Overview of the Company

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

B. Riley also opportunistically invests in and acquires companies or assets that it believes can generate attractive risk-adjusted returns. The company owns and operates several consumer businesses on a principal basis, leveraging its financial, restructuring, and operational expertise to improve performance and maximize free cash flow.

Business Segments

B. Riley reports its activities in five reportable segments:

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

2. Wealth Management: Offers retail brokerage, investment management, insurance, and tax preparation services to individuals, families, small businesses, and institutions.

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

4. Communications: Owns and operates businesses in the communications and cloud technology industry, including Lingo, Marconi Wireless, magicJack, and United Online.

5. Consumer Products: Includes the operations of Targus, a multinational company that designs, manufactures, and sells consumer and enterprise productivity products.

Financial Performance

During the three months ended September 30, 2024, B. Riley’s total revenues decreased by 45.1% to $199.3 million, compared to $363.3 million in the same period of 2023. This was primarily due to decreases in fair value adjustments on loans, services and fees, interest income from loans and securities lending, and sale of goods.

The decrease in fair value adjustments on loans of $70.6 million was mainly attributable to $54.3 million related to the loan to Vintage Capital Management, LLC and $18.6 million related to the loan to Conn’s Inc., which filed for Chapter 11 bankruptcy in July 2024.

Revenues from services and fees decreased by $45.6 million, with the largest declines in the Capital Markets segment ($50.5 million) and the Communications segment ($15.9 million). This was partially offset by increases in the Financial Consulting segment ($3.7 million) and the “All Other” category ($18.6 million).

Trading loss improved by $8.5 million to a loss of $1.2 million, compared to a loss of $9.7 million in the prior-year period. Interest income from loans and securities lending decreased by $16.1 million and $35.3 million, respectively, due to lower loan and securities borrowed balances.

On the expense side, direct cost of services decreased by $3.0 million, while selling, general, and administrative (SG&A) expenses decreased by $17.7 million. The decrease in SG&A was primarily driven by lower expenses in the Capital Markets ($32.5 million) and Communications ($6.9 million) segments, partially offset by increases in Corporate and All Other ($21.4 million).

B. Riley reported a net loss attributable to the company of $284.4 million in the third quarter of 2024, compared to a net loss of $73.8 million in the same period of 2023. The increase in net loss was mainly due to the decrease in revenues, partially offset by lower operating expenses.

For the nine months ended September 30, 2024, B. Riley’s total revenues decreased by 44.7% to $637.2 million, compared to $1,151.9 million in the same period of 2023. The decrease was primarily driven by the same factors that impacted the third quarter results.

Net loss attributable to the company was $767.2 million for the nine-month period, compared to a net loss of $10.3 million in the prior-year period. The significant increase in net loss was mainly due to the decrease in revenues and a $310.9 million decrease in fair value adjustments on loans.

Liquidity and Capital Resources

As of September 30, 2024, B. Riley had $159.2 million in unrestricted cash and cash equivalents, $341.8 million in securities and other investments, and $151.7 million in loans receivable. The company had $2,067.8 million in total borrowings, including $1,529.6 million in senior notes, $490.7 million in term loans, and $13.7 million in revolving credit facilities.

In November 2024, B. Riley entered into a transaction to sell a portion of its Great American Group businesses for approximately $203.0 million. The company used the proceeds to further reduce the outstanding balance on its Nomura credit facility.

B. Riley believes that its current cash, funds available under its credit facilities, and cash expected to be generated from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. However, the company is no longer a well-known seasoned issuer and may face longer and more costly access to the capital markets if needed.

Dividends

B. Riley paid cash dividends on its common stock of $33.6 million during the nine months ended September 30, 2024. In August 2024, the company announced the suspension of its common stock dividend as it prioritizes reducing debt.

The company also pays dividends on its Series A and Series B preferred stock, which had $0.8 million and $0.5 million in dividends in arrears, respectively, as of September 30, 2024. In January 2025, B. Riley announced a temporary suspension of dividends on its preferred stock.

Recent Developments

1. Great American Group Transaction: In November 2024, B. Riley sold a 52.6% equity interest in a newly formed subsidiary that includes its appraisal, valuation, real estate advisory, and auction and liquidations operations for approximately $203.0 million.

2. Wealth Management Sale: In October 2024, B. Riley signed an agreement to sell a portion of its traditional wealth management business to Stifel Financial Corp. for an estimated $27.0 million to $35.0 million in cash.

3. Brands Transaction: In October 2024, B. Riley’s subsidiary, B. Riley Brand Management, transferred its brand interests to a securitization financing vehicle for approximately $189.3 million in proceeds. Separately, the company’s subsidiary, bebe, sold its limited liability company interests in the bebe brands for $46.6 million.

4. Take-Private Proposal: In August 2024, B. Riley’s chairman and co-CEO, Bryant Riley, made an unsolicited proposal to acquire the outstanding shares of the company not currently owned by him in a take-private transaction at $7.00 per share.

5. SEC Subpoenas: In July and November 2024, B. Riley and Bryant Riley received subpoenas from the SEC requesting information related to the company’s business dealings with Brian Kahn, certain securities transactions, and the communications and compliance policies of its regulated subsidiaries.

6. Conn’s and Franchise Group (FRG) Impacts: B. Riley’s results were negatively impacted by significant non-cash markdowns related to its investment in Freedom VCM Holdings, LLC, the indirect parent entity of Franchise Group. This was due to the unexpected announcement regarding FRG’s former CEO and the deterioration of the consumer economy. Additionally, Conn’s Inc., in which FRG had a substantial equity investment, filed for Chapter 11 bankruptcy in July 2024, further impacting B. Riley’s loan receivable from Conn’s.

Outlook and Analysis

B. Riley’s financial performance in 2024 was significantly impacted by the challenges faced by some of its key investments and lending relationships, particularly with Conn’s and Franchise Group. The company’s exposure to these troubled entities resulted in substantial non-cash markdowns and fair value adjustments that weighed heavily on its bottom line.

The company’s decision to suspend its common and preferred stock dividends is a prudent move to preserve cash and focus on reducing its debt burden. B. Riley’s leverage, as evidenced by its $2.1 billion in total borrowings, is a concern and will likely be a key area of focus for management going forward.

The sale of a majority stake in the Great American Group businesses and the planned sale of a portion of the wealth management unit are positive steps that will help B. Riley streamline its operations and generate cash. However, the company’s ability to navigate the challenging environment and execute on its strategic initiatives will be crucial in determining its future performance.

Investors will be closely watching B. Riley’s progress in reducing its debt levels, managing its troubled investments, and identifying new opportunities to drive growth and profitability. The company’s diversified business model and the financial, restructuring, and operational expertise of its management team may provide some resilience, but the current economic and market conditions present significant headwinds.

Overall, B. Riley’s financial report highlights the importance of prudent risk management and the need for diversification in a volatile market environment. The company’s ability to weather the current storm and emerge stronger will depend on its agility, strategic decision-making, and the execution of its transformation initiatives.