NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 — Basis of Presentation
GlassBridge
Enterprises, Inc. (“GlassBridge”, the “Company”, “we”, “us” or “our”)
is a holding company. We actively explore a diverse range of new, strategic asset management business opportunities for our portfolio.
The company’s wholly-owned subsidiary GlassBridge Asset Management, LLC (“GBAM”) is an investment advisor focused
on technology-driven quantitative strategies and other alternative investment strategies.
The
interim Condensed Consolidated Financial Statements of GlassBridge are unaudited but, in the opinion of management, reflect all
adjustments necessary for a fair statement of financial position, results of operations, comprehensive loss and cash flows for
the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal and recurring items. The results
of operations for any interim period are not necessarily indicative of full year results. The Condensed Consolidated Financial
Statements and Notes are presented in accordance with the requirements for Quarterly Reports on Form 10-Q and do not contain certain
information included in our annual Consolidated Financial Statements and Notes presented in accordance with the requirements of
Annual Reports on Form 10-K.
The
unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and
entities in which the Company owns or controls fifty percent or more of the voting shares and has the right to control. The results
of entities disposed of are included in the unaudited Condensed Consolidated Financial Statements up to the date of the disposal
and, where appropriate, these operations have been reflected as discontinued operations. All inter-company balances and transactions
have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments necessary for a fair
presentation have been included in the interim results reported.
The
preparation of the interim Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Condensed Consolidated
Financial Statements and the reported amounts of revenue and expenses for the reporting periods. Despite our intention to establish
accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
The
December 31, 2018 Condensed Consolidated Balance Sheet data was derived from the audited Consolidated Financial Statements but
does not include all disclosures required by GAAP. This Form 10-Q should be read in conjunction with our Consolidated Financial
Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities
and Exchange Commission on April 1, 2019.
The
operating results of our legacy business segments, Consumer Storage and Accessories and Tiered Storage and Security Solutions
(the “Legacy Businesses”) and the Nexsan Business (which includes the “Nexsan Group” as defined below),
are presented in our Condensed Consolidated Statements of Operations as discontinued operations for all periods presented. Our
continuing operations in each period presented represents our “Asset Management Business,” which consists of our investment
advisory business conducted through GBAM, as well as corporate expenses and activities not directly attributable to our Legacy
Businesses or the Nexsan Business. Assets and liabilities directly associated with our Legacy Businesses and Nexsan Business and
that are not part of our ongoing operations have been separately presented on the face of our Condensed Consolidated Balance Sheet
as of both March 31, 2019 and December 31, 2018. See Note 4 -
Discontinued Operations
for further information.
Sale
of international subsidiaries and Imation Latin America Corp.
As
previously disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”)
as of April 2, 2019, on March 31, 2019, the Company entered into a securities purchase agreement (the “IMN Capital Agreement”)
with IMN Capital Holdings, Inc., a Delaware corporation (“IMN Capital”) whereby the Company sold its entire ownership
of its international subsidiaries together with its entire ownership in Imation Latin America Corp., a Delaware corporation (the
“Imation Subsidiaries”). As previously disclosed, certain subsidiaries of the Company, including the Imation Subsidiaries,
are parties to certain lawsuits, claims, and other legal proceedings concerning claims and counterclaims relating to excess payments
made by the Imation Subsidiaries relating to copyright levies in European Union (“EU”) member states (the “Subsidiary
Litigation”). Pursuant to the terms and subject to the conditions of the IMN Capital Agreement, IMN Capital acquired from
the Company the Company’s shares representing the Company’s ownership interests in each of the Imation Subsidiaries
(the “Subsidiary Sale”). Following the Subsidiary Sale, the Imation Subsidiaries are no longer affiliates of the Company,
and the Company has no interest in or to the Imation Subsidiaries except as explicitly described in the IMN Capital Agreement.
In consideration for the Subsidiary Sale, the Company shall receive certain compensation from IMN Capital. As defined in the IMN
Capital Agreement, a payment occurrence is the settlement or final adjudication as to all demands, claims, counter-claims, cross-claims,
third-party claims, damages, fees, costs and expenses, brought and raised on any matters arising from or related to the Subsidiary
Litigation (a “Payment Occurrence”). In connection with the Subsidiary Sale, the purchase price furnished by IMN Capital
to the Company (the “Purchase Price”) shall consist of (i) one hundred dollars ($100.00) payable on the closing date
of the IMN Capital Agreement and (ii) 75% of all net proceeds from Subsidiary Litigation (which, for the avoidance of doubt, shall
be calculated after the payment of (i) the retirement of the Germany pension liability; (ii) contingency fees payable to attorneys
engaged in connection with the Subsidiary Litigation; (iii) fees payable to Mach 5, the litigation financing company and (iv)
the payment of all applicable taxes including income taxes in connection with the Subsidiary Litigation) (such payment, the “Contingent
Payment”). The Company expects to record a one-time non-cash gain of approximately $12 million in connection with IMN Capital
Agreement transaction.
