0001213900-20-034078.txt : 20201030 0001213900-20-034078.hdr.sgml : 20201030 20201029210810 ACCESSION NUMBER: 0001213900-20-034078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 92 CONFORMED PERIOD OF REPORT: 20200930 FILED AS OF DATE: 20201030 DATE AS OF CHANGE: 20201029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: B. Riley Financial, Inc. CENTRAL INDEX KEY: 0001464790 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 270223495 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37503 FILM NUMBER: 201274452 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: SUITE 800 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 818-884-3737 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: SUITE 800 CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: Great American Group, Inc. DATE OF NAME CHANGE: 20090522 10-Q 1 f10q0920_brileyfinancial.htm QUARTERLY REPORT

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

 

Or

 

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

 

For the transition period from              to

 

Commission File Number 001-37503

 

 

 

B. RILEY FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   27-0223495
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
11100 Santa Monica Blvd., Suite 800
Los Angeles, CA
  90025
(Address of Principal Executive Offices)   (Zip Code)

 

(310) 966-1444
(Registrant’s telephone number, including area code)

 

21255 Burbank Boulevard, Suite 400

Woodland Hills, CA 91367

(Former Address)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

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 6.875% share of Series A Cumulative Perpetual Preferred Stock   RILYP   Nasdaq Global Market
Depositary Shares, each representing a 1/1000th fractional interest in a 7.375% share of Series B Cumulative Perpetual Preferred Stock   RILYL   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

 

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)

 

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

 

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 October 27, 2020, there were 25,431,575 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

B. Riley Financial, Inc.

 

Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2020

 

Table of Contents

 

      Page
       
PART I. FINANCIAL INFORMATION    
Item 1. Financial Statements   1
  Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019   1
  Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019   2
  Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019   3
  Condensed Consolidated Statements of Equity for the three and nine months ended September 30, 2020 and 2019   4
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 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   29
Item 3. Quantitative and Qualitative Disclosures About Market Risk   47
Item 4. Controls and Procedures   48
PART II. OTHER INFORMATION    
Item 1. Legal Proceedings   49
Item 1A. Risk Factors   49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   49
Item 3. Defaults Upon Senior Securities   49
Item 4. Mine Safety Disclosures   49
Item 5. Other Information   49
Item 6. Exhibits   49
SIGNATURES   51

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

B. RILEY FINANCIAL, INC.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

   September 30,   December 31, 
   2020   2019 
   (Unaudited)     
Assets        
Assets:        
Cash and cash equivalents  $169,676   $104,268 
Restricted cash   1,410    471 
Due from clearing brokers   19,589    23,818 
Securities and other investments owned, at fair value   459,480    408,213 
Securities borrowed   676,423    814,331 
Accounts receivable, net   45,654    46,624 
Due from related parties   3,766    5,832 
Advances against customer contracts   900    27,347 
Loans receivable, at fair value (includes $236,018 from related parties at September 30, 2020)   344,339    43,338 
Loans receivable, at cost (includes $157,080 from related parties at December 31, 2019)   
    225,848 
Prepaid expenses and other assets   87,560    81,808 
Operating lease right-of-use assets   43,514    47,809 
Property and equipment, net   11,986    12,727 
Goodwill   227,046    223,697 
Other intangible assets, net   194,516    220,525 
Deferred income taxes   14,223    31,522 
Total assets  $2,300,082   $2,318,178 
Liabilities and Equity          
Liabilities:          
Accounts payable  $4,226   $4,477 
Accrued expenses and other liabilities   127,036    130,714 
Deferred revenue   70,565    67,121 
Due to related parties and partners   777    1,750 
Securities sold not yet purchased   48,125    41,820 
Securities loaned   667,109    810,495 
Mandatorily redeemable noncontrolling interests   4,462    4,616 
Operating lease liabilities   55,790    61,511 
Notes payable   714    38,167 
Loan participations sold   13,919    12,478 
Term loan   52,452    66,666 
Senior notes payable   854,926    688,112 
Total liabilities   1,900,101    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; 3,831 and 2,349 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; liquidation preference of $95,773 and $58,723 as of September 30, 2020 and December 31, 2019, respectively.   
    
