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B. Riley Financial, Inc. 10-Q Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

B. Riley Financial, Inc.

Filing date:

02/21/2025

TLDR:

B. Riley Financial, Inc. experienced a significant net loss in Q3 2024, driven by fair value adjustments. Strategic initiatives are underway to improve liquidity and reduce debt, but concerns remain about meeting debt obligations.

ELI5:

B. Riley Financial lost a lot of money this quarter. They’re trying to fix it by selling some things and borrowing differently, but it’s still a bit risky.

Accession #:

0001628280-25-007082

Published on

Analyst Summary

  • Net Loss: A substantial net loss of $769.3 million for the nine months ended September 30, 2024, compared to a net loss of $16.0 million for the same period in 2023.
  • Accumulated Deficit: A significant increase in accumulated deficit to $1,084.7 million as of September 30, 2024, from $281.3 million at the end of 2023.
  • Negative Equity: Total equity (deficit) is negative $426.2 million as of September 30, 2024, compared to positive $359.6 million at the end of 2023.
  • Fair Value Adjustments: Significant fair value adjustments on loans and investments, particularly related to Freedom VCM Holdings, LLC, contributed to the net loss.
  • Gross profit margin decreased from 73.9% to 54.8% for the three months ended September 30, 2024, representing a -25.8% change.
  • Operating profit margin decreased from -2.2% to -41.0% for the three months ended September 30, 2024, representing a -1763.6% change.
  • Net profit margin decreased from -21.0% to -144.3% for the three months ended September 30, 2024, representing a -587.1% change.
  • Return on Assets (ROA) = -18.7%
  • Return on Equity (ROE) = 1934.8%
  • Current Ratio = 1.54
  • Quick Ratio = 1.40
  • Cash Ratio = 0.28
  • Debt-to-Assets Ratio = 1.20
  • Interest Coverage Ratio = 2.48
  • Asset Turnover = 0.21
  • Revenue Growth = -44.7%
  • Net Income Growth = 4720.6%
  • EPS Growth = 44.6

Opportunities and Risks

  • Liquidity Concerns: The company’s ability to meet upcoming debt obligations, particularly the Senior Notes due in 2026, is a significant risk.
  • Fair Value Adjustments: Continued volatility in fair value adjustments on loans and investments could further erode profitability.
  • Related Party Exposure: The company’s exposure to Freedom VCM and Brian Kahn-related entities presents legal and financial risks.
  • Compliance Issues: The “no” response to certain filing requirements raises concerns about regulatory compliance.
  • Strategic Initiatives: Asset sales and refinancing efforts could improve liquidity and reduce debt.
  • Diversified Business Model: The company’s diversified business model provides some resilience against industry-specific downturns.

Potential Implications

Stock Price

  • The company’s stock price of $4.13 reflects these financial challenges, as the valuation ratios are either negative or low, indicating potential undervaluation or investor skepticism.

B. Riley Financial, Inc. – Form 10-Q Report

Executive Summary

B. Riley Financial, Inc.’s Form 10-Q for the quarter ended September 30, 2024, reveals a complex financial picture. The company experienced a significant net loss, largely driven by fair value adjustments on loans and investments, particularly related to Freedom VCM Holdings, LLC. While strategic initiatives are underway to improve liquidity and reduce debt, concerns remain about the company’s ability to meet upcoming debt obligations. The report highlights both risks and opportunities, requiring careful monitoring and strategic execution.

Company Overview

B. Riley Financial, Inc. is a diversified financial services company providing investment banking, wealth management, and other services. Recent strategic shifts include classifying certain businesses as discontinued operations and engaging in transactions to improve liquidity and reduce debt.

Detailed Analysis

Financial Statement Analysis

The condensed consolidated financial statements show a concerning trend in profitability and equity. Key observations include:

  • Net Loss: A substantial net loss of $769.3 million for the nine months ended September 30, 2024, compared to a net loss of $16.0 million for the same period in 2023.
  • Accumulated Deficit: A significant increase in accumulated deficit to $1,084.7 million as of September 30, 2024, from $281.3 million at the end of 2023.
  • Negative Equity: Total equity (deficit) is negative $426.2 million as of September 30, 2024, compared to positive $359.6 million at the end of 2023.
  • Fair Value Adjustments: Significant fair value adjustments on loans and investments, particularly related to Freedom VCM Holdings, LLC, contributed to the net loss.

