Glassbridge Enterprises Inc

OTC:GLAE

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the GlassBridge Enterprises, Inc. Second Quarter 2018 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Danny Zheng, Interim CEO. Please go head.

[Danny Zheng, executive]

Thank you, operator. Good morning, everyone, and thank you, for joining today's earnings call for the second quarter of 2018. I'm your host for today's call, and I'm joined by GlassBridge Chief Operating Officer, Daniel Strauss. We will discuss our ongoing strategic activities and business plan progress, review second quarter results and have opportunity for the questions at the end of today's call. Before that, I would like to remind everyone that certain information discussed on this call that does not relate to historical information might be deemed to be forward-looking statements within the meaning of Private Securities Litigation Act of 1995 (sic) [ Private Securities Litigation Reform Act of 1995 ]. Such statements are subject to risks and uncertainties that could cause results to differ materially from any projected results. Risk factors that could cause result to differ are outlined in the press release issued earlier today as well as our filings with the SEC. I would also like to remind everyone that nothing said on this call constitutes an offer to sell or solicitation to buy any securities in any investment vehicle managed by GlassBridge or its subsidiaries. Any offer or solicitation may only be made pursuant to Confidential Private Offering Memorandum, which are provided only to qualified offerees and which should be carefully reviewed prior to investing.

With that, I will turn the call over to our Chief Operating Officer, Daniel Strauss. Daniel?

[Daniel Strauss, executive]

Thank you, Danny, and good morning, everyone. We would like to provide a brief update on the execution of the company's strategic vision and business plan. We continue to move forward, and there are several topics to cover relating to our asset management business and holding company initiatives. As we've discussed over the past several quarters, we remain focused on our goal of building a profitable, publicly traded asset management company, designed to create and sustain long-term equity value. We have repositioned the resources of the company to develop our asset management business while remaining focused on minimizing additional expenses. As a recap, we have 2 distinct focuses within our asset management business. First, technology-focused alternative asset management, driven by quantitative trading strategies; and second, our joint venture with Roc Nation, focused primarily on venture capital and private equity opportunities.

On the alternative asset management side, our first investment vehicle, managed by our investment adviser subsidiary, GlassBridge Asset Management, LLC, utilizes a quantitative statistical arbitrage strategy, designed to generate attractive risk-adjusted returns that are uncorrelated to the performance of global equity markets. Regrettably, our year-to-date performance has suffered over the past quarter and that weakness emanates primarily from the European-focused strategies. Other regions are having varying degrees of weak performance but remain within the normal range of expected return parameters. Fortunately, several of our quantitative sub-strategies continue to generate positive returns in both the long/short strategy and within the long-only space. Our team has analyzed the recent lackluster performance from the combined Clinton Group strategy capacity and we were able to identify pockets of outperformance within certain sub-strategies. Our capacity agreement with Clinton provides us with exposure to their full suite of quantitative strategies, and we have been able to access the individual sub-strategies and provide investors both targeted geographic exposure and also new emerging strategies, such as machine learning and lower-frequency, long-only strategies. The unbundling and decoupling of these sub-strategies have helped us to focus on new products and develop global distribution efforts, including specifically within the Asian markets. GlassBridge continues to engage in discussions globally with a number of strategic investors regarding coinvestment opportunities alongside our proprietary capital. We announced a joint venture last quarter whereby we plan to offer dedicated individual sub-strategy quantitative products for the Asia financial markets. These geographies are ripe with opportunity for technology-driven products, and we are currently in discussions with several well-established financial institutions, including a number that specialize in digital distribution, to launch products. We continue to engage with allocators and hedge fund investors, including wealth management platforms, trading platforms, family offices, foundations, endowments and high-net-worth individuals. Several of these investors have expressed interest in becoming investors and they are at different stages of their respective due diligence processes. The typical lead time for committing capital for these types of investors varies between 3 and 12 months. Our strategy is to continue discussions with strategic investors and to broaden our approach to include larger institutional investors such as pension funds, consultants and fund of funds that sometimes require longer lead times to close. Consistent with our business plan, we will continue to grow the asset management business in a measured way over the coming quarters. In addition to our technology-driven quantitative strategy, our asset management initiatives include our venture capital and private equity business. The ARRIVE transaction provides GlassBridge shareholders exposure to a venture capital partnership with 2 experienced collaborators who provide a unique value proposition to potential portfolio companies. This partnership has led to a number of proprietary business opportunities and transactions, which have already added value to GlassBridge. Typically, these investments are longer term and less liquid in nature. That said, of the 5 investments ARRIVE has made to date, 2 of the companies have or are in the process of raising capital at higher valuations than at which ARRIVE invested. We continue to evaluate and pursue both venture capital and private equity opportunities arising out of the ARRIVE partnership. ARRIVE continues to see strong deal flow and partnership opportunities. We continue to work on larger transactions, which may impact the bottom line over the coming months, and we will keep you updated as these opportunities progress. Both the GlassBridge quant strategies and ARRIVE transactions offer clients and investors of GlassBridge a differentiated product offering within some of the most attractive areas of the asset management industry. We have been able to call upon the full resources of the Clinton Group to support the evaluation of opportunities as they present themselves. The incremental overhead for our asset management business is significantly lower than our peers, and we will continue to leverage Clinton's infrastructure as we build our business and evaluate these opportunities. We will continue to share updates on these initiatives as appropriate. I will now turn the call back over to Danny to take you through an update on our corporate-level activities and financial results. Danny?

