Good morning, and welcome to the B. Riley Financial's Third Quarter 2023 Earnings Call. My name is Britt, and I will be your call coordinator. Earlier this morning, B. Riley issued its third quarter earnings release. A copy of the release can be found on B. Riley's Investor Relations website at ir.brileyfin.com, or on the right side of your screen if you're joining us today via web. Today's call includes prepared remarks from the Company, which will be followed by a question-and-answer session with the management team. Joining us today from B. Riley are Bryant Riley, Chairman, Co-Founder and CEO; Tom Kelleher, Co-Founder and Co-CEO; and Phillip Ahn, CFO and COO. After management’s remarks, we will open the line for questions. As a reminder, today's call is being recorded, and an audio replay of this call will be available later today. Finally, 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, you may proceed.

Welcome, everyone, and thanks for joining our call. During the quarter, we continued to execute our platform strategy, generating a meaningful amount of operating EBITDA, while at the same time, maintaining disciplined focus on balance sheet flexibility to pursue our continued growth. We generated operating adjusted EBITDA of $107.5 million for the third quarter of 2023, up 34% from Q2 and operating EBITDA of $267.8 million for the first nine months of 2023. Net loss of $76 million was driven by investment losses, which were primarily unrealized and relates to changes in mark-to-market valuation on investments that we hold. As we noted before, our investment gains and losses for any particular period are not indicative of our overall business performance, and we have a high degree of confidence in these investments. Our third quarter operating results highlighted strength across our platform with increased revenue and client activity levels picking up from earlier this year. To put this into perspective, our Q3 operating revenue was the highest quarterly total in our firm's history, and our Q3 operating EBITDA ranks third highest. On a year-to-date basis for the first nine months, our 2023 operating revenue also ranks highest, and operating EBITDA ranks second. This is a direct outcome of our strategy in the steps we've taken to change the relative mix of stable, lower-margin revenue versus episodic higher-margin revenue. A few highlights for the quarter include strong performance from retail liquidation and another record revenue period for advisory services, which continue to perform -- outperform as an additional bright spot on our platform with increased contributions from both our specialty consulting and appraisal units in addition to a strong quarter from our real estate restructuring division. During the quarter, we also saw a meaningful increase in investment banking activity and improved performance…

Thanks, Bryant. For the third quarter of 2023, B. Riley generated total revenues of $462 million, which represents a 48% increase from $312 million for the same period in 2022. Total revenues also increased by 86% to $1.3 billion for the first nine months of 2023 compared to $699 million in the prior year period. Growth in revenue during the quarter was primarily driven by our Auction and Liquidation segment, Consumer segment and Financial Consulting segment. On a GAAP basis, we recorded a third quarter net loss of $76 million, primarily attributable to unrealized investment losses of the equity investments that we hold. Year-to-date, we reported a net loss of $16 million. Despite the markdowns in our investment portfolio, our platform continues to deliver strong operating results. For the third quarter of this year, operating revenues increased to $473 million, up from $319 million in the prior year quarter. Operating revenues increased to $1.22 billion for the first nine months of 2023, up from $843 million in the same prior year period. Third quarter operating adjusted EBITDA increased to $107.5 million, up from $106.2 million in the prior year quarter. And year-to-date, operating adjusted EBITDA increased to $268 million, up from $265 million in the first nine months of 2022. As a reminder, adjusted EBITDA and our metrics for operating and investment results may be considered non-GAAP financial measures. Investors can find additional details relating to these metrics, including a reconciliation to the nearest GAAP measures in our earnings release and our financial supplement, which will be posted to our Investor Relations website. Now turning to a summary of our balance sheet as of September 30. At quarter end, we had approximately $252 million of unrestricted cash and cash equivalents, $1.2 billion in net securities and other investments owned at fair value and $549 million in loans receivable at fair value. Total cash and investments was $2.05 billion, including $58 million of other investments reported in prepaid and other assets. Total debt as of September 30 was approximately $2.36 billion. Total debt net of cash and investments was $311 million at quarter end. Finally, we declared our regular quarterly dividend of $1 per share, which we paid on or about November 30 to stockholders of record as of November 20. In addition, our Board has approved an annual share repurchase plan under which B. Riley may repurchase up to $50 million of our common shares. This completes my financial summary. I'll now turn the call over to Tom Kelleher, our co-CEO, to discuss our business segments. Tom?

