by B. Riley finally files 10K, FRG Litigation Trust ramping up
B. Riley Financial finally filed its 10K for fiscal 2024, doing so on late Friday afternoon. So, finally we know at least a bit more about the nearly half-billion in losses (“impairments”) attributable to the Franchise Group bankruptcy.
Speaking of FRG’s Chapter 11, which wound down in July, the trustee for the Litigation Trust established by the final plan last week filed a motion to gain access to confidential records, indicating that the trust and its trustee, Lawrence Hirsh, are gearing up to seek recovery of FRG assets through the courts.
This Litigation Trust was a key feature of the judge-approved plan for coming out of bankruptcy, and a highly contested one at that. More on this after a look at B. Riley Financial’s 10K.
The much-delayed filing comes on the heels of replacements of both BRF’s CFO in May and its independent auditor this month, and it coincides with word that BRF will not make a Sept. 29 deadline for its 2025 quarterly reports. BRF states simply that it is “unable to file,” even though these quarterlies are required to keep its NASDAQ listing.
The 10K we do have shows BRF with 2024 revenues of $839 million, which is down $627 million from 2023’s $1.5 billion. Cited as causes for the deep drop-off are bad loans extended to, among others, FRG’s holding company, Freedom VCM, as well as trading losses and declines in income from securities lending. Nearly three-fourths of that loss can be tied to FRG.
BRF carried a $200 million loan to former FRG CEO Brian Kahn’s affiliate, Vintage Capital Management, a loan secured by Freedom VCM equity. With FRG’s Chapter 11 filing, that equity was erased, forcing a write-down of another $220 million, according to the 10K. The loan plus the equity loss add up to $444 million, which not surprisingly proved to be quite a drag on earnings, according to the 10K.
Asset sales
BRF and its erstwhile subsidiary Great American Group have been at the center of several bankruptcies in furniture in recent years other than FRG’s, including Conn’s/Badcock, Z Gallerie and United Furniture. Through its BB (bebe) subsidiary, BRF is also at least a part owner in 62 Buddy’s Home Furnishings stores, or was as of the FRG bankruptcy wind-down two months ago. The BRF-Bebe-Buddy’s relationship is quite murky.
The 10K shows an operating loss of $45 million and a net loss of $775 million. For common shareholders, these dips add up to a net loss of $772 million, which compares to a $108 million decline a year ago and a $168 million loss in 2022.
There was some good news, however. BRF did manage to pare down its debt load to $1.8 billion from $2.4 billion for the year prior, the result of several transactions and selloffs of subsidiaries. About a year ago, BRF sold Great American to Oaktree Capital for $400 million. Great American handled the Conn’s and Badcock store closures.
Also sold off was BRF’s Lingo/Bullseye telecom/cloud business and a 6% equity stake in BRF to Oaktree in exchange for a debt facility worth approximately $160 million, according to the 10K.
BRF also announced that eventually it will report a profit for the first half of 2025 on net income of between $125 million and $145 million, which is quite a turnaround, one likely to stave off short sellers’ predictions of an imminent BRF bankruptcy. In the 10K, BRF blames “the many continuing unfounded allegations by short sellers” for harm to its reputation.
Ongoing investigations
Citing dealings with FRG, in particular the $2.6 billion take-private deal in August 2023 it brokered, as well as several substantial loans to and investments in FRG subsidiaries, BRF acknowledges “significant legal liability” resulting from these dealings, liability that could lead to “substantial damages.”
Also cited are investigations by the SEC, lawsuits brought by former shareholders and “ineffective risk management processes and strategies.”
Kahn is mentioned in the 10K no fewer than 66 times, underlining the inextricably linked fortunes of FRG, BRF, Kahn and BRF CEO Bryant Riley. B. Riley made at least 10 loans to Kahn and Kahn-controlled holdings from 2018 through 2023, public filings show.
“Recent events and developments related to our investment in Freedom VCM and our prior business relationship with Brian Kahn and related to the SEC subpoenas we received have had and may continue to have adverse effects on our business, results of operations, reputation and stock price,” the 10K states.
Transactions with FRG are cited for adversely affecting the company’s reputation, operations and stock price, and for continuing to do so through ongoing legal proceedings and “unfounded” allegations by short sellers.
‘No involvement’
BRF asserts that it had “no involvement with, or knowledge of, any of the alleged misconduct” at Prophecy Asset Management, the hedge fund being investigated by the Department of Justice. Separately, Kahn has also claimed that he had neither involvement in nor knowledge of what was a $294 million fraud scheme at Prophecy admitted to by Prophecy co-founder John Hughes. Though multiple news reports have named Kahn as Hughes’ “co-conspirator,” no charges have been brought against him.
