NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Background and Basis of Presentation
Background
GlassBridge
Enterprises, Inc. owns and operates an asset management business
and a sports investment platform through majority owned Adara Enterprises, Corp. f/k/a Imation Enterprises Corp. (“Adara”)
and Sport-BLX, Inc. (“SportBLX”). Adara owns all of our asset management business, operated by Adara Asset Management,
LLC and part of our SportBLX holdings. GlassBridge Asset Management LLC changed its name to Adara Asset Management LLC (“AAM”)
in 2020.
As
used in this document, the terms “GlassBridge”, “the Company”, “we”, “us”, and
“our” mean GlassBridge Enterprises, Inc. and its subsidiaries unless the context indicates otherwise.
Basis
of Presentation
The
financial statements are presented on a consolidated basis and 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 Consolidated Financial Statements up to the date of the disposal and, where
appropriate, these operations have been reflected as discontinued operations. Our Consolidated Financial Statements are prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”). 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 results reported.
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 AAM, 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 Consolidated Balance Sheets
for all periods presented. See Note 5 - Discontinued Operations for further information.
On
August 16, 2018, the Company consummated the NXSN Transaction, wherein the Company, through a series of transactions, sold its
partially-owned subsidiary, the Nexsan Business, to StorCentric, Inc., a Delaware company affiliated with Drobo, Inc. See Note
5 - Discontinued Operations for further information.
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”). 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) $277,900 payable upon the execution 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 recorded a one-time non-cash gain of approximately
$10 million in connection with IMN Capital Agreement transaction.
The
Company’s continued operations and ultimate ability to continue as a going concern will depend on its ability to enhance
revenue and operating results, enter into strategic relationships or raise additional capital. The Company can provide no assurances
that all or any of such plans will occur; and if the Company is unable to return to profitability or otherwise raise sufficient
capital, there would be a material adverse effect on its business.
On
August 20, 2019, the Company effected a reverse split of our common stock, par value $0.01 per share at a ratio of 1:200 (the
“Reverse Stock Split”). On August 21, 2019 (the “Effective Date”), our common stock began trading on the
Reverse Stock Split-adjusted basis on the OTCQB at the opening of trading. In connection with the Reverse Stock Split, our common
stock began trading with a new CUSIP number at such time. There was no change to the Company’s stock symbol. All prior periods
have been retroactively adjusted to give effect to the reverse stock split. See Note 12 - Shareholders’ Equity for
further information.
Note
2 — Summary of Significant Accounting Policies
Use
of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported asset and liability amounts and the contingent asset and liability disclosures at the date of the financial
statements, as well as the revenue and expense amounts reported during the period. Actual results could differ from those estimates.
Foreign
Currency. For our international operations, where the local currency has been determined to be the functional currency, assets
and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’
equity. Income and expense items are translated at average foreign exchange rates prevailing during the year. Income and losses
from foreign currency transactions are included in our Consolidated Statements of Operations.
Cash
Equivalents. Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the
time of purchase. The carrying amounts reported in our Consolidated Balance Sheets for cash equivalents approximate fair value.
Restricted
Cash. Cash related to contractual obligations or restricted by management for specific use is classified as restricted and
is included in non-current assets on our Consolidated Balance Sheets depending on the timing of the restrictions. As of December
31, 2019, and December 31, 2018, we had $0.0 million and $0.4 million, respectively, in non-current assets of discontinued operations
which relates to cash set aside as indemnification for certain customers.
Investments.
Investment securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading.
The Company’s short-term investment balances as of December 31, 2019 and 2018 included trading securities, which are measured
at fair value. The corresponding income or loss associated with these trading securities is reported in our Consolidated Statements
of Operations as a component of “Other income (expense), net”. Trading securities are bought and held principally
for the purpose of selling them in the near term therefore are only held for a short period of time.
Fair
Value Measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a
liability, or the exit price in an orderly transaction between market participants on the measurement date. A three-level hierarchy
is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of
the measurement date. Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly
or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable
inputs. A financial instrument’s level within the hierarchy is based on the highest level of any input that is significant
to the fair value measurement. The Company measures certain assets and liabilities including cash and cash equivalents, and investments
in trading securities at their estimated fair value on a recurring basis. The Company’s non-financial assets such as goodwill
and intangible assets are recorded at fair value on a nonrecurring basis.
Trade
Accounts Receivable and Allowances. Trade accounts receivable are stated net of estimated allowances, which primarily represent
estimated amounts associated with customer returns, discounts on payment terms and the inability of certain customers to make
the required payments. When determining the allowances, we take several factors into consideration, including prior history of
accounts receivable credit activity and write-offs, the overall composition of accounts receivable aging, the types of customers
and our day-to-day knowledge of specific customers. Changes in the allowances are recorded as reductions of net revenue or as
bad debt expense (included in selling, general and administrative expense), as appropriate, in our Consolidated Statements of
Operations. In general, accounts which have entered into an insolvency action, have been returned by a collection agency as uncollectible
or whose existence can no longer be confirmed are written off in full and both the receivable and the associated allowance are
removed from our Consolidated Balance Sheet. If, subsequent to the write-off, a portion of the account is recovered, it is recorded
as a reduction of bad debt expense in our Consolidated Statements of Operations at the time cash is received.
Intangible
Assets. We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated fair value.
The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analyses
require management to make subjective estimates of how the acquired assets will perform in the future using certain valuation
methods.
Impairment
of Long-Lived Assets. We periodically review the carrying value of our property and equipment and our intangible assets, including
goodwill, to test whether current events or circumstances indicate that such carrying value may not be recoverable. For the testing
of long-lived assets that are “held for use,” if the tests indicate that the carrying value of the asset group that
contains the long-lived asset being evaluated is greater than the expected undiscounted cash flows to be generated by such asset
or asset group, an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying
value of such asset group exceeds its estimated fair value. We generally measure fair value by considering sale prices for similar
assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Management judgment
is necessary to estimate the fair value of assets and, accordingly, actual results could vary significantly from such estimates.
Restructuring.
Restructuring generally includes significant actions involving employee-related severance charges, contract termination costs,
and impairment or accelerated depreciation/amortization of assets associated with such actions. These charges are reflected in
the quarter when the actions are probable and the amounts are estimable, which is typically when management approves the associated
actions. Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term or
costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. Asset
impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’ carrying
values over their fair values.
Revenue Recognition.
The Company recognizes revenue in light of the guidance of Accounting Standards Codification (ASC) 606, Revenue from Contracts
with Customers. Revenue is recognized when control of goods has transferred to customers. For the majority of the Company’s
customer arrangements, control transfers to customers at a point-in-time when goods/services have been delivered as that is generally
when legal title, physical possession and risks and rewards of goods/services transfers to the customer. Revenue is recognized
at the transaction price which the Company expects to be entitled. The majority of the Company’s customer arrangements contain
a single performance obligation for services as the promise for services is not separately identifiable from other
promises in the contracts and, therefore, not distinct. The Company may also enter into customer arrangements that involve intellectual
property out-licensing, multiple performance obligations, services and non-standard terms and conditions.
Income
Taxes. We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax obligations based on expected taxable income, statutory tax rates and tax credits allowed in
the various jurisdictions in which we operate. Tax laws require certain items to be included in our tax returns at different times
than the items are reflected in our results of operations. Some of these differences are permanent, such as expenses that are
not deductible in our tax returns, and some are temporary differences that will reverse over time. Temporary differences result
in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We must assess the likelihood that
our deferred tax assets will be realized and establish a valuation allowance to the extent necessary.
We
record income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We
measure deferred tax assets and liabilities using the enacted statutory tax rates that are expected to apply in the years in which
the temporary differences are expected to be recovered or paid.
We
regularly assess the likelihood that our deferred tax assets will be recovered in the future. In accordance with accounting rules,
a valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not
to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing
the need for a valuation allowance. If we determine it is more-likely-than-not that we will not realize all or part of our deferred
tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.
Our
income tax returns are subject to review by various taxing authorities. As such, we record accruals for items that we believe
may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial
statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based solely on the technical
merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount
of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
Treasury
Stock. Our repurchases of shares of common stock are recorded at cost as treasury stock and are presented as a reduction of
shareholders’ equity. When treasury shares are reissued, we use a last-in, first-out method, and the difference between
repurchase cost and fair value at reissuance is treated as an adjustment to equity.
