| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Principles of Consolidation and Basis of Presentation 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 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. 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 have been condensed or omitted pursuant to such rules and regulations. In the opinion of the
CompanyÂ’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 CompanyÂ’s Annual Report on Form 10-K for the year ended December 31, 2014, filed
with the Securities and Exchange Commission on March 30, 2015. The results of operations for the nine months ended September 30,
2015 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.
(b) Use of Estimates The preparation
of the 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 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,
reserves for accounts receivable and slow moving goods held for sale or auction, the carrying value of intangible assets and goodwill,
the fair value of mandatorily redeemable noncontrolling interests and accounting for income tax valuation 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.
(c) Revenue Recognition Revenues
are recognized in accordance with the accounting guidance when persuasive evidence of an arrangement exists, the related services
have been provided, the fee is fixed or determinable, and collection is reasonably assured. Revenues
in the Capital Markets segment are primarily comprised of (i) fees earned from corporate finance and investment banking services;
(ii) revenues from sales and trading activities, and (iii) revenues from wealth management services. Fees
earned from corporate finance and investment banking services are derived from debt, equity and convertible securities offerings
in which the Company acted as an underwriter or placement agent and from financial advisory services rendered in connection with
client mergers, acquisitions, restructurings, recapitalizations and other strategic transactions. Fees from underwriting activities
are recognized in earnings when the services related to the underwriting transaction are completed under the terms of the engagement
and when the income was determined and is not subject to any other contingencies. Revenues
from sales and trading include (i) commissions resulting from equity securities transactions executed as agent or principal and
are recorded on a trade date basis, (ii) related net trading gains and losses from market making activities and from the commitment
of capital to facilitate customer orders, (iii) fees paid for equity research and (iv) principal transactions which include
realized and unrealized net gains and losses resulting from our principal investments in equity and other securities for the CompanyÂ’s
account. Revenues
from wealth management services consist primarily of investment management fees that are recognized over the period the services
are provided. Investment management fees are primarily comprised of fees for investment management services and are generally based
on the dollar amount of the assets being managed. Revenues
in the Valuation and Appraisal segment are primarily comprised of fees for valuation and appraisal services. Revenues are recognized
upon the delivery of the completed services to the related customers and collection of the fee is reasonably assured. Revenues
in the Valuation and Appraisal segment also include contractual reimbursable costs which totaled $734 and $752 for the three months
ended September 30, 2015 and 2014, respectively, and $2,156 and $2,267 for the nine months ended September 30, 2015 and 2014, respectively. Revenues
in the Auction and Liquidation segment are comprised of (i) commissions and fees earned on the sale of goods at auctions and
liquidations; (ii) revenues from auction and liquidation services contracts where the Company guarantees a minimum recovery
value for goods being sold at auction or liquidation; (iii) revenue from the sale of goods that are purchased by the Company
for sale at auction or liquidation sales events; (iv) fees earned from real estate services and the origination of loans;
(v) revenues from financing activities is recorded over the lives of related loans receivable using the interest method; and (vi) revenues
from contractual reimbursable expenses incurred in connection with auction and liquidation contracts. Commission
and fees earned on the sale of goods at auction and liquidation sales are recognized when evidence of an arrangement exists, the
sales price has been determined, title has passed to the buyer and the buyer has assumed the risks of ownership, and collection
is reasonably assured. The commission and fees earned for these services are included in revenues in the accompanying consolidated
statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs which totaled
$1,921 and $1,363 for the three months ended September 30, 2015 and 2014, respectively, and $5,910 and $4,054 for the nine months
ended September 30, 2015 and 2014, respectively. Revenues
earned from auction and liquidation services contracts where the Company guarantees a minimum recovery value for goods being sold
at auction or liquidation are recognized based on proceeds received. The Company records proceeds received from these types of
engagements first as a reduction of contractual reimbursable expenses, second as a recovery of its guarantee and thereafter as
revenue, subject to such revenue meeting the criteria of having been fixed or determinable. Contractual reimbursable expenses and
amounts advanced to customers for minimum guarantees are initially recorded as advances against customer contracts in the accompanying
consolidated balance sheets. If, during the auction or liquidation sale, the Company determines that the proceeds from the sale
will not meet the minimum guaranteed recovery value as defined in the auction or liquidation services contract, the Company accrues
a loss on the contract in the period that the loss becomes known. The Company
also evaluates revenue from auction and liquidation contracts in accordance with the accounting guidance to determine whether to
report auction and liquidation segment revenue on a gross or net basis. The Company has determined that it acts as an agent in
a substantial majority of its auction and liquidation services contracts and therefore reports the auction and liquidation revenues
on a net basis. Revenues
from the sale of goods are recorded gross and are recognized in the period in which the sale of goods held for sale or auction
are completed, title to the property passes to the purchaser and the Company has fulfilled its obligations with respect to the
transaction. These revenues are primarily the result of the Company acquiring title to merchandise with the intent of selling the
items at auction or for augmenting liquidation sales. For liquidation contracts where we take title to retail goods, our net sales
represent gross sales invoiced to customers, less certain related charges for discounts, returns, and other promotional allowances
and are recorded net of sales or value added tax. Fees
earned from real estate services and the origination of loans where the Company provides capital advisory services are recognized
in the period earned, if the fee is fixed and determinable and collection is reasonably assured.
