Business Overview and History
B. Riley Financial, a diversified financial services company, has been navigating a challenging period marked by strategic shifts and balance sheet restructuring. Yet, amidst the turbulence, the firm is taking decisive steps to streamline its operations, strengthen its core businesses, and position itself for renewed growth.
B. Riley Financial was founded in 1997 as a boutique investment bank, providing services such as investment banking, equity research, and institutional brokerage. Over the years, the company has evolved into a diversified financial services platform, leveraging its expertise to deliver tailored solutions to a broad client base spanning public and private companies, financial sponsors, investors, and individuals.
The company's growth strategy has included strategic acquisitions and investments to expand its capabilities and service offerings. In 2009, B. Riley acquired GlassRatner Advisory & Capital Group LLC, which significantly enhanced its financial consulting services. Another notable acquisition was United Online, Inc. in 2016, which added consumer internet access and cloud communication services to B. Riley's portfolio.
As part of its diversification efforts, B. Riley has expanded its service offerings to include wealth management, tax services, bankruptcy, financial advisory, forensic accounting, real estate consulting, and valuation and appraisal services. This expansion has allowed the company to provide a comprehensive suite of financial services to its clients.
In 2023, the company found itself embroiled in challenges stemming from its investment in Franchise Group, Inc. (FRG), a now-bankrupt retail conglomerate. This association, along with the company's principal investment activities, resulted in significant losses and write-downs, necessitating a strategic shift to refocus on its core strengths.
Decisive Actions to Reshape the Business
To navigate these challenges, B. Riley Financial has taken a series of decisive actions to streamline its operations and strengthen its balance sheet. In late 2024, the company established a joint venture with Oaktree Capital Management for its Great American Group (GA) business, which includes its appraisal and valuation services, retail, wholesale, and industrial solutions, and real estate advisory services. This transaction provided the company with $203 million in cash proceeds, allowing it to meaningfully deleverage its balance sheet while retaining a significant equity stake in the joint venture.
Additionally, the company received approximately $236 million in gross proceeds through the financing of its brand assets, including the iconic bebe brand. This injection of capital further bolstered the company's liquidity position and provided resources to invest in its core operations.
Addressing Debt Maturities and Enhancing Flexibility
Recognizing the importance of prudent capital management, B. Riley Financial has taken steps to address its upcoming debt maturities. In February 2025, the company redeemed its $145.3 million in 6.375% Senior Notes, utilizing cash on hand to retire this significant 2025 obligation. Furthermore, the company recently entered into a new $160 million senior secured credit facility with Oaktree Capital Management, replacing its previous credit agreement with Nomura. This new facility provides greater financial and strategic flexibility, enabling the company to focus on its growth initiatives.
Streamlining the Wealth Management Business
As part of its strategic realignment, B. Riley Financial announced the sale of a portion of its traditional W-2 Wealth Management business to Stifel Financial Corp. for an estimated net consideration of $26 million. This transaction allows the company to maintain a core wealth management presence while enabling the W-2 employees who desired a fresh start to transition to a new owner. Post-transaction, B. Riley Financial will retain a group of approximately 170 independent advisors and 81 W-2 advisors, managing around $15 billion in client assets.
Strengthening the Core Businesses
Despite the challenges faced, B. Riley Financial's core businesses have demonstrated resilience and the potential for growth. The company's investment banking and brokerage unit, B. Riley Securities, remains a leading provider of services to the middle market, with a seasoned team and a strong client base. In a normalized environment, this segment has the capability to generate substantial operating EBITDA, as evidenced by its past performance.
The company's Wealth Management division, while reduced in size, continues to be a profitable and stable part of the business, managed by a team that has maintained its client relationships. Additionally, the Advisory Services segment, known as GlassRatner, has delivered record performance in 2024, capitalizing on its expertise in areas such as bankruptcy, turnaround management, and financial due diligence.
Addressing Regulatory Inquiries
Concurrent with its operational and financial restructuring, B. Riley Financial has been cooperating with regulatory authorities regarding inquiries related to its past business dealings with Franchise Group and its chairman's personal loan. The company has stated that both the internal review and the independent investigation conducted by the Audit Committee confirmed that the company and its executives had no involvement with or knowledge of any alleged misconduct concerning Franchise Group or its former CEO.
Financials
B. Riley Financial's financial performance has been significantly impacted by the challenges faced in recent years. The company's revenues and profitability have been affected by losses and write-downs related to its investment activities, particularly those associated with Franchise Group. In the most recent fiscal year (2023), the company reported revenue of $1.64 billion and a net loss of $99.91 million. Operating cash flow for the year was $24.50 million, with free cash flow of $16.79 million.
