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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
6 Months Ended
Jun. 30, 2022
Accounting Policies [Abstract]  
Principles of Consolidation and Basis of Presentation 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. All intercompany accounts and transactions have been eliminated upon consolidation
Applicable accounting guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a Variable Interest Entity (“VIE”); to eliminate the solely quantitative approach previously required for determining the primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE.
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, 2021, filed with the SEC on February 28, 2022. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.
Revision of Prior Period Financial Statements
Revision of Prior Period Financial Statements
In connection with the preparation of the Company’s consolidated financial statements during prior year, the Company identified an error that was not material related to the consolidation of certain VIEs which primarily resulted in a gross up between investing activities and financing activities in the consolidated statements of cash flows. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” the Company evaluated the error and determined that the related impact did not, either individually or in the aggregate, materially misstate previously issued consolidated financial statements. A summary of revisions to certain previously reported financial information presented herein is included in Note 20.
Use of Estimates 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, allowance for doubtful accounts, the fair value of loans receivables, intangible assets and goodwill, share based arrangements, contingent consideration, 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.
Interest Expense — Securities Lending Activities Interest Expense — Securities Lending Activities 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 $14,544 and $10,725 during the three months ended June 30, 2022 and 2021, respectively, and $26,310 and $29,446 during the six months ended June 30, 2022 and 2021, respectively. Interest expense from loan participations sold totaled $258 and $726 during the three and six months ended June 30, 2021, respectively.
Concentration of Risk Concentration of Risk
Revenues in the Capital Markets, Financial Consulting, Wealth Management, Brands and Principal Investments — Communications and Other segments are currently primarily generated in the United States. Revenues in the Auction and Liquidation segment are primarily generated in the United States, Canada, and Europe.
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.
Advertising Expenses Advertising Expenses The Company expenses advertising costs, which consist primarily of costs for printed materials, as incurred. Advertising costs totaled $2,594 and $578 during the three months ended June 30, 2022 and 2021, respectively, and $4,357 and $1,156 during the six months ended June 30, 2022 and 2021, respectively. Advertising expense was included as a component of selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.
Share-Based Compensation Share-Based CompensationThe Company’s share-based payment awards principally consist of grants of restricted stock, restricted stock units and costs associated with the Company’s employee stock purchase plan. In accordance with the applicable accounting guidance, share-based payment awards are classified as either equity or liabilities. For equity-classified awards, the Company measures compensation cost for the grant of membership interests at fair value on the date of grant and recognizes compensation expense in the condensed consolidated statements of operations over the requisite service or performance period the award is expected to vest.In June 2018, the Company adopted the 2018 Employee Stock Purchase Plan (“Purchase Plan”) which allows eligible employees to purchase common stock through payroll deductions at a price that is 85% of the market value of the common stock on the last day of the offering period. In accordance with the provisions of Accounting Standards Codification (“ASC”) 718 - Compensation — Stock Compensation (“ASC 718”), the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense of $43 and $115, respectively, related to the Purchase Plan. During the six months ended June 30, 2022 and 2021, the Company recognized compensation expense of $196 and $342, respectively, related to the Purchase Plan.
Income Taxes 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.
Cash and Cash Equivalents Cash and Cash EquivalentsThe Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Restricted Cash Restricted Cash
As of June 30, 2022 and December 31, 2021, restricted cash included $928 and $927 of cash collateral for leases, respectively.
Cash, cash equivalents and restricted cash consist of the following:
June 30,
2022
December 31,
2021
Cash and cash equivalents$216,098 $278,933 
Restricted cash928 927 
Total cash, cash equivalents and restricted cash$217,026 $279,860 
Securities Borrowed and Securities Loaned 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 210 - Balance Sheet, which requires companies to report disclosures of offsetting assets and liabilities. The Company does not net securities borrowed and securities loaned and these items are presented on a gross basis in the condensed consolidated balance sheets.
Property and Equipment Property and Equipment Property and equipment are stated at cost. Depreciation is 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 expense on property and equipment was $1,021 and $1,031 during the three months ended June 30, 2022 and 2021, respectively, and $2,053 and $1,904 during the six months ended June 30, 2022 and 2021, respectively.
Loans Receivable Loans Receivable
Under ASC 326 - Financial Instruments – Credit Losses, 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 receivables 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 consolidated statements of operations. These loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses will be captured through fair value changes.
