8-K: B. Riley Financial Files 2023 Annual Report, Concludes Independent Investigation

B. Riley Financial released its 2023 annual report, which included the results of an independent investigation that cleared the company of any wrongdoing related to Brian Kahn.

Summary

• B. Riley Financial has filed its 2023 Annual Report on Form 10-K, which includes audited financial statements and the results of an independent investigation.
• The independent investigation, conducted by Winston & Strawn LLP, found no evidence of misconduct by the company or its executives related to Brian Kahn and his affiliates.
• This investigation followed an internal review by Sullivan & Cromwell LLP, which reached the same conclusion.
• The company's 2023 total revenues were $1.644 billion, a slight decrease from the preliminary figure of $1.647 billion.
• The net loss available to common shareholders was $108 million, revised from a preliminary loss of $86.4 million.
• Adjusted EBITDA was $210.2 million, down from the preliminary figure of $239.9 million.
• Operating Adjusted EBITDA was $363.0 million, a decrease from the preliminary figure of $367.6 million.
• The company has retired $115 million of outstanding bonds and reduced additional indebtedness by approximately $55 million since year-end.
• B. Riley is also conducting a strategic review of its Great American Group and is pleased with the interest received to date.
• The company intends to amend its August 21, 2023, Form 8-K to include updated financials for Franchise Group, Inc. (FRG), reflecting the sale of its Badcock and Sylvan Learning businesses as discontinued operations.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the revised financial results and net loss, but the company has taken steps to address concerns and is focusing on growth. The completion of the investigation is a positive, but the financial adjustments are a concern.

Positives

• The independent investigation cleared B. Riley and its executives of any wrongdoing related to Brian Kahn.
• The company has successfully retired $115 million of outstanding bonds and reduced additional indebtedness by approximately $55 million since year-end.
• The strategic review of Great American Group is progressing well, with significant interest from potential buyers.
• B. Riley is focusing on its core businesses and is investing in growth opportunities.
• The company is strengthening its processes and procedures to capitalize on market opportunities.

Negatives

• The company reported a net loss available to common shareholders of $108 million for 2023.
• Total revenues for 2023 were revised down to $1.644 billion from a preliminary figure of $1.647 billion.
• Adjusted EBITDA was revised down to $210.2 million from a preliminary figure of $239.9 million.
• Operating Adjusted EBITDA was revised down to $363.0 million from a preliminary figure of $367.6 million.
• The company experienced a decrease in the fair value of securities and other investments, impacting total assets.

Risks

• The company's aggressive acquisition and investment strategy has led to complexities in its business.
• The company is exposed to fluctuations in the fair value of its investments, which can impact financial results.
• The company's financial results are subject to non-cash adjustments, which can lead to revisions in reported figures.
• The company is subject to risks described in its periodic filings with the SEC, including those in the 2023 Annual Report on Form 10-K.

Future Outlook

The company is focused on its core business, investing in growth, and strengthening processes. They anticipate providing more updates on their first quarter earnings call. The company also expects to file an amended Form 8-K with updated financials for Franchise Group, Inc. (FRG) in the near term.

Management Comments

• Bryant Riley, Chairman and Co-Chief Executive Officer, stated that the company is excited to focus on its core business and creating value for shareholders.
• Management noted that the overall business has continued to perform well since year-end.
• Management believes that relative valuations for small and mid-caps are attractive and they are investing to grow their leadership in providing financial services and capital solutions to this underserved market.
• Management acknowledged the complexities of their business due to an aggressive acquisition and investment strategy and are continuing to strengthen their processes and procedures.

Industry Context

This announcement comes at a time when the financial services industry is facing increased scrutiny and volatility. B. Riley's focus on small and mid-cap companies aligns with a market segment that is currently seen as attractive for investment. The company's diversified platform and strategic review of assets like Great American Group are indicative of a broader trend of financial firms optimizing their portfolios.

Comparison to Industry Standards

• B. Riley's adjusted EBITDA of $210.2 million is lower than some of its diversified financial services peers, such as Houlihan Lokey, which reported an adjusted EBITDA of $1.1 billion for their fiscal year ending March 31, 2023.
• However, B. Riley's focus on the middle market and its diversified services platform differentiates it from firms that are more specialized.
• The company's debt reduction efforts are in line with industry trends of deleveraging in response to rising interest rates.
• The strategic review of Great American Group is similar to moves by other financial firms to divest non-core assets to focus on higher-growth areas.
• The investigation into the Brian Kahn relationship is similar to other investigations into financial firms and their relationships with clients and partners.

Stakeholder Impact

• Shareholders may be concerned about the net loss and revised financial results.
• Employees may be reassured by the completion of the independent investigation.
• Clients may be confident in the company's focus on its core business and growth opportunities.
• Creditors may be pleased with the company's debt reduction efforts.

Next Steps

• The company will provide updates on its first quarter earnings call.
• B. Riley will file an amended Form 8-K to include updated financials for Franchise Group, Inc. (FRG).
• The strategic review process for Great American Group will continue.

Key Dates

Keywords

B. Riley Financial, Annual Report, Independent Investigation, Brian Kahn, Financial Results, Adjusted EBITDA, Debt Reduction, Great American Group, Franchise Group, Audit Committee