RILY shares jump 20% today, what is behind the volatility?

B. Riley Financial, Inc. (BRF), a leading diversified financial services company, has been a volatile name in the markets. The stock is up over 20% today. The 16 million float and 68% short interest lend itself to massive intraday moves. It opens opportunities for traders but with those opportunities comes great risk. Traders would do well to play in smaller size when attempting to navigate the choppy waters around RILY shares. First and foremost is understanding the issues facing the institution. 

The company posted a wider than expected quarterly loss, cut its dividend in half, and delayed its annual filing as it reviews transactions with a key client that has led to shorts piling into the name. 

Shares of RILY have been cut in half over the past 12 months due to concerns around deals with Brian Kahn, a former business partner who was blamed for the collapse of a hedge fund called Prophecy Assets. This fund financed the purchase of Franchise Group, Inc. which is a collection of retail chains that he would take private with the help of B. Riley. 

Short sellers believe that fraud was committed by Prophecy and that B. Riley could be on the hook for some of the legal issues. This has led to weakness in shares of RILY. The news and speculation around the fallout has created volatility in RILY shares. 

Looking at last week"s earnings, RILY reported a mixed set of results for the fourth quarter of 2023, with a wider quarterly loss, a halved dividend, and a delayed annual report filing. The company cited a review of transactions with a key client, Brian Kahn, and the appointment of Moelis & Co. to assess strategic options for its appraisal and asset-disposition businesses. Despite these challenges, B. Riley Financial's Capital Markets segment revenues increased significantly, driven by investment banking and institutional brokerage activities.

BRF's fourth-quarter loss totaled $70 million, or $2.32 per share, compared to $59 million a year earlier. Revenue dropped to $346 million from $382 million. The dividend was cut to 50 cents per share from $1, and the company delayed its annual report filing. CEO Bryant Riley stated that the dividend reduction would enable the company to focus on investing in its business, including potentially repurchasing debt at attractive prices.

B. Riley Financial's Capital Markets segment revenues increased by 75% to $575 million in 2023, up from $328 million in 2022. Segment income also increased by 143% to $198 million in 2023, up from $82 million in 2022. The company's board has approved a quarterly dividend of $0.50 per common share, payable on or about March 22, 2024.

B. Riley Financial's delayed annual report filing is due to the dedication of time and resources spent on reviewing the company's transactions with Brian Kahn, the former head of Franchise Group Inc. The company is compiling the required information to complete the Annual Report and does not anticipate any significant changes to the financial results for the fourth quarter and year ended December 31, 2023.

The company has retained Moelis & Co. to help assess strategic options such as a sale for its appraisal and asset-disposition businesses, formerly known as Great American Group. Proceeds from a potential transaction could be used to de-leverage B. Riley Financial's balance sheet, repurchase shares and bonds in the open market, and invest in the platform, particularly B. Riley Securities, the cornerstone of the company's diversified platform.

In conclusion, B. Riley Financial, Inc. faces several challenges, including a wider quarterly loss, a delayed annual report filing, and a review of transactions with a key client. However, the company's Capital Markets segment revenues have significantly increased, driven by investment banking and institutional brokerage activities. The company's Board of Directors has approved a quarterly dividend, and the company is exploring strategic options for its appraisal and asset-disposition businesses, potentially including a sale. Proceeds from a potential transaction could be used to de-leverage the balance sheet, repurchase shares and bonds, and invest in the platform.