Key Ratios and Trends

Ratio September 30, 2024 December 31, 2023 Trend
Net Loss per Share (Basic & Diluted) $(25.53) $(0.56) Significant Decrease
Total Equity (Deficit) $(426.2M) $359.6M Significant Decrease

Management’s Discussion and Analysis (MD&A)

Management acknowledges the net loss and fair value adjustments related to Freedom VCM and the loan to Vintage Capital Management, LLC. They highlight strategic alternatives being pursued to address liquidity and debt obligations, including potential asset sales and refinancing. The tone is cautiously optimistic, emphasizing ongoing efforts to improve the company’s financial position.

Red Flags and Uncommon Metrics

  • Auditor Qualifications: The report indicates a “no” response to filing requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, raising concerns about compliance.
  • Discontinued Operations: The classification of certain businesses as discontinued operations signals a strategic shift, but also requires careful analysis of the impact on future earnings.
  • Related Party Transactions: Significant related party transactions, particularly loans receivable and fair value adjustments, warrant close scrutiny.
  • Concentration of Risk: Concentration of loans receivable in the retail industry and exposure to Freedom VCM represent significant risks.

Risk and Opportunity Assessment

Risks:

  • Liquidity Concerns: The company’s ability to meet upcoming debt obligations, particularly the Senior Notes due in 2026, is a significant risk.
  • Fair Value Adjustments: Continued volatility in fair value adjustments on loans and investments could further erode profitability.
  • Related Party Exposure: The company’s exposure to Freedom VCM and Brian Kahn-related entities presents legal and financial risks.
  • Compliance Issues: The “no” response to certain filing requirements raises concerns about regulatory compliance.

Opportunities:

  • Strategic Initiatives: Asset sales and refinancing efforts could improve liquidity and reduce debt.
  • Diversified Business Model: The company’s diversified business model provides some resilience against industry-specific downturns.

Conclusion & Actionable Insights

Overall Assessment: The Form 10-Q reveals a concerning financial situation for B. Riley Financial, Inc. The significant net loss, negative equity, and reliance on strategic initiatives to address debt obligations warrant caution.

Recommendations:

  • Monitor Liquidity Closely: Track cash flow, asset sales, and refinancing efforts to assess the company’s ability to meet debt obligations.
  • Evaluate Related Party Exposure: Conduct a thorough review of all related party transactions and assess the potential impact of legal and financial risks.
  • Address Compliance Concerns: Take immediate steps to address the filing requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934.
  • Focus on Core Operations: Prioritize profitable core operations and carefully evaluate the strategic rationale for discontinued operations.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin

    • Ratio/Metric: For the three months ended September 30, 2024: (199,305 – (49,659 + 40,312)) / 199,305 = 54.8%
      For the three months ended September 30, 2023: (363,268 – (52,616 + 42,217)) / 363,268 = 73.9%
      For the nine months ended September 30, 2024: (637,222 – (168,008 + 118,897)) / 637,222 = 54.8%
      For the nine months ended September 30, 2023: (1,151,943 – (156,373 + 129,490)) / 1,151,943 = 75.2%
    • Trend: The gross profit margin decreased from 73.9% to 54.8% for the three months ended September 30, 2024, representing a -25.8% change. The gross profit margin decreased from 75.2% to 54.8% for the nine months ended September 30, 2024, representing a -27.1% change.
    • Industry: The financial services industry typically has a wide range of gross profit margins depending on the specific services offered. Asset management firms often have higher margins (60-80%) while brokerage services may have lower margins (30-50%). B. Riley’s current gross profit margin of 54.8% is at the lower end of the asset management range and at the higher end of the brokerage range.
  • Operating Profit Margin

    • Ratio/Metric: For the three months ended September 30, 2024: (199,305 – 281,051) / 199,305 = -41.0%
      For the three months ended September 30, 2023: (363,268 – 371,250) / 363,268 = -2.2%
      For the nine months ended September 30, 2024: (637,222 – 957,943) / 637,222 = -50.3%
      For the nine months ended September 30, 2023: (1,151,943 – 1,010,581) / 1,151,943 = 12.3%
    • Trend: The operating profit margin decreased from -2.2% to -41.0% for the three months ended September 30, 2024, representing a -1763.6% change. The operating profit margin decreased from 12.3% to -50.3% for the nine months ended September 30, 2024, representing a -509.8% change.
    • Industry: The operating profit margin for diversified financial services firms can vary widely, but a healthy margin is typically in the 15-30% range. B. Riley’s negative operating profit margin indicates significant operating inefficiencies or challenges.
  • Net Profit Margin