Loans receivable, at fair value totaled $770,840 and $873,186 as of June 30, 2022 and December 31, 2021, respectively. The loans have various maturities through March 2027. As of June 30, 2022 and December 31, 2021, the historical cost of loans receivable accounted for under the fair value option was $783,901 and $877,527, respectively, which included principal balances of $788,972 and $886,831 respectively, and unamortized costs, origination fees, premiums and discounts, totaling $5,071 and $9,304, respectively. During the three months ended June 30, 2022 and 2021,
the Company recorded net unrealized losses of $10,985 and $680, respectively, and during the six months ended June 30, 2022 and 2021, the Company recorded a net unrealized loss of $129 and net unrealized gain of $10,046, respectively, on the loans receivable at fair value, which was included in trading income (losses) and fair value adjustments on loans on the condensed consolidated statements of operations.
The Company may periodically provide limited guarantees to third parties for loans that are made to investment banking and lending clients. As of June 30, 2022, the Company has outstanding limited guarantee arrangements with respect to Babcock & Wilcox Enterprises, Inc. (“B&W”) as further described in Note 15. 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. As of June 30, 2022, the Company has not recorded any provision for credit losses on the B&W guarantees since the Company believes that there is sufficient collateral to protect the Company from any credit loss exposure.
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 statements of operations. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans. Unearned income, discounts and premiums are amortized to interest income using a level yield methodology.
Badcock Loan Receivable
On December 20, 2021, the Company entered into a Master Receivables Purchase Agreement (“Receivables Purchase Agreement”) with W.S. Badcock Corporation, a Florida corporation (“WSBC”), an indirect wholly owned subsidiary of Franchise Group, Inc., a Delaware corporation (“FRG”). The Company paid $400,000 in cash to WSBC for the purchase of certain consumer credit receivables of WSBC ("Badcock Receivables"), which was collateralized by the performance of the consumer credit receivables of WSBC. In connection with the Receivables Purchase Agreement, the Company entered into a Servicing Agreement (the “Servicing Agreement”) with WSBC pursuant to which WSBC will provide to the Company certain customary servicing and account management services in respect of the receivables purchased by the Company under the Receivables Purchase Agreement. In addition, subject to certain terms and conditions, FRG has agreed to guarantee the performance by WSBC of its obligations under the Receivables Purchase Agreement and the Servicing Agreement. As of June 30, 2022 and December 31, 2021, the principal outstanding for the Badcock Receivables was $309,355 and $400,000, respectively, and included in loans receivable, at fair value on the condensed consolidated balance sheets.
Securities and Other Investments Owned and Securities Sold Not Yet Purchased Securities and Other Investments Owned and Securities Sold Not Yet PurchasedSecurities 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 June 30, 2022 and December 31, 2021, the Company’s securities and other investments owned and securities sold not yet purchased at fair value consisted of the following securities:
June 30,
2022
December 31,
2021
Securities and other investments owned:
Equity securities$1,055,379 $1,444,474 
Corporate bonds8,231 7,632 
Other fixed income securities2,321 2,606 
Partnership interests and other78,965 77,383 
$1,144,896 $1,532,095 
Securities sold not yet purchased:
Equity securities$226 $20,302 
Corporate bonds2,093 6,327 
Other fixed income securities3,084 1,994 
$5,403 $28,623 
Fair Value Measurements 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 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 is 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 820 - Fair Value Measurements. As of June 30, 2022 and December 31, 2021, partnership and investment fund interests valued at NAV of $78,965 and $77,383, respectively, are included in securities and other investments owned in the accompanying condensed consolidated balance sheets.
Securities and other investments owned also include investments in nonpublic entities that do not have a readily determinable fair value and do not report NAV per share. These investments are accounted for using a measurement alternative under which they are measured at cost and adjusted for observable price changes and impairments. Observable price changes result from, among other things, equity transactions for the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. For these transactions to be considered observable price changes of the same issuer, we evaluate whether these transactions have similar rights and obligations, including voting rights, distribution preferences, conversion rights, and other factors, to the investments we hold. Any investments adjusted to their fair value by applying the measurement alternative are disclosed as nonrecurring fair value measurements, including the level in the fair value hierarchy that was used. As of June 30, 2022 and December 31, 2021, investments in nonpublic entities valued using a measurement alternative of $84,280 and $59,745, respectively, are included in securities and other investments owned in the accompanying condensed consolidated balance sheets.
