Company Overview and History
B. Riley Financial, a diversified financial services platform, has weathered its fair share of challenges in recent years, emerging as a testament to its adaptability and strategic vision. With a rich history spanning over two decades, the company has transformed itself from a boutique investment bank into a diversified financial powerhouse, offering a range of services from investment banking and wealth management to asset disposition and brand investment.
Founded in 1997 and headquartered in Los Angeles, California, B. Riley Financial has evolved through a series of strategic acquisitions and organic growth initiatives. The company's journey of diversification began in earnest in 2010 with the acquisition of Great American Group, a leading provider of asset disposition, advisory, and valuation services. This move significantly expanded B. Riley's capabilities in the auction and liquidation space.
In 2012, the company further broadened its service offerings by acquiring MK Capital Advisors, a boutique investment bank focused on the middle market. This acquisition added investment banking, corporate finance, and restructuring services to B. Riley's growing platform.
The company's expansion continued in 2015 when it entered the wealth management business through the acquisition of FBR & Co.'s Private Client Group. This strategic move provided B. Riley with a retail advisory and brokerage business, further diversifying its revenue streams.
In 2016, B. Riley expanded its communications portfolio by acquiring magicJack VoIP, adding consumer internet access and related subscription services to its offerings. This acquisition, along with others, has helped the company build a more robust and diverse business model.
Challenges and Adaptations
Throughout its history, B. Riley has faced challenges, including volatile revenues due to the episodic nature of capital markets and retail liquidation engagements. The company has actively worked to address these challenges by diversifying its business model to provide more stable cash flows, particularly through the growth of its wealth management and communications segments.
The COVID-19 pandemic in 2020 presented additional hurdles for certain business lines, but B. Riley's diversified structure helped mitigate some of the impacts. Despite these challenges, the company has remained committed to its strategy of building a comprehensive financial services platform.
The company's diversified business model has been a key driver of its success, allowing it to navigate varying economic conditions and market cycles. B. Riley Financial operates through six reportable segments: Capital Markets, Wealth Management, Financial Consulting, Auction and Liquidation, Communications, and Consumer Products. This diversification has enabled the company to generate steady cash flows and maintain resilience in the face of challenges.
One such challenge arose in 2023 when the company's investment in Franchise Group, Inc. (FRG), a major retailer, faced significant headwinds. B. Riley had acquired a 31% stake in FRG as part of a management-led buyout in 2023, but the rapid deterioration of consumer spending and the ongoing fallout from the alleged misconduct of FRG's former CEO ultimately led to FRG filing for Chapter 11 bankruptcy in 2024. This setback, while significant, has not deterred B. Riley's management from their commitment to maximizing value for shareholders.
In the face of this challenge, B. Riley has demonstrated its agility and resilience. The company has streamlined its operations, refocusing on its core financial services businesses, while also taking steps to reduce its debt levels and strengthen its balance sheet. These actions have helped to mitigate the impact of the FRG investment and position the company for future growth.
Financials
Despite the volatility, B. Riley's financial performance has remained relatively strong. As of the company's latest quarterly report, it reported revenue of $343 million and a net loss of $49 million for the first quarter of 2024. While the net loss was primarily driven by non-cash impairment charges related to the FRG investment, the company's core businesses continued to contribute to its overall financial health.
The Capital Markets segment generated $90 million in revenue, with strong performance in areas such as corporate finance, consulting, and investment banking. The Wealth Management segment also delivered solid results, contributing $52 million in revenue. These segments, along with the company's Communications and Consumer Products businesses, have provided a steady stream of cash flows, helping to offset the volatility in the company's principal investments.
For the most recent fiscal year (2023), B. Riley reported revenue of $1.64 billion, a net loss of $99.91 million, operating cash flow of $24.50 million, and free cash flow of $16.79 million. Comparing the first quarter of 2024 to the same period in 2023, revenue decreased by 20.6%, and net income decreased from a profit of $17.16 million to a loss of $49.16 million. However, operating cash flow increased from $52.62 million to $135.36 million, and free cash flow improved from $57.16 million to $134.44 million. The decrease in revenue and net income was primarily due to decreases in the fair value of the company's securities and other investments owned, as well as lower interest income from loans and securities lending. The increases in operating cash flow and free cash flow were primarily due to changes in working capital.
