Beneficient (NASDAQ:BENF) Q1 2025 Earnings Call Transcript

Beneficient (NASDAQ:BENF) Q1 2025 Earnings Call Transcript August 14, 2024

Operator: Hello, and welcome to the Beneficent First Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Director of Communications, Dan Callahan.

Dan Callahan: Good afternoon, and thank you for joining us today for Beneficent’s fiscal first quarter 2025 conference call. In addition to this call, we issued an earnings press release that was posted to the shareholders section of our website at shareholders.trustspam.com. Today’s webcast is being recorded and a replay will be available on the company’s website. On today’s call, management’s prepared remarks may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Actual results and future events could materially differ from those discussed in these forward-looking statements because of factors described in our earnings press release and in the risk factors section of our Form 10-K and in subsequent filings we make with the Securities and Exchange Commission.

Forward-looking statements represent management’s current estimates and Beneficent assumes no obligation to update any forward-looking statements in the future. Today’s call also contains certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website, for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. Hosting the call today are CEO and Chairman, Brad Heppner; and Chief Financial Officer, Greg Ezell. Now I’ll hand the meeting over to Brad.

Brad Heppner: Well, thank you, Dan, and good afternoon and thank you for joining us. Today, I will cover three advancements the company has made in order to initiate our growth plans and renewed sales efforts starting this month. I’ll also discuss some positive news on the legal front. Then Greg Ezell, our Chief Financial Officer, will provide comments on our quarterly results. As a reminder and to help frame today’s discussion, Ben was created to provide fiduciary products and services that deliver liquidity and primary capital for holders and managers of alternative assets. We particularly focus on the target markets of high net worth individuals and small to mid-sized institutions who have been underserved when it comes to exiting alternative assets prior to their maturity.

The traditional process for these smaller investors is incredibly complex. It’s expensive and time-consuming, often taking as long as 15 months or more if liquidity can be found at all. To address this process, we built a fintech platform called Ben AltAccess with a goal of completing these very important transactions in a fraction of that time, now potentially in as few as 15 days. That’s thanks to our newest release of an automated pricing system coupled with our standardized documentation we developed to enhance this entire process. I will speak more on this in just a moment. But turning to our three advancements. First, we created through our GP Solutions group a unique primary capital fiduciary financing product aimed at general partners, which we see as an adjacent and related market to our liquidity fiduciary financings.

Q&A Session

This product is targeted to general partners who are experiencing the challenges of sourcing capital and a lack of innovative new solutions to solve this problem. Recent PEI data shows that it is now taking an average of 18 months for general partners to raise their private equity funds. That’s double what it took them just three years ago. To help this audience learn about how Ben can assist through our primary capital solutions, we have recently launched a new NASDAQ co-branded advertising campaign directed at these important prospects. Our second advancement was announced earlier this week, a significant upgrade to our AltAccess Fintech platform that we call Machine Automated Pricing System or MAPS for short, which automates the pricing of our ExAlt loans that are backed by alternative assets.

It integrates enhanced algorithmic capabilities designed to handle a higher volume of transactions by Beneficient with greater efficiency. We will now be able to provide more timely delivery of pricing for qualified fiduciary financing and enable our customers to achieve earlier liquidity from their alternative assets or for our general partners to secure primary capital solutions during their fundraising, all while fostering increased confidence and transparency. As I stated earlier because of MAPS, liquidity transactions can be completed in as little as 15 days which we believe will further set us apart in this market. Ben’s formula-based pricing system incorporated into MAPS is engineered to adjust pricing dynamically based on a broad spectrum of inputs including the latest private market metrics and public market data.

This innovation is designed to provide customers with up-to-date and precise valuations generated through a consistently applied methodology that’s intended to streamline their decision-making processes. The initial rollout of MAPS is expected to include Ben’s general partner or GP solutions group, particularly the primary commitment program I just mentioned which is focused on providing primary capital solutions and financing anchor and other commitments while also immediately deploying capital into our equity to general partners during their fundraising efforts. Following the initial deployment, we plan to extend the use of MAPS across other target markets to further diversify and enhance our product offerings with the goal of delivering significant value to both our customers and our stockholders while meeting a large and rapidly growing demand for alternative asset liquidity and primary capital commitments.

Our innovation through AltAccess and its integration of MAPS is poised to address the approximate $400 billion in market demand for liquidity restructuring solutions and primary capital. This enhanced platform aims to deliver secure, rapid and transparent transactions reinforcing Ben’s position as an innovator in the alternative asset liquidity market. Now third we have now been listed for a year on the NASDAQ. We believe that a greater portion of the market is becoming increasingly aware of our business and unique solutions. This is important to Ben, in particular, as visibility and volume helps support confidence in the company among our target audiences and facilitates our exchange trust product sales as we work to close accretive asset transactions with customers.