Stock-Based
Compensation. Stock-based compensation awards classified as equity awards are measured at fair value at the date of grant
and expensed over their vesting or service periods.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions
used in the valuation model are supported primarily by historical indicators and current market conditions. Expected volatilities
are based on historical volatility of our stock and are calculated using the historical weekly close rate for a period of time
equal to the expected term. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant. We use historical data and management judgment to estimate option exercise and employee termination
activity within the valuation model. The expected term of stock options granted is based on historical data and represents the
period of time that stock options granted are expected to be outstanding. It is calculated on an aggregated basis and estimated
based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining
the expected term, we consider the vesting period of the awards, the contractual term of the awards, historical average holding
periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors.
The dividend yield, if applicable, is based on the latest dividend payments made on or announced by the date of the grant. Forfeitures
are estimated based on historical experience and current demographics. See Note 9 - Stock-Based Compensation for
further information regarding stock-based compensation.
Income
(Loss) per Common Share. Basic income (loss) per common share is calculated using the weighted average number of shares outstanding
during the year. 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 basic 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 income (loss) per common share because the effect would
be anti-dilutive. See Note 3 - Income (Loss) per Common Share for our calculation of weighted average basic and diluted
shares outstanding.
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. The Company adopted this ASU in the first quarter of 2019 and there was no material impact to its consolidated
results of operations and 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 of this ASU may be applied either at the beginning of the period
(annual or interim) of adoption or retrospectively to each of the period(s) in which the effect of the change in the U.S. federal
corporate tax rate in the Tax Reform Act is recognized. The Company adopted this ASU in the first quarter of 2019 and there was
no material impact to its consolidated results of operations and 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
The
following table sets forth the computation of the weighted average basic and diluted income (loss) per share:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
11.4
|
|
|
$
|
(8.7
|
)
|
Income
from discontinued operations, net of income taxes
|
|
|
11.7
|
|
|
|
12.8
|
|
Net
income
|
|
$
|
23.1
|
|
|
$
|
4.1
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of diluted shares outstanding during the period - basic and diluted (in thousands)
|
|
|
25.5
|
|
|
|
25.5
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share attributable to GlassBridge common shareholders — basic and diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
330.15
|
|
|
$
|
(341.18
|
)
|
Discontinued
operations
|
|
|
461.45
|
|
|
|
482.35
|
|
Net
income
|
|
$
|
791.60
|
|
|
$
|
141.17
|
|
Anti-dilutive
shares excluded from calculation
|
|
|
—
|
|
|
|
—
|
|
Note
4 – Business Combination
During
the first ten months of 2019, the Company entered into three Common Stock Purchase Agreements (the “SportBLX Purchase Agreement”)
with SportBLX, Inc., a Delaware corporation (“SportBLX”), purchasing a total of 13,519 shares of SportBLX common stock
for total consideration of $1,788,379.
On
December 12, 2019, the Company acquired a controlling interest of 50.7% in SportBLX by purchasing an additional 55,000 shares
for total consideration of $19.5 million, in two separate stock purchase agreements. The Company entered into a Common Stock Purchase
Agreement with Joseph A. De Perio (the “De Perio Agreement”) pursuant to which the Company purchased 17,076 shares
of SportBLX common stock in exchange for consideration of $6,061,980. On the same date, the Company entered into a Common Stock
Purchase Agreement with George E. Hall (the “Hall Agreement” and, together with the De Perio Agreement, the “Stock
Purchase Agreements”) pursuant to which the Company purchased 37,924 shares of SportBLX common stock for consideration of
$13,463,020. Joseph De Perio is a member of the Board of Directors of the Company, owns 2.47% of the Company’s outstanding
common stock and is SportBLX’s president. George E. Hall is the beneficial holder of approximately 29.1% of the Company’s
outstanding common stock and is the Executive Chairman and CEO of SportBLX.
The
aggregate consideration paid by the Company in the business combination is $21,313,378.72.
Date
|
|
Description
|
|
Shares
Acquired
|
|
Per
Share Price
|
|
Consideration
|
January
4, 2019
|
|
SportBLX
Purchase Agreement
|
|
|
10,526
|
|
|
$
|
95.0029
|
|
|
$
|
1,000,000
|
|
September
16, 2019
|
|
SportBLX
Purchase Agreement
|
|
|
679
|
|
|
|
263.4074
|
|
|
|
178,854
|
|
October
18, 2019
|
|
SportBLX
Purchase Agreement
|
|
|
2,314
|
|
|
|
263.4074
|
|
|
|
609,525
|
|
|
|
|
|
|
13,519
|
|
|
|
|
|
|
|
1,788,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
12, 2019
|
|
De
Perio Agreement
|
|
|
17,076
|
|
|
|
355.0000
|
|
|
|
6,061,980
|
|
December
12, 2019
|
|
Hall
Agreement
|
|
|
37,924
|
|
|
|
355.0000
|
|
|
|
13,463,020
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
19,525,000
|
|
Total
shares and consideration
|
|
|
|
|
68,519
|
|
|
|
|
|
|
$
|
21,313,379
|
|
The
following table presents the provisional fair value of the assets acquired and liabilities assumed at the date of acquisition:
Cash
and cash equivalents
|
|
$
|
3,365
|
|
Sundry
receivable
|
|
|
14,772
|
|
Investment
– Race Horses
|
|
|
220,000
|
|
Investment
– BLX Trading Corp
|
|
|
4,600
|
|
TANGIBLE
ASSETS ACQUIRED
|
|
|
242,737
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
712,160
|
|
Accrued
expenses
|
|
|
50,000
|
|
Accrued
interest payable
|
|
|
27,796
|
|
Note
payable
|
|
|
2,000,000
|
|
TANGIBLE
LIABILITIES ASSUMED
|
|
|
2,789,956
|
|
NET
TANGIBLE LIABILITIES ASSUMED
|
|
|
(2,547,219
|
)
|
|
|
|
|
|
Goodwill
|
|
|
50,552,094
|
|
INTANGIBLE
ASSETS ACQUIRED
|
|
|
50,552,094
|
|
|
|
|
|
|
Consideration
|
|
|
21,313,379
|
|
Unrealized
gain
|
|
|
3,010,866
|
|
Total
GlassBridge Enterprises, Inc. interest
|
|
|
24,324,245
|
|
Noncontrolling
interests
|
|
|
23,680,630
|
|
|
|
$
|
48,004,875
|
|
The following
table provides unaudited pro forma information for the periods presented as if the SportBLX acquisition had occurred January 1,
2018:
|
|
Year Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in millions)
|
|
Revenues
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
Loss from continuing operations
|
|
$
|
(10.6
|
)
|
|
$
|
(8.3
|
)
|
As
a result of the acquisition, the Company, will seek revenues by creating an online marketplace for sports assets, including revenue
share interests in player and racehorse earnings and equity interests in teams. SportBLX partners with a registered broker-dealer
to effect transactions in sports assets constituting securities. SportBLX enables enthusiasts to use their knowledge to engage
passionately and invest in the athletes and sports teams they love, giving investors opportunities to participate in the value
creation that success in sports brings.
SportBLX
is offering a new asset class and is the first company to bring it to the market. Sports is a multi-billion dollar industry with
economic and non-economic factors that make it very unique. The leadership at SportBLX brings over thirty years of experience
in the financial industry with experience in securitizing, structuring and trading. This unique combination accounts for the goodwill
of $50,552,094 arising from the acquisition.
None
of the goodwill recognized is expected to be deductible
for income tax purposes. The fair value allocation has not yet been completed and all amounts are provisional.
Note
5 — Discontinued
Operations
The
NXSN Sale
Background
of Sale
On
August 16, 2018, the Company completed the disposition of its entire interest in the Nexsan Business, as described herein.
On
August 16, 2018, we simultaneously acquired all of the capital stock of NXSN Acquisition Corp. (together with its subsidiaries,
“NXSN”) from Humilis Holdings Private Equity LP f/k/a Spear Point Private Equity LP (“Humilis”) and sold
all of the capital stock of the Nexsan Group (as defined herein)(collectively the “NXSN Sale”) to StorCentric, Inc.