Liquidity
and Management Plan
The
Company incurred operating and cash flow losses for several reporting periods and had a working capital balance of $0.1
million as of March 31, 2019. These losses raised substantial doubt about our ability to continue as a going concern. Although
the working capital balance is only $0.1 million, it included $3.0 million of cash as of March 31, 2019, which is expected
to fund our operations in the next twelve months. As a result, we have undertaken a financial and operational restructuring plan
approved by our Board of Directors (the “Board”) prior to the 2018 fiscal year (the “Restructuring Plan”).
Operating under the Restructuring Plan includes executing changes to our business model. Management’s execution of the Restructuring
Plan, which we believe will alleviate the substantial doubt about our ability to continue as a going concern, is as follows:
|
|
●
|
Asset
Management Business
: We expect the Asset Management Business to grow assets under
management (AUM) in 2019 and to make progress in the venture and private equity business.
|
|
|
●
|
Legacy
Business
: As we settled most of the major litigation, the Legacy Business cash spending
is expected to be significantly lower in 2019. Furthermore, in 2018 we finalized a European
levy litigation financing agreement which would eliminate levy legal costs going forward.
The major operating expenses are accounting, compliance (statutory audit & tax filing),
legal fees (non-levy related) and Germany pension funding In connection with the Subsidiary
Sale, the Company shall have no further obligations regarding certain entities which
were, prior to the Subsidiary Sale, affiliates or subsidiaries of the Company, including
Imation Argentina S.A.C.I.F.I, Imation Holdings Pte Ltd., Imation Latin America Corp.,
Imation Holdings B.V., Imation Corp. Japan, Imation Canada, Inc., Imation Polska Sp Z.O.O.
and Global Data Media FZ LLC.
|
|
|
|
|
|
|
●
|
Corporate
:
We will continue to reduce corporate spending in all areas including the board cost and
the corporate personnel. We have decided to outsource the corporate finance, accounting
and IT operations to Clinton Group starting in Q1, 2019. This reduces corporate costs
by 50%.
|
|
|
|
|
|
|
●
|
Tax
Refund:
As a result of the 2017 tax reform, we expect to receive approximately a
$1.1 million alternative minimum tax refund in mid-2019.
|
|
|
|
|
|
|
●
|
Pension
Liabilities:
The Company’s application for termination of the GlassBridge Enterprises
Cash Balance Pension Plan (the “Plan”) was approved by the Pension Benefit
Guaranty Corporation. The termination was effective as of April 30, 2019, and
will relieve the Company of the minimum funding requirements of the Plan. See Note 15
–
Subsequent Events
for additional information.
|
|
|
|
|
|
|
●
|
Asset
Monetization:
We sold certain IP addresses to a third party. The Company received
proceeds of $950,000 in the first quarter of 2019.
|
Our
cash balance was $3.0 million as of March 31, 2019. Our liquidity needs for the next 12 months include the following: corporate
expenses of approximately $2.0 million and investments of $1.0 million.
We
expect that our cash and potential cash flow from GBAM and asset monetization (i.e. monetizing the
Arrive investment) will provide liquidity sufficient to meet our obligations as they become due within one year from the date
these financial statements are issued. We also plan to raise additional capital from non-strategic asset sales, or otherwise,
if necessary, although no assurance can be made that we will be able to secure such financing, if needed, on favorable terms or
at all.
Note
2 — New Accounting Pronouncements
Adoption
of New Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a right-of-use (“ROU”) model
that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than
12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition
in the income statement. ASU No. 2016-02 is effective for the Company beginning January 1, 2019, and does not have a material
impact on its consolidated results of operations or financial condition.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU seeks to help entities reclassify
certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017
(the “Tax Reform Act”), enacted on December 22, 2017. ASU 2018-02 was issued in response to concerns regarding current
guidance in GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates
with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in
situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized
in other comprehensive income, rather than net income, and as a result the stranded tax effects would not reflect the appropriate
tax rate. The amendments of this ASU allow an entity to make a reclassification from accumulated other comprehensive income to
retained earnings for the stranded tax effects, which is the difference between the historical corporate income tax rate of 35.0%
and the newly enacted corporate income tax rate of 21.0%. The amendments in this ASU are effective for the Company beginning January
1, 2019, and do not have a material impact on its consolidated results of operations or financial condition.
In
June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the
measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to
employees. The ASU also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue
from Contracts with Customers. The ASU requires a modified retrospective transition approach. For the Company, the ASU is effective
as of January 1, 2019 and does not have a material impact on its consolidated results of operations or financial condition.
In
July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends ASU No. 2016-02, Leases.
The new ASU includes certain clarifications to address potential narrow-scope implementation issues which the Company is incorporating
into its assessment and adoption of ASU No. 2016-02. This ASU has the same transition requirements and effective date as ASU No.
2016-02, which for the Company is January 1, 2019. This standard does not have a material impact on the Company’s consolidated
results of operations or financial condition.
In
July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU No. 2016-02, Leases. The
new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in
financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and nonlease
components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU No. 2016-02,
which for the Company is January 1, 2019. This standard does not have a material impact on the Company’s consolidated results
of operations or financial condition.