    • Ratio/Metric: For the three months ended September 30, 2024: -287,598 / 199,305 = -144.3%
      For the three months ended September 30, 2023: -76,308 / 363,268 = -21.0%
      For the nine months ended September 30, 2024: -769,333 / 637,222 = -120.7%
      For the nine months ended September 30, 2023: -15,967 / 1,151,943 = -1.4%
    • Trend: The net profit margin decreased from -21.0% to -144.3% for the three months ended September 30, 2024, representing a -587.1% change. The net profit margin decreased from -1.4% to -120.7% for the nine months ended September 30, 2024, representing a -8514.3% change.
    • Industry: A positive net profit margin is generally expected. Negative margins, as seen here, suggest the company is not effectively converting revenue into profit.
  • Return on Assets (ROA)

    • Ratio/Metric: Net Loss (9 months) / Average Total Assets = -769,333 / ((6,080,604 + 2,157,276)/2) = -18.7%
    • Industry: A typical ROA for financial services is around 1-2%. A negative ROA indicates the company is losing money relative to its assets.
  • Return on Equity (ROE)

    • Ratio/Metric: Net Loss (9 months) / Average Total Equity = -769,333 / ((359,566 + (-426,222))/2) = 1934.8%
    • Industry: A typical ROE for financial services is around 10-15%. A negative equity makes ROE calculation not meaningful.
  • Earnings Per Share (EPS) – Basic and Diluted

    • Ratio/Metric:
      Three Months Ended September 30, 2024: Basic EPS = (286,412) / 30,499,931 = $(9.39) Diluted EPS = $(9.39)
      Three Months Ended September 30, 2023: Basic EPS = (75,838) / 29,961,068 = $(2.53) Diluted EPS = $(2.53)
      Nine Months Ended September 30, 2024: Basic EPS = (773,211) / 30,281,324 = $(25.53) Diluted EPS = $(25.53)
      Nine Months Ended September 30, 2023: Basic EPS = (16,329) / 28,933,546 = $(0.56) Diluted EPS = $(0.56)
    • Trend: EPS decreased significantly compared to the previous year.
    • Industry: Negative EPS values are unfavorable and indicate losses for shareholders.

Liquidity

  • Current Ratio

    • Ratio/Metric: Current Assets / Current Liabilities = 877,471 / 571,661 = 1.54
    • Industry: A current ratio of 1.54 indicates adequate liquidity.
  • Quick Ratio (Acid-Test Ratio)

    • Ratio/Metric: (Current Assets – Inventory) / Current Liabilities = (877,471 – 80,437) / 571,661 = 1.40
    • Industry: A quick ratio of 1.40 suggests good short-term liquidity.
  • Cash Ratio

    • Ratio/Metric: Cash and Cash Equivalents / Current Liabilities = 159,247 / 571,661 = 0.28
    • Industry: A cash ratio of 0.28 indicates that the company has a limited amount of cash to cover its current liabilities.

Solvency/Leverage

  • Debt-to-Equity Ratio

    • Ratio/Metric: Total Liabilities / Total Equity = 2,583,498 / ABS( -426,222) = -6.1
    • Industry: A negative equity makes Debt-to-Equity Ratio calculation not meaningful.
  • Debt-to-Assets Ratio

    • Ratio/Metric: Total Liabilities / Total Assets = 2,583,498 / 2,157,276 = 1.20
    • Industry: A debt-to-assets ratio of 1.20 is high, indicating that the company has more liabilities than assets.
  • Interest Coverage Ratio (Times Interest Earned)

    • Ratio/Metric: Operating Income / Interest Expense = -81,746 / -32,996 = 2.48
    • Industry: An interest coverage ratio of 2.48 indicates that the company has some capacity to cover its interest expenses.

Activity/Efficiency

  • Asset Turnover

    • Ratio/Metric: Total Revenues (9 months * (4/3)) / Average Total Assets = (637,222 * (4/3)) / ((6,080,604 + 2,157,276)/2) = 0.21
    • Industry: An asset turnover ratio of 0.21 indicates that the company is not generating much revenue from its assets.
  • Days Sales Outstanding (DSO)

    • Ratio/Metric: (Accounts Receivable / Revenue) * 365 = (91,506 / 637,222) * 365 = 52.4 days
    • Industry: A DSO of 52.4 days indicates the average number of days that a company takes to collect revenue after a sale.
  • Days Payable Outstanding (DPO)

    • Ratio/Metric: (Accounts Payable / Cost of Revenue) * 365 = (54,522 / (168,008 + 118,897)) * 365 = 68.6 days
    • Industry: A DPO of 68.6 days indicates the average number of days that a company takes to pay its invoices.