Funds held in trust represents U.S. treasury bills that were purchased with funds raised through the initial public offerings of B. Riley Principal 150 Merger Corporation (“BRPM 150”) and B. Riley Principal 250 Merger Corporation (“BRPM 250”), consolidated special purpose acquisition corporations (“SPACs”). The funds raised are held in trust accounts that are restricted for use and may only be used for purposes of completing an initial business combination or redemption of the class A public common shares of the SPAC’s as set forth in their respective trust agreements. The funds held in trust are included within Level 1 of the fair value hierarchy and included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.
The Company has warrant liabilities related to warrants of the SPAC’s that are held by investors in BRPM 150 and BRPM 250. The warrants are accounted for as liabilities in accordance with ASC 815 - Derivatives and Hedging and are measured at fair value at inception and on a recurring basis using quoted prices in over-the-counter markets. Warrant liabilities are included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets in the amount of $3,737 and $12,938 as of June 30, 2022 and December 31, 2021, respectively. Changes in fair value of warrants are included within change in fair value of financial instruments and other as part of other income (expense) in the condensed consolidated statements of operations. 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 June 30, 2022 and December 31, 2021.
Financial Assets and Liabilities Measured at Fair Value on a
Recurring Basis as of June 30, 2022 Using
Fair value as of June 30, 2022
Quoted prices in active markets
for identical assets
 (Level 1)
Other observable inputs
 (Level 2)
Significant unobservable inputs
 (Level 3)
Assets:
Funds held in trust account$345,514 $345,514 $— $— 
Securities and other investments owned:    
Equity securities971,099 637,183 — 333,916 
Corporate bonds8,231 — 8,231 — 
Other fixed income securities2,321 — 2,321 — 
Total securities and other investments owned981,651 637,183 10,552 333,916 
Loans receivable, at fair value770,840 — — 770,840 
Total assets measured at fair value$2,098,005 $982,697 $10,552 $1,104,756 
Liabilities:
Securities sold not yet purchased:
Equity securities$226 $226 $— $— 
Corporate bonds2,093 — 2,093 — 
Other fixed income securities3,084 — 3,084 — 
Total securities sold not yet purchased5,403 226 5,177 — 
Mandatorily redeemable noncontrolling interests issued after November 5, 20034,160 — — 4,160 
Warrant liabilities3,737 3,737 — — 
Contingent earnout17,722 — — 17,722 
Total liabilities measured at fair value$31,022 $3,963 $5,177 $21,882 
Financial Assets and Liabilities Measured at Fair Value on a
Recurring Basis at December 31, 2021 Using
Fair value at December 31, 2021
Quoted prices in active markets
for identical assets
 (Level 1)
Other observable inputs
 (Level 2)
Significant unobservable inputs
 (Level 3)
Assets:
Funds held in trust account$345,024 $345,024 $— $— 
Securities and other investments owned:
Equity securities1,384,729 1,007,180 — 377,549 
Corporate bonds7,632 — 7,632 — 
Other fixed income securities2,606 — 2,606 — 
Total securities and other investments owned1,394,967 1,007,180 10,238 377,549 
Loans receivable, at fair value873,186 — — 873,186 
Total assets measured at fair value$2,613,177 $1,352,204 $10,238 $1,250,735 
    
Liabilities:    
Securities sold not yet purchased:    
Equity securities$20,302 $20,302 $— $— 
Corporate bonds6,327 — 6,327 — 
Other fixed income securities1,994 — 1,994 — 
Total securities sold not yet purchased28,623 20,302 8,321 — 
Mandatorily redeemable noncontrolling interests issued after November 5, 20034,506 — — 4,506 
Warrant liabilities12,938 12,938 — — 
Total liabilities measured at fair value$46,067 $33,240 $8,321 $4,506 
As of June 30, 2022 and December 31, 2021, financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $1,104,756 and $1,250,735, respectively, or 18.8% and 21.4%, 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 June 30, 2022:
Fair value at
June 30, 2022
Valuation
Technique
Unobservable
Input
RangeWeighted
Average
Assets:
Equity securities$266,927 Market approachMultiple of EBITDA
1.75x - 10.50x
6.39x
Multiple of PV-10
0.33x
0.33x
Multiple of Sales
1.00x
1.00x
Market price of related security
$9.90 - $24.16
$14.18
64,691 Discounted cash flowMarket interest rate17.8%17.8%
2,298 Option pricing modelAnnualized volatility
30.0% - 678.0%
137.5%
Loans receivable at fair value770,840 Discounted cash flowMarket interest rate
6.0% - 28.3%
20.9%
Total level 3 assets measured at fair value$1,104,756 
Liabilities:
Mandatorily redeemable noncontrolling interests issued after November 5, 2003$4,160 Market approachOperating income multiple6.0x6.0x
Contingent earnout17,722 Discounted cash flowEBITDA volatility80.0%80.0%
Total level 3 liabilities measured at fair value$21,882 
