Company Overview

B. Riley Financial, Inc. (Nasdaq: RILY) is a diversified financial services platform that provides a range of tailored solutions to meet the strategic, operational, and capital needs of its clients and partners. The company operates through several consolidated subsidiaries that offer investment banking, brokerage, wealth management, asset management, direct lending, business advisory, valuation, and asset disposition services.

B. Riley opportunistically invests in and acquires companies or assets with attractive risk-adjusted return profiles to benefit its shareholders. The company owns and operates several uncorrelated consumer businesses and invests in brands on a principal basis. B. Riley’s approach is focused on high-quality companies and assets in industries where it has extensive knowledge and can leverage its financial, restructuring, and operational expertise to make operational improvements and maximize free cash flow.

Business Segments

B. Riley reports its activities in six reportable business segments:

1. Capital Markets: Provides investment banking, equity research, institutional brokerage, fund and asset management, and direct lending services. The segment also trades equity securities as a principal and maintains an investment portfolio.

2. Wealth Management: Provides retail brokerage, investment management, insurance, and tax preparation services to individuals, families, small businesses, non-profits, and retirement plans.

3. Financial Consulting: Provides advisory services spanning bankruptcy, restructuring, turnaround management, forensic accounting, crisis and litigation support, appraisal and valuation, real estate, and operations management.

4. Auction and Liquidation: Provides retail liquidation services, helping clients quickly and efficiently dispose of underperforming assets and generate cash from excess inventory.

5. Communications: Owns and operates businesses in the global cloud/unified communications, mobile virtual network, VoIP, and internet access provider industries.

6. Consumer Products: Comprises the Targus business, which designs, manufactures, and sells consumer and enterprise productivity products globally.

Financial Performance Highlights

• Total revenues decreased 63.5% to $148.4 million in Q2 2024 from $406.3 million in Q2 2023, primarily due to decreases in fair value adjustments on loans, trading income, interest income from loans and securities lending.

• Services and fees revenue increased 7.7% to $248.0 million, driven by growth in the Capital Markets, Wealth Management, Financial Consulting, and All Other segments, partially offset by declines in the Auction and Liquidation and Communications segments.

• Trading loss was $31.3 million in Q2 2024 compared to a $33.2 million gain in Q2 2023, due to realized and unrealized losses on investments.

• Fair value adjustments on loans resulted in a $175.6 million loss, primarily related to loans to Vintage Capital Management, Freedom VCM, Badcock Receivables I, and Conn’s.

• Interest income from loans and securities lending decreased $31.9 million and $15.3 million, respectively, due to lower loan and securities borrowed balances.

• Selling, general, and administrative expenses increased 10.8% to $209.3 million, with increases across most segments, particularly in Corporate and All Other.

• The company recognized $27.7 million in impairment charges related to goodwill and tradenames in the Consumer Products segment.

• Net loss attributable to the company was $433.6 million in Q2 2024 compared to net income of $46.4 million in Q2 2023, primarily due to the decrease in revenues and increase in impairment charges.

Liquidity and Capital Resources

• As of June 30, 2024, the company had $236.9 million in unrestricted cash and cash equivalents, $664.1 million in securities and other investments, and $229.2 million in loans receivable.

• Total borrowings outstanding were $2,159.8 million, including $1,528.6 million in senior notes, $581.4 million in term loans, and $19.8 million in revolving credit facility.

• The company believes its current cash, securities and investments, available credit facilities, and expected cash from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months.

• In August 2024, the company announced the suspension of its common stock dividend to prioritize debt reduction.

Recent Developments

1. Great American Group Transaction: On November 15, 2024, the company sold approximately 52.6% of the common equity interests in a newly formed subsidiary that included its appraisal, valuation, real estate advisory, and auction and liquidation operations to an investment management firm. B. Riley will retain a 44.2% non-controlling equity interest in the business.

2. Wealth Management Divestiture: On October 31, 2024, the company signed an agreement to sell a portion of its traditional wealth management business to Stifel Financial for $27-$35 million in cash. The transaction is expected to include up to 15% of the wealth management advisors and $4.5 billion in associated client assets.

3. Brands Transaction: On October 25, 2024, the company’s subsidiary transferred its interests in several brand licensing businesses to a securitization financing vehicle in exchange for $189.3 million. The company’s majority-owned subsidiary, bebe, also sold its interests in the bebe and Brookstone brands for $46.6 million.

4. Nomura Credit Agreement: The company amended its credit agreement with Nomura Corporate Funding Americas, LLC in September 2024, reducing the outstanding term loan balance and terminating the revolving credit facility.

5. Take-Private Proposal: On August 16, 2024, the company’s chairman and co-CEO made an unsolicited proposal to acquire the outstanding shares of the company not currently owned by him in a going-private transaction.

6. SEC Subpoenas: In July 2024, the company and its chairman received subpoenas from the SEC related to various business dealings and transactions.

7. Conn’s and Franchise Group Bankruptcies: The company’s investments in Conn’s and Franchise Group were significantly impacted by the bankruptcy filings of these companies in 2024, resulting in substantial non-cash impairment charges.

Outlook and Risks

B. Riley’s diversified financial platform is affected by various factors, including higher inflation, Federal Reserve actions, the possibility of recession, geopolitical conflicts, and rising energy prices. These uncertainties create challenges for the company’s businesses and may continue to impact its results in future periods.

Key risks facing the company include volatility in revenues and profitability, credit risk, short-term nature of engagements, accuracy of valuations, competition, potential losses from auctions and liquidations, reliance on third-party systems and partners, potential liability from inaccurate appraisals, loss of key personnel, compliance with credit agreements, and the impact of legal proceedings and allegations.

The company’s ability to navigate these risks and capitalize on opportunities within its diversified platform will be critical to its future performance and shareholder value creation.