☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 8,~~July 27, 2020, there were ~~25,827,322~~25,452,765 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

The accompanying notes are an integral part of these condensed consolidated financial statements.

B. Riley Financial, Inc. and its subsidiaries (collectively, the “Company”) provide investment banking and financial services to corporate, institutional and high net worth clients, and asset disposition, valuation and appraisal and capital advisory services to a wide range of retail, wholesale and industrial clients, as well as lenders, capital providers, private equity investors and professional services firms throughout the United States, Australia, Canada, and Europe and ~~with the acquisitions of~~consumer Internet access and cloud communication services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”) ~~on July 1, 2016~~ and magicJack VocalTec Ltd. (“magicJack”) ~~on November 14, 2018, provide consumer Internet access and cloud communication services.~~. The Company acquired a majority ownership interest in BR Brand Holding, LLC (“BR Brand” or “Brands”) on October 28, 2019, which provides licensing of trademarks.

The Company operates in ~~five~~5 operating segments: (i) Capital Markets, through which the Company provides investment banking, corporate finance, securities lending, restructuring, consulting, research, sales and trading and wealth management services to corporate, institutional and high net worth clients; (ii) Auction and Liquidation, through which the Company provides auction and liquidation services to help clients dispose of assets that include multi-location retail inventory, wholesale inventory, trade fixtures, machinery and equipment, intellectual property and real property; (iii) Valuation and Appraisal, through which the Company provides valuation and appraisal services to clients with independent appraisals in connection with asset based loans, acquisitions, divestitures and other business needs; (iv) Principal Investments - United Online and magicJack, through which the Company provides consumer Internet access and related subscription services from United Online and cloud communication services primarily through the magicJack devices; and (v) Brands, which is focused on generating revenue through the licensing of trademarks.

The condensed consolidated financial statements include the accounts of B. Riley Financial, Inc. and its wholly-owned and majority-owned subsidiaries. The condensed consolidated financial statements also include the accounts of ~~(a)~~ Great American Global Partners, LLC which is controlled by the Company as a result of its ownership of a 50% member interest, appointment of two of the three executive officers and significant influence over the funding of operations, and (b) GA Retail Investments, L.P. which is controlled by the Company as a result of its ownership of a 50% partnership interest, appointment of executive officers and significant influence over the operations. The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020. The results of operations for the ~~three~~six months ended ~~March 31,~~June 30, 2020 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expense during the reporting period. Estimates are used when accounting for certain items such as valuation of securities and loan receivables, allowance for doubtful accounts, the fair value of intangible assets and goodwill, the fair value of mandatorily redeemable noncontrolling interests, fair value of share based arrangements, accounting for income tax valuation allowances, recovery of contract assets and sales returns and allowances. Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve. The impact of the COVID-19 outbreak on the Company’s results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position and cash flows may be materially adversely affected.

(c) Interest Expense — Securities Lending Activities and Loan Participations Sold

Interest expense from securities lending activities is included in operating expenses related to operations in the Capital Markets segment. Interest expense from securities lending activities is incurred from equity and fixed income securities that are loaned to the Company and totaled ~~$7,921~~$10,802 and ~~$6,804~~$5,502 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $18,723 and $12,306 for the six months ended June 30, 2020 and 2019, respectively. Loan participations sold as of ~~March 31, 3020~~June 30, 2020 totaled ~~$12,405.~~$14,109. Interest expense from loan participations sold totaled ~~$552~~$419 for the three months ended ~~March 31,~~June 30, 2020, and $971 for the six months ended June 30, 2020.

Revenues in the Capital Markets, Valuation and Appraisal and Principal Investments — United Online and magicJack segments are currently primarily generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States, Australia, Canada and Europe. Revenues in the Brands segment are primarily generated in the United States and Canada.

The Company’s activities in the Auction and Liquidation segment are executed frequently with, and on behalf of, distressed customers and secured creditors. Concentrations of credit risk can be affected by changes in economic, industry, or geographical factors. The Company seeks to control its credit risk and potential risk concentration through risk management activities that limit the Company’s exposure to losses on any one specific liquidation services contract or concentration within any one specific industry. To mitigate the exposure to losses on any one specific liquidations services contract, the Company sometimes conducts operations with third parties through collaborative arrangements.

The Company maintains cash in various federally insured banking institutions. The account balances at each institution periodically exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts. The Company also has substantial cash balances from proceeds received from auctions and liquidation engagements that are distributed to parties in accordance with the collaborative arrangements.

The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled ~~$841~~$864 and ~~$362~~$584 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively, and $1,704 and $946 for the six months ended June 30, 2020 and 2019, respectively. Advertising expense is included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The Company’s share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated with the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed consolidated statements of operations over the requisite service or performance period the award is expected to vest. The fair value of the liability-classified award will be subsequently remeasured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchase common stock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offering period. In accordance with the provisions of ASC 718,~~Compensation — Stock Compensation~~~~(“ASC 718”), the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan.~~

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

As of ~~March 31,~~June 30, 2020 and December 31, 2019, restricted cash balance of $471 related to one of the Company’s telecommunication suppliers.

Securities borrowed and securities loaned are recorded based upon the amount of cash advanced or received. Securities borrowed transactions facilitate the settlement process and require the Company to deposit cash or other collateral with the lender. With respect to securities loaned, the Company receives collateral in the form of cash. The amount of collateral required to be deposited for securities borrowed, or received for securities loaned, is an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained, or excess collateral recalled, when deemed appropriate.

The Company accounts for securities lending transactions in accordance with ASC “Topic 210: Balance Sheet,” which requires companies to report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed consolidated balance sheets.

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Property and equipment held under finance leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Depreciation and amortization expense on property and equipment was ~~$932~~$899 and ~~$1,536~~$1,487 for the three months ended ~~March 31,~~June 30, 2020 and 2019, ~~respectively.~~respectively, and $1,831 and $3,023 for the six months ended June 30, 2020 and 2019, respectively.

~~Loans receivable, at fair value are loans held for investment that are accounted for at fair value under the fair value option.~~ The Company adopted ~~ASU 2016-13 and its amendment ASU 2019-05~~the new credit loss standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized ~~cost~~cost. Under the fair value option, loans receivable are measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the condensed consolidated statements of operations. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes. The impact of ~~December 31, 2019. As of March 31,~~adopting ASC 326 was immaterial to the condensed consolidated financial statements.

Loans receivable, at fair value totaled $325,517 and $43,338 at June 30, 2020 and December 31, 2019, respectively. The loans ~~receivable, at fair value totaled $326,299 and $43,338, respectively, with~~have various maturities through December 2024. As of ~~March 31,~~June 30, 2020 and December 31, 2019, the historical cost of loans receivable ataccounted for under the fair value ~~had~~option was $336,732 and $32,578, respectively, which included principal balances ~~totaling $339,630~~of $341,723 and $32,691 ~~respectively, with cost basis, net of~~and unamortized costs, origination fees, premiums and discounts, totaling ~~$333,466~~$4,991 and ~~$32,578,~~$113, respectively. During the three and six months ended ~~March 31,~~June 30, 2020, the Company recorded unrealized losses of ~~$17,926~~$4,049 and $21,975, respectively on the loans receivable, at fair value, which is included in trading income (losses) ~~income~~ and fair value adjustments on loans on the condensed consolidated statement of operations.

Prior to the adoption of the new credit loss standard effective January 1, 2020, at December 31, 2019 loans receivable, at historical cost totaled $225,848. Loans receivable, at cost are ~~measured at historical cost and~~ reported at their outstanding principal balances of $232,118 net of ~~any~~$6,270 of unearned income, ~~charge-offs,~~and loan origination costs which includes unamortized deferred fees and costs on originated loans, and for purchased loans, net of any unamortized premiums or discounts. As

The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending customers. At June 30, 2020, the Company has provided limited guarantees with respect to the Franchise Group, Inc. (collectively with all of ~~December 31, 2019,~~its affiliates, “FRG”) as further described in Note 14(b) and Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 17. In accordance with the new credit loss standard, the Company evaluates the need to record an allowance for credit losses for these loan guarantees since they have off-balance sheet credit exposures. At June 30, 2020, the Company has not recorded any provision for credit losses on the FRG and B&W guarantees since the underlying guaranteed loans ~~receivable at cost had a carrying value~~are senior to most of ~~$225,848.~~the outstanding debt of FRG and B&W and the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure. The maximum amount of credit exposure related to these limited guarantees is approximately $255,000.

Interest income on loans receivable is recognized based on the stated interest rate of the loan ~~and~~on the unpaid principal balance plus the amortization of any costs, origination fees, premiums and discounts and is included in interest income - loans and securities lending on the condensed consolidated statement of operations. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology.

(m) Securities and Other Investments Owned and Securities Sold Not Yet Purchased

Securities owned consist of marketable securities and investments in partnership interests and other securities recorded at fair value. Securities sold, but not yet purchased represents obligations of the Company to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing prices. Changes in the value of these securities are reflected currently in the results of operations.

As of ~~March 31,~~June 30, 2020 and December 31, 2019, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company’s securities and other investments owned and securities sold and not yet purchased are comprised of common and preferred stocks and warrants, corporate bonds, and investments in partnerships. Investments in common stocks that are based on quoted prices in active markets are included in Level 1 of the fair value hierarchy. The Company also holds loans receivable valued at fair value, nonpublic common and preferred stocks and warrants for which there is little or no public market and fair value is determined by management on a consistent basis. For investments where little or no public market exists, management’s determination of fair value is based on the best available information which may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration various factors including earnings history, financial condition, recent sales prices of the issuer’s securities and liquidity risks. These investments are included in Level 3 of the fair value hierarchy. Investments in partnership interests include investments in private equity partnerships that primarily invest in equity securities, bonds, and direct lending funds. The Company also invests in priority investment funds and the underlying securities held by these funds are primarily corporate and asset-backed fixed income securities and restrictions exist on the redemption of amounts invested by the Company. The Company’s partnership and investment fund interests are valued based on the Company’s proportionate share of the net assets of the partnerships and funds; the value for these investments are derived from the most recent statements received from the general partner or fund administrator. These partnership and investment fund interests are valued at net asset value (“NAV”) in accordance with ASC “Topic 820: Fair Value Measurements.”

The fair value of mandatorily redeemable noncontrolling interests is determined based on the issuance of similar interests for cash, references to industry comparables, and relied, in part, on information obtained from appraisal reports and internal valuation models.

The following tables present information on the financial assets and liabilities measured and recorded at fair value on a recurring basis as of ~~March 31,~~June 30, 2020 and December 31, 2019.

As of ~~March 31,~~June 30, 2020 and December 31, 2019, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were ~~$421,415~~$433,306 and $152,589, respectively, or ~~19.8%~~19% and 6.6%, respectively, of the Company’s total assets. In determining the fair value for these Level 3 financial assets, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable, over-the-counter market trading activity.

The following table summarizes the significant unobservable inputs in the fair value measurement of level 3 financial assets and liabilities by category of investment and valuation technique as of ~~March 31,~~June 30, 2020:

The changes in Level 3 fair value hierarchy during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 are as follows:

The Company adopted ASU 2016-13 and its amendment ASU 2019-05 effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were measured at amortized cost as of December 31, 2019. The loans receivable, at fair value are included in transfers into level 3 fair value assets in the above table. During the three months ended March 31, 2019, there was a transfer of one financial asset from level 1 to level 3 in the fair value hierarchy as a result of the asset’s principal market becoming inactive during the quarter.

The amount reported in the table above for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 includes the amount of undistributed earnings attributable to the noncontrolling interests that is distributed on a quarterly basis. The carrying amounts reported in the condensed consolidated financial statements for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value based on the short-term maturity of these instruments.

As of ~~March 31,~~June 30, 2020, the senior notes payable had a carrying amount of ~~$853,523~~$854,037 and fair value of ~~$666,428.~~$772,721. The carrying amount of the term loan approximates fair value because the effective yield of such instrument is consistent with current market rates of interest for instruments of comparable credit risk.

During the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, except for the impact of the intangible impairment charge as described in Note 7- Goodwill and Other Intangible Assets, there were no assets or liabilities measured at fair value on a non-recurring basis. The fair value of the indefinite-lived intangible assets was determined based on a discounted cash flow model using a rate of ~~14.0%~~13.8%. The indefinite-lived intangible assets are level 3 assets in the fair value hierarchy.

The Company transacts business in various foreign currencies. In countries where the functional currency of the underlying operations has been determined to be the local country’s currency, revenues and expenses of operations outside the United States are translated into United States dollars using average exchange rates while assets and liabilities of operations outside the United States are translated into United States dollars using period-end exchange rates. The effects of foreign currency translation adjustments are included in stockholders’ equity as a component of accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. Transaction gains (loss) were ~~$949~~($438) and ($~~186)~~139) during the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $510 and ($325) during the six months ended June 30, 2020 and 2019, respectively. These amounts are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.

The Company issued 821,816 warrants to purchase common stock of the Company (the “Wunderlich Warrants”) in connection with the acquisition of Wunderlich Securities, Inc. (“Wunderlich”) on July 3, 2017. The Wunderlich Warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at an exercise price of $17.50 per share, subject to, among other matters, the proper completion of an exercise notice and payment. The exercise price and the number of shares of Company common stock issuable upon exercise are subject to customary anti-dilution and adjustment provisions, which include stock splits, subdivisions or reclassifications of the Company’s common stock. ~~The Wunderlich Warrants expire on July 3, 2022.~~ On May 16, 2019, the Company repurchased 638,311 warrants for $2,777 ($4.35 per warrant). On June 11, 2020, 167,352 warrants held in escrow from the acquisition of Wunderlich were cancelled in accordance with the terms of the escrow instructions. The Wunderlich Warrants expire on July 3, 2022. As of ~~March 31,~~June 30, 2020, Wunderlich Warrants to purchase ~~183,505~~16,153 shares of common stock were outstanding.

On October 28, 2019, the Company issued 200,000 warrants to purchase common stock of the Company (the “BR Brands Warrants”) in connection with the acquisition of a majority ownership interest in BR Brand Holdings ~~LLC (“BR Brand”).~~LLC. The BR Brand Warrants entitle the holders of the warrants to acquire shares of the Company’s common stock from the Company at an exercise price of $26.24 per share. One-third of the BR Brand Warrants immediately vested and became exercisable upon issuance, and the remaining two-thirds of warrants will vest and become exercisable following the first and/or second anniversaries of the closing, subject to BR Brand’s (or another related joint venture with Bluestar Alliance LLC) satisfaction of specified financial performance targets. The BR Brand warrants expire three years after the last vesting event occurs.

At ~~March 31,~~June 30, 2020, the Company had a 30.5% ownership interest in bebe stores, inc. (“bebe”). The equity ownership in bebe is accounted for under the equity method of accounting and is included in prepaid expenses and other assets in the condensed consolidated balance sheets.

~~On November 14,~~In 2018, the Company entered into an agreement to acquire shares of National Holdings Corporation (“National Holdings”), a Nasdaq-listed issuer, from Fortress Biotech, Inc. for an aggregate purchase price totaling approximately $22.9 million. The transaction was completed in two tranches. In the first tranche, which was completed in the fourth quarter of 2018, the Company acquired shares representing 24% of the total outstanding shares of National Holdings. The second tranche was completed in the first quarter of 2019. As of ~~March 31,~~June 30, 2020, the Company ~~had purchased~~owned 6,159,550 shares of National Holdings’ common stock, representing ~~46.8%~~45.7% of National Holdings’ outstanding ~~shares, at $3.25 per share.~~shares. The carrying value for the National Holdings investment is included in prepaid expenses and other assets in the condensed consolidated balance sheets. The equity ownership in National Holdings is accounted for under the equity method of accounting.

As of ~~March 31,~~June 30, 2020, the carrying values of the Company’s investments in bebe and National Holdings exceeded their fair values based on their quoted market prices. In light of these facts, the Company evaluated its investments in bebe and National Holdings for impairment. The Company utilized no bright- line tests in such evaluations. Based on the available facts and information regarding the operating results of both entities, the Company’s ability and intent to hold the investments until recovery, the relative amount of the declines, and the length of time that the fair values were less than the carrying values, the Company concluded that recognition of impairment losses in earnings was not required. However, the Company will continue to monitor these investments and it is possible that impairment losses will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.

As of ~~March 31,~~June 30, 2020, the Company has sold investments (“Loan Participations Sold”) to third parties (“Participants”) that are accounted for as secured borrowings under ASC Topic 860, Transfers and Servicing. Under ASC Topic 860, a partial loan transfer does not qualify for sale accounting in order for sale treatment to be allowed. A participation or other partial loan transfer that meets the definition of a participating interest is classified as loan receivable and the portion transferred is recorded as a secured borrowing under loan participations sold in the condensed consolidated balance sheet. The Participants are entitled to payments made by the borrower of the related loan equal to the current Loan Participations Sold outstanding at the interest rates for the respective investment. In the event that the borrower defaults, the Participants have rights to payments from such borrower, but do not have recourse to the Company. The terms of the Loan Participations Sold are commensurate with the terms of the related loan.

As of ~~March 31,~~June 30, 2020, the Company had entered into participation agreements for a total of ~~$12,405.~~$14,109. In addition, the interest income and interest expense related to the Loan Participations Sold resulted in interest income and interest expense which is presented gross on the condensed consolidated statement of operations.

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, non-cash investing activities included $4,633 non-cash conversion of an equity method ~~investment.~~investment and $6,170 conversion of a loan receivable to shares of stock.

As of December 31, 2019, loans receivable recorded at fair value of $43,338 were previously included in securities and other investments owned, at fair value. These loans receivable amounts have been reclassified and reported in loans receivable, at fair value to conform to the 2020 presentation. During the three and six months ended ~~March 31,~~June 30, 2019, trading income and fair value adjustments on loans of ~~$25,867 was~~$5,595 and $31,462, respectively were previously included in services and fees income in the capital markets segment. These trading income and fair value adjustments on loans amounts have been reclassified and reported in trading ~~(loss)~~ income and fair value adjustments on loans to conform to the 2020 presentation. During the three and six months ended ~~March 31,~~June 30, 2019, interest income earned on loans of ~~$2,090 was~~$16,961 and $28,381, respectively were previously included in services and fees income in the capital markets segment. These interest income amounts have been reclassified and reported in interest income – loans and securities lending to conform to the 2020 presentation. During the three and six months ended ~~March 31,~~June 30, 2019, expenses of ~~$4,421,~~$4,569 and $8,990, respectively, were previously included in direct cost of services in the valuation and appraisal segment. These expenses have been reclassified and reported in selling, general and administrative expenses to conform to the 2020 presentation.

In 2018, the operations of GACP II, LP, a private debt investment limited partnership (the “Partnership”) commenced operations. The Company’s investment in the Partnership is a variable interest entity (“VIE”) since the unaffiliated limited partners do not have substantive kick- out or participating rights to remove the Company’s subsidiary that is the general partner managing the Partnership. The Company has determined that it is not the primary beneficiary due to the fact that its fee arrangements are considered at-market and thus not deemed to be variable interests, and it does not hold any other interests in the Partnership that are considered to be more than insignificant. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.

The carrying value of the Company’s investments in the VIE that was not consolidated is shown below.

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes on investments, performing intra-period allocations, and calculating income taxes in interim periods. The ASU also adds guidance to reduce the complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The revised guidance will be applied prospectively and is effective for SEC filers for annual periods or interim periods with fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual periods for which financial statements have not been issued. The Company has not yet adopted this update and is currently evaluating the effect this new standard will have on its financial condition and results of operations.

In June 2016, the FASB issued ASU 2016-13,Financial Instruments − Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard requires an allowance to be recorded for all expected credit losses for certain financial assets. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments.In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments − Credit Losses (Topic 326); Targeted Transition Relief,” which allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10.ASU 2016-13 and ASU 2019-05 are effective for public companies for interim and annual period beginning December 15, 2019.

The Company adopted the new credit losses standard effective January 1, 2020. Pursuant to ASU 2016-13 and its amendment ASU 2019-05, the Company elected the irrevocable fair value option for all outstanding loans receivable that were previously measured at amortized cost. Under the fair value option, loans receivable are now measured at each reporting period based upon their exit value in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in the consolidated statements of operations. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes. The impact of adopting ASC 326 was immaterial to the condensed consolidated financial statements.

On October 11, 2019, the Company and B. Riley Brand Management LLC, an indirect wholly-owned subsidiary of the Company (the “B. Riley Member”), entered into a Membership Interest Purchase Agreement (the “MIPA”) with BR Brand Acquisition LLC (the “BR Brand Member”) and BR Brand, pursuant to which the B. Riley Member acquired a majority of the equity interest in BR Brand. The closing of the transactions in accordance with the MIPA (the “Closing”) occurred on October 28, 2019.

The B. Riley Member completed the Closing of a majority of the equity interest in BR Brand pursuant to the terms of the MIPA in exchange for (i) aggregate consideration of $116,500 in cash and (ii) warrant consideration of $990 from the issuance by the Company to Bluestar Alliance LLC (“Bluestar”), an affiliate of the BR Brand Member, of a warrant to purchase up to 200,000 shares of the Company’s common stock at an exercise price per share equal to $26.24. One-third of the shares of common stock issuable under the warrant immediately vested and became exercisable upon issuance at the Closing, and the remaining two-thirds of such shares of common stock will vest and become exercisable following the first and/or second anniversaries of the Closing, subject to BR Brand’s (or another related joint venture with Bluestar) satisfaction of specified financial performance targets. The fair value of the non-controlling interest in the amount of $29,373 was determined based on the relative fair value of the net assets acquired. The Company incurred $570 of transaction costs in connection with the acquisition.

In connection with the Closing, (i) the BR Brand Member has caused the transfer of certain trademarks, domain names, license agreements and related assets from existing brand owners to BR Brand and (ii) the Company, Bluestar and certain of their affiliates (including the B. Riley Member and the BR Brand Member) entered into an amended and restated operating agreement for BR Brand and certain other commercial agreements.

The Company evaluated the transaction under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and Accounting Standards Update (“ASU”) 2017-01, Business Combinations: Clarifying the Definition of a Business. Based on this evaluation, the Company has determined that the acquisition did not meet the definition of a business and, therefore, has accounted for the transaction as an acquisition of assets. The fair value of the assets acquired, including transaction costs, have been reflected in the accompanying financial statements as follows:

The Company did not record any restructuring charges for the three and six months ended ~~March 31,~~June 30, 2020. The Company recorded restructuring charges in the amount of ~~$147~~$1,552 and $1,699 for the three and six months ended ~~March 31, 2019.~~June 30, 2019, respectively.

The restructuring ~~charge of $147~~charges during the three and six months ended ~~March 31,~~June 30, 2019 ~~was~~were primarily related to severance costs for magicJack employees from a reduction in workforce in the Principal Investments – United Online and magicJack segment.

The following tables summarize the changes in accrued restructuring charge during the three and six months ended ~~March 31,~~June 30, 2020 and 2019:

The following tables summarize the restructuring activities by reportable segment during the three and six months ended ~~March 31,~~June 30, 2019:

The following table presents the contractual gross and net securities borrowing and lending balances and the related offsetting amount as of ~~March 31,~~June 30, 2020 and December 31, 2019:

Additions and changes to the allowance for doubtful accounts consist of the following:

Goodwill was $227,046 at June 30, 2020 and $223,697 at ~~both March 31, 2020 and~~ December 31, 2019. The increase in goodwill of $3,349 is due to the acquisition of a business consulting firm in the second quarter of 2020.

Amortization expense was $4,024 and ~~$3,377~~$3,344 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $8,048 and $6,721 for the six months ended June 30, 2020 and 2019, respectively. At ~~March 31,~~June 30, 2020, estimated future amortization expense was ~~$11,689, $15,218,~~$7,669, $15,225, $14,564, ~~$12,573~~$12,574 and ~~$8,486~~$8,487 for the years ended December 31, 2020 (remaining ~~nine~~six months), 2021, 2022, 2023 and 2024, respectively. The estimated future amortization expense afterDecember 31, 2024 was ~~$15,553.~~$15,556.

In the first quarter of 2020, in accordance with ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, the Company made a qualitative assessment of the impact of the COVID-19 outbreak on goodwill and other intangible assets. The Company determined that the COVID-19 outbreak was a triggering event for testing the indefinite-lived tradenames in the Brands segment and made a determination that the indefinite-lived tradenames in the Brands segment were ~~impaired. In the three months ended March 31, 2020,~~impaired and the Company recognized an impairment charge of ~~$4,000~~$4,000. As a result of the continuing impact and duration of the COVID-19 outbreak on the operations of the Brands segment, the Company determined that there was another triggering event for testing the indefinite-lived tradenames in the Brands ~~segment. We~~segment and made a determination that the indefinite-lived tradenames in the Brands segment were impaired and the Company recognized an additional impairment charge of $8,500 in the second quarter of 2020. The Company will continue to monitor the impacts of the COVID-19 outbreak in future quarters. Changes in our forecasts could cause the book values of indefinite-lived tradenames to exceed fair values which may result in additional impairment charges in future periods.

On April 21, 2017, the Company amended its credit agreement (as amended, the “Credit Agreement”) governing its asset based credit facility with Wells Fargo Bank, National Association (“Wells Fargo Bank”) to increase the maximum borrowing limit from $100,000 to $200,000. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom. Such facility allows the Company to borrow up to 50 million British Pounds. Any borrowings on the UK Credit Agreement reduce the availability on the asset based $200,000 credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. 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(c).~~contracts. 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 Company paid Wells Fargo Bank a closing fee in the amount of $500 in connection with the April 2017 amendment to the Credit Agreement. The interest rate for each revolving credit advance under the Credit Agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on the liquidation engagements funded under the Credit Agreement as set forth therein. Interest expense totaled ~~$277~~$143 and ~~$481~~$104 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $420 and $586 for the six months ended June 30, 2020 and 2019, respectively. There was no0 outstanding balance on this credit facility at ~~March 31,~~June 30, 2020. The outstanding balance on this credit facility was $37,096 at December 31, 2019. At ~~March 31,~~June 30, 2020, there were no open letters of credit outstanding.

We are in compliance with all financial covenants in the asset based credit facility at ~~March 31,~~June 30, 2020.

Notes payable include notes payable to a clearing organization for one of the Company’s broker dealers. The notes payable accrue interest at the prime rate plus 2.0% (6.75% at ~~March 31,~~June 30, 2020) payable annually, maturing January 31, 2022. At ~~March 31,~~June 30, 2020 and December 31, 2019, the outstanding balance for the notes payable was $714 and $1,071, respectively. Interest expense was ~~$15~~$48 and ~~$23~~$22 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $63 and $45 for the six months ended June 30, 2020 and 2019, respectively.

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 the Company, in the capacity as borrowers, entered into a credit agreement (the “BRPAC Credit Agreement”) with the Banc of California, N.A. in the capacity as agent (the “Agent”) and lender and with the other lenders party thereto (the “Closing Date Lenders”). Certain of the Borrowers’ U.S. subsidiaries are guarantors of all obligations under the BRPAC Credit Agreement and are parties to the BRPAC Credit Agreement in such capacity (collectively, the “Secured Guarantors”; and together with the Borrowers, the “Credit Parties”). In addition, the Company and B. Riley Principal Investments, LLC (“BRPI”), the parent corporation of BRPAC and a subsidiary of the Company, are guarantors of the obligations under the BRPAC Credit Agreement pursuant to standalone guaranty agreements pursuant to which the shares outstanding membership interests of BRPAC are pledged as collateral.

The obligations under the BRPAC Credit Agreement are secured by first-priority liens on, and first priority security interest in, substantially all of the assets of the Credit Parties, including a pledge of (a) 100% of the equity interests of the Credit Parties, (b) 65% of the equity interests in United Online Software Development (India) Private Limited, a private limited company organized under the laws of India; and (c) 65% of the equity interests in magicJack VocalTec LTD., a limited company organized under the laws of Israel. Such security interests are evidenced by pledge, security and other related agreements.

The BRPAC Credit Agreement contains certain covenants, including those limiting the Credit Parties’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the BRPAC Credit Agreement requires the Credit Parties to maintain certain financial ratios. The BRPAC Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults and cross defaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the outstanding BRPAC Credit Agreement.

Under the BRPAC Credit Agreement, the Company borrowed $80,000 due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, the Company may request additional optional term loans in an aggregate principal amount of up to $10,000 at any time prior to the first anniversary of the agreement date (the “Option Loan”) with a final maturity date of December 19, 2023. On February 1, 2019, the Credit Parties, the Closing Date Lenders, the Agent and City National Bank, as a new lender (the “New Lender”), entered into the First Amendment to the Credit Agreement and Joinder (the “First Amendment”) pursuant to which, among other things, (i) New Lender became a party to the BRPAC Credit Agreement, (ii) the New Lender extended to Borrowers the Option Loan in the amount of $10,000, (iii) the aggregate outstanding principal amount of the term loans was increased from $80,000 to $90,000; and (iv) the amortization schedule under the BRPAC was amended as set forth in the First Amendment. Additionally, in connection with the Option Loan, the Borrowers executed a term note in favor of New Lender dated February 1, 2019 in the amount of $10,000. Borrowings under the BRPAC Credit Agreement bear interest at a rate equal to (a) the LIBOR rate for Eurodollar loans, plus (b) the applicable margin rate, which ranges from two and one-half percent (2.5%) to three percent (3.0%) per annum, based upon the Borrowers’ ratio of consolidated funded indebtedness to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the preceding four fiscal quarters or other applicable period. At ~~March 31,~~June 30, 2020 ~~the~~ interest rate on the BRPAC Credit Agreement was at ~~3.74%~~2.93%. Interest payments are to be made each one, three or six months. Amounts outstanding under the BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at maturity. For the $80,000 loan, quarterly installments from ~~March 31,~~June 30, 2020 to December 31, 2022 are in the amount of $4,244 per quarter and from March 31, 2023 to December 31, 2023 are $2,122 per quarter. For the $10,000 loan, quarterly installments from ~~March 31,~~June 30, 2020 to December 31, 2022 are $566 per quarter and from March 31, 2023 to December 31, 2023 are $265 per quarter. As of ~~March 31,~~June 30, 2020 and December 31, 2019, the outstanding balance on the term loan was ~~$61,932~~$57,195 (net of unamortized debt issuance costs of ~~$524)~~$452) and $66,666 (net of unamortized debt issuance costs of $600), respectively. Interest expense on the term loan during the three months ended ~~March 31,~~June 30, 2020 and 2019 was ~~$829~~$586 (including amortization of deferred debt issuance costs of ~~$76)~~$72) and ~~$1,278~~$1,257 (including amortization of deferred debt issuance costs of ~~$88)~~$93), respectively. Interest expense on the term loan during the six months ended June 30, 2020 and 2019 was $1,415 (including amortization of deferred debt issuance costs of $148) and $2,535 (including amortization of deferred debt issuance costs of $181), respectively.

We are in compliance with all financial covenants in the BRPAC Credit Agreement at ~~March 31,~~June 30, 2020.

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company issued $38,828 of senior notes ~~due~~ with ~~maturities~~maturity dates ranging from May 2023 to December 2027 pursuant to At the Market Issuance Sales Agreements with B. Riley FBR, 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.

On February 12, 2020, the Company issued $132,250 of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus supplement dated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 6.375%. The 6.375% 2025 Notes are unsecured and due and payable in full on February 28, 2025. In connection with the issuance of the 6.375% 2025 Notes, the Company received net proceeds of ~~$129,233~~$129,213 (after underwriting commissions, fees and other issuance costs of ~~$3,017)~~$3,037).

During March 2020, the Company repurchased bonds with an aggregate face value of $3,443 for $1,829 resulting in a gain net of expenses and original issue discount of $1,556 during the ~~three~~six months ended ~~March 31,~~June 30, 2020. As part of the repurchase, the Company paid $30 in interest accrued through the date of each respective repurchase.

At ~~March 31,~~June 30, 2020 and December 31, 2019, the total senior notes outstanding was ~~$853,523~~$854,037 (net of unamortized debt issue costs of ~~$11,100)~~$10,586) and $688,112 (net of unamortized debt issue costs of $8,875) with a weighted average interest rate of 6.94% and 7.05%, respectively.Interest on senior notes is payable on a quarterly basis.Interest expense on senior notes totaled ~~$14,392~~$15,588 and ~~$8,855~~$10,071 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $29,980 and $18,926 for the six months ended June 30, 2020 and 2019, respectively.

On February 14, 2020, the Company entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. Riley FBR, Inc. governing a program of at-the-market sales of certain of the Company’s senior notes. ~~The most recent sales agreement prospectus was filed~~This program provides for the sale by the Company ~~with the SEC on February 14, 2020 (the “February 2020 Sales Agreement Prospectus”). The Sales Agreement Prospectus allows the Company to sell~~of up to $150,000 of certain of the Company’s senior ~~notes pursuant to an effective Registration Statement on Form S-3.~~notes. As of ~~March 31,~~June 30, 2020, the Company had $148,415 remaining availability under the February 2020 Sales Agreement.

Revenue from contracts with customers by reportable segment for the three and six months ended ~~March 31,~~June 30, 2020 and 2019 is as follows:

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. Receivables related to revenues from contracts with customers totaled ~~$46,450~~$43,226 and $46,624 at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The Company had no significant impairments related to these receivables during the three and six months ended ~~March 31,~~June 30, 2020. The Company’s deferred revenue primarily relates to retainer and milestone fees received from corporate finance and investment banking advisory engagements, asset management agreements, Valuation and Appraisal engagements and subscription services where the performance obligation has not yet been satisfied. Deferred revenue at ~~March 31,~~June 30, 2020 and December 31, 2019 was ~~$73,709~~$71,017 and $67,121, respectively. During the three months ended ~~March 31,~~June 30, 2020 and 2019, the Company recognized revenue of ~~$13,987~~$10,087 and ~~$13,234~~$11,932 that was recorded as deferred revenue at the beginning of the respective year. During the six months ended June 30, 2020 and 2019, the Company recognized revenue of $24,074 and $25,166 that was recorded as deferred revenue at the beginning of the respective year.

Contract costs include: (1) costs to fulfill contracts associated with corporate finance and investment banking engagements are capitalized where the revenue is recognized at a point in time and the costs are determined to be recoverable; (2) costs to fulfill Auction and Liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold at auction or liquidation where the revenue is recognized over time when the performance obligation is satisfied; and (3) commissions paid to obtain magicJack contracts which are recognized ratably over the contract term and third party support costs for magicJack and related equipment purchased by customers which are recognized ratably over the service period.

The capitalized costs to fulfill a contract were ~~$460~~$410 and $450 at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively, and are recorded in prepaid expenses and other assets in the condensed consolidated balance sheets. For the three months ended ~~March 31,~~June 30, 2020 and 2019, the Company recognized expenses of ~~$72~~$70 and ~~$601~~$430 related to capitalized costs to fulfill a contract, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized expenses of $142 and $1,031 related to capitalized costs to fulfill a contract, respectively. There were no significant impairment charges recognized in relation to these capitalized costs during the three and six months ended ~~March 31,~~June 30, 2020 and 2019.

Remaining Performance Obligations and Revenue Recognized from Past Performance

The Company does not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at ~~March 31,~~June 30, 2020. Corporate finance and investment banking fees and retail liquidation engagement fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at ~~March 31,~~June 30, 2020.

The Company’s effective income tax rate was a benefit of ~~27.4%~~24.2% and provision of ~~28.0%~~29.0% for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively.

As of ~~March~~June 30, 2020, the Company had federal net operating loss carryforwards of $53,932 and state net operating loss carryforwards of $64,088. The Company’s federal net operating loss carryforwards will expire in the tax years commencing in December 31, 2032 through December 31, 2037. The state net operating loss carryforwards will expire in the tax years commencing in December 31, 2029.

The Company establishes a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Tax benefits of operating loss, capital loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. The Company’s net operating losses are subject to annual limitations in accordance with Internal Revenue Code Section 382. Accordingly, the Company is limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As of ~~March 31,~~June 30, 2020, the Company believes that the existing net operating loss carryforwards will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided a valuation allowance. The Company does not believe that it is more likely than not that the Company will be able to utilize the benefits related to capital loss carryforwards and has provided a valuation allowance in the amount of $61,945 against these deferred tax assets.

The Company files income tax returns in the U.S., various state and local jurisdictions, and certain other foreign jurisdictions. The Company is currently under audit by certain federal, state and local, and foreign tax authorities. The audits are in varying stages of completion. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities. Uncertain tax positions are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress of tax audits, case law developments and closing of statutes of limitations. Such adjustments are reflected in the provision for income taxes, as appropriate. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the calendar years ended December 31, 2016 to 2019.

Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all dilutive potential common shares outstanding during the period. Basic common shares outstanding exclude 387,365 common shares in ~~2020 and 387,365 common shares in~~ 2019 that ~~are~~were held in escrow and subject to forfeiture. The 387,365 common shares held in escrow ~~includes 387,365 common shares that are subject to forfeiture~~were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations and warranties ~~in connection with the~~and related claims pursuant to a related acquisition of Wunderlich. The shares that remain in escrow are subject to forfeiture upon the final settlement of claims as more fully described in the related escrow instructions. Dilutive common shares outstanding includes contingently issuable shares that are currently in escrow and subject to release if the conditions for the final settlement of claims in accordance with the escrow instructions were satisfied at the end of the respective years.agreement. Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were ~~1,820,178~~1,365,738 and ~~1,952,868~~ 1,104,198 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and 1,592,958 and 1,528,533 for the six months ended June 30, 2020 and 2019, respectively, because to do so would have been anti-dilutive.

The Company is subject to certain legal and other claims that arise in the ordinary course of its business. In particular, the Company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from the Company’s securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. The Company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding the Company’s business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Notwithstanding this uncertainty, the Company does not believe that the results of these claims are likely to have a material effect on its financial position or results of operations.

On August 11, 2017, a putative class action lawsuit titled Freedman v. magicJack VocalTec Ltd. et al., Case 9-17-cv-80940, was filed against magicJack and its Board of Directors in the United States District Court for the Southern District of Florida (Case No: 9:17-cv-80940-RLR). ~~Oral~~In November 2018, the District court granted the Company’s request for dismissal of the case. However, the plaintiff appealed the ruling and oral arguments for the appeal were held ~~on for~~in January ~~17,~~2020. On June 25, 2020, ~~and~~the Appeals court provided its ruling in favor of the Company, ~~is awaiting~~upholding the District court’s ~~decision. The Company cannot estimate~~dismissal of the ~~amount of potential liability, if any, that could arise from this matter.~~case.

