| 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 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. All intercompany accounts and transactions have been eliminated upon consolidation. 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 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, 2016, filed with the Securities
and Exchange Commission on March 10, 2017. The results of operations for the three months ended March 31, 2017 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 condensed consolidated financial statements in accordance with Generally Accepted Accounting Principles (“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, 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, fair value of share based arrangements, fair value of contingent consideration in business combination’s 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, investment banking, restructuring
and wealth management services; and (ii) revenues from sales and trading activities. 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. Fees
earned 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
from sales and trading includes (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 Company’s account. 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 condensed
consolidated statements of operations. Under these types of arrangements, revenues also include contractual reimbursable costs
which totaled $10,610 and $3,018 for the three months ended March 31, 2017 and 2016, 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 condensed 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. 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 $665 and $679 for the three months
ended March 31, 2017 and 2016, respectively. Revenues
in the Principal Investments - United Online segment are primarily comprised of services revenues, which are derived primarily
from fees charged to pay accounts; advertising and other revenues; and products revenues, which are derived primarily from the
sale mobile broadband service devices, including the related shipping and handling fees. Service
revenues are derived primarily from fees charged to pay accounts and are recognized in the period in which fees are fixed or determinable
and the related services are provided to the customer. The Company’s pay accounts generally pay in advance for their services
by credit card, PayPal, automated clearinghouse or check, and revenues are then recognized ratably over the service period. Advance
payments from pay accounts are recorded in the condensed consolidated balance sheet as deferred revenue. In circumstances where
payment is not received in advance, revenues are only recognized if collectability is reasonably assured. Advertising
revenues consist primarily of amounts from the Company’s Internet search partner that are generated as a result of users
utilizing the partner’s Internet search services and amounts generated from display advertisements. The Company recognizes
such advertising revenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the
related performance criteria are met. In determining whether an arrangement exists, the Company ensures that a written contract
is in place, such as a standard insertion order or a customer-specific agreement. The Company assesses whether performance criteria
have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment
terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of customer-provided
performance data to the contractual performance obligation and to internal or third-party performance data in circumstances where
that data is available.
(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 in the Principal Investments - United Online segment include cost of telecommunications and data
center costs, personnel and overhead-related costs associated with operating the Company’s networks and data centers, depreciation
of network computers and equipment, third party advertising sales commissions, license fees, costs related to providing customer
support, costs related to customer billing and processing of customer credit cards and associated bank fees. Direct cost of services
does not include an allocation of the Company’s overhead costs.
(e) Concentration
of Risk Revenues
from one liquidation service contract to a retailer represented 12.2% of total revenues during the three months ended March 31,
2017. Revenues in the Capital Markets, Auction and Liquidation, Valuation and Appraisal and Principal Investments - United Online
segment are primarily generated in the United States, Australia, Canada and Europe. 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 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) Advertising
Expenses The
Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled
$176 and $193 for the three months ended March 31, 2017 and 2016, respectively. Advertising expense is included as a component
of selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
(g) Share-Based
Compensation The
Company’s share based payment awards principally consist of grants of restricted stock and restricted stock units. 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 statement 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.
(h) Income Taxes 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.
(i) 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.
(j) Restricted
Cash As
of March 31, 2017, restricted cash included $518 of cash segregated in a special bank accounts for the benefit of customers related
to our broker dealer subsidiary and collateral for one of our telecommunication suppliers. As of December 31, 2016, restricted
cash included $1,440 of cash collateral related to a retail liquidation engagement in Australia, $1,320 of cash collateral for
foreign exchange contracts and $534 cash segregated in a special bank accounts for the benefit of customers related to our broker
dealer subsidiary and collateral for one of our telecommunication suppliers.
(k) Accounts Receivable Accounts
receivable represents amounts due from the Company’s auction and liquidation, valuation and appraisal, capital markets and
principal investments - United Online 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 customers’
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 months ended March 31, 2017 and 2016 are included in Note 4.
(l) 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.
(m) 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. Depreciation and amortization expense was $520 and $91 for the three
months ended March 31, 2017 and 2016, respectively.
(n) Securities
and Other Investments Owned and Securities Sold Not Yet Purchased Securities
and other investments owned consist of marketable securities and investments in partnership interests, loans receivable 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, 2017 and December 31, 2016, the Company’s securities and other investments owned owned and securities sold
not yet purchased at fair value consisted of the following securities:
March
31, December
31,
2017 2016
Securities
and other investments owned
Common
stocks $ 7,273 $ 2,084
Corporate
bonds 1,771 1,025
Loans
receivable 11,831 -
Partnership
interests 20,218 13,470
$ 41,093 $ 16,579
Securities
sold not yet purchased
Common
stocks $ 105 $ -
Corporate
bonds 1,554 846
$ 1,659 $ 846
(o) Fair Value
Measurements 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 owned and securities sold and not yet purchased are comprised of common stocks, corporate bonds and
investments in partnerships and loans receivable. Investments in common stocks are based on quoted prices in active markets which
are included in Level 1 of the fair value hierarchy. The Company also holds nonpublic common 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’s partnership interests
are valued based on the Company’s proportionate share of the net assets of the partnership which is derived from the most
recent statements received from the general partner which are included in Level 2 of the fair value hierarchy. Loans receivable
are valued at fair value based on the market yield of similar second lien loans collateralized by inventory and other assets of
the borrower and included in Level 3 of the fair value hierarchy. 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, 2017 and December 31, 2016.
