B. Riley Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. The filing identifies the registrant as B. Riley Financial, Inc. (Nasdaq: RILY), not BRC Group Holdings, Inc. Unless noted otherwise, figures below are in millions of dollars.
Business context and financial performance
B. Riley is a diversified financial-services and investment company operating across Capital Markets, Wealth Management, Auction and Liquidation, Financial Consulting, Principal Investments—Communications and Other, and Brands. Results are significantly exposed to market values of proprietary investments and loans, alongside fee-based activities.
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Total revenue | $42.7; down 87.3% year over year | $248.3; down 73.5% year over year |
| Operating income (loss) | $(158.8) | $(154.0) |
| Net income (loss) | $(136.6) | $(145.8) |
| Net income (loss) available to common shareholders | $(142.2); diluted EPS $(5.07) | $(154.2); diluted EPS $(5.52) |
| Cash from operating activities | Not presented separately for the quarter | $(49.9), versus $(147.9) in 2021 |
Quarterly revenue included a $223.9 million trading loss and fair-value loss on loans, compared with $32.7 million of income a year earlier. Management attributed the decline primarily to realized and unrealized proprietary-investment losses, including $219.8 million in the quarter; the six-month trading and loan fair-value result was a $292.3 million loss. Services and fees fell 24.5% in the quarter and 25.9% for the six months. Loan and securities-lending interest income rose 150.4% in the quarter and 100.7% for the six months.
Operating expenses were $201.5 million in the quarter, down 11.1%, and $402.3 million for the six months, down 11.3%. The resulting operating loss was large relative to reported revenue; a conventional positive operating margin was not achieved. SG&A declined, partly offset by increased costs in communications businesses and acquisitions. Interest expense outside securities lending was $31.8 million for the quarter and $62.2 million for the six months.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $216.1 million; restricted cash was $0.9 million. Total assets were $5.875 billion and total equity was $543.4 million.
- Management reported $2.116 billion of borrowings: $1.645 billion of senior notes, $367.8 million of term loans, $80.0 million drawn on the Nomura revolver, and $23.2 million of other notes payable. Senior notes had a weighted-average rate of 5.70%; floating-rate facility costs had risen versus year-end.
- Senior notes and term loans are subject to maturities, covenants and other restrictions. The Nomura facilities require minimum EBITDA of $135 million and specified minimum net asset value; the company stated it was in compliance with applicable financial covenants at quarter-end.
- Operating cash use was $49.9 million for the first half. Investing activities provided $0.5 million net, while financing activities used $10.4 million. Cash, cash equivalents and restricted cash declined $62.8 million from the start of the year.
- Management said available cash, investments, borrowing capacity and expected operating cash flows should fund working capital and capital needs for at least 12 months from issuance of the statements. This is management’s assessment, not a guarantee.
Material changes, outlook and risks
- Acquisitions: The company acquired FocalPoint Securities in January for stated consideration of $124.5 million, including cash, stock and deferred/contingent consideration. In May, conversion of $17.5 million of Lingo debt increased ownership from 40% to 80%; consolidation generated a $6.8 million remeasurement gain. Goodwill increased to $394.3 million, primarily from these acquisitions.
- Segment trends: Capital Markets was the main source of the investment-related losses, with six-month segment revenue negative $34.0 million. Fee revenue weakened in Capital Markets and Wealth Management; communications revenue increased with Marconi Wireless and Lingo, while management expected UOL and magicJack subscription revenue to continue declining year over year.
- Post-quarter event: BRPM 150 completed its FaZe Clan business combination on July 19, 2022 and was deconsolidated. The company also reported purchasing 5,342,500 FaZe Holdings shares for $10 per share in connection with the transaction.
- Distributions: The company paid $62.0 million of common dividends in the first half and declared a $1.00-per-share dividend after quarter-end. Management said regular quarterly dividends were its current intention, but the board may reduce or discontinue them.
- Market and valuation risk: Management cited market volatility, inflation and Federal Reserve actions, COVID-19, supply-chain and labor pressures, energy prices, and Russia’s invasion of Ukraine as sources of economic uncertainty. $1.105 billion of recurring fair-value assets were Level 3 at quarter-end, including $770.8 million of loans, making valuations sensitive to estimates and unobservable inputs.
- Other exposures: The company disclosed legal and regulatory proceedings, but said it did not expect pending claims to materially affect financial position or results. It also has guarantees and indemnities related to Babcock & Wilcox and other commitments; the filing does not establish a certain outcome for these exposures.
- Reporting and controls: The company revised prior-period cash-flow presentation to correct a nonmaterial gross-up between investing and financing activities. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material internal-control changes during the quarter.
No specific earnings or revenue forecast was provided. Management’s outlook is conditional on uncertain market and economic developments; the filing cautions that interim results are not necessarily indicative of full-year results.
Investor facts to verify
- How much of the trading and loan fair-value losses are realized, and how portfolio values and loan marks evolve after quarter-end.
- Liquidity and borrowing-base headroom, covenant calculations and sensitivity to higher floating interest rates; management estimated a 1% rate increase would add $2.1 million of interest expense over the first half.
- Cash generation and dividend affordability given first-half operating cash outflow, debt obligations and the board’s discretion over future distributions.
- Acquisition performance, including FocalPoint and Lingo integration, contingent/deferred payments, and the carrying values of related goodwill and intangibles.
- Potential outcomes and cash requirements from guarantees, litigation/regulatory matters, and the FaZe transaction and post-quarter deconsolidation.