B. Riley Financial, Inc. (RILY) on Q2 2024 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the B. Riley Financial Investor Call. Earlier today, B. Riley issued a press release detailing its preliminary results for the second quarter of 2024, which can be found on its Investor Relations website at ir.brileyfin.com. Today's call includes prepared remarks from the company followed by a question-and-a session. [Operator Instructions] As a reminder, this call is being recorded, and an audio replay will be available on the company's Investor Relations website later today. Today's call will also include non-GAAP measures, the reconciliations for these as well as an explanation for the use of these metrics. And the definition of these terms is available in the press release, which is available on the company's Investor Relations website. And before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements. Now I will turn the call over to Mr. Bryant Riley. Mr. Riley, please proceed. Bryant Riley: Thank you for joining the call this morning. As we announced this morning, we are continuing to finalize our financial statements for the second quarter and are working to file our quarterly report as soon as possible. In the meantime, we have released preliminary estimates for the second quarter which included a net loss in the range of $435 million to $475 million. Operating adjusted EBITDA is expected to be in the range of $50 million to $55 million for the second quarter demonstrating the consistent contribution of our core businesses. The net loss for the quarter reflects a non-cash impairment charge of approximately $28 million for Targus a charge of $25 million, which relates to a deferred tax benefit and a non-cash write-down of approximately $330 million to $370 million our Freedom VCM investment, which relates to the Franchise Group to private transaction and also our loan to Vintage Capital. As it relates to our investment in FRG, the thesis that we and other investors underwrote for this transaction contemplated a continuation of normal course operations from its subsidiaries that would allow the FRG parent to execute on a value unlocking asset monetization strategy. FRG made early progress to this end with the sale of Sylvan Learning and the sale of Badcock Funiture to Conn's. However, the rapid deterioration in consumer spending, which accelerated over the past quarter, ultimately impacted its operating performance and investments, including in Conn's, which filed for bankruptcy in July. While these more recent events impacted the valuation of our investment during this quarter, all of these issues have been compounded by the ongoing fallout related to the alleged misconduct of FRG's former CEO, which has created a challenging dynamic among FRG's lenders and counterparties. Throughout all of this, our firm is directly or indirectly become the subject of criticism and scrutiny stemming from the circumstances surrounding Brian Kahn. To this end, I should surprise no one and not unexpectedly, the company and I received subpoenas in July from the SEC. These primarily relate to the company's dealings with Brian Kahn. We are responding to the subpoenas that are fully cooperating with the SEC. We are confident that the SEC will reach the same conclusion that our own internal investigation with the assistance of two separate law firms did that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates. Well, the business of investing inherently involves taking risks that results in wins and losses, we regret how the nature of this investment losses overshadowed the operating strength of our platform and the value our firm delivers to our clients every day. We are more focused than ever on reducing this overhang and restoring confidence among all our stakeholders, including the shareholders on this call. Our management team has been one of the largest net buyers of our stock in the market over the last decade. We have paid a dividend every quarter since becoming listed as B. Riley Financial. Near term, we are focused on operating a strong flexible balance sheet. Our view has been that returning capital to shareholders while maintaining a leverage ratio of 2 to 3x is a prudent strategy. We are currently outside of that range, and so we are pausing our dividend in an effort to retire more of our outstanding debt. While we have significant cash on the balance sheet, it's important to understand the benefit, the capital strength provides our operating businesses and our clients. The decision to suspend our dividend will also help support other strategic decisions we view as a priority at this time. Second quarter write-down is notwithstanding, we continue to work towards maximizing value from our existing principal positions. Our review of the Great American Group business is advancing, and we look forward to keeping you updated on that process. We have so much respect and appreciation for this management team and the business that Great American has built. Prior to our combination, the Great American business overextended, and we made a concerted effort to focus on two core business lines, asset appraisal and asset disposition. Those businesses generated approximately $153 million in revenue and approximately $35 million in operating income for fiscal year 2023. In similar fashion, we are going back to our roots and refocusing on our core financial services business. We will also continue to benefit from the steady cash flow generated by our communications and brands portfolios. I still believe there is not a firm that can execute like we can. Despite the setback created by FRG, we remain a platform that is purpose-built to create opportunities for the firm and for clients and partners. When we acquired our advisory practice formerly known as GlassRatner, the business was generating approximately $25 million in revenues and $5 million in EBITDA. We immediately recognize that the managerial talent and practices of this team can not only make us better, but that together, we could cross-sell, grow and support tack-on acquisitions. Six years later, we are on an approximately $23 million EBITDA run rate as we continue to grow and find opportunities to enhance this business through geographic and capability expansion. In early July, we closed the acquisition of Interface Consulting International, a leading engineering and construction consulting and expert services firm. ICC joins B. Riley Advisory Services, where it will enhance our forensic accounting and litigation support practice. Wealth Management is an example of once money-losing business that has been rebuilt under our banner is now generating double-digit EBITDA. And our institutional broker-dealer, B. Riley Securities, delivers incredible value to its clients and provides a multitude of opportunities to virtually all of the subsidiaries across our firm. While volatile, the environment for our core financial services appears to be improving. Transactional activity is increasing market wide, both in terms of capital raising and MA. Concurrently, restructuring and liability management is seeing increased activity. We have added key hires serving each of these market segments in recent months and have an active pipeline of senior producers looking to join our platform. During the second quarter, we had our 24th Annual Institutional Investor Conference. Hundreds of our clients ranging from mutual fund managers