B. Riley Financial, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The filing identifies the registrant as B. Riley Financial, Inc.; this differs from the company name in the request metadata. The company is a diversified financial-services platform with six reporting segments, alongside consumer and communications businesses.
Financial performance and position
- Q3 revenue: $462.3 million, up 48.1% from the restated prior-year quarter. The increase was driven chiefly by goods sales, including Targus and larger asset-purchase liquidation engagements.
- Q3 results: Operating income was $20.6 million, versus $75.3 million. Net loss was $76.3 million and loss available to common shareholders was $75.8 million, or $2.53 per diluted share, compared with net income available to common shareholders of $45.8 million, or $1.53 per diluted share.
- Nine-month revenue and results: Revenue was $1.301 billion, up 86.2%. Operating income was $188.5 million; net loss was $16.0 million and loss available to common shareholders was $16.3 million, or $0.56 per diluted share. The prior-year nine-month common-shareholder loss was $108.4 million.
- Margins and costs: Gross margin on goods sold was 37.6% in Q3 and 33.9% for the nine-month period. Operating expenses rose 86.5% in Q3 and 74.0% year to date. Q3 operating income represented about 4.5% of revenue.
- Cash flow: Nine-month operating cash use was $41.0 million, investing cash provided was $313.0 million, and financing cash use was $285.5 million. Cash, cash equivalents and restricted cash declined $16.6 million to $254.3 million. Interest paid was $231.9 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $252.3 million; investments owned at fair value were $1.198 billion and loans receivable at fair value were $549.1 million. Borrowings were $2.364 billion, including $1.667 billion of senior notes, $618.3 million of term loans, $57.2 million drawn on the Targus revolver, and $21.3 million of other notes payable. Total assets were $6.143 billion, total liabilities $5.675 billion, and total equity $467.7 million.
Material changes versus comparable periods
- Q3 investment results swung to a $75.4 million realized and unrealized loss, from a $19.1 million gain a year earlier. This was a major contributor to the quarterly loss.
- For the first nine months, trading income and loan fair-value adjustments were $83.3 million, compared with a $144.0 million loss in 2022. Conversely, realized and unrealized investment losses remained substantial at $85.0 million, though lower than the prior-year $136.2 million loss.
- Interest expense rose 30.8% in Q3 to $45.2 million and 44.8% year to date to $140.1 million, reflecting additional borrowing and higher floating rates.
- Goods sales increased sharply following the Targus acquisition and growth in liquidation asset-purchase engagements. Services and fees also increased overall, but Capital Markets and Wealth Management service-fee revenue declined year to date.
- The 2022 comparative statements were restated to reclassify dividend income and investment gains or losses from revenue to other income. The filing says the correction did not affect net income, earnings per share, balance sheets, equity, or cash flows.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue guidance. It said available cash, investments, credit facilities and expected operating cash flows should be sufficient for working capital and capital needs for at least 12 months from issuance of the financial statements.
- The company recorded $35.5 million of Q3 non-cash Consumer-segment impairment, comprising $27.5 million of goodwill and $8.0 million of tradename impairment, citing Targus performance and weaker PC-market conditions. Nine-month impairment totaled $37.2 million, including a separate $1.7 million Capital Markets tradename charge.
- Targus was not in compliance with its fixed-charge-coverage covenant at September 30. An October 31, 2023 amendment modified the covenant and waived the breach; the company reported subsequent compliance and no event of default.
- In August, the company invested $281.1 million for a 31% interest in Freedom VCM and sold its BRRII subsidiary for a note receivable. Freedom VCM assumed the related Pathlight loan obligations, releasing the company from its associated obligations and guarantees.
- Market, credit, valuation and liquidity risks are material considerations. About $1.224 billion of recurring fair-value assets were Level 3, requiring significant unobservable inputs. Management cited inflation, Federal Reserve actions, recession risk and geopolitical uncertainty. A 1% increase in floating rates was estimated to raise nine-month interest expense by $2.2 million.
- Disclosure controls and procedures were deemed ineffective at September 30. The filing describes material weaknesses involving review controls over fair-value assumptions and income taxes, as well as prior-period classification of investment income. Management said remediation was ongoing and expected before year-end 2023; remediation was not yet established as complete.
- The company reported ordinary-course litigation and regulatory matters, but did not believe their outcomes were likely to materially affect financial position or results. It also disclosed guarantees related to Babcock & Wilcox, including a guarantee of up to $100 million of obligations.
Important facts for investors to verify
- Whether operating cash flow improves and whether reported liquidity remains adequate given debt service, dividends and investment commitments.
- Performance and valuation assumptions for Targus, the Freedom VCM investment, loans receivable and other Level 3 assets; monitor for further impairments or fair-value losses.
- Debt maturities, floating-rate exposure, covenant compliance and the continuing effectiveness of the amended Targus covenant.
- Whether management completes and tests remediation of the disclosed control weaknesses, and whether future filings require further corrections.
- The sustainability of the quarterly common dividend and preferred dividends in light of losses, cash use and financing needs.