(the “Buyer”), a newly-incorporated Delaware company affiliated with Drobo, Inc., a Delaware corporation (“Drobo”)
for $5,675,000. As previously reported, NXSN owned all of the issued and outstanding shares of capital stock (the “Nexsan
Shares”) of Nexsan Corporation, a Delaware corporation (“Nexsan”); and Nexsan owns all of the outstanding capital
stock of the following companies: Nexsan Technologies Limited, an England and Wales entity (“Nexsan UK”), Nexsan Technologies
Incorporated, a Delaware corporation (“Nexsan US”), Connected Data, Inc., a California corporation (“Connected
Data”), 6360319 Canada Inc and 6360246 Canada Inc, Canadian corporations (“First Canadian Entity” and collectively
with Nexsan UK, Nexsan US, Connected Data, the “Direct Subsidiaries”); and First Canadian Entity owns all of the outstanding
capital stock of Nexsan Technologies Canada, Inc., a Canadian corporation (“Nexsan Canada” and collectively with the
Second Canadian Entity, the “Indirect Subsidiaries” and the Indirect Subsidiaries collectively with the Direct Subsidiaries
and Nexsan, the “Nexsan Group”).
Prior
to the NXSN Sale, we owned fifty percent of the common stock of NXSN and a Senior Secured Convertible Note of NXSN dated January
23, 2017 (the “NXSN Note”) in the original principal amount of $25,000,000 which Note was declared in default on November
14, 2017. The NXSN Note is secured in favor of the Company by that certain Guaranty and Security Agreement dates as of January
23, 2017 by and among NXSN, Nexsan, the Company and the other participants thereto (the “NXSN Security Agreement”)
pursuant to which inter alia Nexsan, Connected Data and Nexsan US, collectively, had guaranteed the obligations of NXSN under
the NXSN Note (collectively, the “Nexsan Guaranty”). We had pledged the NXSN Note as security for that certain GlassBridge
Enterprises, Inc. Secured Promissory Note dated September 28, 2017 (the “GlassBridge Note”) issued in favor of IOENGINE,
LLC, a Delaware limited liability company(“IOENGINE”) in the original principal amount of $4,000,000 pursuant to that
certain Pledge Agreement dated September 28, 2017 by and between the Company and IOENGINE (the “GlassBridge Pledge Agreement”),
in connection with the settlement of litigation with IOENGINE.
The
Company had acquired from Connected Data a Promissory Note dated May 15, 2015 made by Drobo initially in favor of Connected Data
(including the related along, the “Drobo Note”).
Description
of Sale and Material Agreements
As
the first step in the NXSN Transaction, the Company caused NXSN to enter into an Exchange Agreement dated as of August 16, 2018
with Humilis (the “NXSN-Humilis Agreement”) pursuant to which NXSN agreed to grant Humilis an option to purchase the
Nexsan Shares (the “Share Option”), equal to an aggregate of 140,000,500 shares of NXSN common stock and 5,600,000
shares of NXSN preferred stock, as set forth in an assignable Option Agreement dated as of an even date with the NXSN-Humilis
Agreement (the “Option Agreement”) in exchange, inter alia, for the transfer to the Company of all of Humilis’
equity interests in NXSN.
Such
Option Agreement was then assigned to Humilis Holdings LLC, an affiliate of Humilis, which, in turn, assigned the Option Agreement
to Buyer pursuant to an Assignment of Contract by and between Humilis Holdings LLC and Buyer (the “Buyer-Humilis Assignment”),
after which Buyer exercised the Share Option in accordance with the terms of the Option Agreement by entering into that certain
Stock Purchase Agreement, dated August 16, 2018 (the “SPA”), by and among StorCentric, Inc., as Buyer, NXSN, as Seller,
and the Company as Parent, contemplating gross proceeds in the amount of $5,675,000 (the “SPA Gross Proceeds”).
Subject
to the terms and conditions of the SPA and the ancillary agreements referred to in the SPA (the “Ancillary Agreements”)
(i) the Company and NXSN caused the Nexsan Guaranty and all encumbrances on the Nexsan Shares and the assets and business of Nexsan
and the Nexsan Subsidiaries, including under the NXSN Security Agreement to be released, (ii) NXSN transferred all right, title
and interest in and to the Nexsan Shares to Buyer free and clear of all encumbrances, (iii) Buyer paid off any and all amounts
due and owing under the GlassBridge Note out of the purchase price otherwise payable to NXSN in accordance with that certain Pre-Pay
Agreement dated as of August 13, 2018 by and among IOENGINE, the Company and Scott McNulty (the “IOENGINE Pre-Payment Agreement”),
being Two Million Two Hundred Fifty Thousand Dollars ($2,250,000; (iv) in accordance with that certain Settlement Agreement and
Mutual Release dated August 10, 2018 entered into inter alia, by NXSN, Nexsan US and Humilis (the “NTI A/R Settlement Agreement”)
regarding the Receivables Litigation (as defined in the SPA), Nexsan US paid the Payment (as defined therein); (v) Buyer paid
NXSN the Consideration described in the SPA to NXSN as payment in full for the purchase of the Shares, (vi) the Company delivered
a certification that the original signed Drobo Note cannot be located (with appropriate indemnities) to Buyer and the Drobo Note
was deemed to be cancelled, and (vii) all obligations of the Nexsan and the Nexsan Subsidiaries toward the Company or NXSN (other
than the obligations under the SPA) were extinguished.
The SPA also provided
for the placement in an Escrow Account $650,000 of the Consideration (the “Escrowed Funds”) to be held as a possible
source of indemnification by NXSN and the Company for any indemnifiable costs or liabilities arising within 18 months of the NXSN
Transaction. Escrowed funds of $610,760, net of claims, were remitted to the Company on February 19, 2020. Furthermore,
The SPA provided for the working capital adjustment toward the SPA Gross Proceeds based on the difference between the actual working
capital on July 31, 2018 and the working capital target.
Upon
deducting the Escrowed Funds and payment made to IOENGINE pursuant to the IOENGINE Pre-Payment Agreement from the SPA Gross Proceeds,
the Company received a cash payment of Two Million Seven Hundred Seventy-five Thousand Dollars ($2,775,000.00) in connection with
the SPA.
The
Legacy Businesses
In
September 2015, the Company adopted a restructuring plan (the “Restructuring Plan”) approved by the Board of Directors
of the Company (the “Board”) which began the termination process of our Legacy Businesses. Strategically, our Board
and management determined that there was not a viable plan to make the Legacy Businesses successful and, accordingly, we began
to aggressively wind down these businesses in an accelerated manner via the Restructuring Plan. On January 4, 2016, the Company
closed on the sale of its Memorex trademark and receivables associated with two associated trademark licenses to DPI Inc., a St.
Louis-based branded consumer electronics company for $9.4 million. The Restructuring Plan also called for the aggressive rationalization
of the Company’s corporate overhead and focused on reducing our operating losses. As of December 31, 2016, the wind-down
of our Legacy Businesses was substantially complete. We have effectively terminated all employees associated with our Legacy Businesses
and ceased all operations, including revenue-producing activities. As of December 31, 2019, we have substantially collected all
our outstanding receivables and settled all of our outstanding payables associated with these businesses.
On
December 28, 2018, GlassBridge entered into a Purchase Agreement with Hilco IP Services LLC d/b/a Hilco Streambank, a Delaware
limited liability company as purchaser (the “Purchaser”), whereby Purchaser would acquire GlassBridge’s right,
title and interest in and to certain IPv4 internet protocol addresses for an aggregate purchase price of $950,000 (the “Address
Purchase Agreement”) to be held in escrow subject to the subsequent sale of the IPv4 addresses. On February 15, 2019, GlassBridge
and Purchaser entered into a Letter Agreement to complete the transactions contemplated in the Address Purchase Agreement (the
“Letter Agreement”). Pursuant to the terms of the Letter Agreement: (1) GlassBridge (i) delivered an executed bill
of sale to Purchaser, (ii) delivered ten (10) blank signed American Registry for Internet Numbers (“ARIN”) Officer
Attestation Forms (the “ARIN Forms’) to Purchaser and (iii) designated Purchaser or Purchaser’s designee, as
applicable, as a point of contact on GlassBridge’s ARIN accounts as necessary; and (2) Purchaser instructed the escrow agent
to release $750,000 to GlassBridge, with $200,000 to remain in escrow.
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) $277,900 payable upon the execution 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
$10.0 million in connection with IMN Capital Agreement transaction.
