It dumped on already puking shareholders a surprise disclosure of huge losses that exceed its capital, amid reports of widening SEC investigation.
By Wolf Richter for WOLF STREET.
B. Riley Financial – a financial services firm that includes an investment bank for small caps, a wealth management firm, a provider of retail liquidation services, and financial consulting – has been steeped in various allegations by short-sellers since February 2023. Bloomberg, based on sources, then reported an SEC investigation. And B. Riley’s stock had crashed.
But today, the stock [RILY] crashed another 52% as the company surprised already puking shareholders by reporting preliminary financial results for Q2, including a huge loss that exceeds its capital, while Bloomberg reported this morning that the SEC investigation was widening. It also suspended its dividend.
The 52% plunge today is just a dip on this mindboggling chart. B. Riley had become a meme stock in 2020. In less than two years through the end of 2021, the shares spiked by 400% to a terminal high of $89 during peak Consensual Hallucination, as we’ve come to call this phenomenon. At that point, the company had a market value of $2.4 billion. By November 2023, share had dropped by 80% to $18, therefore earning their entry into our pantheon of Imploded Stocks. After the rug-pull this morning, the stock trades currently at about $8.
Also note the hilarious moment (blue in the chart above) when the company skillfully leveraged market delusion by selling 2.09 million shares in a share offering on July 28, 2023 at $55 a share, extracting $115 million from the hapless public. August 8, 2023, so seven trading days later, was the last day shares closed above $55. A month later, they’d had already dropped by 16% from the price of the share sale, and what followed was the continuation of the rollercoaster ride to heck.
Bloomberg reported this morning about the widening SEC investigation:
“The US Securities and Exchange Commission is assessing whether Los Angeles-based B. Riley adequately disclosed the risks embedded in some of its assets, people familiar with the matter said. The agency is also seeking information on the interactions between founder Bryant Riley and longtime business partner Brian Kahn, the former chief executive of Franchise Group Inc., the people said. Franchise Group, or FRG, is one of B. Riley’s larger investment holdings.
“The inquiry includes a review of possible improper trading by other insiders, said the people, who asked for anonymity because the probe hasn’t been announced by the agency. Another topic regulators have asked about is the movement between companies of receivables due from cash-strapped retail customers whose repayment might be doubtful, the people said.”
And B. Riley reported this morning that it would likely book a net loss for Q2 of $435 to $475 million, or $14 to $15 per share.
The net loss would more than wipe out its equity capital of $300 million that it had reported on its Q1 quarterly report. The loss includes these write-downs and charges:
- $330-370 million in write-downs of:
Its investment in Freedom VCM, “the indirect parent entity of FRG.” Franchise Group’s retail brands still include Vitamin Shoppe, Pet Supplies Plus, and furniture seller American Freight, after having sold Sylvan Learning earlier in 2024.
Its Vintage Capital loan receivable, “which is primarily collateralized by equity interests in FRG,” it said. “The Company is in the process of completing the valuation of these items which could impact these estimates,” it said.
- $28 million impairment charge of its investment in Targus [which sells laptop bags], which B. Riley had acquired in October 2022 for $250 million.
- $25 million charge “related to a valuation allowance for deferred income taxes.”
It also disclosed today:
- No more dividends — in order preserve capital.
- Total outstanding debt as of June 30, 2024: $2.16 billion.
- Cash and cash equivalents: $237 million.
- Total cash and investments: $1.1 billion
- “Operating adjusted EBITDA” (income before interest, taxes, depreciation, amortization, and all the bad stuff): $50 to $55 million.
B. Riley said in the disclosure:
“The reports concerning Brian Kahn, FRG’s former CEO, and his alleged misconduct at [hedge fund] Prophecy have continued to create additional challenges for this investment [FRG], despite the fact that these allegations are unrelated to FRG or B. Riley. Ultimately, we believe these developments have materially impacted the execution of FRG’s business strategy, including its ability to divest or otherwise monetize certain assets.”
Riley Financial came about as a publicly traded company in June 2014 via a reverse merger with Great American Group, whose shares were traded over the counter. Great American’s name was changed to B. Riley Financial, and B. Riley founder Bryant Riley, became Chairman and CEO of the combined company. The combined company continued to trade over the counter. After the reverse merger, B. Riley acquired MK Capital Advisors, a wealth management firm.
Long ride up the promo-curve to peak Consensual Hallucination. In July 2015, B. Riley’s stock was approved for listing on the Nasdaq under the ticker RILY, where it traded thinly for around $10 a share as a micro-cap with a market cap of about $150 million. But pretty soon the stock promos started, and the thinly traded shares took off. Then the meme stock crowd got a hold of them in 2020 catapulting them during the era of Consensual Hallucination to $80, before they kathoomphed.
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