On January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately $151,000. The Court ordered mediation before a federal magistrate took place on August 6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020, the Company agreed to settle this matter, subject to court approval.

In July 2017, an arbitration claim was filed with FINRA by Dominick & Dickerman LLC and Michael Campbell against WSI and Gary Wunderlich with respect to the acquisition by Wunderlich Investment Company, Inc. (“WIC”) (the parent corporation of WSI) of certain assets of Dominick & Dominick LLC in 2015. The Claimants allege that respondents overvalued WIC so that the purchase price paid to the Claimants in shares of WIC stock was artificially inflated. On April 7, 2020, the arbitration panel issued an award against ~~B. Riley Wealth Management, LLC (formerly, Wunderlich Securities, Inc.)~~BRWM and Gary Wunderlich holding each party jointly and severally liable for damages, costs and expenses in an aggregate amount of $11,400. The Company ~~recorded a loss accrual in the consolidated financial statements during the three months ended March 31, 2020. The Company~~ filed a ~~petition~~motion to vacate the arbitration award in the U.S. District Court for the Southern District of New York on May 5, 2020. In June 2020, Dominick & Dickerman LLC settled the matter for $10,150 in cash. Michael Campbell agreed that the award shall be vacated as to him.

~~magicJack believes that it files all required tax returns~~settlement, and ~~pays all required federal, state and municipal taxes (such as sales, excise, utility, and ad valorem taxes), fees and surcharges. magicJack is~~on June 5, 2020, the subject of inquiries and examinations by various states and municipalities in the normal course of business. In accordance with generally accepted accounting principles, magicJack makes a provision for a liability for taxes when it is both probable that a liability has been incurredCompany and the ~~amount~~FCC entered into a Consent Decree to settle the FCC’s inquiry. In the Consent Decree, magicJack made no admission of ~~the liability can be reasonably estimated. These provisions are reviewed at least quarterly~~non-compliance with FCC regulations but did agree to make certain changes to its product offerings and ~~adjusted~~marketing materials on a go forward basis and to ~~reflect the impact~~make a cash payment of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. magicJack believes any possible claims are without merit and vigorously defends its rights. However, if a government entity were to prevail in any matter, it could have a material adverse effect on magicJack’s financial condition, results of operation and cash flows. In addition, it is at least reasonably possible that a potential loss may exist for tax contingencies in addition$5,000 to the ~~provisions taken by magicJack.~~FCC.

Historically, magicJack considered the requirements to collect sales taxes under the auspices of a 1991 Supreme Court case, Quill Corp. v. North Dakota, which established the precedent that a physical presence in the respective state is required for an entity to be subject to a state’s sales and use tax requirements. Accordingly, magicJack had concluded that it did not have nexus for sales tax in those states in which it had no physical presence (i.e., it had no employees regularly and systematically there and it had no property there). On June 21, 2018, via South Dakota v. Wayfair, Inc. (No. 17-494) (“Wayfair”) the U.S. Supreme Court reversed its prior ruling and eliminated the “physical presence” requirement. In consideration of the ruling, magicJack made the decision to start collecting sales tax on direct sales of its magicJack device and access right renewals in states that have adopted similar “Economic Nexus” laws. magicJack began registering for, collecting and remitting sales tax to identified jurisdictions during the third quarter of 2018. The Company will continue to monitor the situation and add additional states if deemed necessary. Though the South Dakota law is to be applied prospectively, it is not certain if other states may try to enact laws on a retrospective basis based on the Wayfair ruling, and the Company cannot estimate the likelihood of liability or the potential amount of assessments that could arise from prior periods if other states tried to apply the ruling on a retrospective basis.

In a letter dated September 12, 2019, the Company received notice that the State of California has selected the Company’s 2016 and 2017 California corporate income tax returns for examination. The Company has received the initial information document request and the first meeting with the auditor scheduled in March 2020 was rescheduled to a date to be determined due to COVID -19. The Company believes that the positions taken in its 2016 and 2017 California corporate income tax returns are reasonable and appropriate, however, the Company cannot be sure of the ultimate outcome of the examination and cannot estimate the likelihood of liability or the amount of potential assessments, if any, that could arise from the examination.

~~(c)~~(b) Franchise Group Commitment Letter, Loan Participant Guaranty and CIBC Guarantee

On February 14, 2020, affiliates of ~~Franchise Group, Inc. (collectively with all of its affiliates, “FRG”)~~FRG entered into an ABL Credit Agreement (the “Franchise Credit Agreement”), with GACP Finance Co., LLC (“GACP Finance”) as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided an asset based credit facility to FRG in an aggregate principal amount of $100,000 In connection with the Franchise Credit Agreement, the Company entered into a commitment letter, dated as of February 14, 2020 (the “Commitment Letter”), pursuant to which the Company committed to provide a $100,000 asset based lending facility to FRG, on April 14, 2020 if, on or before such date, the obligations under the Franchise Credit Agreement are not refinanced in full. On May 1, 2020, the Company extended its commitment under the Commitment Letter until 30 days prior to the maturity date which is currently set forth in the Franchise Credit Agreement as September 30, 2020.

On February 14, 2020, FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the “Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principal amount of $575,000.

On February 19, 2020, the Company entered into a limited guaranty (the “Loan Participant Guaranty”) to one of the lenders under the Term Loan Credit Agreement (the “Loan Participant”) pursuant to which the Company guaranteed the payment when due of certain obligations, including principal, interest, and other amounts payable to the Loan Participant under the Term Loan Credit Agreement in an amount not to exceed $50,000 plus certain expenses of the Loan Participant and certain protective advances related to such guaranteed obligations (the “Loan Participant Guaranteed Obligations”). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant to the Term Loan Credit Agreement. The Loan Participant Guaranty remains in effect until the date that the Loan Participant Guaranteed Obligations have been paid in full.

The Loan Participant Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future unsecured and unsubordinated indebtedness. The Loan Participant Guaranteed Obligations are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.

On February 14, 2020, the Company entered into a limited guaranty (the “CIBC Guaranty”) in favor of CIBC Bank USA (“CIBC”), pursuant to which the Company guaranteed the payment when due of certain obligations, including all principal, interest, and other amounts that shall be at any time payable by FRG under FRG’s credit agreement with CIBC and the lenders party thereto, dated as of May 16, 2019, as amended (the “CIBC Credit Agreement”) in an amount not to exceed $125,000 plus certain expenses of CIBC related to such guaranteed obligations (the “CIBC Guaranteed Obligations”). CIBC may require payment of the CIBC Guaranteed Obligations by the Company upon the occurrence of either (a) the failure of FRG to pay any principal of any loan or any reimbursement obligation in respect of any letter of credit disbursement or (b) the failure of FRG to pay any interest on any loan or on any reimbursement obligation in respect of any letter of credit disbursement within five business days of the date due, in each case pursuant to the CIBC Credit Agreement. The CIBC Guaranty ~~remains in effect until the earlier of (a) the date that the CIBC Guaranteed Obligations have been paid in full or (b)~~terminated on June 30, 2020.

~~The CIBC Guaranteed Obligations are unsecured obligations of~~(c) Babcock & Wilcock Commitments and Guarantee

On May 14, 2020, the Company entered into an a agreement to provide Babcock & Wilcox Enterprises, Inc. (“B&W”) future commitments to loan B&W up to $40,000 at various dates starting in November 2020 and ~~rank equally~~the Company provided a limited guaranty of B&W’s obligations under B&W’s amended credit facility as more fully described in right of payment with all of the Company’s other existing and future unsecured and unsubordinated indebtedness. The CIBC Guaranteed Obligations are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.Note 17 - Related Party Transactions.

Share- based compensation expense for restricted stock units under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”) was $4,109 and ~~$1,726~~$2,860 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $9,265 and $5,353 for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020, in connection with employee stock incentive plans the Company granted 586,916 restricted stock units with a weighted average grant date fair value of $18.53 per share. The restricted stock units generally vest over a period of one to three years based on continued service. Performance based restricted stock units generally vest based on both the employee’s continued service and the Company’s common stock price, as defined in the grant, achieving a set threshold during the three-year period following the grant. In determining the fair value of restricted stock units on the grant date, the fair value is adjusted for (a) estimated forfeitures, (b) expected dividends based on historical patterns and the Company’s anticipated dividend payments over the expected holding period and (c) the risk-free interest rate based on U.S. Treasuries for a maturity matching the expected holding period.

~~As of March 31, 2020, the expected remaining unrecognized share-based compensation expense of $15,238 will be expensed over a weighted average period of 1.3 years.~~

~~A summary of equity incentive award activity for the three months ended March 31, 2020 was as follows:~~

~~The total fair value of shares vested during the three months ended March 31, 2020 was $312.~~

(b) ~~Amended and Restated FBR & Co. 2006 Long-Term Stock Incentive Plan~~

In connection with the acquisition of FBR & Co. on June 1, 2017, the equity awards previously granted or available for issuance under the FBR & Co. 2006 Long-Term Stock Incentive Plan (the “FBR Stock Plan”) may be issued under the Plan. The share-based compensation expense in connection with the FBR Stock Plan restricted stock awards was $791 and $767 during the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the expected remaining unrecognized share-based compensation expense of $3,833 will be expensed over a weighted average period of 1.6 years.

~~A summary of equity incentive award activity for the three months ended March 31, 2020 was as follows:~~

~~The total fair value of shares vested under the FBR Stock Plan during the three months ended March 31, 2020 was $657.~~

In connection with the Company’s Purchase Plan, share based compensation was ~~$165~~$59 and ~~$121~~$74 for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $224 and $195 for the six months ended June 30, 2020 and 2019, respectively. At ~~March 31,~~June 30, 2020, there were ~~592~~524,891 shares reserved for issuance under the Purchase Plan.

During the six months ended June 30, 2020, the Company repurchased 1,240,581 shares of its common stock for $27,779 which represents an average price of $22.39 per common share. On July 1, 2020, the Company entered into an agreement to repurchase 900,000 shares of its common stock for $19,800 ($22.00 per common share) from one of its shareholders. In accordance with the agreement, the Company repurchased 450,000 shares for $9,900 on July 2, 2020 and the remaining 450,000 shares are required to be repurchased for $9,900 at a mutually agreeable date prior to January 1, 2021. In addition to the repurchases of common stock, 387,365 shares of the Company’s common stock that were previously held in escrow in connection with the acquisition of WIC in 2017 were forfeited and cancelled on June 11, 2020 to indemnify the Company for certain representations and warranties and related claims pursuant to a related acquisition agreement.

B. Riley FBR ~~MLV~~ and B. Riley Wealth Management (“BRWM”), the Company’s broker-dealer subsidiaries, are registered with the SEC as broker-dealers and are members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Company’s broker-dealer subsidiaries are subject to ~~SEC~~the SEC’s Uniform Net Capital Rule (Rule 15c3-1) which requires the subsidiaries to maintain minimum net capital and provides that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. As ~~such, they are subject to the minimum net capital requirements promulgated by the SEC. As~~ of ~~March 31,~~June 30, 2020, B. Riley FBR had net capital of ~~$103,271,~~$99,404, which was ~~$100,994~~$96,325 in excess of its required net capital of ~~$2,277; MLV~~$3,079; and BRWM had net capital of ~~$91,~~$4,923 which was ~~$50~~$4,263 in excess of its required net capital of ~~$41; and BRWM had net capital of $5,569, which was $4,975 in excess of its required net capital of $594.~~$660.

At ~~March 31,~~June 30, 2020, amounts due from related parties of ~~$4,391 includes~~$295 included $32 from GACP I, L.P. (“GACP I”) and ~~$14~~$15 from GACP II, L.P. (“GACP II”) for management fees and other operating expenses, $5and $248 due from B. Riley Principal Merger Corp, a company that consummated its initial public offering on April 11, 2019, and our wholly owned subsidiary, B. Riley Principal Sponsor Co. LLC, is the Sponsor, and $4,340 due from John Ahn, President of Great American Partners, LLC, our indirect wholly owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory Note connected with a Transfer Agreement as further discussed below. At March 31, 2020, amounts due to related parties includes $353 due to CA Global Partners (“CA Global”) for operating expenses related to wholesale and industrial liquidation engagements managed by CA Global on behalf of GA Global Ptrs, and is included in due to related parties and partners on the accompanying condensed balance sheets. During the three months ended March 31, 2020, the Company sold a portion of a loan receivable to GACP for $1,800. At March 31, 2020, the Company had sold loan participations to B. Riley Partners Opportunity Fund, a private equity fund managed by one of our subsidiaries, in the amount of $12,405, and recorded interest expense of $552 during the three months ended March 31, 2020 related to B. Riley Partners Opportunity Fund’s loan participations. Our executive officer’s and board of directors have a 69.8% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 48.8% in the B. Riley Partners Opportunity Fund at March 31, 2020.Ptrs. At December 31, 2019, amounts due from related parties of $5,832 included $145 from GACP I and $12 from GACP II for management fees and other operating expenses, $13 due from B. Riley Principal Merger Corp, a company that consummated its initial public offering on April 11, 2019, for which our wholly owned subsidiary, B. Riley Principal Sponsor Co. LLC, was the Sponsor, and $3,846 due from John Ahn, who at the time was the President of Great American Capital Partners, LLC, our indirect wholly owned subsidiary (“GACP”), pursuant to a Secured Line of Promissory Note ~~connected with~~related to a Transfer Agreement as further discussed below. During the six months ended June 30, 2020, the Company sold a portion of a loan receivable to GACP for $1,800. At June 30, 2020, the Company had sold loan participations to BRC Partners Opportunity Fund, LP (“BRCPOF”), a private equity fund managed by one of its subsidiaries, in the amount of $14,109, and recorded interest expense of $971 during the six months ended June 30, 2020 related to BRCPOF’s loan participations. Our executive officers and members of our board of directors have a 72.9% financial interest, which includes a financial interest of Bryant Riley, our Co-Chief Executive Officer, of 42.1% in the BRCPOF at June 30, 2020. At June 30, 2020 and December 31, 2019, the Company had outstanding loan to participations to ~~B. Riley Partners Opportunity Fund~~BRCPOF in the amount of $14,109 and $12,478, respectively.

On April 1, 2019, the Company entered into a Transfer Agreement (the “Transfer Agreement”) with GACP II, a fund managed by GACP, and John Ahn, who is the ~~President~~brother of ~~GACP.~~Phil Ahn, the Company’s Chief Financial Officer and Chief Operating Officer. The Transfer Agreement provides for among other things, the transfer to Mr. J. Ahn of 55.56% of the Company’s limited partnership interest in GACP II (the “Transferred Interest”), which represents a capital commitment in the aggregate amount of $5,000. In connection with the Transfer Agreement, the Company provided Mr. J. Ahn with a non-recourse, secured line of credit in an aggregate amount of up to $5,003 pursuant to the terms of a Secured Line of Credit Promissory Note (the “Note”) dated April 1, 2019, to fund the purchase price of the Transferred Interest. We also entered into a Security Agreement with Mr. J. Ahn on April 1, 2019, which granted to the Company a security interest in the Transferred Interest to secure Mr. J. Ahn’s obligations under the Note. The Note is subject to an interest rate per annum of 7.00%. As of ~~March~~December 31, ~~2020,~~2019, the principal and accrued interest on the Note were ~~$4,291 (amount transferred as~~$3,798 and $48, respectively. In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P., a limited partnership controlled by Mr. J. Ahn, (“Whitehawk”). Whitehawk has agreed to provide investment advisory services for GACP I and GACP II. In accordance with the terms of ~~March 31, 2020) and $49, respectively. For~~ the ~~three~~Note, Mr. Ahn surrendered the Transferred Interest to the Company in exchange for the cancellation of the Note. During the six months ended ~~March 31,~~June 30, 2020, interest ~~earned~~payments received on the Note was ~~$74~~$121 and management fees paid for investment advisory services by Whitehawk was $103.

On May 22, 2020, the Company earned $3,275 of underwriting fees from the initial public offering of B. Riley Principal Merger Corp. II, (“BRPM II”), which was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “BRPM II IPO”). The Company ~~periodically~~has also agreed to loan BRPM II up to $300 for operating expenses. The loan is interest free and there were no amounts outstanding at June 30, 2020. BRPM II entered into a non-binding letter of intent to acquire a privately held company that is not related to the Company (the “Proposed Acquisition”). The non-binding letter of intent contemplates that the Company would provide a backstop guarantee to raise $50,000 new equity in a private placement for the Proposed Acquisition. The Proposed Acquisition is expected to be completed in the fourth quarter of 2020, subject to, among other things, the negotiation and execution of a definitive agreement between BRPM II and the privately held company.

In addition to the above, the Company from time to time participates in loans and financing arrangements in respect of companies in which the Company has an equity ownership and representation on the board of directors or equivalent body. The Company may also provide consulting services or investment banking services to raise capital for these companies. These transactions can be summarized as follows:

The Company has a loan receivable due from Sonim Technologies, Inc. (“Sonim”) that is included in loans receivable at fair value with a fair value of ~~$9,155 and~~ $9,603 at ~~March 31, 2020 and~~ December 31, ~~2019, respectively. The principal amount due on the loan at March 31, 2020 was $10,170, interest~~2019. Interest is payable at 10.0% per annum with a maturity date of September 1, 2022. During the three months ended March 31, 2020, the Company received principal payments in the amount of $88. A portion of the loan receivable is convertible into common stock of Sonim at $8.87 per share depending on when the Company elects to exercise its’ option to convert the principal balance of the loan into common stock of Sonim.

The original loan was made in October 2017 in connection with the Company’s initial investment in common stock and preferred stock that was purchased from Sonim’s existing shareholders.In October 2017, the Company also entered into a management services agreement with Sonim to provide advisory and consulting services for management fees of up to $200 per year. The management services agreement was terminated in September 2019.

In June 2020 Sonim repaid $4,000 of the outstanding loan balance in cash and the remaining principal amount, accrued interest and other amounts outstanding of $6,170 under the loan converted into shares of common stock of Sonim at the then public offering price of shares of Sonim’s common stock.

The Company has a last-out term loan receivable due from ~~Babcock & Wilcox Enterprises, Inc. (“~~B~~&W”)~~&W that is included in loans receivable, at fair value with a fair value of ~~$104,998~~$150,812 at ~~March 31,~~June 30, 2020. As of December 31, 2019, the last-out term loan was included in loans receivable, at cost with a carrying value of $109,147. ~~The carrying value~~On January 31, 2020, the Company provided B&W with an additional $30,000 of last-out term loans pursuant to new amendments to B&W’s credit agreement. On May 14, 2020, the Company provided B&W with another $30,000 of last-out term loans pursuant to a further amendment to B&W’s credit agreement which also included future commitments for the Company to loan ~~was comprised~~B&W $40,000 at various dates starting in November 2020 and a limited guaranty by the Company of B&W’s obligations under the ~~principal amount of $113,330 less original issue discount of $4,183 at December 31, 2019.~~amended credit facility, (the “Amendment Transactions”). Interest is payable ~~monthly~~quarterly at the fixed rate of 12.0% per ~~annum. The loan was~~annum in common stock of B&W at $2.28 per common share through December 31, 2020 and in cash thereafter. All of these loans were made to B&W as part of various amendments to B&W’s existing credit agreement with other lenders not related to the Company. As part of the Amendment Transactions, the Company entered into the following agreements: (i) an Amendment and Restatement Agreement, dated as of May 14, 2020, among B&W, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, including the Company; (ii) a Fee Letter, dated as of May 14, 2020, among the Company and B&W; (iii) a Fee and Interest Equitization Agreement, dated May 14, 2020, between the Company, B. Riley FBR, and B&W; (iv) a Termination Agreement, dated as of May 14, 2020, the Company and B&W and acknowledged by Bank of America, N.A. with respect to the Backstop Commitment Letter; and (v) a Limited Guaranty Agreement, dated as of May 14, 2020, among the Company, B&W and Bank of America, N.A.

In connection with making the loan to B&W, in April 2019 the Company received warrants to purchase 1,666,667 shares of common stock of B&W with an exercise price of $0.01 per share. The option to exercise the warrants expires on April 5, 2022.

One of the Company’s wholly owned subsidiaries entered into a services agreement with B&W that provided for the President of the Company to serve as the Chief Executive Officer of B&W until November 30, 2020 (the “Executive Consulting Agreement”), unless terminated by either party with thirty days written notice. Under this agreement, fees for services provided are $750 per annum, paid monthly. In addition, subject to the achievement of certain performance objectives as determined by B&W’s compensation committee of the board, a bonus or bonuses may also be earned and payable to the Company.

On January 31, 2020, the Company provided B&W with $30,000 of additional last-out term loans pursuant to new amendments to B&W’s existing credit agreement discussed above. The additional last-out term loan receivable due from B&W is included in loans receivable, at fair value with a fair value of $27,603 at March 31, 2020. Pursuant to the new amendment, the Company also agreed upon a term sheet pursuant to which B&W would undertake a refinancing transaction on or prior to May 11, 2020 (the “Refinancing”) and B&W and the existing lenders would amend and restate the credit agreement. As part of the Refinancing, the size of the B&W’s board of directors may also be reduced to five members, with the Company retaining the ability to appoint two members. On January 31, 2020, the Company also entered into a letter agreement with B&W (the “Backstop Commitment Letter”) pursuant to which the Company agreed to fund any shortfall in the $200,000 of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties on the same terms contemplated by the Refinancing. The Company, B&W and the lenders that are a party to B&W’s existing credit agreement are in negotiations to amend and restate B&W’s existing credit agreement, which would include, among other things, an extension of the maturity of amounts outstanding under the credit facility, the termination of the Backstop Commitment Letter, the commitment by an affiliate of the Company to provide up to $70,000 in additional term loan financing incrementally over the duration of the amended credit facility, and a limited guaranty by the Company of B&W’s obligations under the amended credit facility.

The Company has loans receivable due from theMaven, Inc. (“Maven”) that are included in loans receivable, at fair value ~~with a fair value~~ of ~~$25,572 and $21,150~~$71,118 at ~~March 31, 2020 and~~June 30, 2020. At December 31, 2019, ~~respectively. The~~the Company ~~also has~~had a loan receivable due from Maven that is included in loans receivable at fair value ~~with a fair value~~ of ~~$44,323 March 31, 2020. As of December 31, 2019, the~~$21,150 and another loan ~~was~~receivable from Maven that is included in loans receivable at historical cost with a carrying value of ~~$47,933. The loan receivable was~~$47,933 (which is comprised of the principal balance due in the amount of $49,921, less original issue discount of ~~$1,988 at December 31, 2019.~~$1,988). Interest on these loans is payable at ~~rates of~~ 12.0% to 15.0% per annum with maturity dates through June 2022.

The Company has a loan receivable due from Vitamin Shoppe, a subsidiary of ~~Franchise Group, Inc.,~~FRG, (“Vitamin Shoppe”) that iswas included in loans receivable, at fair value with a fair value of ~~$4,651 and~~ $4,951 at ~~March 31, 2020 and~~ December 31, ~~2019, respectively.~~2019. Interest iswas payable at 13.7% per annum with a maturity date of December 16, 2022. The principal balance of $4,697 on the Vitamin Shoppe loan receivable was repaid in May 2020 and the final interest payment of $31 was paid on June 1, 2020. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company ~~recognized $7,160~~earned $4,329 of ~~advisory~~underwriting fees from FRG in connection with FRG’s capital ~~rasing and acquisition transactions.~~raising activities.

The Company ~~also entered into~~is party to a Commitment Letter, Loan Participant Guaranty and was party to the CIBC Guarantee with FRG as disclosed above in Note 14 – Commitments and Contingencies.

The Company’s business is classified into the Capital Markets segment, Auction and Liquidation segment, Valuation and Appraisal segment, Principal Investments — United Online and magicJack segment, and Brands segment. These reportable segments are all distinct businesses, each with a different marketing strategy and management structure.

The following is a summary of certain financial data for each of the Company’s reportable segments:

The following table presents revenues by geographical area:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020			2019
Revenues:
Revenues - Services and fees:
North America	$	124,039	$	139,968	$	282,505		$	243,788
Australia		1,038		—		1,702			15
Europe		518		—		769			61
Total Revenues - Services and fees	$	125,595	$	139,968	$	284,976		$	243,864

Trading (losses) income and fair value adjustments on loans
North America	$	114,547	$	5,595	$	(67,895	)	$	31,462

Revenues - Sale of goods
North America	$	1,820	$	2,160	$	2,824		$	3,105

Revenues - Interest income - Loans and securities lending:
North America	$	24,506	$	16,961	$	46,357		$	28,381

Total Revenues:
North America	$	264,912	$	164,684	$	263,791		$	306,736
Australia		1,038		—		1,702			15
Europe		518		—		769			61
Total Revenues	$	266,468	$	164,684	$	266,262		$	306,812

Three Months Ended
March 31,
2020 2019
Revenues:
Revenues - Services and fees:
North America $ 158,466 $ 103,820
Australia 664 15
Europe 251 61
Total Revenues - Services and fees $ 159,381 $ 103,896

Trading (losses) income and fair value adjustments on loans $ (182,442 ) $ 25,867
North America

Revenues - Sale of goods
North America $ 1,004 $ 945

Revenues - Interest income - Loans and securities lending:
North America $ 21,851 $ 11,420

Total Revenues:
North America $ (1,121 ) $ 142,052
Australia 664 15
Europe 251 61
Total Revenues $ (206 ) $ 142,128

During the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 long-lived assets, which consist of property and equipment and other assets, of ~~$12,223~~$12,287 and ~~$12,727,~~$13,997, respectively, were located in North America.

Segment assets are not reported to, or used by, the Company’s Chief Operating Decision Maker to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

NOTE 19 — SUBSEQUENT EVENTS

From time to time, the Company may decide to pay dividends which will be dependent upon our financial condition and results of operations. On July 30, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.25 per share to $0.30 per share. On July 30, 2020, the Company declared a regular quarterly dividend of $0.30 per share and a special dividend of $0.05 per share which will be paid on or about August 28, 2020 to stockholders of record as of August 14, 2020. While it is the Board’s current intention to make regular dividend payments 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 on 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.

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 materially 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; the unpredictable and ongoing impact of the COVID-19 pandemic; changing conditions in the financial markets; our ability to generate sufficient revenues to achieve and maintain profitability; our exposure to credit risk; the short term nature of our engagements; the accuracy of our estimates and valuations of inventory or assets in “guarantee” based engagements; competition in the asset management business; potential losses related to our auction or liquidation engagements; our dependence on communications, information and other systems and third parties; potential losses related to purchase transactions in our auction and liquidations business; the potential loss of financial institution clients; potential losses from or illiquidity of our proprietary investments; changing economic and market conditions; potential liability and harm to our reputation if we were to provide an inaccurate appraisal or valuation; potential mark-downs in inventory in connection with purchase transactions; failure to successfully compete in any of our segments; loss of key personnel; our ability to borrow under our credit facilities or at-the-market offering as necessary; failure to comply with the terms of our credit agreements or senior notes; our ability to meet future capital requirements; our ability to realize the benefits of our completed acquisitions, including our ability to achieve anticipated opportunities and operating cost savings, and accretion to reported earnings estimated to result from completed and proposed acquisitions in the time frame expected by management or at all; the diversion of management time on acquisition- related issues; the failure of our brand investment portfolio licensees to pay us royalties; and the intense competition to which our brand investment portfolio is subject. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Except as otherwise required by the context, references in this 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) and its subsidiaries provide collaborative financial services and solutions through several operating subsidiaries including:

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B. Riley FBR, Inc. (“B. Riley FBR”) is a leading, full service investment bank providing financial advisory, corporate finance, research, securities lending and sales and trading services to corporate, institutional and high net worth individual clients. B. Riley FBR was formed in November 2017 through the merger of B. Riley & Co, LLC and FBR Capital Markets & Co., which the Company acquired in June 2017; the name of the combined broker dealer was subsequently changed to B. Riley FBR, Inc.

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B. Riley Wealth Management, Inc. (“B. Riley Wealth Management”) provides comprehensive wealth management and brokerage services to individuals and families, corporations and non-profit organizations, including qualified retirement plans, trusts, foundations and endowments. B. Riley Wealth Management was formerly Wunderlich Securities, Inc., which the Company acquired on July 3, 2017 and changed the name in June 2018.

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B. Riley Capital Management, LLC, a Securities and Exchange Commission (“SEC”) registered investment advisor, which includes:

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B. Riley Asset Management, an advisor to certain private funds and to institutional and high net worth investors;

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Great American Capital Partners, LLC (“GACP”), the general partner of two private funds, GACP I, L.P. and GACP II, L.P., both direct lending funds that provide senior secured loans and second lien secured loan facilities to middle market public and private U.S. companies.

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GlassRatner Advisory & Capital Group LLC (“GlassRatner”), a specialty financial advisory services firm that provides consulting services to shareholders, creditors and companies, including due diligence, fraud investigations, corporate litigation support, crisis management and bankruptcy services. We acquired GlassRatner on August 1, 2018. GlassRatner strengthens B. Riley’s diverse platform and compliments the restructuring services provided by B. Riley FBR.

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Great American Group, ~~LLC(“~~LLC (“Great American Group”), a leading provider of asset disposition and auction solutions to a wide range of retail and industrial clients.

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Great American Group Advisory and Valuation Services, LLC, a leading provider of appraisal and valuation services for asset based lenders, private equity firms and corporate clients.

We also pursue a strategy of investing in or acquiring companies which we believe have attractive investment return characteristics. We acquired United Online, Inc. (“UOL” or “United Online”) on July 1, 2016 and magicJack VocalTec Ltd. (“magicJack”) on November 14, 2018 as part of our principal investment strategy.

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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 primarily sold in the United States.

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magicJack is a Voice over IP (“VoIP”) cloud-based technology and services communications provider.

BR Brand, in which the company owns a majority interest, provides licensing of a brand investment portfolio. BR Brand owns the assets and intellectual property related to licenses of six brands: Catherine Malandrino, English Laundry, Joan Vass, Kensie Girl, Limited Too and Nanette Lepore.

We are headquartered in Los Angeles with offices in major cities throughout the United States including New York, Chicago, Boston, Dallas, Memphis, Metro Washington D.C and West Palm Beach.

For financial reporting purposes we classify our businesses into five operating segments: (i) Capital Markets, (ii) Auction and Liquidation, (iii) Valuation and Appraisal, (iv) Principal Investments – United Online and magicJack and (v) Brands.

Capital Markets Segment. Our Capital Markets segment provides a full array of investment banking, corporate finance, consulting, financial advisory, research, securities lending, wealth management and sales and trading services to corporate, institutional and high net worth clients. Our corporate finance and investment banking services include merger and acquisitions as well as restructuring advisory services to public and private companies, initial and secondary public offerings, and institutional private placements. In addition, we trade equity securities as a principal for our account, including investments in funds managed by our subsidiaries. Our Capital Markets segment also includes our asset management businesses that manage various private and public funds for institutional and individual investors.

Auction and Liquidation Segment. Our Auction and Liquidation segment utilizes our significant industry experience, a scalable network of independent contractors and industry-specific advisors to tailor our services to the specific needs of a multitude of clients, logistical challenges and distressed circumstances. Furthermore, our scale and pool of resources allow us to offer our services across North American as well as parts 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.

Valuation and Appraisal Segment. Our Valuation and Appraisal segment provides Valuation and Appraisal services to financial institutions, lenders, private equity firms and other providers of capital. These services primarily include the valuation of assets (i) for purposes of determining and monitoring the value of collateral securing financial transactions and loan arrangements and (ii) in connection with potential business combinations. Our Valuation and Appraisal segment operates through limited liability companies that are majority owned by us.

Principal Investments - United Online and magicJack Segment. Our Principal Investments - United Online and magicJack segment consists of businesses which have been acquired primarily for attractive investment return characteristics. Currently, this segment includes UOL, through which we provide consumer Internet access, and magicJack, through which we provide VoIP communication and related product and subscription services.

Brands Segment. Our Brands segment consists of our brand investment portfolio that is focused on generating revenue through the licensing of trademarks and is held by BR Brand.

Recent Developments

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve. The impact of the COVID-19 outbreak on our results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of the COVID-19 outbreak on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, our results of operations, financial position and cash flows may be materially adversely affected.

Results of Operations

The following period to period comparisons of our financial results are not necessarily indicative of future results.

Three Months Ended ~~March 31,~~June 30, 2020 Compared to Three Months Ended ~~March 31,~~June 30, 2019

Condensed Consolidated Statements of Operations

(Dollars in thousands)

										Three Months Ended
	Three Months Ended									June 30,			June 30,			Change
	March 31, 2020			March 31, 2019			Change			2020			2019			Amount			%
Revenues:
Services and fees	$	159,381		$	103,896		$	55,485		$	125,595		$	139,968		$	(14,373	)		(10.3	%)
Trading (losses) income and fair value adjustments on loans		(182,442	)		25,867			(208,309	)
Trading income and fair value adjustments on loans											114,547			5,595			108,952			n/m
Interest income - Loans and securities lending		21,851			11,420			10,431			24,506			16,961			7,545			44.5	%
Sale of goods		1,004			945			59			1,820			2,160			(340	)		(15.7	%)
Total revenues		(206	)		142,128			(142,334	)		266,468			164,684			101,784			61.8	%

Operating expenses:
Direct cost of services		19,952			14,116			5,836			7,985			19,663			(11,678	)		(59.4	%)
Cost of goods sold		769			1,119			(350	)		860			1,805			(945	)		(52.4	%)
Selling, general and administrative expenses		87,744			94,964			(7,220	)		106,562			91,907			14,655			15.9	%
Restructuring charge		—			147			(147	)		—			1,552			(1,552	)		(100.0	%)
Impairment of tradenames		4,000			—			4,000			8,500			—			8,500			100.0	%
Interest expense - Securities lending and loan participations sold		8,473			6,804			1,669			11,221			5,502			5,719			103.9	%
Total operating expenses		120,938			117,150			3,788			135,128			120,429			14,699			12.2	%
Operating (loss) income		(121,144	)		24,978			(146,122	)
Operating income											131,340			44,255			87,085			196.8	%
Other income (expense):
Interest income		246			637			(391	)		224			331			(107	)		(32.3	%)
Loss from equity investments		(236	)		(3,762	)		3,526			(318	)		(1,400	)		1,082			(77.3	%)
Interest expense		(15,654	)		(10,770	)		(4,884	)		(16,509	)		(11,588	)		(4,921	)		42.5	%
(Loss) income before income taxes		(136,788	)		11,083			(147,871	)
Benefit (provision) for income taxes		37,539			(3,104	)		40,643
Net (loss) income		(99,249	)		7,979			(107,228	)
Net loss attributable to noncontrolling interests		(584	)		(44	)		(540	)
Net (loss) income attributable to B. Riley Financial, Inc.		(98,665	)		8,023			(106,688	)
Income before income taxes											114,737			31,598			83,139			263.1	%
Provision for income taxes											(32,208	)		(9,289	)		(22,919	)		246.7	%
Net income											82,529			22,309			60,220			269.9	%
Net (loss) income attributable to noncontrolling interests											(1,311	)		152			(1,463	)		n/m
Net income attributable to B. Riley Financial, Inc.											83,840			22,157			61,683			278.4	%
Preferred stock dividends		1,055			—			1,055			1,087			—			1,087			100.0	%
Net (loss) income available to common shareholders	$	(99,720	)	$	8,023		$	(107,743	)
Net income available to common shareholders										$	82,753		$	22,157		$	60,596			273.5	%

n/m - Not applicable or not meaningful.

3233

Revenues

The table below and the discussion that follows are based on how we analyze our business.

	Three Months Ended											Three Months Ended
	March 31, 2020			March 31, 2019		Change						June 30, 2020		June 30, 2019		Change
	Amount			Amount		Amount			%			Amount		Amount		Amount			%
Revenues - Services and fees:
Capital Markets segment	$	104,413		$	48,014	$	56,399			117.5	%	$	86,858	$	71,692	$	15,166			21.2	%
Auction and Liquidation segment		20,661			20,709		(48	)		-0.2	%		7,206		33,740		(26,534	)		-78.6	%
Valuation and Appraisal segment		8,788			8,583		205			2.4	%		7,669		9,742		(2,073	)		-21.3	%
Principal Investments - United Online and magicJack segment		21,718			26,590		(4,872	)		-18.3	%		20,656		24,794		(4,138	)		-16.7	%
Brands		3,801			—		3,801			100.0	%		3,206		—		3,206			100.0	%
Subtotal		159,381			103,896		55,485			53.4	%		125,595		139,968		(14,373	)		-10.3	%

Revenues - Sale of goods:
Auction and Liquidation segment													1,045		1,176		(131	)		-11.1	%
Principal Investments - United Online and magicJack segment		1,004			945		59			6.2	%		775		984		(209	)		-21.2	%
Subtotal		1,004			945		59			6.2	%		1,820		2,160		(340	)		-15.7	%

Trading (losses) income and fair value adjustments on loans
Trading income and fair value adjustments on loans
Capital Markets segment		(182,442	)		25,867		(208,309	)		-805.3	%		114,547		5,595		108,952			n/m
Subtotal		(182,442	)		25,867		(208,309	)		-805.3	%		114,547		5,595		108,952			n/m

Interest income - Loans and securities lending:
Capital Markets segment		21,851			11,420		10,431			91.3	%		24,506		16,961		7,545			44.5	%
Total revenues	$	(206	)	$	142,128	$	(142,334	)		-100.1	%	$	266,468	$	164,684	$	101,784			61.8	%

n/m - Not applicable or not meaningful.

Total revenues ~~decreased~~increased approximately ~~$142.3~~$101.8 million to ~~($0.2 million) during the three months ended March 31, 2020 from $142.1~~$266.5 million during the three months ended ~~March 31,~~June 30, 2020 from $164.7 million during the three months ended June 30, 2019. The ~~decrease~~increase in revenues during the three months ended ~~March 31,~~June 30, 2020 was primarily due to ~~a decrease~~an increase in revenue from trading ~~losses~~income and fair value adjustments on loans of ~~$208.3 million, partially offset by increases in revenue from services and fees of $55.5~~$109.0 million and interest income - loans and securities lending of ~~$10.4 million. The increase~~$7.5 million, partially offset by decreases in revenue from services and fees of ~~$55.5~~$14.4 million and a decrease in revenues from sales of goods of $0.3 million. The decrease in revenue from services and fees of $14.4 million in the three months ended ~~March 31,~~June 30, 2020 was primarily due to ~~increases~~decreases in revenue of ~~$56.4~~$26.5 million in the ~~Capital Markets~~Auction and Liquidation segment, ~~$0.2~~$2.1 million in the Valuation and Appraisal segment and ~~$3.8 million in the Brands segment partially offset by a decrease of revenue of $4.9~~$4.1 million in the Principal Investments — United Online and magicJack segment, partially offset by increases of revenue of $15.2 million in the Capital Markets segment and $3.2 million in the Brands segment.