 
Common stock, $0.0001 par value; 100,000,000 shares authorized; 25,431,575 and 26,972,332 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.   3    3 
Additional paid-in capital   332,085    323,109 
Retained earnings   43,938    39,536 
Accumulated other comprehensive loss   (2,167)   (1,988)
Total B. Riley Financial, Inc. stockholders' equity   373,859    360,660 
Noncontrolling interests   26,122    29,591 
Total equity   399,981    390,251 
Total liabilities and equity  $2,300,082   $2,318,178 

 

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

 

1

 

 

B. RILEY FINANCIAL, INC.

Condensed Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except share data)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Revenues:                
Services and fees  $144,823   $113,111   $429,799   $356,975 
Trading income (loss) and fair value adjustments on loans   31,753    40,268    (36,142)   71,730 
Interest income - Loans and securities lending   26,026    25,766    72,383    54,147 
Sale of goods   23,651    918    26,475    4,023 
Total revenues   226,253    180,063    492,515    486,875 
Operating expenses:                    
Direct cost of services   23,264    7,936    51,201    41,715 
Cost of goods sold   9,813    911    11,442    3,835 
Selling, general and administrative expenses   97,143    101,092    291,449    287,963 
Restructuring charge   1,557        1,557    1,699 
Impairment of tradenames           12,500     
Interest expense - Securities lending and loan participations sold   10,975    10,273    30,669    22,579 
Total operating expenses   142,752    120,212    398,818    357,791 
Operating income   83,501    59,851    93,697    129,084 
Other income (expense):                    
Interest income   67    361    537    1,329 
Income (loss) from equity investments   409    1,113    (145)   (4,049)
Interest expense   (16,374)   (12,772)   (48,537)   (35,130)
Income before income taxes   67,603    48,553    45,552    91,234 
Provision for income taxes   (18,711)   (14,409)   (13,380)   (26,802)
Net income   48,892    34,144    32,172    64,432 
Net income (loss) attributable to noncontrolling interests   513    (158)   (1,382)   (50)
Net income attributable to B. Riley Financial, Inc.   48,379    34,302    33,554    64,482 
Preferred stock dividends   1,088        3,230     
Net income available to common shareholders  $47,291   $34,302   $30,324   $64,482 
                     
Basic income per common share  $1.86   $1.29   $1.18   $2.45 
Diluted income per common share  $1.75   $1.21   $1.14   $2.37 
                     
Weighted average basic common shares outstanding   25,446,292    26,556,223    25,699,735    26,351,839 
Weighted average diluted common shares outstanding   27,050,448    28,233,423    26,689,700    27,251,837 

 

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

 

2

 

 

B. RILEY FINANCIAL, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
Net income  $48,892   $34,144   $32,172   $64,432 
Other comprehensive income (loss):                    
Change in cumulative translation adjustment   526    (521)   (179)   (184)
Other comprehensive income (loss), net of tax   526    (521)   (179)   (184)
Total comprehensive income   49,418    33,623    31,993    64,248 
Comprehensive income (loss) attributable to noncontrolling interests   513    (158)   (1,382)   (50)
Comprehensive income attributable to B. Riley Financial, Inc.  $48,905   $33,781   $33,375   $64,298 

 

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

 

3

 

 

B. RILEY FINANCIAL, INC.

Condensed Consolidated Statements of Equity

(Unaudited)

(Dollars in thousands, except share data)

 

Three Months Ended September 30, 2020 and 2019

 

 

                   Accumulated         
                   Additional       Other         
   Preferred Stock   Common Stock   Paid-in   Retained   Comprehensive   Noncontrolling   Total 
   Shares   Amount   Shares   Amount   Capital   Earnings   Loss   Interests   Equity 
Balance, July 1, 2020   2,531   $
    25,864,393   $3   $306,772   $5,927   $(2,693)  $26,210   $336,219 
Preferred stock issued   1,300    
    
    
    31,377    
    
    
    31,377 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes           41,984        (273)   
    
    
    (273)
Common stock repurchased and retired   
    
    (474,802)   
    (10,569)   
    
