Earnings Call Transcript - BENF Q2 2026

Operator, Operator

Good day, and thank you for standing by. Welcome to the Beneficient Second Quarter Fiscal 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Callahan, Director of Communications. Please go ahead.

Dan Callahan, Director of Communications

Good morning, everyone. And thank you for joining us on Beneficient's Fiscal Second Quarter 2026 Conference Call and Webcast. In addition to the call and webcast, we issued a results press release last Friday that was posted in the Shareholders section of our website at shareholders.trustben.com. Today's webcast, as the operator indicated, 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 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 Beneficient 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. At this time, I am pleased to introduce James Silk, the interim CEO for Beneficient. He was appointed to that position by the Board in July of this year. Mr. Silk previously served as Executive Vice President and Chief Legal Officer for Beneficient from January 2020 until May 2024. During that time, he was integral to the development of the company's corporate structure, the completion of the company's business combination transaction, and the navigation of the complex legal issues associated with running the company's business. Additionally, Mr. Silk oversaw the company's operations, underwriting risks, and legal groups. After James completes his remarks, Greg Ezell, Chief Financial Officer, will provide some financial highlights. I'll now hand the call over to James.

James Silk, Interim CEO

Well, a lot has happened over the past 6 months. We have faced some challenges. The potential of Beneficient's business and our market opportunity remains strong. When I talked to the Board about returning back in July, it was clear they were united and committed to Beneficient, which is important to me. Since my return, management, I, and others have been focused on stabilizing the company, getting it to a place where we can execute on our mission to provide liquidity and primary capital to customers in the alternative asset market. It's our core business. And I am committed to that mission, and it has been energizing to lead the charge during this transition period. As it relates to recent developments, as we previously disclosed, in June, we separated from our former Chairman and CEO, Brad Heppner. This occurred just before our annual report was filed after the company identified credible evidence that Mr. Heppner had committed fraud against the company. As previously disclosed, Mr. Heppner was recently indicted and now faces multiple criminal charges. The company is considering all available options related to Mr. Heppner's conduct, including counterclaims and litigation against him. The company also intends to vigorously pursue claims regarding the validity of over $100 million of debt owed to an entity related to Mr. Heppner. Overall, while unpleasant, we believe this presents an opportunity for the company to move past Mr. Heppner, both reputationally and substantively, ultimately better positioning the company to execute going forward. Another important recent development concerns the previously disclosed agreement to settle all claims pending in the lawsuits related to GWG against the company, its subsidiaries, and each of their current and former directors and officers. That settlement has been approved by the GWG Busy Court, with the district court for the northern district of Texas granting the motion for preliminary approval of that settlement. The hearing on final approval of that settlement has been set for January of 2026. So important progress there. Notably, the settlement is within insurance limits and requires no out-of-pocket payments by the company. I would also note that the claims against Mr. Heppner's entities are not included in that settlement. The company has also worked to regain compliance with NASDAQ listing rules. As previously disclosed, we were not in compliance with the NASDAQ periodic reporting requirement due to the timing of developments surrounding Mr. Heppner's circumstances. Now, as of the first quarter 10-Q filing a few weeks ago, we are back in line with our periodic reporting. In fact, thanks to our incredibly dedicated accounting team, we filed a 10-K and two 10-Qs in just over 6 weeks. That has been an impressive achievement. We've also regained compliance with the market value of listed securities requirement. Furthermore, the company continues to take steps to regain compliance with NASDAQ good price requirements. More specifically, we anticipate holding a special meeting on December 1, 2025, to seek shareholder approval for a reverse stock split of our common stock. Bottom line regarding NASDAQ compliance is that we have worked on a compliance plan, presented that plan to the NASDAQ panel, and have been executing on it. Importantly, as part of that plan to regain compliance with NASDAQ's continued listing requirements and what I view as a strong show of confidence in the company's future, Tom Hicks, our Board Chair, converted approximately $53 million of our preferred units in the company's subsidiary into the company's Class A common shares. In connection with that conversion, we agreed not to sell the shares until October 1, 2028, which is 3 years. We also agreed to forego any potential appreciation of the converted shares during that lockup period. Additionally, we agreed during that lockup period to vote those shares with the Board's recommendation for all matters other than the election of directors. We believe this transaction aligns our interests with those of our common shareholders and reinforces leadership's confidence in the company's mission and future. A final note on developments is that we continue to focus on our relations with Kansas. We are committed to Kansas, we appreciate the state, and we will continue to work to deliver on our obligations to Kansas and its communities. So far, I've focused on recent developments. To that end, we've cut costs and operating expenses, which Greg will discuss further. We've also reduced our legitimate third-party debt from $27 million in January to under $4 million as of today. We are also streamlining operations and plan to roll out simpler ways to provide liquidity and capital to customers. We're reviewing our existing tools and tech to see how we can use them in adjacent markets.