Revenues from services and fees in the Capital Markets segment increased ~~$56.4~~$15.2 million, to ~~$104.4~~$86.9 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$48.0~~$71.7 million during the three months ended ~~March 31,~~June 30, 2019. The increase in revenues was primarily due to an increase in revenue of ~~$49.5~~$10.1 million from corporate finance, consulting and investment banking fees, an increase in revenues from commissions of ~~$3.6~~$2.4 million and an increase in asset management fees of ~~$2.8~~$0.2 million.

Revenues from services and fees in the Auction and Liquidation segment ~~remained at $20.7~~decreased $26.5 million to $7.2 million during the three months ended ~~March 31,~~June 30, 2020 from $33.7 million during the three months ended June 30, 2019. The decrease in revenues in the Auction and ~~2019.~~Liquidation segment was primarily due to fewer large retail liquidation engagements during the quarter and the impact of COVID-19 which resulted in delays and temporary stoppage of certain retail liquidation engagements. In June 2020, a number of retail liquidation engagements resumed as a number of states allowed the reopening of retail stores.

Revenues from services and fees in the Valuation and Appraisal segment ~~increased $0.2~~decreased $2.1 million to ~~$8.8~~$7.7 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$8.6~~$9.7 million during the three months ended ~~March 31,~~June 30, 2019. The ~~increase~~decrease in revenues in the Valuation and Appraisal segment is primarily due to ~~an increase~~a decrease in revenues for appraisal engagements of $0.7 million where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity ~~investors.~~investors and $1.4 million for appraisal engagements where we provide corporate valuation services and the valuation of machinery and equipment.

Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased ~~$4.9~~$4.1 million to ~~$21.7~~$20.7 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$26.6~~$24.8 million during the three months ended ~~March 31,~~June 30, 2019. The decrease in revenues from services and fees is a result of a decrease in subscription services of ~~$3.6~~$2.8 million and a decrease in advertising licensing and other of ~~$1.3~~$1.4 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.

Revenues from services and fees in the Brands segment were ~~$3.8~~$3.2 million for the three months ended ~~March 31,~~June 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority interest in BR Brands on October 28, 2019. The primary source of revenue included in this segment is the licensing of trademarks.

Trading income and fair value adjustments on loans ~~decreased~~increased $109.0 million to ~~a loss of $182.4~~$114.5 million for the three months ended ~~March 31,~~June 30, 2020 from ~~a gain of $25.9~~$5.6 million for the three months ended ~~March 31,~~June 30, 2019. The ~~$182.4~~$114.5 million ~~loss~~gain for the three months ended ~~March 31,~~June 30, 2020 includes realized and unrealized ~~amounts~~gains earned on investments made in our proprietary trading account of ~~$164.5~~$118.6 million, ~~and~~partially offset by unrealized ~~amounts~~losses on our loans receivable that are measured at fair value of ~~$17.9~~$4.1 million.

Interest income – loans and securities lending increased ~~$10.4~~$7.5 million, to ~~$21.9~~$24.5 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$11.4~~$17.0 million during the three months ended ~~March 31,~~June 30, 2019. Interest income from securities lending was ~~$10.1~~$13.5 million and $7.7 million during the three months ended June 30, 2020 and 2019, respectively. Interest income from loans was $11.0 million and $9.3 million during the three months ended ~~March 31, 2020 and 2019, respectively. Interest income from loans was $11.7 million and $2.1 million during the three months ended March 31,~~June 30, 2020 and 2019, respectively. The increase in interest income on loans was primarily due to the increase in lending activities in our Capital Markets segment which included an increase in loans receivable to ~~$326.3~~$325.5 million at ~~March 31,~~June 30, 2020 from ~~$87.5~~$250.5 million at ~~March 31,~~June 30, 2019.

Sale of Goods, Cost of Goods Sold and Gross Margin

	Three Months Ended March 31, 2020									Three Months Ended March 31, 2019									Three Months Ended June 30, 2020									Three Months Ended June 30, 2019
				Principal									Principal									Principal									Principal
				Investments -									Investments -									Investments -									Investments -
	Auction			United						Auction			United						Auction and			United Online						Auction and			United Online
	and Liquidation			Online and magicJack						and Liquidation			Online and magicJack						Liquidation			and magicJack						Liquidation			and magicJack
	Segment			Segment			Total			Segment			Segment			Total			Segment			Segment			Total			Segment			Segment			Total
Revenues - Sale of Goods	$	—		$	1,004		$	1,004		$	—		$	945		$	945		$	1,045		$	775		$	1,820		$	1,176		$	984		$	2,160
Cost of goods sold		29			740			769			14			1,105			1,119			285			575			860			852			953			1,805
Gross margin on sale of goods	$	(29	)	$	264		$	235		$	(14	)	$	(160	)	$	(174	)	$	760		$	200		$	960		$	324		$	31		$	355

Gross margin percentage		(100.0	%)		26.3	%		23.4	%		(100.0	%)		(16.9	%)		(18.4	%)		72.7	%		25.8	%		52.7	%		27.6	%		3.2	%		16.4	%

Revenues from the sale of goods ~~increased $0.1~~decreased $0.3 million, to ~~$1.0~~$1.8 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$0.9~~$2.2 million during the three months ended ~~March 31, 2019.~~June 30, 2019. The ~~increase~~decrease in revenues from sale of goods ~~were~~was primarily attributable to ~~$0.1~~a $0.3 million ofdecrease in the sales of magicJack devices that are sold in connection with VoIP services. Cost of goods sold for the three months ended ~~March 31,~~June 30, 2020 was ~~$0.8~~$0.9 million, resulting in a gross margin of ~~23.4%~~52.7%.

Operating Expenses

Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment during the three months ended ~~March 31,~~June 30, 2020 and 2019 are as follows:

	Three Months Ended March 31, 2020								Three Months Ended March 31, 2019								Three Months Ended June 30, 2020								Three Months Ended June 30, 2019
				Principal								Principal								Principal								Principal
				Investments -								Investments -								Investments -								Investments -
	Auction			United					Auction			United					Auction and			United Online					Auction and			United Online
	and Liquidation			Online and magicJack					and Liquidation			Online and magicJack					Liquidation			and magicJack					Liquidation			and magicJack
	Segment			Segment			Total		Segment			Segment			Total		Segment			Segment			Total		Segment			Segment			Total
Revenues - Services and fees	$	20,661			21,718				$	20,709		$	26,590				$	7,206		$	20,656				$	33,740		$	24,794
Direct cost of services		14,816			5,136		$	19,952		6,274			7,842		$	14,116		3,217			4,768		$	7,985		12,939			6,724		$	19,663
Gross margin on services and fees	$	5,845		$	16,582				$	14,435		$	18,748				$	3,989		$	15,888				$	20,801		$	18,070

Gross margin percentage		28.3	%		76.4	%				69.7	%		70.5	%				55.4	%		76.9	%				61.7	%		72.9	%

Total direct costs ~~increased $5.8~~decreased $11.7 million, to ~~$20.0~~$8.0 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$14.1~~$19.7 million during the three months ended ~~March 31,~~June 30, 2019. Direct costs of services ~~increased~~decreased by ~~$8.5~~$9.7 million in the Auction and Liquidation segment ~~partially offset by a decrease of $2.7~~and $2.0 million in the Principal Investments — United Online and magicJack segment. The ~~increase~~decrease in direct costs in the Auction and Liquidation segment was primarily due to mix of more fee type retail liquidation engagement ~~types~~which have lower gross margins that were performed during the three months ended ~~March 31,~~June 30, 2020 as compared to the three months ended ~~March 31,~~June 30, 2019. The decrease in direct costs in the Principal Investments — United Online and magicJack segment was primarily as a result of the sale of a division of magicJack in ~~the second quarter~~May of 2019.

Auction and Liquidation

Gross margin in the Auction and Liquidation segment for services and fees decreased to ~~28.3%~~55.4% of revenues during the three months ended ~~March 31,~~June 30, 2020, as compared to ~~69.7%~~61.7% of revenues during the three months ended ~~March 31, 2020.~~June 30, 2019. The decrease in margin in the Auction and Liquidation segment is due to the mix of ~~engagement types between guarantee and commission and fees~~more fee type retail liquidation engagements which generally have lower gross margins that were performed ~~during~~in the three months ended ~~March 31,~~June 30, 2020 as compared to the ~~prior year period.~~same period in 2019 where the Company had more retail liquidation engagements that contain guarantees of recovery values that generally yield higher gross margins.

Principal ~~Investments—~~Investments — United Online and magicJack

Gross margins in the Principal Investments — United Online and magicJack segment increased to ~~76.4%~~76.9% of revenues during the three months ended ~~March 31,~~June 30, 2020, as compared to ~~70.5%~~72.9% of revenues during the three months ended ~~March 31, 2020.~~June 30, 2019. The increase in margin in the Principal Investments — United Online and magicJack segment is primarily due to the sale of a division of magicJack in the second quarter of 2019.

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the three months ended ~~March 31,~~June 30, 2020 and 2019 were comprised of the following:

Selling, General and Administrative Expenses

	Three Months Ended					Three Months Ended
	June 30, 2020					June 30, 2019					Change
	Amount		%			Amount		%			Amount			%
Capital Markets segment	$	82,121		77.0	%	$	64,328		70.0	%	$	17,793			27.7	%
Auction and Liquidation segment		2,729		2.6	%		3,297		3.6	%		(568	)		(17.2	)%
Valuation and Appraisal segment		6,191		5.8	%		7,005		7.6	%		(814	)		(11.6	)%
Principal Investments - United Online and magicJack segment		6,900		6.5	%		8,795		9.6	%		(1,895	)		(21.5	)%
Brands segment		1,024		1.0	%		—		0.0	%		1,024			100.0	%
Corporate and Other segment		7,597		7.1	%		8,482		9.2	%		(885	)		(10.4	)%
Total selling, general & administrative expenses	$	106,562		100.0	%	$	91,907		100.0	%	$	14,655			15.9	%

Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019 Change
Amount % Amount % Amount %
Capital Markets segment $ 55,816 63.7 % $ 64,665 68.1 % $ (8,849 ) (13.7 %)
Auction and Liquidation segment 1,527 1.7 % 2,917 3.1 % (1,390 ) (47.7 %)
Valuation and Appraisal segment 6,908 7.9 % 7,220 7.6 % (312 ) (4.3 %)
Principal Investments - United Online and magicJack segment 8,342 9.5 % 10,483 11.0 % (2,141 ) (20.4 %)
Brands segment 1,618 1.8 % — 0.0 % 1,618 100.0 %
Corporate and Other segment 13,533 15.4 % 9,679 10.2 % 3,854 39.8 %
Total selling, general & administrative expenses $ 87,744 100.0 % $ 94,964 100.0 % $ (7,220 ) (7.6 %)

Total selling, general and administrative expenses ~~decreased~~increased approximately ~~$7.2~~$14.7 million to ~~$87.7~~$106.6 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$95.0~~$91.9 million for the three months ended ~~March 31,~~June 30, 2019. The ~~decrease~~increase of approximately ~~$7.2~~$14.7 million in selling, general and administrative expenses was due to ~~a decrease~~increases of ~~$8.8~~$17.8 million in the Capital Markets segment ~~a decrease~~and $1.0 million in the Brands segment, partially offset by decreases of ~~$1.4~~$0.6 million in the Auction and Liquidation segment, ~~a decrease of $0.3~~$0.8 million in the Valuation and Appraisal segment, ~~a decrease of $2.1~~$1.9 million in the Principal Investments — United Online and magicJack segment ~~partially offset by an increase of $1.6 million in the Brands segment~~ and ~~an increase of $3.9~~$0.9 million in the Corporate and Other segment.

Capital Markets

Selling, general and administrative expenses in the Capital Markets segment ~~decreased~~increased by ~~$8.8~~$17.8 million to ~~$55.8~~$82.1 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$64.7~~$64.3 million during the three months ended ~~March 31,~~June 30, 2019. The ~~decrease~~increase was primarily due to ~~a decrease~~increases of ~~$25.8~~$17.5 million in consulting expenses ~~partially offset by increases of $15.1~~and $2.6 million in payroll and related expenses partially offset by decreases of $1.5 million in business development expenses and $0.9 million in travel and entertainment expenses.

Auction and Liquidation

Selling, general and administrative expenses in the Auction and Liquidation segment decreased by ~~$1.4~~$0.6 million to ~~$1.5~~$2.7 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$2.9~~$3.3 million during the three months ended ~~March 31,~~June 30, 2019. The decrease in selling, general and administrative expenses in the Auction and Liquidation segment was primarily due to a decrease of ~~$1.2~~$0.5 million in payroll and related expenses.

Valuation and Appraisal

Selling, general and administrative expenses in the Valuation and Appraisal segment decreased by ~~$0.3~~$0.8 million to ~~$6.9~~$6.2 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$7.2~~$7.0 million during the three months ended ~~March 31,~~June 30, 2019. The decrease in selling, general and administrative expenses in the Valuation and Appraisal segment was primarily due to a decrease of ~~$0.4~~$0.5 million in ~~payroll~~travel and ~~related~~entertainment expenses.

Principal Investments — United Online and magicJack

Selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment decreased ~~$2.1~~$1.9 million to ~~$8.3~~$6.9 million for the three months ended ~~March 31,~~June 30, 2020 from ~~$10.5~~$8.8 million for the three months ended ~~March 31,~~June 30, 2019. The decrease in selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment is primarily due to ~~a decrease~~decreases of ~~$0.8~~$0.7 million in payroll and related expenses and ~~$0.5~~$0.7 million in ~~legal~~other expenses.

3536

Brands

Selling, general and administrative expenses in the Brands segment was ~~$1.6~~$1.0 million for the three months ended ~~March 31,~~June 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority equity interest in BR Brands on October 28, 2019.

Corporate and Other

Selling, general and administrative expenses for the Corporate and Other segment ~~increased~~decreased approximately ~~$3.8~~$0.9 million to ~~$13.5~~$7.6 million during the three months ended ~~March 31,~~June 30, 2020 from ~~$9.7~~$8.5 million for the three months ended ~~March 31,~~June 30, 2019. The ~~increase of~~decrease in expenses in the Corporate and Other segment for the three months ended ~~March 31,~~June 30, 2020 was primarily due to ~~recording~~a reversal of an accrual to other expenses from the final negotiated settlement of a pre-acquisition litigation claim that related to ~~one of~~ our wealth management business we acquired ~~subsidiaries of $10.2 million~~ in ~~other expenses partially offset by a gain of $1.6 million on extinguishment of debt from the repurchase of senior notes and a decrease of $5.5 million in professional fees.~~2017.

Impairment of tradenames.Due to the impact of the COVID-19 outbreak on economic activity and market volatility, we tested our intangible assets as of ~~March 31,~~June 30, 2020 and made the determination that theindefinite-lived tradenames in the Brands segment were ~~impaired. In the three months ended March 31, 2020,~~impaired and the Company recognized an impairment charge of ~~$4.0 million on the indefinite-lived tradenames.~~

$8.5 million.

Other Income (Expense). Other income included interest income of $0.2 million during the three months ended ~~March 31,~~June 30, 2020 and ~~$0.6~~$0.3 million during the three months ended ~~March 31,~~June 30, 2019. Interest expense was ~~$15.7~~$16.5 million during the three months ended ~~March 31,~~June 30, 2020 compared to ~~$10.8~~$11.6 million during the three months ended ~~March 31,~~June 30, 2019. The increase in interest expense during the three months ended ~~March 31,~~June 30, 2020 was primarily due to an increase in interest expense of $5.5 million from the issuance of additional senior notes, ~~due in 2021, 2023, 2024, 2025, 2026 and 2027,~~ partially offset by a decrease in interest expense of ~~$0.4~~$0.7 million from the term loan dated December ~~2018 and a decrease in interest expense on our asset based credit facility and other of $0.2 million.~~2018. Other income in the three months ended ~~March 31,~~June 30, 2020 also included ~~a loss on~~losses from equity investments of ~~$0.2~~$0.3 million, ~~income on~~a decrease from losses from equity investments ~~compared to $3.8~~of $1.4 million in the prior year period.

~~(Loss)~~ Income Before Income Taxes. ~~Loss~~Income before income taxes was ~~$136.8~~$114.7 million during the three months ended ~~March 31,~~June 30, 2020 compared to income before income taxes of ~~$11.1~~$31.6 million during the three months ended ~~March 31,~~June 30, 2019. The ~~decrease~~increase in income before income taxes was primarily due to an increase in revenues from trading income and fair value adjustments in the Capital Markets segment of $109.0 million, an increase in segment income of $1.4 million in the Principal Investments – United Online and magicJack segment, offset by a decrease in ~~revenues~~segment income of ~~approximately $142.3~~$15.8 million in the Auction and Liquidation segment, a loss of $6.3 million in the Brands segment and an increase in interest expense of $4.9 million, an increase in operating expenses of $3.8 million and a decrease in interest income of $0.4 million, partially offset by a decrease in loss from equity investments of $3.5 million, as discussed above.million.

~~Benefit (Provision)~~Provision for Income Taxes. ~~Benefit from~~Provision for income taxes was ~~$37.5~~$32.2 million during the three months ended ~~March 31,~~June 30, 2020 compared to ~~provision for income taxes of $3.1~~$9.3 million during the three months ended ~~March 31,~~June 30, 2019. The effective income tax rate was ~~a benefit of 27.4%~~28.1% for the three months ended ~~March 31,~~June 30, 2020 as compared to ~~a provision of 28.0%~~29.4% for the three months ended ~~March 31,~~June 30, 2019.

Net ~~Loss~~(Loss) Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interests represents the proportionate share of net income generated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners, LLC, 50% of the membership interest of which we do not own. The net loss attributable to noncontrolling interests was ~~$0.6~~$1.3 million during the three months ended ~~March 31,~~June 30, 2020 compared to ~~$44 thousand~~net income attributable to noncontrolling interests of $0.2 million during the three months ended ~~March 31,~~June 30, 2019.

Net Income Attributable to the Company. Net income attributable to the Company for the three months ended June 30, 2020 increased to $83.8 million, an increase of $61.6 million, from net income attributable to the Company of $22.2 million for the three months ended June 30, 2019. The increase in net income attributable to the Company during the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to an increase in operating income of $87.1 million, a decrease in loss from equity investments of $1.1 million, and partially offset by an increase in provision for income taxes of $22.9 million, an increase in interest expense of $4.9 million, an increase in loss attributable to noncontrolling interest of $1.5 million.

Preferred Stock Dividends. On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On April 13, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020.

Net (Loss) Income Available to Common Shareholders. Net income available to common shareholders for the three months ended June 30, 2020 was $82.8 million, from net income available to common shareholders of $22.2 million for the three months ended June 30, 2019. The increase in net income available to common shareholders during the three months ended June 30, 2020 as compared to the same period in 2019 was primarily due to an increase in operating income of $87.1 million, a decrease in loss from equity investments of $1.1 million, and partially offset by an increase in provision for income taxes of $22.9 million, an increase in interest expense of $4.9 million, an increase in loss attributable to noncontrolling interest of $1.5 million.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Condensed Consolidated Statements of Operations

(Dollars in thousands)

	Six Months Ended						Change
	June 30, 2020			June 30, 2019			Amount			%
Revenues:
Services and fees	$	284,976		$	243,864		$	41,112			16.9	%
Trading (losses) income and fair value adjustments on loans		(67,895	)		31,462			(99,357	)		(315.8	%)
Interest income - Loans and securities lending		46,357			28,381			17,976			63.3	%
Sale of goods		2,824			3,105			(281	)		(9.0	%)
Total revenues		266,262			306,812			(40,550	)		(13.2	%)

Operating expenses:
Direct cost of services		27,937			33,779			(5,842	)		(17.3	%)
Cost of goods sold		1,629			2,924			(1,295	)		(44.3	%)
Selling, general and administrative expenses		194,306			186,871			7,435			4.0	%
Restructuring charge		—			1,699			(1,699	)		(100.0	%)
Impairment of tradenames		12,500			—			12,500			100.0	%
Interest expense - Securities lending and loan participations sold		19,694			12,306			7,388			60.0	%
Total operating expenses		256,066			237,579			18,487			7.8	%
Operating income		10,196			69,233			(59,037	)		(85.3	%)
Other income (expense):
Interest income		470			968			(498	)		(51.4	%)
Loss from equity investments		(554	)		(5,162	)		4,608			(89.3	%)
Interest expense		(32,163	)		(22,358	)		(9,805	)		43.9	%
(Loss) income before income taxes		(22,051	)		42,681			(64,732	)		(151.7	%)
Benefit (provision) for income taxes		5,331			(12,393	)		17,724			(143.0	%)
Net (loss) income		(16,720	)		30,288			(47,008	)		(155.2	%)
Net (loss) income attributable to noncontrolling interests		(1,895	)		108			(2,003	)		n/m
Net (loss) income attributable to B. Riley Financial, Inc.		(14,825	)		30,180			(45,005	)		(149.1	%)
Preferred stock dividends		2,142			—			2,142			100.0	%
Net (loss) income available to common shareholders	$	(16,967	)	$	30,180		$	(47,147	)		(156.2	%)

n/m - Not applicable or not meaningful.

Revenues

The table below and the discussion that follows are based on how we analyze our business.

	Six Months Ended
	June 30, 2020			June 30, 2019		Change
	Amount			Amount		Amount			%
Revenues - Services and fees:
Capital Markets segment	$	191,271		$	119,706	$	71,565			59.8	%
Auction and Liquidation segment		27,867			54,449		(26,582	)		-48.8	%
Valuation and Appraisal segment		16,457			18,325		(1,868	)		-10.2	%
Principal Investments - United Online and magicJack segment		42,374			51,384		(9,010	)		-17.5	%
Brands		7,007			—		7,007			100.0	%
Subtotal		284,976			243,864		41,112			16.9	%

Revenues - Sale of goods:
Auction and Liquidation segment		1,045			1,176		(131	)		-11.1	%
Principal Investments - United Online and magicJack segment		1,779			1,929		(150	)		-7.8	%
Subtotal		2,824			3,105		(281	)		-9.0	%

Trading (losses) income and fair value adjustments on loans
Capital Markets segment		(67,895	)		31,462		(99,357	)		n/m
Subtotal		(67,895	)		31,462		(99,357	)		n/m

Interest income - Loans and securities lending:
Capital Markets segment		46,357			28,381		17,976			63.3	%
Total revenues	$	266,262		$	306,812	$	(40,550	)		-13.2	%

n/m - Not applicable or not meaningful.

Total revenues decreased approximately $40.6 million to $266.3 million during the six months ended June 30, 2020 from $306.8 million during the six months ended June 30, 2019. The decrease in revenues during the six months ended June 30, 2020 was primarily due to a decrease in revenue from trading losses and fair value adjustments on loans of $99.4 million and a decrease in revenues from sales of goods of $0.3 million, partially offset by increases in revenue from services and fees of $41.1 million and interest income - loans and securities lending of $18.0 million. The increase in revenue from services and fees of $41.1 million in the six months ended June 30, 2020 was primarily due to increases in revenue of $71.6 million in the Capital Markets segment and $7.0 million in the Brands segment, partially offset by decreases of revenue of $26.6 million in the Auction and Liquidation segment, $1.9 million in the Valuation and Appraisal segment and $9.0 million in the Principal Investments — United Online and magicJack segment.

Revenues from services and fees in the Capital Markets segment increased $71.6 million, to $191.3 million during the six months ended June 30, 2020 from $119.7 million during the six months ended June 30, 2019. The increase in revenues was primarily due to an increase in revenue of $59.6 million from corporate finance, consulting and investment banking fees, an increase in commissions of $6.0 million and an increase in asset management fees of $3.0 million.

Revenues from services and fees in the Auction and Liquidation segment decreased $26.6 million to $27.9 million during the six months ended June 30, 2020 from $54.4 million during the six months ended June 30, 2019. The decrease in revenues in the Auction and Liquidation segment was primarily due to fewer large retail liquidation engagements during the six months ended June 30, 2020 and the impact of COVID-19 which resulted in delays and temporary stoppage in certain retail liquidation engagements. In June 2020, a number of retail liquidation engagements resumed as a number of states allowed the reopening of retail stores.

Revenues from services and fees in the Valuation and Appraisal segment decreased $1.9 million to $16.5 million during the six months ended June 30, 2020 from $18.3 million during the six months ended June 30, 2019. The decrease in revenues in the Valuation and Appraisal segment is primarily due to a decrease in revenues of $0.6 million for appraisal engagements where we perform valuations for the monitoring of collateral for financial institutions, lenders, and private equity investors and $1.3 million for appraisal engagements where we provide corporate valuation services and the valuation of machinery and equipment.

Revenues from services and fees in the Principal Investments - United Online and magicJack segment decreased $9.0 million to $42.4 million during the six months ended June 30, 2020 from $51.4 million during the six months ended June 30, 2019. The decrease in revenues from services and fees is a result of a decrease in subscription services of $6.3 million and a decrease in advertising licensing and other of $2.7 million. Management expects revenues from the Principal Investments - United Online and magicJack segment to continue to decline year over year.

Revenues from services and fees in the Brands segment were $7.0 million for the six months ended June 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority interest in BR Brands on October 28, 2019. The primary source of revenue included in this segment is the licensing of trademarks.

Trading income and fair value adjustments on loans decreased $99.4 million to a loss of $67.9 million for the six months ended June 30, 2020 from a gain of $31.5 million for the six months ended June 30, 2019. The $67.9 million loss for the six months ended June 30, 2020 includes realized and unrealized loss amounts earned on investments made in our proprietary trading account of $45.9 million and unrealized losses on our loans receivable at fair value of $22.0 million.

Interest income – loans and securities lending increased $18.0 million, to $46.4 million during the six months ended June 30, 2020 from $28.4 million during the six months ended June 30, 2019. Interest income from securities lending was $23.6 million and $17.0 million during the six months ended June 30, 2020 and 2019, respectively. Interest income from loans was $22.8 million and $11.4 million during the six months ended June 30, 2020 and 2019, respectively. The increase in interest income on loans was primarily due to the increase in lending activities in our Capital Markets segment which included an increase in loans receivable to $325.5 million at June 30, 2020 from $250.5 million at June 30, 2019.

Sale of Goods, Cost of Goods Sold and Gross Margin

	Six Months Ended June 30, 2020									Six Months Ended June 30, 2019
				Principal									Principal
				Investments -									Investments -
	Auction and			United Online						Auction and			United Online
	Liquidation			and magicJack						Liquidation			and magicJack
	Segment			Segment			Total			Segment			Segment			Total
Revenues - Sale of Goods	$	1,045		$	1,779		$	2,824		$	1,176		$	1,929		$	3,105
Cost of goods sold		314			1,315			1,629			866			2,058			2,924
Gross margin on sale of goods	$	731		$	464		$	1,195		$	310		$	(129	)	$	181

Gross margin percentage		70.0	%		26.1	%		42.3	%		26.4	%		(6.7	)%		5.8	%

Revenues from the sale of goods decreased $0.3 million, to $2.8 million during the six months ended June 30, 2020 from $3.1 million during the six months ended June 30, 2019. The decrease in revenues from sale of goods was primarily attributable to a decrease in the sales of magicJack devices that are sold in connection with VoIP services. Cost of goods sold for the six months ended June 30, 2020 was $1.6 million, resulting in a gross margin of 42.3%.

Operating Expenses

Direct Cost of Services. Direct cost of services and direct cost of services measured as a percentage of revenues – services and fees by segment during the six months ended June 30, 2020 and 2019 are as follows:

	Six Months Ended June 30, 2020								Six Months Ended June 30, 2019
				Principal								Principal
				Investments -								Investments -
	Auction			United Online					Auction			United Online
	and Liquidation			and magicJack					and Liquidation			and magicJack
	Segment			Segment			Total		Segment			Segment			Total
Revenues - Services and fees	$	27,867		$	42,374				$	54,449		$	51,384
Direct cost of services		18,033			9,904		$	27,937		19,213			14,566		$	33,779
Gross margin on services and fees	$	9,834		$	32,470				$	35,236		$	36,818

Gross margin percentage		35.3	%		76.6	%				64.7	%		71.7	%

Total direct costs decreased $5.8 million, to $27.9 million during the six months ended June 30, 2020 from $33.8 million during the six months ended June 30, 2019. Direct costs of services decreased by $1.2 million in the Auction and Liquidation segment and $4.7 million in the Principal Investments — United Online and magicJack segment. The decrease in direct costs in the Auction and Liquidation segment was primarily due to the impact of COVID-19 which resulted in delays and temporary stoppage certain retail liquidation engagements. In June 2020, a number of retail liquidation engagements resumed as a number of states allowed the reopening of retail stores. The decrease in direct costs in the Principal Investments — United Online and magicJack segment was primarily as a result of the sale of a division of magicJack in May of 2019.

Auction and Liquidation

Gross margin in the Auction and Liquidation segment for services and fees decreased to 35.3% of revenues during the six months ended June 30, 2020, as compared to 64.7% of revenues during the six months ended June 30, 2019. The decrease in margin in the Auction and Liquidation segment is due to the mix of more fee type retail liquidation engagements which generally have lower gross margins that were performed in the three months ended June 30, 2020 as compared to the same period in 2019 where the Company had more retail liquidation engagements that contain guarantees of recovery values that generally yield higher gross margins.

Principal Investments — United Online and magicJack

Gross margins in the Principal Investments — United Online and magicJack segment increased to 76.6% of revenues during the six months ended June 30, 2020, as compared to 71.7% of revenues during the six months ended June 30, 2019. The increase in margin in the Principal Investments — United Online and magicJack segment is primarily due to the sale of a division of magicJack in May of 2019.

Selling, General and Administrative Expenses. Selling, general and administrative expenses during the six months ended June 30, 2020 and 2019 were comprised of the following:

Selling, General and Administrative Expenses

	Six Months Ended					Six Months Ended
	June 30, 2020					June 30, 2019					Change
	Amount		%			Amount		%			Amount			%
Capital Markets segment	$	137,937		71.0	%	$	128,993		69.1	%	$	8,944			6.9	%
Auction and Liquidation segment		4,256		2.2	%		6,214		3.3	%		(1,958	)		(31.5	)%
Valuation and Appraisal segment		13,099		6.7	%		14,225		7.6	%		(1,126	)		(7.9	)%
Principal Investments - United Online and magicJack segment		15,242		7.8	%		19,278		10.3	%		(4,036	)		(20.9	)%
Brands segment		2,642		1.4	%		—		0.0	%		2,642			100.0	%
Corporate and Other segment		21,130		10.9	%		18,161		9.7	%		2,969			16.3	%
Total selling, general & administrative expenses	$	194,306		100.0	%	$	186,871		100.0	%	$	7,435			4.0	%

Total selling, general and administrative expenses increased approximately $7.4 million to $194.3 million during the six months ended June 30, 2020 from $186.9 million for the six months ended June 30, 2019. The increase of approximately $7.4 million in selling, general and administrative expenses was due to increases of $8.9 million in the Capital Markets segment, $2.6 million in the Brands segment and $3.0 million in the Corporate and Other segment, partially offset by decreases of $2.0 million in the Auction and Liquidation segment, $1.1 million in the Valuation and Appraisal segment and $4.0 million in the Principal Investments — United Online and magicJack segment.

Capital Markets

Selling, general and administrative expenses in the Capital Markets segment increased by $8.9 million to $137.9 million during the six months ended June 30, 2020 from $129.0 million during the six months ended June 30, 2019. The increase was primarily due to increases of $17.9 million in payroll and related expenses, partially offset by a decrease of $8.3 million in consulting expenses.

Auction and Liquidation

Selling, general and administrative expenses in the Auction and Liquidation segment decreased by $2.0 million to $4.3 million during the six months ended June 30, 2020 from $6.2 million during the six months ended June 30, 2019. The decrease in selling, general and administrative expenses in the Auction and Liquidation segment was primarily due to a decrease of $1.7 million in payroll and related expenses.

Valuation and Appraisal

Selling, general and administrative expenses in the Valuation and Appraisal segment decreased by $1.1 million to $13.1 million during the six months ended June 30, 2020 from $14.2 million during the six months ended June 30, 2019. The decrease in selling, general and administrative expenses in the Valuation and Appraisal segment was primarily due to decreases of $0.7 million in travel and entertainment expenses, $0.3 million in consulting expenses and $0.3 million in legal expenses, partially offset by an increase of $0.2 million in payroll and related expenses.

Principal Investments — United Online and magicJack

Selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment decreased $4.0 million to $15.2 million for the six months ended June 30, 2020 from $19.3 million for the six months ended June 30, 2019. The decrease in selling, general and administrative expenses in the Principal Investments — United Online and magicJack segment is primarily due to decreases of $1.3 million in payroll and related expenses, $0.8 million in legal expenses, $0.3 million in transaction costs and $0.9 million in other expenses.

Brands

Selling, general and administrative expenses in the Brands segment was $2.6 million for the six months ended June 30, 2020. We established the Brands segment in 2019 following the acquisition of a majority equity interest in BR Brands on October 28, 2019.

Corporate and Other

Selling, general and administrative expenses for the Corporate and Other segment increased approximately $3.0 million to $21.1 million during the six months ended June 30, 2020 from $18.2 million for the six months ended June 30, 2019. The increase of expenses in the Corporate and Other segment for the six months ended June 30, 2020 was primarily due to an increase of $2.3 million in payroll and related expenses.

Impairment of tradenames. Due to the impact of the COVID-19 outbreak on economic activity and market volatility, we tested our intangible assets as of March 31, 2020 and June 30, 2020 and made the determination that the indefinite-lived tradenames in the Brands segment were impaired and the Company recognized impairment charges of $12.5 million.

Other Income (Expense). Other income included interest income of $0.5 million during the six months ended June 30, 2020 and $1.0 million during the six months ended June 30, 2019. Interest expense was $32.2 million during the six months ended June 30, 2020 compared to $22.4 million during the six months ended June 30, 2019. The increase in interest expense during the six months ended June 30, 2020 was primarily due to an increase in interest expense of $11.1 million from the issuance of senior notes due in 2021, 2023, 2024, 2025, 2026 and 2027, partially offset by a decrease in interest expense of $1.1 million from the term loan dated December 2018 and a decrease in interest expense on our asset based credit facility and other of $0.2 million. Other income in the six months ended June 30, 2020 also included losses on equity investments of $0.6 million, a decrease from losses from equity investments of $5.2 million in the prior year period.

(Loss) Income Before Income Taxes. Loss before income taxes was $22.1 million during the six months ended June 30, 2020 compared to income before income taxes of $42.7 million during the six months ended June 30, 2019. The decrease in income before income taxes was primarily due to a decrease in revenues of approximately $40.6 million, an increase in interest expense of $9.8 million, an increase in operating expenses of $18.5 million and a decrease in interest income of $0.5 million, partially offset by a decrease in loss from equity investments of $4.6 million, as discussed above.

Benefit (Provision) for Income Taxes. Benefit from income taxes was $5.3 million during the six months ended June 30, 2020 compared to provision for income taxes of $12.4 million during the six months ended June 30, 2019. The effective income tax rate was a benefit of 24.2% for the six months ended June 30, 2020 as compared to a provision of 29.0% for the six months ended June 30, 2019.

Net (Loss) Income Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interests represents the proportionate share of net income generated by BR Brand, 20% of the membership interest of which we do not own and Great American Global Partners, LLC, 50% of the membership interest of which we do not own. The net loss attributable to noncontrolling interests was $1.9 million during the six months ended June 30, 2020 compared to net income of $0.1 million during the six months ended June 30, 2019.

Net (Loss) Income Attributable to the Company. Net loss attributable to the Company for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$98.7~~$14.8 million, from net income attributable to the Company of ~~$8.0~~$30.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019. The decrease in net income attributable to the Company during the ~~three~~six months ended ~~March 31,~~June 30, 2020 as compared to the same period in 2019 was primarily due to a decrease in operating income of ~~$146.1~~$59.0 million, an increase in interest expense of ~~$4.9~~$9.8 million and a decrease in interest income of ~~$0.4~~$0.5 million and an increase in loss attributable to noncontrolling interest of ~~$0.5~~$2.0 million, partially offset by an increase in benefit from income taxes of ~~$40.6~~$17.7 million and a decrease in loss from equity investments of ~~$3.5~~$4.6 million.

Preferred Stock Dividends. On October 7, 2019, the Company closed its public offering of Depositary Shares, each representing 1/1000th of a share of 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share. Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. On January 9, 2020, the Company declared a cash dividend representing $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holders of record as of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020.

Net (Loss) Income Available to Common Shareholders. Net loss available to common shareholders for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$99.7~~$17.0 million, from net income available to common shareholders of ~~$8.0~~$30.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019. The increase in net loss available to common shareholders during the ~~three~~six months ended ~~March 31,~~June 30, 2020 as compared to the same period in 2019 was primarily due to a decrease in operating income of ~~$146.1~~$59.0 million, an increase in interest expense of ~~$4.9~~$9.8 million, a decrease in interest income of ~~$0.4~~$0.5 million and an increase in loss attributable to noncontrolling interest of ~~$0.5~~$2.0 million and an increase in preferred stock dividends of ~~$1.1~~$2.1 million, partially offset by an increase in benefit from income taxes of ~~$40.6~~$17.7 million and a decrease in loss from equity investments of ~~$3.5~~$4.6 million.

Liquidity and Capital Resources

Our operations are funded through a combination of existing cash on hand, cash generated from operations, borrowings under our senior notes payable, term loan and credit facility, and special purposes financing arrangements.

During the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, we generated net loss of ~~$99.2~~$16.7 million and net income of ~~$8.0~~$30.3 million, respectively. Our cash flows and profitability are impacted by the number and size of retail liquidation and capital markets engagements performed on a quarterly and annual basis.

