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EX-32.2 - GlassBridge Enterprises, Inc.ex32-2.htm
EX-32.1 - GlassBridge Enterprises, Inc.ex32-1.htm
EX-31.2 - GlassBridge Enterprises, Inc.ex31-2.htm
EX-31.1 - GlassBridge Enterprises, Inc.ex31-1.htm
EX-21.1 - GlassBridge Enterprises, Inc.ex21-1.htm
EX-10.45 - GlassBridge Enterprises, Inc.ex10-45.htm
EX-10.44 - GlassBridge Enterprises, Inc.ex10-44.htm
EX-10.43 - GlassBridge Enterprises, Inc.ex10-43.htm
EX-10.4 - GlassBridge Enterprises, Inc.ex10-4.htm
EX-10.3 - GlassBridge Enterprises, Inc.ex10-3.htm
EX-10.2 - GlassBridge Enterprises, Inc.ex10-2.htm
EX-10.1 - GlassBridge Enterprises, Inc.ex10-1.htm
EX-4.2 - GlassBridge Enterprises, Inc.ex4-2.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-K

 

 

 

(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2019
or
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from             to

 

Commission file number: 1-14310 

 

 

 

 

GLASSBRIDGE ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   41-1838504

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

411 East 57th Street, Suite 1-A

New York, New York

(Address of principal executive offices)

 

10022

(Zip Code)

 

(212) 220-3300

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act: None

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

Preferred Stock Purchase Rights

(Title of class)

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one).

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [X] Smaller reporting company [X]
            Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Aggregate market value of voting and non-voting stock of the registrant held by non-affiliates of the registrant, based on the closing price of $62.00 as reported on the OTCQB on June 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), was $1.0 million.

 

The number of shares outstanding of the registrant’s common stock on March 31, 2020 was 25,170.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Selected portions of the registrant’s definitive proxy statement on Schedule 14A for the registrant’s 2020 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 
 

 

GLASSBRIDGE ENTERPRISES, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2019

 

TABLE OF CONTENTS

 

    Page
     
PART I
 
ITEM 1 BUSINESS 3
ITEM 1A RISK FACTORS 6
ITEM 1B UNRESOLVED STAFF COMMENTS 13
ITEM 2 PROPERTIES 13
ITEM 3 LEGAL PROCEEDINGS 14
ITEM 4 MINE SAFETY DISCLOSURES 14
 
PART II
 
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 15
ITEM 6 SELECTED FINANCIAL DATA 15
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 53
ITEM 9A CONTROLS AND PROCEDURES 53
ITEM 9B OTHER INFORMATION 53
 
PART III
 
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 54
ITEM 11 EXECUTIVE COMPENSATION 54
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 54
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 55
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 55
 
PART IV
 
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 55
ITEM 16 FORM 10-K SUMMARY 57
  SIGNATURES 58

 

1

 

 

Cautionary Statements Regarding Forward-Looking Statements

 

We may from time to time make written or oral forward-looking statements with respect to our future goals, including statements contained in this Form 10-K, in our other filings with the U.S. Securities and Exchange Commission (“SEC”) and in our reports to shareholders.

 

Certain information which does not relate to historical financial information may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include information concerning the launch of our asset management business and related investment vehicles, strategic initiatives and potential acquisitions, the results of operations of our existing business lines, the impact of legal or regulatory matters on our business, as well as other actions, strategies and expectations, and are identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may,” “will,” “could,” “might,” or “continues” or similar expressions. Such statements are subject to a wide range of risks and uncertainties that could cause our actual results in the future to differ materially from our historical results and those presently anticipated or projected. We wish to caution investors not to place undue reliance on any such forward-looking statements. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arising after such date. Risk factors include various factors set forth from time to time in our filings with the SEC including the following: the negative impacts of our delisting from the New York Stock Exchange (“NYSE”), including reduced liquidity and market price of our common stock and the number of investors willing to hold or acquire our common stock; significant costs relating to pending and future litigation; our ability to attract and retain talented personnel; the structure or success of our participation in any joint investments; risks associated with any future acquisition or business opportunities; our need to consume resources in researching acquisitions, business opportunities or financings and capital market transactions; our ability to integrate additional businesses or technologies; the impact of our Reverse Stock Split (as defined herein) on the market trading liquidity of our common stock; the market price volatility of our common stock; our need to incur asset impairment charges for intangible assets and goodwill; significant changes in discount rates, rates of return on pension assets and mortality tables; our reliance on aging information systems and our ability to protect those systems against security breaches; our ability to integrate accounting systems; changes in tax guidance and related interpretations and inspections by tax authorities; our ability to raise capital from third party investors for our asset management business; our ability to comply with extensive regulations relating to the launch and operation of our asset management business; our ability to compete in the intensely competitive asset management business; the performance of any investment funds we sponsor or accounts we manage; difficult market and economic conditions, including changes in interest rates and volatile equity and credit markets; our ability to achieve steady earnings growth on a quarterly basis in our asset management business; the significant demands placed on our resources and employees, and associated increases in expenses, risks and regulatory oversight, resulting from the potential growth of our asset management business; our ability to establish a favorable reputation for our asset management business; the lack of operating history of our asset manager subsidiary and any funds that we may sponsor; our ability to realize the anticipated benefits of the third-party investment in our partially-owned data storage business; decreasing revenues and greater losses attributable to our partially-owned data storage products; our ability to quickly develop, source and deliver differentiated and innovative products; our dependence on third parties for new product introductions or technologies; our dependence on third-party contract manufacturing services and supplier-provided parts, components and sub-systems; our dependence on key customers, partners and resellers; foreign currency fluctuations and negative or uncertain global or regional economic conditions as well as various factors set forth from time to time in Item 1A of this Form 10-K and from time to time in our filings with the SEC.

