8-K: B. Riley Financial Announces Preliminary Q2 2024 Results, Impacted by Franchise Group Investment

B. Riley Financial reports a significant net loss for Q2 2024 due to non-cash losses primarily related to its investment in Franchise Group, leading to a suspension of the common dividend.

Summary

• B. Riley Financial released preliminary financial results for the second quarter of 2024, revealing a net loss between $435 and $475 million, or $14 to $15 per diluted share.
• The company experienced a substantial non-cash markdown of approximately $330 to $370 million related to its investment in Freedom VCM, the parent of Franchise Group (FRG), and a loan receivable collateralized by FRG equity.
• This markdown was driven by a weaker consumer spending environment impacting FRG's businesses and the alleged misconduct of FRG's former CEO, Brian Kahn.
• An impairment charge of $28 million was recorded for the goodwill of Targus, also affected by consumer spending habits.
• A $25 million charge was taken for a valuation allowance for deferred income taxes.
• Operating adjusted EBITDA is expected to be in the range of $50 to $55 million.
• As of June 30, 2024, cash and cash equivalents were approximately $237 million, total cash and investments were about $1.1 billion, and total outstanding debt was around $2.16 billion.
• B. Riley is suspending its common dividend to prioritize deleveraging and is reviewing strategic alternatives for Great American Group.

Sentiment

Score: 3

Explanation: The document conveys a negative sentiment due to the significant net loss, substantial write-downs, dividend suspension, and delays in reporting. While management expresses confidence in the core business, the overall tone is concerning for investors.

Positives

• B. Riley's core financial services businesses remain strong despite the losses from principal investments.
• The company has a diversified asset base that provides uncorrelated free cash flow.
• B. Riley is actively working to maximize value from its existing principal positions.
• The company is refocusing on its core financial services businesses.
• The company has $1.1 billion in total cash and investments.

Negatives

• The company is reporting a significant net loss of $435 to $475 million for Q2 2024.
• The substantial write-down is primarily due to the performance of the investment in Franchise Group (FRG).
• The company is suspending its common dividend to prioritize deleveraging.
• There is a $28 million impairment charge related to the goodwill of Targus.
• The company is recording a $25 million charge related to a valuation allowance for deferred income taxes.

Risks

• The company's financial results are heavily impacted by the performance of its principal investments, particularly Franchise Group.
• The weaker consumer spending environment is negatively affecting some of B. Riley's businesses.
• Allegations of misconduct against FRG's former CEO have created additional challenges for the investment.
• The company is experiencing delays in finalizing valuations of certain loans and investments, leading to a late filing of its quarterly report.
• The company's high debt level of $2.16 billion could pose a risk.

Future Outlook

B. Riley is focusing on its core financial services businesses, working to maximize value from existing principal positions, and positioning the firm to capitalize on opportunities. The company is also reviewing strategic alternatives for Great American Group and will provide updates when appropriate.

Management Comments

• Our second quarter results were negatively impacted by non-cash losses, the overwhelming majority of which relate to performance of our investment in Franchise Group, Inc. (FRG) and our Vintage Capital loan receivable.
• We have taken and are continuing to take actions to ensure we maintain a strong, flexible balance sheet and will be suspending our common dividend as we prioritize deleveraging.
• The operating strength of this platform has recently been masked by the performance of our principal investments.
• As we look ahead, we will be refocusing on our core financial services businesses and supporting our valued clients across the small-cap and middle-market sectors as we have for the past 27 years.

Industry Context

The challenges faced by B. Riley, particularly with its investment in Franchise Group, highlight the risks associated with consumer-facing businesses in the current economic environment. The impact of weaker consumer spending and the alleged misconduct of a key executive at a portfolio company underscore the importance of due diligence and risk management in private equity and investment management.

Comparison to Industry Standards

• The significant non-cash markdown of $330 to $370 million related to the Franchise Group investment is substantial and indicates a potential underperformance compared to industry benchmarks for similar investments.
• The impairment charge of $28 million for Targus goodwill suggests that the company's valuation of this asset may have been overly optimistic compared to industry standards.
• The suspension of the common dividend is a significant move and may be viewed negatively by investors, especially when compared to peers that maintain consistent dividend payouts.
• The operating adjusted EBITDA of $50 to $55 million, while positive, needs to be evaluated against the backdrop of the substantial net loss to determine if it is in line with industry expectations for a diversified financial services platform.
• Companies like Houlihan Lokey (HLI) and Moelis & Company (MC) are often used as benchmarks for investment banking and financial advisory services. B. Riley's performance will likely be compared to these firms' results.

Stakeholder Impact

• Shareholders will be negatively impacted by the significant net loss and the suspension of the common dividend.
• Employees may experience uncertainty due to the company's financial challenges and strategic review.
• Customers may be concerned about the company's financial stability.
• Creditors may be concerned about the company's high debt level.

Next Steps

• B. Riley will host a conference call on August 12, 2024, to discuss the preliminary results.
• The company will continue its review of strategic alternatives for Great American Group.
• B. Riley will work towards maximizing value from its existing principal positions.
• The company will file its Quarterly Report on Form 10-Q as soon as practical.

Key Dates

Keywords

B. Riley Financial, Franchise Group, Financial Results, Net Loss, EBITDA, Investment, Dividend Suspension, Deleveraging, Impairment, Consumer Spending