10-Q: B. Riley Financial Reports Net Loss in Q2 2024 Amid Strategic Review and Market Challenges

B. Riley Financial, Inc. reported a significant net loss for the second quarter of 2024, driven by fair value adjustments and strategic shifts, while continuing to address liquidity concerns through asset sales and debt reduction.

Summary

• B. Riley Financial, Inc. reported a net loss of $(482.8) million for the six months ended June 30, 2024, primarily due to fair value adjustments.
• The company is undergoing a strategic review of its Appraisal and Valuation Services, and Retail, Wholesale & Industrial Solutions businesses, potentially leading to a sale or other transaction.
• A loan amendment with Nomura requires reducing the term loan principal to no more than $100 million by September 30, 2025.
• Subsequent to June 30, 2024, B. Riley entered into a secured financing transaction for its brand operations and brands equity investments receiving proceeds of $189.3 million and contributed its interests in the Great American Group businesses to a newly formed subsidiary for approximately $203 million.
• The company believes its current resources and expected operating cash flows will be sufficient for working capital and capital expenditure needs for at least the next 12 months.
• Loans receivable, at fair value, totaled $229.2 million as of June 30, 2024, compared to $532.4 million at the end of 2023.
• The fair value of the investment in Freedom VCM totaled $63.7 million as of June 30, 2024, a significant decrease from $287.0 million at the end of 2023.
• Subsequent to June 30, 2024, Freedom VCM filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on November 3, 2024 which impacts the collateral for this loan receivable.
• The fair value of the investment in Freedom VCM was reduced to zero at September 30, 2024 and a fair value adjustment of $(63,674) was recorded in the quarter ended September 30, 2024.
• The company acquired Nogin on May 3, 2024, for a total consideration of approximately $56.4 million, recording goodwill of $56.0 million and other intangible assets of $17.4 million.
• The company recorded a non-cash impairment charge of $27.7 million in the Consumer Products segment, consisting of $26.7 million for goodwill and $1.0 million for tradenames.
• The company has suspended its common stock dividend as it prioritizes reducing its debt.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the significant net loss, fair value adjustments, and strategic review indicating potential asset sales. While the company is taking steps to address liquidity concerns, the overall tone suggests financial challenges and uncertainty.

Positives

• The company is actively deleveraging its balance sheet through asset sales and debt repayments.
• The company believes its current resources and expected operating cash flows will be sufficient for working capital and capital expenditure needs for at least the next 12 months.
• Revenues from services and fees increased $17.7 million during the three months ended June 30, 2024.
• The company acquired Nogin on May 3, 2024, which complements the company's principal investments strategy and offers potential growth to the company's portfolio of principal investments.

Negatives

• B. Riley Financial reported a net loss of $(482.8) million for the six months ended June 30, 2024.
• Fair value adjustments, particularly related to the Freedom VCM investment, significantly impacted the company's profitability.
• The fair value of the investment in Freedom VCM totaled $63.7 million as of June 30, 2024, a significant decrease from $287.0 million at the end of 2023.
• The company recorded a non-cash impairment charge of $27.7 million in the Consumer Products segment.
• The company has suspended its common stock dividend as it prioritizes reducing its debt.

Risks

• Continued deterioration in the collateral, including in the performance of Freedom VCM or delays in the execution of its strategies, including the possible disposition of additional businesses and further de-leveraging of its balance sheet, for the loan receivable may impact the ultimate collection of principal and interest.
• In light of Mr. Kahns alleged involvement with the alleged misconduct concerning Prophecy Asset Management LP, the Company can provide no assurances that it will not be subject to claims asserting an interest in the Freedom VCM equity interests owned by Mr. Kahn, including those that collateralize the Amended and Restated Note.
• Future collection of the $93,000 Conns loan receivable is expected to be paid from the sale of assets and servicing of a pool consumer receivables that serve as collateral for the loan where we have a second lien on these assets.
• These proceeds are expected to be collected over the next year and will be impacted by Conns voluntary petition filing on July 23, 2024 for relief (the Chapter 11 Cases) under chapter 11 of title 11 of the United States Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of Texas (the Bankruptcy Court).

Future Outlook

The company believes that the current cash and cash equivalents, securities and other investments owned, funds available under our credit facilities, and cash expected to be generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months from issuance date of the accompanying financial statements.

Management Comments

• Management evaluates many different financial and non-financial metrics to assess the individual performance of each of these various businesses.
• Management believes that gains and losses on individual investments are generally impacted by individual characteristics specific to each investment and although this has an impact on our overall financial performance the impact of these gains and losses may not be indicative of the overall strength or weakness in each of our business operations.

Industry Context

The announcement reflects challenges in the financial services industry, particularly in managing investment portfolios and navigating market volatility. The strategic review and asset sales indicate a focus on streamlining operations and reducing risk, a common response to economic uncertainty.

Comparison to Industry Standards

• Given the diversified nature of B. Riley's operations, direct comparison to industry standards is challenging.
• However, the company's focus on restructuring and asset disposition services aligns with trends in the distressed debt and special situations investment sectors.
• Companies like Houlihan Lokey and PJT Partners also provide restructuring and financial advisory services, but B. Riley's direct lending and investment activities differentiate its business model.
• The company's wealth management segment competes with larger firms like Morgan Stanley and Goldman Sachs, but B. Riley focuses on high-net-worth clients and smaller institutions.
• The consumer products segment, through Targus, competes with other computer accessories manufacturers like Logitech and Kensington, but B. Riley's involvement in brand management and licensing adds another layer of complexity to the comparison.