As I’ve shared in prior conversations, Beneficient benefits from a number of strategic advantages which provide a substantial moat around our business as we work to scale up and deliver on our vision. Primary among these are first our custom-built, patented, protected technology platform. Second, our statutory and regulatory oversight and compliance, providing confidence to our customers and counterparties with whom we transact. Third, just being in a publicly traded company with exposure to our optimum alternative assets through our ExAlt loans. And finally, thousands of industry relationships giving us access to the holders of private assets. Our financial model also provides an innovative approach that enables our stockholders to benefit from the free fee revenue generated from our fiduciary products and trust and custody services, and also the unique opportunity to benefit from the upside returns of the underlying loan portfolios, which include many of the best-known and most sought-after investments in private equity.

I am pleased to say that our custody business returned to profitability in the quarter ending June 30. Now let’s dig into the opportunity here in a bit more detail. With publicly traded equities, investors can readily open a brokerage account at one of many brokerage firms, transacting these equities on a major exchange quickly, easily, and at a nominal cost. In contrast, with alternative assets, there is no readily available communal marketplace where regulated entity exercising fiduciary powers on behalf of its investors provides dedicated permanent capital and ease of timely trade execution for liquidity. This means that most alternative assets are very illiquid, time-consuming, and expensive to transact in and hold for most investors, with the exception of well-capitalized, sophisticated institutional firms.

Despite these limitations, there continues to be an ever-increasing number of mid-to-high net worth individuals and small-to-mid sized institutions participating in the alternative asset markets. We estimate mid-to-high net worth investors in small-to-medium sized institutions, those markets in the U.S. alone account for more than $2.7 trillion of net asset value, and we believe the unmet demand for liquidity is over $61 billion annually, growing to more than $100 billion within the next five years. Further, the market for general partners seeking liquidity for restructurings in the secondary market is in excess of $100 billion annually. We feel we are in the right position to address this demand for secondary market liquidity for mid-high net worth investors, small-to-medium sized institutions and general partners with a combined market of over $150 billion today.

But that is just the market for existing alternative investments. Going back to my earlier comments about our new primary capital solution for GPs, as fund sponsors continue to launch new products and face an increasingly competitive and challenging fundraising environment, we believe there is up to approximately $330 billion in additional primary capital demand over the coming years, which we can finance from our balance sheet in the same manner. The deals we have done to date demonstrate that our architecture can deliver our products and our board recently approved an exchange trust product plan to complete up to $5 billion of fiduciary financing to customer exalt trusts through our exchange trust transactions. As we have highlighted in the past, our business plan is to finance liquidity transactions at a discount to market value, collect services revenue from the fiduciary and custody services we provide and share in the upside on investments.

Those investments that back our exalt loans upon maturity. This is a distinct contrast to most other private equity companies in the market today who typically only participate as a broker, a manager, a trader, or fiduciary, not in the multiple of these roles as Ben does. As Ben liquidity closes liquidity and primary capital transactions with our customers, our ExAlt loan collateral portfolio is expected to proportionately increase. Our plan is to grow and scale our capital commensurate with the demand for liquidity and primary capital products and in a manner that strengthens Ben’s balance sheet over time. In order to achieve an optimized risk adjusted return and diversification under our endowment model, operational economies of scale, improved margins and tangible book value for our shareholders, our company must innovate and market new fiduciary products and services.

Now, before I hand off the call, I want to provide an update on certain legal proceedings where we have received positive news in the last quarter. Last month, the Texas State District Court vacated its entirety previously disclosed arbitration award against the company in the aggregate amount of approximately $55.3 million pertaining to a former member of the board of directors of Beneficent Management LLC who challenged the termination of certain equity awards under two incentive plans. The court directed the parties to file motions requesting any further relief that may be available within 20 days of that order. The company intends to continue to vigorously defend itself in the event the claimant seeks any additional relief or in the event he seeks an appeal in connection with the order.