 

2

 

 

PART I

 

Item 1. Business.

 

General

 

GlassBridge Enterprises, Inc. owns and operates an asset management business and a sports investment platform (the “Business”). The Business is operated through majority owned Adara Enterprises, Corp. f/k/a Imation Enterprises Corp. (“Adara”) and Sport-BLX, Inc. (“SportBLX”), among other subsidiaries.

 

As used in this document, the terms “GlassBridge”, “the Company”, “we”, “us”, and “our” mean GlassBridge Enterprises, Inc. and its subsidiaries and unless the context indicates otherwise.

 

Asset Management Business

 

The Company operates its diversified private asset management business through a number of subsidiaries that sponsor our fund offerings. We expect our asset management business to earn revenues primarily by providing investment advisory services to third party investors through our managed funds, as well as separate managed accounts.

 

Our employees each support one or more of the subsidiaries identified below, which provide to our clients what we consider unique and cutting-edge investment strategies. Since the end of 2019, we have added or augmented a number of strategies and continue to seek and create additional ones. We may also look to acquire other asset managers to complement or supplement our business.

 

We have established a full support infrastructure for our asset management business, including compliance, monitoring, reporting, and operations capabilities that can support additional strategies and assets growth.

 

GlassBridge Investment Management LLC

 

GlassBridge Investment Management, which has applied for registration as a registered investment advisor with the SEC, manages approximately $20 million in assets.

 

Adara Asset Management LLC

 

Adara Asset Management (“AAM”) registered as a commodity pool operator (CPO) with the National Futures Association in February 2020.

 

In February 2017, we closed a Capacity and Services transaction with Clinton Group Inc. (“Clinton”), a registered investment adviser controlled by George E. Hall (“Mr. Hall”) who beneficially owns 29.1% of our outstanding shares. This allowed AAM to initially place up to $1 billion of investment capacity under Clinton’s management within Clinton’s quantitative equity strategy for a five-year term. We have the option of expanding such investment capacity to $1.5 billion and to extend the term for two subsequent one-year periods, subject to certain conditions. The Capacity and Services transaction was structured to provide for the quick and efficient scaling of our asset management business.

 

AAM helps operate Arrive LLC (“Arrive”), the investment arm of Roc Nation, a full-service entertainment company engaging in artist and athlete management, label publishing, touring, film/TV, and new ventures. Arrive makes venture capital investments and serves as the general partner and investment manager to a third-party fund. Leveraging Roc Nation’s cultural impact and institutional infrastructure, Arrive helps portfolio companies form an emotional connection with their consumers, in addition to deploying strategic capital alongside top-tier financial institutions in multi-stage deals. Arrive currently manages one third-party fund.

 

AAM is general partner and investment manager to The Sports & Entertainment Fund LP (“S&E”), which currently holds a $17.8 million investment. S&E seeks to acquire revenue share interests in athlete contracts and other sports assets.

 

GlassBridge Capital LLC

 

GlassBridge Capital manages traditional liquid investments for third party clients and engages in a limited amount of proprietary trading.

 

Investment advisory services include managing the composition of each fund’s portfolio (including the purchase, retention and disposition of portfolio securities in accordance with the fund’s investment objectives, policies and restrictions), conducting investment research, monitoring compliance with each fund’s investment restrictions and applicable laws and regulations, overseeing the selection and continued employment of sub-advisors and monitoring such sub-advisors’ investment performance and adherence to investment policies, risk management and compliance procedures, overseeing other service providers, maintaining public relations and marketing programs for each of the funds, preparing and distributing regulatory reports and overseeing distribution through third party financial intermediaries. We anticipate that our revenues will increase or decrease as our average assets under management rises or falls. The percentage amount of the investment advisory fees may vary from fund to fund.

 

AAM’s success will depend in large part on our ability to create attractive investment products and raise capital from third party investors. If we are unable to raise capital from third party investors, we would be unable to collect management fees or deploy capital into investments and potentially collect performance fees, which would adversely affect our ability to generate revenue and cash flow from this business.

 

The investment advisory industry is intensely competitive. We compete with many domestic and global competitors that may provide investment products with similar features and objectives to those we offer. These institutions range from small boutique firms to large financial institutions.

 

Poor performance of any investment funds we sponsor or accounts we manage would adversely affect our ability to generate revenue, income and cash flow, and could adversely affect our ability to raise capital for future investment funds and accounts.

 

Difficult market and economic conditions, including, without limitation, changes in interest rates and volatile equity and credit markets, can adversely affect our asset management business in many ways, including by reducing the value or performance of the investments made by any investment funds we sponsor or accounts we manage and reducing our ability to raise or deploy capital, each of which could adversely affect our revenue, earnings and cash flow and adversely affect our financial prospects and condition.

 

3

 

 

Any revenue, earnings, net income and cash flow attributable to our asset management business is likely to be highly variable, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of shares of our common stock to decline and be volatile.

 

Sports Investment Platform

 

GlassBridge acquired its sports investment platform in 2019, by purchasing a controlling interest in SportBLX, a financial technology company that enables a marketplace for sports assets, including revenue share interests in player earnings and equity interests in teams. SportBLX partners with a registered broker-dealer to effect transactions in sports assets constituting securities. SportBLX is focused initially on American professional sports like basketball, baseball and football.