Thanks, Phil. B. Riley's unique combination of businesses and collaborative team approach has enabled us to continue to deliver against the backdrop of challenging markets. Throughout 2023, we have remained focused on executing on our strategic plans by continuing to invest in our platform, extending and strengthening our market share and building out our execution capabilities. Excluding our investment results, our Capital Markets segment contributed operating revenues of $151 million and operating income of $51 million during the third quarter. Within this segment, revenues from B. Riley Securities represented a year-over-year increase of over 10% with investment banking fees revenue up over 100% from Q2, driven by significantly higher underwritten offerings. In addition to adding several new clients in Q3, we completed key mandates for several repeat clients, including Harrow Health and Landsea Homes. Our M&A pipeline is beginning to bear fruit, and we expect activity to accelerate going into 2024. B. Riley Securities has established its leadership in capital formation for small caps in the middle market. As we continue to focus on developing and adding talent to expand our coverage, we believe we are positioned to increase market share as investment banking activity returns to more normalized activity levels. In our Wealth Management segment, revenues increased both year-over-year and on a sequential basis to $51 million. Our third quarter results demonstrate continued progress in our strategic initiatives to realign this business with improving margins and an upward trend in reoccurring revenues. At quarter end, our wealth assets under management totaled $24 billion, and our producer base remained flat at approximately 400, representing a balanced mix between independent and W-2 advisers. As capital market activity improves, we believe there is an opportunity for more upside in this business. In Auction and Liquidations, B. Riley Retail Solutions had a robust…

Thanks, Tom. Before we open up the call for Q&A, I just wanted to take a few moments to address the news surrounding FRG. It wouldn't be appropriate for us to speculate or provide commentary on the reported allegations. However, I do think it's important for us to lend context to how we view FRG as a business and our rationale for that investment. During the quarter, we announced our role leading the financing of FRG's $2 billion take-private transaction. We placed a significant portion of the equity and principally invested in the deal alongside management and other co-investors. We own a little over 30% equity interest in the private entity in connection with that transaction. FRG is comprised of six distinct businesses with over 3,000 combined locations across the U.S. and Canada, including American Freight, Badcock Furniture, Buddy's Home Furnishing, Pet Supply Plus, Sylvan Learning Centers and the Vitamin Shoppe. Given our view that FRG's public valuation was below the sum of its parts, we saw a compelling opportunity to participate in its take private as do many co-investors of that deal. We invested in FRG based on the fundamental of those distinct businesses, that is we underwrote and that is what we invested in, the FRG business. And our confidence in these businesses has not waned at all. From an operational perspective, FRG is not run by any one individual. As franchise businesses, these companies are run by six different management teams that operate with their own infrastructures. FRG was formed through the purchase of shares of the founder of Liberty Tax in 2018. We purchased these shares at approximately $8 per share, and we were a largest shareholder than the current management team at that time. We realized a return of over 30% IRR over the next few years on that original investment. We know these assets. As CEO, Brian Kahn was the architect to help put these businesses together to form FRG as it is known today. I've known Brian for many years and have had no direct experience with what has been alleged. We learned of this matter late last week like many others, and we continue to closely monitor relevant developments. However, I have no interest in going through hypotheticals and speculation. B. Riley's business is much more than just FRG and to the extent to which we have ever needed to work to protect the firm's interest and that of our investment partners, we have and always will. With that, we are ready to open for Q&A. As always, we're happy to address any questions within the context of our results and our overall business. Operators, please open the line for questions. Thanks.

[Operator Instructions] my first question comes from Sean at Charles Lane Capital.

So on the consumer side, how big did the revenue increase? Like what contribution came from Targus on that?

Phil, do you have that number? I can tell you that effectively, I can break it down for you on EBITDA and will come back to you. But Targus was close to breakeven EBITDA for the quarter. The brands business represented the vast majority of the EBITDA, and the brands business is doing great.

And just remind me, what is that Scotch & Soda, is that currently impacted?

So we have six brands that consist of smaller brands that we originally acquired from Bluestar. And then the bigger ones are Justice, Hurley, Scotch & Soda and then we also have a majority position in PB. So those are the majority. We're actually seeing some exciting momentum in Limited Too. That's one of our six brands where that's got a kind of many of the children that shop there are now mothers, and there's a lot of momentum around that brand. So it's -- we'll see what happens, but there's definitely some momentum there.

Got it. And then on Auction and Liquidation, big quarter. How should we think about the cadence of that business I mean, for the current quarter, are you seeing engagements? How do we kind of model that out?