New
Accounting Pronouncements To Be Adopted
In
August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates,
amends, and adds disclosure requirements for fair value measurements. The amended and new disclosure requirements primarily relate
to Level 3 fair value measurements. For the Company, the ASU is effective as of January 1, 2020. The removal and amendment of
certain disclosures may be early adopted with retrospective application while the new disclosure requirements are to be applied
prospectively. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of
operations and financial condition.
In
August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which makes minor
changes to the disclosure requirements related to defined benefit pension and other postretirement plans. The ASU requires a retrospective
transition approach. For the Company, the ASU is effective as of January 1, 2021. As this ASU relates only to disclosures, there
will be no impact to the Company’s consolidated results of operations and financial condition.
Note
3 — Income (Loss) per Common Share
Basic
income (loss) per common share is calculated using the weighted average number of shares outstanding for the period. Unvested
restricted stock and treasury shares are excluded from the calculation of basic weighted average number of common shares outstanding.
Once restricted stock vests, it is included in our common shares outstanding.
Diluted
income (loss) per common share is computed on the basis of the weighted average shares outstanding plus the dilutive effect of
our stock-based compensation plans using the “treasury stock” method. Since the exercise price of our stock options
is greater than the average market price of the Company’s common stock for the period, we did not include dilutive common
equivalent shares for these instruments in the computation of diluted net income (loss) per share because the effect would have
been anti-dilutive.
The
following table sets forth the computation of the weighted average basic and diluted income (loss) per share:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions, except for per share amounts)
|
|
2019
|
|
|
2018
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.9
|
)
|
|
$
|
(1.7
|
)
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
10.5
|
|
|
|
—
|
|
|
Net gain (loss)
|
|
$
|
9.6
|
|
|
$
|
(1.7
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the period - basic and diluted
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share attributable to GlassBridge common shareholders — basic and diluted:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.18
|
)
|
|
$
|
(0.33
|
)
|
|
Discontinued operations
|
|
|
2.06
|
|
|
|
—
|
|
|
Net gain (loss)
|
|
$
|
1.88
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from calculation
|
|
|
0.1
|
|
|
|
0.4
|
|
Note
4 — Discontinued Operations
On
March 31, 2019, the Company entered into a securities purchase agreement with IMN Capital Holdings, Inc., a Delaware company (“IMN
Capital”) to sell its entire ownership of its international subsidiaries and Imation Latin America Corp., a Delaware corporation
(the “Imation Subsidiaries”) (the “Subsidiary Sale”). In connection with the sale, the purchase price
furnished by IMN Capital to the Company consisted of (i) one hundred dollars ($100.00) payable on the closing date of the IMN
Capital Agreement and (ii) 75% of all net proceeds from subsidiary litigation (which, for the avoidance of doubt, shall be calculated
after the payment of (i) the retirement of the Germany pension liability; (ii) contingency fees payable to attorneys engaged in
connection with the Subsidiary Litigation; (iii) fees payable to Mach 5, the litigation financing company and (iv) the payment
of all applicable taxes including income taxes in connection with the subsidiary litigation). The Company recorded a one-time
non-cash gain of approximately $9.6 million in connection with IMN Capital Agreement transaction.
The
operating results for the Legacy Businesses and the Nexsan Business are presented in our Condensed Consolidated Statements of
Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable
to these businesses that were eliminated from our ongoing operations.
The
key components of the results of discontinued operations were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Net revenue
|
|
$
|
0.1
|
|
|
$
|
9.3
|
|
|
Cost of goods sold
|
|
|
0.1
|
|
|
|
4.5
|
|
|
Gross profit
|
|
|
—
|
|
|
|
4.8
|
|
|
Selling, general and administrative
|
|
|
0.3
|
|
|
|
3.9
|
|
|
Research and development
|
|
|
—
|
|
|
|
1.2
|
|
|
Restructuring and other
|
|
|
—
|
|
|
|
0.1
|
|
|
Other (income) expense
|
|
|
(0.6
|
)
|
|
|
(0.4
|
)
|
|
Income from discontinued operations, before income taxes
|
|
|
0.3
|
|
|
|
—
|
|
|
Income on sale of discontinued businesses, before income taxes
|
|
|
9.6
|
|
|
|
—
|
|
|
Income tax benefit (provision)
|
|
|
0.6
|
|
|
|
—
|
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
10.5
|
|
|
$
|
—
|
|
Net
income of discontinued operations for the three months ended March 31, 2019 increased by $10.5 million compared to the same period
last year mainly due to the sale of the Imation Subsidiaries.
Current
assets of discontinued operations were $0.0 million as of March 31, 2019. Current assets of discontinued operations as of December
31, 2018 of $2.4 million included $0.7 million of accounts receivable, $1.0 million related to funds held in escrow and $0.7 million
of other current assets. The decrease of the current assets in 2019 was due to the sale of the Imation Subsidiaries.