The third quarter of 2024 saw a substantial decline in financial performance, with revenue dropping to $199.31 million, representing a year-over-year decrease of 45.1%. The company reported a net loss of $287.60 million for the quarter. This significant decrease in revenue was primarily attributed to decreases in fair value adjustments on loans, interest income from loans and securities lending, and sale of goods, partially offset by increases in services and fees revenue. The substantial net loss was largely driven by unrealized losses on investments and impairment charges.
B. Riley Financial operates through five reportable business segments: Capital Markets, Wealth Management, Financial Consulting, Communications, and Consumer Products. The Capital Markets segment, which includes investment banking and principal investments, has been particularly impacted by recent challenges. The segment's portfolio of loans receivable decreased from $532.42 million at the end of 2023 to $151.70 million as of September 30, 2024. Significant fair value adjustments on these loans resulted in losses of $71.48 million and $259.26 million for the three and nine months ended September 30, 2024, respectively.
The Wealth Management segment reported revenues of $50.06 million and $152.71 million for the three and nine months ended September 30, 2024, respectively. Total assets under management for this segment stood at approximately $25.70 billion as of September 30, 2024, with $8.10 billion in advisory assets.
The Communications segment, which includes several acquired businesses in cloud communications and internet services, generated revenues of $67.56 million and $229.13 million for the three and nine months ended September 30, 2024, respectively. The Consumer Products segment, primarily comprised of Targus, reported revenues of $55.25 million and $164.25 million for the same periods.
For the fourth quarter of 2024, B. Riley Financial provided preliminary estimates, projecting net income available to common shareholders between $48 million and $68 million, with diluted net income per share ranging from $1.57 to $2.22. The company also estimated a net loss from continuing operations of $178 million to $187 million and operating adjusted EBITDA from continuing operations of $12 million to $14 million.
Liquidity
The company's liquidity position has been bolstered by the recent transactions and refinancing efforts. The $203 million in cash proceeds from the joint venture with Oaktree Capital, combined with the $236 million from brand asset financing, have significantly improved B. Riley Financial's cash position. Additionally, the new $160 million senior secured credit facility provides further financial flexibility.
As of September 30, 2024, B. Riley Financial reported cash and cash equivalents of $160.61 million. The company maintained a $100 million revolving credit facility, which was undrawn at that time. The current ratio and quick ratio both stood at 2.16, indicating a relatively strong short-term liquidity position. However, the company's debt-to-equity ratio was -6.04, reflecting the significant impact of recent losses on the company's equity position.
By the end of the fourth quarter of 2024, B. Riley Financial reported preliminary cash, cash equivalents, and restricted cash of approximately $257 million. Total debt stood at $1.78 billion, with total debt net of cash and investments at approximately $991 million, representing a decline of $221 million from the third quarter of 2024.
Outlook and Prospects
As B. Riley Financial emerges from this transitional period, the company is poised to focus on its core strengths and drive renewed growth. With a strengthened balance sheet, enhanced financial flexibility, and a streamlined operational structure, the firm is well-positioned to capitalize on opportunities in its investment banking, wealth management, and advisory services businesses.
The financial services industry, particularly the middle market investment banking segment in which B. Riley operates, has demonstrated resilience despite recent macroeconomic uncertainties. Industry estimates suggest a compound annual growth rate of 4-6% over the next five years for this segment, providing a potentially favorable environment for B. Riley's core operations.
While the company continues to navigate the lingering effects of its past challenges, including ongoing SEC inquiries and lawsuits related to its dealings with Brian Kahn and Franchise Group, the decisive actions taken to reshape the organization and address its debt obligations have laid the groundwork for a more sustainable and profitable future. The company maintains that these claims are without merit and intends to vigorously defend against them.
Conclusion
B. Riley Financial has weathered a challenging period, marked by strategic missteps and the need to address its balance sheet. However, the company's recent actions, including the establishment of a joint venture with Oaktree Capital, the financing of its brand assets, and the streamlining of its wealth management business, have positioned it for a renewed focus on its core strengths. With a strengthened financial position, the company is poised to capitalize on opportunities in its investment banking, wealth management, and advisory services segments, positioning it for long-term success. As B. Riley Financial enters 2025, investors will be closely watching the company's ability to execute on its growth strategy and deliver consistent financial performance in the face of ongoing challenges and industry dynamics.