As of ~~March 31,~~June 30, 2020, we had ~~$124.2~~$106.3 million of unrestricted cash and cash equivalents, $0.5 million of restricted cash, ~~$287.8~~$399.0 million of securities and other investments held at fair value, ~~$326.3~~$325.5 million of loans receivable, and ~~$939.7~~$926.0 million of borrowings outstanding. The borrowings outstanding of ~~$939.7~~$926.0 million at ~~March 31,~~June 30, 2020 included (a) ~~$125.5~~$854.0 million of borrowings from the issuance of the ~~7.50% 2027~~series of Senior Notes that are due at various dates ranging from May 31, 2023 to December 31, 2023 with interest rates ranging from 6.375% to 7.5%, (b) $122.5 million of borrowings from the issuance of the 7.25% 2027 Notes, (c) $127.4 million of borrowings from the issuance of the 7.375% 2023 Notes, (d) $113.1 million of borrowings from the issuance of the 6.875% 2023 Notes, (e) $110.5 million of borrowings from the issuance of the 6.75% 2024 Notes, (f) $134.7 million of borrowings from the issuance of the 6.50% 2026 Notes, (g) $130.9 million of borrowings from the issuance of the 6.375% 2025 Notes, (h) $61.9$57.2 million term loan borrowed pursuant to the BRPAC Credit Agreement discussed below, ~~(i)~~(c) $0.7 million of notes payable, and ~~(j) $12.4~~(d) $14.1 million of loan participations sold. We believe that our current cash and cash equivalents, securities and other investments owned, funds available under our asset based credit facility, and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements. We continue to monitor our financial performance to ensure sufficient liquidity to fund operations and execute on our business plan.

From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. On July 30, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.25 per share to $0.30 per share. On July 30, 2020, the Company declared a regular quarterly dividend of $0.30 per share and a special dividend of $0.05 per share which will be paid on or about August 28, 2020 to stockholders of record as of August 14, 2020. On May 8, 2020, we declared a quarterly dividend of $0.25 per share which ~~will be~~was paid on ~~or about~~ June 10, 2020 to stockholders of record as of June 1, 2020. During the year ended December 31, 2019, we paid cash dividends on our common stock of $41.1 million. On March 3, 2020, the Board of Directors announced an increase to the regular quarterly dividend from $0.175 per share to $0.25 per share. While it is the Board’s current intention to make regular dividend payments of ~~$0.25~~$0.30 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 our common stock dividend activity for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and the year ended December 31, 2019 was as follows:

			Regular		Special		Total				Regular		Special		Total
		Stockholder	Dividend		Dividend		Dividend			Stockholder	Dividend		Dividend		Dividend
Date Declared	Date Paid	Record Date	Amount		Amount		Amount		Date Paid	Record Date	Amount		Amount		Amount
May 8, 2020									June 10, 2020	June 1, 2020	$	0.25	$	0.00	$	0.25
March 3, 2020	March 31, 2020	March 17, 2020	$	0.25	$	0.10	$	0.35	March 31, 2020	March 17, 2020		0.25		0.10		0.35
October 30, 2019	November 26, 2019	November 14, 2019		0.175		0.475		0.650	November 26, 2019	November 14, 2019		0.175		0.475		0.650
August 1, 2019	August 29, 2019	August 15, 2019		0.175		0.325		0.500	August 29, 2019	August 15, 2019		0.175		0.325		0.500
May 1, 2019	May 29, 2019	May 15, 2019		0.08		0.18		0.26	May 29, 2019	May 15, 2019		0.08		0.18		0.26
March 5, 2019	March 26, 2019	March 19, 2019		0.08		0.00		0.08	March 26, 2019	March 19, 2019		0.08		0.00		0.08

Holders of Series A Preferred Stock, when and as authorized by the board of directors of the Company, are entitled to cumulative cash dividends at the rate of 6.875% per annum of the $25,000 liquidation preference ($25.00 per Depositary Share) per year (equivalent to $1,718.75 or $1.71875 per Depositary Share). Dividends will be payable quarterly in arrears, on or about the last day of January, April, July and October. ~~As of March 31, 2020, dividends in arrears in respect of the Depositary Shares were $725.~~ On January 9, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on January 31, 2020 to holders of record as of the close of business on January 21, 2020. On April 13, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which was paid on April 30, 2020 to holders of record as of the close of business on April 23, 2020. On July 7, 2020, the Company declared a cash dividend $0.4296875 per Depositary Share, which will be paid on or about July 31, 2020 to holders of record as of the close of business on July 21, 2020.

Our principal sources of liquidity to finance our business are our existing cash on hand, cash generated from operations, borrowings under our senior notes payable, term loan and credit facility, issuances of common and preferred stock and special purpose financing arrangements.

Cash Flow Summary

	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Net cash provided by (used in):
Operating activities	$	455		$	8,924		$	13,432		$	1,438
Investing activities		(71,492	)		(26,513	)		(82,557	)		(227,576	)
Financing activities		92,332			8,241			71,815			104,067
Effect of foreign currency on cash		(1,332	)		23			(705	)		37
Net increase (decrease) in cash, cash equivalents and restricted cash	$	19,963		$	(9,325	)	$	1,985		$	(122,034	)

Cash provided by in operating activities was ~~$0.5~~$13.4 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to ~~$8.9~~$1.4 million during the ~~three~~six months ended ~~March 31,~~June 30, 2019. Cash provided by operating activities for the ~~three~~six months ended ~~March 31,~~June 30, 2020 included net loss of ~~$99.2~~$16.7 million adjusted for noncash items of ~~$24.9~~$34.0 million and changes in operating assets and liabilities of ~~$74.8~~$3.9 million. Noncash items of ~~$24.9~~$34.0 million include (a) depreciation and amortization of ~~$5.0~~$9.9 million, (b) share-based compensation of ~~$5.3~~$9.5 million, (c) loss on equity investments of ~~$0.2~~$0.6 million, (d) fair value adjustments of ~~$17.9~~$22.0 million, (e) provision for doubtful accounts of ~~$0.7~~$2.1 million, (f) income allocated for mandatorily redeemable noncontrolling interests of ~~$0.2~~$0.4 million, (g) other ~~noncash~~non-cash interest and other of ~~$2.8~~$6.9 million, (h) deferred income taxes of ~~$4.3~~$14.3 million, (i) impairment of intangibles and loss on disposal of fixed assets of ~~$4.0~~$12.6 million and (j) gain on extinguishment of debt of $1.6 million.

Cash used in investing activities was ~~$71.5~~$82.6 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to cash used in investing activities of ~~$26.5~~$227.6 million for the ~~three~~six months ended ~~March 31,~~June 30, 2019. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, cash used in investing activities consisted of cash used for purchases of loans receivable of ~~$115.3~~$152.2 million, repayments of loan participations sold of ~~$0.2~~$0.9 million, cash used for equity investments of $6.5 million and cash used for ~~purchases~~acquisition of ~~property and equipment~~other businesses of ~~$0.4~~$1.5 million, offset by cash received from loans receivable repayment of ~~$42.1~~$74.5 million, sale of a loan receivable to a related party of $1.8 million, loan participations sold of $2.4 million and dividends from equity investments of ~~$0.6~~$0.8 million. During the ~~three~~six months ended ~~March 31,~~June 30, 2019, cash used in investing activities consisted of cash used for loans receivable of ~~$20.2~~$225.1 million, cash used for equity investments of ~~$10.6~~$25.2 million and cash used for purchases of property and equipment of ~~$1.7~~$2.5 million, offset by proceeds from sale of division of magicJack of $6.2 million, cash received from loans receivable repayment of ~~$5.5~~$17.6 million, ~~and~~ dividends from equity investments of ~~$0.4~~$0.9 million and proceeds from sale of property, equipment and intangible assets of $0.5 million.

Cash provided by financing activities was ~~$92.3~~$71.8 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to cash provided by financing activities of ~~$8.2~~$104.1 million during the ~~three~~six months ended ~~March 31,~~June 30, 2019. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, cash provided by financing activities primarily consisted of $171.1 million proceeds from issuance of senior notes and $4.6 million proceeds from issuance of preferred stock, offset by (a) $37.1 million used to repay our asset based credit facility, (b) ~~$24.1~~$27.8 million used to repurchase our common stock, (c) ~~$9.6~~$17.5 million used to pay dividends on our common shares, (d) ~~$4.8~~$9.6 million use for repayment on our term loan, (e) $1.8 million used to repurchase our senior notes, (f) ~~$2.7~~$2.8 million used to pay debt issuance costs, (g) ~~$1.3~~$2.1 million distribution to noncontrolling interests, (h) ~~$1.1~~$2.1 million used to pay dividends on our preferred shares (i) ~~$0.5~~$2.7 million used for payment of employment taxes on vesting of restricted stock and (j) $0.4 million used to repay our other notes payable. During the ~~three~~six months ended ~~March 31,~~June 30, 2019, cash provided by financing activities primarily consisted of $10.0 million proceeds from our term loan, ~~$5.0~~$123.9 million proceeds from issuance of senior notes, offset by (a) ~~$2.6 million used to buyback our common stocks, (b) $2.6~~$10.0 million used to pay ~~cash~~ dividends on our common ~~stocks,~~shares, (b) $8.3 million use for repayment on our term loan, (c) ~~$0.7~~$6.0 million used to repurchase our common stock and warrants, (d) $2.0 million used to pay debt issuance costs, (e) $2.3 million used for payment of employment taxes on vesting of restricted stock, ~~(d) $0.4 million used for repayment of notes payable, approximately $0.2 million used for debt issuance costs and (e) $0.3~~(f) $0.9 million distribution to noncontrolling ~~interests.~~ interests, and (g) $0.4 million used to repay our other notes payable.

3844

Credit Agreements

On April 21, 2017, we amended the asset based credit facility agreement (as amended, the “Credit Agreement”) with Wells Fargo Bank to increase the maximum borrowing limit from $100.0 million to $200.0 million. Such amendment, among other things, also extended the expiration date of the credit facility from July 15, 2018 to April 21, 2022. The Credit Agreement continues to allow for borrowings under the separate credit agreement (a “UK Credit Agreement”) which was dated March 19, 2015 with an affiliate of Wells Fargo Bank which provides for the financing of transactions in the United Kingdom with borrowings up to 50.0 million British Pounds. Any borrowing on the UK Credit Agreement reduce the availability of the asset based $200.0 million credit facility. The UK Credit Agreement is cross collateralized and integrated in certain respects with the Credit Agreement. The Credit Agreement continues to include the addition of our Canadian subsidiary, from the October 5, 2016 amendment to the Credit Agreement, to facilitate borrowings to fund retail liquidation transactions in Canada. From time to time, we utilize this credit facility to fund costs and expenses incurred in connection with liquidation engagements. We also utilize this credit facility in order to issue letters of credit in connection with liquidation engagements conducted on a guaranteed basis. Subject to certain limitations and offsets, we are permitted to borrow up to $200.0 million under the credit facility, less the aggregate principal amount borrowed under the UK Credit Agreement (if in effect). Borrowings under the credit facility are only made at the discretion of the lender and are generally required to be repaid within 180 days. The interest rate for each revolving credit advance under the related credit agreement is, subject to certain terms and conditions, equal to the LIBOR plus a margin of 2.25% to 3.25% depending on the type of advance and the percentage such advance represents of the related transaction for which such advance is provided. The credit facility is secured by the proceeds received for services rendered in connection with the liquidation service contracts pursuant to which any outstanding loan or letters of credit are issued and the assets that are sold at liquidation related to such contract, if any. The credit facility also provides for success fees in the amount of 2.5% to 17.5% of the net profits, if any, earned on liquidation engagements that are financed under the credit facility as set forth in the related credit agreement. We typically seek borrowings on an engagement-by- engagement basis. The credit agreement governing the credit facility contains certain covenants, including covenants that limit or restrict our ability to incur liens, incur indebtedness, make investments, dispose of assets, make certain restricted payments, merge or consolidate and enter into certain transactions with affiliates. There was no outstanding balance on this credit facility at ~~March 31,~~June 30, 2020. The outstanding balance on this credit facility was $37.1 million at December 31, 2019. At ~~March 31,~~June 30, 2020, there were no open letters of credit outstanding.

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 the Company, in the capacity of borrowers, entered into a credit agreement with the Banc of California, N.A. in the capacity as agent and lender and with the other lenders party thereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, we borrowed $80.0 million due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregate principal amount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019, the Borrowers entered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in which the new lender extended to Borrowers the additional $10.0 million as further discussed in Note 9 to the accompanying financial statements. The borrowings under the BRPAC Credit Agreement bear interest equal to the LIBOR plus a margin of 2.50% to 3.00% depending on the Borrowers’ consolidated total funded debt ratio as defined in the BRPAC Credit Agreement.

Borrowings under the BRPAC Credit Agreement are due in quarterly installments commencing on March 31, 2019 with any remaining amounts outstanding due at maturity. For the $80.0 million loan, quarterly installments from ~~March 31,~~June 30, 2020 to December 31, 2022 are $4.2 million per quarter and from March 31, 2023 to December 31, 2023, the quarterly installments are $2.1 million per quarter. For the $10.0 million loan, quarterly installments from ~~March 31,~~June 30, 2020 to December 31, 2022 are $0.6 million per quarter and from March 31, 2023 to December 31, 2023, the quarterly installments are $0.3 million per quarter. At ~~March 31,~~June 30, 2020 and December 31, 2019, the outstanding balance of the term loan was ~~$61.9~~$57.2 million (net of unamortized debt issuance costs of $0.5 million) and $66.7 million (net of unamortized debt issuance costs of $0.6 million), respectively.

Senior Note Offerings

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, we issued $38.8 million of senior notes due with maturities dates ranging from May 2023 to December 2027 pursuant to At the Market Issuance Sales Agreements with B. Riley FBR, Inc. which governs the program of at-the-market sales of our senior notes. We filed a series of prospectus supplements with the SEC which allowed us to sell these senior notes.

On February 12, 2020, we issued $132.3 million of senior notes due in February 2025 (“6.375% 2025 Notes”) pursuant to the prospectus supplement dated February 10, 2020. Interest on the 6.375% 2025 Notes is payable quarterly at 6.375%. The 6.375% 2025 Notes are unsecured and due and payable in full on February 28, 2025. In connection with the issuance of the 6.375% 2025 Notes, we received net proceeds of $129.2 million (after underwriting commissions, fees and other issuance costs of $3.0 million).We currently anticipate using the net proceeds from the 6.375% 2025 notes for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.

During March 2020, we repurchased bonds with an aggregate face value of $3.4 million for $1.8 million resulting in a gain net of expenses of $1.6 million as of ~~March 31,~~June 30, 2020. As part of the repurchase, we paid $30 thousand in interest accrued through the date of each respective repurchase.

At ~~March 31,~~June 30, 2020 and December 31, 2019, the total senior notes outstanding was ~~$853.5~~$854.0 million (net of unamortized debt issue costs of ~~$11.1~~$10.6 million) and $688.1 million (net of unamortized debt issue costs of $8.9 million) with a weighted average interest rate of 6.94% and 7.05%, respectively.Interest on senior notes is payable on a quarterly basis.Interest expense on senior notes totaled ~~$14.3~~$15.6 million and ~~$8.9~~$10.1 million for the three months ended ~~March 31,~~June 30, 2020 and 2019, respectively and $30.0 million and $18.9 million for the six months ended June 30, 2020 and 2019, respectively.

On February 14, 2020, we entered into a new At Market Issuance Sales Agreement (the “February 2020 Sales Agreement”) with B. Riley FBR, Inc. governing a program of at-the-market sales of certain of our senior notes. The most recent sales agreement prospectus was filed by us with the SEC on February 14, 2020 (the “February 2020 Sales Agreement Prospectus”). The Sales Agreement Prospectus allows us to sell up to $150.0 million of certain of our senior notes pursuant to an effective Registration Statement on Form S-3. As of ~~March 31,~~June 30, 2020, we had $148.4 million remaining availability under the February 2020 Sales Agreement.

Off Balance Sheet Arrangements

As part of our investment banking and financial services activities, from time to time we enter into guaranties of debt, commitments of other entities, and similar transactions that may be considered off-balance sheet arrangements.

B&W Credit Agreement and Backstop

On January 31, 2020, the Company provided Babcock & Wilcox Enterprises, Inc. (“B&W”) $30 million of additional Tranche A-4 last out term loans pursuant to Amendment No. 20 (“Amendment No. 20”) to the Credit Agreement, dated May 11, 2015 (as amended to date, the “B&W Credit Agreement”) with Bank of America, N.A., as administrative agent and lender, and the other lenders party thereto. The Company is a lender with respect to B&W’s existing last out term loans under the Credit Agreement. Kenneth Young, our President, is the Chief Executive Officer of B&W. Pursuant to Amendment No. 20, B&W and the lenders, including the Company, also agreed upon a term sheet pursuant to which B&W would undertake a refinancing transaction on or prior to May 11, 2020 (the “Refinancing”) and B&W and the lenders, including the Company, would amend and restate the Credit Agreement on the terms specified therein. As part of the Refinancing, the size of B&W’s board of directors may also be reduced to 5 members, with the Company retaining the ability to appoint 2 members. On January 31, 2020, B&W also entered into a letter agreement with the Company (the “Backstop Commitment Letter”) pursuant to which the Company agreed to fund any shortfall in the $200 million of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties on the same terms contemplated by the Refinancing. ~~The~~ On May 14, 2020, the Company entered into the Amendment Transactions with B&W ~~and the lenders that are~~as more provided B&W with another $30,000 of last-out term loans pursuant to a ~~party~~further amendments to B&W’s ~~existing credit agreement are in negotiations to amend and restate B&W’s existing~~ credit agreement which ~~would include, among other things, an extension of the maturity of amounts outstanding under the credit facility, the termination of the Backstop Commitment Letter, the commitment by an affiliate of~~also included future commitments for the Company to ~~provide up to $70.0 million~~loan B&W $40,000 as various dates starting in ~~additional term loan financing incrementally over the duration of the amended credit facility,~~November 2020 and a limited guaranty by the Company of B&W’s obligations under the amended ~~credit facility.~~ credit.

Franchise Group Commitment Letter and Loan Participant Guaranty

Commitment Letter

On February 14, 2020, affiliates of Franchise Group, Inc. (collectively with all of its affiliates, “FRG”) entered into an ABL Credit Agreement (the “Franchise Credit Agreement”), with GACP Finance Co., LLC (“GACP Finance”) as administrative agent and collateral agent, and the lenders from time to time party thereto, pursuant to which the lenders provided an asset based credit facility to FRG in an aggregate principal amount of $100.0 million. In connection with the Franchise Credit Agreement, the Company entered into a commitment letter, dated as of February 14, 2020 (the “Commitment Letter”), pursuant to which the Company committed to provide a $100.0 million asset based lending facility to FRG, on April 14, 2020 if, on or before such date, the obligations under the Franchise Credit Agreement are not refinanced in full. On May 1, 2020, we extended our commitment under the Commitment Letter until 30 days prior to the maturity date which is currently set forth in the Franchise Credit Agreement as September 30, 2020.

The Loan Participant Guaranty

On February 14, 2020 FRG, the lenders from time to time party thereto and GACP Finance as administrative agent, entered into a Credit Agreement (the “Term Loan Credit Agreement”), pursuant to which the lenders provided a term loan facility to FRG in an aggregate principal amount of $575.0 million.

On February 19, 2020, the Company entered into a limited guaranty (the “Loan Participant Guaranty”) to one of the lenders under the Term Loan Credit Agreement (the “Loan Participant”) pursuant to which the Company guaranteed the payment when due of certain obligations, including principal, interest, and other amounts payable to the Loan Participant under the Term Loan Credit Agreement in an amount not to exceed $50.0 million plus certain expenses of the Loan Participant and certain protective advances related to such guaranteed obligations (the “Loan Participant Guaranteed Obligations”). The Loan Participant may require payment of the Loan Participant Guaranteed Obligations by the Company upon the occurrence of certain guarantor events of default, including payment or bankruptcy events of default, in each case pursuant to the Term Loan Credit Agreement. The Loan Participant Guaranty remains in effect until the date that the Loan Participant Guaranteed Obligations have been paid in full.

CIBC Guaranty

On February 14, 2020, the Company entered into a limited guaranty (the “CIBC Guaranty”) in favor of CIBC Bank USA (“CIBC”), pursuant to which the Company guaranteed the payment when due of certain obligations, including all principal, interest, and other amounts that shall be at any time payable by FRG under FRG’s credit agreement with CIBC and the lenders party thereto, dated as of May 16, 2019, as amended (the “CIBC Credit Agreement”) in an amount not to exceed $125.0 million plus certain expenses of CIBC related to such guaranteed obligations (the “CIBC Guaranteed Obligations”). CIBC may require payment of the CIBC Guaranteed Obligations by the Company upon the occurrence of either (a) the failure of FRG to pay any principal of any loan or any reimbursement obligation in respect of any letter of credit disbursement or (b) the failure of FRG to pay any interest on any loan or on any reimbursement obligation in respect of any letter of credit disbursement within five business days of the date due, in each case pursuant to the CIBC Credit Agreement. The CIBC Guaranty ~~remains in effect until the earlier of (a) the date that the CIBC Guaranteed Obligations have been paid in full and (b)~~terminated on June 30, 2020.

The CIBC Guaranteed Obligations are unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future unsecured and unsubordinated indebtedness. The CIBC Guaranteed Obligations are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables.

B. Riley Principal Merger Corp. II LOI Backstop Commitment

B. Riley Principal Merger Corp. II (“BRPM II”), which was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, entered into non-binding letter of intent to acquire a privately held company that is not related to the Company (the “Proposed Acquisition”). The non-binding letter of intent contemplates that the Company would provide a backstop guarantee to raise $50,000 new equity in a private placement for the Proposed Acquisition (the “LOI Backstop Commitment”). The Proposed Acquisition is expected to be completed in the fourth quarter of 2020, subject to, among other things, the negotiation and execution of a definitive agreement between BRPM II and the privately held company.

Except as disclosed above, we have no material obligations, assets or liabilities which would be considered off-balance sheet arrangements and do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, established for the purpose of facilitating off-balance sheet arrangements.

Contractual Obligations

In February 2020, we issued $132.3 million of our 6.375% 2025 Notes, which are due and payable in full on February 28, 2025. As a result, our total senior notes payable increased to $1,117.0 million as of ~~March 31,~~June 30, 2020 and our senior notes payable due in more than 5 years increased to $560.5 ~~million. Additionally, our total contractual obligations increased to $1,295.8 million and our total payments due in more than 5 years increased to $585.2~~ million. There were no other material changes to our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Standards

See Note 2(v) to the accompanying financial statements for recent accounting pronouncements we have not yet adopted and recently adopted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

B. Riley’s primary exposure to market risk consists of risk related to changes in interest rates. B. Riley has not used derivative financial instruments for speculation or trading purposes.

Interest Rate Risk

Our primary exposure to market risk consists of risk related to changes in interest rates. We utilize borrowings under our senior notes payable and credit facilities to fund costs and expenses incurred in connection with our acquisitions and retail liquidation engagements. Borrowings under our senior notes payable are at fixed interest rates and borrowings under our credit facilities bear interest at a floating rate of interest. We invest in loans receivable that primarily bear interest at floating rates of interest.

The primary objective of our investment activities is to preserve capital for the purpose of funding operations while at the same time maximizing the income we receive from investments without significantly increasing risk. To achieve these objectives, our investments allow us to maintain a portfolio of cash equivalents, short-term investments through a variety of securities owned that primarily includes common stocks, corporate bonds and investments in partnership interests, and loans receivable. Our cash and cash equivalents through ~~March 31,~~June 30, 2020 included amounts in bank checking and liquid money market accounts. We may be exposed to interest rate risk through trading activities in convertible and fixed income securities as well as U.S. Treasury securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to interest rate risk in these activities.

Foreign Currency Risk

The majority of our operating activities are conducted in U.S. dollars. Revenues generated from our foreign subsidiaries totaled ~~$0.9~~$2.5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 or ~~0.6%~~0.9% of our services and fees revenues of ~~$159.3~~$284,976 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020. The financial statements of our foreign subsidiaries are translated into U.S. dollars at period-end rates, with the exception of revenues, costs and expenses, which are translated at average rates during the reporting period. We include gains and losses resulting from foreign currency transactions in income, while we exclude those resulting from translation of financial statements from income and include them as a component of accumulated other comprehensive loss. Transaction gains (losses), which were included in our condensed consolidated statements of operations, amounted to a gain of ~~$0.9~~$0.5 million and a ~~gain~~loss of ~~$0.2~~$0.3 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. We may be exposed to foreign currency risk; however, our operating results during the ~~three~~six months ended ~~March 31,~~June 30, 2020 included less than ~~$1.0~~$0.3 million of revenues from our foreign subsidiaries and a 10% appreciation of the U.S. dollar relative to the local currency exchange rates would result in ~~less than $0.1~~a $2.5 million increase in our operating income and a 10% depreciation of the U.S. dollar relative to the local currency exchange rates would have resulted in a net decrease in our operating income of less than ~~$0.1~~$0.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon the foregoing evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that as of ~~March 31,~~June 30, 2020 our disclosure controls and procedures were ~~not~~ effective ~~at the reasonable assurance level.~~as of such date.

Remediation of Material Weakness

Since the quarter ended December 31, 2019, management undertook remediation measures related to the previously reported material weakness in internal control over financial reporting. We completed these remediation measures in the quarter ended June 30, 2020, including testing of the design and concluding on the operating effectiveness of the related controls. Specifically, we enhanced the related party policies and procedures, with a specific focus on related party disclosures, that included the creation of a related party oversight function and increasing the frequency of related party controls.

Changes in Internal Control over Financial Reporting

~~There~~Except for the changes in connection with our implementation of the remediation plan discussed above, there have been no changes to our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Remediation~~

Management has been implementing and continues to implement measures designed to ensure that the control deficiency contributing to the material weakness as of December 31, 2019 is remediated, such that the controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating a related party oversight function and (ii) enhancing the related party policies and procedures with a specific focus on related party disclosures.

While we believe that these actions will be sufficient to remediate the material weakness, it will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.

Inherent Limitation on Effectiveness of Controls

Our management, including our Co-Chief Executive Officers and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well- designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

On January 5, 2017, complaints filed in November 2015 and May 2016 naming MLV & Co. (“MLV”), a broker-dealer subsidiary of FBR, as a defendant in putative class action lawsuits alleging claims under the Securities Act, in connection with the offerings of Miller Energy Resources, Inc. (“Miller”) have been consolidated. The Master Consolidated Complaint, styled Gaynor v. Miller et al., is pending in the United States District Court for the Eastern District of Tennessee, and, like its predecessor complaints, continues to allege claims under Sections 11 and 12 of the Securities Act against nine underwriters for alleged material misrepresentations and omissions in the registration statement and prospectuses issued in connection with six offerings (February 13, 2013; May 8, 2013; June 28, 2013; September 26, 2013; October 17, 2013 (as to MLV only) and August 21, 2014) with an alleged aggregate offering price of approximately ~~$151.0 million.~~$151,000. The Court ordered mediation before a federal magistrate took place on August 6, 2019, with no resolution. In December 2019, the Court remanded the case to state court. In July 2020, the Company signed a binding term sheet to settle this matter, subject to court approval.

In July 2017, an arbitration claim was filed with FINRA by Dominick & Dickerman LLC and Michael Campbell against WSI and Gary Wunderlich with respect to the acquisition by Wunderlich Investment Company, Inc. (“WIC”) (the parent corporation of WSI) of certain assets of Dominick & Dominick LLC in 2015. The Claimants allege that respondents overvalued WIC so that the purchase price paid to the Claimants in shares of WIC stock was artificially inflated. On April 7, 2020, the arbitration panel issued an award against ~~B. Riley Wealth Management, LLC (formerly, Wunderlich Securities, Inc.)~~BRWM and Gary Wunderlich holding each party jointly and severally liable for damages, costs and expenses in an aggregate amount of ~~$11.4 million. The Company recorded a loss accrual in the consolidated financial statements during the three months ended March 31, 2020.~~$11,400. The Company filed a ~~petition~~motion to vacate the arbitration award in the U.S. District Court for the Southern District of New York on May 5, 2020. In June 2020, Dominick & Dickerman LLC settled the matter for $10,150 in. Michael Campbell agreed that the award shall be vacated as to him.

In December 2015, magicJack received a Letter of Inquiry (the “2015 LOI”) from the Enforcement Bureau (the “Bureau”) of the Federal Communications Commission (“FCC”) in which the Bureau indicated that it was investigating whether ~~magicJack was~~the Company is subject to the FCC’s rules applicable to interconnected VoIP providers. magicJack believes that it is not an interconnected VoIP provider under current regulations and is not subject to the FCC rules. Previously, magicJack received similar letters of inquiry in 2010 and 2013, neither of which resulted in any enforcement action. magicJack responded to the 2015 LOI in February 2016. ~~magicJack is currently participating~~The Company participated in discussions with the FCC regarding a potential ~~settlement.~~settlement, and on June 5, 2020, the Company and the FCC entered into a Consent Decree to settle the FCC’s inquiry. In the Consent Decree magicJack made no admission of non-compliance with FCC regulations but did agree to make certain changes to its product offerings and marketing materials on a go forward basis and to make a monetary payment of $5,000 to the FCC.

Item 1A. Risk Factors.

Given the nature of our operations and services we provide, a wide range of factors could materially affect our operations and profitability. Changes in competitive, market and economic conditions also affect our operations. TheThere are certain risks and uncertainties described below are not the only risks and uncertainties facing us. Additional risks and uncertainties not presently known or that are currently considered to be immaterial may also materially and adversely affectin our business ~~operations or stock price. If any~~that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the ~~following risks or uncertainties occurs,~~year ended December 31, 2019, filed with the Securities and Exchange Commission on March 9, 2020 and our ~~business, financial condition or operating results could materially suffer.~~Quarterly Report on Form 10-Q for the three months ended March 31, 2020, filed with the Securities and Exchange Commission on May 11, 2020. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in ~~this~~the Annual Report on Form 10-K for the year ended December 31, 2019 and the Quarterly Report on Form 10-Q for the three months ended March 31, 2020, could materially affect our business, financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. ~~The risk factors below amend and supersede~~There have been no material changes to the risk factors ~~previously disclosed~~set forth in ~~our~~the Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2019 and the Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

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~~Our revenues and results of operations are volatile and difficult to predict.~~

~~Our revenues and results of operations fluctuate significantly from quarter to quarter, due to a number of factors. These factors include, but are not limited to, the following:~~

	●	~~Our ability to attract new clients and obtain additional business from our existing client base;~~

	●	The number, size and timing of mergers and acquisition transactions, capital raising transactions and other strategic advisory services where we act as an adviser on our Auction and Liquidation and investment banking engagements;

	●	~~The extent to which we acquire assets for resale, or guarantee a minimum return thereon, and our ability to resell those assets at favorable prices;~~

	●	~~Variability in the mix of revenues from the Auction and Liquidation and Valuation and Appraisal businesses;~~

	●	The rate of decline we experience from our dial-up and DSL Internet access pay accounts in our UOL business as customers continue to migrate to broadband access which provides faster Internet connection and download speeds offered by our competitors;

	●	~~The rate of growth of new service areas;~~

	●	~~The types of fees we charge clients, or other financial arrangements we enter into with clients; and~~

	●	~~Changes in general economic and market conditions, including the effects of the ongoing COVID-19 pandemic, or an outbreak of another highly infectious or contagious disease.~~

We have limited or no control over some of the factors set forth above and, as a result, may be unable to forecast our revenues accurately. For example, our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain and beyond our control. A client’s acquisition transaction may be delayed or terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or other problems in the business of a client or a counterparty. If the parties fail to complete a transaction on which we are advising or an offering in which we are participating, we will earn little or no revenue from the contemplated transaction.

We rely on projections of revenues in developing our operating plans for the future and will base our expectations regarding expenses on these projections and plans. If we inaccurately forecast revenues and/or earnings, or fail to accurately project expenses, we may be unable to adjust our spending in a timely manner to compensate for these inaccuracies and, as a result, may suffer operating losses and such losses could have a negative impact on our financial condition and results of operations. If, for any reason, we fail to meet company, investor or analyst projections of revenue, growth or earnings, the market price of the common stock could decline and you may lose all or part of your investment.

Conditions in the financial markets and general economic conditions, including the ongoing COVID-19 pandemic, have impacted and may continue to impact our ability to generate business and revenues, which may cause significant fluctuations in our stock price.

Our business has been in the past, and we expect it in the future to be, be materially affected by conditions in the financial market and general economic conditions, such as the level and volatility of interest rates, investor sentiment, the availability and the cost of credit, the U.S. mortgage market, the U.S. real estate market, volatile energy prices, consumer confidence, unemployment, the adverse effects of events such as outbreaks of contagious disease (such as the ongoing COVID-19 pandemic), and geopolitical issues. Further, certain aspects of our business are cyclical in nature and changes in the current economic environment may require us to adjust our sales and marketing practices and react to different business opportunities and modes of competition. If we are not successful in reacting to changing economic conditions, we may lose business opportunities which could harm our financial condition.

Adverse economic developments, like the ongoing COVID-19 pandemic, can have an unpredictable impact on our business. For example, we are more likely to conduct auctions and liquidations in connection with insolvencies and store closures during periods of economic downturn relative to periods of economic expansion; however, temporary limits on businesses due to mandated “social distancing” measures and “stay at home” work restrictions have limited our ability to conduct auctions and liquidations.

In addition, weakness or disruption in equity markets, such as the recent market volatility due to the ongoing COVID-19 pandemic, and diminished trading volume of securities could adversely impact our sales and trading business in the future. Any industry-wide declines in the size and number of underwritings and mergers and acquisitions transactions could also have an adverse effect on our investment banking revenues, which we are currently experiencing due to the ongoing COVID-19 pandemic. Reductions in the trading prices for equity securities, such as those that have occurred due to the ongoing COVID-19 pandemic, tend to reduce the transaction value of investment banking transactions, such as underwriting and mergers and acquisitions transactions, which in turn may reduce the fees we earn from these transactions. Market conditions may also affect the level and volatility of securities prices and the liquidity and value of investments in our funds and proprietary inventory, and we may not be able to manage our business’s exposure to these market conditions. In addition to these factors, deterioration in the financial markets or economic conditions, such as those that have occurred due to the ongoing COVID-19 pandemic, could materially affect our investment banking business in other ways, including the following:

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~~Our opportunity to act as underwriter or placement agent could be adversely affected by a reduction in the number and size of capital raising transactions or by competing sources of equity.~~

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The number and size of mergers and acquisitions transactions or other strategic advisory services where we act as adviser could be adversely affected by continued uncertainties in valuations related to asset quality and creditworthiness, volatility in the equity markets, and diminished access to financing.

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~~Market volatility could lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in the revenue we receive from commissions and spreads.~~

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We may experience losses in securities trading activities, or as a result of write-downs in the value of securities that we own, as a result of deteriorations in the businesses or creditworthiness of the issuers of such securities.

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~~We may experience losses or write downs in the realizable value of our proprietary investments due to the inability of companies we invest in to repay their borrowings.~~

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~~Our access to liquidity and the capital markets could be limited, preventing us from making proprietary investments and restricting our sales and trading businesses.~~

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We may incur unexpected costs or losses as a result of the bankruptcy or other failure of companies for which we have performed investment banking services to honor ongoing obligations such as indemnification or expense reimbursement agreements.

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Sudden sharp declines in market values of securities can result in illiquid markets and the failure of counterparties to perform their obligations, which could make it difficult for us to sell securities, hedge securities positions, and invest funds under management.

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As an introducing broker to clearing firms, we are responsible to the clearing firm and could be held liable for the defaults of our customers, including losses incurred as the result of a customer’s failure to meet a margin call. When we allow customers to purchase securities on margin, we are subject to risks inherent in extending credit. This risk increases when a market is rapidly declining and the value of the collateral held falls below the amount of a customer’s indebtedness. If a customer’s account is liquidated as the result of a margin call, we are liable to our clearing firm for any deficiency.

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Competition in our investment banking, sales, and trading businesses could intensify as a result of the increasing pressures on financial services companies and larger firms competing for transactions and business that historically would have been too small for them to consider.

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~~Market volatility could result in lower prices for securities, which may result in reduced management fees calculated as a percentage of assets under management.~~

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~~Market declines could increase claims and litigation, including arbitration claims from customers.~~

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Our industry could face increased regulation as a result of legislative or regulatory initiatives. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

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~~Government intervention may not succeed in improving the financial and credit markets and may have negative consequences for our business.~~

It is difficult to predict how long the current financial market and economic conditions related to the ongoing COVID-19 pandemic will continue, whether they will further deteriorate and if they do, which of our business lines will be adversely affected. We are currently being impacted by the ongoing COVID-19 pandemic, including with respect to the above-described risks. While we are continuing to monitor the spread of COVID-19 and related risks, the rapid development and fluidity of situation precludes any prediction as to its ultimate impact on us. However, if the spread continues, such impact could grow and our business, financial condition, results of operations and cash flows could be materially adversely affected.

~~Global economic and political uncertainty, in particular due to the ongoing COVID-19 pandemic, could adversely affect our revenue and results of operations.~~

As a result of the international nature of our business, we are subject to the risks arising from adverse changes in global economic and political conditions. Uncertainty about the effects of current and future economic and political conditions on us, our customers, suppliers and partners makes it difficult for us to forecast operating results and to make decisions about future investments. Deterioration in economic conditions in any of the countries in which we do business could result in reductions in sales of our products and services and could cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.

The ongoing COVID-19 pandemic has caused severe disruptions in the U.S. and global economy, which has impacted the business, activities, and operations of our customers, as well as our business and operations. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. Many states and localities have imposed limitations on commercial activity and public gatherings and events, as well as moratoria on evictions. Concern about the spread of COVID-19 has caused and is likely to continue to cause quarantines, business shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and overall economic and financial market instability, all of which may result a decrease in our business. Such conditions are likely to exacerbate many of the risks described elsewhere in these Risk Factors. Unfavorable economic conditions may also make it more difficult for us to access the capital markets, use the capital markets for our clients or otherwise obtain additional financing.

The continued spread of COVID-19, or a significant outbreak of another contagious disease, could negatively impact the availability of key personnel necessary to conduct our business, and the business and operations of our third-party service providers who perform critical services for our business. If COVID-19, or a future highly infectious or contagious disease, is not successfully contained, we could experience a material adverse effect on our business, financial condition, results of operations and cash flow. Among the factors outside our control that are likely to affect the impact the COVID-19 pandemic will ultimately have on our business are:

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~~the pandemic’s course and severity;~~

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~~the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits and commercial activity;~~

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political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce or other public activities, moratoria and other suspensions of evictions or rent and related obligations;

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the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity;

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the timing and availability of direct and indirect governmental support for various financial assets, and possible related distortions in market values and liquidity for such assets whose markets have or are assumed to have government support versus possibly similar assets that do not;

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~~potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties;~~

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~~the ability of our employees and our third-party vendors to work effectively during the course of the pandemic;~~

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~~potential longer-term shifts toward telecommuting and telecommerce; and~~

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geographic variation in the severity and duration of the COVID-19 pandemic, including in states such as New York and California where high percentages of our clients, customers and personnel are located.