Current
liabilities of discontinued operations were $0.6 million as of March 31, 2019. Current liabilities of discontinued operations
of $4.6 million as of December 31, 2018 included $1.7 million of accounts payable, $1.0 million due to CMC and $2.2 million of
other current liabilities. The decrease of the current liabilities in 2019 was due to the sale of the Imation Subsidiaries.
Other
liabilities of discontinued operations were $0.2 million as of March 31, 2019. Other liabilities of discontinued operations
of $2.2 million as of December 31, 2018 included $0.5 million of withholding tax, $0.6 million of tax contingencies and $1.1 million
of other liabilities. The decrease of the other liabilities in 2019 was due to the sale of the Imation Subsidiaries.
Note
5 — Supplemental Balance Sheet Information
Additional
supplemental balance sheet information is provided as follows:
Other
assets primarily included a $4.0 million strategic investment in equity securities. The strategic investment in equity securities
is consistent with our stated strategy of exploring a diverse range of new strategic asset management business opportunities for
our portfolio. Historically, we accounted for such investment under the cost method of accounting. The adoption of ASU No. 2016-01
in the first quarter of 2018 effectively eliminated the cost method of accounting and the carrying value of this investment is
written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. Our strategic investment
in equity securities does not have a readily determinable fair value therefore the new guidance was adopted prospectively. As
of March 31, 2019, there were no indicators of impairment for this investment. The Company will assess the investment for potential
impairment on a quarterly basis. In addition, other assets as of March 31, 2019 also include a $1.1 million receivable for minimum
tax credit refund, escrowed funds related to the NXSN sale of $0.7 million and $0.2 million of other assets.
Other
current liabilities primarily included pension minimum contributions of $1.9 million and $1.9 million, levy accruals of $0.0
million and $0.3 million and accrued payroll of $0.1 million and $0.2 million as of March 31, 2019 and December 31, 2018,
respectively.
Other
liabilities included pension liabilities of $14.4 million and $23.0 million as of March 31, 2019 and December 31, 2018, respectively.
The change in the pension liabilities was due to the Subsidiary Sale.
Note
6 — Intangible Assets
As
of March 31, 2019 and December 31, 2018, the Company did not have any intangible assets. Amortization expenses were $0.0 million
and $0.5 million for the three months ended March 31, 2019 and 2018, respectively, and the prior year expense related to intangible
assets acquired when we closed the Capacity and Services Transaction with Clinton on February 2, 2017. These intangible assets
were impaired in the fourth quarter of 2018.
Amortization
expense for intangible assets consisted of the following:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Amortization expense
|
|
$
|
0.0
|
|
|
$
|
0.5
|
|
The
Company currently does not expect to have any amortization expenses for the remainder of 2019 or thereafter.
Note
7 — Restructuring and Other Expense
Restructuring
and other expense was $0.1 million and $0.0 million for the three months ended March 31, 2019 and 2018, respectively.
Activity
related restructuring accruals was as follows:
|
(In millions)
|
|
Severance
and Related
|
|
|
Accrued balance at December 31, 2018
|
|
$
|
0.1
|
|
|
Charges
|
|
|
0.1
|
|
|
Usage and payments
|
|
$
|
(0.1
|
)
|
|
Accrued balance at March 31, 2019
|
|
$
|
0.1
|
|
Note
8 — Stock-Based Compensation
Stock-based
compensation for continuing operations consisted of the following:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Stock-based compensation expense
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
We
have stock-based compensation awards consisting of stock options, restricted stock and stock appreciation rights under four plans
(collectively, the “Stock Plans”) which are described in detail in our Annual Report on Form 10-K for the year ended
December 31, 2018. As of March 31, 2019, there were 288,295 shares available for grant under the 2011 Incentive Plan. No
further shares were available for grant under any other stock incentive plan.
Stock
Options
The
following table summarizes our stock option activity:
|
|
|
Stock Options
|
|
|
Weighted Average Exercise Price
|
|
|
Outstanding December 31, 2018
|
|
|
22,758
|
|
|
$
|
83.67
|
|
|
Canceled
|
|
|
(20,648
|
)
|
|
|
83.14
|
|
|
Outstanding March 31, 2019
|
|
|
2,110
|
|
|
$
|
88.79
|
|
|
Exercisable as of March 31, 2019
|
|
|
2,110
|
|
|
$
|
88.79
|
|
The
outstanding options are non-qualified and generally have a term of ten years. The weighted average assumptions used in the valuation
of options are not applicable for the periods ending March 31, 2019 and 2018 as no options were granted over this time.
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected life (months)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
N/A
|
|
As
of March 31, 2019, there was no unrecognized compensation expense related to non-vested stock options granted under our Stock
Plans.
Restricted
Stock
The
following table summarizes our restricted stock activity:
|
|
|
Restricted
Stock
|
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
|
Nonvested as of December 31, 2018
|
|
|
30,000
|
|
|
$
|
7.03
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
(15,000
|
)
|
|
|
7.03
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
Nonvested as of March 31, 2019
|
|
|
15,000
|
|
|
$
|
7.03
|
|
The
cost of the awards is determined using the fair market value of the Company’s common stock on the date of the grant, and
compensation is recognized on a straight-line basis over the requisite vesting period.