Results
of Discontinued Operations
The
operating results for the Legacy Businesses and the Nexsan Business are presented in our 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:
|
|
For
the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Net
revenue
|
|
$
|
—
|
|
|
$
|
24.8
|
|
Cost
of goods sold
|
|
|
—
|
|
|
|
13.7
|
|
Gross
profit
|
|
|
—
|
|
|
|
11.1
|
|
Selling,
general and administrative
|
|
|
—
|
|
|
|
8.1
|
|
Research
and development
|
|
|
—
|
|
|
|
2.4
|
|
Restructuring
and other
|
|
|
—
|
|
|
|
(3.8
|
)
|
Other
income (expense)
|
|
|
1.3
|
|
|
|
(1.7
|
)
|
Income from discontinued operations, before income taxes
|
|
|
1.3
|
|
|
|
6.1
|
|
Gain
on sale of discontinued businesses, before income taxes
|
|
|
9.4
|
|
|
|
6.4
|
|
Income
tax benefit
|
|
|
1.0
|
|
|
|
0.3
|
|
Income from discontinued businesses, net of income taxes
|
|
$
|
11.7
|
|
|
$
|
12.8
|
|
Net
income of discontinued operations for year ended December 31, 2019 decreased by $1.1 million compared to the year
ended December 31, 2018.
Restructuring
and other for the year ended December 31, 2018, includes the net loss attributable to a noncontrolling interest of $0.6
million.
The
depreciation and amortization expenses recorded as part of income (loss) from discontinued operations (included in selling, general
and administrative and research and development expenses in table above) were $0.0 and $0.3 million for the year ended December
31, 2019 and 2018, respectively.
Lease
expense recorded as part of income (loss) from discontinued operations (included in selling, general and administrative expenses
in table above) were $0.0 million and $0.5 million for the years ending December 31, 2019 and 2018, respectively. This expense
was related to the Nexsan Business and the Company is no longer obligated under the lease.
The
income tax (provision) benefit related to discontinued operations was $1.0 million and $0.3 million for the years ended December
31, 2019 and 2018, respectively. See Note 11 - Income Taxes for additional information.
There
were no current assets of discontinued operations as of December 31, 2019. Current assets of discontinued operations of $2.4 million
as of December 31, 2018 included $0.7 million of accounts receivable, $1.0 million related to the funds held in escrow for the
Address Purchase Agreement and $0.7 million of other current assets. The decrease of the current assets in 2019 was primarily
due to the sale of the Imation Subsidiaries.
Current
liabilities of discontinued operations were $0.0 million as of December 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 liability amounts. The decrease of the current liabilities in 2018 was primarily due to the divestiture of the
Nexsan Business.
Other
liabilities of discontinued operations were $0.0 million as of December 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.
Note
6 — Supplemental Balance Sheet Information
Additional
supplemental balance sheet information is provided below.
Other
current assets of $2.8 million as of December 31, 2019 include $1.7 million of prepaid professional service fees to a related
party, $0.5 million for a tax refund to be received in 2020 and $0.6 million of escrowed funds related to the NXSN Transaction.
For more information regarding the NXSN Transaction, see Note 5 – Discontinued Operations.
Total
assets of as of December 31, 2019 include a $14.8 million investment in Arrive LLC (“Arrive”). The Company recognized
a $12 million unrealized gain on the Arrive investment from the prior year, net of a $1.2 million distribution. The Arrive investment
was $4.0 million as of December 31, 2018, which 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 December 31, 2019, there were no indicators of impairment for this investment.
The Company will assess the investment for potential impairment, quarterly.
Other
assets and other investments of $2.4 million include a $0.9 million investment in the Möbius Fund SCA SICAV-RAIF. In January
2020, the Company contributed an addition $0.4 million to the investment due to market downturn. The investment subsequently ended
and resulted in a $1.3 million loss that will be realized in the first quarter of 2020. A $0.5 million minimum tax credit is also
included in other assets and other investments as of December 31, 2019. Other assets as of December 31, 2018 include a $1.1 million
minimum tax refund, escrowed funds related to the NXSN Transaction of $0.7 million and $0.3 million of other assets. For more
information regarding the NXSN Transaction, see Note 5 - Discontinued Operations.
Other
current liabilities (included as a separate line item in our Consolidated Balance Sheets) include the following:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Accrued
payroll
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Levy
accruals
|
|
|
—
|
|
|
|
0.3
|
|
Pension
minimum contributions
|
|
|
—
|
|
|
|
1.9
|
|
Other
current liabilities
|
|
|
1.4
|
|
|
|
1.1
|
|
Total
other current liabilities
|
|
$
|
1.5
|
|
|
$
|
3.5
|
|
Other
current liabilities as of December 31, 2019, included accruals for professional services fees of $0.7 million and fees related
to insurance and other claims of $0.4 million.
As
of December 31, 2019, pension liabilities were $13.5 million. Following a payment made on October 3, 2019 in fulfillment of a
settlement agreement with the Pension Benefit Guaranty Corporation, the Company is no longer obligated for this liability, as
of January 6, 2020. Pension liabilities were $23.0 million as of December 31, 2018. See Note 10 – Retirement Plans
for additional information on the pension liability.
Stock
purchase agreements as of December 31, 2019, include notes payable of $12.1 million and $5.5 million to George E. Hall and Joseph
A. De Perio, respectively, in conjunction with the Stock Purchase Agreement for shares of SportBLX common stock. See Note 15 –
Related Party Transactions for additional information.
As
of December 31, 2019, the Company has a note payable of $13.0 million in connection with a Securities Purchase Agreement with
Orix PTP Holdings, LLC. See Note 15 – Related Party Transactions for additional information.
Note
7 — Debt
Debt
and notes payable consists of the following:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Pension
liability
|
|
$
|
13.5
|
|
|
$
|
25.1
|
|
Stock purchase
agreement notes payable (see Note 15 – Related Party Transactions)
|
|
|
17.6
|
|
|
|
—
|
|
Orix notes payable
|
|
|
13.0
|
|
|
|
—
|
|
Deferred financing
costs
|
|
|
(2.7
|
)
|
|
|
|
|
Other
liabilities
|
|
|
0.2
|
|
|
|
2.9
|
|
Total
long term debt
|
|
|
41.6
|
|
|
|
28.0
|
|
Pension
liabilities of $13.5 million as of December 31, 2019 are not included in the maturity schedule below as the Company is no longer
obligated for the liability as of January 6, 2020. See Note 10 – Retirement Plans for additional information on the pension
liability.
Stock
purchase agreement notes payable bear interest at a 5% annual rate and mature on December 12, 2022. The interest under the notes
is payable in arrears on the first day of each calendar quarter, or, at the Company’s option, in shares of common stock
of the Company at a price reflecting market value.
The
Orix notes payable bear interest at a 7.5% annual rate and mature on September 30, 2026. Principal payments are due annually,
commencing on March 31, 2021 and thereafter on March 31 of each year until maturity. The first two principal installments are
$3,461,538 each and the remaining installments are $519,231 each. All accrued interest is due and payable in arrears, commencing
on September 30, 2020 and thereafter on September 30 of each year until maturity.
Scheduled
maturities of the Company’s long-term debt, as they exist as of December 31, 2019, in each of the next four fiscal years
and thereafter are as follows:
Fiscal
years ending in
|
|
(in
millions)
|
|
2020
|
|
$
|
—
|
|
2021
|
|
|
5.0
|
|
2022
|
|
|
22.6
|
|
2023
|
|
|
0.8
|
|
2024
|
|
|
0.7
|
|
2025
and thereafter
|
|
|
1.5
|
|
Total
|
|
|
30.6
|
|
Note
8 — Restructuring and Other Expense
Restructuring
expenses generally include severance and related charges, lease termination costs and other costs related to restructuring programs.
Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally,
these charges are reflected in the period in which the Board approves the associated actions, the actions are probable, and the
amounts are estimable which may occur prior to the communication to the affected employee(s). This estimate considers all information
available as of the date the financial statements are issued.
Restructuring
and Other Expense
The
components of our restructuring and other expense for our continuing operations included in our Consolidated Statements of Operations
were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Restructuring
Expense:
|
|
|
|
|
|
|
|
|
Severance
and related
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Total
restructuring
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
German
levy settlement
|
|
|
—
|
|
|
|
(5.0
|
)
|
Total
other
|
|
$
|
—
|
|
|
$
|
(5.0
|
)
|
Total
|
|
$
|
0.1
|
|
|
$
|
(4.8
|
)
|
Note
9 — Stock-Based Compensation
Stock
compensation consisted of the following:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
(In
millions)
|
|
Stock
compensation expense
|
|
$
|
—
|
|
|
$
|
—
|
|
The
2011 Incentive Plan was approved and adopted by our shareholders on May 4, 2011 and became effective immediately. The 2011 Incentive
Plan was amended and approved by our shareholders on May 8, 2013. The 2011 Incentive Plan permits the grant of stock options,
SARs, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards.
