B. Riley Financial's stock loses half its value after bank suspends dividend and projects a loss

By Steve Gelsi

Bank discloses subpoena from the SEC and problems with its exposure to Franchise Group Inc.

B. Riley Financial Inc.'s stock lost half its value Monday after the investment bank said it's suspending its dividend due partly to the fallout from a loan it provided to help the former chief executive of Franchise Group Inc. acquire the company last year.

B. Riley (RILY) said its second-quarter results have been affected by noncash losses. It expects to post a second-quarter loss of $14 to $15 a share for the quarter, or $435 million to $475 million.

The company said it will file a delay of its quarterly filings with the Securities and Exchange Commission to due to the extra time needed to finalize the valuations of some of its loans and investments, and it said that it is "working diligently" to complete the work.

The company also disclosed that it was subpoenaed by the SEC in July as part of the regulator's investigation of Brian Kahn, the former CEO of Franchise Group.

The company said it is responding to the subpoenas and cooperating with the SEC.

B. Riley's stock fell by $8.41, dropping to $8.54 a share, its lowest level in about a decade.

Most of the bank's already disclosed losses are related to the performance of its investment in Franchise Group and its Vintage Capital loan receivable, which is primarily collateralized by its equity interests in Franchise Group.

"The substantial write-down during the quarter was driven by a confluence of recent events, including the impact of a meaningfully weaker consumer spending environment on [Franchise Group's] businesses and its investments," B. Riley said.

Reports of an SEC probe of Kahn and his alleged misconduct at hedge fund Prophecy Asset Management "have continued to create additional challenges for this investment, despite the fact that these allegations are unrelated to [Franchise Group] or B. Riley," the company said.

The developments have "materially impacted the execution of [Franchise Group's] business strategy, including its ability to divest or otherwise monetize certain assets," the company said.

Franchise Group's retail brands include Vitamin Shoppe, Pet Supplies Plus and furniture seller American Freight. It sold Sylvan Learning to Unleashed Brands earlier this year. It also sold Badcock Furniture to Conn's. In July, Conn's filed for bankruptcy.

In a conference call with analysts, Bryant Riley, co-CEO of B. Riley, said the bank and other investors based their stake in Franchise Group on the "continuation of normal course operations from its subsidiaries that would allow the [Franchise Group] parent to execute on a value unlocking asset monetization strategy," but instead a drop in consumer spending accelerated in the second quarter.

In February, B. Riley said it conducted an audit of its business dealings with Kahn and concluded that "the company and its executives, including Bryant Riley, had no involvement with, or knowledge of, any of the alleged misconduct concerning Prophecy."

Kahn was the subject of a report by Bloomberg last year that said regulators were looking into the role he played in the demise of Prophecy Asset Management in 2020.

Kahn, who has not been charged with any infractions, has said he has done nothing wrong.

Meanwhile, B. Riley said its effort to explore strategic alternatives for Great American Group is advancing. The company said in February it was considering a deal for the appraisal and valuation business, which also houses the bank's retail, wholesale and industrial-solutions services.

"The operating strength of this platform has recently been masked by the performance of our principal investments," Riley said. "As we look ahead, we will be refocusing on our core financial services businesses and supporting our valued clients across the small-cap and middle-market sectors as we have for the past 27 years."

Along with its net loss for the quarter, B. Riley plans to report a noncash markdown of approximately $330 million to $370 million related to its investment in Freedom VCM, the indirect parent entity of Franchise Group, and the Vintage Capital loan receivable.

It will also book an impairment charge of $28 million primarily related to the goodwill of computer-accessory brand Targus, which has continued to be affected by consumer spending habits. The company will also disclose a $25 million charge related to a valuation allowance for deferred income taxes for the quarter.

Total cash and investments as of June 30 are about $1.1 billion, with about $2.16 billion of total outstanding debt.

"We regret how the nature of this investment [loss] overshadowed the operating strength of our platform and the value our firm delivers to our clients every day," Riley said. "We are more focused than ever on reducing this overhang and restoring confidence among all stakeholders."

Prior to Monday's moves, B. Riley's stock was down 19.3% in 2024, while the S&P 500 SPX has risen about 12%.

-Steve Gelsi

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08-12-24 1436ET

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