As
of March 31, 2019, there was less than $0.1 million of total unrecognized compensation expense related to non-vested restricted
stock granted under our Stock Plans. That expense is expected to be recognized over a weighted average period of 1.0 years.
Note
9 — Retirement Plans
Pension
Plans
Effective
January 1, 2010, the U.S. pension plan was amended to exclude new hires and rehires from participating in the plan.
In addition, we eliminated benefit accruals under the U.S. plan as of January 1, 2011, thus “freezing” the defined
benefit pension plan. Under the plan freeze, no pay credits were made to a participant’s account balance after December 31,
2010. However, interest credits will continue in accordance with the annual update process.
During
the three months ended March 31, 2019, the Company did not make any contributions to our U.S. pension plan. The Company was notified
by the PBGC on April 16, 2019 that the Company’s application for termination of the GlassBridge Enterprises Cash Balance
Pension Plan was approved by the Pension Benefit Guaranty Corporation with a termination date of April 30, 2019. The termination
will relieve the Company of the funding requirements of the Plan. See Note 15 –
Subsequent Events
for additional
information.
Components
of net periodic pension (credit) cost included the following:
|
|
|
United States
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Interest cost
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
Expected return on plan assets
|
|
|
(0.7
|
)
|
|
|
(0.8
|
)
|
|
Amortization of net actuarial loss
|
|
|
0.1
|
|
|
|
0.1
|
|
|
Net periodic pension credit
|
|
|
—
|
|
|
|
(0.2
|
)
|
|
Settlement loss
|
|
|
—
|
|
|
|
—
|
|
|
Total pension (credit) cost
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
Germany
was the Company’s only remaining international plan. In connection with the Subsidiary Sale, the Company no longer has any
international plans.
Note
10 — Income Taxes
For
interim income tax reporting, we are required to estimate our annual effective tax rate and apply it to year-to-date pre-tax income/loss
excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized
are excluded.
For
the three months ended March 31, 2019, we recorded income tax from continuing operations of $0.0 million on a loss of $0.9 million.
For the three months ended March 31, 2018, we recorded income tax of $0.0 million on a loss of $1.7 million. The
effective income tax rate for the three months ended March 31, 2019 differs from the U.S. federal statutory rate of 21% primarily
due to a valuation allowance on various deferred tax assets.
Adjustments
were made to previous financial statements as a result of the Tax Reform Act passed on December 22, 2017. Most significantly,
the elimination of the corporate alternative minimum tax and ability to file for refunds of minimum tax credit carryovers resulted
in reclassification of $2.2 million as a receivable, half of which is shown as a current receivable on the balance sheet to reflect
the cash refund due later in 2019 (with the remainder due in years 2020 through 2022).
We
accrue for the effects of uncertain tax positions and the related potential penalties and interest. For the three months ending
March 31, 2019 we reversed $607k of the liability related to our Legacy businesses’ foreign subsidiaries, as these liabilities
stay with the foreign entities that were sold during the quarter. The tax benefit was recorded in discontinued operations, where
the liabilities of $0.6 million and $0.9 million as of December 31, 2018 and March 31, 2018, respectively, had previously been
recorded.
We
file income tax returns in multiple jurisdictions and are subject to review by various U.S and foreign taxing authorities. Our
U.S. federal income tax returns for 2015 through 2018 are subject to examination by the Internal Revenue Service. With few exceptions,
we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2012.
In the event that we have determined not to file tax returns with a particular state or city, all years remain subject to examination
by the tax jurisdiction.
Note
11 — Shareholders’ Equity
Treasury
Stock
On
May 2, 2012, the Board authorized a share repurchase program that allowed for the repurchase of 500,000 shares of common stock.
On November 14, 2016, our Board authorized a new share repurchase program under which we may repurchase up to 500,000 shares of
common stock. This authorization replaces the Board’s prior May 2, 2012 share repurchase authorization. Under the share
repurchase program, we may repurchase shares from time to time using a variety of methods, which may include open market transactions
and privately negotiated transactions.
The
Company did not purchase any shares during the three months ended March 31, 2019. Since the inception of the November 14, 2016
authorization, we have repurchased 65,915 shares of common stock for $0.3 million and, as of March 31, 2019, we had remaining
authorization to repurchase 434,085 additional shares. The treasury stock held as of March 31, 2019 was acquired at an average
price of $44.88 per share.