The aggregate number of shares of our common stock that may be issued under all stock-based awards made under the 2011 Incentive
Plan is 4,671. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustments
as provided in the 2011 Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. Awards may
be granted under the 2011 Incentive Plan until the earlier to occur of May 3, 2021 or the date on which all shares available for
awards under the 2011 Incentive Plan have been granted; provided, however, that incentive stock options may not be granted after
February 10, 2021.
Stock-based
compensation awards issued under the 2011 Incentive Plan generally have a term of ten years and, for employees, vest over a three-year
period. Exercise prices of awards issued under these plans are equal to the fair value of the Company’s stock on the date
of grant.
As
of December 31, 2019, there were 879 outstanding stock-based compensation awards under the 2011 Incentive Plan. As of December
31, 2019, there were no shares available for grant under our 2011 Incentive Plan.
Stock
Options
The
following table summarizes our stock option activity:
|
|
Stock
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Outstanding December 31,
2017
|
|
|
947
|
|
|
$
|
16,962.00
|
|
|
|
1.8
|
|
Canceled
|
|
|
(834
|
)
|
|
|
16,992.00
|
|
|
|
|
|
Outstanding December 31, 2018
|
|
|
113
|
|
|
$
|
16,734.00
|
|
|
|
0.2
|
|
Canceled
|
|
|
(113
|
)
|
|
|
16,734.00
|
|
|
|
0.2
|
|
Granted
|
|
|
1,360
|
|
|
|
106.00
|
|
|
|
9.7
|
|
Vested
|
|
|
(481
|
)
|
|
|
106.00
|
|
|
|
9.7
|
|
Outstanding December
31, 2019
|
|
|
879
|
|
|
$
|
106.00
|
|
|
|
9.7
|
|
Exercisable as
of December 31, 2019
|
|
|
481
|
|
|
$
|
106.00
|
|
|
|
9.7
|
|
The
Company granted 1,360 options during the year ended December 31, 2019. As of December 31, 2019 there are 879 shares outstanding
and 481 exercisable stock options remaining. The aggregate intrinsic value of all outstanding stock options was $0.0 million as
of December 31, 2018. There were no options exercised in 2019. No options were granted or exercised during the year ended December
31, 2018.
Total
stock-based compensation expense associated with stock options related to continuing operations recognized in our Consolidated
Statements of Operations for the years ended December 31, 2019 and 2018 was $0.0 million and (0.3) million, respectively. As of
December 31, 2019, unrecognized compensation expense related to outstanding stock options was immaterial.
No
related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2019 or 2018.
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, 2017
|
|
|
1,070
|
|
|
$
|
706.00
|
|
Granted
|
|
|
801
|
|
|
|
226.00
|
|
Vested
|
|
|
(1,491
|
)
|
|
|
336.00
|
|
Forfeited
|
|
|
(230
|
)
|
|
|
972.00
|
|
Nonvested
as of December 31, 2018
|
|
|
150
|
|
|
$
|
1,406.00
|
|
Vested
|
|
|
(75
|
)
|
|
|
1,406.00
|
|
Forfeited
|
|
|
(75
|
)
|
|
|
1,406.00
|
|
Nonvested
as of December 31, 2019
|
|
|
—
|
|
|
$
|
—
|
|
Of
the restricted stock granted during the year ended December 31, 2018, none of the shares were performance-based. There were no
shares granted during the year ended December 31, 2019.
The
total fair value of shares that vested during the years 2019 and 2018 was $0.1 million and $0.5 million, respectively.
Total
stock-based compensation expense associated with restricted stock relating to continuing operations recognized in our Consolidated
Statements of Operations for the years ended December 31, 2019 and 2018 was $0.0 million and $0.3 million, respectively. This
expense would result in a related tax benefit of $0.0 million and $0.1 million for the years ended December 31, 2019 and 2018,
respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation allowance,
and, due to the valuation allowance, we did not recognize the related tax benefit in 2019 or 2018. As of December 31, 2019,
there was no longer any unrecognized compensation expense related to outstanding restricted stock.
No
related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2019 or 2018.
Stock
Appreciation Rights (SARs)
The
Company’s remaining SARs expired on December 31, 2017, and were cancelled in 2018 since the stock price and performance
conditions were not met. We had not recorded any compensation expense associated with these SARs based on the applicable accounting
rules. The Company did not grant any SARs for the years ended December 31, 2019 and 2018.
Note
10 — Retirement Plans
Pension
Plans
GlassBridge
and the U.S. Pension Benefit Guaranty Corporation (the “PBGC”) entered into an agreement on May 13, 2019 to terminate
the Imation Cash Balance Pension Plan (the “Plan”) based on the PBGC’s findings that (i) the Plan did not meet
the minimum funding standard required under Section 412 of the Internal Revenue Code of 1986, as amended; (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.
GlassBridge and all other members of Seller’s controlled group (within the meaning of 29 U.S.C. §1301(a)(14)) (collectively,
and including the Company, the “Controlled Group Members”)) were jointly and severally liable to the PBGC for all
liabilities under Title IV of ERISA in connection with the Plan’s termination, including unfunded benefit liabilities, due
and unpaid Plan contributions, premiums, and interest on each of the foregoing (the “Pension Liabilities”), as a result
of which a lien in favor of the Plan, on all property of each Controlled Group Member, arose and was perfected by PBGC (the “Lien”).
On October 1, 2019, the Company entered into a settlement agreement (“Settlement Agreement”) with the PBGC. Pursuant
to the terms of the Settlement Agreement, GlassBridge paid $3,000,000 in cash to PBGC on October 3, 2019 (the “Settlement
Payment”). Per the terms of the Settlement Agreement and following the Settlement Payment on October
3, 2019, the PBGC will be deemed to have released all Controlled Group Members from the Lien as of January 6, 2020.
Note
11 — Income Taxes
The
components of loss from continuing operations before income taxes were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
U.S.
|
|
$
|
11.4
|
|
|
$
|
(13.8
|
)
|
International
|
|
|
—
|
|
|
|
5.0
|
|
Total
|
|
$
|
11.4
|
|
|
$
|
(8.8
|
)
|
The
components of the income tax (provision) benefit from continuing operations were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
0.1
|
|
International
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
|
|
|
|
|
|
International
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
0.1
|
|
The
income tax provision from continuing operations differs from the amount computed by applying the statutory United States income
tax rate (21 percent) because of the following items:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Tax
at statutory U.S. tax rate
|
|
$
|
2.4
|
|
|
$
|
1.9
|
|
State
income taxes, net of federal benefit
|
|
|
0.5
|
|
|
|
0.6
|
|
Net
effect of international operations
|
|
|
—
|
|
|
|
(4.0
|
)
|
Valuation
allowances
|
|
|
(28.6
|
)
|
|
|
30.8
|
|
Tax
on unremitted earnings of foreign subsidiaries
|
|
|
(0.4
|
)
|
|
|
0.5
|
|
U.S.
tax on foreign earnings
|
|
|
—
|
|
|
|
(0.2
|
)
|
Stock-based
compensation
|
|
|
0.3
|
|
|
|
(0.3
|
)
|
Net
effect of subsidiary sale
|
|
|
25.0
|
|
|
|
(29.2
|
)
|
Minimum
tax credit refundable
|
|
|
—
|
|
|
|
0.1
|
|
Reclassification
to discontinued operations and other
|
|
|
0.8
|
|
|
|
(0.1
|
)
|
Income
tax (provision) benefit
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Tax
legislation from the Tax Cuts and Jobs Act (“Tax Reform Act”) passed on December 22, 2017 has been incorporated into
the tax provision. The Tax Reform Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1)
reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) eliminating the corporate alternative minimum
tax (“AMT”) and changing how existing AMT credits can be realized; (3) creating a new limitation on deductible interest
expense; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning
after December 31, 2017.
The
tax law change that had a significant impact on the Company’s 2017 and 2018 tax provisions is the ability to realize minimum
tax credit carryovers as cash refunds, with the elimination of the corporate alternative minimum tax. A tax benefit of $2.1 million
was recorded in continuing operations in 2017 and was increased by another $0.1 in 2018 when the IRS announced a sequestration
reduction would not apply to the refund. The Company received a $1.1 million cash refund in 2019, and will receive $0.5
million in 2020 and $0.3 million in each of 2021 and 2022.
Tax
reform changes related to international subsidiaries did not impact the 2019 tax provision since the subsidiaries were sold in
2019.
Tax
laws require certain items to be included in our tax returns at different times than the items are reflected in our results of
operations. Some of these items are temporary differences that will reverse over time. We record the tax effect of temporary differences
as deferred tax assets and deferred tax liabilities in our Consolidated Balance Sheets.