 

SportBLX, together with broker dealers, 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 also enables institutional investors to invest in securities tied to uncorrelated assets with attractive yields and the potential for equity-like returns backed by assets that participate in an industry that has thrived for decades through multiple business cycles.

 

Company History

 

GlassBridge was incorporated as Imation Corp. in Delaware in 1996, from the spin-off of substantially all of 3M Company’s data storage and imaging systems businesses. Until 2015, we primarily provided data storage and security solutions through our two legacy business segments: Consumer Storage and Accessories and Tiered Storage and Security Solutions (the “Legacy Business”).

 

As described in Notes to Consolidated Financial Statements – Note 5 – Discontinued Operations, in August 2018, the Company divested the Nexsan business, consisting of Nexsan Corporation, Connected Data Inc., and Transporter brand products, acquired between 2012 and 2015 (the “Nexsan Business”).

 

In February 2017, we changed our name to GlassBridge Enterprises, Inc. to reflect our new primary focus on asset management and delisted our common stock from The New York Stock Exchange, at the beginning of August 2017, when our common stock began trading in the OTC Markets Group under the symbol “GLAE”.

 

On January 4, 2019, for total consideration of $1,000,000, Sport-BLX 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, Mr. Hall, SportBLX’s Executive Chairman and CEO, held 65.6% of SportBLX’s outstanding shares.

 

On March 31, 2019, the Company sold all of its international subsidiaries (“Imation Subsidiaries”) to IMN Capital Holdings, Inc. (“IMN Capital”). Certain Company subsidiaries, including the Imation Subsidiaries, are parties to legal proceedings relating to payments that the Imation Subsidiaries made pursuant to European Union copyright levies (the “Subsidiary Litigation”). As consideration for the sale, IMN Capital paid the Company $280,000 and agreed to pay the Company 25% of all net proceeds from the Subsidiary Litigation. The Company recorded a one-time non-cash gain of approximately $10 million in connection with the sale. See Item 3 for current status of extant litigation.

 

On May 13, 2019, GlassBridge and the U.S. Pension Benefit Guaranty Corporation (the “PBGC”) entered into an agreement to terminate the Imation Cash Balance Pension 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 to protect the interests of the Plan participants. GlassBridge and all other members of Seller’s controlled group were liable to the PBGC for all obligations under ERISA in connection with the Plan’s termination. On October 1, 2019, the Company entered into a settlement agreement with the PBGC, pursuant to which GlassBridge paid $3,000,000 to PBGC in settlement of these obligations.

 

On August 20, 2019, the Company effected a 1:200 reverse common stock split.

 

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. Adara issued the notes in consideration for the assignment by the Company to Adara of the right to receive certain payments from IMN Capital and transfer by the Company to Adara of some of the 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.

 

4

 

 

On December 12, 2019, 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 interest at a 5% annual rate, due December 12, 2022. On the same date, the Company purchased from George E. Hall (“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 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. Mr. Hall beneficially owns approximately 29.1% of our outstanding shares.

 

On December 18, 2019, we terminated our Services Agreement and Management Services Agreement, effective March 31, 2020, with Clinton, as the Company began to provide for itself the services Clinton provided under the agreements.

 

At December 31, 2019, we employed 17 people.

 

Executive Officers

 

As of April 3, 2020, the company has three executive officers.

 

Joseph De Perio, age 41, is the Chairman of the Board of Directors. Mr. De Perio joined our Board on May 20, 2015. On March 22, 2017, the Board appointed Joseph De Perio to serve as its Chairman and as the Company’s principal executive officer, effective on the same day. Previously, Mr. De Perio served as the Board’s Non-Executive Chairman. Mr. De Perio served as a Senior Portfolio Manager of Clinton Relational Opportunity Master Fund, L.P. from October 2010 to December 2018; he also served in a similar capacity from 2006 until December 2007. From December 2007 until October 2010, Mr. De Perio was a Vice President at Millennium Management, L.L.C., a global investment management firm. Mr. De Perio was a Private Equity Associate at Trimaran Capital Partners, a private investment firm, from 2004 until 2006 and an analyst and associate in the mergers and acquisitions department at CIBC Oppenheimer, a national investment boutique, from 2000 until 2004. Mr. De Perio served on the board of directors of Viking Systems, Inc., a leading worldwide developer, manufacturer and marketer of 3D and 2D visualization solutions for complex minimally invasive surgery, from June 2011 until its sale to Conmed Corporation in October 2012, and Overland Storage, Inc. (f/k/a Overland Data, Inc.), a provider of data protection appliances, from April 2011 until its sale to Sphere 3D Corporation in December 2014. Mr. De Perio also served on the board of directors of EveryWare Global, Inc., a provider of tabletop and food preparation products for the consumer and foodservice markets, from May 2013 until April 2015 when the company filed for protection under Chapter 11 of the United States Bankruptcy Code pursuant to a pre-packaged plan of reorganization. Mr. De Perio received a B.A. in business economics and organizational behavior management with honors from Brown University.