Multiple shareholder and class action lawsuits are tied to BRF’s dealings with Kahn and the FRG take-private transaction, the 10K acknowledges. Allegations in these civil suits include securities fraud, breach of fiduciary duty and failure to disclose risks, claims the 10K states are “meritless.” BRF is named as a defendant in three class action suits, one each brought in January, May and July 2024.
In addition, a claim for more than $32 million has been made by the liquidation trustee for Sorrento Therapeutics against a BRF subsidiary as part of Sorrento’s own bankruptcy. BRF’s motion to dismiss the claim was denied just 10 days ago, according to the 10K. BRF states that the effort to claw back the $32 million in transfers “lacks merit” and that it “intends to continue to assert its statutory defenses to defeat such claims.”
Perhaps because the 10K filing came so late in the day, BRF share prices were able to surpass their 50-day moving average on Friday. The average is $5.68, and the share price finished the day and the week at $6.75 on heavy volume of nearly 1.5 million shares, according to Yahoo Finance.
About two weeks prior to filing its delinquent 10K, BRF dismissed its independent accounting firm, Marcum, and replaced it with BDO Global effective Friday, or the time of the 10K’s filing. BDO will perform the independent audit for fiscal 2025.
Checking in Wilmington, Delaware
Back to FRG, Hirsh motioned the court on Sept. 5 for a change to the judge’s protective order that limits who can see confidential documents. Hirsh’s purview is to investigate and possibly sue to recover losses and assets deemed by the trustee to have been misappropriated. To do this, Hirsh argues that he and the new board need access to key documents, including investigative reports from independent directors.
Over an objection filed by Kahn and his wife, equity holders in Freedom VCM, the FRG bankruptcy judge approved the Litigation Trust and funding of its efforts to the tune of $13.3 million, or precisely the same amount that the Kahns claimed they were owed as creditors of the FRG holdco.
A hearing on Hirsh’s motion is scheduled for Sept. 30; objections to the motion were due Friday.
It is likely that Hirsh is interested in access to the Wartell Report summarizing the independent investigation conducted by Michael Wartell. Appointed by FRG debtors, Wartell said in his declaration of support of the final settlement that claims the Litigation Trustee might pursue include “the lack of disclosure of Mr. Kahn’s pledging of his Franchise Group shares to B. Riley”; the source of Kahn’s ownership and funding of the shares; the take-private transaction; transfers of $54 million in funds from FRG’s holding company to Freedom VCM Holdings; and the decision to file for bankruptcy, according to Wartell’s declaration filed with the court.
Arhaus v. Chi
As long as we’re rounding up the legal news affecting our industry from courts throughout the country, reports from San Francisco tell us that Arhaus has dropped its claims “without prejudice” against RH concerning Lisa Chi leaving Arhaus for RH in May. Remaining, however, is the suit by Arhaus naming specifically Chi.
Both Arhaus and RH are HNN Top 125 retailers, and both trade at the upper end, sometimes with similar stylings of home furnishings.
Arhaus claimed in a court filing July 24 that Chi misappropriated trade secrets and confidential information, information Arhaus claims she then took with her to become president at RH. Arhaus also claims that these misappropriations violate her confidentiality agreement signed in 2022.
Chi has until Oct. 14 to file a response. She held the title of chief merchandising officer at Arhaus.
Finally, two bits of esoterica.
First, it strikes me that available at a bargain price are the name and intellectual property of both Conn’s and Badcock. Our former Badcock store here in northwest Georgia still has its signage up and a branded truck parked in the strip center parking lot. The store is shuttered, but the passive advertising lives on. What’s to stop someone from swooping in and grabbing all this remaining brand equity and simply unlocking the doors? (I know it’s not quite that simple because of leases, utilities, etc. But it’s almost that easy.)
I wonder the same about Conn’s. Maybe Shaq and the ironically named Authentic Brands group is interested?
Secondly, how is it that bankruptcies can outlast virtually everyone directly involved with them and longer than the bankrupting company ever existed in the first place? Remember Furniture Brands International’s bankruptcy back in September 2013? That dumpster fire lives on. I just checked the docket, and there are motions filed as recently as November 2023, with no action indicated on the final motion requesting yet another delay. So, the FBI bankruptcy could actually be described as ongoing!
Why didn’t I go to law school?