The changes in Level 3 fair value hierarchy during the six months ended June 30, 2022 and 2021 were as follows:
Level 3
Balance at
Beginning of
Year
Level 3 Changes During the Period Level 3
Balance at
End of
Period
Fair
Value
Adjustments
Relating to
Undistributed
Earnings
Purchases,
Sales and
Settlements
Transfer in
and/or out
of Level 3
Six Months Ended June 30, 2022
Equity securities$377,549 $(24,047)$— $18,423 $(38,009)$333,916 
Loans receivable at fair value873,186 (47)5,373 (66,835)(40,837)770,840 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 4,506 — 468 (814)— 4,160 
Contingent earnout— (4,500)— 22,222 — 17,722 
Six Months Ended June 30, 2021
Equity securities $149,292 $53,074 $— $119,745 $(3,613)$318,498 
Loans receivable at fair value390,689 10,141 4,473 (135,008)— 270,295 
Mandatorily redeemable noncontrolling interests issued after November 5, 2003 4,700 — (595)— — 4,105 
The amount reported in the table above during the six months ended June 30, 2022 and 2021 included 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 June 30, 2022 and December 31, 2021, the senior notes payable had a carrying amount of $1,644,678 and $1,606,560, respectively, and fair value of $1,544,036 and $1,661,189, respectively. The carrying amount of the term loans approximates fair value because the effective yield of such instruments are consistent with current market rates of interest for instruments of comparable credit risk.
The investments in nonpublic entities that do not report NAV are measured at cost, adjusted for observable price changes and impairments, with changes recognized in trading income (losses) and fair value adjustments on loans on the condensed consolidated statements of operations. These investments are evaluated on a nonrecurring basis based on the observable price changes in orderly transactions for the identical or similar investment of the same issuer. Further adjustments are not made until another observable transaction occurs. Therefore, the determination of fair values of these investments in nonpublic entities that do not report NAV does not involve significant estimates and assumptions or subjective and complex judgments. Investments in nonpublic entities that do not report NAV are subject to a qualitative assessment for indicators of impairment. If indicators of impairment are present, the Company is required to estimate the investment’s fair value and immediately recognize an impairment charge in an amount equal to the investment’s carrying value in excess of its estimated fair value.
The following table presents information on the assets measured at fair value on a nonrecurring basis by level within the fair value hierarchy as of June 30, 2022. These investments were measured due to an observable price change or impairment during the six months ended June 30, 2022.
Fair Value Measurement Using
TotalQuoted prices in active markets
for identical assets
 (Level 1)
Other observable inputs
 (Level 2)
Significant unobservable inputs
 (Level 3)
As of June 30, 2022
  
Investments in nonpublic entities that do not report NAV$16,387 $— $15,737 $650 
Derivative and Foreign Currency Translation 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. As of June 30, 2022, there were no forward exchange contracts outstanding. As of December 31, 2021, 6,000€ forward exchange contracts were outstanding.
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 gain from forward exchange contracts was zero and $363 during the three months ended June 30, 2022 and 2021, respectively, and $68 and $673 during the six months ended June 30, 2022 and 2021, respectively. This amount was reported as a component of selling, general and administrative expenses in the condensed consolidated 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 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 gain was $834 and loss was $390 during the three months ended June 30, 2022 and 2021, respectively, and gains were $1,130 and $166 during the six
months ended June 30, 2022 and 2021, respectively. These amounts were included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.
As disclosed in Note 2(s) below, the Company has consolidated two VIE’s, BRPM 150 and BRPM 250, which have outstanding warrants that were issued in their respective initial public offerings. The warrants have been recorded as a liability since the warrants contain a provision to be settled in cash in the event of a qualifying cash tender offer, which is outside the control of the Company, for both BRPM 150 and BRPM 250. The outstanding warrants are considered derivative instruments with the warrant liability measured at fair value at each reporting date until exercised, with changes in fair value reported in other income in the condensed consolidated statements of operations. As of June 30, 2022 and December 31, 2021, the warrant liability totaled $3,737 and $12,938, respectively, which was included in accrued expenses and other liabilities in the condensed consolidated balance sheet.