In terms of geographic performance, the majority of B. Riley's revenues are generated in North America. In the first quarter of 2024, 92.1% of revenues came from North America, 4.8% from Europe, Middle East, and Africa, 1.9% from Asia, and 0.5% from Latin America.
Looking at the performance of individual segments in the first quarter of 2024, the Capital Markets segment had revenues of $89.82 million, including $60.35 million in services and fees, $30.47 million in trading income and fair value adjustments on loans, and $59.94 million in interest income from loans and securities lending. The Wealth Management segment had revenues of $51.78 million, primarily from $51.18 million in services and fees. The Auction and Liquidation segment had revenues of $5.78 million, including $3.56 million in services and fees and $2.22 million from the sale of goods. The Financial Consulting segment had revenues of $35.09 million in services and fees. The Communications segment had revenues of $82.37 million, including $81.07 million in services and fees and $1.30 million from the sale of goods. The Consumer Products segment had revenues of $51.52 million from the sale of goods.
Liquidity
B. Riley has a strong balance sheet, with $191 million in cash and cash equivalents as of March 31, 2024. This liquidity, combined with the company's disciplined approach to capital allocation, provides a solid foundation for navigating the current challenges and pursuing new growth opportunities.
The company's debt-to-equity ratio stood at 9.57x as of March 31, 2024. B. Riley has access to a $200 million asset-based credit facility with Wells Fargo Bank and a $100 million revolving credit facility as part of its Nomura credit agreement, both with no outstanding balance as of March 31, 2024. The company's current ratio and quick ratio were both 4.86x as of the same date, indicating strong short-term liquidity.
Future Outlook and Strategy
Looking ahead, B. Riley remains focused on maximizing value from its existing principal positions, while also exploring strategic alternatives for its Great American Group business, which provides asset appraisal and disposition services. The company has also been actively recruiting senior talent to bolster its core financial services capabilities, positioning it to capitalize on the improving market environment for transactional activity and restructuring services.
Despite the recent setbacks, B. Riley's management team remains confident in the company's ability to weather the storm and emerge stronger. The company's diversified business model, resilient operations, and strategic focus on its core financial services capabilities position it well to capitalize on the evolving market dynamics and deliver long-term value to its shareholders.
In its most recent earnings call, B. Riley reported a net loss in the range of $435 million to $475 million for the second quarter of 2024, driven by several non-cash charges and impairments. However, the company's operating adjusted EBITDA was expected to be in the range of $50 million to $55 million for the same quarter, demonstrating the consistent contribution from its core businesses. The company has decided to pause its dividend in an effort to retire more of its outstanding debt and is focused on operating with a strong and flexible balance sheet.
B. Riley expressed optimism about the improving environment for its core financial services businesses, noting increased transactional activity in capital raising and M&A, as well as increased restructuring and liability management activity. This positive outlook, combined with the company's strategic initiatives, suggests that B. Riley is positioning itself for potential growth and improved performance in the future.
In November 2023, B. Riley disclosed that it had received subpoenas from the SEC related to the company's dealings with Brian Kahn, the former CEO of Franchise Group Inc. (FRG). The company's internal investigation, assisted by two separate law firms, concluded that the company and its executives, including Bryant Riley, had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates. In July 2024, Bryant Riley, the co-founder and chairman of B. Riley, told employees that he feels "personally sick" after the collapse of Franchise Group, which filed for Chapter 11 bankruptcy.
In conclusion, B. Riley Financial's journey is a testament to the power of adaptability and resilience in the face of adversity. With a rich history, a diversified business model, and a steadfast commitment to its clients and shareholders, the company is poised to navigate the current challenges and seize new opportunities that lie ahead. While recent events have presented significant hurdles, B. Riley's management remains focused on strengthening the company's core businesses, improving its financial position, and creating long-term value for its stakeholders.