Yes. So look, we have tried to be really clear about how we think about the episodic businesses. And for a long time, the broker dealer was really the driver of the EBITDA and episodic businesses. We have always known that liquidation and retail advisory would have its time, and that business has been on breakeven when there's nothing going on through some advisory stuff and things like that. And that's the same with the broker-dealer. When there's no capital markets and there's just no M&A, which has been the environment kind of off and on over the course of the last three or four months, our goal is just to breakeven and to have meaningful upside when things turn. And I think what you saw this quarter is there is a little bit more distress in the retail side, both domestically and Europe. We are a leader there, and we had one of our best quarters ever. And I can't tell you that the timing of the next event, it's really short usually. We will find out a month before there's a company that the banks may want to do something. Usually happens in Q4 because what you typically do is give a retailer through the holidays. So I will say that as I look forward in the next year of that business, I think it's going to be a very strong business. But I can't tell you that like there's an exact backlog. There's a lot of activity.

Okay. A lot of news out there on a particular landlord recently filing for bankruptcy. Can you comment on just is your real estate solutions business seeing any uptick in activity?

Yes. I mean we're definitely seeing an uptick in activity. I just can't quantify it for you.

Okay, fair enough. And then just last for me, just on the buyback, timing of that. I mean the stocks obviously have been hit recently. Is that something that's going to be felt soon, or how are you guys thinking about that?

I mean it's obviously something that we've done in the past, we'll do in the future when we think it makes sense. I mean, realize that what is not on our balance sheet is the decision we made to sell bonds to a broad array of buyers because yield was hard to get two years ago. And that is a huge asset. If we were to buy those bonds back in the open market, that would be from where we issued them over $280 million profit. So we have -- we can do that. We have to determine whether we think the opportunities are better than the yield that those trade. Obviously, we have equity out there that is -- has a very low yield, and we feel like that's very undervalued. Or will -- but the other thing I've said, Sean, before is the number one thing we will do is we will utilize those dollars for retail advisory situations, liquidations where we are a principal that's our best IRR. And then there's just not a lot of buyers of small-cap stocks and there's not a lot of funders of small cap companies. And this is a time where we think we can use our balance sheet to really create a lot of value for our shareholders. If you remember the last go around, after COVID, I mean, we changed our whole business based on what we did there. Our EBITDA doubled. And we think that this environment is a great environment for us. We are incredibly well positioned to take advantage of that.

Okay, yes. I guess just you're trading at -- the stock is at a kind of alarmingly high yield. Any thought of maybe diverting some of the funds you guys use for dividend towards either more buybacks or buying the bonds, just given how high your dividend deal is today.

Look, I think that we would -- the dividends are very important to us, and it's important for us to return a portion of our EBITDA to shareholders. I think what we could do if we wanted to be more aggressive around on those things. We have some -- like the brand assets are amazing assets. They generate $50 million of dividends. Those assets are super valuable. Do we think from Tom -- and the partners here are in that business are amazing and I'm a huge fan. But is that something that historically has traded at 12x, maybe trade at 8x or 10x now? That's something that if things got -- if there was an opportunity for us to do something dramatic because our shares, our business is being undervalued, we would not hesitate to do something like that.

[Operator Instructions]

We have an e-mail in question. This is Mike Frank. Bryant, can you walk through the updated recurring EBITDA and then go through the forward interest expense and maybe touch on the breakeven for B. Riley Securities.

Sure. So the breakeven EBITDA, when you're talking about breakeven where we're paying for our whole dividend, right, paying all on interest expense. It's in and around $85 million. And let me give you how we underwrite that $85 million and then you can kind of work through those numbers. So the way that we underwrite that $85 million is the broker-dealer or for a long period of time, was averaging $30 million a quarter in EBITDA. We just -- we underwrite that at $15 million a quarter. Obviously, it did more this quarter. The retail advisory can be all over the place, but we underwrite that to $7 million a quarter. Appraisal advisory, I mean, look at those numbers, those numbers -- the appraisal business is up 35%. Advisory is up far more than that. Those two businesses this quarter did over $10 million in EBITDA. So we underwrite that to $8 million to $10 million in EBITDA per quarter. So you're at about $30 million. Telecoms, we were underwriting that to closer to $70 million, $80 million a quarter. I think it's in and around $15 million to $17.5 per million quarter, the telecom assets. Wealth, we underwrite to about $4 million per quarter. Brands, including BB, $12 million per quarter, Interest income in and around $25 million per quarter, $25 million to $30 million per quarter, and Targus, $10 million per quarter. So Targus right now is -- last quarter was flat. It's going to be EBITDA positive this quarter, and we are starting to see the PC market come back for many, many years. That business generated at least $40 million in EBITDA per quarter. So we're not going to -- we recognize right now that, that business is up but in our long-term model, we underwrite that. So if you add all that up, it comes out to somewhere and then take $10 million from Core it comes out to somewhere in and around $85 million, $90 million. And then there's -- we think those are the conservative views of each of those businesses.