Following
is a summary of treasury share activity:
|
|
|
Treasury
Shares
|
|
|
Balance as of December 31, 2018
|
|
|
550,302
|
|
|
Purchases
|
|
|
—
|
|
|
Restricted stock grants
|
|
|
—
|
|
|
Forfeitures and other
|
|
|
—
|
|
|
Balance as of March 31, 2019
|
|
|
550,302
|
|
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss and related activity consisted of the following:
|
(In millions)
|
|
Defined Benefit Plans
|
|
|
Balance as of December 31, 2018
|
|
$
|
(20.7
|
)
|
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
|
|
0.1
|
|
|
Balance as of March 31, 2019
|
|
$
|
(20.6
|
)
|
Details
of amounts reclassified from accumulated other comprehensive loss and the line item in the Condensed Consolidated Statements of
Operations are as follows:
|
|
|
Amounts Reclassified from Accumulated Other
Comprehensive Loss
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Affected Line Item in the Condensed Consolidated Statements of Operations
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Where (Gain) Loss is Presented
|
|
Amortization of net actuarial loss
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
Other income (expense)
|
|
Cumulative translation adjustment
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
Discontinued operations
|
|
Total reclassifications for the period
|
|
$
|
0.1
|
|
|
$
|
(0.2
|
)
|
|
|
Income
taxes are not provided for cumulative translation adjustment relating to permanent investments in international subsidiaries.
Reclassification adjustments are made to avoid double counting in comprehensive income (loss) items that are also recorded as
part of net income (loss) and are presented net of taxes in the Consolidated Statements of Comprehensive Income (Loss).
Note
12 — Segment Information
The
Legacy Businesses and the Nexsan Business are presented in our Condensed Consolidated Statements of Operations as discontinued
operations and are not included in segment results for all periods presented. See Note 4 -
Discontinued Operations
for
further information about these divestitures.
On
February 2, 2017, we closed the Capacity and Services Transaction with Clinton. The Capacity and Services Transaction allows GBAM
to access investment capacity within Clinton’s quantitative equity strategy. In addition, we have recently taken steps to
build our own independent organizational foundation while leveraging Clinton’s capabilities and infrastructure. While our
intention is to primarily engage in the management of third-party assets, we may make opportunistic proprietary investments from
time to time that comply with applicable laws and regulations. Since the closing of the Capacity and Services Transaction, we
have focused on our Asset Management Business as our primary operating business segment. See Note 14 - Related Party Transactions
for additional information.
In
March 2017, ARRIVE was formed through a collaboration with Roc Nation, a full-service entertainment company founded by Shawn “JAY
Z” Carter, Primary Venture Partners (“Primary”) and GBAM. Primary will serve as a venture advisor and GlassBridge
will provide institutional and operational support. ARRIVE was created to invest alongside entrepreneurs and early stage businesses.
Among other things, ARRIVE has launched a traditional venture fund in order to, among other activities, support existing portfolio
companies through their subsequent growth stages and anticipates launching other special purpose investment vehicles to invest
in private equity transactions.
In
June 2017, we launched our first GBAM-managed investment fund (the “GBAM Fund”) which focuses on technology-driven
quantitative strategies and other alternative investment strategies. The fund initially performed in-line with the expectation
for 2017. However, we had a difficult time raising third-party capital due to the overall under-performance of the hedge fund
industry. In Q4, 2018, after our internal business review and deliberations, we decided to temporarily close the GBAM Fund
to save operating costs.
We
have made the determination to consolidate the GBAM Fund and, accordingly, its financial results were included in our Consolidated
Financial Statements as part of the Asset Management Business shown below.
As
of March 31, 2019, the Asset Management Business is our only reportable segment.
We
evaluate segment performance based on revenue and operating loss. The operating loss reported in our segments excludes corporate
and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported
consolidated results. The corporate and unallocated operating loss includes costs which are not allocated to the business segments
in management’s evaluation of segment performance such as litigation settlement expense, corporate expense and other expenses.
For
our Asset Management Business, we include net income from GBAM Fund activities in our performance evaluation. Net income from
GBAM Fund activities primarily represents realized and unrealized gains and losses for the GBAM Fund.
Net
revenue and operating loss from continuing operations by segment were as follows:
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
Asset Management Business
|
|
|
—
|
|
|
|
0.1
|
|
|
Total net revenue
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
(In millions)
|
|
2019
|
|
|
2018
|
|
|
Operating income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
Asset Management Business
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
Total segment operating loss
|
|
|
0.0
|
|
|
|
(0.9
|
)
|
|
Corporate and unallocated
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
Restructuring and other
|
|
|
(0.1
|
)
|
|
|
—
|
|
|
Total operating loss
|
|
|
(0.9
|
)
|
|
|
(1.7
|
)
|
|
Interest expense
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
Net gain (loss) from GBAM Fund activities
|
|
|
—
|
|
|
|
(0.1
|
)
|
|
Other income (expense), net
|
|
|
—
|
|
|
|
0.2
|
|
|
Loss from continuing operations before income taxes
|
|
$
|
(0.9
|
)
|
|
$
|
(1.7
|
)
|
Note
13 — Litigation, Commitments and Contingencies
The
Company is a party, as either a sole or joint defendant or plaintiff, in various lawsuits, claims and other legal matters that
arise in the ordinary course of conducting business (including litigation relating to our Legacy Businesses and discontinued operations).
All such matters involve uncertainty and accordingly, outcomes that cannot be predicted with assurance. As of March 31, 2019,
we are unable to estimate with certainty the ultimate aggregate amount of monetary liability or financial impact that we may incur
with respect to these matters. It is reasonably possible that the ultimate resolution of these matters, individually or in the
aggregate, could materially affect our financial condition, results of operations and cash flows.