    
    (10,569)
Share based payments                   4,778    
    
    
    4,778 
Dividends on common stock ($0.35 per share)       
        
    
    (9,280)   
    
    (9,280)
Dividends on preferred stock ($429.69 per share)                   
    (1,088)   
    
    (1,088)
Net income       
        
        48,379    
    513    48,892 
Distributions to noncontrolling interests   
    
    
    
    
    
    
    (601)   (601)
Other comprehensive income       
        
    
    
    526    
    526 
Balance, September 30, 2020   3,831   $
    25,431,575   $3   $332,085   $43,938   $(2,167)  $26,122   $399,981 
                                              
Balance, July 1, 2019   
   $
    26,919,941   $3   $255,865   $22,424   $(1,824)  $710   $277,178 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes       
    51,730    
    (335)   
    
    
    (335)
Common stock repurchased and retired       
    (50,171)       (1,021)   
    
    
    (1,021)
Share based payments                   4,728    
    
    
    4,728 
Dividends on common stock ($0.50 per share)                       (14,769)   
    
    (14,769)
Net income                       34,302        (158)   34,144 
Other comprehensive income                           (521)       (521)
Balance, September 30, 2019      $    26,921,500   $3   $259,237   $41,957   $(2,345)  $552   $299,404 

 

Nine Months Ended September 30, 2020 and 2019

 

 

                   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   1,482    
    
    
    36,007    
    
    
    36,007 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes           561,991        (2,950)               (2,950)
Common stock repurchased and retired           (2,102,748)       (38,348)               (38,348)
Share based payments                   14,267                14,267 
Dividends on common stock ($0.95 per share)                       (25,922)   
    
    (25,922)
Dividends on preferred stock ($1,289.07 per share)   
    
    
    
    
    (3,230)   
    
    (3,230)
Net income                       33,554        (1,382)   32,172 
Distributions to noncontrolling interests   
    
    
    
    
    
    
    (2,087)   (2,087)
Other comprehensive loss                       
    (179)   
    (179)
Balance, September 30, 2020   3,831   $    25,431,575   $3   $332,085   $43,938   $(2,167)  $26,122   $399,981 
                                              
Balance, January 1, 2019   
   $
    26,603,355   $2   $258,638   $1,579   $(2,161)  $602   $258,660 
ESPP shares issued and vesting of restricted stock, net of shares withheld for employer taxes   
    
    556,077    1    (2,627)   
    
    
    (2,626)
Common stock repurchased and retired           (237,932)       (4,273)               (4,273)
Common stock warrants repurchased   
    
    
    
    (2,777)   
    
    
    (2,777)
Share based payments                   10,276    
    
    
    10,276 
Dividends on common stock ($0.84 per share)                   
    (24,104)   
    
    (24,104)
Net income                       64,482    
    (50)   64,432 
Other comprehensive income                   
    
    (184)   
    (184)
Balance, September 30, 2019   
   $
    26,921,500   $3   $259,237   $41,957   $(2,345)  $552   $299,404 

 

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

 

4

 

 