As we mentioned on the last call and highlighted in press releases and filings, the company and key members of its leadership received letters from the SEC advising us that the Securities and Exchange Commission staff has terminated its investigation and does not intend to recommend an enforcement action by the SEC under the previously issued Wells notices. And regarding Beneficent’s lawsuit for defamation against the Wall Street Journal’s reporter Alex Gladstone, as previously reported, a federal judge in the United States District Court for the Eastern District of Texas ruled against a motion to dismiss by the defendants, noting, and I quote, “The article repeatedly juxtaposes facts and uses provocative language in ways to convey the defamatory jest identified by the plaintiffs.” And that Beneficent, and I quote again, “Repeatedly notified Gladstone of specific factual errors in the article and that Gladstone nevertheless rejected or ignored their corrections to serve his preconceived agenda.” The company believes its case is just and will continue to pursue it with the utmost determination and discipline.

A few weeks ago, on July 26, Ben filed to add the Wall Street Journal’s publisher, Dow Jones and Company, Inc., to the suit. With those updates, I will turn the call over to Beneficent’s Chief Financial Officer, Greg Ezell, to provide the financial update for the quarter. Greg?

Greg Ezell: Thank you, Brad. Let’s now turn to our quarterly results and financial position as of June 30, 2024. First, I’ll start with a few highlights from the quarter. We reported investments with a fair value of 331.4 million, up slightly from 329.1 million at the end of our prior fiscal year, which served as collateral for Ben Liquidity’s net loan portfolio of 255.9 million and 256.2 million, respectively. Revenues were 10.0 million in the first quarter of fiscal 2025, as compared to a negative 2.7 million in the same quarter of fiscal 2024. Due to the court ruling vacating the previously disclosed arbitration award, this resulted in a release of the recognized loss contingency accrual in the amount of 55.0 million being reflected in the June 30, 2024 Statement of Comprehensive Income and Loss.

Excluding the non-cash goodwill impairment Due to the court ruling vacating the previously disclosed arbitration award, this resulted in a release of the recognized loss contingency accrual in the amount of $55.0 million being reflected in the June 30, 2024 Statement of Comprehensive Income and Loss. Excluding the non-cash goodwill impairment and the loss contingency accrual release in each period as applicable, operating expenses were $17.3 million in the first quarter of fiscal 2025, as compared to $56.9 million in the same period of fiscal 2024, which represents a decrease of 70%. Next, we’ll move to our primary business segments, Ben Liquidity, which generates interest revenue for supplying liquidity off the balance sheet, and Ben Custody, which produces fee revenue for the use of the platform and trust services.

As typical, I will be focusing my discussion on these business segments as it’s their operations, along with corporate and other, that accrues to Ben equity holders. During the first quarter of fiscal 2025, Ben Liquidity recognized $10.8 million in base interest revenue, up 1.9% from the prior quarter due to slightly higher carrying value of loans receivable offset by higher allowances for credit losses. Operating loss for the first fiscal quarter was $0.5 million compared to an operating loss of $29.4 million for the fourth quarter of fiscal 2024. This improvement was primarily due to lower credit loss adjustments and lower operating expenses, partially offset by higher interest expense. Moving on to Ben Custody, NAV of alternative assets and other securities held at period end was $380.7 million compared to $381.2 million at March 31, 2024.

The decrease was driven by monetization from investments exceeding the increase in the fair value of the investments held in custody. Revenues applicable to Ben Custody were $5.4 million in the first fiscal quarter, compared to $5.6 million for the prior quarter. The slight decline was due to lower NAV of alternative assets and other securities held in custody. Operating income for the quarter was $1.3 million compared to an operating loss of $50.0 million in the prior quarter, primarily due to lower non-cash goodwill impairment of $3.1 million this quarter compared to $28.7 million in the prior quarter. Additionally, in the quarter ended March 31, 2024, we recognized $25.5 million provision for credit losses related to accrued fees collateralized by securities of our former parent company compared to no such credit losses in the current quarter.

Adjusted operating income for the current quarter was $4.4 million compared to adjusted operating income of $4.0 million for the quarter ended March 31, 2024. The increase was primarily due to lower operating expenses, which is mirroring the decrease in expenses we are seeing across the organization as we continue to look for opportunities to operate more efficiently. At the end of the quarter, the company had cash and cash equivalents of $4.4 million and total debts of $120.6 million. Distributions received from alternative assets and other securities held in custody totaled $7.2 million for the quarter compared to $12.0 million for the prior year period. That concludes my remarks on the quarter, but I would like to make one additional announcement.

Ben will be presenting at the Sidoti Virtual Conference tomorrow afternoon and hosting one-on-one discussions for investors, so reach out to your Sidoti representative if you are interested. With that, we close out today’s webcast. Thank you for your participation and have a great rest of the day.

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Operator: Ladies and gentlemen, thank you for participating. This does conclude today’s program and you may now disconnect.