Operator, Operator

Ladies and gentlemen, please stand by your conference. We'll resume momentarily.

Dan Callahan, Director of Communications

We're just having a little bit of technical difficulty with James' line. Thank you for your patience. I apologize to everyone for this.

Gregory Ezell, Chief Financial Officer

That sounds good, Dan. Yes, we'll turn our attention now to the quarterly results and financial position as of September 30, 2025. First, I'll start with a few highlights from the quarter. We reported investments with a fair value of $244 million. These investments serve as collateral for Beneficient's net loan portfolio of $223 million. Revenues were a negative $2.8 million and $15.4 million for the second quarter and year-to-date periods in fiscal 2026 compared to a positive $8.6 million and $18.6 million in the prior year. GAAP revenues mainly reflect mark-to-market adjustments on the investments that serve as collateral to Beneficient's loan portfolio, which for the current fiscal year also includes adjustments to fair value for investments we have deemed probable of being sold at an amount less than the most recently reported GP value. These arise specifically from our asset sales initiatives that we have previously disclosed. Operating expenses were $15.1 million in the second quarter of fiscal 2026 compared to $22.3 million in the same period for fiscal 2025. On a year-to-date basis, operating expenses for fiscal 2026 were $95.1 million, which included the accrual of a loss contingency of $62.8 million and additional interest expense on the loss contingency accrual of $1.7 million, compared to negative $12.0 million for the prior quarter, which included the release of a loss contingency accrual of $55.0 million and a noncash goodwill impairment of $3.7 million. Excluding the noncash goodwill impairment and the accrual or release of a loss contingency, operating expenses for fiscal 2026 were $13.4 million in the second quarter as compared to $22.0 million in the same period for fiscal 2025. Reported GAAP net loss attributable to Beneficient's common shareholders for the current quarter was $3.6 million and $68.7 million for the current year-to-date period, primarily reflecting negative mark-to-market adjustments on investments as part of the asset sales initiative and the accrual of the loss contingency, including post-judgment interest impacting both the current quarter and the year-to-date period for fiscal 2026. During the current fiscal year, we have completed asset sales or equity redemptions of certain investments held by the customer ExAlt Trust, which has resulted in an aggregate of $46.4 million in gross proceeds on a year-to-date basis through the filing date of our Form 10-Q last Friday. These proceeds have been used to pay down certain debt and provide working capital. Next, we'll move on to our primary business segments. In liquidity, which generates interest revenue for supplying liquidity off the balance sheet, and Beneficient custody, which produces fee revenue for the use of the platform and trust services. As is typical, I will focus my discussion on these business segments, as their operations, along with corporate and others, accrue to Beneficient's equity holders. During the second quarter of fiscal 2026, Beneficient's liquidity recognized $8.5 million of interest income, a decrease of 3.8% from the quarter ended June 30, 2025, primarily due to a higher percentage of loans being placed on non-accrual status, partially offset by the effects of compounding interest on the remaining loans. Beneficient liquidity recognized $17.3 million of interest income for the six months ended September 30, 2025, down 24.1% compared to the prior year period, primarily due to lower loans net of the allowance for credit loss resulting from higher levels of non-accrual loans and loan prepayments, partially offset by new loans originated during the period. Operating loss for the fiscal second quarter was $0.8 million, an improvement from an operating loss of $6 million for the quarter ended June 30, 2025. The increase in operating performance was due to lower intersegment credit losses in the current fiscal period as compared to the quarter ended June 30, 2025, because of the disposition of certain investments during the period, which generated loan repayments at Beneficient liquidity sooner than had been estimated in prior periods. Operating loss was $6.8 million for the six months ended September 30, 2025, declining from operating income of $2.4 million in the prior year period. This decrease is partially a result of lower revenues period-over-period and an increase in intersegment credit losses in the current fiscal year as compared to the same period in the prior year. Moving on to Beneficient custody, NAV of alternative assets and other securities held in custody stood at $271.4 million as of September 30, 2025, down from $338.2 million as of March 31, 2025. The decrease was driven by the disposition of certain alternative assets, distributions, and unrealized losses on existing assets, primarily related to the disposition of assets as part of our asset sales initiative and adjustments to NAV based on updated information reported from the fund's investment sponsor or manager during the period, offset by $11.8 million of new originations. Revenues applicable to Beneficient custody were $3.1 million for the fiscal second quarter, compared to $4.2 million for the quarter ended June 30, 2025. The decrease was a result of the lower NAV of alternative assets and other securities held in custody at the beginning of the period when such fees are calculated, along with certain upfront intersegment fees that are amortized into revenue over time being fully recognized in a prior period. In custody revenues were $7.3 million for the six months ended September 30, 2025, down 32.5% compared to the prior year period, primarily due to lower NAV of alternative assets and other securities held in custody, along with certain upfront intersegment fees that are amortized into revenues over time being fully recognized in a prior year period. Operating income for the second fiscal quarter decreased to $2.3 million from $3.1 million for the quarter ended June 30, 2025. The decrease was primarily due to the decline in revenues applicable to this operating segment as described earlier and employee and professional service expenses, offset by slightly lower segment operating expenses. Operating income was $5.4 million for the six months ended September 30, 2025, compared to operating income of $5.6 million in the prior year period. While revenues declined in the current year period compared to the same period in the prior year, operating expenses declined by a similar amount, primarily due to a noncash goodwill impairment in the prior year period of $3.4 million. No such impairment was recorded in the current year period. Adjusted operating income for the six months ended September 30, 2025, was $5.4 million compared to adjusted operating income of $9.0 million in the prior year period, with the decrease in adjusted operating income primarily due to lower revenue related to lower NAV of alternative assets, offset by slightly higher operating expenses during the current fiscal period. As of September 30, 2025, the company had cash and cash equivalents of $4.9 million and total debt of $104.0 million. Distributions received from alternative assets and other securities held in custody totaled $7.8 million and proceeds received from asset sales amounted to $37.2 million for the six months ended September 30, 2025. This concludes my prepared remarks on the financials.