Redeemable Noncontrolling Interests in Equity of Subsidiaries Redeemable Noncontrolling Interests in Equity of Subsidiaries The Company records redeemable noncontrolling interests in equity of subsidiaries to reflect the economic interests of the class A ordinary shareholders in BRPM 150 and BRPM 250 sponsored SPACs and the 20% noncontrolling interest of Lingo. These interests are presented as redeemable noncontrolling interests in equity of subsidiaries within the condensed consolidated balance sheet, outside of the permanent equity section. The class A ordinary shareholders of BRPM 150 and BRPM 250 have redemption rights that are considered to be outside of the Company’s control. The operating agreement with Lingo has provisions which result in the noncontrolling interest being accounted for as temporary equity. The total redeemable noncontrolling interest of Lingo amounted to $7,284 at June 30, 2022 and includes $127 of net losses, which is reflected in net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in the condensed consolidated statement of operations. As of June 30, 2022 and December 31, 2021, the total carrying amount of the redeemable noncontrolling interests in equity of subsidiaries was $352,894 and $345,000, respectively. Remeasurements to the redemption value of the redeemable noncontrolling interest in equity of subsidiaries are recorded within retained earnings.
Equity Investment Equity Investment
As of June 30, 2022 and December 31, 2021, equity investments of $43,235 and $39,190, respectively, were included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. The Company’s share of earnings or losses from equity method investees was included in income from equity investments in the accompanying condensed consolidated statements of operations.
bebe stores, inc.
As of June 30, 2022 and December 31, 2021, the Company had a 40.1% ownership interest in bebe stores, inc. (“bebe”). In December 2021, the Company purchased an additional 71,970 shares of newly issued common stock of bebe for $612 and increased its ownership interest from 39.5% to 40.1%. The equity ownership in bebe was accounted for under the equity method of accounting and was included in prepaid expenses and other assets in the condensed consolidated balance sheets.
Other Equity Investments
The Company had other equity investments over which the Company exercises significant influence but which did not meet the requirements for consolidation. The equity ownership in these other investments was accounted for under the equity method of accounting and was included in prepaid expenses and other assets in the condensed consolidated balance sheets.
Supplemental Non-cash Disclosures Supplemental Non-cash DisclosuresDuring the six months ended June 30, 2022, non-cash investing activities included $20,320 in issuance of the Company's common stock as part of the purchase price consideration from the FocalPoint acquisition and $22,661 in seller financing for deferred cash consideration, the conversion of $17,500 of debt owed by Lingo to equity, and the repayment of loans receivable in the amount of $850 with equity securities. During the six months ended June 30, 2021, non-cash investing activities included the repayment of a loan receivable in full in the amount of $133,453 with equity securities. In addition, $35,000 of loans receivable were exchanged for $35,000 of newly issued debt securities and a $36,000 note receivable was issued for the sale of equity securities to a third party.
Variable Interest Entities Variable Interest Entities
The Company holds interests in various entities that meet the characteristics of a VIE but are not consolidated as the Company is not the primary beneficiary. Interests in these entities are generally in the form of equity interests, loans receivable, or fee arrangements.
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion at each reporting date. In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed.
The Company, through its subsidiary, National Holdings Corporation (“National”), has entered into agreements to provide investment banking and advisory services to numerous investment funds (the “Funds”) that are considered VIEs under the accounting guidance.
The Company earns fees from the Funds in the form of placement agent fees and carried interest. For placement agent fees, the Company receives a cash fee of generally 7% to 10% of the amount of raised capital for the Funds and the fee is recognized at the time the placement services occurred. The Company receives carried interest as a percentage allocation (8% to 15%) of the profits of the Funds as compensation for asset management services provided to the Funds and it is recognized under the ownership model of ASC 323 - Investments – Equity Method and Joint Ventures as an equity method investment with changes in allocation recorded currently in the results of operations. As the fee arrangements under such agreements are arm’s length and contain customary terms and conditions and represent compensation that is considered fair value for the services provided, the fee arrangements are not considered variable interests and accordingly, the Company does not consolidate such VIEs.
Placement agent fees attributable to such arrangements during the six months ended June 30, 2022 and 2021 were $12,088 and $25,382, respectively, and are included in services and fees in the condensed consolidated statements of operations.
The carrying value of the Company’s investments in the VIEs that were not consolidated is shown below.