Intellectual
Property Litigation
The
Company is subject to allegations of patent infringement by our competitors as well as non-practicing entities (“NPEs”)
- sometimes referred to as “patent trolls” - who may seek monetary settlements from us, our competitors, suppliers
and resellers. The nature of such litigation is complex and unpredictable and, consequently, the Company is not able to reasonably
estimate with precision the amount of any monetary liability or financial impact that may be incurred with respect to these matters.
As of May 15, 2019, given the exits from the Legacy Businesses, the Company believes that the ultimate resolution of these
matters in the aggregate will not materially adversely affect our financial condition, results of operations and cash flows.
Trade
Related Litigation
On
January 26, 2016, CMC, a supplier of our Legacy Businesses, filed a suit in the District Court of Ramsey County Minnesota, seeking
damages from the Company and the Company’s wholly-owned subsidiary Imation Latin America Corp. (“ILAC”) for
alleged breach of contract. CMC also brought similar claims in Japan and the Netherlands against other of our subsidiaries. As
previously disclosed in the Current Report on Form 8-K we filed with the SEC on September 18, 2017, we entered into a settlement
agreement with CMC on September 15, 2017 resolving all claims relating to the CMC lawsuits. Pursuant to the settlement, (i) we
agreed that our subsidiary Imation Corporation Japan (“ICJ”) will cause the release and payment to CMC of approximately
$9.2 million in attached assets, (ii) ICJ made a payment to CMC of $1.5 million on October 10, 2017, (iii) our subsidiary Imation
Europe B.V. (“IEBV”) will cause the release and payment to CMC of approximately $825,000 in attached assets, (iv)
ICJ issued to CMC an unsecured promissory note (the “CMC Note”) in the amount of $1.5 million, and (v) we guaranteed
CMC ICJ’s obligations under the CMC Note. As of December 31, 2017, both ICJ and Europe B.V. had released the required payments
to CMC. In January 2018, ICJ made a $0.5 million payment to CMC in relation to the $1.5 million CMC Note discussed above. On
March 28, 2019, the Company, together with its subsidiaries, including IJC, entered into a pre-pay agreement (the “Pre-Pay
Agreement”) with CMC providing that the Company shall pre-pay the remaining balance of $1,000,000 due and payable under
the CMC Note for a one-time cash payment of $325,000, and CMC accepted such pre-payment in full satisfaction of the Company’s
obligations under the settlement agreement and the CMC Note. The $325,000 payment was made on March 28, 2019.
The
Company has various trade disputes with vendors related to the Legacy Businesses. The Company believes it has made adequate accruals
with respect to the disputes for which such is appropriate according to our accounting policy.
Employee
Matters
On
March 29, 2017, three former Legacy Business employees who were among the approximately 100 similarly situated employees terminated
as a result of the Restructuring Plan filed a lawsuit in the Minnesota State District Court of Ramsey County asserting state law
claims for non-payment of allegedly promised severance benefits of approximately $200,000. While full discovery of the relevant
facts has not been completed, we believe these state law claims are without merit and are vigorously defending our position. On
February 27, 2019, the Company settled the claim for a gross payment of $86,000.
Forty-five former Legacy Business employees
are suing the Company for unpaid severance allegedly promised to them by the Company. Plaintiffs allege the Company promised them
and other employees a severance package that they claim is separate from severance under Imation’s discretionary ERISA severance
plan called the Income Assistance Plan. The case has not been filed and no schedule is set. We believe these state law claims
are without merit and are vigorously defending our position.
Copyright
Levies
We had previously
disclosed various copyright levy litigations related to our former subsidiary – IEBV. In connection with the Subsidiary
Sale, the Company is no longer liable for adverse outcomes and may receive Contingent Payouts should IEBV prevail in litigation.
Indemnification
Obligations
In
the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance
under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim.
There have historically been no material losses related to such indemnifications. As of March 31, 2019 and December 31,
2018, estimated liability amounts associated with such indemnifications were not material.
Environmental
Matters
Our
Legacy Business operations and indemnification obligations resulting from our spinoff from 3M subject us liabilities arising from
a wide range of federal, state and local environmental laws. For example, from time to time we have received correspondence from
3M notifying us that we may have a duty to defend and indemnify 3M with respect to certain environmental claims such as remediation
costs. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability
has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed and
are adjusted accordingly. We did not have any environmental accruals as of March 31, 2019. Compliance with environmental
regulations has not had a material adverse effect on our financial results.
Note
14 — Related Party Transactions
On
January 1, 2019, the Company and Clinton entered into a management service agreement (the “Management Service Agreement”),
pursuant to which Clinton agreed to provide certain services to the Company, including accounting and treasury services, service
of managing the third party fund administrator, IT services, payroll and benefit services and other administration services as
reasonably requested by the Company. The initial term of this Management Service Agreement is six (6) months (the “Initial
Term”) and shall renew for successive renewal terms of three (3) calendar months (each, a “Renewal Term”) unless
either Party provides notice of nonrenewal to the other Party prior to the conclusion of the then current initial term or renewal
term. The Company shall pay Clinton at the rate of $68,750 each quarter for the Initial Term and each Renewal Term.
