B. Riley Financial, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. The filing reports annual results; it does not provide a clear standalone Q4 income statement. The issuer identified in the filing is B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc.
Business context
B. Riley is a diversified financial services platform with six reportable segments: Capital Markets, Wealth Management, Financial Consulting, Auction and Liquidation, Communications, and Consumer Products. Its businesses include investment banking, brokerage, lending, advisory and liquidation services, communications services, and Targus computer accessories. Results reflect both acquired businesses and market-sensitive investment and trading activity.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $1.644 billion | $1.081 billion |
| Operating income | $144.7 million (8.8% margin) | $69.4 million (6.4% margin) |
| Net loss attributable to B. Riley | $99.9 million | $159.8 million |
| Net loss available to common shareholders | $108.0 million; diluted loss per share $3.69 | $167.8 million; diluted loss per share $5.95 |
| Net cash from operating activities | $24.5 million | $6.7 million |
| Cash and cash equivalents at year-end | $232.0 million | $268.6 million |
| Borrowings at year-end | $2.356 billion | Not stated here as a comparable total |
Revenue rose 52.1%, while operating expenses rose 48.2% to $1.499 billion. The company remained loss-making despite higher operating income: results included $162.6 million of realized and unrealized investment losses, $187.0 million of interest expense, and $70.3 million of goodwill and tradename impairment. Interest expense increased from $141.2 million in 2022. Revenue growth included a substantial contribution from acquired businesses and a $244.5 million year-over-year improvement in trading income and loan fair-value adjustments, which shifted from a 2022 loss to 2023 income.
Investing activities provided $301.2 million of cash, while financing activities used $365.9 million. The company reported $1.092 billion of securities and other investments and $532.4 million of loans receivable at fair value. The $2.356 billion borrowing total comprises $1.668 billion of senior notes, $625.2 million of term loans, $43.8 million of revolving borrowings, and $19.4 million of notes payable; securities-lending balances are separately reported. Senior notes had maturities ranging from 2024 to 2028 and a 5.71% weighted-average rate. At year-end, scheduled 2024 borrowings maturities were $190.3 million; the company subsequently redeemed $115.5 million of 6.75% notes in February 2024.
Material changes and management commentary
- Capital Markets services and fee revenue fell 15.0%, and Wealth Management revenue fell 16.1%; management cited a difficult M&A and capital-markets environment and the full-year effect of a prior wealth-management restructuring.
- Communications services revenue rose 45.1%, principally reflecting a full year of Lingo and BullsEye results. Management expects subscription revenue at UOL, magicJack, and Marconi to continue declining.
- Targus contributed $233.2 million in product sales, but the Consumer Products segment recorded a $77.7 million loss, including $68.6 million of impairment charges. Management cited Targus performance and weaker-than-expected recovery in the computer accessories market.
- The board reduced the common dividend from $1.00 per share to $0.50 per share for the first quarter of 2024. Future dividends remain discretionary.
- In February 2024, the company engaged Moelis to review strategic alternatives, including a potential sale or other transaction, for its appraisal and valuation and retail, wholesale, and industrial solutions businesses. Completion and terms are uncertain; possible proceeds could be used to reduce debt, repurchase securities, or invest in the platform.
Risks, contingencies, and unusual items
- Financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were not effective at December 31, 2023. New material weaknesses involved IT controls at subsidiaries, reliance on a third-party SOC report, investment valuation reviews, and related-party disclosures. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Management said remediation was underway and expected by the end of 2024.
- Debt and covenant exposure: Debt service, floating-rate borrowing costs, refinancing needs, and restrictions in credit agreements pose liquidity risks. Targus credit agreement amendments waived financial covenant breaches for the September and December 2023 periods; the company reported compliance and no event of default at year-end. Several lenders extended deadlines for delivery of the audited financial statements to April 29, 2024.
- Freedom VCM and related-party exposure: B. Riley holds a 31% Freedom VCM interest valued at $287.0 million and a $200.5 million, 12% payment-in-kind note secured primarily by Freedom VCM equity. The company also reported related-party receivables tied to consumer receivables. Management cautions that collateral value, distributions, business performance, and legal claims could affect collectability and valuation. The company made a $108 million second-lien loan to Conn’s in December 2023.
- Legal matters: Two putative securities class actions filed in 2024 allege omissions and securities-law violations relating to Brian Kahn and the FRG take-private transaction; the company says the claims are meritless and intends to defend them. A creditors’ committee also alleges that approximately $32.2 million in Sorrento payments were avoidable preferential transfers; the company disputes the claim. The company says independent reviews found that it and its executives had no involvement with or knowledge of the alleged misconduct concerning Kahn or his affiliates.
- Other exposures: The company guaranteed up to $150 million of certain Babcock & Wilcox credit obligations and retained a separate guarantee of up to $90 million of obligations related to cash collateral. Its investment portfolio includes significant Level 3 assets requiring judgment-based valuation. Reported loan fair values were below aggregate principal balances.
- Cybersecurity: Targus discovered unauthorized access to certain file systems on April 5, 2024, causing temporary operational interruption while containment and recovery proceeded. The company said it did not then expect a material impact on consolidated results; investigation was ongoing as of filing.
Investor verification priorities
- Track cash generation, debt maturities, borrowing costs, covenant compliance, and the effect of the February 2024 note redemption.
- Review the composition, valuation assumptions, and concentration of Level 3 investments and loans, especially Freedom VCM- and consumer-receivables-related exposures.
- Assess Targus operating performance and whether its outlook supports the remaining goodwill and intangible-asset carrying values.
- Monitor remediation and independent testing of the reported material weaknesses, and the status of financial-statement delivery extensions.
- Follow developments in the FRG-related lawsuits, the Sorrento preference demand, the strategic alternatives review, and the Targus cybersecurity investigation.
- Confirm the sustainability of the reduced common dividend in light of losses, cash flows, debt obligations, and subsidiary restrictions on distributions.