And then, Phil, do you want to comment on the interest expense going forward and any other corporate overhead that might be included in those recurring businesses?

Well, I can just comment on the go-forward interest expense. We're roughly run rating at $42 million a quarter in interest expense that when we netted against some of our investments and the net interest income that we're receiving, the net of that is in the low 20s. And the -- when Bryant was just talking about the operating business that is inclusive of allocations for corporate.

So the quick math, quick math is if you take 90 and we have D&A of 12 -- excuse me, we have interest of, call it, 40. It depends whether we're going to pay taxes or not. The dividend -- there's no CapEx in this business, very little CapEx. And you always have a minimum amount of taxes, but that's kind of the math.

Our next question comes from Brett at Nokomis Capital.

Bryant, could you just remind us which brands were the -- where essentially your royalty income goes into dividend? And if there's anything else that was added into that line-item year-over-year.

Yes. Phil, do you have the breakdown of each of the brands roughly? I mean do you have that number handy.

I'm sorry, actually, I don't have that, but I can follow up on that with you, Brett.

Okay.

Yes. Brett, the number you're solving, the Brands business had a really strong quarter. Hold on will just give you a little bit to have it here. Just give me one second. But the Brands business had a really strong quarter. So six brands for the quarter was in and around 3-ish and change million. Hurley Justice was in and around $9 million, that's $9.5 million, that's higher than typical. Scotch & Soda, we had a little bump from Scotch & Soda because they have done a really good job of kind of getting to a spot of liquidating the assets before it's just a regular brand. So we picked up a couple of million there. So that's probably the biggest difference you're seeing is the Scotch & Soda.

Got it. Because I can't remember the timing. Scotch & Soda was not in Q3 a year ago?

No. It was not.

Okay. So when I think of that -- I think it went from $9.2 million to $12.9 million of dividend income, I should think about a moderate amount of same-store growth, probably mostly limited to which we're seeing in, I guess, a bigger presence in Walmart and then adding Scotch & Soda get to that growth.

Yes.

This concludes today's Q&A. I'd like to turn the call back to Mr. Riley for his closing remarks.

Thanks, operator. I want to actually answer some questions that I don't think were asked, and I think there's noise out there, so I want to address it and be crystal clear. We would have bought all of Franchise Group. We are a huge fan of that business, and it's a really simple analysis. They have a great steady EBITDA in Vitamin Shoppes. Pet Supplies Plus, which is bought for $900 million is going to get to $140 million in the next couple of years. American Freight is an unbelievable business that faces the same challenges at Targus. That's a business that was doing $110 million in 2021 and went down along with Badcock. That was our opportunity. And we would buy that over and over again. We were a founder in that business. We have been a great -- we've got a great partnership with Brian. We have a great partnership with other management teams. We've helped fund Badcock. We sold the real estate. We made 27% IRR on our receivables. We made the first batch, we made over 40% on the second batch. We have $50 million exposure there now, which is money good. And we, over time, determine that the better path was to allow shareholders that were involved in Franchise Group, many of which rolled as well as management, many of which purchased in the deal to participate. So there should be no confusion where that is. And I know that today, a statement came out from Brian denying any involvement and what happened with Prophecy, and that's good enough for me. So I'm -- I don't -- I want to just be crystal clear. I believe we are going to make a lot of money for our shareholders and Franchise Group, just like we did in the first investment when we bought a big chunk of Liberty Tax at eight and just like we did in Badcock, and we will continue to do so. So I want to answer that question, and we'll go back to closing the call. And by the way, I just want to again, shout out to everybody that's a partner with us. Many of our shareholders that invested in our initial deal at five are still shareholders, and we appreciate your partnership. Our -- the people that we work with, our partners are sort -- they're the best out there, and I am so excited about how we're going to create value over the next year with a little bit of dislocation out there. So, thank you, operator, and we look forward to next quarter. End of Q&A:

Thank you. Before we conclude today's call, I will provide B. Riley's financial safe harbor statement, which 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 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, statements regarding our excitement and the expected growth of our business segments. 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, Inc.'s periodic filings with 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, 2022, under the captions Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations as applicable. Additional information will be set forth in B. Riley Financial's quarterly report on Form 10-Q for the quarter ended September 30, 2023. 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 today for B. Riley Financial's Third Quarter 2023 Earnings Conference Call. You may now disconnect.