Beneficient — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2023 (Beneficient’s fiscal first quarter of 2024). This is not calendar-year Q1. The company completed its de-SPAC merger and converted from a limited partnership to a Nevada corporation in June; prior-period per-share figures were retroactively adjusted.
Business and financial results
Beneficient provides liquidity, financing, custody and trust-administration services for investors in alternative assets. Its ExAlt Loans and related fees are eliminated in consolidated reporting because the Customer ExAlt Trusts are consolidated, so reported consolidated revenue does not show the company’s operating revenue in the usual way.
| Metric | Quarter ended June 30, 2023 | Prior-year quarter |
|---|---|---|
| Consolidated revenue | $(2.7) million | $(37.0) million |
| Operating loss | $(1,156.0) million | $(86.0) million |
| Net loss attributable to Beneficient common shareholders | $(1,115.5) million | $(54.0) million |
| Basic and diluted loss per share, Class A / Class B | $(5.50) / $(5.33) | $(0.27) / $(0.27) |
| Net cash used in operating activities | $(13.9) million | $(37.1) million |
Headline revenue and loss reflect fair-value movements in assets held by the trusts and consolidation eliminations. In the operating segments, Ben Liquidity recorded $12.0 million of interest income, down from $14.3 million; Ben Custody recorded $6.6 million of trust-services and administration revenue, down from $7.3 million. Those intersegment amounts are eliminated from consolidated revenue. Management’s non-GAAP adjusted operating loss was $24.5 million, compared with $47.1 million; the measure excludes specified items and is not a substitute for GAAP results.
- Exceptional charge: A $1,096.3 million non-cash goodwill impairment followed a sustained decline in the company’s stock price and market capitalization. Goodwill fell to $1,271.6 million from $2,367.9 million at March 31. Management reported no valuation cushion for the Ben Liquidity or Ben Custody reporting units after the impairment.
- Costs: Compensation and benefits rose to $35.8 million from $11.6 million, including $27.0 million of share-based compensation, among it $15.0 million related to the recapitalization and approximately $8.0 million associated with public listing/performance conditions. Professional services increased to $10.4 million from $7.9 million.
- Cash flow: Investing activities provided $11.2 million, primarily from $12.0 million of alternative-asset distributions. Financing activities used $3.0 million. Cash, cash equivalents and restricted cash ended at $3.9 million, including $3.1 million unrestricted cash.
Financial condition, debt and material changes
- Total assets were $1,795.9 million, including $486.9 million of investments held by Customer ExAlt Trusts and $1,271.6 million of goodwill. Total liabilities were $263.9 million; temporary equity was $251.1 million; total equity was $1,280.9 million.
- Carrying value of related-party debt was $100.1 million and Customer ExAlt Trust loan payable was $49.5 million. The company reported compliance with debt covenants at June 30. On July 12, debt amendments set a 9.5% fixed rate and extended first- and second-lien maturities to September 2024 and September 2027, respectively. First-lien installments of $5.0 million quarterly are subject to not causing a going-concern issue; second-lien payments are deferred until the first lien is repaid.
- Ben Liquidity’s loan portfolio had $503.9 million of gross loans and a $199.7 million allowance, leaving $304.2 million net. The allowance was 39.64% of loans, and 36.43% of loans were nonperforming. The increase in the allowance from March 31 was primarily associated with adopting CECL on April 1.
- Customer ExAlt Trust alternative assets had a fair value of $374.6 million, down from $385.9 million, and $60.2 million of unfunded capital commitments. Management says the assets’ cash flows are the primary collateral and repayment source; distributions were lower than anticipated and may remain constrained through the rest of fiscal 2024.
- GWG-related holdings remain significant risks. At June 30, the trusts held $94.8 million principal of L Bonds and GWG common stock; L Bonds later converted to interests in the GWG Wind Down Trust following GWG’s August 1 bankruptcy-plan emergence. GWG-related assets and receivables have incurred material losses and allowances.
Outlook, contingencies and notable developments
- Liquidity outlook: Management expects to fund operations over the next 12 months through operating cash flow, loan payments and fees, possible refinancing, expense reductions and capital raising. It cautions that refinancing or new financing may not be available on acceptable terms, or at all. The $250 million Yorkville standby equity purchase agreement is an option subject to conditions, not committed cash proceeds. Management reported approximately $4.4 million of unrestricted cash at July 31.
- Cost reductions: A July plan began furloughing about 30 employees, approximately 20% of the workforce, and targets lower vendor spending. Management estimated professional-services and other expense reductions of up to approximately $35 million annualized from prior levels.
- Potential further impairment: The company reported a continuing significant decline in its share price after June 30 and warned that another goodwill impairment could occur in the second fiscal quarter of 2024; amount and timing are uncertain.
- Legal and regulatory: The SEC staff issued a Wells Notice on June 29, preliminarily indicating a recommendation for a civil enforcement action concerning the company’s association with GWG. It is not a formal charge or finding, and the company says it intends to contest the matter. The filing also describes ongoing litigation and potential GWG estate claims; the Litigation Trustee has authority to pursue or settle estate claims after the bankruptcy plan’s August 1 effective date. Disclosed potential exposures include up to $350 million plus costs in the PCA matter, a $36.3 million arbitration claim plus other requested damages, and estimated potential impact of $155 million to $382 million for certain retained GWG causes of action. Outcomes and loss estimates are uncertain.
- Dilution and control: Post-quarter developments included conversion of BCH Preferred C-1 into 44.0 million Class A shares on July 10 and additional equity-linked financings. Class B shares carry 10 votes each and their holders can elect a board majority. The GWG Wind Down Trust held approximately 72.4% of Class A shares as of July 10, according to the filing.
Key investor verification points
- Track unrestricted cash, operating cash burn, actual Yorkville proceeds and the availability and terms of any refinancing or other capital.
- Review the drivers and assumptions behind the $1.1 billion goodwill impairment and monitor for further impairment as the share price and business forecasts change.
- Assess loan performance, nonperforming exposures, collateral values, CECL assumptions and actual distributions from the illiquid alternative-asset portfolio.
- Monitor the SEC Wells process, GWG Litigation Trust claims and other litigation for developments, potential costs and effects on financing or operations.
- Quantify actual and potential dilution from share resales, the SEPA, preferred conversions, warrants and subsequent liquidity transactions; verify voting control and large-holder sales.
- Compare promised cost savings and new originations with realized results, while distinguishing non-GAAP adjusted results from GAAP performance.