to private equity partners to public company executives joined us for our flagship event in Beverly Hills. After years of unprecedented underperformance, there appears to be renewed optimism in small cap stocks in a post peak rate environment. Market segments where we have been early such as energy infrastructure, fintech and cryptocurrency have seen renewed investor interest. We remain well positioned in our core financial services businesses and are determined to minimize the impact from our principal losses on these operating subsidiaries. With that, we will open the call for questions. And I hope everyone can appreciate that we are still in the process of finalizing our financial statements and quarterly report. So it will be somewhat limited that I have just discussed in the announcement we released this morning. Thank you. Operator: [Operator Instructions] This concludes our question-and-answer session. Before we conclude today's call, I will provide B. Riley's financial safe harbor statements includes important cautions regarding forward-looking statements made during this call. Statements made during this call that are not descriptions of historical facts are forward-looking statements that are based on management's current expectations and assumptions and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions to prove incorrect, our business operating results, financial condition and stock price could be materially negatively affected. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of today's date. Such forward-looking statements include, but are not limited to, maintaining a strong flexible balance sheet the strategic alternative review process for Great American Group and any expected related announcements and working to maximize value from existing principal positions and positioning the firm to capitalize on opportunities presented to our core operating businesses. Factors that could cause such actual results to differ materially from those contemplated or implied by such forward-looking statements include, without limitation, the risks described from time to time in B. Riley Financial and periodically annual report from the SEC, including, without limitation, the risks described in B. Riley Financial, Inc.'s annual report on Form 10-K for the year ended December 31, 2023 under the captions Risk Factors and Management's Discussion and Analysis of financial conditions and results of operations as applicable. These factors should be considered carefully, and participants are cautioned not to place undue reliance on such forward-looking statements. All information is current as of today's call and B. Riley Financial undertakes no duty to update this information. Thank you for joining us for today's call. You may now disconnect. End of Q&A:
B. Riley Shares Surge 16% After Co-CEO Proposes to Buy Investment Bank Amid Struggles
In a regulatory filing on Friday, Bryant Riley, co-CEO of B. Riley Financial (NASDAQ:RILY), proposed to acquire the investment bank, sending the company’s shares soaring over 16% on Friday. The $7 per share offer represents a 39% premium to the stock's last closing price.
The move comes as B. Riley's stock has plummeted 70% this week, highlighting the significant challenges the Los Angeles-based financial services firm faces, particularly regarding its investment in Franchise Group (FRG), the parent company of Vitamin Shoppe.
Riley, the co-founder and largest shareholder of B. Riley, stated that the acquisition would only proceed with approval from a special committee of independent directors on the board. He emphasized that the current public company structure forces the bank to prioritize short-term objectives and devote undue attention to external stakeholders who may not share the company's long-term vision.
Earlier this week, B. Riley shares tumbled nearly 52% after it disclosed preliminary second-quarter results, including the suspension of its dividend and a projected net loss of $435 to $475 million for the quarter ending June 30. This equates to a loss of $14 to $15 per share.
The financial setback was largely attributed to non-cash losses tied to B. Riley's investment in Franchise Group and a loan receivable from Vintage Capital, which is collateralized by equity interests in FRG. Riley cited these investments as the primary factors behind the poor quarterly performance.
B. Riley Financial Shares Plummet 51% After Suspending Dividend and Reporting Significant Q2 Loss
Shares of B. Riley Financial (NASDAQ:RILY) took a dramatic plunge, dropping by 51% on Monday following the release of the company’s preliminary second-quarter results. The financial services firm disclosed a significant net loss for the quarter, along with the suspension of its dividend.
B. Riley Financial anticipates reporting a net loss between $435 million and $475 million, translating to a loss of $14 to $15 per share. The substantial losses are largely attributed to non-cash markdowns, with the company pointing to the underperformance of its investment in Franchise Group, Inc. (FRG) and its Vintage Capital loan receivable as major factors.
Chairman and Co-Chief Executive Officer Bryant Riley highlighted that the company's financial setbacks were primarily driven by its exposure to Franchise Group, as well as challenges related to the former CEO of FRG, Brian Kahn, whose alleged misconduct has further complicated the investment, despite the issues being unrelated to B. Riley or FRG itself.
B. Riley expects to recognize a non-cash markdown of approximately $330 million to $370 million tied to its investment in Freedom VCM, the parent entity of FRG, and the associated Vintage Capital loan receivable. Additionally, the company plans to record an impairment charge of $28 million, mainly due to goodwill associated with Targus, which has been negatively affected by shifting consumer spending patterns. Another $25 million charge is expected for a valuation allowance related to deferred income taxes for the quarter.
B. Riley Financial Shares Plunge 10% Amid SEC Probe Report
B. Riley Financial (NASDAQ:RILY) experienced a 10% drop in its stock price intra-day today amid reports that the Securities and Exchange Commission (SEC) is investigating the firm's connections with a client involved in securities fraud.
Bloomberg News reported that the SEC is looking into B. Riley's relationship with Brian Kahn, who is implicated as an unnamed co-conspirator in a Department of Justice (DoJ) case. This case relates to the 2020 collapse of the Prophecy Asset Management hedge fund. However, B Riley has stated that it has not received any official communication from the SEC regarding this investigation.
A spokesperson for B. Riley, in response to Bloomberg News, asserted the company's readiness to cooperate with any SEC inquiries, as it has done previously with regulatory matters. The spokesperson also expressed openness to an investigation into the alleged destructive tactics employed by short sellers against B. Riley. These tactics reportedly include coordinated options trading without disclosure obligations and personal attacks on the firm's employees for profit motives.
The SEC's investigation is said to be particularly focused on Kahn's role in the acquisition of retail company Franchise Group Inc., a transaction that B Riley facilitated last year with partial financing from Nomura. It is believed that some of Kahn's assets were used as collateral in this deal.
