B. Riley Financial, Inc. — Form 10-Q Summary
Registrant note: The supplied filing is for B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc. It covers the quarter and six months ended June 30, 2023. Comparative 2022 results were restated for revenue classification; the company says the restatement did not change net income, EPS, balance sheets, equity, or cash flows.
Business context
B. Riley is a diversified financial-services and investment platform operating across Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Communications, and Consumer. Consumer includes Targus, acquired in October 2022; Communications results reflect acquisitions including BullsEye and the consolidation of Lingo.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $406.3 million, versus $139.6 million in 2022 | $838.4 million, versus $386.5 million in 2022 |
| Operating income (loss) | $83.0 million, versus $(61.8) million | $167.9 million, versus $(15.9) million |
| Net income (loss) | $43.8 million, versus $(136.6) million | $60.3 million, versus $(145.8) million |
| Net income (loss) available to common shareholders | $44.4 million; diluted EPS $1.55, versus loss of $142.2 million; diluted EPS $(5.07) | $59.5 million; diluted EPS $2.05, versus loss of $154.2 million; diluted EPS $(5.52) |
| Operating cash flow | Not separately presented for the quarter | $77.1 million provided, versus $49.9 million used in 2022 |
| Investing / financing cash flow | Not separately presented for the quarter | $216.3 million provided / $456.8 million used |
Quarterly operating margin was approximately 20.4% (operating income divided by revenue); the comparable 2022 quarter had an operating loss. Results improved sharply year over year, primarily because investment and loan fair-value results swung to gains from substantial losses, alongside acquired-business revenue. These comparisons are affected by acquisition timing and the restatement.
- Quarterly trading income and loan fair-value adjustments were $42.4 million, including $33.2 million of investment gains and a $9.2 million unrealized loan gain. For the first half, this line was $93.9 million, including $52.7 million of unrealized loan gains and $41.4 million of investment gains.
- Sale-of-goods revenue was $58.4 million in Q2 and $126.2 million for the half, largely reflecting Targus; reported gross margins on sale of goods were 30.9% and 30.3%, respectively.
- Q2 interest expense was $47.3 million, up from $31.8 million; first-half interest expense was $94.9 million, up from $62.2 million. Management attributed the increase to additional borrowing and higher floating rates.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $107.6 million ($109.9 million including restricted cash); securities and other investments were $1.072 billion, and loans receivable at fair value were $683.8 million.
- Total borrowings were approximately $2.327 billion: $1.666 billion of senior notes, $529.2 million of term loans, $110.9 million drawn on revolving facilities, and $21.3 million of other notes payable. Total liabilities were $5.791 billion and total equity was $461.9 million.
- Cash, cash equivalents, and restricted cash declined $161.0 million during the half, ending at $109.9 million. Financing outflows included $175.8 million for redemption of subsidiary temporary equity, $172.8 million of term-loan repayments, $80.3 million of common dividends, $78.8 million of revolver repayments, $58.9 million of senior-note repurchases, and $53.8 million of share repurchases.
- Management said available cash, investments, credit facilities, and expected operating cash flow should be sufficient for working capital and capital expenditures for at least 12 months from issuance of the financial statements. The company reported compliance with financial covenants at June 30.
Material changes, outlook and risks
- Services and fees increased 20.2% in Q2, but segment trends differed: Communications rose with acquisitions, while Capital Markets and Wealth Management fees declined. Management expects subscription revenue at UOL, magicJack, and Marconi to continue declining year over year.
- The company reported $41.7 million of loans receivable on non-accrual at June 30, or about 6.1% of loans at fair value, compared with $7.2 million, or 1.0%, at year-end. Loan values and many investments rely on fair-value estimates; Level 3 financial assets totaled $1.071 billion.
- On May 10, 2023, B. Riley committed to provide up to $560 million of equity funding for the proposed Franchise Group acquisition and guaranteed certain obligations, generally capped at $57 million (with exceptions for fraud or willful and material breach). Management expected its actual equity contribution to be below the commitment. The transaction was subject to shareholder approval and other closing conditions.
- After quarter-end, on July 28, the company issued 2,090,909 common shares at $55 per share, for approximately $115 million of net proceeds. On July 25, it declared a $1.00-per-share common dividend.
- Management cited inflation, Federal Reserve actions, possible recession, market volatility, geopolitical events, credit and investment risks, and acquisition execution as uncertainties. No quantitative earnings or revenue guidance is provided in the supplied filing text.
- Disclosure controls and procedures were assessed as ineffective at June 30. Management cited material weaknesses involving review controls for acquisition-related fair values and income taxes, as well as prior classification of investment income; remediation was ongoing, with completion expected before year-end 2023. The filing also describes ordinary-course litigation and investigations, whose outcomes cannot be predicted, while stating the company did not expect them to materially affect financial position or results.
Investor verification priorities
- Confirm the filing issuer and the correct reporting entity, given the request metadata names BRC Group Holdings while the filing identifies B. Riley Financial, Inc.
- Assess the sustainability and cash realization of reported earnings, particularly investment gains, unrealized loan gains, and Level 3 valuations.
- Review loan portfolio credit quality, including the increase in non-accrual loans and exposure to major borrowers and related parties.
- Evaluate debt maturities, floating-rate exposure, covenant headroom, cash needs, and the potential funding and guarantee obligations tied to the proposed FRG transaction.
- Track control remediation, the effects of the prior restatement, and subsequent share issuance, dividends, and capital allocation.