We focus principally on certain sectors of the economy in our investment banking operations, and deterioration in the business environment in these sectors or a decline in the market for securities of companies within these sectors could harm our business.

Volatility in the business environment in the industries in which our clients operate or in the market for securities of companies within these industries could adversely affect our financial results and the market value of our common stock. The business environment for companies in some of these industries has been subject to high levels of volatility in recent years, and our financial results have consequently been subject to significant variations from year to year. For example, the consumer goods and services sectors are subject to consumer spending trends, which have been volatile, to mall traffic trends, which have been down, to the availability of credit, and to broader trends such as the rise of Internet retailers. Most recently, the consumer goods and services sector has been severely impacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain duration due to “social distancing” measures, “stay at home” work restrictions and the closing of non-essential businesses imposed to control the pandemic. Emerging markets have driven the growth of certain consumer companies but emerging market economies are fragile, subject to wide swings in GDP, and subject to changes in foreign currencies. The technology industry has been volatile, driven by evolving technology trends, by technological obsolescence, by enterprise spending, and by changes in the capital spending trends of major corporations and government agencies around the world.

Our investment banking operations focus on various sectors of the economy, and we also depend significantly on private company transactions for sources of revenues and potential business opportunities. Most of these private company clients are initially funded and controlled by private equity firms. To the extent that the pace of these private company transactions slows or the average transaction size declines due to a decrease in private equity financings, difficult market conditions, such as those due to the ongoing COVID-19 pandemic, in our target industries or other factors, our business and results of operations may be harmed.

Underwriting and other corporate finance transactions, strategic advisory engagements and related sales and trading activities in our target industries represent a significant portion of our investment banking business. This concentration of activity in our target industries exposes us to the risk of declines in revenues in the event of downturns in these industries, such as those due to the ongoing COVID-19 pandemic.

~~Our corporate finance and strategic advisory engagements are singular in nature and do not generally provide for subsequent engagements.~~

Our investment banking clients generally retain us on a short-term, engagement-by-engagement basis in connection with specific corporate finance, merger and acquisition transactions (often as an advisor in company sale transactions) and other strategic advisory services, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements with these clients may not recur, we must seek new engagements when our current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from new or existing clients, our business, results of operations and financial condition could be adversely affected.

~~The asset management business is intensely competitive.~~

Over the past several years, the size and number of asset management funds, including hedge funds and mutual funds, has continued to increase. If this trend continues, it is possible that it will become increasingly difficult for our funds to raise capital. More significantly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors leads to a reduction in the size and duration of pricing inefficiencies. Many alternative investment strategies seek to exploit these inefficiencies and, in certain industries, this drives prices for investments higher, in either case increasing the difficulty of achieving targeted returns. In addition, if interest rates were to rise or there were to be a prolonged bull market in equities, the attractiveness of our funds relative to investments in other investment products could decrease. Competition is based on a variety of factors, including:

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~~investment performance;~~

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~~investor perception of the drive, focus and alignment of interest of an investment manager;~~

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~~quality of service provided to and duration of relationship with investors;~~

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~~business reputation; and~~

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~~level of fees and expenses charged for services.~~

We compete in the asset management business with a large number of investment management firms, private equity fund sponsors, hedge fund sponsors and other financial institutions. A number of factors serve to increase our competitive risks, as follows:

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~~investors may develop concerns that we will allow a fund to grow to the detriment of its performance;~~

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some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities;

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some of our competitors may perceive risk differently than we do which could allow them either to outbid us for investments in particular sectors or, generally, to consider a wider variety of investments;

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there are relatively few barriers to entry impeding new asset management firms, and the successful efforts of new entrants into our various lines of business, including former “star” portfolio managers at large diversified financial institutions as well as such institutions themselves, will continue to result in increased competition; and

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~~other industry participants in the asset management business continuously seek to recruit our best and brightest investment professionals away from us.~~

These and other factors could reduce our earnings and revenues and adversely affect our business. In addition, if we are forced to compete with other alternative asset managers on the basis of price, we may not be able to maintain our current base management and incentive fee structures. We have historically competed primarily on the performance of our funds, and not on the level of our fees relative to those of our competitors. However, there is a risk that fees in the alternative investment management industry will decline, without regard to the historical performance of a manager, including our managers. Fee reductions on our existing or future funds, without corresponding decreases in our cost structure, would adversely affect our revenues and distributable earnings.

~~Poor investment performance may decrease assets under management and reduce revenues from and the profitability of our asset management business.~~

Revenues from our asset management business are primarily derived from asset management fees. Asset management fees are generally comprised of management and incentive fees. Management fees are typically based on assets under management, and incentive fees are earned on a quarterly or annual basis only if the return on our managed accounts exceeds a certain threshold return, or “highwater mark,” for each investor. We will not earn incentive fee income during a particular period, even when a fund had positive returns in that period, if we do not generate cumulative performance that surpasses a highwater mark. If a fund experiences losses, we will not earn incentive fees with regard to investors in that fund until its returns exceed the relevant highwater mark.

In addition, investment performance is one of the most important factors in retaining existing investors and competing for new asset management business. Investment performance may be poor as a result of the current or future difficult market or economic conditions, including changes in interest rates or inflation, terrorism, widespread outbreaks of disease, such as the ongoing COVID-19 pandemic, or political uncertainty, our investment style, the particular investments that we make, and other factors. Poor investment performance may result in a decline in our revenues and income by causing (i) the net asset value of the assets under our management to decrease, which would result in lower management fees to us, (ii) lower investment returns, resulting in a reduction of incentive fee income to us, and (iii) investor redemptions, which would result in lower fees to us because we would have fewer assets under management.

To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our asset management business will likely be reduced and our ability to grow existing funds and raise new funds in the future will likely be impaired.

~~The historical returns of our funds may not be indicative of the future results of our funds.~~

The historical returns of our funds should not be considered indicative of the future results that should be expected from such funds or from any future funds we may raise. Our rates of returns reflect unrealized gains, as of the applicable measurement date, which may never be realized due to changes in market and other conditions not in our control that may adversely affect the ultimate value realized from the investments in a fund. The returns of our funds may have also benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities. Furthermore, the historical and potential future returns of the funds we manage also may not necessarily bear any relationship to potential returns on our common stock.

~~We are subject to risks in using custodians.~~

Our asset management subsidiary and its managed funds depend on the services of custodians to settle and report securities transactions. In the event of the insolvency of a custodian, our funds might not be able to recover equivalent assets in whole or in part as they will rank among the custodian’s unsecured creditors in relation to assets which the custodian borrows, lends or otherwise uses. In addition, cash held by our funds with the custodian will not be segregated from the custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

~~We may suffer losses if our reputation is harmed.~~

Our ability to attract and retain customers and employees may be diminished to the extent our reputation is damaged. If we fail, or are perceived to fail, to address various issues that may give rise to reputational risk, we could harm our business prospects. These issues include, but are not limited to, appropriately dealing with market dynamics, potential conflicts of interest, legal and regulatory requirements, ethical issues, customer privacy, record-keeping, sales and trading practices, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products and services. Failure to appropriately address these issues could give rise to loss of existing or future business, financial loss, and legal or regulatory liability, including complaints, claims and enforcement proceedings against us, which could, in turn, subject us to fines, judgments and other penalties. In addition, our Capital Markets operations depend to a large extent on our relationships with our clients and reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging in our business than in other businesses.

Our Capital Markets operations are highly dependent on communications, information and other systems and third parties, and any systems failures could significantly disrupt our Capital Markets business.

Our data and transaction processing, custody, financial, accounting and other technology and operating systems are essential to our Capital Markets operations. A system malfunction (due to hardware failure, capacity overload, security incident, data corruption, etc.) or mistake made relating to the processing of transactions could result in financial loss, liability to clients, regulatory intervention, reputational damage and constraints on our ability to grow. We outsource a substantial portion of our critical data processing activities, including trade processing and back office data processing. We also contract with third parties for market data and other services. In the event that any of these service providers fails to adequately perform such services or the relationship between that service provider and us is terminated, we may experience a significant disruption in our operations, including our ability to timely and accurately process transactions or maintain complete and accurate records of those transactions.

Adapting or developing our technology systems to meet new regulatory requirements, client needs, expansion and industry demands also is critical for our business. Introduction of new technologies present new challenges on a regular basis. We have an ongoing need to upgrade and improve our various technology systems, including our data and transaction processing, financial, accounting, risk management and trading systems. This need could present operational issues or require significant capital spending. It also may require us to make additional investments in technology systems and may require us to reevaluate the current value and/or expected useful lives of our technology systems, which could negatively impact our results of operations.

Secure processing, storage and transmission of confidential and other information in our internal and outsourced computer systems and networks also is critically important to our business. We take protective measures and endeavor to modify them as circumstances warrant. However, our computer systems and software are subject to unauthorized access, computer viruses or other malicious code, inadvertent, erroneous or intercepted transmission of information (including by e-mail), and other events that have had an information security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

A disruption in the infrastructure that supports our business due to fire, natural disaster, health emergency (for example, the ongoing COVID-19 pandemic), power or communication failure, act of terrorism or war may affect our ability to service and interact with our clients. If we are not able to implement contingency plans effectively, any such disruption could harm our results of operations. Due to the ongoing COVID-19 pandemic, many businesses, including ours, have shifted largely to telecommuting. While we continue to evaluate the situation and invest in our technological infrastructure, the duration and effects of this shift are uncertain, but could make our operations more vulnerable.

~~The growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates may adversely affect this business and may increase competition.~~

The continued growth of electronic trading and the introduction of new technologies is changing our market-making business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically, through alternative trading systems. We expect that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-making business and with our algorithmic trading platform, and we may experience continued competitive pressures in these and other areas. Significant resources have been invested in the development of our electronic trading systems, which includes our at-the-market business, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically manual trading markets.

~~Pricing and other competitive pressures may impair the revenues of our sales and trading business.~~

We derive a significant portion of our revenues for our investment banking operations from our sales and trading business. There has been intense price competition and trading volume reduction in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has increased the downward pressure on per share trading commissions and spreads. We expect these trends toward alternative trading systems and downward pricing pressure in the business to continue. We experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the basis of price or by using their own capital to facilitate client trading activities. In addition, we face pressure from our larger competitors, many of whom are better able to offer a broader range of complementary products and services to clients in order to win their trading business. These larger competitors may also be better able to respond to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. As we are committed to maintaining and improving our comprehensive research coverage in our target sectors to support our sales and trading business, we may be required to make substantial investments in our research capabilities to remain competitive. If we are unable to compete effectively in these areas, the revenues of our sales and trading business may decline, and our business, results of operations and financial condition may be harmed.

Some of our large institutional sales and trading clients in terms of brokerage revenues have entered into arrangements with us and other investment banking firms under which they separate payments for research products or services from trading commissions for sales and trading services, and pay for research directly in cash, instead of compensating the research providers through trading commissions (referred to as “soft dollar” practices). In addition, we have entered into certain commission sharing arrangements in which institutional clients execute trades with a limited number of brokers and instruct those brokers to allocate a portion of the commission directly to us or other broker-dealers for research or to an independent research provider. If more of such arrangements are reached between our clients and us, or if similar practices are adopted by more firms in the investment banking industry, we expect that would increase the competitive pressures on trading commissions and spreads and reduce the value our clients place on high quality research. Conversely, if we are unable to make similar arrangements with other investment managers that insist on separating trading commissions from research products, volumes and trading commissions in our sales and trading business also would likely decrease.

~~Larger and more frequent capital commitments in our trading and underwriting businesses increase the potential for significant losses.~~

Certain financial services firms make larger and more frequent commitments of capital in many of their activities. For example, in order to win business, some investment banks increasingly commit to purchase large blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting process in which marketing is typically completed before an investment bank commits to purchase securities for resale. We have participated in this activity and expect to continue to do so and, as a result, we are subject to increased risk. Conversely, if we do not have sufficient regulatory capital to so participate, our business may suffer. Furthermore, we may suffer losses as a result of the positions taken in these transactions even when economic and market conditions are generally favorable for others in the industry.

We may increasingly commit our own capital as part of our trading business to facilitate client sales and trading activities. The number and size of these transactions may adversely affect our results of operations in a given period. We may also incur significant losses from our sales and trading activities due to market fluctuations and volatility in our results of operations. To the extent that we own assets, i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market.

We have made and may make Principal Investments in relatively high-risk, illiquid assets that often have significantly leveraged capital structures, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of the principal amount we invest in these activities.

From time to time, we use our capital, including on a leveraged basis, in proprietary investments in both private company and public company securities that may be illiquid and volatile. The equity securities of a privately-held entity in which we make a proprietary investment are likely to be restricted as to resale and are otherwise typically highly illiquid. In the case of fund or similar investments, our investments may be illiquid until such investment vehicles are liquidated. We expect that there will be restrictions on our ability to resell the securities that we acquire for a period of up to one year after we acquire those securities. Thereafter, a public market sale may be subject to volume limitations or dependent upon securing a registration statement for an initial and potentially secondary public offering of the securities. We may make Principal Investments that are significant relative to the overall capitalization of the investee company and resales of significant amounts of these securities might be subject to significant limitations and adversely affect the market and the sales price for the securities in which we invest. In addition, our Principal Investments may involve entities or businesses with capital structures that have significant leverage. The large amount of borrowing in the leveraged capital structure increases the risk of losses due to factors such as rising interest rates, downturns in the economy or deteriorations in the condition of the investment or its industry. In the event of defaults under borrowings, the assets being financed would be at risk of foreclosure, and we could lose our entire investment.

Even if we make an appropriate investment decision based on the intrinsic value of an enterprise, we cannot assure you that general market conditions will not cause the market value of our investments to decline. For example, an increase in interest rates, a general decline in the stock markets, such as the recent declines in the stock markets due to the ongoing COVID-19 pandemic, or other market and industry conditions adverse to companies of the type in which we invest and intend to invest could result in a decline in the value of our investments or a total loss of our investment.

In addition, some of these investments are, or may in the future be, in industries or sectors which are unstable, in distress or undergoing some uncertainty. Further, the companies in which we invest may rely on new or developing technologies or novel business models, or concentrate on markets which are or may be disproportionately impacted by pressures in the financial services and/or mortgage and real estate sectors, have not yet developed and which may never develop sufficiently to support successful operations, or their existing business operations may deteriorate or may not expand or perform as projected. Such investments may be subject to rapid changes in value caused by sudden company-specific or industry-wide developments. Contributing capital to these investments is risky, and we may lose some or all of the principal amount of our investments. There are no regularly quoted market prices for a number of the investments that we make. The value of our investments is determined using fair value methodologies described in valuation policies, which may consider, among other things, the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third parties for the investment and the trading price of recent sales of securities (in the case of publicly-traded securities), restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individual investments are based on estimates and assumptions specific to the particular investments. Therefore, the value of our investments does not necessarily reflect the prices that would actually be obtained by us when such investments are sold. Realizations, if any, at values significantly lower than the values at which investments have been reflected on our balance sheet would result in loses of potential incentive income and Principal Investments.

~~We are exposed to credit risk from a variety of our activities and we may not be able to fully realize the value of the collateral securing certain of our loans.~~

We are generally exposed to the risk that third parties that owe us money, securities or other assets will fail to meet their obligations to us due to numerous causes, including bankruptcy, lack of liquidity, or operational failure, among others. Additionally, when we guarantee or backstop the obligations of third parties, we are exposed to the risk that our guarantee or backstop may be called by the holder following a default by the primary obligor, which could cause us to incur significant losses, and, when our obligations are secured, expose us to the risk that the holder may seek to foreclose on collateral pledged by us.

We incur credit risk through loans, lines of credit, guarantees and backstop commitments issued to or on behalf of businesses and individuals, and other loans collateralized by a variety of assets, including securities. Our credit risk and credit losses can increase if our loans or investments are concentrated among borrowers or issuers engaged in the same or similar activities, industries, or geographies, or to borrowers or issuers who as a group may be uniquely or disproportionately affected by economic or market conditions. The deterioration of an individually large exposure, for example due to natural disasters, health emergencies or pandemics (like the ongoing COVID-19 pandemic), acts of terrorism, severe weather events or other adverse economic events, could lead to additional loan loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net income and regulatory capital.

~~The amount and duration of our credit exposures have been increasing over the past year, as have the breadth and size of the entities to which we have credit exposures.~~

We permit our clients to purchase securities on margin. During periods of steep declines in securities prices, the value of the collateral securing client margin loans may fall below the amount of the purchaser’s indebtedness. If clients are unable to provide additional collateral for these margin loans, we may incur losses on those margin transactions. This may cause us to incur additional expenses defending or pursuing claims or litigation related to counterparty or client defaults.

Although a substantial amount of our loans to counterparties are protected by holding security interests in the assets or equity interests of the borrower, we may not be able to fully realize the value of the collateral securing our loans due to one or more of the following factors:

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Our loans may be unsecured, therefore our liens on the collateral, if any, are subordinated to those of the senior secured debt of the borrower, if any. As a result, we may not be able to control remedies with respect to the collateral.

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The collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of secured debt of the borrower that ranks senior to our loan.

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~~Bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process.~~

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~~Our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral.~~

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~~The need to obtain regulatory and contractual consents could impair or impede how effectively the collateral would be liquidated and could affect the value received.~~

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Some or all of the collateral may be illiquid and may have no readily ascertainable market value. The liquidity and value of the collateral could be impaired as a result of changing economic conditions, competition, and other factors, including the availability of suitable buyers.

~~We may experience write downs of our investments and other losses related to the valuation of our investments and volatile and illiquid market conditions.~~

In our proprietary investment activities, our concentrated holdings, illiquidity and market volatility may make it difficult to value certain of our investment securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of these factors could require us to take write downs in the value of our investment and securities portfolio, which may have an adverse effect on our results of operations in future periods.

~~Our underwriting and market making activities may place our capital at risk.~~

We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities we purchased as an underwriter at the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. Further, even though underwriting agreements with issuing companies typically include a right to indemnification in favor of the underwriter for these offerings to cover potential liability from any material misstatements or omissions, indemnification may be unavailable or insufficient in certain circumstances, for example if the issuing company has become insolvent. As a market maker, we may own large positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if our holdings were more diversified.

Our businesses may be adversely affected by the disruptions in the credit markets, such as those due to the ongoing COVID-19 pandemic, including reduced access to credit and liquidity and higher costs of obtaining credit.

In the event existing internal and external financial resources do not satisfy our needs, we would have to seek additional outside financing. The availability of outside financing will depend on a variety of factors, such as our financial condition and results of operations, the availability of acceptable collateral, market conditions, the general availability of credit, the volume of trading activities, and the overall availability of credit to the financial services industry, all of which may be negatively impacted due to the ongoing COVID-19 pandemic.

Widening credit spreads, as well as significant declines in the availability of credit, could adversely affect our ability to borrow on an unsecured basis. Disruptions in the credit markets could make it more difficult and more expensive to obtain funding for our businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability, particularly in our businesses that involve investing and taking principal positions.

Liquidity, or ready access to funds, is essential to financial services firms, including ours. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our sales and trading business, and perceived liquidity issues may affect the willingness of our clients and counterparties to engage in sales and trading transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption, including disruptions due to the ongoing COVID-19 pandemic, or an operational problem that affects our sales and trading clients, third parties or us. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.

Our clients engaging us with respect to mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance their transactions. The lack of available credit and the increased cost of credit could adversely affect the size, volume and timing of our clients’ merger and acquisition transactions-particularly large transactions-and adversely affect our investment banking business and revenues.

~~We have experienced losses and may not achieve or maintain profitability.~~

Our profitability in each reporting period is impacted by the number and size of retail liquidation and Capital Markets engagements we perform on a quarterly or annual basis. We have experienced losses with respect to our current operations and it is possible that we may continue to experience losses as we continue to expand our operations and manage disruptions due to the ongoing COVID-19 pandemic. In addition, we expect that our operating expenses will increase to the extent that we grow our business. We may not be able to generate sufficient revenues to maintain profitability.

~~Because of their significant stock ownership, some of our existing stockholders will be able to exert control over us and our significant corporate decisions.~~

Our executive officers, directors and their affiliates own or control, in the aggregate, approximately 25.4% of our outstanding common stock as of March 31, 2020. In particular, our Chairman and Co-Chief Executive Officer, Bryant R. Riley, owns or controls, in the aggregate,4,722,409 shares of our common stock or 18.2% of our outstanding common stock as of March 31, 2020. These stockholders are able to exercise influence over matters requiring stockholder approval, such as the election of directors and the approval of significant corporate transactions, including transactions involving an actual or potential change of control of the company or other transactions that non-controlling stockholders may not deem to be in their best interests. This concentration of ownership may harm the market price of our common stock by, among other things:

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~~delaying, deferring, or preventing a change in control of our company;~~

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~~impeding a merger, consolidation, takeover, or other business combination involving our company;~~

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~~causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or~~

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~~discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.~~

~~We may incur losses as a result of “guarantee” based engagements that we enter into in connection with our Auction and Liquidation solutions business.~~

In many instances, in order to secure an engagement, we are required to bid for that engagement by guaranteeing to the client a minimum amount that such client will receive from the sale of inventory or assets. Our bid is based on a variety of factors, including: our experience, expertise, perceived value added by engagement, valuation of the inventory or assets and the prices we believe potential buyers would be willing to pay for such inventory or assets. An inaccurate estimate of any of the above or inaccurate valuation of the assets or inventory could result in us submitting a bid that exceeds the realizable proceeds from any engagement. If the liquidation proceeds, net of direct operating expenses, are less than the amount we guaranteed in our bid, we will incur a loss. Therefore, in the event that the proceeds, net of direct operating expenses, from an engagement are less than the bid, the value of the assets or inventory decline in value prior to the disposition or liquidation, or the assets are overvalued for any reason, we may suffer a loss and our financial condition and results of operations could be adversely affected.

~~Losses due to any auction or liquidation engagement may cause us to become unable to make payments due to our creditors and may cause us to default on our debt obligations.~~

We have three engagement structures for our Auction and Liquidation services: (i) a “fee” based structure under which we are compensated for our role in an engagement on a commission basis, (ii) purchase on an outright basis (and take title to) the assets or inventory of the client, and (iii) “guarantee” to the client that a certain amount will be realized by the client upon the sale of the assets or inventory based on contractually defined terms in the auction or liquidation contract. We bear the risk of loss under the purchase and guarantee structures of Auction and Liquidation contracts. If the amount realized from the sale or disposition of assets, net of direct operating expenses, does not equal or exceed the purchase price (in purchase transaction), we will recognize a loss on the engagement, or should the amount realized, net of direct operating expenses, not equal or exceed the “guarantee,” we are still required to pay the guaranteed amount to the client.

~~The ongoing COVID-19 pandemic has temporarily limited our Auction and Liquidation businesses.~~

While we expect that our Auction and Liquidation services business will experience increased demand in the medium to long term as a result of business disruptions due to the ongoing COVID-19 pandemic, restrictions limiting travel, public gatherings and requiring store closures due to “social distancing” measures imposed to control the pandemic has temporarily limited our ability to conduct auctions and liquidations. We cannot predict when these restrictions will be relaxed or lifted or the extent to which such restrictions will materially and negatively affect our auction and liquidation businesses.

~~We could incur losses in connection with outright purchase transactions in which we engage as part of our Auction and Liquidation solutions business.~~

When we conduct an asset disposition or liquidation on an outright purchase basis, we purchase from the client the assets or inventory to be sold or liquidated and therefore, we hold title to any assets or inventory that we are not able to sell. In other situations, we may acquire assets from our clients if we believe that we can identify a potential buyer and sell the assets at a premium to the price paid. We store these unsold or acquired assets and inventory until they can be sold or, alternatively, transported to the site of a liquidation of comparable assets or inventory that we are conducting. If we are forced to sell these assets for less than we paid, or are required to transport and store assets multiple times, the related expenses could have a material adverse effect on our results of operations.

We depend on financial institutions as primary clients for our Valuation and Appraisal business. Consequently, the loss of any financial institutions as clients may have an adverse impact on our business.

A majority of the revenue from our Valuation and Appraisal business is derived from engagements by financial institutions. As a result, any loss of financial institutions as clients of our valuation and advisory services, whether due to changing preferences in service providers, failures of financial institutions or mergers and consolidations within the finance industry, could significantly reduce the number of existing, repeat and potential clients, thereby adversely affecting our revenues. In addition, any larger financial institutions that result from mergers or consolidations in the financial services industry could have greater leverage in negotiating terms of engagements with us, or could decide to internally perform some or all of the Valuation and Appraisal services which we currently provide to one of the constituent institutions involved in the merger or consolidation or which we could provide in the future. Any of these developments could have a material adverse effect on our Valuation and Appraisal business.

~~We may face liability or harm to our reputation as a result of a claim that we provided an inaccurate appraisal or valuation and our insurance coverage may not be sufficient to cover the liability.~~

We could face liability in connection with a claim by a client that we provided an inaccurate appraisal or valuation on which the client relied. Any claim of this type, whether with or without merit, could result in costly litigation, which could divert management’s attention and company resources and harm our reputation. Furthermore, if we are found to be liable, we may be required to pay damages. While our appraisals and valuations are typically provided only for the benefit of our clients, if a third party relies on an appraisal or valuation and suffers harm as a result, we may become subject to a legal claim, even if the claim is without merit. We carry insurance for liability resulting from errors or omissions in connection with our appraisals and valuations; however, the coverage may not be sufficient if we are found to be liable in connection with a claim by a client or third party.

~~We could be forced to mark down the value of certain assets acquired in connection with outright purchase transactions.~~

In most instances, inventory is reported on the balance sheet at its historical cost; however, according to U.S. Generally Accepted Accounting Principles, inventory whose historical cost exceeds its market value should be valued conservatively, which dictates a lower value should apply. Accordingly, should the replacement cost (due to technological obsolescence or otherwise), or the net realizable value of any inventory we hold be less than the cost paid to acquire such inventory (purchase price), we will be required to “mark down” the value of such inventory held. If the value of any inventory held on our balance sheet is required to be written down, such write down could have a material adverse effect on our financial position and results of operations.

We operate in highly competitive industries. Some of our competitors may have certain competitive advantages, which may cause us to be unable to effectively compete with or gain market share from our competitors.

We face competition with respect to all of our service areas. The level of competition depends on the particular service area and, in the case of our asset and liquidation services, the category of assets being liquidated or appraised. We compete with other companies and investment banks to help clients with their corporate finance and capital needs. In addition, we compete with companies and online services in the bidding for assets and inventory to be liquidated. The demand for online solutions continues to grow and our online competitors include other e-commerce providers, auction websites such as eBay, as well as government agencies and traditional liquidators and auctioneers that have created websites to further enhance their product offerings and more efficiently liquidate assets. We expect the market to become even more competitive as the demand for such services continues to increase and traditional and online liquidators and auctioneers continue to develop online and offline services for disposition, redeployment and remarketing of wholesale surplus and salvage assets. In addition, manufacturers, retailers and government agencies may decide to create their own websites to sell their own surplus assets and inventory and those of third parties.

We also compete with other providers of valuation and advisory services. Competitive pressures within the Valuation and Appraisal services market, including a decrease in the number of engagements and/or a decrease in the fees which can be charged for these services, could affect revenues from our Valuation and Appraisal services as well as our ability to engage new or repeat clients. We believe that given the relatively low barriers to entry in the Valuation and Appraisal services market, this market may become more competitive as the demand for such services increases.

Some of our competitors may be able to devote greater financial resources to marketing and promotional campaigns, secure merchandise from sellers on more favorable terms, adopt more aggressive pricing or inventory availability policies and devote more resources to website and systems development than we are able to do. Any inability on our part to effectively compete could have a material adverse effect on our financial condition, growth potential and results of operations.

We compete with specialized investment banks to provide financial and investment banking services to small and middle-market companies. Middle-market investment banks provide access to capital and strategic advice to small and middle-market companies in our target industries. We compete with those investment banks on the basis of a number of factors, including client relationships, reputation, the abilities of our professionals, transaction execution, innovation, price, market focus and the relative quality of our products and services. We have experienced intense competition over obtaining advisory mandates in recent years, and we may experience pricing pressures in our investment banking business in the future as some of our competitors seek to obtain increased market share by reducing fees. Competition in the middle-market may further intensify if larger Wall Street investment banks expand their focus to this sector of the market. Increased competition could reduce our market share from investment banking services and our ability to generate fees at historical levels.

We also face increased competition due to a trend toward consolidation. In recent years, there has been substantial consolidation and convergence among companies in the financial services industry. This trend was amplified in connection with the unprecedented disruption and volatility in the financial markets during the past several years, and, as a result, a number of financial services companies have merged, been acquired or have fundamentally changed their respective business models. Many of these firms may have the ability to support investment banking, including financial advisory services, with commercial banking, insurance and other financial services in an effort to gain market share, which could result in pricing pressure in our businesses.

magicJack competes with the traditional telephone service providers, which provide telephone service using the public switched telephone network. Certain of these traditional providers have also added, or are planning to add, broadband telephone services to their existing telephone and broadband offerings. We also face, or expect to face, competition from cable companies, which offer broadband telephone services to their existing cable television and broadband offerings. Further, wireless providers offer services that some customers may prefer over wireline-based service. In the future, as wireless companies offer more minutes at lower prices, their services may become more attractive to customers as a replacement for broadband or wireline-based phone service. We face competition on magicJack device sales from manufacturers of smart phones, tablets and other handheld wireless devices. Also, we compete against established alternative voice communication providers, and may face competition from other large, well-capitalized Internet companies. In addition, we compete with independent broadband telephone service providers.

Our brand investment portfolio competes with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangements with retailers and wholesalers in the United States and internationally. These arrangements could be with our existing retail and wholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in which our branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees that manufacture and distribute our products. These companies may be able to respond more quickly to changes in retailer, wholesaler and consumer preferences and devote greater resources to brand acquisition, development and marketing.

~~If we are unable to attract and retain qualified personnel, we may not be able to compete successfully in our industry.~~

Our future success depends to a significant degree upon the continued contributions of senior management and the ability to attract and retain other highly qualified management personnel. We face competition for management from other companies and organizations; therefore, we may not be able to retain our existing personnel or fill new positions or vacancies created by expansion or turnover at existing compensation levels. Although we have entered into employment agreements with key members of the senior management team, there can be no assurances such key individuals will remain with us. The loss of any of our executive officers or other key management personnel would disrupt our operations and divert the time and attention of our remaining officers and management personnel which could have an adverse effect on our results of operations and potential for growth.

We also face competition for highly skilled employees with experience in our industry, which requires a unique knowledge base. We may be unable to recruit or retain other existing technical, sales and client support personnel that are critical to our ability to execute our business plan. Additionally, the ongoing COVID-19 pandemic could affect the availability of our key personnel.

~~We frequently use borrowings under credit facilities in connection with our guaranty engagements, in which we guarantee a minimum recovery to the client, and outright purchase transactions.~~

In engagements where we operate on a guaranty or purchase basis, we are typically required to make an upfront payment to the client. If the upfront payment is less than 100% of the guarantee or the purchase price in a “purchase” transaction, we may be required to make successive cash payments until the guarantee is met or we may issue a letter of credit in favor of the client. Depending on the size and structure of the engagement, we may borrow under our credit facilities and may be required to issue a letter of credit in favor of the client for these additional amounts. If we lose any availability under our credit facilities, are unable to borrow under credit facilities and/or issue letters of credit in favor of clients, or borrow under credit facilities and/or issue letters of credit on commercially reasonable terms, we may be unable to pursue large liquidation and disposition engagements, engage in multiple concurrent engagements, pursue new engagements or expand our operations. We are required to obtain approval from the lenders under our existing credit facilities prior to making any borrowings thereunder in connection with a particular engagement. Any inability to borrow under our credit facilities, or enter into one or more other credit facilities on commercially reasonable terms may have a material adverse effect on our financial condition, results of operations and growth.

~~Defaults under our credit agreements could have an adverse impact on our ability to finance potential engagements.~~

The terms of our credit agreements contain a number of events of default. Should we default under any of our credit agreements in the future, lenders may take any or all remedial actions set forth in such credit agreement, including, but not limited to, accelerating payment and/or charging us a default rate of interest on all outstanding amounts, refusing to make any further advances or issue letters of credit, or terminating the line of credit. As a result of our reliance on lines of credit and letters of credit, any default under a credit agreement, or remedial actions pursued by lenders following any default under a credit agreement, may require us to immediately repay all outstanding amounts, which may preclude us from pursuing new liquidation and disposition engagements and may increase our cost of capital, each of which may have a material adverse effect on our financial condition and results of operations.

~~If we cannot meet our future capital requirements, we may be unable to develop and enhance our services, take advantage of business opportunities and respond to competitive pressures.~~

We may need to raise additional funds in the future to grow our business internally, invest in new businesses, expand through acquisitions, enhance our current services or respond to changes in our target markets. If we raise additional capital through the sale of equity or equity derivative securities, the issuance of these securities could result in dilution to our existing stockholders. If additional funds are raised through the issuance of debt securities, the terms of that debt could impose additional restrictions on our operations or harm our financial condition. Additional financing may be unavailable on acceptable terms.

~~We are subject to net capital and other regulatory capital requirements; failure to comply with these rules would significantly harm our business.~~

B. Riley FBR, our broker-dealer subsidiary, is subject to the net capital requirements of the SEC, FINRA, and various self-regulatory organizations of which it is a member. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form. Failure to maintain the required net capital may subject a firm to limitation of its activities, including suspension or revocation of its registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies, and ultimately may require its liquidation. Failure to comply with the net capital rules could have material and adverse consequences, such as:

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~~limiting our operations that require intensive use of capital, such as underwriting or trading activities; or~~

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restricting us from withdrawing capital from our subsidiaries, when our broker-dealer subsidiary has more than the minimum amount of required capital. This, in turn, could limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt and/or repurchase our shares.

In addition, a change in the net capital rules or the imposition of new rules affecting the scope, coverage, calculation, or amount of net capital requirements, or a significant operating loss or any large charge against net capital, could have similar adverse effects.

Furthermore, B. Riley FBR is subject to laws that authorize regulatory bodies to block or reduce the flow of funds from it to B. Riley Financial, Inc. As a holding company, B. Riley Financial, Inc. depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments, if any, and to fund all payments on its obligations, including debt obligations. As a result, regulatory actions could impede access to funds that B. Riley Financial, Inc. needs to make payments on obligations, including debt obligations, or dividend payments. In addition, because B. Riley Financial, Inc. holds equity interests in the firm’s subsidiaries, its rights as an equity holder to the assets of these subsidiaries may not materialize, if at all, until the claims of the creditors of these subsidiaries are first satisfied.

~~We may incur losses as a result of ineffective risk management processes and strategies.~~

We seek to monitor and control our risk exposure through operational and compliance reporting systems, internal controls, management review processes and other mechanisms. Our investing and trading processes seek to balance our ability to profit from investment and trading positions with our exposure to potential losses. While we employ limits and other risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate economic and financial outcomes or the specifics and timing of such outcomes. Thus, we may, in the course of our investment and trading activities, incur losses, which may be significant.

In addition, we are investing our own capital in our funds and funds of funds as well as principal investing activities, and limitations on our ability to withdraw some or all of our investments in these funds or liquidate our investment positions, whether for legal, reputational, illiquidity or other reasons, may make it more difficult for us to control the risk exposures relating to these investments.

~~Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risks.~~

Our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk. We seek to manage, monitor and control our operational, legal and regulatory risk through operational and compliance reporting systems, internal controls, management review processes and other mechanisms; however, there can be no assurance that our procedures will be fully effective. Further, our risk management methods may not effectively predict future risk exposures, which could be significantly greater than the historical measures indicate. In addition, some of our risk management methods are based on an evaluation of information regarding markets, clients and other matters that are based on assumptions that may no longer be accurate. A failure to adequately manage our growth, or to effectively manage our risk, could materially and adversely affect our business and financial condition.

We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, and breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. As an introducing broker, we could be held responsible for the defaults or misconduct of our customers. These may present credit concerns, and default risks may arise from events or circumstances that are difficult to detect, foresee or reasonably guard against. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.

~~Our common stock price may fluctuate substantially, and your investment could suffer a decline in value.~~

~~The market price of our common stock may be volatile and could fluctuate substantially due to many factors, including, among other things:~~

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~~actual or anticipated fluctuations in our results of operations;~~

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~~announcements of significant contracts and transactions by us or our competitors;~~

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~~sale of common stock or other securities in the future;~~

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~~the trading volume of our common stock;~~

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~~changes in our pricing policies or the pricing policies of our competitors; and~~

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~~general economic conditions~~

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market factors may materially harm the market price of our common stock, regardless of our operating performance.

~~The trading price of our common shares is subject to volatility.~~

On November 16, 2016, we began trading our shares on the NASDAQ Global Market. Trading of our common stock has in the past been highly volatile and the market price of shares of our common stock could continue to fluctuate substantially. Additionally, if we are not able to maintain our listing on NASDAQ, then our common stock will again be quoted for trading on an over-the-counter quotation system and may be subject to more significant fluctuations in stock price and trading volume and large bid and ask price spreads.

Our amended and restated certificate of incorporation authorizes our board of directors to issue new series of preferred stock that may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.

Our amended and restated certificate of incorporation provides that our board of directors will be authorized to issue from time to time, without further stockholder approval, up to 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change of control of our company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights.

~~Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market price of our stock.~~

Our amended and restated certificate of incorporation and our bylaws, as amended, contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. We are also governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. The foregoing and other provisions in our amended and restated certificate of incorporation, our bylaws, as amended, and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could prevent the consummation of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.

~~Our ability to use net loss carryovers to reduce our taxable income may be limited.~~

As a result of the common stock offering that was completed on June 5, 2014, the Company had a more than 50% ownership shift in accordance with Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, the Company may be limited to the amount of net operating loss that may be utilized in future taxable years depending on the Company’s actual taxable income. As a result of the acquisition of UOL on July 1, 2016, the historical net operating losses of UOL are limited to offset income we generate post acquisition. As of December 31, 2019, the Company believes that the net operating loss that existed as of the more than 50% ownership shift will be utilized in future tax periods before the loss carryforwards expire and it is more-likely-than-not that future taxable earnings will be sufficient to realize its deferred tax assets and has not provided an allowance. However, to the extent that the Company is unable to utilize such net operating loss, it may have a material adverse effect on our financial condition and results of operations.