 

Daniel A. Strauss, age 35, is our Chief Executive Officer. Mr. Strauss served as our Chief Operating Officer from March 2017 through December 2019. Mr. Strauss was a Portfolio Manager at Clinton from 2010 until 2019. Mr. Strauss is currently the Chief Executive Office of Adara and is a member of the board of directors of Adara and SportBLX. Mr. Strauss has over ten years of experience in corporate finance as a portfolio manager and investment analyst in private and public equity through which he has developed a deep understanding of corporate finance and strategic planning activities. At Clinton, Mr. Strauss was responsible for evaluating and executing private equity transactions across a range of industries. Post-investment, Mr. Strauss was responsible for the ongoing management and oversight of Clinton’s portfolio investments. From 2008 to 2010, he worked for Angelo, Gordon & Co. as a member of the firm’s private equity and special situations area. Mr. Strauss was previously with Houlihan Lokey, where he focused on mergers and acquisitions from 2006 to 2008. Mr. Strauss has served on the boards of directors of Pacific Mercantile Bancorp (NASDAQ: PMBC) from August 2011 until December 2015 and Community Financial Shares, Inc. (OTC: CFIS) from December 2012 until its sale to Wintrust Financial Corporation in July 2015. Mr. Strauss received a Bachelor of Science in Finance and International Business from the Stern School of Business at New York University.

 

Francis Ruchalski, CPA, age 56, is our Chief Financial Officer. Mr. Ruchalski is also currently the Chief Financial Officer of Clinton and a member of its board of directors. He has been employed by Clinton since 1997. In addition, Mr. Ruchalski is the Chief Financial Officer of SportBLX, a member of its board of directors and a member of the board of directors for Adara. Prior to joining Clinton, Mr. Ruchalski was an audit manager with Anchin, Block & Anchin, LLP, a certified public accounting firm, from 1986 to 1997. Mr. Ruchalski’s responsibilities while with Anchin, Block & Anchin LLP included client auditing and financial and taxation planning. Mr. Ruchalski holds a bachelor of science in accounting from St. John’s University.

 

Availability of SEC Reports

 

Our SEC filings are available to the public from the SEC’s internet site at www.sec.gov. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and our proxy statements are available on the SEC’s internet site. These reports are available through the SEC’s internet site as soon as they are published by the SEC, after we electronically file the material with, or furnish it to, the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The foregoing reports are available free of charge on our internet site, www.glassbridge.com, and we make electronic or paper copies available on request.

 

A copy of the GlassBridge code of ethics and charters for the committees of our Board may be obtained, free of charge, by sending a written request to Corporate Secretary, GlassBridge Enterprises, Inc., 411 East 57th Street, Suite 1-A, New York, New York 10022. Our code of ethics is part of our broader Business Conduct Policy, which may be obtained by written request to the Corporate Secretary, as above. If we make any amendments to our code of ethics other than technical, administrative or other non-substantive amendments, or grant any waiver, including any implicit waiver, from a provision of the code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions requiring disclosure under applicable SEC rules, we intend to disclose the nature of such amendment or waiver via current report of Form 8-K and/or a separate release, as necessary. Our website address is www.glassbridge.com. No information furnished via any website is incorporated by reference into this Annual Report on Form 10-K.

 

5

 

  

Item 1A.Risk Factors

 

Our business is subject to numerous risks, uncertainties and other factors that could have a material and adverse impact on our business, prospects, financial condition, results of operations or cash flow. These risks, uncertainties and other factors, including the ones discussed below, elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC, could materially and adversely affect our business, prospects, financial condition, results of operations or cash flow. Investors should carefully consider such risks, together with all the other information included in this Annual Report on Form 10-K, in evaluating us and our common stock.

 

Risks Related to our Company and Common Stock

 

Pending and future litigation may lead us to incur significant costs.

 

We are subject to various threatened legal actions in the ordinary course of our business. With respect to our Legacy Business and Nexsan Business, claims have and may continue to arise from time to time alleging that we infringe on the intellectual property rights of others. See Item 3 for descriptions of current litigations. Additionally, we are subject to allegations of patent infringement by our competitors as well as by non-practicing entities, sometimes referred to as “patent trolls,” who may seek monetary settlements from us.

 

Litigation is always subject to many uncertainties and outcomes that are not predictable. Even when not merited, the defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. In addition, we may be required to pay damage awards or settlements or become subject to injunctions or other equitable remedies, which could have a material adverse effect on our business, financial condition, results of operations or liquidity. We use legal and appropriate means to contest litigation threatened or filed against us, but we have found there is a strong tendency toward litigation in the patent area in our industry and this litigation environment poses a business risk. The outcome of litigation is often difficult to predict, and the outcome of pending or future litigation may have a material adverse effect on our business, financial condition, results of operations or liquidity.

 

Our participation in any joint investment could be adversely affected by our lack of sole decision-making authority, our reliance on a partner’s financial condition and disputes between us and our partners.

 

We may hold partial ownership interests in businesses or otherwise acquire businesses jointly or establish joint ventures with third parties, including equity positions that are not readily liquid. In such circumstances, we may not be in a position to exercise significant decision-making authority regarding a target business, partnership or other entity if we do not own a substantial majority of the equity interests of the target. These investments may involve risks not present were a third party not involved, including the possibility that partners might become insolvent or fail to fund their shares of required capital contributions. In addition, partners may have economic or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such partners, some of which may possess more industry or technical knowledge or have better access to capital and other resources, may also seek similar acquisition targets as us and we may be in competition with them for such business combination targets. Disputes between us and partners may result in litigation or arbitration that would increase our costs and expenses and divert a substantial amount of our management’s time and effort away from our business. Consequently, actions by, or disputes with, partners might result in subjecting assets owned by the partnership to additional risk. We may also, in certain circumstances, be liable for the actions of our third-party partners. For example, in the future, we may agree to guarantee indebtedness incurred by a partnership or other entity. Such a guarantee may be on a joint and several basis with our partner, in which case, we may be liable in the event such partner defaults on its guarantee obligation.