(d) Direct Cost of Services Direct
cost of services relate to service and fee revenues. The costs consist of employee compensation and related payroll benefits, travel
expenses, the cost of consultants assigned to revenue-generating activities and direct expenses billable to clients in the Valuation
and Appraisal segment. Direct costs of services include participation in profits under collaborative arrangements in which the
Company is a majority participant. Direct costs of services also include the cost of consultants and other direct expenses related
to auction and liquidation contracts pursuant to commission and fee based arrangements in the Auction and Liquidation segment.
Direct cost of services does not include an allocation of the CompanyÂ’s overhead costs.
(e) Concentration of Risk Revenue
from one wholesale auction and liquidation engagement represented 11.7% of total revenues during the three months ended September
30, 2015 and revenues from one liquidation engagement represented 14.0% of total revenues during the nine months ended September
30, 2015. Revenues in the Valuation and Appraisal segment and the Auction and Liquidation segment are currently primarily generated
in the United States. The
CompanyÂ’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
CompanyÂ’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 liquidation 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.
(f) Income Taxes The
Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the 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.
(g) Cash and Cash Equivalents The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
(h) Restricted Cash As of
September 30, 2015, restricted cash included $80 of cash collateral for the purchase of a forward exchange contract as more fully
described on Note 2(o) and $44 of cash segregated in a special reserve bank account for the benefit of customers related to our
broker dealer subsidiary. As of December 31, 2014, restricted cash included $7,532 of cash collateral for the letters of credit
and the outstanding loan balance under the $100,000 asset based credit facility described in Note 7, $50 of cash segregated in
a special reserve bank account for the benefit of customers related to our broker dealer subsidiary, and $75 of cash collateral
for electronic payment processing in Europe.
(i) Accounts Receivable Accounts
receivable represents amounts due from the CompanyÂ’s auction and liquidation, valuation and appraisal, and capital markets
customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio.
In establishing the required allowance, management utilizes a specific customer identification methodology. Management also considers
historical losses adjusted for current market conditions and the customersÂ’ financial condition and the current receivables
aging and current payment patterns. Account balances are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure
related to its customers. Bad debt expense and changes in the allowance for doubtful accounts for the three and nine months ended
September 30, 2015 and 2014 are included in Note 4.
(j) Advances Against Customer Contracts Advances
against customer contracts represent advances of contractually reimbursable expenses incurred prior to, and during the term of
the auction and liquidation services contract. These advances are charged to expense in the period that revenue is recognized under
the contract.
(k) Goods Held for Sale or Auction Goods
held for sale or auction are stated at the lower of cost, determined by the specific-identification method, or market.
(l) Property and Equipment Property
and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful
lives of the assets. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of
the lease term or estimated useful life of the asset. Property and equipment under capital leases are stated at the present value
of minimum lease payments. Depreciation and amortization expense was $102 and $122 for the three months ended September 30, 2015
and 2014, respectively, and $315 and $375 for the nine months ended September 30, 2015 and 2014, respectively.
(m) Securities Owned and Securities Sold Not Yet Purchased Securities
owned consist of marketable 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
September 30, 2015 and December 31, 2014, the CompanyÂ’s securities owned and securities sold not yet purchased at fair value
consisted of the following securities:
September 30, 2015 December 31, 2014
Securities owned
Common stocks $ 6,872 $ 16,667
Mutual funds 3,013 —
Corporate bonds 501 1,188
Partnership interests and other securities 7,162 100
$ 17,548 $ 17,955
Securities sold not yet purchased
Common stocks $ 5,395 $ —
Corporate bonds 1,086 746
$ 6,481 $ 746
(n) Fair Value Measurements The CompanyÂ’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. The Company also records mandatorily redeemable noncontrolling interests
that were issued after November 5, 2003 at fair value with fair value determined in accordance with the Accounting Standards
Codification (“ASC”). The table below presents information about the Company’s securities owned, mandatorily
redeemable noncontrolling interests and securities sold not yet purchased that are measured at fair value on a recurring basis
as of September 30, 2015 and December 31, 2014 which are categorized using the three levels of fair value hierarchy. 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 CompanyÂ’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 following
tables present information on the assets and liabilities measured and recorded at fair value on a recurring basis as of September
30, 2015 and December 31, 2014.