In
2019 and 2018 the net cash paid for income taxes, relating to both continuing and discontinued operations, was $0.0 million and
$0.4 million, respectively.
The
components of net deferred tax assets and liabilities were as follows:
|
|
As
of December 31,
|
|
|
2019
|
|
2018
|
|
|
(In
millions)
|
Compensation
and employee benefits
|
|
|
—
|
|
|
|
0.3
|
|
Tax
credit carryforwards
|
|
|
21.4
|
|
|
|
22.2
|
|
Net
operating loss carryforwards
|
|
|
144.1
|
|
|
|
147.3
|
|
Accrued
liabilities and other reserves
|
|
|
—
|
|
|
|
0.2
|
|
Pension
|
|
|
3.4
|
|
|
|
4.2
|
|
Intangible
assets, net
|
|
|
—
|
|
|
|
2.5
|
|
Capital
losses
|
|
|
26.9
|
|
|
|
9.5
|
|
Other,
net
|
|
|
40.6
|
|
|
|
44.4
|
|
Total
deferred tax assets
|
|
|
236.4
|
|
|
|
230.6
|
|
Valuation
allowance
|
|
|
(236.4
|
)
|
|
|
(230.6
|
)
|
Net
deferred tax assets
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Unremitted
earnings of foreign subsidiaries
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Total
deferred tax liabilities
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Valuation
allowance
|
|
|
—
|
|
|
|
—
|
|
Total
deferred tax liabilities
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Net
deferred tax liabilities
|
|
$
|
(0.2
|
)
|
|
$
|
(0.5
|
)
|
We
regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation allowance is recorded
to the extent we conclude a deferred tax asset is not considered more-likely-than-not to be realized. We consider all positive
and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance.
Our
accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised
as a result of our assessment is recorded through income tax provision in our Consolidated Statements of Operations. Changes in
our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and
results of operations.
We
maintain a valuation allowance related to our deferred tax assets. The valuation allowance was $236.4 million and $230.6
million as of December 31, 2019 and 2018, respectively. The deferred tax asset changes and corresponding valuation allowance changes
in 2019 compared to 2018 were due primarily to an increase in capital loss carryforwards from the sale of foreign subsidiaries,
deductible for tax only when the company earns capital gains.
The
net deferred tax liability not offset by valuation allowance of $0.2 million relates to foreign tax withholding on unremitted
foreign earnings.
The
table below shows the components of our deferred tax balances as they are recorded on our Consolidated Balance Sheets:
|
|
As
of December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Deferred
tax liability - non-current
|
|
|
(0.2
|
)
|
|
|
(0.5
|
)
|
Total
|
|
$
|
(0.2
|
)
|
|
$
|
(0.5
|
)
|
Federal
net operating loss carryforwards totaling $597.0 million will begin expiring in 2029. The Company had analysis performed
by outside consultants to confirm that none of the federal net operating loss carryovers should be limited by Section 382. This
limitation could result if there is a more than 50 percent ownership shift in the GlassBridge shares within a three-year testing
period. No such ownership shift has occurred through December 31, 2019.
The
Company’s $597.0 million in federal net operating loss carryforwards generated through 2017 continue to be subject
to the historical tax rules that allow carryforward for 20 years from origin, with the ability to offset 100 percent of future
taxable income. Any future year tax losses will be subject to the Tax Reform Act limitations which, while having indefinite life,
can offset only 80 percent of future taxable income.
We
have state income tax loss carryforwards of $323.6 million, which will expire at various dates up to 2037. We have U.S. and foreign
tax credit carryforwards of $21.4 million, $17.5 million of which will expire between 2020 and 2022,
and the remainder of which will expire between 2023 and 2032. Federal capital losses of $107.7 million will
expire between 2020 and 2024.
Our
income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items
that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position
in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based
solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized
as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
(In
Millions)
|
|
Beginning
Balance
|
|
$
|
0.6
|
|
|
$
|
0.9
|
|
Additions:
|
|
|
|
|
|
|
|
|
Additions
for tax positions of current years
|
|
|
—
|
|
|
|
—
|
|
Additions
for tax positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Reductions:
|
|
|
|
|
|
|
|
|
Reductions
for tax positions of prior years
|
|
|
(0.4
|
)
|
|
|
—
|
|
Settlements
with taxing authorities
|
|
|
—
|
|
|
|
—
|
|
Reductions
due to lapse of statute of limitations
|
|
|
—
|
|
|
|
(0.3
|
)
|
Total
|
|
|
0.2
|
|
|
|
0.6
|
|
The
total amount of unrecognized tax benefits as of December 31, 2019 was reduced by $0.4 million to $0.2 million with the sale of
the foreign subsidiaries and elimination of corresponding international tax issues. It is reasonably possible that the amount
of the unrecognized tax benefits could increase or decrease during the next twelve months; however, it is not possible to reasonably
estimate the effect on the unrecognized tax benefit at this time.
Our
federal income tax returns for 2016 through 2019 are subject to examination by the Internal Revenue Service. For state purposes,
the statutes of limitation vary by jurisdiction. With few exceptions, we are no longer subject to examination for years before
2013.
Note
12 — Shareholders’ Equity
Reverse
Stock Split
On
August 20, 2019, the Company filed an Amendment (the “Amendment”)
to the Restated Certificate of Incorporation, as amended, of the Company (the “Articles”) with the Secretary of State
of the State of Delaware to: (i) effect a reverse split of our common stock at a ratio of 1:200 (the “Reverse Stock
Split”) and (ii) effect an amendment allowing the stockholders of the Company to act by written consent in lieu of meeting,
subject to certain limitations (the “Written Consent Amendment”).
On
August 21, 2019 (the “Effective Date”), our common stock began trading on the Reverse Stock Split-adjusted basis on
the OTCQB at the opening of trading. In connection with the Reverse Stock Split, our common stock began trading with a new CUSIP
number at such time. There was no change to the Company’s stock symbol.
No
fractional shares of common stock were issued in connection with the Reverse Stock Split. If, as a result of the Reverse Stock
Split, a stockholder would otherwise have held a fractional share, a stockholder, in lieu of the issuance of such fractional share,
was entitled, upon surrender to the exchange agent of a certificate(s) representing its pre-split shares or upon conversion of
its shares held in book-entry, to receive a cash payment equal to the fraction to which the stockholder would otherwise be entitled,
multiplied by $106, which is the closing price per share (as adjusted to give effect to the Reverse Stock Split) on the OTCQB
on the closing date immediately prior to the Effective Date.
EQ
by Equiniti (“EQ”), the Company’s transfer agent, acted as the exchange agent for the Reverse Stock Split, and
provided instructions to stockholders of record regarding the process for exchanging shares. EQ issued all of the post-Reverse
Stock Split shares through its paperless Direct Registration System (“DRS”).
Treasury
Stock
On
May 2, 2012, our Board of Directors authorized a share repurchase program that allowed for the repurchase of 2,500 shares of common
stock. On November 14, 2016, our Board authorized a new share repurchase program under which we may repurchase up to 2,500 of
our outstanding shares of common stock. This authorization replaces the Board’s previous share repurchase authorization
from May 2, 2012. 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.
Since
the inception of the November 14, 2016 authorization, we have repurchased 780 shares of common stock for $0.3 million and, as
of December 31, 2019, we had authorization to repurchase 1,720 additional shares.
During
the year ended December 31, 2019, the Company purchased 450 of treasury shares for $28,434. During the year ended 2018, the Company
purchased 70 shares for $13,575. The treasury stock held as of December 31, 2018 was acquired at an average price of $8,496.47
per share. The following is a summary of treasury share activity:
|
|
Treasury
Shares
|
|
Balance
as of December 31, 2017
|
|
|
2,820
|
|
Purchases
|
|
|
70
|
|
Restricted
stock grants and other
|
|
|
(488
|
)
|
Balance
as of December 31, 2018
|
|
|
2,402
|
|
Purchases
|
|
|
450
|
|
Forfeitures
and other
|
|
|
75
|
|
Balance
as of December 31, 2019
|
|
|
2,927
|
|
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss and related activity consisted of the following:
|
|
Defined
Benefit Plans
|
|
|
Total
|
|
|
|
(In
millions)
|
|
Balance
as of December 31, 2018
|
|
$
|
(20.7
|
)
|
|
$
|
(20.7
|
)
|
Amounts
reclassified from accumulated other comprehensive loss, net of tax
|
|
|
0.1
|
|
|
|
0.1
|
|
Net
current period other comprehensive income (loss)
|
|
|
0.1
|
|
|
|
0.1
|
|
Balance
as of December 31, 2019
|
|
$
|
(20.6
|
)
|
|
$
|
(20.6
|
)
|
(1)
No income tax expense was recorded for liability adjustments for defined benefit plans for the year ended December 31, 2019.
