GlassBridge: Fiscal 4Q17 Financial Results

GlassBridge Enterprises, Inc. announced its financial results for the fourth quarter and fiscal year ended December 31, 2017.

Overview
Over the past year, it repositioned the resources of the company to develop its asset management business. It currently have two distinct focuses within its asset management business: technology-focused alternative asset management driven by quantitative trading strategies, and venture capital and private equity opportunities through a joint venture with Roc Nation.

Within its quantitative strategy, it seeded the first investment vehicle managed by investment adviser subsidiary GlassBridge Asset Management, LLC (GBAM). The company able to secure initial third party investment in 4Q17.

Consistent with it original business plan, the firm believes that ongoing improvements within the quantitative trading space – and the growing sophistication related to processing large quantities of market data – allow to remain well positioned to capture assets looking to benefit from this investment area.

GlassBridge continues to engage in discussions globally with a number of strategic investors regarding it product offerings, and have had some success curating our multiple sub-strategies into a product that matches an investor’s needs. 

It continue to endeavor to work towards examining other distribution platforms including liquid alternatives in the U.S. and abroad.

In addition to its technology-driven quantitative strategy, asset management initiatives include private equity business. As announced earlier this year, the company entered into a strategic partnership called ARRIVE with Primary Venture Partners and Roc Nation, a global sports and entertainment management organization. This partnership already has led to a number of proprietary business opportunities and transactions that have already added value to GlassBridge. The firm continues to evaluate and pursue both venture capital and private equity opportunities arising out of the ARRIVE partnership. ARRIVE has made a number of investments since it was launched earlier this year and continues to see strong deal flow and partnership opportunities. Together, GlassBridge’s quantitative trading strategies and the ARRIVE transactions offer clients and investors of GlassBridge a differentiated product offering within attractive areas of the asset management industry, and consistent with business plan, the company will continue to grow the asset management business in a measured way over the coming quarters.

While encouraged by the progress in our asset management business, GlassBridge was disappointed that it partially owned storage business, the Nexsan business, did not meet its expectations. It closed a transaction in January 2017 with NXSN Acquisition Corp. (together with its subsidiaries, NXSN), an affiliate of Spear Point Capital Management LLC, pursuant to which all of the issued and outstanding common stock of the Nexsan business was sold to NXSN in exchange for 50% of the issued and outstanding common stock of NXSN and a $25 million senior secured convertible promissory note.

Prior to the consummation of the NXSN Transaction, Spear Point Capital Management contributed all of the issued and outstanding stock of Connected Data, Inc. (CDI) to Nexsan Corporation. The NXSN transaction was designed to provide for third-party investment in company’s storage business to enhance its growth, minimize the need to make the investment ourselves, and preserve the potential for equity value upside. While the results of the NXSN transaction initially met expectations, Spear Point’s management of and investment in NXSN proved to be both inadequate and in violation of the NXSN transaction agreements. Accordingly, in November 2017, it invoked the rights resulting from such violations to exercise the voting rights created thereby and re-take management control of the Nexsan business to prevent further damages.

In the last few months, GlassBridge has taken swift action to stabilize the Nexsan business and to minimize cash burn.

These actions included:

• (1) installing a new leadership team and reducing the executive compensation;
• (2) providing a revolving credit facility to Nexsan;
• (3) restoring confidence with employees, key customers and key suppliers;
• (4) eliminating the Transporter engineering team, which is not critical to the company’s go-forward strategy;
• (5) scaling back discretionary spending in consulting, travel and expense, and marketing programs;
• (6) eliminating money losing products; and
• (7) improving working capital efficiency.

Despite all of the challenges, 4Q17 operating loss decreased by approximately 36% from the prior quarter and revenue was stabilized. Glassbridge expects Nexsan operating results will be further improved, if not profitable, in 1Q18. 

In order to thrive, Nexsan must carve out a market niche in which it can compete and generate high margin SaaS (software as a service) revenue. 

Nexsan has always been much more than a block storage company. Now, it has an opportunity to position itself as a storage solutions provider to the increasingly critical, complex and evolving archival market segment. Nexsan’s Assureon product offerings are suited to address one of the fast growing segment of the storage market – Secured Archive Data Management. The next significant evolution of Assureon is underway. New features will enable customers to manage cloud and on-premises storage seamlessly with proprietary software. As Nexsan works to grow its Assureon cloud management capability, it is also getting ‘back to basics’ in other areas of the business. This means doing fewer things, but doing them better and more efficiently. Nexsan is in a highly competitive storage business and may require additional funding. Though Nexsan is now in a better position, it is not out of the woods yet. GlassBridge will continue to explore options to preserve corporate cash and to protect shareholder value.

