RILYL - Fundamentals, Financials, History, and Analysis
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B. Riley Financial, a diversified financial services platform, has established itself as a prominent player in the investment banking, brokerage, wealth management, and asset disposition sectors. With a history spanning over two decades, the company has built a reputation for delivering tailored solutions to its broad client base, which includes public and private companies, financial sponsors, investors, financial institutions, and individuals.

Business Overview and Operational Highlights

B. Riley Financial's operations are divided into six reportable segments: Capital Markets, Wealth Management, Financial Consulting, Auction and Liquidation, Communications, and Consumer Products. This diversified structure has allowed the company to capitalize on various market opportunities and mitigate risks across different economic cycles.

The company's journey began in 1997, focusing initially on investment banking, corporate finance, securities lending, and research. Over the years, B. Riley Financial has expanded its capabilities through both organic growth and strategic acquisitions. A significant milestone in the company's history came in 2016 with the acquisition of FBR & Co., a leading investment banking and institutional brokerage firm. This transaction substantially enhanced B. Riley Financial's investment banking and institutional sales and trading capabilities, positioning it as a preeminent middle market investment bank.

Following the FBR & Co. acquisition, B. Riley Financial continued its growth trajectory by adding several businesses to its portfolio. Notable acquisitions include GlassRatner Advisory & Capital Group, United Online, and magicJack VoIP. These strategic moves allowed the company to further diversify its service offerings and client base, establishing B. Riley Financial as a comprehensive financial services platform serving various segments of the economy.

The Capital Markets segment is a core driver of B. Riley's business, providing investment banking, corporate finance, securities lending, restructuring, research, sales, and trading services to corporate and institutional clients. Key financial metrics for this segment include revenues from corporate finance, consulting and investment banking fees, commissions and fees, and trading income and fair value adjustments on loans.

The Wealth Management segment offers wealth management and tax services to corporate and high-net-worth clients, while the Financial Consulting segment provides bankruptcy, financial advisory, forensic accounting, real estate consulting, and valuation and appraisal services. The Wealth Management segment generates revenues primarily from wealth and asset management fees, while the Financial Consulting segment's key financial metrics include revenues from services and fees.

The Auction and Liquidation segment is responsible for the company's auction and liquidation services, helping clients dispose of assets ranging from multi-location retail inventory to intellectual property. Key financial metrics for this segment include revenues from services and fees, and sale of goods.

The Communications segment generates revenue through consumer internet access, cloud communication services, and mobile phone voice, text, and data services and devices. Key financial metrics include revenues from subscription services and sale of goods.

Finally, the Consumer Products segment, which was recently added to the company's portfolio, produces revenue through the sale of laptop and computer accessories. Key financial metrics for this segment include revenues from sale of goods.

Financial Performance and Liquidity

Over the past few years, B. Riley Financial has demonstrated a mixed financial performance. In the fiscal year 2023, the company reported total revenue of $1.64 billion, a 52.30% increase from the previous year's $1.08 billion. However, net income for the same period declined to a loss of $99.91 million, compared to a profit of $445.05 million in the prior year. This significant decline in profitability was primarily driven by a $171.37 million in unusual items, including impairment charges and restructuring costs. Operating cash flow (OCF) for 2023 was $24.50 million, while free cash flow (FCF) stood at $16.79 million.

The most recent quarter (Q2 2024) showed further challenges, with revenue of $343.03 million and a projected net loss ranging from $435 million to $475 million. This substantial loss was primarily driven by non-cash impairment charges related to Targus and the company's investment in Freedom VCM/Franchise Group. Despite these challenges, B. Riley Financial's core businesses continued to perform well, with operating adjusted EBITDA for the quarter expected to be in the range of $50 million to $55 million. The company also reported strong cash flow generation, with OCF of $135.36 million and FCF of $134.44 million for the quarter.

As of December 31, 2023, B. Riley Financial maintained a strong liquidity position, with $231.96 million in cash and cash equivalents. The company's current ratio stood at 3.33, indicating a healthy ability to meet its short-term obligations. Additionally, the company's debt-to-equity ratio of 9.57 suggests a moderately leveraged capital structure, providing flexibility for future growth initiatives.

More recent data from the second quarter of 2024 shows cash holdings of $190.69 million, with a current ratio and quick ratio both at 8.86. The company also has access to a $200 million asset-based credit facility with Wells Fargo Bank, further enhancing its liquidity position.

Navigating Challenges and Opportunities

B. Riley Financial's recent financial performance has been significantly impacted by several headwinds, including the fallout from the Franchise Group (FRG) take-private transaction and the ongoing scrutiny surrounding the company's dealings with former FRG CEO Brian Kahn. In the second quarter of 2024, the company recorded a non-cash impairment charge of approximately $330 million to $370 million related to its Freedom VCM investment, which included the FRG acquisition.

The company and its executives, including Chairman and Co-CEO Bryant Riley, have received subpoenas from the SEC related to their dealings with Brian Kahn. B. Riley Financial is fully cooperating with the investigation and remains confident that the SEC will reach the same conclusion as its internal investigation - that the company had no involvement with or knowledge of any alleged misconduct by Kahn or his affiliates. Additionally, putative class action lawsuits have been filed against the company and certain officers and directors related to the company's investments and financing tied to Franchise Group and Brian Kahn.

Despite these challenges, the company has demonstrated resilience and is taking proactive steps to address its financial position. B. Riley has undertaken a strategic review of its Great American Group business, which generated approximately $153 million in revenue and $35 million in operating income for the fiscal year 2023. The company's management team remains focused on maximizing value from its existing principal positions and positioning the firm to capitalize on opportunities in its core financial services businesses, such as the improving environment for capital raising and M&A activities.

Furthermore, B. Riley continues to benefit from the steady cash flow generated by its communications and brands portfolios. The company's institutional broker-dealer, B. Riley Securities, has also proven to be a valuable asset, delivering significant value to its clients and providing cross-selling opportunities across the firm's various subsidiaries.

In an effort to strengthen its financial position, B. Riley Financial has paused its dividend payments to focus on retiring more of its outstanding debt, as it is currently outside of its targeted leverage ratio of 2-3x. The company is committed to operating with a strong, flexible balance sheet and maximizing value from its existing principal positions.

Outlook and Conclusion

Despite the recent setbacks, B. Riley Financial remains a diversified financial services platform with the potential to navigate the evolving market landscape. The company's management team has expressed determination to minimize the impact of its principal losses on the operating subsidiaries and restore confidence among stakeholders. With a focus on reducing debt, optimizing its business portfolio, and capitalizing on opportunities in its core financial services divisions, B. Riley Financial appears poised to weather the current challenges and emerge as a stronger, more resilient organization.

The company's wealth management business has shown improvement, now generating double-digit EBITDA, indicating enhanced profitability over time. This positive trend in one of its core segments provides a bright spot amidst the current challenges.

As the company continues to execute its strategic initiatives, investors will closely monitor B. Riley Financial's ability to leverage its diverse capabilities, institutional expertise, and robust talent pool to drive sustainable growth and profitability in the quarters and years ahead. The ongoing strategic alternative review process for the Great American Group business and the company's efforts to optimize its core financial services operations will be crucial factors in determining B. Riley Financial's future trajectory and its ability to overcome the current hurdles facing the organization.

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