B. RILEY FINANCIAL, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   Nine Months Ended
September 30,
 
   2020   2019 
Cash flows from operating activities:        
Net income      $32,172   $64,432 
Adjustments to reconcile net income to net cash provided by operating activities:              
Depreciation and amortization       14,765    14,217 
Provision for doubtful accounts       2,438    1,646 
Share-based compensation       14,267    10,276 
Fair value adjustments, non-cash       21,755    (13,343)
Non-cash interest and other       (12,901)   (14,941)
Effect of foreign currency on operations       (602)   8 
Loss from equity investments       145    4,049 
Deferred income taxes       17,312    6,358 
Impairment of intangibles and loss on disposal of fixed assets       14,057    (327)
Gain on extinguishment of debt       (1,556)    
Income allocated for mandatorily redeemable noncontrolling interests       779    857 
Change in operating assets and liabilities:              
Due from clearing brokers       4,230    9,947 
Securities and other investments owned       (36,859)   (32,122)
Securities borrowed       137,908    211,139 
Accounts receivable and advances against customer contracts       25,336    (8,645)
Prepaid expenses and other assets       (3,507)   (9,619)
Accounts payable, accrued expenses and other liabilities       (10,297)   31,473 
Amounts due to/from related parties and partners       1,093    (4,574)
Securities sold, not yet purchased       6,304    (8,531)
Deferred revenue       3,444    (502)
Securities loaned       (143,386)   (215,575)
Net cash provided by operating activities       86,897    46,223 
Cash flows from investing activities:              
Purchases of loans receivable       (169,100)   (350,695)
Repayments of loans receivable       75,982    98,742 
Sale of loan receivable to related party       1,800     
Proceeds from loan participations sold       2,400    31,806 
Repayment of loan participations sold       (1,131)   (3,175)
Purchases of property, equipment and other       (1,517)   (2,885)
Proceeds from sale of property, equipment and intangible assets       1    504 
Purchase of equity investments       (6,486)   (33,391)
Proceeds from sale of division of magicJack           6,196 
Dividends and distributions from equity investments       1,005    1,454 
Acquisition of other businesses       (1,500)    
Net cash used in investing activities       (98,546)   (251,444)
Cash flows from financing activities:              
Repayment of asset based credit facility       (37,096)    
Repayment of notes payable        (357)   (357)
Proceeds from term loan           10,000 
Repayment of term loan       (14,429)   (17,924)
Proceeds from issuance of senior notes       171,417    244,497 
Redemption of senior notes       (1,829)    
Payment of debt issuance costs       (2,761)   (4,212)
Payment of employment taxes on vesting of restricted stock       (2,950)   (2,626)
Common dividends paid       (25,822)   (25,049)
Preferred dividends paid       (3,230)    
Repurchase of common stock       (38,348)   (4,273)
Repurchase of warrants           (2,777)
Distribution to noncontrolling interests       (3,013)   (1,095)
Proceeds from issuance of preferred stock       36,007     
Net cash provided by financing activities       77,589    196,184 
Increase (decrease) in cash, cash equivalents and restricted cash       65,940    (9,037)
Effect of foreign currency on cash, cash equivalents and restricted cash       407    (183)
Net increase (decrease) in cash, cash equivalents and restricted cash       66,347    (9,220)
Cash, cash equivalents and restricted cash, beginning of period       104,739    180,278 
Cash, cash equivalents and restricted cash, end of period      $171,086   $171,058 
           
Supplemental disclosures:          
Interest paid  $75,231   $52,931 
Taxes paid  $1,460   $5,029 

 

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

 

5

 

 

B. RILEY FINANCIAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share data)

 

NOTE 1—ORGANIZATION AND NATURE OF BUSINESS OPERATIONS

 

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 consumer Internet access and cloud communication services through its wholly-owned subsidiaries United Online, Inc. (“UOL” or “United Online”) and magicJack VocalTec Ltd. (“magicJack”). 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 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.

 

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 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. 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 nine months ended September 30, 2020 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 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.

 

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(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 $10,530 and $9,721 for the three months ended September 30, 2020 and 2019, respectively, and $29,253 and $22,027 for the nine months ended September 30, 2020 and 2019, respectively. Loan participations sold as of September 30, 2020 and 2019 totaled $13,919 and $28,872, respectively. Interest expense from loan participations sold totaled $445 for the three months ended September 30, 2020, and $1,416 for the nine months ended September 30, 2020. Interest expense from loan participations sold totaled $552 for the three and nine months ended September 30, 2019.

 

(d) Concentration of Risk

 

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.

 

(e) Advertising Expenses

 

The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $560 and $437 for the three months ended September 30, 2020 and 2019, respectively, and $2,264 and $1,383 for the nine months ended September 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 income.

 

(f) Share-Based Compensation

 

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 income over the requisite service or performance period the award is expected to vest.

 

(g) 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.

 

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(h) 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.

 

(i) Restricted Cash

 

As of September 30, 2020, restricted cash included $939 of cash collateral for foreign exchange contracts and $471 of collateral related to one of the Company’s telecommunication suppliers. As of December 31, 2019, restricted cash included $471 of collateral related to one of the Company’s telecommunication suppliers.