Legal Proceedings

• On July 9, 2024, a putative class action was filed by Brian Gale, Mark Noble, Terry Philippas and Lawrence Bass in the Delaware Chancery Court against Freedom VCM, Mr. Kahn, Andrew Laurence, Matthew Avril, and the Company.
• On July 3, 2024, each of the Company and Bryant Riley, Chairman and Co-Chief Executive Officer, received a subpoena from the U.S. Securities and Exchange Commission (the SEC) requesting the production of certain documents and other information primarily related to (i) the Companys business dealings with Brian Kahn, (ii) certain transactions in an unrelated public companys securities, and (iii) the communications and related compliance and other policies and procedures of certain of its regulated subsidiaries.
• On May 2, 2024, a putative class action was filed by Ted Donaldson in the Superior Court for the State of California, County of Los Angeles on behalf of all persons who acquired the Companys senior notes pursuant to the shelf registration statement filed with the SEC on Form S-3 dated January 28, 2021, and the prospectuses filed and published on August 4, 2021 and December 2, 2021 (the Note Offerings).
• On January 24, 2024, a putative securities class action complaint was filed by Mike Coan in U.S. Federal District Court, Central District of California, against the Company, Mr. Riley, Tom Kelleher and Phillip Ahn (Defendants).
• A second putative class action lawsuit was filed on March 15, 2024 by the KL Kamholz Joint Revocable Trust (Kamholz).
• On September 21, 2023, the Company received a demand alleging that certain payments in the aggregate amount of approximately $32,166 made by Sorrento Therapeutics, Inc. (Sorrento), a chapter 11 debtor in U.S. Bankruptcy Court, Southern District of Texas, to B. Riley Commercial Capital, LLC (BRCC), pursuant to that certain Bridge Loan Agreement dated September 30, 2022 between Sorrento and BRCC, are avoidable as preferential transfers.

Related Party Transactions

• The Company provides asset management and placement agent services to unconsolidated funds affiliated with the Company (the Funds).
• In June 2020, the Company entered into an investment advisory services agreement with Whitehawk Capital Partners, L.P. (Whitehawk), a limited partnership controlled by Mr. J. Ahn, who is the brother of Phil Ahn, the Companys Chief Financial Officer and Chief Operating Officer.
• On February 1, 2024, one of the Company's loans receivable with a principal amount of $4,521 was sold to a fund managed by Whitehawk for $4,584.
• On May 20, 2023, the Company entered into a loan agreement with Applied Digital (APLD).
• California Natural Resources Group, LLC (CalNRG) was a related party as a result of the Company's approximately 25.0% equity ownership.
• On May 23, 2024, the Company sold its equity interest in CalNRG for $9,272 resulting in a realized gain of $254, and no commitments remain.
• On May 10, 2023, the Company entered into certain agreements pursuant to which the Company had, among other things, agreed to provide certain equity funding and other support as part of the FRG take-private transaction as previously discussed in Note 2(i).
• Simultaneously with the completion of the FRG take-private transaction, one of our subsidiaries and VCM, an affiliate of Brian Kahn, amended and restated a promissory note (the Amended and Restated Note), pursuant to which VCM owes our subsidiary the aggregate principal amount of $200,506 and bears interest at the rate of 12.00% per annum payable-in-kind with a maturity date of December 31, 2027.
• On November 2, 2023, the Company agreed to lend up to $15,369 to Torticity, LLC, of which $6,690 was drawn upon with $8,679 remaining, with interest payable of 15.0% per annum and a maturity date of November 2, 2026.
• On November 21, 2023, the Company agreed to lend up to $10,000 to Kanaci Technologies, LLC (Kanaci), of which $4,000 was drawn upon with $6,000 remaining, with interest payable of 15.0% per annum and a maturity date of June 30, 2026.
• On March 2, 2021, the Company purchased a $2,400 minority equity interest in Dash Medical Holdings, LLC (Dash) and one of the board of directors of the Company is a member of the board of directors of Dash.
• On March 10, 2023, the Company sold a loan receivable including accrued interest in the amount of $7,600 to two related parties.

Stakeholder Impact

• Shareholders: The net loss and suspension of common stock dividends will negatively impact shareholder returns.
• Employees: Restructuring charges and reorganization activities may lead to workforce reductions.
• Customers: The strategic review and potential sale of business segments could impact service offerings and relationships with clients.
• Creditors: The company is actively managing its debt obligations, but the financial challenges could increase credit risk for senior noteholders and other creditors.

Next Steps

• The company will continue to execute its strategic review process, potentially leading to the sale or other transaction of its Appraisal and Valuation Services, and Retail, Wholesale & Industrial Solutions businesses.
• The company is required to reduce the term loan principal to no more than $100 million by September 30, 2025, as per the loan amendment with Nomura.
• The company will continue to monitor its financial performance and take steps to ensure sufficient liquidity to fund operations and execute its business plan.

Key Dates