Firstly, that button doesn't do a factory reset, it simply forces a restart of the device. It's like pushing the reset button on a PC. A factory reset will wipe all the books on the device, put the original firmware back on and start the setup process.
From your description, my guess is that the database on the device is corrupt. The simplest way to fix that is to go into the settings and sign out of your Kobo account. This will remove the current database and put an empty on in place and do a restart. Then it will prompt you to setup the device and load all the sideloaded books into the database and hence the library. You will need to authorise the device to read DRM'd books. You might need to remove them and re-add them before they will work.
Alternatively, you can do a factory reset from the "Device information" page of the settings. This will clear everything and put you back to the "out of the box" state.
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