Details
of amounts reclassified from Accumulated other comprehensive loss and the line item in our Consolidated Statement of Operations
for the year ended December 31, 2019 are as follows:
|
|
Amounts
Reclassified
from Accumulated
Other Comprehensive Loss
|
|
|
Affected
Line Item in the Statement Where Net
Loss is Presented
|
|
|
(In
millions)
|
|
|
|
Amortization
of net actuarial loss
|
|
|
0.1
|
|
|
Other
Income (Expense)
|
Total
reclassifications for the period
|
|
$
|
0.1
|
|
|
|
Income
taxes are not provided for foreign translation relating to permanent investments in international subsidiaries. Reclassification
adjustments are made to avoid double counting in comprehensive loss items that are also recorded as part of net loss and are presented
net of taxes in the Consolidated Statements of Comprehensive Loss.
Non-Controlling
Interest
On
October 1, 2019, the Company sold to Orix PTP Holdings, LLC (“Orix”), for $17,562,700, 20.1% of the outstanding
stock of Adara, until then a Company wholly owned subsidiary, together with two promissory notes of Adara to the Company in
total principal amount of $13,000,000 (the “Orix Transaction”). Adara issued the notes in consideration for the assignment by the Company to Adara of
the right to receive payments from IMN Capital described above and transfer by the Company to Adara of some of
Company’s SportBLX shares. In connection with the transaction, Adara’s Board of Directors was expanded to five
directors, including one director designated by Orix. In addition, GlassBridge, Orix, and Adara entered into a
Stockholders’ Agreement pursuant to which Orix may, among other things, during the three months beginning April 1,
2021, sell back its Adara stock to GlassBridge, at book value, and, during the term of the Stockholders Agreement, has the
right to purchase all or a portion of GlassBridge’s Adara shares, at book value plus 20%, subject to
GlassBridge’s right to respond to the notice by purchasing all of Orix’s Adara shares at that
price.
382
Rights Agreement
On
August 6, 2015, the Board of Directors adopted a rights plan intended to avoid an “ownership change” within the meaning
of Section 382 of the Code, and thereby preserve the current ability of the Company to utilize certain net operating loss carryforwards
and other tax benefits of the Company and its subsidiaries (the “Tax Benefits”). If the Company experiences an “ownership
change,” as defined in Section 382 of Code, the Company’s ability to fully utilize the Tax Benefits on an annual basis
will be substantially limited, and the timing of the usage of the Tax Benefits and such other benefits could be substantially
delayed, which could therefore significantly impair the value of those assets. The rights plan is intended to act as a deterrent
to any person or group acquiring “beneficial ownership” of 4.9% or more of the Company’s outstanding shares
of common stock, without the approval of the Board. The description and terms of the Rights (as defined below) applicable to the
rights plan are set forth in the 382 Rights Agreement, dated as of August 7, 2015 (the “Rights Agreement”), by and
between the Company and Wells Fargo Bank, N.A., as Rights Agent.
As
part of the Rights Agreement, the Board authorized and declared a dividend distribution of one right (a Right) for each outstanding
share of the Company’s common stock, to stockholders of record at the close of business on September 10, 2015. Each Right
entitles the holder to purchase from the Company a unit consisting of one one-hundredth of a share (a “Unit”) of Series
A Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a purchase price
of $15.00 per Unit, subject to adjustment (the “Purchase Price”). Until a Right is exercised, the holder thereof,
as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in
respect of Rights.
Under
the Rights Agreement, an Acquiring Person is any person or group of affiliated or associated persons (a “Person”)
who is or becomes the beneficial owner of 4.9% or more of the outstanding shares of the Company’s common stock other than
as a result of repurchases of stock by the Company, dividends or distribution by the Company, stock issued under certain benefit
plans or certain inadvertent actions by stockholders. For purposes of calculating percentage ownership under the Rights Agreement,
outstanding shares of the Company’s common stock include all of the shares of common stock actually issued and outstanding.
Beneficial ownership is determined as provided in the Rights Agreement and generally includes, without limitation, any ownership
of securities a Person would be deemed to actually or constructively own for purposes of Section 382 of the Code or the Treasury
Regulations promulgated thereunder. The Rights Agreement provides that the following shall not be deemed an Acquiring Person for
purposes of the Rights Agreement: (i) the Company or any subsidiary of the Company and any employee benefit plan of the Company,
or of any subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant
to the terms of any such plan or (ii) any Person that, as of August 7, 2015, is the beneficial owner of 4.9% or more of the shares
of Common Stock outstanding (such Person, an “Existing Holder”) unless and until such Existing Holder acquires beneficial
ownership of additional shares of common stock (other than pursuant to a dividend or distribution paid or made by the Company
on the outstanding shares of common stock or pursuant to a split or subdivision of the outstanding shares of common stock) in
an amount in excess of 0.5% of the outstanding shares of common stock.
The
Rights Agreement provides that a Person shall not become an Acquiring Person for purpose of the Rights Agreement in a transaction
that the Board determines is exempt from the Rights Agreement, which determination shall be made in the sole and absolute discretion
of the Board, upon request by any Person prior to the date upon which such Person would otherwise become an Acquiring Person,
including, without limitation, if the Board determines that (i) neither the beneficial ownership of shares of common stock by
such Person, directly or indirectly, as a result of such transaction nor any other aspect of such transaction would jeopardize
or endanger the availability to the Company of the Tax Benefits or (ii) such transaction is otherwise in the best interests of
the Company.
Initially,
the Rights will not be exercisable and will be attached to all common stock representing shares then outstanding, and no separate
Rights certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate
from the common stock and become exercisable and a distribution date (a “Distribution Date”) will occur upon the earlier
of (i) 10 business days (or such later date as the Board shall determine) following a public announcement that a Person has become
an Acquiring Person or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a
tender offer, exchange offer or other transaction that, upon consummation thereof, would result in a Person becoming an Acquiring
Person.
Until
the Distribution Date, common stock held in book-entry form, or in the case of certificated shares, common stock certificates,
will evidence the Rights and will contain a notation to that effect. Any transfer of shares of common stock prior to the Distribution
Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred on the books
and records of the Rights Agent as provided in the Rights Agreement.
If
on or after the Distribution Date, a Person is or becomes an Acquiring Person, each holder of a Right, other than certain Rights
including those beneficially owned by the Acquiring Person (which will have become void), will have the right to receive upon
exercise common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to
two times the Purchase Price.
In
the event that, at any time following the first date of a public announcement that a Person has become an Acquiring Person or
that discloses information which reveals the existence of an Acquiring Person or such earlier date as a majority of the Board
becomes aware of the existence of an Acquiring Person (any such date, the Stock Acquisition Date), (i) the Company engages in
a merger or other business combination transaction in which the Company is not the surviving corporation, (ii) the Company engages
in a merger or other business combination transaction in which the Company is the surviving corporation and the common stock of
the Company is changed or exchanged or (iii) 50% or more of the Company’s assets, cash flow or earning power is sold or
transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have
the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price.
At
any time following the Stock Acquisition Date and prior to an Acquiring Person obtaining shares that would lead to a more than
50% change in the outstanding common stock, the Board may exchange the Rights (other than Rights owned by such Person which have
become void), in whole or in part, for common stock or Preferred Stock at an exchange ratio of one share of common stock, or one
one-hundredth of a share of Preferred Stock (or of a share of a class or series of the Company’s preferred stock having
equivalent rights, preferences and privileges), per Right, subject to adjustment.
The
Rights and the Rights Agreement will expire on the earliest of (i) 5:00 P.M. New York City time on August 7, 2021, which was extended
by stockholder approval on June 18, 2018, pursuant to a Resolution of the Board of Directors at its Meeting on April 13, 2018,
(ii) the time at which the Rights are redeemed or exchanged pursuant to the Rights Agreement, (iii) the date on which the Board
determines that the Rights Agreement is no longer necessary for the preservation of material valuable Tax Benefits or is no longer
in the best interest of the Company and its stockholders, (iv) the beginning of a taxable year to which the Board determines that
no Tax Benefits may be carried forward and (v) the first anniversary of the adoption of the Agreement if stockholder approval
has not been received by or on such date.