 

Future acquisitions or business opportunities could involve unknown risks that could harm our business and adversely affect our financial condition.

 

As part of our strategic plan to use excess capital, including through acquisitions, we may acquire interests in a number of different businesses, some of which may be outside of industries that have comprised our historical focus. We have in the past, and may in the future, acquire businesses or make acquisitions, directly or indirectly through our subsidiaries, that involve unknown risks, some of which will be particular to the industry in which the business or acquisition targets operate, including risks in industries with which we are not familiar or experienced. Although we intend to conduct extensive business, financial and legal due diligence in connection with the evaluation of future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. We may be unable to adequately address the financial, legal and operational risks raised by such businesses or acquisitions, especially if we are unfamiliar with the relevant industry. The realization of any unknown risks could expose us to unanticipated costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or acquisitions, which could adversely affect our financial condition and liquidity. In addition, our financial condition and results of operations may be adversely impacted depending on the specific risks applicable to any business or company we acquire and our ability to address those risks.

 

6

 

 

We could consume resources in researching acquisitions, business opportunities or financings and capital market transactions that are not ultimately consummated, which could materially adversely affect our financial condition and subsequent attempts to locate and acquire or invest in another business.

 

We anticipate that the investigation of each specific acquisition or business opportunity and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments with respect to such transaction will require substantial management time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made not to consummate a specific acquisition, business opportunity or financing and capital market transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific acquisition, investment target or financing, we may fail to consummate the investment or acquisition for any number of reasons, including those beyond our control. Any such event could consume significant management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and our ability to consummate other acquisitions and investments.

 

Additional businesses or technologies we acquire could prove difficult to integrate, disrupt our ongoing business, dilute stockholder value or have an adverse effect on our results of operations.

 

We may engage in further acquisitions of businesses or technologies to augment our growth. Acquisitions involve challenges and risks in negotiation, execution, valuation and integration. Even if successfully negotiated, closed and integrated, certain acquisitions may not advance our business strategy, may fall short of expected return-on-investment targets or may fail. Any past or future acquisition could also involve additional risks, including:

 

  potential disruption of our ongoing business and distraction of management;
     
  difficulty integrating the operations and products of the acquired business;
     
  use of cash to fund the acquisition or for unanticipated expenses;
     
  limited market experience in new businesses;
     
  exposure to unknown liabilities, including litigation against the companies that we acquire;
     
  additional costs due to differences in culture, geographical locations and duplication of key talent;
     
  delays associated with or resources being devoted to regulatory review and approval and other ongoing compliance matters;
     
  acquisition-related accounting charges affecting our balance sheet and operations;
     
  difficulty integrating the financial results of the acquired business in our consolidated financial statements;
     
  controls in the acquired business;
     
  potential impairment of goodwill;
     
  dilution to our current stockholders from the potential issuance of equity securities to consummate a proposed acquisition; and
     
  potential loss of key employees or customers of the acquired company.

 

In the event that we enter into any acquisition agreements, closing of the transactions could be delayed or prevented by regulatory approval requirements, including antitrust review or other conditions. We may not be successful in addressing these risks or any other problems encountered in connection with any attempted acquisitions, and we could assume the economic risks of such failed or unsuccessful acquisitions. We may not realize the expected benefits of any acquisitions as rapidly as, or to the extent anticipated by, the marketplace, investors, financial analysts or industry analysts. Any such failure may have a material adverse impact on our financial condition, results of operations and stock price.

 

7

 

 

The market price of our common stock is volatile, and you may lose part or all your investment.

 

The market price of our common stock has been, and may continue to be, volatile. Any of the factors discussed herein or such as the following may affect the market price of our common stock:

 

  actual or anticipated fluctuations in our operating results;
     
  actions by our competitors;
     
  developments with respect to patents or proprietary rights;
     
  litigation;
     
  changes in key personnel;
     
  market conditions and trends in the businesses and industries in which we operate;
     
  contraction in our operating results or growth rates;
     
  the potential impact of activist investors;
     
  changes in financial estimates by securities analysts relating specifically to us or the industries in which we participate in general; and
     
  any future guidance we may provide to the public, any changes in such guidance or any difference between our guidance and actual results.

 

In addition, general economic conditions may cause the stock market to experience extreme price and volume fluctuations from time to time. In the past, stockholders have instituted securities class action litigation against various companies following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and attention of management could be diverted from our business.

 

We may incur asset impairment charges for intangible assets and goodwill in the future.

 

We evaluate assets on our balance sheet, including such intangible assets and goodwill, annually in connection with our fiscal year end reporting or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. The test for impairment of goodwill requires a comparison of the carrying value of the reporting unit for which goodwill is assigned with the fair value of the reporting unit calculated based on discounted future cash flows. If the carrying value of the reporting unit is greater than the fair value a second step is performed to calculate any impairment. During the fourth quarter of 2018, the Company incurred impairment charges of $6.2 million related to intangible assets that were acquired when we closed a transaction with Clinton on February 2, 2017. As of December 31, 2019, the Company had goodwill of approximately $50.6 million as a result of the acquisition of a controlling interest in SportBLX, Inc.

 

Risks Related to our Asset Management Business

 

AAM has limited performance history, and any fund we may sponsor will be in its formation stage, without an operating history upon which prospective investors can evaluate the fund’s performance.

 

AAM and any fund we may sponsor have no operating history upon which prospective investors can evaluate the fund’s performance. Poor performance of any funds we may sponsor is likely to have a material adverse effect on our business, results of operations and financial condition.