Overview of Financial Results
GlassBridge’s revenue for 4Q17 was $8.8 million, down 22.1% from 4Q16. All of the 4Q17 revenue was attributable to Nexsan business. There was no revenue generated by asset management business in the quarter. Gross margins improved from 45.1% in 4Q16 to 47.7% in 4Q17. Selling, general and administrative expenses declined by $1.7 million, or 23.3% Y/Y. Operating loss from continuing operations increased from $5.1 million to a loss of $10.5 million in 4Q17. Loss from discontinued operations decreased from $9.8 million to a loss of $0.2 million in 4Q17. Cash balance and short term investments totaled $9.5 million as of December 31, 2017.

Detailed 4Q17 Results
The following financial results are for the current and prior period unless otherwise indicated. Included within the following financial results are our continuing operations, including the corporate holding company, asset management business and partially-owned storage business accounted for using the variable interest entity method as further described in our Annual Report on Form 10-K for the year ended December 31, 2017.  
                                                     
Net revenue for 4Q17 was $8.8 million, down 22.1% from 4Q16. This was largely due to the market decline in the block HDD disk and hybrid flash storage arrays market sectors, which affected sales of certain of the products sold by our Nexsan business.

Gross margin for 4Q17 was 47.7%, a 2.6% increase from 4Q16. The increase was primarily driven by production cost improvements and product mix changes.

Selling, general and administrative expenses in 4Q17 were $5.6 million, down 23.3% from 4Q16. The decrease was primarily due to the headcount reductions in Nexsan executive team, sales and marketing departments.

R&D expenses in 4Q17 were $1.6 million, compared to $2.4 million in 4Q16, primarily due to due to the headcount reductions in Nexsan California engineering team.

GBAM Fund expenses were $0.2 million in 4Q17 compared to none in 4Q16. GBAM Fund expenses include general and administrative expenses for our investment vehicle launched at the end of 2Q17.

Goodwill and intangible assets impairment were $3.8 million and $2.7 million, respectively, in 4Q17 compared to none in 4Q16. Impairment charges were driven by management’s decision to stop investing in Transporter technology which came from the acquisition of CDI.

Special charges were $0.8 million in 4Q17 compared to $0.5 million in 4Q16. The 4Q17 charges were primarily related to Nexsan non-cash asset write off.

Operating loss from continuing operations was $10.5 million in 4Q17 compared to a loss of $5.1 million in 4Q16.

Net gains from GBAM Fund activities were $0.2 million in 4Q17 compared to none in 4Q16. Net gains from GBAM Fund activities include income or loss associated with our proprietary investment in the GBAM Fund, which was launched at the end of the 2Q17.

Income tax benefit was $2.3 million in 4Q17 compared to an income tax provision of $2.4 million in 4Q16. The change was primarily due to recording a U.S. tax refund receivable attributable to the elimination of the corporate alternative minimum tax by U.S. federal tax reform legislation enacted in 2017. The company expects to receive the first 50% of the refund in 1H19 and the remaining 50% of the refund in 1H20.

Discontinued operations had a loss (after tax) in 4Q17 of $0.2 million compared with a loss (after tax) of $9.8 million in 4Q16. The loss in 4Q16 was primarily due to a one-time legal accrual. Discontinued operations include the results of the IronKey business, which was divested in February 2016, and the legacy businesses we exited.

Net loss excluding non-controlling interest was $3.5 million for 4Q17 compared to a net loss of $21.4 million in 4Q16.

Loss per share from continuing operations attributable to GlassBridge common stockholders was $0.66 in 4Q17 compared with a loss per share of $3.22 in 4Q16 based on weighted average shares outstanding of 5.0 million and 3.6 million, respectively (adjusted to give effect to the February 2017 1:10 reverse stock split).
  
Cash and short-term investments balance was $9.5 million (including $0.1 million cash of our variable interest entity as further described in the Annual Report on Form 10-K for the year ended December 31, 2017) as of December 31, 2017, down by $8.9 million during Q4 2017, primarily driven by operating loss and litigation settlement payments.

FY17 Summary
For the twelve months ended December 31, 2017, GlassBridge reported net revenue of $36.5 million, down 17.2% compared with the twelve months ended December 31, 2016. Operating loss from continuing operations totaled $29.3 million for the twelve months ended December 31, 2017, including special charges of $1.9 million, goodwill and intangible assets impairment of $6.5 million, and a basic and diluted loss per share from continuing operations of $2.70. For the twelve months ended December 31, 2016, the firm reported net revenue of $44.1 million, an operating loss from continuing operations of $35.0 million, including special charges of $7.6 million, and a basic and diluted loss per share from continuing operations of $10.76.

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