The tax benefits, grants and other incentives available to us require us to continue to meet various conditions and may be terminated, repaid or reduced in the future, which could increase our costs and taxes.

The Israeli government currently provides major tax and capital investment incentives to domestic companies, as well as grant and loan programs relating to research and development and marketing and export activities. In recent years, the Israeli Government has reduced the benefits available under these programs and the Israeli Governmental authorities have indicated that the government may in the future further reduce, seek repayment or eliminate the benefits of those programs. magicJack currently takes advantage of these programs. There is no assurance that we will continue to meet the conditions of such benefits and programs or that such benefits and programs would continue to be available to us in the future. If we fail to meet the conditions of such benefits and programs or if they are terminated or further reduced, it could have an adverse effect on our business, operating results and financial condition.

~~Changes in tax laws or regulations, or to interpretations of existing tax laws or regulations, to which we are subject could adversely affect our financial condition and cash flows.~~

We are subject to taxation in the United States and in some foreign jurisdictions. Our financial condition and cash flows are impacted by tax policy implemented at each of the federal, state, local and international levels. We cannot predict whether any changes to tax laws or regulations, or to interpretations of existing tax laws or regulations, will be implemented in the future or whether any such changes would have a material adverse effect on our financial condition and cash flows. However, future changes to tax laws or regulations, or to interpretations of existing tax laws or regulations, could increase our tax burden or otherwise adversely affect our financial condition and cash flows.

Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.

Firms in the financial services industry have been operating in a difficult regulatory environment which we expect will become even more stringent in light of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced increased scrutiny from a variety of regulators, including the SEC, the NYSE, FINRA and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to carry on particular businesses. For example, a failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Investment Advisers Act of 1940 on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or by the Investment Company Act of 1940, could result in investigations, sanctions and reputational damage. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or FINRA or other self-regulatory organizations that supervise the financial markets. Substantial legal liability or significant regulatory action against us could have adverse financial effects on us or cause reputational harm to us, which could harm our business prospects.

In addition, financial services firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts and regularly review and update our policies, controls and procedures. However, appropriately addressing conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to appropriately address conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs and additional operational personnel. Failure to adhere to these policies and procedures may result in regulatory sanctions or litigation against us. For example, the research operations of investment banks have been and remain the subject of heightened regulatory scrutiny which has led to increased restrictions on the interaction between equity research analysts and investment banking professionals at securities firms. Several securities firms in the U.S. reached a global settlement in 2003 and 2004 with certain federal and state securities regulators and self-regulatory organizations to resolve investigations into the alleged conflicts of interest of research analysts, which resulted in rules that have imposed additional costs and limitations on the conduct of our business.

Asset management businesses have experienced a number of highly publicized regulatory inquiries which have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisors and broker-dealers. Our subsidiary, B. Riley Capital Management, LLC, is registered as an investment advisor with the SEC and regulatory scrutiny and rulemaking initiatives may result in an increase in operational and compliance costs or the assessment of significant fines or penalties against our asset management business, and may otherwise limit our ability to engage in certain activities. In addition, the SEC staff has conducted studies with respect to soft dollar practices in the brokerage and asset management industries and proposed interpretive guidance regarding the scope of permitted brokerage and research services in connection with soft dollar practices. The SEC staff has indicated that it is considering additional rulemaking in this and other areas, and we cannot predict the effect that additional rulemaking may have on our asset management or brokerage business or whether it will be adverse to us. In addition, Congress is currently considering imposing new requirements on entities that securitize assets, which could affect our credit activities. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.

~~Financial reforms and related regulations may negatively affect our business activities, financial position and profitability.~~

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) instituted a wide range of reforms that have impacted and will continue to impact financial services firms and continues to require significant rule-making. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. The legislation and regulation of financial institutions, both domestically and internationally, include calls to increase capital and liquidity requirements; limit the size and types of the activities permitted; and increase taxes on some institutions. FINRA’s oversight over broker-dealers and investment advisors may be expanded, and new regulations on having investment banking and securities analyst functions in the same firm may be created. Certain of the provisions of the Dodd-Frank Act remain subject to further rule making procedures and studies. As a result, we cannot assess the full impact of all of these legislative and regulatory changes on our business at the present time. However, these legislative and regulatory changes could affect our revenue, limit our ability to pursue business opportunities, impact the value of assets that we hold, require us to change certain of our business practices, impose additional costs on us, or otherwise adversely affect our businesses. If we do not comply with current or future legislation and regulations that apply to our operations, we may be subject to fines, penalties or material restrictions on our businesses in the jurisdiction where the violation occurred. Accordingly, such legislation or regulation could have an adverse effect on our business, results of operations, cash flows or financial condition.

~~Our failure to deal appropriately with conflicts of interest could damage our reputation and adversely affect our business.~~

As we have expanded the number and scope of our businesses, we increasingly confront potential conflicts of interest relating to our and our funds’ and clients’ investment and other activities. Certain of our funds have overlapping investment objectives, including funds which have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among ourselves and those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of the Company or other funds to take any action.

In addition, there may be conflicts of interest regarding investment decisions for funds in which our officers, directors and employees, who have made and may continue to make significant personal investments in a variety of funds, are personally invested. Similarly, conflicts of interest may exist or develop regarding decisions about the allocation of specific investment opportunities between the Company and the funds.

We also have potential conflicts of interest with our investment banking and institutional clients including situations where our services to a particular client or our own proprietary or fund investments or interests conflict or are perceived to conflict with a client. It is possible that potential or perceived conflicts could give rise to investor or client dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materially adversely affect our business in a number of ways, including as a result of redemptions by our investors from our hedge funds, an inability to raise additional funds and a reluctance of counterparties to do business with us.

~~Our exposure to legal liability is significant, and could lead to substantial damages.~~

We face significant legal risks in our businesses. These risks include potential liability under securities laws and regulations in connection with our Capital Markets, asset management and other businesses. The volume and amount of damages claimed in litigation, arbitrations, regulatory enforcement actions and other adversarial proceedings against financial services firms have increased in recent years. We also are subject to claims from disputes with our employees and our former employees under various circumstances. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time, making the amount of legal reserves related to these legal liabilities difficult to determine and subject to future revision. Legal or regulatory matters involving our directors, officers or employees in their individual capacities also may create exposure for us because we may be obligated or may choose to indemnify the affected individuals against liabilities and expenses they incur in connection with such matters to the extent permitted under applicable law. In addition, like other financial services companies, we may face the possibility of employee fraud or misconduct. The precautions we take to prevent and detect this activity may not be effective in all cases and there can be no assurance that we will be able to deter or prevent fraud or misconduct. Exposures from and expenses incurred related to any of the foregoing actions or proceedings could have a negative impact on our results of operations and financial condition. In addition, future results of operations could be adversely affected if reserves relating to these legal liabilities are required to be increased or legal proceedings are resolved in excess of established reserves.

~~Misconduct by our employees or by the employees of our business partners could harm us and is difficult to detect and prevent.~~

There have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur at our firm. For example, misconduct could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter misconduct and the precautions we take to detect and prevent this activity may not be effective in all cases. Our ability to detect and prevent misconduct by entities with which we do business may be even more limited. We may suffer reputational harm for any misconduct by our employees or those entities with which we do business.

Our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our financial condition, results of operations and business and the price of our common stock and other securities.

The Sarbanes-Oxley Act and the related rules require our management to conduct an annual assessment of the effectiveness of our internal control over financial reporting and require a report by our independent registered public accounting firm addressing our internal control over financial reporting. To comply with Section 404 of the Sarbanes-Oxley Act, we are required to document formal policies, processes and practices related to financial reporting that are necessary to comply with Section 404. Such policies, processes and practices are important to ensure the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.

If we fail for any reason to comply with the requirements of Section 404 in a timely manner, our independent registered public accounting firm may, at that time, issue an adverse report regarding the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition, results of operations and business, and result in a decline in the price of our common stock and other securities.

~~We may not pay dividends regularly or at all in the future.~~

From time to time, we may decide to pay dividends which will be dependent upon our financial condition and results of operations. Our Board of Directors may reduce or discontinue dividends at any time for any reason it deems relevant and there can be no assurances that we will continue to generate sufficient cash to pay dividends, or that we will continue to pay dividends with the cash that we do generate. The determination regarding the payment of dividends is subject to the discretion of our Board of Directors, and there can be no assurances that we will continue to generate sufficient cash to pay dividends, or that we will pay dividends in future periods.

~~Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.~~

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, clients and business partners, and personally identifiable information of our employees, in our servers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties. In addition, such a breach could disrupt our operations and the services we provide to our clients, damage our reputation, and cause a loss of confidence in our services, which could adversely affect our business and our financial condition.

Significant disruptions of information technology systems, breaches of data security, or unauthorized disclosures of sensitive data or personally identifiable information could adversely affect our business, and could subject us to liability or reputational damage.

Our business is increasingly dependent on critical, complex, and interdependent information technology (“IT”) systems, including Internet-based systems, some of which are managed or hosted by third parties, to support business processes as well as internal and external communications. The size and complexity of our IT systems make us vulnerable to, and we have experienced, IT system breakdowns, malicious intrusion, and computer viruses, which may result in the impairment of our ability to operate our business effectively.

In addition, our systems and the systems of our third-party providers and collaborators are potentially vulnerable to data security breaches which may expose sensitive data to unauthorized persons or to the public. Such data security breaches could lead to the loss of confidential information, trade secrets or other intellectual property, or could lead to the public exposure of personal information (including personally identifiable information) of our employees, customers, business partners, and others. In addition, the increased use of social media by our employees and contractors could result in inadvertent disclosure of sensitive data or personal information, including but not limited to, confidential information, trade secrets and other intellectual property.

Any such disruption or security breach, as well as any action by us or our employees or contractors that might be inconsistent with the rapidly evolving data privacy and security laws and regulations applicable within the United States and elsewhere where we conduct business, could result in enforcement actions by U.S. states, the U.S. Federal government or foreign governments, liability or sanctions under data privacy laws that protect personally identifiable information, regulatory penalties, other legal proceedings such as but not limited to private litigation, the incurrence of significant remediation costs, disruptions to our development programs, business operations and collaborations, diversion of management efforts and damage to our reputation, which could harm our business and operations. Because of the rapidly moving nature of technology and the increasing sophistication of cybersecurity threats, our measures to prevent, respond to and minimize such risks may be unsuccessful.

In addition, the European Parliament and the Council of the European Union adopted a comprehensive general data privacy regulation (“GDPR”) in 2016 that took effect in May 2018 and governs the collection and use of personal data in the European Union. The GDPR, which is wide-ranging in scope, will impose several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the European Union to the United States, enhances enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the infringer, whichever is greater. In addition, the California Consumer Privacy Act effective on January 1, 2020 and applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The CCPA will give consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the sale of the consumer’s personal information, and the right not to be discriminated against for exercising these rights. In October 2019, the California Attorney General adopted regulations to implement the CCPA. In addition, similar laws have and may be adopted by other states where the Company does business. The impact of the CCPA and other state privacy laws on the Company’s business is yet to be determined.

Due to the ongoing COVID-19 pandemic, most of our personnel have shifted to working remotely and we cannot predict the duration of this shift. While we have made substantial investments on our information security infrastructure, this shift has could put stress on our information security infrastructure and increase the risk of a data breach.

~~We may enter into new lines of business, make strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties for our business.~~

We may enter into new lines of business, make future strategic investments or acquisitions and enter into joint ventures. As we have in the past, and subject to market conditions, we may grow our business by increasing assets under management in existing investment strategies, pursue new investment strategies, which may be similar or complementary to our existing strategies or be wholly new initiatives, or enter into strategic relationships, or joint ventures. In addition, opportunities may arise to acquire or invest in other businesses that are related or unrelated to our current businesses.

To the extent we make strategic investments or acquisitions, enter into strategic relationships or joint ventures or enter into new lines of business, we will face numerous risks and uncertainties, including risks associated with the required investment of capital and other resources and with combining or integrating operational and management systems and controls and managing potential conflicts. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues, or produces investment losses, or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected, and our reputation and business may be harmed. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control.

~~UOL competes against large companies, many of whom have significantly more financial and marketing resources, and our business will suffer if we are unable to compete successfully.~~

UOL competes with numerous providers of broadband, mobile broadband and DSL services, as well as other dial-up Internet access providers, many of whom are large and have significantly more financial and marketing resources. The principal competitors for UOL’s mobile broadband and DSL services include, among others, local exchange carriers, wireless and satellite service providers, and cable service providers. These competitors include established providers such as AT&T, Verizon, Sprint, and T-Mobile. UOL’s principal dial-up Internet access competitors include established online service and content providers, such as AOL and MSN, and independent national Internet service providers, such as EarthLink and its PeoplePC subsidiary. Dial-up Internet access services do not compete favorably with broadband services with respect to connection speed and do not have a significant, if any, price advantage over certain broadband services. In addition, there are a number of mobile virtual network operators, some of which focus on pricing as their main selling point. Certain portions of the U.S., primarily rural areas, currently have limited or no access to broadband services. However, the U.S. government has indicated its intention to facilitate the provision of broadband services to such areas. Such expansion of the availability of broadband services will increase the competition for Internet access subscribers in such areas and will likely adversely affect the UOL business. In addition to competition from broadband, mobile broadband, and DSL providers, competition among dial-up Internet access service providers is intense and neither UOL’s pricing nor the features of UOL’s services provides us with a significant competitive advantage, if any, over certain of UOL’s dial-up Internet access competitors. We expect that competition, particularly with respect to price, for broadband, mobile broadband, and DSL services, as well as dial-up Internet access services, will continue and may materially and adversely impact our business, financial condition, results of operations, and cash flows.

~~Dial-up and DSL pay accounts may decline faster than expected and adversely impact our business.~~

A significant portion of UOL’s revenues and profits come from dial-up Internet and DSL access services and related services and advertising revenues. UOL’s dial-up and DSL Internet access pay accounts and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for dial-up and DSL Internet access, competitive pressures in the industry and limited sales efforts. Consumers continue to migrate to broadband access, primarily due to the faster connection and download speeds provided by broadband access. Advanced applications such as online gaming, music downloads and videos require greater bandwidth for optimal performance, which adds to the demand for broadband access. The pricing for basic broadband services has been declining as well, making it a more viable option for consumers. In addition, the popularity of accessing the Internet through tablets and mobile devices has been growing and may accelerate the migration of consumers away from dial-up Internet access. The number of dial-up Internet access pay accounts has been adversely impacted by both a decrease in the number of new pay accounts signing up for UOL’s services, as well as the impact of subscribers canceling their accounts, which we refer to as “churn.” Churn has increased from time to time and may increase in the future. If we experience a higher than expected level of churn, it will make it more difficult for us to increase or maintain the number of pay accounts, which could adversely affect our business, financial condition, results of operations, and cash flows.

We expect UOL’s dial-up and DSL Internet access pay accounts to continue to decline. As a result, related services revenues and the profitability of this segment may decline. The rate of decline in these revenues may continue to accelerate.

We may not be able to consistently make a high level of expense reductions in the future. Continued declines in revenues relating to the UOL business, particularly if such declines accelerate, will materially and adversely impact the profitability of this business.

Failure to maintain or grow advertising revenues from UOL, including as a result of failing to increase or maintain the number of subscribers for UOL’s services, could have a negative impact on advertising profitability.

Advertising revenues are a key component of revenues and profitability from UOL. UOL’s services currently generate advertising revenues from search placements, display advertisements and online market research associated with Internet access and email services. Factors that have caused, or may cause in the future, UOL’s advertising revenues to fluctuate include, without limitation, changes in the number of visitors to UOL’s websites, active accounts or consumers purchasing our services and products, the effect of, changes to, or terminations of key advertising relationships, changes to UOL’s websites and advertising inventory, changes in applicable laws, regulations or business practices, including those related to behavioral or targeted advertising, user privacy, and taxation, changes in business models, changes in the online advertising market, changes in the economy, advertisers’ budgeting and buying patterns, competition, and changes in usage of UOL’s services. Decreases in UOL’s advertising revenues are likely to adversely impact our profitability. Further, our successful operation and management of UOL, including the ability to generate advertising revenues for UOL’s services, will depend in part upon our ability to increase or maintain the number of subscribers for UOL’s services. A decline in the number of subscribers using UOL’s services could result in decreased advertising revenues, and decreases in advertising revenues would adversely impact our profitability. The failure to increase or maintain the number of subscribers for UOL’s services could have a material adverse effect on advertising revenues and our profitability.

Interruption or failure of the network, information systems or other technologies essential to the UOL business could impair our ability to provide services relating to the UOL business, which could damage our reputation and harm our operating results.

Our successful operation of the UOL business depends on our ability to provide reliable service. Many of UOL’s products are supported by data centers. UOL’s network, data centers, central offices and those of UOL’s third-party service providers are vulnerable to damage or interruption from fires, earthquakes, hurricanes, tornados, floods and other natural disasters, terrorist attacks, power loss, capacity limitations, telecommunications failures, software and hardware defects or malfunctions, break ins, sabotage and vandalism, human error and other disruptions that are beyond our control. Some of the systems serving the UOL business are not fully redundant, and our disaster recovery or business continuity planning may not be adequate. The UOL business could also experience interruptions due to cable damage, theft of equipment, power outages, inclement weather and service failures of third-party service providers. The occurrence of any disruption or system failure or other significant disruption to business continuity may result in a loss of business, increase expenses, damage to reputation for providing reliable service, subject us to additional regulatory scrutiny or expose us to litigation and possible financial losses, any of which could adversely affect our business, results of operations and cash flows.

~~We may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future.~~

From time to time third parties have alleged that UOL infringes on their intellectual property rights, including patent rights. We may be unaware of filed patent applications and of issued patents that could be related to the products and services we acquired in the UOL acquisition. These claims are often made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future royalty streams. Defending against disputes, litigation or other legal proceedings, whether or not meritorious, may involve significant expense and diversion of management’s attention and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions. Both the costs of defending lawsuits and any settlements or judgments against us could adversely affect our results of operations and cash flows.

If there are events or circumstances affecting the reliability or security of the Internet, access to the websites related to the UOL business and/or the ability to safeguard confidential information could be impaired causing a negative effect on the financial results of our business operations.

Our website infrastructure and the website infrastructure of UOL may be vulnerable to computer viruses, hacking or similar disruptive problems caused by customers, other Internet users, other connected Internet sites, and the interconnecting telecommunications networks. Such problems caused by third-parties could lead to interruptions, delays or cessation of service to the customers of the UOL products and services. Inappropriate use of the Internet by third-parties could also potentially jeopardize the security of confidential information stored in our computer system, which may deter individuals from becoming customers. There can be no assurance that any such measures would not be circumvented in future. Dealing with problems caused by computer viruses or other inappropriate uses or security breaches may require interruptions, delays or cessation of service to customers, which could have a material adverse effect on our business, financial condition and results of operations. The ongoing COVID-19 pandemic has put increased strain on the internet due to, among other things, an increase in remote work and the effects on our business are difficult to estimate.

The UOL business processes, stores and uses personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.

The UOL business receives, stores and processes personal information and other customer data, and UOL enables customers to share their personal information with each other and with third parties. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other customer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We will generally comply with industry standards and are and will be subject to the terms of privacy policies and privacy-related obligations to third parties. We will strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or UOL’s practices. Any failure or perceived failure to comply with UOL’s privacy policies, privacy-related obligations to customers or other third parties, or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause customers to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as customers, vendors or developers, violate applicable laws or policies, such violations may also put our customers’ information at risk and could in turn have an adverse effect on our business.

Our marketing efforts for UOL’s business may not be successful or may become more expensive, either of which could increase our costs and adversely impact our business, financial condition, results of operations, and cash flows.

We rely on relationships for our UOL business with a wide variety of third parties, including Internet search providers such as Google, social networking platforms such as Facebook, Internet advertising networks, co-registration partners, retailers, distributors, television advertising agencies, and direct marketers, to source new members and to promote or distribute our services and products. In addition, in connection with the launch of new services or products for our UOL business, we may spend a significant amount of resources on marketing. With any of our brands, services, and products, if our marketing activities are inefficient or unsuccessful, if important third-party relationships or marketing strategies, such as Internet search engine marketing and search engine optimization, become more expensive or unavailable, or are suspended, modified, or terminated, for any reason, if there is an increase in the proportion of consumers visiting our websites or purchasing our services and products by way of marketing channels with higher marketing costs as compared to channels that have lower or no associated marketing costs, or if our marketing efforts do not result in our services and products being prominently ranked in Internet search listings, our business, financial condition, results of operations, and cash flows could be materially and adversely impacted.

~~Our UOL business is dependent on the availability of telecommunications services and compatibility with third-party systems and products.~~

Our UOL business substantially depends on the availability, capacity, affordability, reliability, and security of our telecommunications networks. Only a limited number of telecommunications providers offer the network and data services we currently require for our UOL business, and we purchase most of our telecommunications services from a few providers. Some of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, some telecommunications providers may cease to offer network services for certain less populated areas, which would reduce the number of providers from which we may purchase services and may entirely eliminate our ability to purchase services for certain areas. Currently, our mobile broadband service of our UOL business is entirely dependent upon services acquired from one service provider, and the devices required by the provider can be used for only such provider’s service. If we are unable to maintain, renew or obtain a new agreement with the telecommunications provider on acceptable terms, or the provider discontinues its services, our business, financial condition, results of operations, and cash flows could be materially and adversely affected. Sprint, which owns Clearwire, ceased using WiMAX technology on the Clearwire network. This affected our mobile broadband subscribers for our UOL business that utilized the Clearwire network.

Our dial-up Internet access services of our UOL business also rely on their compatibility with other third-party systems, products and features, including operating systems. Incompatibility with third-party systems and products could adversely affect our ability to deliver our services or a user’s ability to access our services and could also adversely impact the distribution channels for our services. Our dial-up Internet access services are dependent on dial-up modems and an increasing number of computer manufacturers, including certain manufacturers with whom we have distribution relationships, do not pre-load their new computers with dial-up modems, requiring the user to separately acquire a modem to access our services. We cannot assure you that, as the dial-up Internet access market declines and new technologies emerge, we will be able to continue to effectively distribute and deliver our services.

~~Government regulations could adversely affect our business or force us to change our business practices.~~

The services that are provided by UOL are subject to varying degrees of international, federal, state and local laws and regulation, including, without limitation, those relating to taxation, bulk email or “spam,” advertising (including, without limitation, targeted or behavioral advertising), user privacy and data protection, consumer protection, antitrust, export, and unclaimed property. Compliance with such laws and regulations, which in many instances are unclear or unsettled, is complex. New laws and regulations, such as those being considered or recently enacted by certain states, the federal government, or international authorities related to automatic-renewal practices, spam, user privacy, targeted or behavioral advertising, and taxation, could impact our revenues or certain of our business practices or those of our advertisers.

UOL resells broadband Internet access services offered by other parties pursuant to wholesale agreements with those providers. In an order released in March 2015, the Federal Communications Commission (the “FCC”) classified retail broadband Internet access services as telecommunications services subject to regulation under Title II of the Communications Act. That ruling is subject to a pending appeal. The classification of retail broadband Internet access services as telecommunications services means that providers of these services are subject to the general requirement that their charges, practices and classifications for telecommunications services be “just and reasonable,” and that they refrain from engaging in any “unjust or unreasonable discrimination” with respect to their charges, practices or classifications. However, the FCC has not determined what, if any, regulations will apply to wholesale broadband Internet access services, and it is uncertain whether it will adopt requirements that will be favorable or unfavorable to us. It is also possible that the classification of retail broadband Internet access services will be overturned on appeal, that Congress will adopt legislation reversing that decision, or that a future FCC will reverse that decision.

Broadband Internet access is also currently classified as an “information service.” While current policy exempts broadband Internet access services (but not all broadband services) from contributing to the Universal Service Fund (“USF”), Congress and the FCC may consider expanding the USF contribution base to include broadband Internet access services. If broadband Internet access providers become subject to USF contribution obligations, they would likely impose a USF surcharge on end users. Such a surcharge will raise the effective cost of our broadband services to UOL’s customers, which could adversely affect customer satisfaction and have an adverse impact on our revenues and profitability.

Failure to make proper payments for federal USF contributions, FCC regulatory fees or other amounts mandated by federal and state regulations; failure to maintain proper state tariffs and certifications; failure to comply with federal, state or local laws and regulations; failure to obtain and maintain required licenses, franchises and permits; imposition of burdensome license, franchise or permit requirements for us to operate in public rights-of-way; and imposition of new burdensome or adverse regulatory requirements could limit the types of services we provide or the terms on which we provide these services.

We cannot predict the outcome of any ongoing legislative initiatives or administrative or judicial proceedings or their potential impact upon the communications and information technology industries generally or upon the UOL business specifically. Any changes in the laws and regulations applicable to UOL, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity by regulators of, such laws and regulations, could significantly impact our services and products, our costs, or the manner in which we or our advertisers conduct business, all of which could adversely impact our business, financial condition, results of operations, and cash flows and cause our business to suffer.

The FCC and some states require us to obtain prior approval of certain major merger and acquisition transactions, such as the acquisition of control of another telecommunications carrier. Delays in obtaining such approvals could affect our ability to close proposed transactions in a timely manner and could increase our costs and increase the risk of non-consummation of some transactions.

~~We manage debt investments that involve significant risks and potential additional liabilities.~~

GACP I., L.P. and GACP II, L.P., both direct lending funds of which our wholly owned subsidiary GACP is the general partner, may invest in secured debt issued by companies that have or may incur additional debt that is senior to the secured debt owned by the fund. In the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of any such company, the owners of senior secured debt (i.e., the owners of first priority liens) generally will be entitled to receive proceeds from any realization of the secured collateral until they have been reimbursed. At such time, the owners of junior secured debt (including, in certain circumstances, the fund) will be entitled to receive proceeds from the realization of the collateral securing such debt. There can be no assurances that the proceeds, if any, from the sale of such collateral would be sufficient to satisfy the loan obligations secured by subordinate debt instruments. To the extent that the fund owns secured debt that is junior to other secured debt, the fund may lose the value of its entire investment in such secured debt.

In addition, the fund may invest in loans that are secured by a second lien on assets. Second lien loans have been a developed market for a relatively short period of time, and there is limited historical data on the performance of second lien loans in adverse economic circumstances. In addition, second lien loan products are subject to intercreditor arrangements with the holders of first lien indebtedness, pursuant to which the second lien holders have waived many of the rights of a secured creditor, and some rights of unsecured creditors, including rights in bankruptcy, which can materially affect recoveries. While there is broad market acceptance of some second lien intercreditor terms, no clear market standard has developed for certain other material intercreditor terms for second lien loan products. This variation in key intercreditor terms may result in dissimilar recoveries across otherwise similarly situated second lien loans in insolvency or distressed situations. While uncertainty of recovery in an insolvency or distressed situation is inherent in all debt instruments, second lien loan products carry more risks than certain other debt products.

~~The market in which magicJack participates is highly competitive and if we do not compete effectively, our operating results may be harmed by loss of market share and revenues.~~

The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companies and alternative voice communication providers and manufacturers of communication devices.

The principal competitors for our products and services include the traditional telephone service providers, such as AT&T, Inc., CenturyLink, Inc. and Verizon Communications Inc., which provide telephone service using the public switched telephone network. Certain of these traditional providers have also added, or are planning to add, broadband telephone services to their existing telephone and broadband offerings. We also face, or expect to face, competition from cable companies, such as Cablevision Systems Corp., Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable (a division of Time Warner Inc.), which offer broadband telephone services to their existing cable television and broadband offerings. Further, wireless providers, including AT&T Mobility, Inc., Sprint Corporation, T-Mobile USA Inc., and Verizon Wireless, Inc. offer services that some customers may prefer over wireline-based service. In the future, as wireless companies offer more minutes at lower prices, their services may become more attractive to customers as a replacement for broadband or wireline-based phone service.

We face competition on magicJack device sales from Apple, Samsung, Motorola and other manufacturers of smart phones, tablets and other handheld wireless devices. Also, we compete against established alternative voice communication providers, such as Vonage, Google Voice, Ooma, and Skype, which is another non-interconnected voice provider, and may face competition from other large, well-capitalized Internet companies. In addition, we compete with independent broadband telephone service providers.

Increased competition may result in our competitors using aggressive business tactics, including providing financial incentives to customers, selling their products or services at a discount or loss, offering products or services similar to our products and services on a bundled basis at a discounted rate or no charge, announcing competing products or services combined with aggressive marketing efforts, and asserting intellectual property rights or claims, irrespective of their validity.

We believe that some of our existing competitors may choose to consolidate or may be acquired in the future. Additionally, some of our competitors may enter into alliances or joint ventures with each other or establish or strengthen relationships with other third parties. Any such consolidation, acquisition, alliance, joint venture or other relationship could adversely affect our ability to compete effectively, lead to pricing pressure, our loss of market share and could harm our business, results of operations and financial condition.

~~magicJack may face difficulty in attracting new customers, and if we fail to attract new customers, our business and results of operations may suffer.~~

Most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than us and have the advantage of a large existing customer base. Because most of our customers are purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract customers away from their existing providers. In addition, these competitors could focus their substantial financial resources to develop competing technology that may be more attractive to potential customers than what we offer. Our competitors’ financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions.

magicJack’s competitors also could use their greater financial resources to offer broadband telephone service with more attractive service packages that include on-site installation and more robust customer service. In addition, because of the other services that our competitors provide, they may choose to offer broadband telephone service as part of a bundle that includes other products, such as video, high speed Internet access and wireless telephone service, which we do not offer at the present time. This bundle may enable our competitors to offer broadband telephone service at prices with which we may not be able to compete or to offer functionality that integrates broadband telephone service with their other offerings, both of which may be more desirable to consumers. Any of these competitive factors could make it more difficult for us to attract and retain customers to our products, and cause us to lower our prices in order to compete and reduce our market share and revenues.

~~magicJack may be unable to obtain enough phone numbers in desirable area codes to meet demand, which may adversely affect our ability to attract new customers and our results of operations.~~

magicJack’s operations are subject to varying degrees of federal and state regulation. It currently allows customers to select the area code for their desired phone number from a list of available area codes in cities throughout much of the United States. This selection may become limited if we are unable to obtain phone numbers, or a sufficient quantity of phone numbers, including certain area codes, due to exhaustion and consequent shortages of numbers in those area codes, restrictions imposed by federal or state regulatory agencies, or a lack of telephone numbers made available to us by third parties. If we are unable to provide our customers with a nationwide selection of phone numbers, or any phone numbers at all, in all geographical areas and is unable to obtain telephone numbers from another alternative source, or is required to incur significant new costs in connection with obtaining such phone numbers, our relationships with current and future customers may be damaged, causing a shortfall in expected revenue, increased customer attrition, and an inability to attract new customers. As a result, our business, results of operations and financial condition could be materially and adversely affected.

~~If magicJack’s services are not commercially accepted by customers, our prospects for growth will suffer.~~

Our success in deriving a substantial amount of revenues from magicJack’s broadband telephone service offering sold to consumers and businesses relies on the commercial acceptance of our offering from consumers and business. Although we currently sell our services to a number of customers, it cannot be certain that future customers will find our services attractive. If customer demand for our services does not develop or develops more slowly than anticipated, it would have a material adverse effect on our business, results of operations and financial condition. Our success relies on the commercial acceptance of our offering from these advertisers and retailers. magicJack is not currently selling its advertising and retailing services and it cannot be certain future online advertisers and retailers will find its services attractive. If demand for these services does not develop or develops more slowly than anticipated, it would have a material adverse effect on our business, results of operations and financial condition.

~~If magicJack is unable to retain its existing customers, our revenue and results of operations would be adversely affected.~~

We offer magicJack services pursuant to a subscriber agreement that ranges generally from one month to five years in duration and allows our customers to gain access to our servers for telephone calls. Our customers do not have an obligation to renew their subscriber agreement after their initial term period expires, and these agreements may not be renewed on the same or on more profitable terms. As a result, our ability to grow depends in part on retaining customers for renewals. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the prices of our services, the fees imposed by government entities, the prices of comparable services offered by our competitors or reductions in our customers’ spending levels. If our customers do not renew their services, renew on less favorable terms, or do not purchase additional functionality, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.

The market for magicJack’s services and products is characterized by rapidly changing technology and our success will depend on our ability to enhance our existing service and product offerings and to introduce new services and products on a timely and cost effective basis.

The market for magicJack’s services and products is characterized by rapidly changing enabling technology, frequent enhancements and evolving industry standards. Our continued success depends on our ability to accurately anticipate the evolution of new products and technologies and to enhance our existing products and services. Historically, several factors have deterred consumers and businesses from using voice over broadband service, including security concerns, inconsistent quality of service, increasing broadband traffic and incompatible software products. If we are unable to continue to address those concerns and foster greater consumer demand for our products and services, our business and results of operations will be adversely affected.

Our success also depends on our ability to develop and introduce innovative new magicJack services and products that gain market acceptance. We may not be successful in selecting, developing, manufacturing and marketing new products and services or enhancing existing products and services on a timely basis. We may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new products, services and enhancements. The introduction of new products or services by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing service offerings could render our existing or future services obsolete. If our services become obsolete due to wide-spread adoption of alternative connectivity technologies, our ability to generate revenue may be impaired. In addition, any new markets into which we attempt to sell our services, including new countries or regions, may not be receptive. If we are unable to successfully develop or acquire new products or services, enhance our existing products or services to anticipate and meet customer preferences or sell magicJack products and services into new markets, our revenue and results of operations would be adversely affected.

~~We may be unsuccessful in protecting our proprietary rights or may have to defend ourselves against claims of infringement, which could impair or significantly affect our business.~~

Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology that is similar ours. Legal protections afford only limited protection for our technology. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt, to copy aspects of our products or to obtain and use information that it regards as proprietary. Third parties may also design around our proprietary rights, which may render our protected products less valuable, if the design around is favorably received in the marketplace. In addition, if any our products or the technology underlying our products is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions.

We cannot assure you that our products do not infringe intellectual property rights held by others or that they will not in the future. Third parties may assert infringement, misappropriation, or breach of license claims against us from time to time. Such claims could cause us to incur substantial liabilities and to suspend or permanently cease the use of critical technologies or processes or the production or sale of major products. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, misappropriation, or other claims. Any such litigation could result in substantial costs and diversion of our resources, which in turn could materially adversely affect our business and financial condition. Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we attempt to design around the technology at issue or to find another provider of suitable alternative technology to permit it to continue offering applicable software or product solutions, our continued supply of software or product solutions could be disrupted or our introduction of new or enhanced software or products could be significantly delayed.

magicJack’s products must comply with various domestic and international regulations and standards and failure to do so could have an adverse effect on our business, operating results and financial condition.

magicJack’s products must comply with various domestic and international regulations and standards defined by regulatory agencies. If it does not comply with existing or evolving industry standards and other regulatory requirements or if we fail to obtain in a timely manner any required domestic or foreign regulatory approvals or certificates, we will not be able to sell our products where these standards or regulations apply, which may harm our business. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes could have a material adverse effect on our business, financial condition, and operating results.

~~magicJack’s emergency and E911 calling services are different from those offered by traditional wireline telephone companies and may expose us to significant liability.~~

While we do not believe that we are currently subject to regulatory requirements to provide such capability, we provide our customers with emergency calling services/E911 calling services (“E911”) that significantly differ from the emergency calling services offered by traditional wireline telephone companies. Those differences may cause significant delays, or even failures, in callers’ receipt of the emergency assistance they need. Traditional wireline telephone companies route emergency calls from a fixed location over a dedicated infrastructure directly to an emergency services dispatcher at the public safety answering point (“~~PSAP~~”) in the caller’s area. Generally, the dispatcher automatically receives the caller’s phone number and actual location information. Because the magicJack devices are portable or nomadic, the only way we can determine to which PSAP to route an emergency call, and the only location information that our E911 service can transmit to a dispatcher at a PSAP is the information that our customers have registered with us. A customer’s registered location may be different from the customer’s actual location at the time of the call because customers can use their magicJack devices to make calls almost anywhere a broadband connection is available. Significant delays may occur in a customer updating its registered location information, and in applicable databases being updated and new routing implemented once a customer has provided new information. If our customers encounter delays when making emergency services calls and any inability to route emergency calls properly, or of the answering point to automatically recognize the caller’s location or telephone number, such delays can have devastating consequences. Customers may, in the future, attempt to hold us responsible for any loss, damage, personal injury or death suffered as a result.

Traditional phone companies also may be unable to provide the precise location or the caller’s telephone number when their customers place emergency calls. However, traditional phone companies are covered by federal legislation exempting them from liability for failures of emergency calling services, and magicJack is not afforded such protection. In addition, magicJack has lost, and may in the future lose, existing and prospective customers because of the limitations inherent in our emergency calling services. Additionally, service interruptions from our third-party providers could cause failures in our customers’ access to E911 services. Any of these factors could cause us to lose revenues, incur greater expenses or cause our reputation or financial results to suffer.

~~State and local governments may seek to impose E911 fees.~~

Many state and local governments have sought to impose fees on customers of VoIP providers, or to collect fees from VoIP providers, to support implementation of E911 services in their area. The application of such fees with respect to magicJack users and use is not clear because various statutes and regulations may not cover our services, we do not bill our customers monthly, nor do we bill customers at all for telecommunication services. We may also not know the end user’s location because the magicJack devices and services are nomadic. Should a regulatory authority require payment of money from us for such support, we may be required to develop a mechanism to collect fees from our customers, which may or may not be satisfactory to the entity requesting us to be a billing agent. We cannot predict whether the collection of such additional fees or limitations on where our services are available would impact customers’ interest in purchasing our products.

In settlement of litigation, magicJack agreed that it would, at least once a year, issue bills for 911 emergency calling services to each user who has access to 911 services through their magicJack services, and who has provided a valid address in a U.S. jurisdiction that provides access to 911 services and which is legally empowered to impose 911 charges on such users in accordance with applicable state and/or local law.

Certain E911 regulatory authorities have asserted or may assert in the future that we are liable for damages, including end user assessed E911 taxes, surcharges and/or fees, for not having billed and collected E911 fees from our customers in the past or in the future. If a jurisdiction were to prevail in such claims, the decision could have a material adverse effect on our financial condition and results of operations.

Increases in credit card processing fees and high chargeback costs would increase our operating expenses and adversely affect our results of operations, and an adverse change in, or the termination of, magicJack’s relationship with any major credit card company would have a severe, negative impact on our business.

