 and December 31, 2021, the outstanding balance on the term loan was $74.1 million (net of unamortized debt issuance costs of $0.9 million), and $53.7 million (net of unamortized debt issuance costs of $0.6 million), respectively. Interest expense on the term loan during the three months ended June 30, 2022 and 2021 was $0.6 million (including amortization of deferred debt issuance costs of $0.1 million ) and $0.7 million (including amortization of deferred debt issuance costs of $0.08 million), respectively. Interest expense on the term loan during the six months ended June 30, 2022 and 2021 was $0.6 million (including amortization of deferred debt issuance costs of $0.1 million ) and $1.4 million (including amortization of deferred debt issuance costs of $0.2 million), respectively.
We are in compliance with all financial covenants in the amended BRPAC Credit Agreement as of June 30, 2022.
Senior Note Offerings
During the three months ended June 30, 2022 and 2021, we issued $15.8 million and $72.5 million, respectively, of senior notes, and during the six months ended June 30, 2022 and 2021, we issued $35.9 million and $85.3 million, respectively, of senior notes due with maturities dates ranging from May 2024 to August 2028 pursuant to At the Market Issuance Sales Agreements with B. Riley Securities, Inc. which governs the program of at-the-market sales of the Company’s senior notes. A series of prospectus supplements were filed by the Company with the SEC which allowed the Company to sell these senior notes.
As of June 30, 2022 and December 31, 2021, the total senior notes outstanding was $1,644.8 million (net of unamortized debt issue costs of $19.1 million) and $1,606.6 million (net of unamortized debt issue costs of $21.5 million) with a weighted average interest rate of 5.70% and 5.69%, respectively. Interest on senior notes is payable on a quarterly basis. Interest expense on senior notes totaled $24.7 million and $20.0 million for the three months ended June 30, 2022 and 2021, respectively, and totaled $49.1 million and $38.6 million for the six months ended June 30, 2022 and 2021, respectively.
The most recent sales agreement prospectus was filed by us with the SEC on January 5, 2022 (the “January 2022 Sales Agreement Prospectus”), supplementing the prospectus filed on August 11, 2021, the prospectus filed on April 6, 2021, and the prospectus filed on January 28, 2021. This program provides for the sale by the Company of up to $250.0 million of certain of the Company’s senior notes. As of June 30, 2022, and December 31, 2021 the Company had $76.0 million and $111.9 million, respectively, remaining availability under the January 2022 Sales Agreement.
Off Balance Sheet Arrangements
Information about our off-balance sheet arrangements is included in Note 15 of the Notes to the Condensed Consolidated Financial Statements. Such information is hereby incorporated by reference.
Recent Accounting Standards
See Note 2(t) to the accompanying financial statements for recent accounting standards we have not yet adopted and recently adopted.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.