 

Our Asset Management Business depends in large part on our ability to raise capital from third party investors. If we are unable to raise capital from third party investors, we will be unable to collect management fees or deploy their capital into investments and potentially collect performance fees, which would materially affect our ability to generate revenue and cash flow from our asset management business.

 

Our ability to raise capital from third party investors depends on a number of factors, including certain factors that are outside our control. Certain factors, such as the performance of the stock market and the asset allocation rules or investment policies to which such third-party investors are subject, could inhibit or restrict the ability of third party investors to make investments in our funds or the asset classes in which our funds invest. There are no assurances that we can find or secure commitments from investors. If economic conditions were to deteriorate or if we are unable to find enough investors, we might raise less than our desired amount for a given fund. If we are unable to successfully raise enough capital, it could materially affect our ability to generate revenue and cash flow from our Asset Management Business, which could adversely affect our financial prospects and condition.

 

8

 

 

In addition, we intend to negotiate terms for our funds and investments with potential investors. The outcome of such negotiations could result in our agreement to terms that are materially less favorable to us than funds managed by our competitors. Such terms could restrict our ability to raise funds with objectives or strategies that compete with existing funds, add additional expenses and obligations for us in managing the fund or increase our potential liabilities, all of which could ultimately reduce our revenues.

 

Our Asset Management Business is subject to extensive regulation, which increases our costs of doing business, and our failure to comply with regulatory requirements may harm our financial condition.

 

Our Asset Management Business is subject to extensive regulation in the United States, particularly by the SEC and the Commodity Futures Trading Commission. We are or may become subject to regulation under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Commodity Exchange Act, and various other statutes, regulations and rules. As a result of launching our Asset Management Business, we face increased costs in complying with newly applicable regulations, and we could continue to experience higher costs if new rules and regulatory actions or legislation require us to spend more time, hire additional personnel or buy new technology to comply with these rules and laws. The changes in laws or regulations could also have a material adverse effect on us by limiting the sources of our revenues and increasing our costs. Our business may be materially affected not only by securities regulations, but also by regulations of general application. For example, existing and proposed tax legislation and other governmental regulations and policies, including the interest rate policies of the Federal Reserve Board or cybersecurity regulation, could increase our compliance and other costs.

 

Although we will strive to conduct our business in accordance with applicable laws or regulations, if we were found to have violated an applicable law or regulation, we could be subject to fines, suspensions of personnel or other sanctions, including revocation of our registration as an investment advisor. If a sanction were imposed against us or our personnel, even if only for a small monetary amount, the adverse publicity related to such a sanction could harm our reputation, result in redemptions by investors in the funds we may launch and impede our ability to attract new investors, all of which could result in a material adverse effect to our business, results of operations and financial condition.

 

The asset management business is intensely competitive.

 

The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, investor liquidity and willingness to invest, fund terms, fees, brand recognition and business reputation. Our Asset Management Business competes with many domestic and global competitors that may provide investment products with similar features and objectives to those we offer. These institutions range from small boutique firms to large financial institutions. We expect that competition will continue to increase. A number of factors serve to increase our competitive risks:

 

  a number of our competitors have greater financial, technical, marketing and other resources and more personnel than we do;
     
  some of our funds may not perform as well as competitors’ funds or other available investment products;
     
  several of our competitors have significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities;
     
  some of our competitors may have a lower cost of capital;
     
  some of our competitors may have access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;
     
  some of our competitors may be subject to less regulation and accordingly may have more flexibility to undertake and execute certain businesses or investments than we can and/or bear less compliance expense than we do;
     
  some of our competitors may have more flexibility than us in raising certain types of investment funds;
     
  some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make;
     
  some of our competitors may be more successful than us in the development and implementation of new technology to address investor demand for product and strategy innovation;

 

9

 

 

  there are relatively few barriers to entry impeding new alternative asset fund management firms, and the successful efforts of new entrants into our various businesses is expected to continue to result in increased competition;
     
  some of our competitors may have better expertise or be regarded by investors as having better expertise in a specific asset class or geographic region than we do;
     
  some investors may prefer to invest with an investment manager that is not publicly traded or is of a different size; and
     
  other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

 

This competitive pressure could adversely affect our ability to make successful investments and may limit our ability to raise future investment funds, any of which would adversely impact our business, revenue, results of operations and cash flow.

 

Privacy and data security concerns, laws, or other regulations could expose us to liability or impair our operations.

 

Our Asset Management Business requires collection of sensitive personal information. Privacy and data security are rapidly evolving areas of concern and regulation. Changes in laws restricting or otherwise governing data and transfer thereof could be difficult to comply with, result in increased costs, or impair our operations. Security measures that we implement may fail due to third-party attack, employee error or sabotage, or other causes. Hacking techniques change frequently and therefore can be difficult to prevent. In addition, service providers could suffer security breaches or data losses that affect investors’ information. A security breach could damage our reputation, resulting in loss of investors, subject the Company to liability, or otherwise materially adversely affect the Company’s business and financial performance.

 

Poor performance of any investment funds we sponsor or accounts we manage would adversely affect our ability to generate revenue, income and cash flow, and could adversely affect our ability to raise capital for future investment funds and accounts.