At
any time until the earlier of the Distribution Date or the expiration date of the Rights, the Company may redeem the Rights in
whole, but not in part, at a price of $0.001 per Right. Immediately upon the action of the Board ordering redemption of the Rights,
the Rights will terminate and the only right of the holders of Rights will be to receive the $0.001 redemption price.
Note
13 — Business Segment Information and Geographic Data
The
Legacy Businesses and Nexsan Business are presented in our Consolidated Statements of Operations as discontinued operations and
are not included in segment results for all periods presented. See Note 5 - Discontinued Operations for further
information about these divestitures.
As
of December 31, 2019, the asset management business and sports investment platform are our reportable segments.
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.
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Operating
income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
Asset
management business
|
|
|
0.1
|
|
|
|
(3.6
|
)
|
Sports
investment platform
|
|
|
(0.2
|
)
|
|
|
(3.6
|
)
|
Total segment operating
loss
|
|
|
(0.1
|
)
|
|
|
(3.6
|
)
|
Corporate and unallocated
|
|
|
(3.2
|
)
|
|
|
(3.3
|
)
|
Intangible impairment
|
|
|
—
|
|
|
|
(6.2
|
)
|
Restructuring and
other
|
|
|
(0.1
|
)
|
|
|
4.8
|
|
Total
operating loss
|
|
|
(3.4
|
)
|
|
|
(8.3
|
)
|
Interest expense
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
Net income (loss)
from AAM fund activities
|
|
|
—
|
|
|
|
(0.9
|
)
|
Other income (expense),
net
|
|
|
15.1
|
|
|
|
(0.5
|
)
|
Income
(loss) from continuing operations before income taxes
|
|
$
|
11.4
|
|
|
$
|
(8.8
|
)
|
Restructuring
and other for the year ended December 31, 2019 includes severance cost. Restructuring and other for the year ended December 31,
2018, includes severance costs of $0.2 million and a gain on the German levy settlement of $5.0 million. See Note 8 - Restructuring
and Other Expenses for more information.
Note
14 — Litigation, Commitments and Contingencies
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 December 31, 2019, and 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 December 31, 2019. Compliance with environmental regulations
has not had a material adverse effect on our financial results.
Operating
Leases
We
incur rent expense under operating leases, which primarily relate to office space. Most long-term leases include one or more options
to renew at the then fair rental value for a period of approximately one to three years. The following table sets forth the components
of net rent expense for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
|
|
(In
millions)
|
|
Minimum
lease payments
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Contingent
rentals
|
|
|
—
|
|
|
|
—
|
|
Total
rental expense, net
|
|
$
|
—
|
|
|
$
|
0.1
|
|
The
Company does not have any long-term lease obligations as of December 31, 2019.
Note
15 - Related Party Transactions
On
January 1, 2019, the Company and Clinton Group Inc. (“Clinton”)
entered into a management service agreement (the “Management Service Agreement”), pursuant to which Clinton agreed
to provide certain services to the Company.
Prior to being
appointed our Chief Executive Officer and Chief Financial Officer, respectively, Daniel A. Strauss served as our Chief Executive
Officer, and Francis Ruchalski served as our Chief Financial Officer, pursuant to the terms of 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. Clinton also made 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 Amended Services Agreement was terminated on December 18, 2019.
Clinton
paid Mr. Strauss and Mr. Ruchalski compensation and benefits under the Amended Service Agreement through December 15, 2019,
and they became employees of the Company on December 18, 2019 and December 16, 2019, respectively.
As of December 31, 2019,
the Company paid Clinton $2,400,000 under the Amended Services Agreement and the Management Services Agreement, recorded
$1,170,833 and $500,000 within “Selling, general and administrative” in our Consolidated Statements of Operations
for the twelve months ended December 31, 2019 and 2018, respectively.
In January 2019,
for total consideration of $1,000,000, Sport-BLX Inc. issued to the Company shares of Sport-BLX common stock, constituting 9.0%
of the common stock outstanding after giving effect to the transaction. Immediately before the transaction, George E. Hall (“Mr.
Hall”), SportBLX’s Executive Chairman and CEO, held 65.6% of SportBLX’s outstanding shares. Mr. Hall owns beneficially
approximately 29.1% of the Company’s outstanding common stock.
On September
13, 2019, the Board approved a success fee in connection with the completion of the Orix Transaction and the pension settlement
to Clinton. The Board approved a fee equal to 15% of the cash consideration, for its work on the Orix Transaction and 10% of the
difference between the gross pension liabilities and the settlement payment. Accordingly, the Company paid Clinton a success fee
of $2,635,000 related to the Orix Transaction and $1,348,385 related to the pension settlement.
On
December 12, 2019, the Company purchased from Mr. Hall 37,924 shares of SportBLX common stock in exchange for $1,346,302 in cash
and a $12,116,718 principal amount promissory note bearing interest at a 5% annual rate, due December 12, 2022. On the same date,
the Company purchased from Joseph A. De Perio (“Mr. De Perio”) 17,076 shares of SportBLX common stock in exchange for
$606,198 in cash and a $5,455,782 principal amount promissory note bearing 5% interest, due December 12, 2022. Interest under
the notes is payable in arrears on the first day of each calendar quarter in cash, or, at the Company’s option, in shares
of common stock of the Company at a price reflecting market value. Mr. De Perio owns 2.47% of the Company’s common stock,
is a member of the Board of Directors of the Company, and is SportBLX’s president.
In connection
with the successful consummation of a settlement with the PBGC, the Board voted on May 3, 2019 to furnish to Clinton a one-time
cash payment of $250,000 in consideration of Clinton’s efforts regarding the same.
On November
15, 2019, the Company, and Clinton Special Opportunities Fund LLC (“CSO”) entered into a Credit Facility Letter Agreement
(the “Letter Agreement”) pursuant to which the Company extended to CSO a one-year revolving credit facility in the
aggregate principal amount up to $1,000,000. The loan is evidenced by a grid note bearing interest at a 10% annual rate, which
matures November 15, 2020 (the “Note”). CSO’s obligations under the Letter Agreement and the Note are secured
by security interests in all of CSO’s assets, including all of CSO’s Company common stock, and guaranteed by Mr. Hall,
CSO’s sole member. As of December 31, 2019, CSO borrowed $250,000 under the Letter Agreement.
On December
6, 2019, SportBLX issued an unsecured demand note, effective as of October 1, 2019, to the Company in the aggregate principal
amount of up to $1,750,000 (the “Demand Note-1”), which superseded the demand note issued on October 1, 2019, by the
Company in favor of SportBLX for $1,000,000. The Demand Note-1 bears interest at an 8% annual rate and matures upon the earlier
to occur of (a) demand by the Company, or (b) April 1, 2020. As of December 31, 2019, SportBLX borrowed $1,750,000 under the Demand
Note-1.
On December
27, 2019, SportBLX issued an unsecured demand note, effective as of December 27, 2019, to the Company in the aggregate principal
amount of $250,000 (the “Demand Note-2”). The Demand Note-2 bears interest at an 8% annual rate and matures upon the earlier
to occur of (a) demand by the Company, or (b) April 1, 2020. As of December 31, 2019 SportBLX borrowed $250,000 under the Demand
Note-2.
Note
16 – Subsequent Events
On
March 20, 2020, Glassbridge Athlete LLC (the “Borrower”), a wholly owned subsidiary of the Company borrowed $16,000,000
from Orix pursuant to the terms of a Secured Promissory Note Agreement dated as of March 17, 2020 (the “Loan”). Interest
on the Loan is payable via “PIK” (payment in kind) at the rate of 5%, and is payable on a quarterly basis and is capitalized.
All accrued and unpaid interest, along with all unpaid principal, is due and payable on the date that is 18 months from the initial
funding date. Orix owns 20.1% of Adara Enterprises Corp., of which the Corporation owns the remaining 79.9%.
The
Loan is secured by a lien on substantially all of the assets of the Borrower pursuant to a Security Agreement, as well as by a
pledge of the Corporation’s equity interests in Borrower.
The
proceeds of the Loan, along with an additional $1.8 million contributed by the Borrower, were used to fund the purchase of limited
partnership interests by the Borrower in The Sports & Entertainment Fund, L.P. (the “Fund”). The Fund seeks to
invest in entities that enter into revenue sharing agreements, or savings and investment agreements, or other transactions with
professional athletes. Adara Asset Management LLC, a wholly-owned subsidiary of Adara Enterprises Corp., is the general partner
and investment manager of the Fund.