B. Riley Financial, Inc. — Q1 2024 Form 10-Q
Entity note: The supplied filing identifies the registrant as B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc. Verify that this is the intended filing. Financial statements are unaudited and cover the three months ended March 31, 2024, with comparison to Q1 2023. Amounts below are in millions of dollars unless stated otherwise.
Business context and period
B. Riley is a diversified financial-services and investment company operating across Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Communications, and Consumer Products. The company also holds investment and lending positions. Targus is reported in Consumer Products; brand-licensing operations are included in All Other following a 2023 segment reassessment.
Key financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $343.0 | $432.1 |
| Operating income (loss) | $(3.4) | $84.9 |
| Net income (loss) | $(48.0) | $16.6 |
| Net income (loss) available to common shareholders | $(51.2) | $15.1 |
| Basic and diluted EPS | $(1.71) | $0.53 basic; $0.51 diluted |
| Operating cash flow | $135.4 | $52.6 |
| Cash, cash equivalents and restricted cash at period end | $192.6 | $212.3 |
Revenue declined 20.6%. Services and fees rose 9.2% to $257.3 million, but trading losses and loan fair-value adjustments swung to a combined $29.9 million loss from $51.6 million of income. Loan and securities-lending interest income fell 22.3% to $59.9 million, and goods sales fell 17.9% to $55.7 million. Operating expenses were nearly flat at $346.5 million. The resulting operating margin was approximately negative 1.0%, versus positive 19.7% in Q1 2023; common-shareholder net margin was approximately negative 14.9%, versus positive 3.5%.
Loss before taxes was $65.0 million, compared with pretax income of $24.5 million. A $17.1 million tax benefit partly offset the loss. Realized and unrealized investment losses were $29.5 million, similar to $28.4 million a year earlier. Interest expense was $44.9 million, down from $47.6 million.
Balance sheet, debt and liquidity
| At March 31, 2024 | Amount |
|---|---|
| Total assets | $4,997.6 |
| Total liabilities | $4,698.0 |
| Total equity | $299.7 |
| Cash and cash equivalents | $190.7 |
| Securities and other investments at fair value | $949.9 |
| Loans receivable at fair value | $452.5 |
| Borrowings reported by management | $2,186.4 |
Borrowings comprised $1,553.6 million of senior notes, $596.3 million of term loans, $22.2 million drawn on the Targus revolver, and $14.3 million of other notes payable. Senior notes had a weighted-average interest rate of 5.63%; several floating-rate facilities had rates around 8.4%–11.4%. Senior-note fair value was $1,038.3 million, below its $1,553.6 million carrying amount. Cash, cash equivalents and restricted cash declined by $41.3 million during the quarter.
Management stated that cash, investments, available facilities and expected operating cash flows should fund working capital and capital expenditures for at least 12 months from issuance of the financial statements. Operating cash flow benefited substantially from working-capital movements, including changes in securities borrowed and loaned; it should not be read as equivalent to recurring earnings. The filing reports compliance with financial covenants at March 31, 2024, while noting prior Targus covenant amendments waived breaches for earlier periods.
Material changes and segment performance
- Capital Markets revenue fell to $89.8 million from $185.4 million, primarily reflecting the reversal from prior-year trading and loan fair-value gains to current-period losses. Segment income was $0.4 million versus $86.0 million.
- Financial Consulting revenue increased 40.3% to $35.1 million; segment income rose to $6.1 million from $3.8 million.
- Wealth Management revenue increased 4.0% to $51.8 million; segment income was $1.7 million versus $1.4 million.
- Communications revenue declined 5.2% to $82.4 million and segment income fell to $8.1 million from $10.8 million. Management expects UOL, magicJack and Marconi subscription revenue to continue declining year over year.
- Consumer Products revenue fell 21.6% to $51.5 million, and the segment loss widened to $3.4 million from $1.6 million, reflecting weaker worldwide computer and laptop sales.
- All Other revenue rose to $26.7 million from $13.6 million, substantially reflecting bebe merchandise-rental activity after the company acquired control and began consolidating bebe in late 2023.
Operating cash flow increased year over year, while investing activities provided $18.3 million versus using $57.2 million in Q1 2023. Financing activities used $190.9 million, including $115.5 million to redeem 6.75% notes, $30.0 million of term-loan repayments and $16.0 million of common dividends. No common shares were repurchased under the public repurchase program during the quarter.
Outlook, risks and unusual items
- Strategic review: B. Riley retained Moelis to review strategic alternatives for its Appraisal and Valuation Services and Retail, Wholesale and Industrial Solutions businesses; a sale or other transaction is possible, but completion and terms are uncertain. Potential proceeds could be used for debt reduction, share or bond repurchases, or investment in the platform.
- Post-quarter developments: On May 3, 2024, a subsidiary completed the Nogin acquisition for approximately $59.0 million, including $37.7 million of DIP financing and $21.3 million additional cash consideration. On May 1, the company announced redemption of the remaining $25.0 million of 6.75% notes due 2024 on May 31.
- Concentrated and valuation-sensitive exposures: The $200.5 million principal loan to a Brian Kahn affiliate bears 12% paid-in-kind interest and is secured primarily by Freedom VCM equity. Its fair value was $183.3 million. The company also disclosed retail-related loans, including a $93.0 million Conn’s loan balance, and a $150 million maximum principal guarantee exposure under a Babcock & Wilcox credit agreement. The Freedom VCM investment’s fair value declined to $244.6 million from $287.0 million during the quarter, including a $42.4 million unrealized loss.
- Legal matters: The filing describes securities class actions relating to allegations involving Brian Kahn and the FRG transaction, a May 2024 class action concerning senior-note offerings, and a demand to recover approximately $32.2 million in alleged preferential transfers from Sorrento Therapeutics. The company disputes the claims; potential liability for the securities actions could not be estimated.
- Controls: Management concluded disclosure controls and procedures were not effective at the reasonable-assurance level at March 31, 2024. Previously identified material weaknesses include IT general controls, investment valuation review controls, and related-party transaction disclosures. Remediation was ongoing; management expected completion before year-end 2024.
- Market and operating risks: The filing cites volatile capital markets, credit and investment valuation risk, possible recession, inflation and interest rates, illiquidity, litigation and reputational exposure, and geopolitical uncertainty. Management provided no numerical earnings or revenue guidance.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for B. Riley Financial, Inc., despite the request metadata naming BRC Group Holdings, Inc.
- Check the filing cover-page certifications: the supplied text marks “No” for having filed all required reports during the prior 12 months and for submitting all required Interactive Data Files. Clarify the basis and any reporting implications.
- Assess debt maturities, refinancing access and covenant headroom, particularly the notes due in 2025 and later, and the company’s reliance on marketable investments and borrowing-base collateral.
- Review the quality and sustainability of operating cash flow, given the large working-capital contribution and the quarter’s substantial GAAP loss.
- Monitor the valuation, collateral and collection risks for the Freedom VCM/Kahn-related loan and equity investment, Conn’s and other concentrated loans, and the Babcock & Wilcox guarantees.
- Track remediation and testing of material weaknesses, as well as the progress and potential consequences of disclosed litigation and the strategic-alternatives review.