 

In the event that any of our investment funds or accounts we manage were to perform poorly, our ability to generate revenue, income and cash flow, and our ability to raise capital for future investment funds and accounts, would be adversely affected. Moreover, we could experience losses on our investments of our own principal as a result of poor investment performance by our investment funds. Poor performance of our investment funds could make it more difficult for us to raise new capital. Potential investors in our funds will assess our investment funds’ performance and our ability to raise capital and avoid excessive redemption levels will depend on our investment funds’ satisfactory performance. Accordingly, poor fund performance may deter future investment in our funds and thereby decrease the capital invested in our funds and ultimately, our management fee revenue. Alternatively, in the face of poor fund performance, investors could demand lower fees or fee concessions which would likewise decrease our revenue.

 

Difficult market and economic conditions, including, without limitation, changes in interest rates and volatile equity and credit markets, can adversely affect our Asset Management Business in many ways, including by reducing the value or performance of the investments made by any investment funds we may sponsor or accounts we manage, including, without limitation, any fund managed by Clinton, and reducing our ability to raise or deploy capital, each of which could adversely affect our revenue, earnings and cash flow and adversely affect our financial prospects and condition.

 

Our Asset Management Business is materially affected by conditions in the global financial markets and economic conditions or events throughout the world that are outside our control, including but not limited to changes in interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions and/or other events. In the event of a market downturn, each of our businesses could be affected in different ways. We are unable to predict whether and to what extent uncertainty surrounding economic and market conditions will be reduced, and even in the absence of uncertainty, adverse conditions and/or other events in particular sectors may cause our performance to suffer further.

 

Challenging market and economic conditions may make it more difficult and competitive to find suitable investments for any investment funds we may sponsor or accounts we manage, or to effectively raise or deploy capital. This could adversely affect our performance and ability to raise new funds. During periods of difficult market conditions or slowdowns (which may be across one or more industries, sectors or geographies), the value or performance of the investments made by any investment funds we may sponsor or accounts we manage may be reduced, which could adversely affect our revenue, earnings and cash flow and adversely affect our financial prospects and condition.

 

Difficult economic conditions may adversely affect our businesses in many ways, including by reducing the value or hampering the performance of the investments made by our funds or reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue, net income and cash flow and adversely affect our financial prospects and condition.

 

A financial downturn could adversely affect our operating results in a number of ways, and if the economy was to enter a recessionary or inflationary period, it may cause our revenue and results of operations to decline by causing:

 

  our AUM to decrease, lowering management fees and other income from our funds;
     

adverse conditions for the portfolio companies of our funds (e.g., decreased revenues, liquidity pressures increased difficulty in obtaining access to financing and complying with the terms of existing financings, as well as increased financing costs);
   
 

lower investment returns, reducing performance fees; and
     

material reductions in the value of our fund investments, affecting our ability to realize performance fees from these investments.

 

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Lower investment returns and such material reductions in value may result because, among other reasons, during periods of difficult market conditions or slowdowns (which may be across one or more industries, sectors or geographies), companies in which our funds invest may experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. During such periods, these companies may also have difficulty in expanding their businesses and operations and be unable to meet their debt service obligations or other expenses as they become due, including expenses payable to us. In addition, during periods of adverse economic conditions, our funds and their portfolio companies may have difficulty accessing financial markets, which could make it more difficult or impossible to obtain funding for additional investments and harm our AUM and operating results.

 

Any revenue, earnings, net income and cash flow attributable to our Asset Management Business is likely to be highly variable, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of shares of our common stock to decline and be volatile.

 

Any revenue, earnings, net income and cash flow attributable to our asset management business is likely to be highly variable. We may also experience fluctuations in our results, including our revenue and net income, from quarter to quarter due to a number of factors, including changes in the valuations of our funds’ investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. The valuations of investments made by our funds could also be subject to high volatility as a result of uncertainty regarding governmental policy with respect to, among other things, tax reform, financial services regulation, international trade, immigration, healthcare, labor, infrastructure and energy. Achieving steady earnings growth on a quarterly basis may be difficult, which could in turn cause the price of shares of our common stock to decline and be volatile.

 

The potential future growth of our asset management business may place significant demands on our resources and employees, and may increase our expenses, risks and regulatory oversight.

 

The potential future growth of our asset management business may place significant demands on our infrastructure and our investment team and other employees, which may increase our expenses. The potential inability of our systems to accommodate an increasing volume of transactions could constrain our ability to expand our asset management businesses. We may face significant challenges in maintaining and developing adequate financial and operational controls, implementing new or updated information and financial systems, managing and appropriately sizing our work force, and updating other components of our business on a timely and cost-effective basis. There can be no assurance that we will be able to manage the growth of our Asset Management Business effectively, or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.

 

If we are unable to establish a favorable reputation our ability to grow our asset management business could be limited, and any damage to our reputation could harm our asset management business.

 

Our success depends, in part, on establishing and maintaining a strong reputation in the investment community, Our reputation is vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate even if they are without merit or satisfactorily addressed. Our reputation may be impacted by many factors, including but not limited to, litigation, regulatory inquiries or investigations, conflicts of interest, employee misconduct or rumors. Any damage to our reputation could result in redemptions by investors in any funds we may sponsor or accounts we may manage and impede our ability to attract new investors or negatively impact our relationships with third party intermediaries, all of which could result in a material adverse effect to our business, results of operations and financial condition.

 

Our asset management business is subject to extensive regulation, which increases our costs of doing business, and our failure to comply with regulatory requirements may harm our financial condition.