On
January 31, 2017, the Company held a special meeting of the stockholders of the Company at which the stockholders approved the
issuance of up to 1,500,000 shares (the “Capacity Shares”) of the Company’s common stock (as adjusted to reflect
the Reverse Stock Split), par value $0.01 per share, pursuant to the Subscription Agreement, dated as of November 22, 2016, by
and between the Company and Clinton, as amended by Amendment No. 1 to the Subscription Agreement, dated as of January 9, 2017
(as so amended, the “Subscription Agreement”). Pursuant to the terms of the Subscription Agreement, on February 2,
2017 (the “Initial Closing Date”), the Company entered into the Capacity and Services Transaction with Clinton Group
and GBAM (the “Capacity and Services Transaction”). As consideration for the capacity and services Clinton has agreed
to provide under the Capacity and Services Transaction and pursuant to the terms of the Subscription Agreement, the Company issued
1,250,000 shares of the Company’s common stock (as adjusted to reflect the Reverse Stock Split) to Madison Avenue Capital
Holdings, Inc. (“Madison”), an affiliate of Clinton, on the Initial Closing Date. The closing price of the Company’s
common stock on the Initial Closing Date was $8.10. The Company also entered into a Registration Rights Agreement with Madison
on the Initial Closing Date, relating to the registration of the resale of the Capacity Shares as well as a letter agreement with
Madison pursuant to which Madison has agreed to a three-year lockup with respect to any Capacity Shares issued to it.
The
Company did not have a short term investment balance in Clinton Lighthouse as of March 31, 2019 and December
31, 2018, and as such did not have any unrealized gains for the three months ended March 31, 2019. Pursuant to the Capacity
and Services Agreement, the Company will no longer incur management or performance fees related to our investment in Clinton Lighthouse.
Daniel
A. Strauss serves as our Chief Executive Officer and Chief Operating Officer, and Francis Ruchalski serves as our Chief
Financial Officer, pursuant to the terms of a the Amended and Restated Services Agreement we entered into with Clinton
on March 31, 2019 (the “Amended Services Agreement”) replacing in its entirety that certain Services Agreement
we entered into with Clinton on March 2, 2017 (the “Services Agreement”). The Amended Services Agreement provides
that Clinton will make available certain of its employees to provide services to the Company, including CEO services,
COO services and CFO services (the “Executive Services”). In addition to the Executive Services, Clinton will make
available other employees of Clinton as necessary to manage certain business functions as deemed necessary in the sole discretion
of Clinton to provide other management services (the “Management Services”). Under the Amended Services Agreement,
Clinton may designate substitutes for Mr. Strauss or Mr. Ruchalski or any other employee providing any Management Services. In
consideration for the Executive Services and Management Services, the Company shall provide to Clinton a rate of
$243,750 for the initial term, such term being the first three (3) months following the execution date of the Amended Services
Agreement, and to automatically renew for successive renewal terms of three (3) calendar months each, the fee for
each renewal term being $243,750. Clinton will continue to pay Mr. Strauss’s and Mr. Ruchalski’s
compensation and benefits and we have agreed to pay or reimburse Mr. Strauss for their reasonable expenses. Pursuant to
the terms of the Amended Services Agreement, we have also agreed to indemnify Mr. Strauss, Mr. Ruchalski, Clinton, any
substitute for Mr. Strauss, Mr. Ruchalski, or any other Clinton employee providing services under the Master Services Agreement
for certain losses. As of March 31, 2019, the Company paid Clinton $1,462,500 under the Services Agreement and
recorded $462,500 and $125,000 within “Selling, general and administrative” in our
Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018, respectively.
Note
15 — Subsequent Events
As
previously disclosed, on July 1, 1996, GlassBridge Enterprises, Inc., formerly known as Imation Corp., a Delaware corporation
(the “Company”) adopted the Imation Cash Balance Pension Plan, now known as the GlassBridge Enterprises Cash Balance
Pension Plan (the “Plan”), an employee benefit plan formed pursuant to 29 U.S.C. § 1321(a). Beginning in September
2018, the Company entered into discussions with the U.S. Pension Benefit Guaranty Corporation (the “PBGC”), a United
States government agency established by Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”)
which insures certain pension plans., for the purpose of obtaining certain relief from the Company’s obligations under the
Plan. On April 16, 2019, the Company received notice from the PBGC, that the Company’s application for termination of the
Plan had been approved by the PBGC, with the termination date of the Plan to occur on April 30, 2019, the PBGC finding that (i)
the Plan did not meet the minimum funding standard required under section 412 of the Internal Revenue Code; (ii) the Plan would
be unable to pay benefits when due and (iii) the Plan should be terminated in order to protect the interests of the Plan participants
(the “Notice of Determination”).