June 30,
2022
December 31,
2021
Securities and other investments owned, at fair value$30,968 $27,445 
Loans receivable, at fair value76,995 205,265 
Other assets2,855 4,956 
Maximum exposure to loss$110,818 $237,666 
B. Riley Principal 150 and 250 Merger Corporations
In 2021, the Company along with BRPM 150 and BRPM 250, both newly formed special purpose acquisition companies incorporated as Delaware corporations, consummated the initial public offerings of 17,250,000 units of BRPM 150 and 17,250,000 units of BRPM 250. Each Unit of BRPM 150 and BRPM 250 consisted of one share of class A common stock and one-third of one redeemable warrant, each whole warrant entitling the holder thereof to purchase one share of BRPM 150 or BRPM 250 class A common stock at an exercise price of $11.50 per share. The BRPM 150 and BRPM 250 Units were each sold at a price of $10.00 per unit, generating gross proceeds to BRPM 150 of $172,500 and BRPM 250 of $172,500. These proceeds which totaled $345,000 were deposited in a trust account established for the benefit of the BRPM 150 and BRPM 250 class A public shareholders and was included in prepaid expenses and other assets in the condensed balance sheet. These proceeds are invested only in U.S. treasury securities in accordance with the governing documents of BRPM 150 and BRPM 250. Under the terms of the BRPM 150 and BRPM 250 initial public offerings, BRPM 150 and BRPM 250 are required to consummate a business combination transaction within 24 months (or 27 months under certain circumstances) of the completion of their respective initial public offerings.
In connection with the completion of the initial public offerings of BRPM 150 and BRPM 250, the Company invested in the private placement units of BRPM 150 and BRPM 250. Both BRPM 150 and BRPM 250 are determined to be VIE’s because each of the entities do not have enough equity at risk to finance their activities without additional subordinated
financial support. The Company has determined that the class A shareholders of BRPM 150 and BRPM 250 do not have substantive rights as shareholders of BRPM 150 and BRPM 250 since these equity interests are determined to be temporary equity. As such, the Company has determined that it is the primary beneficiary of BRPM 150 and BRPM 250 as it has the right to receive benefits or the obligation to absorb losses of each of the entities, as well as the power to direct a majority of the activities that significantly impact BRPM 150 and BRPM 250’s economic performance. Since the Company is determined to be the primary beneficiary, BRPM 150 and BRPM 250 are consolidated into the Company’s financial statements.
On July 19, 2022, BRPM 150 completed a business combination with FaZeClan Holdings, Inc. (“Faze Holdings”) in a reverse merger transaction resulting in BRPM 150 no longer being a VIE of the Company and no longer be included in the consolidated group of the Company. In connection with the de-consolidation of BRPM 150 subsequent to June 30, 2022, among other items, prepaid expenses and other assets decreased by $172,762 related to funds held in a trust account and redeemable noncontrolling interests in equity of subsidiaries decreased by $172,500.
Recent Accounting Standards Recent Accounting Standards
Not yet adopted
In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (Topic 820). This update clarifies that a contractual restriction on the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security's unit of account. Therefore, a contractual sale restriction should not be considered when measuring an equity security's fair value. The update also prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. Specific disclosures related to equity securities subject to contractual sale restrictions are required and include the fair value of such equity securities on the balance sheet, the nature and remaining duration of the corresponding restrictions, and any circumstances that could cause a lapse in the restrictions. The amendments in this update are effective for the Company for fiscal periods beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. Investment companies as defined by Topic 946 should apply the amendments in this update to an equity security with a contract containing a sale restriction that was executed or modified on or after the date of adoption. For an equity security with a contract containing a sale restriction that was executed before the date of adoption, investment companies should continue to account for the equity security under their historical accounting policy for measuring such securities until the contractual restrictions expire or are modified. The Company has not yet adopted this update and is currently evaluating the effect, if any, this new standard will have on its financial position and results of operations.
Recently adopted
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provided optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate (“LIBOR”). The amendments applied only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which refined the scope of Topic 848 through optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships. The Company adopted the ASU effective January 1, 2022. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position, and disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers to require acquiring entities to apply Topic 606 when recognizing and measuring contract assets and contract liabilities instead of only recognizing such items at fair value on the acquisition date. The update addressed diversity in practice related to the acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The Company early adopted the ASU on January 1, 2022. The impact of adopting the ASU was immaterial to the consolidated results of operations, cash flows, financial position, and disclosures.