Dan Callahan, Director of Communications

Well, we're going to throw it to James, who is back and up and running. James, we'll ask, you were talking about the conversion.

James Silk, Interim CEO

All right. Can you hear me, Dan?

Dan Callahan, Director of Communications

Yes.

James Silk, Interim CEO

Okay. While we're doing it live, this is not recorded unless this is one of the more creative ways to demonstrate live performance. Moving back to the conversion. As part of our plan to regain compliance with the NASDAQ continued listing requirements, Tom Hicks, our Board Chair, and I converted $53 million of our preferred units into the company's Class A common shares. In connection with that conversion, we agreed not to sell the shares until October 1, 2028, which is 3 years. We also agreed to forego any potential appreciation in the value of the converted shares during that lockup period. Additionally, we agreed to vote those shares with the Board's recommendation for all matters other than in the election of directors. We believe this transaction aligns our interest with those of our common shareholders and reinforces leadership's confidence in the company's mission and future. I also want to highlight that we continue to focus on our relationships with Kansas. In short, we're committed to Kansas. We appreciate Kansas, and we'll continue to work to deliver on our obligations to Kansas and its communities. But those are the recent developments, and we recognize the next steps are crucial for the success of our business plan and strategy. To that end, we have cut costs and operating expenses, which Greg outlined. We've also reduced our legitimate third-party debt from $27 million in January to under $4 million as of today. We're also streamlining operations and plan to roll out simpler ways to provide liquidity and capital to customers. We're exploring adjacent markets where our solutions may work with minimal extra cost. In summary, we’re working towards making Beneficient leaner, more flexible, and easier for our target market to understand and do business with. By carrying out these steps, we believe we'll be better positioned to seize new opportunities. The market for early liquidity services is large and growing. A Jefferies study in July found that private market secondaries accelerated, reaching a 6-month record in the first half of this year with global transaction volumes at $103 billion. That's a 51% increase from $68 billion in the first half of 2024. Accordingly, we believe investors in alternative assets need liquidity and other services, and we have the solutions to meet those needs. I'll close by simply saying that I'm very excited about our future, and I'm glad to be back helping management and the employees on our positive path forward. With that, I'll turn it back over to Dan to close out and take any questions.

Dan Callahan, Director of Communications

Yes. Operator, we're available for questions.

Operator, Operator

Our first question comes from the line of Michael Kim with Small-Cap Research.

Michael Kim, Analyst

First, James, I understand the core value propositions of the company remain intact. But just curious how your strategic vision might differ slightly and what your priorities are going forward, particularly as it relates to reaccelerating origination volumes?