 

(j) Securities Borrowed and Securities Loaned

 

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.

 

(k) Property and Equipment

 

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 $967 and $1,163 for the three months ended September 30, 2020 and 2019, respectively, and $2,798 and $4,186 for the nine months ended September 30, 2020 and 2019, respectively.

 

(l) Loans Receivable

 

The Company adopted 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. 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 income. 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.

 

Loans receivable, at fair value totaled $344,339 and $43,338 at September 30, 2020 and December 31, 2019, respectively. The loans have various maturities through December 2024. As of September 30, 2020 and December 31, 2019, the historical cost of loans receivable accounted for under the fair value option was $355,413 and $32,578, respectively, which included principal balances of $360,500 and $32,691 and unamortized costs, origination fees, premiums and discounts, totaling $5,087 and $113, respectively. During the three and nine months ended September 30, 2020, the Company recorded unrealized gains (losses) of $141 and ($21,835), respectively on the loans receivable, at fair value, which is included in trading income (losses) and fair value adjustments on loans on the condensed consolidated statement of income.

 

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 reported at their outstanding principal balances of $232,118 net of $6,270 of unearned income, 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.

 

The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending customers.  At September 30, 2020, the Company has provided limited guarantees with respect to the Franchise Group, Inc. (collectively with all of its affiliates, “FRG”) as further described in Note 17 and Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 14(c).  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 September 30, 2020, the Company has not recorded any provision for credit losses on the FRG and B&W guarantees since the underlying guaranteed loans are senior to most of 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 $205,000.

 

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Interest income on loans receivable is recognized based on the stated interest rate of the loan 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 income. 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 and other investments 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 September 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:

 

   September 30,   December 31, 
   2020   2019 
Securities and other investments owned:        
Equity securities  $392,674   $353,162 
Corporate bonds   5,956    19,020 
Other fixed income securities   3,557    8,414 
Partnership interests and other   57,293    27,617 
   $459,480   $408,213 
           
Securities sold not yet purchased:          
Equity securities  $42,086   $5,360 
Corporate bonds   4,490    33,436 
Other fixed income securities   1,549    3,024 
   $48,125   $41,820 

 

(n) 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 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.

 

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

 

   Financial Assets and Liabilities Measured at Fair Value
on a Recurring Basis at September 30, 2020 Using
 
   Fair value at
September 30,
   Quoted prices in active markets for identical assets   Other observable inputs   Significant unobservable inputs 
   2020   (Level 1)   (Level 2)   (Level 3) 
Assets:                
Securities and other investments owned:                
Equity securities  $392,674   $290,425   $
   $102,249 
Corporate bonds   5,956    
    5,956    
 
Other fixed income securities   3,557    
    3,557    
 
Investment funds valued at net asset value(1)   57,293                
Total securities and other investments owned   459,480    290,425    9,513    102,249 
Loans receivable, at fair value   344,339    
    
    344,339 
Total assets measured at fair value  $803,819   $290,425   $9,513   $446,588 
                     
Liabilities:                    
Securities sold not yet purchased:                    
Equity securities  $42,086   $42,086   $
   $
 
Corporate bonds   4,490    
    4,490    
 
Other fixed income securities   1,549    
    1,549    
 
Total securities sold not yet purchased   48,125    42,086    6,039    
 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,462    
    
    4,462 
Total liabilities measured at fair value  $52,587   $42,086   $6,039   $4,462 

 

   Financial Assets and Liabilities Measured at Fair Value 
   on a Recurring Basis at December 31, 2019 Using 
   Fair value at
December 31,
2019
   Quoted prices in active markets for identical assets
(Level 1)
   Other observable inputs
(Level 2)
   Significant unobservable inputs
(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 

 

 

(1)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy in accordance with ASC “Topic 820 Fair Value Measurements.” The fair value amounts presented in the tables above for investment funds valued at net asset value are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated balance sheets.