Financial Assets Measured at Fair Value on a Recurring Basis at September 30, 2015, Using
Fair Value at September 30, 2015 Quoted prices in active markets for identical assets (Level 1) Other observable inputs (Level 2) Significant unobservable inputs (Level 3)
Assets:
Securities owned
Common stocks $ 6,872 $ 6,846 $ — $ 26
Mutual funds 3,013 3,013 — —
Corporate bonds 501 501 — —
Partnership interests and other securities 7,162 — 5,996 1,166
Total assets measured at fair value $ 17,548 $ 10,360 $ 5,996 $ 1,192
Liabilities:
Securities sold not yet purchased
Common stocks $ 5,395 $ 5,395 $ — $ —
Corporate bonds 1,086 — 1,086 —
Contingent consideration 2,347 — — 2,347
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 2,278 — — 2,278
Total liabilities measured at fair value $ 11,106 $ 5,395 $ 1,086 $ 4,625
Financial Assets Measured at Fair Value on a Recurring Basis at December 31, 2014, Using
Fair Value at December 31, 2014 Quoted prices in active markets for identical assets (Level 1) Other observable inputs (Level 2) Significant unobservable inputs (Level 3)
Assets:
Securities owned
Common stocks $ 16,667 $ 16,348 $ — $ 319
Corporate bonds 1,188 — 1,188 —
Partnership interests and other securities 100 — 100 —
Total assets measured at fair value $ 17,955 $ 16,348 $ 1,288 $ 319
Liabilities:
Securities sold not yet purchased Corporate bonds $ 746 $ — $ 746 $ —
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 $ 2,285 $ — $ — $ 2,285
Total liabilities measured at fair value $ 3,031 $ — $ 746 $ 2,285 The
Company determined the fair value of mandatorily redeemable noncontrolling interests described above 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 changes in Level 3 fair value hierarchy during the nine months ended September 30, 2015 and 2014
is as follows:
Level 3 Balance at Beginning of Period Level 3 Changes During the Period Level 3 Balance at End of Period
Fair Value Adjustments Relating to Undistributed Earnings Purchases, Sales and Settlements Transfer in and/or out of Level 3
Nine Months Ended September 30, 2015
Common stocks $ 319 $ — $ — $ (293 ) $ — $ 26
Partnership interests $ — $ 41 $ — $ 1,125 $ — $ 1,166
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 $ 2,285 $ — $ (7 ) $ — $ — $ 2,278
Contingent consideration (1) $ — $ 2,347 $ — $ — $ — $ 2,347
Nine Months Ended September 30, 2014
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 $ 2,273 $ — $ (48 ) $ — $ — $ 2,225
(1) Fair value adjustment of $2,347 including initial value of contingent consideration of $2,229 and an adjustment for imputed interest of $118 for the nine months ended September 30, 2015. The
amount reported in the table above for the nine months ended September 30, 2015 and 2014 includes the amount of undistributed earnings
attributable to the mandatorily redeemable noncontrolling interests that is distributed on a quarterly basis. The
carrying amounts reported in the condensed consolidated financial statements for cash, restricted cash, accounts receivable, accounts
payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturity of these instruments.
The carrying amounts of the notes payable (including credit lines used to finance liquidation engagements) and long-term debt approximate
fair value because the contractual interest rates or effective yields of such instruments are consistent with current market rates
of interest for instruments of comparable credit risk. (o) Derivative Instruments
and Hedging Activity The
Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain
auction and liquidation engagements with operations outside the United States. At September 30, 2015, the CompanyÂ’s use of
derivatives consists of a forward exchange contract agreement in the amount of $1,870 Canadian dollars. The forward exchange
contract was originally required to be settled anytime between June 27, 2015 and August 31, 2015 and in August 2015 the settlement
date was extended to November 30, 2015. The net gains and losses from foreign exchange contracts are reported as a component
of selling, general and administrative expenses in the condensed consolidated financial statements. The net gain from forward exchange
contracts was $68 and $28 during the three and nine months ended September 30, 2015. (p) Foreign Currency
Translation 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 countryÂ’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. Equity accounts of foreign subsidiaries are translated at
the historical rate. The effects of foreign currency translation adjustments are included in stockholdersÂ’ equity as a component
of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets. Foreign currency transaction
losses were $127 and $442 during the three and nine months ended September 30, 2015. Foreign currency transaction gains were $32
and $76 during the three and nine months ended September 30, 2014. These amounts are included in selling, general and administrative
expenses in our condensed consolidated statements of operations. (q) Share-based Compensation Share-based
compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as expense over
the employeeÂ’s requisite service period for all stock-based awards granted or modified. The awards principally consist of grants
of restricted stock units with the fair value of the award, adjusted for estimated forfeitures. In accordance with the applicable
accounting guidance, the grant of restricted stock units are classified as equity based awards. (r)
Supplemental Cash Flows Disclosure During
the nine months ended September 30, 2015, supplemental non-cash activity included a decrease in goods held for sale or auction
of $4,026, a decrease in prepaid expenses of $2,531, and a decrease of note payable of $6,570 related to the bankruptcy filing
of Great American Group Energy and Equipment, LLC (“GAGEE”), a wholly-owned special purpose subsidiary of the Company,
in the first quarter of 2015 as more fully described in Note 8. (s)
Reclassifications Certain
reclassifications have been made to the condensed consolidated financial statements in 2014 to conform to the current year presentation.
During the three and nine months ended September 30, 2014, $217 and $795, respectively, of costs were reclassified from selling,
general and administrative costs to direct costs in the valuation and appraisal segment. (t) Recent Accounting
Pronouncements In
February 2015, the FASB issued ASU 2015-2, Consolidation (Topic 810): Amendments to the Consolidation Analysis |