James Silk, Interim CEO

Thank you, Michael. That's a very good question. I think management going forward will be focused on implementing the business model in our core space, which is the high net worth or ultra-high net worth market, focusing on transactions in that $5 million to $25 million range, which has been a core part of our early model. The difference would be that previously, there was a focus on perhaps larger transactions, more foundational ones. I think our approach will be more incremental in terms of the size of the transactions.

Michael Kim, Analyst

Thank you, Michael. Got it. Makes sense. Okay. And then maybe as you have discussions with some of these high net worth investors, have you sensed that maybe prospective customers might be taking a bit of a pause in terms of allocation decisions, given the current market volatility, especially as you work through the management transition? And then related to that, any update on timing as it relates to naming a permanent CEO?

James Silk, Interim CEO

So a couple of questions there. In terms of dealing with our customer base, I think the need for liquidity and sort of consideration of timing is present. The market wants to see us stabilize before we begin to move forward, which is exactly what we are doing, and quite frankly, what I believe we have done positioning ourselves to move forward. In terms of my role as the interim CEO, we continue to evaluate this transition period. The Board will be communicating its approach regarding the permanent CEO position shortly, but the focus right now has been on stabilizing. We are now shifting more to optimizing our model. As I mentioned previously, we're simplifying our approach to our products, and I anticipate further developments on that front.

Michael Kim, Analyst

Got it. And then maybe just one question for Greg. I appreciate some of the incremental color on the expense side. Looking forward, just curious to get your perspective on potential opportunities to rationalize the cost base, particularly regarding corporate and other expenses.

Gregory Ezell, Chief Financial Officer

Yes, good question, Michael. We continually evaluate all of our vendors and ways to be more efficient. As you've seen over time, we really have reduced base expenses significantly. There are some additional opportunities that we evaluate, but I think there will be more modest and incremental reductions versus the more drastic changes we've seen over the last 6 months regarding cost reductions.

Operator, Operator

Our next question comes from the line of Brendan McCarthy with Sidoti & Company.

Brendan McCarthy, Analyst

Great. I want to start off by discussing the balance sheet. I noticed in the press release you mentioned $104 million in debt on the balance sheet. Can you provide some color on the breakdown of that debt? Is all of it stemming from the credit agreement with BCH? How should investors think about the debt moving forward?

Gregory Ezell, Chief Financial Officer

Yes, that's a good question. So, as of September 30, $104 million includes about $8 million related to our credit facility we call HICS. The rest is primarily related to the HCLP loans, which are the notes tied to Brad Heppner-related entities. We are currently investigating the validity of those amounts.

James Silk, Interim CEO

It's worth noting that the HIC/TCV loan balance is now below $4 million. The HCLP loan, as Greg mentioned, relates to Brad Heppner's debt, which we intend to challenge. This has been central to the criminal indictment against Mr. Heppner, and we will pursue all remedies regarding that debt.

Brendan McCarthy, Analyst

Understood. I appreciate that. There has also been talk about exploring adjacent markets and simplifying the operating model. How can investors think about what that means looking ahead for Beneficient?

James Silk, Interim CEO

Sure. Regarding simplifying the model, it's both about cost and transparency. The current product design involves a fair number of internal entities that increase some costs and complications on our end. We’re simplifying that from an internal standpoint. The aim is to develop products where the revenues and cash flows from those services flow more cleanly into the public company, making it easier for shareholders to understand and ultimately provide more value to them.

Brendan McCarthy, Analyst

Got it. That's helpful. Has there been any discussions with end-market customers related to outsourcing that technology?

James Silk, Interim CEO

Yes, we're having conversations about that. There is nothing to report yet, but we are exploring market receptiveness and refinement of our internal offerings to make them more outward facing, and those discussions are ongoing.

Brendan McCarthy, Analyst

Great. That's good to hear. My last question is for the core liquidity business. Is most of the pipeline still focused on the PCP channel, or is there interest in broader liquidity transactions as well?

James Silk, Interim CEO

Currently, the pipeline reflects where we were about 3 or 4 months ago, mainly due to our focus on stabilizing and resolving NASDAQ compliance matters. The deal flow is leaning towards the PCP channel, but as we have gotten current with our filings, we are reopening the process, so I expect this will evolve over the near to medium term.

Operator, Operator

I'm currently showing no further questions at this time. I would now like to turn the call back over to Dan Callahan for closing remarks.

Dan Callahan, Director of Communications

Thank you, everybody, for joining us and bearing with us through our technical difficulties. If you want to listen to the replay, it will be available in the Shareholders section of trustben.com. Thanks again for joining us this morning, and have a great rest of your day.

Operator, Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.