Valuation

  • Price-to-Earnings Ratio (P/E)

    • Ratio/Metric: Market Cap / Net Income = (30,499,931 * 4.13) / (769,333/ (9/12)) = -0.5
    • Industry: A negative P/E ratio is not meaningful.
  • Price-to-Book Ratio (P/B)

    • Ratio/Metric: Market Cap / Book Value of Equity = (30,499,931 * 4.13) / ABS(-426,222) = -0.3
    • Industry: A negative P/B ratio is not meaningful.
  • Price-to-Sales Ratio (P/S)

    • Ratio/Metric: Market Cap / Annual Revenue = (30,499,931 * 4.13) / (637,222 * (4/3)) = 0.47
    • Industry: A P/S ratio of 0.47 is relatively low, suggesting that the company’s stock may be undervalued.
  • Enterprise Value to EBITDA (EV/EBITDA)

    • Ratio/Metric: EV = Market Cap + Total Debt – Cash and Equivalents = (30,499,931 * 4.13) + (2,583,498 – (-426,222)) – 159,247 = 150,044,720
      EBITDA = Net Income + Interest Expense + Taxes + Depreciation and Amortization = -769,333 + 102,195 + 17,915 + 34,127 = -615,096
      EV/EBITDA = 150,044,720 / ABS(-615,096) = -244
    • Industry: A negative EV/EBITDA ratio is not meaningful.

Growth Rates

  • Revenue Growth

    • Ratio/Metric: (Current Revenue – Previous Revenue) / Previous Revenue = (637,222 – 1,151,943) / 1,151,943 = -44.7%
    • Industry: A revenue growth of -44.7% is a significant decrease.
  • Net Income Growth

    • Ratio/Metric: (Current Net Income – Previous Net Income) / Previous Net Income = (-769,333 – (-15,967)) / (-15,967) = 4720.6%
    • Industry: A net income growth of 4720.6% is a significant increase.
  • EPS Growth

    • Ratio/Metric: (Current EPS – Previous EPS) / Previous EPS = (-25.53 – (-0.56)) / (-0.56) = 44.6
    • Industry: An EPS growth of 44.6 is a significant increase.

Other Relevant Metrics

  • Transfer and Contribution Agreement, dated October 25, 2024, between B. Riley Brand Management, LLC and BR Funding Holdings 2024-1, LLC.
    This agreement indicates a transfer of assets or business operations to a newly formed entity, BR Funding Holdings 2024-1, LLC. The financial implications would depend on the nature and value of the transferred assets, and the purpose of the transfer (e.g., securitization, restructuring).
  • Membership Interest Purchase Agreement, dated October 25, 2024, by and among bebe stores, inc., HBN 120, LLC, BB Brand Holdings, LLC and BKST Brand Management, LLC.
    This agreement suggests a change in ownership or control of bebe stores, inc. The financial impact would depend on the purchase price, the assets and liabilities involved, and the strategic rationale for the acquisition.
  • Equity Purchase Agreement, dated October 13, 2024, by and among OCM SSF III Great American PT, L.P. , Opps XII Great American Holdings, LLC , VOF Great American Holdings, L.P., BR Financial Holdings, LLC , on behalf of itself and as seller’s representative , John Bankert , Ken Bloore , Michael Marchlik , Great American Holdings, LLC, and, solely for purposes of Section 9.14 therein, B. Riley Financial, Inc.
    This agreement indicates a sale of equity in Great American Holdings, LLC. The financial implications would depend on the sale price, the ownership stake involved, and the impact on B. Riley’s consolidated financial statements.

Commentary

B. Riley Financial’s financial performance in Q3 2024 and the nine months ending September 30, 2024, reveals a concerning trend of declining profitability and operational efficiency. The company experienced a significant decrease in revenues, leading to negative operating and net profit margins. While liquidity appears adequate based on current and quick ratios, the high debt-to-assets ratio and negative equity raise solvency concerns. The company’s stock price of $4.13 reflects these financial challenges, as the valuation ratios are either negative or low, indicating potential undervaluation or investor skepticism.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️