A significant number of magicJack’s customers purchase its products through magicJack’s website and pay for its products and services using credit or debit cards. The major credit card companies or the issuing banks may increase the fees that they charge for transactions using their cards. An increase in those fees would require us to either increase the prices we charge for our products, or suffer a negative impact on our profitability, either of which could adversely affect our business, financial condition and results of operations.

We have potential liability for chargebacks associated with the transactions we process, or that are processed on our behalf by merchants selling our products. If a customer returns his or her magicJack products at any time, or claims that magicJack’s product was purchased fraudulently, the returned product is “charged back” to magicJack or its bank, as applicable. If magicJack or its sponsoring banks are unable to collect the chargeback from the merchant’s account, or, if the merchant refuses or is financially unable, due to bankruptcy or other reasons, to reimburse the merchant’s bank for the chargeback, we bear the loss for the amount of the refund paid.

We are vulnerable to credit card fraud, as we sell magicJack products directly to customers through our website. Card fraud occurs when a customer uses a stolen card (or a stolen card number in a card-not-present-transaction) to purchase merchandise or services. In a traditional card-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the merchant or magicJack receive authorization for the transaction, magicJack or the merchant are liable for any loss arising from the transaction. Because sales made directly from magicJack’s website are card-not-present transactions, we are more vulnerable to customer fraud. We are also subject to acts of consumer fraud by customers that purchase magicJack products and services and subsequently claim that such purchases were not made.

In addition, as a result of high chargeback rates or other reasons beyond our control, the credit card companies or issuing bank may terminate their relationship with magicJack, and there are no assurances that it will be able to enter into a new credit card processing agreement on similar terms, if at all. Upon a termination, if magicJack’s credit card processor does not assist it in transitioning its business to another credit card processor, or if magicJack were not able to obtain a new credit card processor, the negative impact on our liquidity likely would be significant. The credit card processor may also prohibit magicJack from billing discounts annually or for any other reason. Any increases in the magicJack’s credit card fees could adversely affect our results of operations, particularly if we elect not to raise our service rates to offset the increase. The termination of magicJack’s ability to process payments on any major credit or debit card, due to high chargebacks or otherwise, would significantly impair our ability to operate our business.

~~Flaws in magicJack’s technology and systems could cause delays or interruptions of service, damage our reputation, cause us to lose customers and limit our growth.~~

Our service could be disrupted by problems with magicJack technology and systems, such as malfunctions in our software or other facilities and overloading of our servers. Our customers could experience interruptions in the future as a result of these types of problems. Interruptions could in the future cause us to lose customers, which could adversely affect our revenue and profitability. In addition, because magicJack’s systems and our customers’ ability to use our services are Internet-dependent, our services may be subject to “hacker attacks” from the Internet, which could have a significant impact on our systems and services. If service interruptions adversely affect the perceived reliability of our service, it may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.

We depend on overseas manufacturers, and for certain magicJack products, third-party suppliers, and our reputation and results of operations would be harmed if these manufacturers or suppliers fail to meet magicJack’s requirements.

The manufacture of the magicJack devices is conducted by a manufacturing company in China, and certain parts are produced in Taiwan and Hong Kong. These manufacturers supply substantially all of the raw materials and provide all facilities and labor required to manufacture our products. If these companies were to terminate their arrangements with us or fail to provide the required capacity and quality on a timely basis, either due to actions of the manufacturers; earthquakes, typhoons, tsunamis, fires, floods, or other natural disasters; or the actions of their respective governments, we would be unable to manufacture our products until replacement contract manufacturing services could be obtained. To qualify a new contract manufacturer, familiarize it with the magicJack products, quality standards and other requirements, and commence volume production is a costly and time-consuming process. We cannot assure you that we would be able to establish alternative manufacturing relationships on acceptable terms or in a timely manner that would not cause disruptions in our supply. Any interruption in the manufacture of our products would be likely to result in delays in shipment, lost sales and revenue and damage to our reputation in the market, all of which would harm our business and results of operations. In addition, while the magicJack contract obligations with its contract manufacturer in China is denominated in U.S. dollars, changes in currency exchange rates could impact our suppliers and increase our prices.

~~We rely on independent retailers to sell the magicJack devices, and disruption to these channels would harm our business.~~

Because we sell a significant amount of the magicJack devices, other devices and certain services to independent retailers, we are subject to many risks, including risks related to their inventory levels and support for magicJack’s products. In particular, magicJack’s retailers maintain significant levels of our products in their inventories. If retailers attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted.

The retailers who sell magicJack products also sell products offered by its competitors. If these competitors offer the retailers more favorable terms, those retailers may de-emphasize or decline to carry magicJack’s products. In the future, we may not be able to retain or attract a sufficient number of qualified retailers. If we are unable to maintain successful relationships with retailers or to expand our distribution channels, our business will suffer.

To continue this method of sales, we will have to allocate resources to train vendors, systems integrators and business partners as to the use of our products, resulting in additional costs and additional time until sales by such vendors, systems integrators and business partners are made feasible. Our business depends to a certain extent upon the success of such channels and the broad market acceptance of our products. To the extent that our channels are unsuccessful in selling our products, our revenues and operating results will be adversely affected.

Many factors out of our control could interfere with our ability to market, license, implement or support magicJack products with any of our channels, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of magicJack’s channels, the introduction of competitive product offerings by other companies that are sold through one or more of its channels, potential contract defaults by one or more of its channels, bankruptcy of one or more distribution channel, or changes in ownership or management of one or more of its channels. For example, in February 2015, RadioShack Corporation, one of magicJack’s retail customers, filed a voluntary petition in bankruptcy court. magicJack was owed $1.3 million by RadioShack which it did not collect and sales to RadioShack were ceased to limit exposure. magicJack made limited sales to the RadioShack entity that emerged from the bankruptcy proceedings and terminated its relationship with that entity effective as of October 27, 2016. Some of magicJack’s competitors may have stronger relationships with its channels than magicJack does or offer more favorable terms with respect to their products, and magicJack has limited control, if any, as to whether those channels implement its products rather than its competitors’ products or whether they devote resources to market and support its competitors’ products rather than its offerings. If magicJack fails to maintain relationships with these channels, fails to develop new channels, fails to effectively manage, train, or provide incentives to existing channels or if these channels are not successful in their sales efforts, sales of magicJack’s products may decrease and our operating results would suffer. The independent retailers we rely on may be impacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain duration due to “social distancing” measures imposed to control the pandemic and they may be limited in their ability to sell magicJack devices to customers.

We may not be able to maintain adequate customer care during periods of growth or in connection with our addition of new and complex devices or features, which could adversely affect our ability to grow and cause our financial results to be negatively impacted.

We consider our offshore customer care to be critically important to acquiring and retaining customers. A portion of our customer care for magicJack products is provided by third parties located in Costa Rica and the Philippines. This approach exposes us to the risk that we may not maintain service quality, control or effective management within these business operations. The increased elements of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase in reputational risk. Interruptions in our customer care caused by disruptions at our third-party facilities may cause us to lose customers, which could adversely affect our revenue and profitability. If our customer base expands rapidly in the U.S. or abroad, we may not be able to expand our outsourced customer care operations quickly enough to meet the needs of our customer base, and the quality of our customer care will suffer and our access right renewal rate may decrease. As we broaden our magicJack offerings and its customers build increasingly complex home networking environments, we will face additional challenges in training our customer care staff. We could face a high turnover rate among our customer service providers. We intend to have our customer care provider hire and train customer care representatives in order to meet the needs of our customer base. If they are unable to hire, train and retain sufficient personnel to provide adequate customer care, we may experience slower growth, increased costs and higher levels of customer attrition, which would adversely affect our business and results of operations.

~~If we are unable to maintain an effective process for local number portability provisioning, our growth may be negatively impacted.~~

We comply with requests for local number portability from our customers. Local number portability means that our customers can retain their existing telephone numbers when subscribing to magicJack’s services, and would in turn allow former customers to retain their telephone numbers should they subscribe to another carrier. If we are unable to maintain the technology to expedite porting our customers’ numbers, demand for our services may be reduced, and this will adversely affect our revenue and profitability.

If we cannot continue to obtain key switching elements from magicJack’s primary competitors on acceptable terms, we may not be able to offer our local voice and data services on a profitable basis, if at all.

We will not be able to provide our local voice and data services on a profitable basis, if at all, unless we are able to obtain key switching elements from some of magicJack’s primary competitors on acceptable terms. To offer local voice and data services in a market, we must connect our servers with other carriers in a specific market. This relationship is governed by an interconnection agreement or carrier service agreement between us and that carrier. magicJack has such agreements with Verizon, AT&T, XO Communications Services and CenturyLink in a majority of its markets. If we are unable to continue these relationships, enter into new interconnection agreements or carrier service agreements with additional carriers in other markets or if these providers liquidate or file for bankruptcy, our business and profitability may suffer.

~~Regulatory initiatives may continue to reduce the maximum rates we are permitted to charge long distance service providers for completing calls by our customers to customers served by our servers.~~

The rates that we charge and is charged by service providers for terminating calls by their customers to customers served by its servers, and for transferring calls by its customers onto other carriers, cannot exceed rates determined by regulatory authorities. In 2011, the FCC adopted an order fundamentally overhauling its existing intercarrier compensation (“~~ICC~~”) rules, which govern payments between carriers for exchange traffic. This order established a new ICC regime that will result in the elimination of virtually all terminating switched access charges and reciprocal compensation payments over a transition period that will end in 2020. The reductions resulting from these new ICC rules have affected and will continue to affect our revenues and results of operations.

Regulation of broadband telephone services are developing and therefore uncertain; and future legislative, regulatory or judicial actions could adversely impact our business and expose us to liability.

The current regulatory environment for broadband telephone services is developing and therefore uncertain. The United States and other countries have begun to assert regulatory authority over broadband telephone service and are continuing to evaluate how broadband telephone service will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain. Future legislative, judicial or other regulatory actions could have a negative effect on our business. If its VoIP telephony service or our other magicJack products and services become subject to the rules and regulations applicable to telecommunications providers, if current broadband telephone service rules are expanded and applied to us, or if additional rules and regulations applicable specifically to broadband telephone services are adopted, we may incur significant compliance costs, and we may have to restructure our service offerings, exit certain markets or start charging for our services at least to the extent of regulatory costs or requirements, any of which could cause our services to be less attractive to customers. We are faced, and may continue to face, difficulty collecting such charges from our customers and/or carriers, and collecting such charges may cause us to incur legal fees. We may be unsuccessful in collecting all of the regulatory fees owed to us. The imposition of any such additional regulatory fees, charges, taxes and regulations on VoIP communications services could materially increase our costs and may limit or eliminate our competitive pricing advantages.

Regulatory and governmental agencies may determine that we should be subject to rules applicable to certain broadband telephone service providers or seek to impose new or increased fees, taxes, and administrative burdens on broadband telephone service providers. We also may change our product and service offerings in a manner that subjects us to greater regulation and taxation. Such obligations could include requirements that we contribute directly to federal or state Universal Service Funds. We may also be required to meet various disability access requirements, number portability obligations, and interception or wiretapping requirements, such as the Communications Assistance for Law Enforcement Act. The imposition of such regulatory obligations or the imposition of additional federal, state or local taxes on our services could increase our cost of doing business and limit our growth.

We offer our magicJack products and services in other countries, and therefore could also be subject to regulatory risks in each such foreign jurisdiction, including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all, which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing broadband telephone service is illegal, the governments of those countries may attempt to assert jurisdiction over us. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products and services in one or more countries, could delay or prevent potential acquisitions, expose us to significant liability and regulation and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties.

The success of our business relies on customers’ continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services or charge their customers more for also using our services, which could adversely affect our revenue and growth.

Our customers must have broadband access to the Internet in order to use our service. Providers of broadband access, some of whom are also competing providers of voice services, may take measures that affect their customers’ ability to use our service, such as degrading the quality of the data packets they transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for also using our services.

In 2015, the FCC adopted net neutrality rules that prohibited broadband providers from: 1) blocking legal content, applications, services, or non-harmful devices; 2) impairing or degrading lawful Internet traffic on the basis of content, applications, services, or non-harmful devices; 3) engaging in paid prioritization by favoring some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind or by prioritizing content and services of their affiliates; and 4) unreasonably interfering with or unreasonably disadvantaging the ability of consumers to select, access, and use the lawful content, applications, services, or devices of their choosing; or of edge providers to make lawful content, applications, services, or devices available to consumers. In doing so, the FCC reclassified broadband Internet access - the retail broadband service mass-market customers buy from cable, phone, and wireless providers - as a telecommunications service regulated under Title II of the Communications Act of 1934, although the FCC agreed to forbear from many requirements of Title II. Significantly, these rules applied equally to fixed and mobile broadband networks.

After the FCC’s new net neutrality rules went into effect in June 2015, various broadband providers and their trade associations challenged the FCC’s decision before the U.S. Court of Appeals for the D.C. Circuit. In June 2016, the D.C. Circuit issued its decision upholding the FCC’s rules. The D.C. Circuit also denied various petitions seeking rehearing en banc of the court’s decision. Various parties have sought review by the United States Supreme Court of the D.C. Circuit’s decision, which remains pending. We cannot predict the outcome of these proceedings.

In December 2017, the FCC adopted its “Restoring Internet Freedom Order,” which: 1) restored the classification of broadband Internet access services as unregulated information services, ending Title II regulation of these services; 2) eliminated the FCC’s three “bright-line” net neutrality rules; 3) eliminated the FCC’s “general conduct” rule; and 4) adopted a new transparency rule.

Multiple parties filed petitions seeking judicial review of the “Restoring Internet Freedom Order,” which were consolidated and heard by the United States Court of Appeals for the D.C. Circuit. In October 2019, the D.C. Circuit largely upheld the FCC decision to eliminate legal prohibitions against broadband providers blocking, throttling, or otherwise degrading the quality of our data packets or attempting to extract additional fees from us or our customers, which could adversely impact our business.

We may be bound by certain FCC regulations relating to the provision of E911 service, and if we fail to comply with FCC regulations requiring us to provide E911 emergency calling services, we may be subject to fines or penalties.

In 2005, the FCC issued regulations requiring interconnected voice-over broadband providers to provide E911 services and to notify customers of any differences between the broadband telephone service emergency calling services and those available through traditional telephone providers and obtain affirmative acknowledgments from customers of those notifications. In 2019, the FCC adopted rules broadening the scope of its E911 requirements, including imposing 911 obligations on outbound VoIP providers – obligations that will take effect in two years.

Limitations on our ability to provide E911 service or comply with the FCC’s new mandates could materially limit our growth and have a material adverse effect on our profitability. We could be subjected to various fines and forfeitures. FCC rulings could also subject us to greater regulation in some states.

~~Regulatory rulings and/or carrier disputes could affect the manner in which we interconnect and exchange traffic with other providers and the costs and revenues associated with doing so.~~

We exchange calls with other providers pursuant to applicable law and interconnection agreements and other carrier contracts that define the rates, terms, and conditions applicable to such traffic exchange. The calls we exchange originate from and terminate to a customer that uses a broadband Internet connection to access our services and are routed using telephone numbers of the customer’s choosing. There is uncertainty, however, with respect to intercarrier compensation for such traffic while rules continue to be challenged in various courts. The FCC Report and Order issued in November 2011 has asserted its jurisdiction over such traffic. Various state commissions have also issued rulings with respect to the exchange of different categories of traffic under interconnection agreements. To the extent that another provider were to assert that the traffic we exchanges with them is subject to higher levels of compensation than we, or the third parties terminating our traffic to the PSTN, pay today (if any), or if other providers from whom we currently collect compensation for the exchange of such traffic refuse to pay it going forward, we may need to seek regulatory relief to resolve such a dispute. Given the recent changes to the intercarrier compensation regime, we cannot guarantee that the outcome of any proceeding would be favorable, and an unfavorable ruling could adversely affect the amounts we collect and/or pay to other providers in connection with the exchange of our traffic. The FCC clarified in January 2015 that its VoIP symmetry rule does not require a CLEC or its VoIP provider partner to provide the physical last-mile facility to the VoIP provider’s end user customers in order to provide the functional equivalent of end office switching, and thus for the CLEC to be eligible to assess access charges for this service. The ruling confirms that the VoIP symmetry rule is technology and facilities neutral and applies regardless of whether a CLEC’s VoIP partner is a facilities-based or over-the-top VoIP provider. However, in November 2016, the U.S. Court of Appeals for the D.C. Circuit vacated the FCC’s ruling. In December 2019, the Federal Communications Commission (FCC) issued an order on remand revisiting its interpretation of the VoIP symmetry rule, concluding that LECs may assesses end office switched access charges only if the LEC or its VoIP partner provides a physical connection to the last-mile facilities used to serve an end user. If neither the LEC nor its VoIP partner provides such physical connection, it is not providing the functional equivalent of end office switched access and the LEC may not assess end office switched access charges. The FCC also decided to give its order retroactive effect to “prevent an undue hardship being worked upon those parties who properly interpreted the VoIP Symmetry Rule and have been in disputes ever since.” We are still assessing the impact of this recent FCC order that will affect the amounts we collect and/or pay to other providers in connection with the exchange of our traffic.

~~Server failures or system breaches could cause delays or adversely affect our service quality, which may cause us to lose customers and revenue.~~

In operating our servers, we may be unable to connect and manage a large number of customers or a large quantity of traffic at high speeds. Any failure or perceived failure to achieve or maintain high-speed data transmission could significantly reduce demand for our magicJack services and adversely affect our operating results. In addition, computer viruses, break-ins, human error, natural disasters and other problems may disrupt our servers. The system security and stability measures we implement may be circumvented in the future or otherwise fail to prevent the disruption of our services. The costs and resources required to eliminate computer viruses and other security problems may result in interruptions, delays or cessation of services to our customers, which could decrease demand, decrease our revenue and slow our planned expansion.

~~Hardware and software failures, delays in the operation of magicJack’s computer and communications systems or the failure to implement system enhancements may harm our business.~~

Our success depends on the efficient and uninterrupted operation of magicJack’s software and communications systems. A failure of our servers could impede the delivery of services, customer orders and day-to-day management of our business and could result in the corruption or loss of data. Despite any precautions we may take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at our various facilities could result in interruptions in the flow of data to our servers and from our servers to our customers. In addition, any failure by our computer environment to provide our required telephone communications capacity could result in interruptions in our service. Additionally, significant delays in the planned delivery of system enhancements and improvements, or inadequate performance of the systems once they are completed, could damage our reputation and harm our business. Finally, long-term disruptions in infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, and acts of terrorism (particularly involving cities in which it has offices) could adversely affect our business. Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on reasonable terms, or at all. We cannot assure you that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a lawsuit, regardless of its merit, could be costly and divert management’s attention. In addition to potential liability, if we experience interruptions in our ability to supply our services, our reputation could be harmed and we could lose customers.

Our magicJack service requires an operative broadband connection, and if the adoption of broadband does not progress as expected, the market for our services will not grow and we may not be able to grow our business and increase our revenue.

Use of magicJack’s service requires that the user be a subscriber to an existing broadband Internet service, most typically provided through a cable or digital subscriber line, or DSL, connection. Although the number of broadband subscribers in the U.S. and worldwide has grown significantly over the last five years, this service has not yet been adopted by all consumers and is not available in every part of the United States and Canada, particularly rural locations. If the adoption of broadband services does not continue to grow, the market for our services may not grow.

Our magicJack business is subject to privacy and online security risks, including security breaches, and we could be liable for such breaches of security. If we are unable to protect the privacy of our customers making calls using our service, or information obtained from our customers in connection with their use or payment of our services, in violation of privacy or security laws or expectations, we could be subject to significant liability and damage to our reputation.

Although we have developed systems and processes that are designed to protect customer information and prevent fraudulent transactions, data loss and other security breaches, such systems and processes may not be sufficient to prevent fraudulent transactions, data loss and other security breaches. Failure to prevent or mitigate such breaches may adversely affect our operating results.

Customers may believe that using our services to make and receive telephone calls using their broadband connection could result in a reduction of their privacy, as compared to traditional wireline carriers. Additionally, our website, www.magicJack.com, serves as an online sales portal.We currently obtain and retain personal information about our website users in connection with such purchases. In addition, we obtain personal information about our customers as part of their registration to use our products and services. Federal, state and foreign governments have enacted or may enact laws or regulations regarding the collection and use of personal information.

Our business involves the storage and transmission of users’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. An increasing number of websites, including several other Internet companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users. A party that is able to circumvent our security measures could misappropriate magicJack’s or its users’ proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

Currently, a significant number of our users authorize it to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Non-technical means, for example, actions by a suborned employee, can also result in a data breach.

Possession and use of personal information in conducting our business subjects it to legislative and regulatory burdens that could require notification of data breach, restrict our use of personal information and hinder our ability to acquire new customers or market to existing customers. We may incur expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

Under payment card rules and magicJack’s contracts with its card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be seriously damaged.

Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult as we expand the number of places where we operate. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of magicJack’s users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and liability. Our insurance policies carry coverage limits that may not be adequate to reimburse it for losses caused by security breaches.

magicJack’s users, as well as those of other prominent Internet companies, have been and will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate passwords, credit card numbers, or other personal information or to introduce viruses or other malware through “trojan horse” programs to magicJack’s users’ computers. These emails appear to be legitimate emails sent by magicJack, but direct recipients to fake websites operated by the sender of the email or request that the recipient send a password or other confidential information via email or download a program. Despite our efforts to mitigate “spoof” and “phishing” emails through product improvements and user education, “spoof” and “phishing” remain a serious problem that may damage our brands, discourage use of our websites, and increase our costs.

We have a stringent privacy policy covering the information we collect from our customers and have established security features to protect this information. However, our security measures may not prevent security breaches. We may need to expend resources to protect against security breaches or to address problems caused by breaches. If unauthorized third parties were able to penetrate our security and gain access to, or otherwise misappropriate, our customers’ personal information or be able to access their telephone calls, it could harm our reputation and, therefore, our business and magicJack could be subject to liability. Such liability could include claims for misuse of personal information or unauthorized use of credit cards. These claims could result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant financial resources. Internet privacy is a rapidly changing area and we may be subject to future requirements and legislation that are costly to implement and negatively impact our results.

~~magicJack has operations located in Israel, and therefore our results may be adversely affected by political, economic and military conditions in Israel.~~

magicJack’s business and operations may be directly influenced by the political, economic and military conditions affecting Israel at any given time. A change in the security and political situation in Israel could have a material adverse effect on our business, operating results and financial condition. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, including Hezbollah in Lebanon and Hamas in the Gaza Strip. In the last few years, these conflicts involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. In addition, political uprisings and conflicts in various countries in the Middle East, including Syria and Iraq, and including terrorist organizations gaining control and political power in the region such as the Islamic State of Iraq and Syria, or ISIS, are affecting the political stability of those countries. It is not clear how this instability will develop and how it will affect the political and security situation in the Middle East.

Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business, operating results and financial condition.

Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results and financial condition.

~~Our operations could be disrupted as a result of the obligation of magicJack’s personnel to perform military service.~~

Several of magicJack’s employees reside in Israel and may be required to perform annual military reserve duty and may be called for active duty under emergency circumstances at any time. Our operations could be disrupted by the absence for a significant period of time of one or more of these employees due to military service. Any such disruption could adversely affect our business, results of operations and financial condition.

The failure of our licensees to sell products that generate royalties to us, to pay us royalties pursuant to their license agreements with us, or to renew these agreements could negatively affect our results of operations and financial condition.

Our revenues are dependent on royalty payments made to us under our license agreements. Although some of our license agreements guarantee a minimum royalty payment to us each year, the failure of our licensees to satisfy these or the other obligations under their agreements with us, their decision to not renew their agreements with us or their inability to grow or maintain their sales of products bearing our brands or their businesses generally could cause our revenues to decline. These events or circumstances could occur for a variety of reasons, many of which are outside our control, including business and operational risks that impact our licensees’ ability to make payments and sell products generally, such as obtaining and maintaining desirable store locations and consumer acceptance and presence; retaining key personnel, including the specific individuals who work on sales and marketing for products bearing our brands; and liquidity and capital resources risks.

The consumer goods and services sector has been severely impacted by the ongoing COVID-19 pandemic, which has resulted in mandatory store closures of uncertain duration due to “social distancing” measures imposed to control the pandemic and our licensees may have difficulty selling their merchandise and meeting their financial obligations to us.

The failure by any of our key licensees or the concurrent failure by several licensees to meet their financial obligations to us or to renew their respective license agreements with us could materially and adversely impact our results of operations and our financial condition.

~~Our brand investment portfolio is subject to intense competition.~~

We hold a majority interest in a brand investment portfolio that is focused on generating revenue through the licensing of trademarks. Therefore, our degree of success is dependent on the strength of our brands, consumer acceptance of our brands and our licensees’ ability to design, manufacture and sell products bearing our brands, all of which is dependent on the ability of us and our licensees responding to ever-changing consumer demands. We cannot control the level of consumer acceptance of our brands and changing preferences and trends may lead customers to purchase other products. Further, we cannot control the level of resources that our licensees commit to supporting our brands, and our licensees may choose to support products bearing other brands to the detriment of our brands because our agreements generally do not prevent them from licensing or selling other products, including products bearing competing brands.

In addition, we compete with companies that own other brands and trademarks, as these companies could enter into similar licensing arrangements with retailers and wholesalers in the United States and internationally. These arrangements could be with our existing retail and wholesale partners, thereby competing with us for consumer attention and limited floor or rack space in the same stores in which our branded products are sold, and vying with us for the time and resources of the retailers and wholesale licensees that manufacture and distribute our products. These companies may be able to respond more quickly to changes in retailer, wholesaler and consumer preferences and devote greater resources to brand acquisition, development and marketing. We may not be able to compete effectively against these companies.

If we or our brands are unable to compete successfully against current and future competitors, we may be unable to sustain or increase demand for products bearing our brands, which could have a material adverse effect on our reputation, prospects, performance and financial condition.

~~Our level of indebtedness, and restrictions under such indebtedness, could adversely affect our operations and liquidity.~~

Our senior notes include: (a) the 6.875% 2023 Notes with an aggregate principal amount of approximately $113.1 million; (b) the 7.375% 2023 Notes with an aggregate principal amount of approximately $127.4 million, (c) the 7.25% 2027 Notes with an aggregate principal amount of $122.5 million; (d) the 7.50% 2027 Notes with an aggregate principal amount of $125.5 million; (e) the 2024 Notes with an aggregate principal amount of approximately $110.5 million; (f) the 2026 Notes with an aggregate principal amount of approximately $134.7 million and (g) the 2025 Notes with an aggregate principal amount of approximately $130.9 million. The Company periodically enters into At Market Issuance Sales Agreements with B. Riley FBR. Most recently, the Company entered into the February 2020 Sales Agreement on February 14, 2020. Pursuant to the February 2020 Sales Agreement, the Company may sell from time to time, at the Company’s option, up to the aggregate principal amount of $150,000,000 of the 7.25% 2027 Notes, 7.375% 2023 Notes, 6.875% 2023 Notes, 2024 Notes, 2026 Notes, 2025 Notes and Depositary Shares. At March 31, 2020, the Company had $148.4 million available for offer and sale pursuant to the February 2020 Sales Agreement.

On December 19, 2018, BRPI Acquisition Co LLC (“BRPAC”), a Delaware limited liability company, UOL, and YMAX Corporation, a Delaware corporation (collectively, the “Borrowers”), indirect wholly owned subsidiaries of ours, in the capacity of borrowers, entered into a credit agreement with the Banc of California, N.A. in the capacity as agent and lender and with the other lenders party thereto (the “BRPAC Credit Agreement”). Under the BRPAC Credit Agreement, we borrowed $80.0 million due December 19, 2023. Pursuant to the terms of the BRPAC Credit Agreement, we may request additional optional term loans in an aggregate principal amount of up to $10.0 million at any time prior to the first anniversary of the agreement date. On February 1, 2019, the Borrowers entered into the First Amendment to Credit Agreement and Joinder with City National Bank as a new lender in which the new lender extended to Borrowers the additional $10.0 million as further discussed in Note 9 to the accompanying financial statements. In April 2017, we amended our Credit Agreement with Wells Fargo Bank (the “Wells Fargo Credit Agreement”) to increase our retail liquidation line of credit from $100 million to $200 million.

The terms of such indebtedness contain various restrictions and covenants regarding the operation of our business, including, but not limited to, restrictions on our ability to merge or consolidate with or into any other entity. We may also secure additional debt financing in the future in addition to our current debt. Our level of indebtedness generally could adversely affect our operations and liquidity, by, among other things: (i) making it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because we may not have sufficient cash flows to make our scheduled debt payments; (ii) causing us to use a larger portion of our cash flows to fund interest and principal payments, thereby reducing the availability of cash to fund working capital, capital expenditures and other business activities; (iii) making it more difficult for us to take advantage of significant business opportunities, such as acquisition opportunities or other strategic transactions, and to react to changes in market or industry conditions; and (iv) limiting our ability to borrow additional monies in the future to fund working capital, capital expenditures, acquisitions and other general corporate purposes as and when needed, which could force us to suspend, delay or curtail business prospects, strategies or operations.

We may not be able to generate sufficient cash flow to pay the interest on our debt, and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt, we may have to delay or curtail our operations. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. These alternative strategies may not be affected on satisfactory terms, if at all, and they may not yield sufficient funds to make required payments on our indebtedness. If, for any reason, we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our debt, which could allow our creditors at that time to declare certain outstanding indebtedness to be due and payable or exercise other available remedies, which may in turn trigger cross acceleration or cross default rights in other agreements. If that should occur, we may not be able to pay all such debt or to borrow sufficient funds to refinance it. Even if new financing were then available, it may not be on terms that are acceptable to us.

~~Our senior notes are unsecured and therefore are effectively subordinated to any secured indebtedness that we currently have or that we may incur in the future.~~

Our senior notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, our senior notes are effectively subordinated to any secured indebtedness that we or our subsidiaries have currently outstanding or may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. The indenture governing our senior notes does not prohibit us or our subsidiaries from incurring additional secured (or unsecured) indebtedness in the future. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness and may consequently receive payment from these assets before they may be used to pay other creditors, including the holders of our senior notes.

~~Our senior notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.~~

Our senior notes are obligations exclusively of the Company and not of any of our subsidiaries. None of our subsidiaries is a guarantor of our senior notes, and our senior notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Therefore, in any bankruptcy, liquidation or similar proceeding, all claims of creditors (including trade creditors) of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of our senior notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, our senior notes will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. The indenture governing our senior notes does not prohibit us or our subsidiaries from incurring additional indebtedness in the future. In addition, future debt and security agreements entered into by our subsidiaries may contain various restrictions, including restrictions on payments by our subsidiaries to us and the transfer by our subsidiaries of assets pledged as collateral.

~~The indenture under which our senior notes were issued contains limited protection for holders of our senior notes.~~

The indenture under which our senior notes were issued offers limited protection to holders of our senior notes. The terms of the indenture and our senior notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on the holders of our senior notes. In particular, the terms of the indenture and our senior notes do not place any restrictions on our or our subsidiaries’ ability to:

●

issue debt securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to our senior notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to our senior notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to our senior notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to our senior notes with respect to the assets of our subsidiaries;

●

~~pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities subordinated in right of payment to our senior notes;~~

●

~~sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);~~

●

~~enter into transactions with affiliates;~~

●

~~create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;~~

●

~~make investments; or~~

●

~~create restrictions on the payment of dividends or other amounts to us from our subsidiaries.~~

In addition, the indenture does not include any protection against certain events, such as a change of control, a leveraged recapitalization or “going private” transaction (which may result in a significant increase of our indebtedness levels), restructuring or similar transactions. Furthermore, the terms of the indenture and our senior notes do not protect holders of our senior notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity. Also, an event of default or acceleration under our other indebtedness would not necessarily result in an event of default under our senior notes.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of our senior notes may have important consequences for the holders of our senior notes, including making it more difficult for us to satisfy our obligations with respect to our senior notes or negatively affecting the trading value of our senior notes.

Other debt we issue or incur in the future could contain more protections for its holders than the indenture and our senior notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of our senior notes.

~~An increase in market interest rates could result in a decrease in the value of our senior notes.~~

In general, as market interest rates rise, notes bearing interest at a fixed rate decline in value. Consequently, if the market interest rates increase after our senior notes were purchased, the market value of our senior notes may decline. We cannot predict the future level of market interest rates.

~~An active trading market for our senior notes may not develop, which could limit the market price of our senior notes or the ability of our senior note holders to sell them.~~

The 7.25% 2027 Notes are quoted on Nasdaq under the symbol “RILYG,” the 7.50% 2027 Notes are quoted on Nasdaq under the symbol “RILYZ,” the 7.375% 2023 Notes are quoted on Nasdaq under the symbol “RILYH,” the 6.875% 2023 Notes are quoted on Nasdaq under the symbol “RILYI,” the 2024 Notes are quoted on Nasdaq under the symbol “RILYO,” the 2026 Notes are quoted on Nasdaq under the symbol “RILYN,” and the 2025 Notes are quoted on Nasdaq under the symbol “RILYM.” We cannot provide any assurances that an active trading market will develop for our senior notes or that our senior note holders will be able to sell their senior notes. If the senior notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, general economic conditions, our financial condition, performance and prospects and other factors. Accordingly, we cannot assure our senior note holders that a liquid trading market will develop for our senior notes, that our senior note holders will be able to sell our senior notes at a particular time or that the price our senior note holders receive when they sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for our senior notes may be harmed. Accordingly, our senior note holders may be required to bear the financial risk of an investment in our senior notes for an indefinite period of time.

~~We may issue additional notes.~~

Under the terms of the indenture governing our senior notes, we may from time to time without notice to, or the consent of, the holders of our senior notes, create and issue additional notes which will be equal in rank to our senior notes. We will not issue any such additional notes unless such issuance would constitute a “qualified reopening” for U.S. federal income tax purposes.

The rating for the 7.25% 2027 Notes, 7.375% 2023 Notes, 6.875% 2023 Notes, 2024 Notes, 2026 Notes or 2025 Notes could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency.

We have obtained a rating for the 7.25% 2027 Notes, 7.375% 2023 Notes, 6.875% 2023 Notes, 2024 Notes, 2026 Notes and 2025 Notes (collectively, the “Rated Notes”). Ratings only reflect the views of the issuing rating agency or agencies and such ratings could at any time be revised downward or withdrawn entirely at the discretion of the issuing rating agency. A rating is not a recommendation to purchase, sell or hold any of the Rated Notes. Ratings do not reflect market prices or suitability of a security for a particular investor and the rating of the Rated Notes may not reflect all risks related to us and our business, or the structure or market value of the Rated Notes. We may elect to issue other securities for which we may seek to obtain a rating in the future. If we issue other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for or the market value of the Rated Notes.

~~There is no established market for the Depositary Shares and the market value of the Depositary Shares could be substantially affected by various factors.~~

The Depositary Shares are a new issue of securities with no established trading market. Although the shares recently began trading on the Nasdaq Global Market, an active trading market on the Nasdaq Global Market for the Depositary Shares may not develop or last, in which case the trading price of the Depositary Shares could be adversely affected. If an active trading market does develop on the Nasdaq Global Market, the Depositary Shares may trade at prices higher or lower than their initial offering price. The trading price of the Depositary Shares also depends on many factors, including, but not limited to:

●

~~prevailing interest rates;~~

●

~~the market for similar securities;~~

●

~~general economic and financial market conditions; and~~

●

~~the Company’s financial condition, results of operations and prospects.~~

The Company has been advised by some of the underwriters that they intend to make a market in the Depositary Shares, but they are not obligated to do so and may discontinue market-making at any time without notice.

The Series A Preferred Stock and the Depositary Shares rank junior to all of the Company’s indebtedness and other liabilities and are effectively junior to all indebtedness and other liabilities of the Company’s subsidiaries.

In the event of a bankruptcy, liquidation, dissolution or winding-up of the affairs of the Company, the Company’s assets will be available to pay obligations on the 6.875% Series A Cumulative Perpetual Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), only after all of the Company’s indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of the Company’s assets will rank junior to the prior claims of the Company’s current and future creditors and any future series or class of preferred stock the Company may issue that ranks senior to the Series A Preferred Stock. In addition, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and other liabilities of (as well as any preferred equity interests held by others in) the Company’s existing subsidiaries and any future subsidiaries. The Company’s existing subsidiaries are, and any future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to the Company in respect of dividends due on the Series A Preferred Stock. If the Company is forced to liquidate its assets to pay its creditors, the Company may not have sufficient assets to pay amounts due on any or all of the Series A Preferred Stock then outstanding. The Company and its subsidiaries have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock. The Company may incur additional indebtedness and become more highly leveraged in the future, which could harm the Company’s financial position and potentially limit cash available to pay dividends. As a result, the Company may not have sufficient funds remaining to satisfy its dividend obligations relating to the Series A Preferred Stock if the Company incurs additional indebtedness.

Future offerings of debt or senior equity securities may adversely affect the market price of the Depositary Shares. If the Company decides to issue debt or senior equity securities in the future, it is possible that these securities will be governed by an indenture or other instrument containing covenants restricting the Company’s operating flexibility. Additionally, any convertible or exchangeable securities that the Company issues in the future may have rights, preferences and privileges more favorable than those of the Series A Preferred Stock and may result in dilution to owners of the Depositary Shares. The Company and, indirectly, the Company’s shareholders, will bear the cost of issuing and servicing such securities. Because the Company’s decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond the Company’s control, the Company cannot predict or estimate the amount, timing or nature of the Company’s future offerings. Thus, holders of the Depositary Shares will bear the risk of the Company’s future offerings reducing the market price of the Depositary Shares and diluting the value of their holdings in the Company.

The Company may issue additional shares of the Series A Preferred Stock and additional series of preferred stock that rank on a parity with the Series A Preferred Stock as to dividend rights, rights upon liquidation or voting rights.