 

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As of September 30, 2020 and December 31, 2019, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $446,588 and $152,589, respectively, or 19.4% 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 September 30, 2020:

 

   Fair value at             
   September 30,            Weighted
   2020   Valuation Technique  Unobservable Input  Range  Average
Assets:                
Equity securities  $102,249   Market approach  Multiple of revenue  2.49x - 6.29x  4.92x
           Multiple of EBITDA  5.50x - 10.00x  5.70x
           Multiple of PV-10  .28x  .28x
           Market price of related security  $0.43 - $4.00/share  $1.39
        Option pricing model  Annualized volatility  107.0%  107.0%
Loans receivable at fair value   344,339   Discounted cash flow  Market interest rate  4.9%-17.3%  15%
        Market approach  Market price of related security  $0.43/share  $0.43
Total level 3 assets measured at fair value  $446,588             
                  
Liabilities:                 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003  $4,462   Market approach  Operating income multiple  6.0x  6.0x

 

The changes in Level 3 fair value hierarchy during the nine months ended September 30, 2020 and 2019 are as follows:

 

   Level 3   Level 3 Changes During the Period   Level 3 
   Balance at   Fair   Relating to   Purchases,   Transfer in   Balance at 
   Beginning of   Value   Undistributed   Sales and   and/or out   End of 
   Year   Adjustments   Earnings   Settlements   of Level 3   Period 
Nine Months Ended September 30, 2020                        
Equity securities  $109,251   $(11,314)  $
   $4,984   $(672)  $102,249 
Loans receivable at fair value   43,338    (21,834)   3,134    93,853    225,848    344,339 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,616    
    (154)   
    
    4,462 
Nine Months Ended September 30, 2019                              
Equity securities  $24,577   $715   $1,424   $24,215   $
   $50,931 
Loans receivable at fair value   33,731    11,648    1,621    (11,489)   
    35,511 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003   4,633    
    (238)   
    
    4,395 

 

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.

 

The amount reported in the table above for the nine months ended September 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 September 30, 2020, the senior notes payable had a carrying amount of $854,926 and fair value of $845,227. 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 nine months ended September 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 13.8%.  The indefinite-lived intangible assets are level 3 assets in the fair value hierarchy.

 

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(o) Derivative and Foreign Currency Translation

 

The Company periodically uses derivative instruments, which primarily consist of the purchase of forward exchange contracts, for certain loans receivable and Auction and Liquidation engagements with operations outside the United States. During the nine months ended September 30, 2020, the Company’s use of derivatives consisted of the purchase of forward exchange contracts in the amount of 12,700 Euros, of which 2,000 Euros were settled. As of September 30, 2020, forward exchange contracts in the amount of 10,700 Euros were outstanding. The Company did not use any derivative contracts during the nine months ended September 30, 2019.

 

The forward exchange contracts were entered into to improve the predictability of cash flows related to a retail store liquidation engagement and a loan receivable. The net loss from forward exchange contracts was $16 during the nine months ended September 30, 2020. This amount is reported as a component of Selling, general and administrative expenses in the consolidated statements of income.

 

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 (loss) gains were ($97) and $446 during the three months ended September 30, 2020 and 2019, respectively and $413 and $121 during the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income.

 

(p) Common Stock Warrants

 

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. 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 September 30, 2020, Wunderlich Warrants to purchase 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. 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.

 

(q) Equity Investments

 

bebe stores, inc.

 

At September 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.

 

National Holdings Corporation

 

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 September 30, 2020, the Company owned 6,159,550 shares of National Holdings’ common stock, representing 45.3% of National Holdings’ outstanding 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.

 

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As of September 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.

 

(r) Loan Participations Sold

 

As of September 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 September 30, 2020, the Company had entered into participation agreements for a total of $13,919. 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 income.

 

(s) Supplemental Non-cash Disclosures

 

During the nine months ended September 30, 2020, non-cash investing activities included $4,633 non-cash conversion of an equity method investment and $9,778 conversion of loans receivable to shares of stock.

 

(t) Reclassifications

 

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 nine months ended September 30, 2019, trading income and fair value adjustments on loans of $40,268 and $71,730, 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 income and fair value adjustments on loans to conform to the 2020 presentation. During the three and nine months ended September 30, 2019, expenses of $4,505 and $13,495, 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.

 

(u) Variable Interest Entity

 

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.

 

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

 

Partnership investments  $