Financial
Assets and Liabilities Measured at Fair Value
on
a Recurring Basis at March 31, 2017, Using
Quoted
prices in Other Significant
Fair
Value at active
markets for observable unobservable
March
31, identical
assets inputs inputs
2017 (Level
1) (Level
2) (Level
3)
Assets:
Securities owned
Common
stocks $ 7,273 $ 7,272 $ - $ 1
Corporate
bonds 1,771 - 1,611 160
Loan
receivable 11,831 - - 11,831
Partnership
interests 20,218 4,403 44 15,771
Total
assets measured at fair value $ 41,093 $ 11,675 $ 1,655 $ 27,763
Liabilities:
Securities sold not
yet purchased
Common
stocks $ 105 $ - $ 105 $ -
Corporate
bonds 1,554 - 1,554 -
Total securities sold
not yet purchased 1,659 - 1,659 -
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003 3,190 - - 3,190
Total
liabilities measured at fair value $ 4,849 $ - $ 1,659 $ 3,190
Financial
Assets and Liabilities Measured at Fair Value
on
a Recurring Basis at December 31, 2016, Using
Quoted
prices in Other Significant
Fair
Value at active
markets for observable unobservable
December
31, identical
assets inputs inputs
2016 (Level
1) (Level
2) (Level
3)
Assets:
Securities owned
Common
stocks $ 2,084 $ 1,785 $ - $ 299
Corporate
bonds 1,025 - 865 160
Partnership
interests 13,470 - 44 13,426
Total
assets measured at fair value $ 16,579 $ 1,785 $ 909 $ 13,885
Liabilities:
Securities sold not
yet purchased
Corporate
bonds $ 846 $ - $ 846 $ -
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003 $ 3,214 $ - $ - $ 3,214
Contingent
consideration $ 1,242 $ - $ - $ 1,242
Total
liabilities measured at fair value $ 5,302 $ - $ 846 $ 4,456 The
changes in Level 3 fair value hierarchy during the three months ended March 31, 2017 and 2016 is as follows:
Level
3 Level
3 Changes During the Year Level
3
Balance
at Fair Relating
to Purchases, Transfer
in Balance
at
Beginning
of Value Undistributed Sales
and and/or
out End
of
Period Adjustments Earnings Settlements of
Level 3 Period
Three Months Ended
March 31, 2017
Common
stocks $ 299 $ 87 $ - $ (385 ) $ - $ 1
Corporate bonds 160 - - - - 160
Loan receivable - - - 11,831 - 11,831
Partnership interests 13,426 2,061 - 284 - 15,771
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003 3,214 - (24 ) - - 3,190
Contingent consideration 1,242 8 - (1,250 ) - -
Three Months Ended
March 31, 2016
Common stocks $ 290 $ (80 ) $ - $ - $ - $ 210
Partnership interests 1,766 65 (15 ) - - 1,816
Mandatorily
redeemable noncontrolling interests issued after November 5, 2003 2,330 - (99 ) - - 2,231
Contingent consideration 2,391 31 - (1,250 ) - 1,172 The
fair value adjustment for contingent consideration of $8 and $31 represents imputed interest for the three months ended March
31, 2017 and 2016, respectively. The amount reported in the table above for the three months ended March 31, 2017 and 2016 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, restricted cash, accounts receivable, accounts
payable, accrued payroll and related, accrued value added tax, income taxes payable and accrued expenses and other current liabilities
approximate fair value based on the short-term maturity of these instruments. The
carrying amount of the senior notes payable approximates 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.
(p) Contingent
Consideration In
connection with the acquisition of MK Capital Advisors , LLC (“MK Capital”) The
contingent cash and stock consideration was payable on the first and second anniversary dates of the closing provided that MK
Capital generated a minimum amount of gross revenues as defined in the purchase agreement for the twelve months following the
first and second anniversary dates of the closing. MK Capital achieved the minimum amount of revenues for the first and second
anniversary periods and the contingent cash consideration and contingent stock consideration for the first anniversary period
was paid and issued on February 2, 2016 and for the second anniversary period was paid and issued on February 2, 2017. Upon the
payment of the contingent stock consideration on February 2, 2017, the Company recorded a deferred tax benefit and an increase
to additional paid-in capital in the amount of $1,151 in accordance with ASC 805.
(q) Derivative
and Foreign Currency Translation 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. During the three months ended March 31, 2017, the
Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of $25,000 Australian
dollars that was settled on January 31, 2017. The Company did not use any derivative contracts during the three months ended
March 31, 2016. The forward exchange contract was entered into to improve the predictability of cash flows related to a
retail store liquidation engagement that was completed in December 2016. The net loss from forward exchange contracts was
$70 during the three months ended March 31, 2017. This amount is reported as a component of selling, general and administrative
expenses in the condensed consolidated financial statements of operations. 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 year-end exchange rates. The effects of foreign currency translation adjustments are
included in stockholders' equity as a component of accumulated other comprehensive income in the accompanying condensed consolidated
balance sheets. Transaction losses were $324 and $145 during the three months ended March 31, 2017 and 2016, respectively. These
amounts are included in selling, general and administrative expenses in our condensed consolidated statements of operations.
(r) Recent Accounting
Pronouncements In
February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02: Leases (Topic 842) (“ASU 2016-02”) In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) In
March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations (Reporting Revenue Gross versus Net) In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (ASU 2016-15) In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill
Impairment |