The Company is allowed to issue additional shares of Series A Preferred Stock and additional series of preferred stock that would rank on a parity with the Series A Preferred Stock as to dividend payments and rights upon the Company’s liquidation, dissolution or winding up of the Company’s affairs pursuant to the Company’s articles of incorporation and the certificate of designation for the Series A Preferred Stock without any vote of the holders of the Series A Preferred Stock. The Company’s articles of incorporation authorize the Company to issue up to 1,000,000 shares of preferred stock in one or more series on terms determined by the Company’s Board of Directors. Prior to the issuance of Series A Preferred Stock, the Company had no outstanding series of preferred stock. However, the use of depositary shares enables the Company to issue significant amounts of preferred stock, notwithstanding the number of shares authorized by the Company’s articles of incorporation. The issuance of additional shares of Series A Preferred Stock and additional series of parity preferred stock could have the effect of reducing the amounts available to the Series A Preferred Stockholders upon the Company’s liquidation or dissolution or the winding up of the Company’s affairs. It also may reduce dividend payments on the Series A Preferred Stock issued and outstanding if the Company does not have sufficient funds to pay dividends on all Series A Preferred Stock outstanding and other classes of stock with equal priority with respect to dividends.

In addition, although holders of the Depositary Shares are entitled to limited voting rights (discussed further below), the holders of the Depositary Shares will vote separately as a class along with all other outstanding series of the Company’s preferred stock that the Company may issue upon which like voting rights have been conferred and are exercisable. As a result, the voting rights of holders of the Depositary Shares may be significantly diluted, and the holders of such other series of preferred stock that the Company may issue may be able to control or significantly influence the outcome of any vote.

Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may cause prevailing market prices for the Depositary Shares and the Company’s common stock to decline and may adversely affect the Company’s ability to raise additional capital in the financial markets at times and prices favorable to the Company. Such issuances may also reduce or eliminate the Company’s ability to pay dividends on the Company’s common stock.

~~Holders of Depositary Shares will have extremely limited voting rights.~~

The voting rights of holders of Depositary Shares will be limited. The Company’s common stock is the only class of the Company’s securities that carries full voting rights. Voting rights for holders of Depositary Shares will exist primarily with respect to the ability to elect (together with the holders of other outstanding series of the Company’s preferred stock, or Depositary Shares representing interests in the Company’s preferred stock, or additional series of preferred stock the Company may issue in the future and upon which similar voting rights have been or are in the future conferred and are exercisable) two additional directors to the Company’s Board of Directors in the event that six quarterly dividends (whether or not declared or consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to the Company’s articles of incorporation or certificate of designation (in some cases voting together with the holders of other outstanding series of the Company’s preferred stock as a single class) that materially and adversely affect the rights of the holders of Depositary Shares (and other series of preferred stock, as applicable) or create additional classes or series of the Company’s stock that are senior to the Series A Preferred Stock, provided that in any event adequate provision for redemption has not been made. Other than the limited circumstances described in this prospectus supplement, holders of Depositary Shares will not have any voting rights.

~~The Depositary Shares have not been rated.~~

The Series A Preferred Stock and the Depositary Shares have not been rated and may never be rated. It is possible, however, that one or more rating agencies might independently decide to assign a rating to the Depositary Shares or that the Company may elect to obtain a rating of the Depositary Shares in the future. Furthermore, the Company may elect to issue other securities for which the Company may seek to obtain a rating. If any ratings are assigned to the Depositary Shares in the future or if the Company issues other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, could adversely affect the market for, or the market value of, the Depositary Shares.

Ratings reflect the views of the issuing rating agency or agencies, and such ratings could at any time be revised downward, placed on negative outlook or withdrawn entirely at the discretion of the issuing rating agency or agencies. Furthermore, a rating is not a recommendation to purchase, sell or hold any particular security, including the Depositary Shares. Ratings do not reflect market prices or the suitability of a security for a particular investor, and any future rating of the Depositary Shares may not reflect all risks related to the Company and its business, or the structure or market value of the Depositary Shares.

The conversion feature may not adequately compensate the holders, and the conversion and redemption features of the Series A Preferred Stock and the Depositary Shares may make it more difficult for a party to take over the Company and may discourage a party from taking over the Company.

Upon the occurrence of a Delisting Event or Change of Control (each as defined in the certificate of designation for the Series A Preferred Stock), holders of the Depositary Shares will have the right (unless, prior to the Delisting Event Conversion Date or Change of Control Conversion Date (each as defined in the certificate of designation for the Series A Preferred Stock), as applicable, the Company has provided or provide notice of the Company’s election to redeem the Series A Preferred Stock) to direct the depositary to convert some or all of the Series A Preferred Stock underlying their Depositary Shares into the Company’s common stock (or equivalent value of alternative consideration), and under these circumstances the Company will also have a special optional redemption right to redeem the Series A Preferred Stock. Upon such a conversion, the holders will be limited to a maximum number of shares of the Company’s common stock equal to the Share Cap (as defined in the certificate of designation for the Series A Preferred Stock) multiplied by the number of shares of Series A Preferred Stock converted. If the Common Stock Price is less than $11.49 (which is approximately 50% of the closing sale price per share of the Company’s common stock on October 1, 2019), subject to adjustment, the holders will receive a maximum number of shares of the Company’s common stock per depositary share, which may result in a holder receiving value that is less than the liquidation preference of the Depositary Shares. In addition, those features of the Series A Preferred Stock and Depositary Shares may have the effect of inhibiting a third party from making an acquisition proposal for the Company or of delaying, deferring or preventing a change of control of the Company under circumstances that otherwise could provide the holders of the Company’s common stock and Depositary Shares with the opportunity to realize a premium over the then-current market price or that shareholders may otherwise believe is in their best interests.

~~The market price of the Depositary Shares could be substantially affected by various factors.~~

~~The market price of the Depositary Shares will depend on many factors, which may change from time to time, including:~~

●

~~prevailing interest rates, increases in which may have an adverse effect on the market price of the Depositary Shares;~~

●

~~the annual yield from distributions on the Depositary Shares as compared to yields on other financial instruments;~~

●

~~general economic and financial market conditions;~~

●

~~government action or regulation;~~

●

~~the financial condition, performance and prospects of the Company and its competitors;~~

●

~~changes in financial estimates or recommendations by securities analysts with respect to the Company, its competitors or the industry in which the Company operates;~~

●

~~the Company’s issuance of additional preferred equity or debt securities; and~~

●

~~actual or anticipated variations in quarterly operating results of the Company and its competitors.~~

As a result of these and other factors, investors who purchase the Depositary Shares may experience a decrease, which could be substantial and rapid, in the market price of the Depositary Shares, including decreases unrelated to the Company’s operating performance or prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed as part of this Quarterly Report are listed in the index to exhibits immediately preceding such exhibits, which index to exhibits is incorporated herein by reference.

Exhibit Index

Incorporated by Reference
Exhibit
No.
Description Form Exhibit Filing Date

4.1 Third Supplemental Indenture, dated as of February 12, 2020, by and between the Company and The Bank of New York Mellon Trust Company National Association, as Trustee 8-K 4.4 2/12/2020

4.2 Form of 6.375% Senior Note due 2025 (included in Exhibit 4.1) 8-K 4.4 2/12/2020

10.1* Commitment Letter, dated as of February 14, 2020, by and between the Company and Franchise Group, Inc.

10.2* Loan Participant Guaranty, dated as of February 19, 2020, by the Company in favor of the Loan Participant

10.3* CIBC Guaranty, dated as of February 14, 2020, by the Company in favor of CIBC Bank USA, as administrative agent

10.4* Amendment No. 20 to Credit Agreement, dated as of January 31, 2020, by and among Babcock & Wilcox Enterprises, Inc., Bank of America, N.A., as administrative agent, and the lenders party thereto, including the Company

10.5* ^ Backstop Commitment Letter, dated as of January 31, 2020, by and between the Company and Babcock & Wilcox Enterprises, Inc.

		Incorporated by Reference
Exhibit No.	Description	Form	Exhibit	Filing Date
10.1	Amendment and Restatement Agreement, dated as of May 14, 2020, among B&W, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, including the Company §*

10.2	Fee Letter, dated as of May 14, 2020, among the Company and B&W*

10.3	Fee and Interest Equitization Agreement, dated May 14, 2020, between the Company, B. Riley FBR, and B&W*

10.4	Termination Agreement, dated as of May 14, 2020, the Company and B&W and acknowledged by Bank of America, N.A. with respect to the Backstop Commitment Letter*

10.5	Limited Guaranty Agreement, dated as of May 14, 2020, among the Company, B&W and Bank of America, N.A.*

10.6	Limited Waiver, Joinder and Amendment Number Two to Credit Agreement, dated as of May 1, 2020, by and among Franchise Group New Holdco, LLC, Franchise Group Intermediate Holdco, LLC, each of its subsidiaries named therein, the lenders named therein, GACP Finance Co., LLC, as administrative agent, and Kayne Solutions Fund, L.P., as collateral agent* ^

10.7	Joinder and Amendment Number Three to ABL Credit Agreement, dated as of May 1, 2020, by and among Franchise Group New Holdco, LLC, Franchise Group Intermediate Holdco, LLC, each of its subsidiaries named therein, the lenders named therein, and GACP Finance Co., LLC, as administrative agent and collateral agent* ^

10.6 Underwriting Agreement, dated as of February 10, 2020, by and among the Company and B. Riley FBR, Inc., as representative of the several underwriters named therein. 8-K 1.1 2/12/2020

10.7 At Market Issuance Sales Agreement, dated as of February 14, 2020, by and between B. Riley Financial, Inc. and B. Riley FBR, Inc. S-3 1.2 2/14/2020

31.1*
Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2* Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.3* Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1** Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2** Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS* XBRL Instance Document

101.SCH* XBRL Taxonomy Extension Schema Document

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* XBRL Taxonomy Extension Label Linkbase Document

101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document

31.1*		Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2*		Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.3*		Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1**		Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* §	~~Filed herewith.~~
**	~~Furnished herewith.~~
#	~~Management contract or compensatory plan or arrangement~~

^	The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to the Company. Certain schedules and annexes to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or annex will be furnished to the U.S. Securities and Exchange Commission or its staff upon request.
*	Filed herewith.
**	Furnished herewith.
#	Management contract or compensatory plan or arrangement
^	Pursuant to Item 601(b)(10) of Regulation S-K, certain annexes to the agreement have not been filed herewith. The registrant agrees to furnish supplementally a copy of any omitted annex to the Securities and Exchange Commission upon request.

8452

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	B. Riley Financial, Inc.

Date: ~~May 11,~~July 31, 2020	By:	/s/ PHILLIP J. AHN
		~~Name:~~	~~Phillip J. Ahn~~
		Name:	Phillip J. Ahn
		Title:	Chief Financial Officer and Chief Operating Officer (Principal Financial Officer)

false --12-31 Q2 0001464790 2027-05-31 2027-12-31 2023-05-31 2023-09-30 2024-05-31 2026-09-30 2025-02-28

Delaware		27-0223495
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

~~21255 Burbank Boulevard,~~11100 Santa Monica Blvd., Suite ~~400~~ ~~Woodland Hills,~~800 Los Angeles, CA		~~91367~~ 90025
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth ~~company ☐~~company☐

	March 31,			December 31,			June 30,			December 31,
	2020			2019			2020			2019
	(Unaudited)						(Unaudited)
Assets
Assets:
Cash and cash equivalents	$	124,231		$	104,268		$	106,253		$	104,268
Restricted cash		471			471			471			471
Due from clearing brokers		10,879			23,818			29,089			23,818
Securities and other investments owned, at fair value		287,786			408,213			399,044			408,213
Securities borrowed		674,163			814,331			786,363			814,331
Accounts receivable, net		46,450			46,624			43,226			46,624
Due from related parties		4,391			5,832			295			5,832
Advances against customer contracts		11,121			27,347			1,413			27,347
Loans receivable, at fair value (includes $216,302 from related parties at March 31, 2020)		326,299			43,338
Loans receivable, at fair value (includes $233,396 from related parties at June 30, 2020)								325,517			43,338
Loans receivable, at cost (includes $157,080 from related parties at December 31, 2019)		—			225,848			—			225,848
Prepaid expenses and other assets		114,686			81,808			105,312			81,808
Operating lease right-of-use assets		46,213			47,809			44,636			47,809
Property and equipment, net		12,223			12,727			12,287			12,727
Goodwill		223,697			223,697			227,046			223,697
Other intangible assets, net		212,500			220,525			199,991			220,525
Deferred income taxes		35,786			31,522			14,329			31,522
Total assets	$	2,130,896		$	2,318,178		$	2,295,272		$	2,318,178
Liabilities and Equity
Liabilities:
Accounts payable	$	6,858		$	4,477		$	4,301		$	4,477
Accrued expenses and other liabilities		103,452			130,714			106,531			130,714
Deferred revenue		73,709			67,121			71,017			67,121
Due to related parties and partners		1,061			1,750			617			1,750
Due to clearing brokers		5,126			—
Securities sold not yet purchased		14,298			41,820			9,804			41,820
Securities loaned		670,859			810,495			779,013			810,495
Mandatorily redeemable noncontrolling interests		4,508			4,616			4,351			4,616
Operating lease liabilities		59,430			61,511			57,364			61,511
Notes payable		714			38,167			714			38,167
Loan participations sold		12,405			12,478			14,109			12,478
Term loan		61,932			66,666			57,195			66,666
Senior notes payable		853,523			688,112			854,037			688,112
Total liabilities		1,867,875			1,927,927			1,959,053			1,927,927

Commitments and contingencies (Note 14)
B. Riley Financial, Inc. stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 2,531 and 2,349 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively; liquidation preference of $63,273 and $58,723 as of March 31, 2020 and December 31, 2019, respectively.		—			—
Common stock, $0.0001 par value; 100,000,000 shares authorized; 25,988,565 and 26,972,332 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.		3			3
B. Riley Financial, Inc. stockholders' equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; 2,531 and 2,349 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively; liquidation preference of $63,273 and $58,723 as of June 30, 2020 and December 31, 2019, respectively.								—			—
Common stock, $0.0001 par value; 100,000,000 shares authorized; 25,864,393 and 26,972,332 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively.								3			3
Additional paid-in capital		308,472			323,109			306,772			323,109
(Accumulated deficit) retained earnings		(70,232	)		39,536
Retained earnings								5,927			39,536
Accumulated other comprehensive loss		(3,208	)		(1,988	)		(2,693	)		(1,988	)
Total B. Riley Financial, Inc. stockholders’ equity		235,035			360,660
Total B. Riley Financial, Inc. stockholders' equity								310,009			360,660
Noncontrolling interests		27,986			29,591			26,210			29,591
Total equity		263,021			390,251			336,219			390,251
Total liabilities and equity	$	2,130,896		$	2,318,178		$	2,295,272		$	2,318,178

	Three Months Ended March 31,						Six Months Ended June 30,
	2020			2019			2020			2019
Cash flows from operating activities:
Net (loss) income	$	(99,249	)	$	7,979		$	(16,720	)	$	30,288
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,956			4,913			9,879			9,744
Provision for doubtful accounts		724			233			2,081			1,067
Share-based compensation		5,322			2,614			9,489			5,548
Fair value adjustments, non-cash		17,926			49			21,975			(5,639	)
Non-cash interest and other		(2,827	)		736			(6,943	)		(3,144	)
Effect of foreign currency on operations		179			130			(73	)		339
Loss from equity investments		236			3,762			554			5,162
Deferred income taxes		(4,254	)		(390	)		(14,340	)		6,430
Impairment of intangibles and loss on disposal of fixed assets		4,046			88			12,550			(344	)
Gain on extinguishment of debt		(1,556	)		—			(1,556	)		—
Income allocated for mandatorily redeemable noncontrolling interests		175			169			397			446
Change in operating assets and liabilities:
Due from clearing brokers		12,939			15,320			(5,271	)		8,493
Securities and other investments owned		125,061			(15,274	)		20,009			8,926
Securities borrowed		140,168			104,104			27,967			171,425
Accounts receivable and advances against customer contracts		15,674			(2,845	)		27,601			(22,420	)
Prepaid expenses and other assets		(37,151	)		(3,706	)		(19,707	)		(45,500	)
Accounts payable, accrued expenses and other liabilities		(22,097	)		(1,251	)		738			1,143
Amounts due to/from related parties and partners		752			(1,236	)		4,404			(3,454	)
Securities sold, not yet purchased		(27,522	)		(1,675	)		(32,017	)		5,131
Deferred revenue		6,589			893			3,896			(790	)
Securities loaned		(139,636	)		(105,689	)		(31,481	)		(171,413	)
Net cash provided by operating activities		455			8,924			13,432			1,438
Cash flows from investing activities:
Purchases of loans receivable		(115,328	)		(20,154	)		(152,228	)		(225,072	)
Repayments of loans receivable		42,128			5,500			74,450			17,640
Sale of loan receivable to related party		1,800			—			1,800			—
Proceeds from loan participations sold								2,400			—
Repayment of loan participations sold		(244	)		—			(940	)		—
Purchases of property, equipment and other		(438	)		(1,746	)		(851	)		(2,514	)
Proceeds from sale of property, equipment and intangible assets		1			12			1			503
Purchase of equity investments		—			(10,558	)		(6,486	)		(25,183	)
Proceeds from sale of division of magicJack								—			6,196
Dividends and distributions from equity investments		589			433			797			854
Acquisition of other businesses								(1,500	)		–
Net cash used in investing activities		(71,492	)		(26,513	)		(82,557	)		(227,576	)
Cash flows from financing activities:					��
Repayment of asset based credit facility		(37,096	)		—			(37,096	)		—
Repayment of notes payable		(357	)		(357	)		(357	)		(357	)
Proceeds from term loan		—			10,000			—			10,000
Repayment of term loan		(4,810	)		—			(9,620	)		(8,305	)
Proceeds from issuance of senior notes		171,078			4,987			171,078			123,935
Redemption of senior notes		(1,829	)		—			(1,829	)		—
Payment of debt issuance costs		(2,724	)		(145	)		(2,760	)		(2,039	)
Payment of employment taxes on vesting of restricted stock		(505	)		(714	)		(2,678	)		(2,291	)
Common dividends paid		(9,609	)		(2,606	)		(17,489	)		(9,991	)
Preferred dividends paid		(1,055	)		—			(2,142	)		—
Repurchase of common stock		(24,068	)		(2,650	)		(27,779	)		(3,252	)
Repurchase of warrants								—			(2,777	)
Distribution to noncontrolling interests		(1,323	)		(274	)		(2,143	)		(856	)
Proceeds from issuance of preferred stock		4,630			—			4,630			—
Net cash provided by financing activities		92,332			8,241			71,815			104,067
Increase (decrease) in cash, cash equivalents and restricted cash		21,295			(9,348	)		2,690			(122,071	)
Effect of foreign currency on cash, cash equivalents and restricted cash		(1,332	)		23			(705	)		37
Net increase (decrease) in cash, cash equivalents and restricted cash		19,963			(9,325	)		1,985			(122,034	)
Cash, cash equivalents and restricted cash, beginning of period		104,739			180,278			104,739			180,278
Cash, cash equivalents and restricted cash, end of period	$	124,702		$	170,953		$	106,724		$	58,244

Supplemental disclosures:
Interest paid	$	21,785		$	17,435		$	45,934		$	31,604
Taxes paid	$	574		$	192		$	608		$	891

	March 31,		December 31,		June 30,		December 31,
	2020		2019		2020		2019
Securities and other investments owned:
Equity securities	$	234,867	$	353,162	$	341,515	$	353,162
Corporate bonds		18,429		19,020		5,375		19,020
Other fixed income securities		5,243		8,414		2,768		8,414
Partnership interests and other		29,247		27,617		49,386		27,617
	$	287,786	$	408,213	$	399,044	$	408,213

Securities sold not yet purchased:
Equity securities	$	124	$	5,360	$	4,181	$	5,360
Corporate bonds		13,361		33,436		5,272		33,436
Other fixed income securities		813		3,024		351		3,024
	$	14,298	$	41,820	$	9,804	$	41,820

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	RILY	Nasdaq Global Market
Depositary Shares, each representing a 1/1000th fractional interest in a share of Series A Cumulative Perpetual Preferred Stock	RILYP	Nasdaq Global Market
7.25% Senior Notes due 2027	RILYG	Nasdaq Global Market
7.50% Senior Notes due 2027	RILYZ	Nasdaq Global Market
6.50% Senior Notes due 2026	RILYN	Nasdaq Global Market
6.375% Senior Notes due 2025	RILYM	Nasdaq Global Market
6.75% Senior Notes due 2024	RILYO	Nasdaq Global Market
7.375% Senior Notes due 2023	RILYH	Nasdaq Global Market
6.875% Senior Notes due 2023	RILYI	Nasdaq Global Market

		Page

PART I. FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the three and six months ended ~~March 31,~~June 30, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ for the three and six months ended ~~March 31,~~June 30, 2020 and 2019	3
	Condensed Consolidated Statements of Equity for the three and six months ended ~~March 31,~~June 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3031
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4147
Item 4.	Controls and Procedures	4248
PART II. OTHER INFORMATION		43
Item 1.	Legal Proceedings	4349
Item 1A.	Risk Factors	4349
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8350
Item 3.	Defaults Upon Senior Securities	8350
Item 4.	Mine Safety Disclosures	8350
Item 5.	Other Information	8350
Item 6.	Exhibits	8350
SIGNATURES		8553

																Accumulated
										Additional						Other
	Preferred Stock				Common Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
	Shares		Amount		Shares			Amount		Capital			Earnings			Loss			Interests			Equity
Balance, January 1, 2020		2,349	$	—		26,972,332		$	3	$	323,109		$	39,536		$	(1,988	)	$	29,591		$	390,251
Preferred stock issued		182		—		—			—		4,630			—			—			—			4,630
Vesting of restricted stock, net of shares withheld for employer taxes		—		—		38,298			—		(520	)		—			—			—			(520	)
Common stock repurchased and retired		—		—		(1,022,065	)		—		(24,068	)		—			—			—			(24,068	)
Share based payments		—		—		—			—		5,321			—			—			—			5,321
Dividends on common stock ($0.35 per share)		—		—		—			—		—			(10,048	)		—			—			(10,048	)
Dividends on preferred stock ($429.69 per share)		—		—		—			—		—			(1,055	)		—			—			(1,055	)
Net loss		—		—		—			—		—			(98,665	)		—			(584	)		(99,249	)
Distributions to noncontrolling interests		—		—		—			—		—			—			—			(1,021	)		(1,021	)
Other comprehensive loss		—		—		—			—		—			—			(1,220	)		—			(1,220	)
Balance, March 31, 2020		2,531	$	—		25,988,565		$	3	$	308,472		$	(70,232	)	$	(3,208	)	$	27,986		$	263,021

Balance, January 1, 2019		—	$	—		26,603,355		$	2	$	258,638		$	1,579		$	(2,161	)	$	602		$	258,660
Vesting of restricted stock, net of shares withheld for employer taxes		—		—		78,911			—		(714	)		—			—			—			(714	)
Common stock repurchased and retired		—		—		(157,050	)		—		(2,650	)		—			—			—			(2,650	)
Share based payments		—		—		—			—		2,614			—			—			—			2,614
Dividends on common stock ($0.08 per share)		—		—		—			—		—			(2,134	)		—			—			(2,134	)
Net income		—		—		—			—		—			8,023			—			(44	)		7,979
Other comprehensive income		—		—		—			—		—			—			170			—			170
Balance, March 31, 2019		—	$	—		26,525,216		$	2	$	257,888		$	7,468		$	(1,991	)	$	558		$	263,925

	Financial Assets and Liabilities Measured at Fair Value								Financial Assets and Liabilities Measured at Fair Value
	on a Recurring Basis at March 31, 2020 Using								on a Recurring Basis at June 30, 2020 Using
			Quoted prices								Quoted prices in
	Fair value at		inactive markets for identical		Other observable		Significant unobservable		Fair value at		active markets for		Other observable		Significant unobservable
	March 31,		assets		inputs		inputs		June 30,		identical assets		inputs		inputs
	2020		(Level 1)		(Level 2)		(Level 3)		2020		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities and other investments owned:
Equity securities	$	234,867	$	139,751	$	—	$	95,116	$	341,515	$	233,726	$	—	$	107,789
Corporate bonds		18,429		—		18,429		—		5,375		—		5,375		—
Other fixed income securities		5,243		—		5,243		—		2,768		—		2,768		—
Investment funds valued at net asset value⁽¹⁾		29,247								49,386
Total securities and other investments owned		287,786		139,751		23,672		95,116		399,044		233,726		8,143		107,789
Loans receivable, at fair value		326,299		—		—		326,299		325,517		—		—		325,517
Total assets measured at fair value	$	614,085	$	139,751	$	23,672	$	421,415	$	724,561	$	233,726	$	8,143	$	433,306

Liabilities:
Securities sold not yet purchased:
Equity securities	$	124	$	124	$	—	$	—	$	4,181	$	4,181	$	—	$	—
Corporate bonds		13,361		—		13,361		—		5,272		—		5,272		—
Other fixed income securities		813		—		813		—		351		—		351		—
Total securities sold not yet purchased		14,298		124		14,174		—		9,804		4,181		5,623		—
Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,508		—		—		4,508		4,351		—		—		4,351
Total liabilities measured at fair value	$	18,806	$	124	$	14,174	$	4,508	$	14,155	$	4,181	$	5,623	$	4,351

	Financial Assets and Liabilities Measured at Fair Value
	on a Recurring Basis at December 31, 2019 Using
			Quoted prices
			in active markets for		Other		Significant
	Fair value at December 31		identical assets		observable inputs		unobservable inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities and other investments owned:
Equity securities	$	353,162	$	243,911	$	—	$	109,251
Corporate bonds		19,020		—		19,020		—
Other fixed income securities		8,414		—		8,414		—
Investment funds valued at net asset value⁽¹⁾		27,617
Total securities and other investments owned		408,213		243,911		27,434		109,251
Loans receivable, at fair value		43,338		—		—		43,338
Total assets measured at fair value	$	451,551	$	243,911	$	27,434	$	152,589

Liabilities:
Securities sold not yet purchased:
Equity securities	$	5,360	$	5,360	$	—	$	—
Corporate bonds		33,436		—		33,436		—
Other fixed income securities		3,024		—		3,024		—
Total securities sold not yet purchased		41,820		5,360		36,460		—

Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,616		—		—		4,616
Total liabilities measured at fair value	$	46,436	$	5,360	$	36,460	$	4,616

	Financial Assets and Liabilities Measured at Fair Value
	on a Recurring Basis at December 31, 2019 Using
			Quoted prices in
	Fair value at		active markets for		Other observable		Significant unobservable
	December 31		identical assets		inputs		inputs
	2019		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities and other investments owned:
Equity securities	$	353,162	$	243,911	$	—	$	109,251
Corporate bonds		19,020		—		19,020		—
Other fixed income securities		8,414		—		8,414		—
Investment funds valued at net asset value⁽¹⁾		27,617
Total securities and other investments owned		408,213		243,911		27,434		109,251
Loans receivable, at fair value		43,338		—		—		43,338
Total assets measured at fair value	$	451,551	$	243,911	$	27,434	$	152,589

Liabilities:
Securities sold not yet purchased:
Equity securities	$	5,360	$	5,360	$	—	$	—
Corporate bonds		33,436		—		33,436		—
Other fixed income securities		3,024		—		3,024		—
Total securities sold not yet purchased		41,820		5,360		36,460		—

Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,616		—		—		4,616
Total liabilities measured at fair value	$	46,436	$	5,360	$	36,460	$	4,616

	Level 3		Level 3 Changes During the Period											Level 3		Level 3		Level 3 Changes During the Period											Level 3
	Balance at		Fair			Relating to			Purchases,			Transfer in		Balance at		Balance at Beginning of Year		Fair Value Adjustments			Relating to Undistributed Earnings			Purchases, Sales and Settlements			Transfer in and/or out of Level 3		Balance at End of Period
	Beginning of		Value			Undistributed			Sales and			and/or out		End of
	Year		Adjustments			Earnings			Settlements			of Level 3		Period
Three Months Ended March 31, 2020
Six Months Ended June 30, 2020
Equity securities	$	109,251	$	(15,135	)	$	—		$	1,000		$	—	$	95,116	$	109,251	$	(2,462	)	$	—		$	1,000		$	—	$	107,789
Loans receivable at fair value		43,338		(17,926	)		1,289			73,750			225,848		326,299		43,338		(21,974	)		2,462			75,843			225,848		325,517
Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,616		—			(108	)		—			—		4,508		4,616		—			(265	)		—			—		4,351
Three Months Ended March 31, 2019
Six Months Ended June 30, 2019
Equity securities	$	24,577	$	(18	)	$	—		$	(45	)	$	—	$	24,514	$	24,577	$	5,267		$	1,360		$	1,451		$	—	$	32,655
Corporate bonds		—		—			—			—			1,330		1,330
Loans receivable at fair value		33,731		35			475			(200	)		—		34,041		33,731		8,619			475			(978	)		—		41,847
Mandatorily redeemable noncontrolling interests issued after November 5, 2003		4,633		—			(104	)		—			—		4,529		4,633		—			(409	)		—			—		4,224

	Exercise		Expiration	Issued and Outstanding Warrants as of Beginning		Warrants		Warrants			Issued and Outstanding Warrants as of End of
	Price		Date	of Period		Issued		Repurchased			Period

For the year ended December 31, 2019
Wunderlich Warrants	$	17.50	July 3, 2022		821,816		—		(638,311	)		183,505
BR Brand Warrants	$	26.24	October 28, 2024		—		200,000		—			200,000
Total					821,816		200,000		(638,311	)		383,505

For the three months ended March 31, 2020
Wunderlich Warrants	$	17.50	July 3, 2022		183,505		—		—			183,505
BR Brand Warrants	$	26.24	October 28, 2024		200,000		—		—			200,000
Total					383,505		—		—			383,505

	March 31, 2020		June 30, 2020
Partnership investments	$	14,751	$	20,352
Due from related party		14		15
Maximum exposure to loss	$	14,765	$	20,367

Consideration paid by B. Riley:
Cash acquisition consideration	$	116,500
Transaction costs		570
Total cash consideration		117,070
Warrant consideration		990
Total consideration	$	118,060

Tangible assets acquired and assumed:
Cash and cash equivalents	$	2,160
Accounts receivable		1,751
Deferred revenue		(1,332	)
Tradename		136,176
Customer list		8,678
Non-controlling interest		(29,373	)
Total	$	118,060

			As of March 31, 2020						As of December 31, 2019
			Gross						Gross
			Carrying		Accumulated		Intangibles		Carrying		Accumulated		Intangibles			As of June 30, 2020						As of December 31, 2019
		Useful Life	Value		Amortization		Net		Value		Amortization		Net		Useful Life	Gross Carrying Value		Accumulated Amortization		Intangibles Net		Gross Carrying Value		Accumulated Amortization		Intangibles Net
Amortizable assets:
Customer relationships		2 to 16 Years	$	99,008	$	30,528	$	68,480	$	99,008	$	27,269	$	71,739	2 to 16 Years	$	99,008	$	33,788	$	65,220	$	99,008	$	27,269	$	71,739
Domain names		7 Years		230		123		107		233		117		116	7 Years		235		132		103		233		117		116
Advertising relationships		8 Years		100		47		53		100		44		56	8 Years		100		50		50		100		44		56
Internally developed software and other intangibles		0.5 to 5 Years		11,765		5,456		6,309		11,765		4,843		6,922	0.5 to 5 Years		11,775		6,068		5,707		11,765		4,843		6,922
Trademarks		7 to 10 Years		4,600		1,465		3,135		4,600		1,324		3,276	7 to 10 Years		4,600		1,605		2,995		4,600		1,324		3,276
Total				115,703		37,619		78,084		115,706		33,597		82,109			115,718		41,643		74,075		115,706		33,597		82,109

Non-amortizable assets:	Non-amortizable assets:
Tradenames				134,416		—		134,416		138,416		—		138,416			125,916		—		125,916		138,416		—		138,416
Total intangible assets			$	250,119	$	37,619	$	212,500	$	254,122	$	33,597	$	220,525		$	241,634	$	41,643	$	199,991	$	254,122	$	33,597	$	220,525

				Weighted
				Average
	Shares			Fair Value
Nonvested at January 1, 2020		2,263,988		$	12.35
Granted		5,575			24.54
Vested		(16,157	)		19.30
Nonvested at March 31, 2020		2,253,406		$	12.33

	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
	Capital Markets		Principal Investments - United Online and magicJack		Total		Capital Markets			Principal Investments - United Online and magicJack		Total
Restructuring charge:
Employee termination costs	$	—	$	1,418	$	1,418	$	—		$	1,594	$	1,594
Facility closure and consolidation charge (recovery)		25		109		134		(4	)		109		105
Total restructuring charge	$	25	$	1,527	$	1,552	$	(4	)	$	1,703	$	1,699

							Amounts not				Gross amounts recognized		Gross amounts offset in the consolidated balance sheets⁽¹⁾		Net amounts included in the consolidated balance sheets		Amounts not offset in the consolidated balance sheets but eligible for offsetting upon counterparty default⁽²⁾		Net amounts
							offset in the
							consolidated balance
			Gross amounts		Net amounts		sheets but eligible for
			offset in the		included		offsetting
	Gross amounts		consolidated balance		inthe consolidated		upon counterparty
	recognized		sheets⁽¹⁾		balance sheets		default⁽²⁾		Net amounts
As of March 31, 2020
As of June 30, 2020
Securities borrowed	$	674,163	$	—	$	674,163	$	674,163	$	—	$	786,363	$	—	$	786,363	$	786,363	$	—
Securities loaned	$	670,859	$	—	$	670,859	$	670,859	$	—	$	779,013	$	—	$	779,013	$	779,013	$	—
As of December 31, 2019
Securities borrowed	$	814,331	$	—	$	814,331	$	814,331	$	—	$	814,331	$	—	$	814,331	$	814,331	$	—
Securities loaned	$	810,495	$	—	$	810,495	$	810,495	$	—	$	810,495	$	—	$	810,495	$	810,495	$	—

	Three Months Ended March 31, 2020															Three Months Ended June 30, 2020
	Reportable Segment															Reportable Segment
									Principal														Principal
									Investments -														Investments-
	Capital			Auction and			Valuation and		United Online and							Capital			Auction and		Valuation and		United Online and
	Markets			Liquidation			Appraisal		magicJack		Brands		Total			Markets			Liquidation		Appraisal		magicJack		Brands		Total

Revenues from contracts with customers:
Corporate finance, consulting and investment banking fees	$	67,382		$	—	��	$	—	$	—	$	—	$	67,382		$	49,653		$	—	$	—	$	—	$	—	$	49,653
Wealth and asset management fees		20,320			—			—		—		—		20,320			18,701			—		—		—		—		18,701
Commissions, fees and reimbursed expenses		14,470			16,178			8,788		—		—		39,436			12,785			2,596		7,668		—		—		23,049
Subscription services		—			—			—		18,833		—		18,833			—			—		—		18,287		—		18,287
Service contract revenues		—			4,483			—		—		—		4,483			—			4,610		—		—		—		4,610
Advertising, licensing and other		—			—			—		3,889		3,801		7,690			—			1,045		—		3,145		3,206		7,396
Total revenues from contracts with customers		102,172			20,661			8,788		22,722		3,801		158,144			81,139			8,251		7,668		21,432		3,206		121,696

Other sources of revenue:
Interest income - Loans and securities lending		21,851			—			—		—		—		21,851			24,506			—		—		—		—		24,506
Trading losses on investments		(164,516	)		—			—		—		—		(164,516	)
Trading gains on investments																	118,596			—		—		—		—		118,596
Fair value adjustment on loans		(17,926	)		—			—		—		—		(17,926	)		(4,049	)		—		—		—		—		(4,049	)
Other		2,241			—			—		—		—		2,241			5,719			—		—		—		—		5,719
Total revenues	$	(56,178	)	$	20,661		$	8,788	$	22,722	$	3,801	$	(206	)	$	225,911		$	8,251	$	7,668	$	21,432	$	3,206	$	266,468

	Three Months Ended					Three Months Ended					Six Months Ended
	March 31,					June 30,					June 30,
	2020			2019		2020			2019		2020			2019
Net (loss) income attributable to B. Riley Financial, Inc.	$	(98,665	)	$	8,023
Net income (loss) attributable to B. Riley Financial, Inc.						$	83,840		$	22,157	$	(14,825	)	$	30,180
Preferred stock dividends		(1,055	)		—		(1,087	)		—		(2,142	)		—
Net (loss) income applicable to common shareholders	$	(99,720	)	$	8,023
Net income (loss) applicable to common shareholders						$	82,753		$	22,157	$	(16,967	)	$	30,180

Weighted average common shares outstanding:
Basic		26,028,613			26,217,215		25,627,085			26,278,352		25,827,849			26,247,952
Effect of dilutive potential common shares:
Restricted stock units and warrants		—			352,938		1,365,738			543,442		��			448,191
Contingently issuable shares		—			117,378		—			74,779		—			74,779
Diluted		26,028,613			26,687,531		26,992,823			26,896,573		25,827,849			26,770,922

Basic income per common share	$	(3.83	)	$	0.31
Diluted income per common share	$	(3.83	)	$	0.30
Basic income (loss) per common share						$	3.23		$	0.84	$	(0.66	)	$	1.15
Diluted income (loss) per common share						$	3.07		$	0.82	$	(0.66	)	$	1.13

		Incorporated by Reference
Exhibit No.	Description	Form	Exhibit	Filing Date

4.1	Third Supplemental Indenture, dated as of February 12, 2020, by and between the Company and The Bank of New York Mellon Trust Company National Association, as Trustee	8-K	4.4	2/12/2020

4.2	Form of 6.375% Senior Note due 2025 (included in Exhibit 4.1)	8-K	4.4	2/12/2020

10.1*	Commitment Letter, dated as of February 14, 2020, by and between the Company and Franchise Group, Inc.

10.2*	Loan Participant Guaranty, dated as of February 19, 2020, by the Company in favor of the Loan Participant

10.3*	CIBC Guaranty, dated as of February 14, 2020, by the Company in favor of CIBC Bank USA, as administrative agent

10.4*	Amendment No. 20 to Credit Agreement, dated as of January 31, 2020, by and among Babcock & Wilcox Enterprises, Inc., Bank of America, N.A., as administrative agent, and the lenders party thereto, including the Company

10.5* ^	Backstop Commitment Letter, dated as of January 31, 2020, by and between the Company and Babcock & Wilcox Enterprises, Inc.

10.6	Underwriting Agreement, dated as of February 10, 2020, by and among the Company and B. Riley FBR, Inc., as representative of the several underwriters named therein.	8-K	1.1	2/12/2020

10.7	At Market Issuance Sales Agreement, dated as of February 14, 2020, by and between B. Riley Financial, Inc. and B. Riley FBR, Inc.	S-3	1.2	2/14/2020

31.1*	Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.2*	Certification of Co-Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

31.3*	Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934

32.1**	Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**	Certification of Co-Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.3**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema Document

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document