[Danny Zheng, executive]

Thanks, Daniel. Let me start with our Nexsan business. We are very pleased with its second quarter performance. Nexsan had achieved profitability for 2 consecutive quarters. In addition, our newly launched Nexsan Assureon Cloud Transfer, a product that allow our customers to seamlessly manage and protect their stored data on-premises and in cloud, has generated positive reviews from industry analysts and strong interest from our customers. As we discussed in the prior quarter, a return to profitability was the first milestone in our journey. While we continue to leverage Nexsan's competitive advantage across all of our product lines to generate cash, invest in the business and grow, we are actively seeking corporate opportunities to improve Nexsan and its product offerings. We also made good progress on several legacy matters since last quarter. First, we entered a litigation finance and management agreement with Mach 5 B.V., a Netherlands company, relating to the Dutch levy litigation and the French levy litigation.

Mach 5 and its affiliate has expertise and have an interest in the subject matters of the Dutch and France levy litigation. Pursuant to the litigation management agreement, Mach 5 has agreed to assume the responsibilities for paying legal fees and expenses and managing a litigation tactic and strategy. Second, we have settled a multiyear litigation in Brazil. Imation do Brasil is the plaintiff in the case and we have received approximately $750,000 settlement 2 weeks ago. Third, we settled the last customer claim case in Japan for $45,000. Our goal is to wrapping up the pending legacy issues so we can focus on our asset management business. I will now review the financial results in detail. The following financial results are for continuing operations, including our asset management business, partially owned Nexsan business and the corporate holding company, for the current and prior period, unless otherwise indicated. Net revenue for Q2 2018 was $8.0 million, down 9.1% from Q2 2017. The revenue was mostly related to our Nexsan business, the revenue decline was primarily a result of our effort to optimize investment in sales and marketing, which was scaled back by approximately 42% year-over-year. Gross margin for Q2 2018 was 48.8%, a 2.2% increase from Q2 2017. The increase was primarily driven by production differentiation and product mix change. Selling, general and administrative expense in Q2 2018 were $4.7 million, down 39% from Q2 2017. The decrease was primarily due to cost reductions for our partially owned Nexsan business and the corporate cost reduction. Research and development expense in Q2 2018 were $700,000 compared to $2.2 million in Q2 2017. The decrease was primarily due to eliminating investments in Nexsan Transporter technology, which did not generate sufficient returns, and the headcount reductions. GBAM Fund expense were $100,000 in Q2 2018 compared to 0 in Q2 2017. GBAM Fund expense included general and administration expense for our investment vehicle launched at the end of second quarter in 2017. Operating loss from continuing operations was $1.7 million in Q2 2018 compared to a loss of $5.2 million in Q2 2017, mostly driven by improvements in our Nexsan business and lower corporate general and administration expenses. Net loss from GBAM Fund activity were $400,000 in Q2 2018 compared to 0 in Q2 2017. Net loss from GBAM Fund activity included the loss associated with our proprietary investment in GBAM Fund. This continuing operation has a gain after tax in Q2 2018 of $700,000 compared with the loss after tax of $1.2 million in Q2 2017. The change was primarily due to a reduction in legal and consulting costs, favorable asset recovery and the translation impact. Discontinued operations included the result of IronKey business, which was divested in 2016, and the legacy business that we substantially wound down by the first quarter of 2016. Net loss excluding noncontrolling interest was $1.3 million for Q2 2018 compared to a net loss of $5.1 million in Q2 2017. Loss per share from continuing operations attributable to GlassBridge common stockholders was $0.39 in Q2 2018 compared with the loss per share of $0.78 in Q2 2017, based on a weighted average shares outstanding of 5.1 million and 5.0 million, respectively. Cash and short-term investments were $5.3 million, including $700,000 cash of our variable interest entity as further described in the quarterly report on Form 10-Q for the second quarter 2018. Compared to the first quarter, the cash was down by $3.1 million during Q2 2018, primarily driven by operating loss, working capital changes and pension funding.

Our liquidity needs for the next 12 months include the following: corporate expense of about $3.5 million, pension funding of approximately $2.8 million, others about $500,000 and any cash shortfall associated with Nexsan and the asset management business. We expect that our cash, a tax refund and profit from Nexsan business will provide liquidity sufficient to meet the obligations when they become due in the next 12 months. Beyond 12 months, we expect the profit generated from our asset management business will offset the corporate operating expense. If necessary, we might raise additional capital and monetize certain nonstrategic assets. However, there will be no assurance such initiative will be successful. I would now turn it over to Daniel for closing remarks. Daniel?

[Daniel Strauss, executive]

Thanks, Danny. Our initial investment vehicle infrastructure has been created, and we have experienced initial positive risk-adjusted returns and expect to generate revenue in the coming quarters. We remain focused on using the asset management platform we have built to grow our business by raising third-party assets and executing select accretive transactions. We will continue to execute our business plan to drive our business forward. I hope that today's call has served to articulate our progress and expected drivers of shareholder value, our asset management efforts and our capital deployment strategy. The board and the management team remain pleased with our progress to date and the velocity and efforts with which our team continues to press forward. We will now take any questions you may have. Operator?

[Operator]

[Operator Instructions] There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Strauss for closing remarks.

[Daniel Strauss, executive]

Thank you, everyone, for taking the time to join our call. We look forward to keeping you updated on our business as we progress. Thank you.

[Danny Zheng, executive]

Thank you, everyone.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.