 

Our asset management business is subject to extensive regulation in the United States, particularly by the SEC. We are or may become subject to regulation under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and various other statutes, regulations and rules. As a result of launching our asset management business, we face increased costs in complying with newly applicable regulations, and we could continue to experience higher costs if new rules and regulatory actions or legislation require us to spend more time, hire additional personnel or buy new technology to comply with these rules and laws. The changes in laws or regulations could also have a material adverse effect on us by limiting the sources of our revenues and increasing our costs. Our business may be materially affected not only by securities regulations, but also by regulations of general application. For example, existing and proposed tax legislation and other governmental regulations and policies, including the interest rate policies of the Federal Reserve Board or cybersecurity regulation, could increase our compliance and other costs.

 

Although we will strive to conduct our business in accordance with applicable laws or regulations, if we were found to have violated an applicable law or regulation, we could be subject to fines, suspensions of personnel or other sanctions, including revocation of our registration as an investment advisor. If a sanction were imposed against us or our personnel, even if only for a small monetary amount, the adverse publicity related to such a sanction could harm our reputation, result in redemptions by investors in the funds we may launch and impede our ability to attract new investors, all of which could result in a material adverse effect to our business, results of operations and financial condition.

 

11

 

Risks Related to our Sports Investment Platform

 

Our sports investment platform operates in a new area of finance.

 

Our sports investment platform operates in a new area of finance. Whereas syndicated investing in sports teams is common, securitizing earnings of sports players is not yet an established practice. The Company will have to structure transactions that are attractive to investors, with little experience of its own or elsewhere as guidance. In addition, SportBLX will be required to effectively market the securities to investors to be successful and may be required to rely on third-party registered broker-dealers in this effort. To date, SportBLX has completed only one securitization and there can be no assurance of further transactions. Potential investors may be unwilling to invest in a relatively untried form of transaction or demand higher returns to offset greater risk.

 

Our sports investment platform is a relatively new business.

 

We acquired a controlling interest in SportBLX only at the end of 2019, and SportBLX has been in business only since late 2018. Since its formation, SportBLX has completed only one financing transaction as of the filing of this annual report. Accordingly, potential investors in SportBLX-sponsored transactions have little basis on which to evaluate the quality of SportBLX offerings, and investors in the Company will have little basis on which to gauge SportBLX’s contributions to the Company’s results of operations.

 

SportBLX may not be able to identify investment opportunities that are sufficiently attractive that potential investors would want to invest in them.

 

Our sports investment platform will fail as a business, unless we develop a reputation for offering successful investments to investors. Our ability to do so will depend greatly upon our ability in selecting attractive assets for investors. We cannot assure you that we will be fully successful in these endeavors.

 

Our business is sports-centric, and our success is tied to sports generally and, in particular, to changes in popularity of the sports on which we choose to focus.

 

We are largely dependent on the continued popularity of sports, generally, and, in particular, the popularity of the sports upon which we have chosen to focus including basketball, baseball and football. Changes in popularity of these sports globally or in particular, the United States, could be influenced by competition from other sports or alternative forms of entertainment. A change in sports fans’ tastes, a change in perceptions relating to particular sports (for example, if a particular aspect of such sports become unpopular due to safety or other considerations), or a popularity shift towards sports events that are currently under-represented or not present in our portfolio, could result in reduced investment in our offerings and reduced revenue to the Company.

 

Sports related risks may negatively affect our business.

 

SportBLX endeavors to structure its securities in athlete-based earnings streams such that investors have downside protection in their investment. However, we cannot assure that we will be fully successful in the structuring endeavors. Securities based on sports have inherent risks such as injury and poor performance, among others.

 

The offer and sale of securities is highly regulated, and consequences of noncompliance can be severe.

 

The offer, issuance, and sale, of securities are highly regulated by federal and state laws. To avoid registration and qualification of securities that we offer, we rely on exemptions from these laws that, among other things, require us to have a reasonable basis to believe that each person seeking to invest in securities that we offer is legally permitted to invest.

 

We may be required to make our offerings through a registered broker dealer licensed to sell securities in the states in which investors reside. We have engaged North Capital Private Securities Corporation (“NCPSC”), which is licensed to sell unregistered securities in 53 U.S. states and territories to act in this capacity as well as to vet investors on our behalf. SportBLX may be unable to operate its platform if NCPSC discontinues the engagement, or if we discontinue the engagement due to dissatisfaction with NCPSC’s performance, and we are unable to find a suitable replacement. We cannot continue the engagement if we do not reasonably believe that NCPSC’s determination of investors’ qualification is reliable.

 

Failure by SportBLX to comply with securities laws could make the Company liable for severe penalties and rescission of securities sales, as well as injunctions against SportBLX to cease operations. In addition, if SportBLX’s operations were considered broker-dealer activity, SportBLX would have to cease operations until licensed as a broker-dealer, a substantial undertaking, and the Company would realize material adverse effects on results of operations and financial condition.

 

12

 

 

Privacy and data security concerns, laws, or other regulations could expose us to liability or impair our operations.

 

SportBLX’s operations require it to collect sensitive personal information. Privacy and data security are rapidly evolving areas of concern and regulation. Changes in laws restricting or otherwise governing data and transfer thereof could be difficult to comply with, result in increased costs, or impair our operations. Security measures that we implement may fail due to third-party attack, employee error or sabotage, or other causes. Hacking techniques change frequently and therefore can be difficult to prevent. In addition, service providers could suffer security breaches or data losses that affect investors’ information. A security breach could damage our reputation, resulting in loss of investors, subject the Company to liability, or otherwise materially, adversely affect the Company’s business and financial performance.

 

If we do not adapt to technological changes, the SportBLX platform may become less attractive to sports investors, which could have a material and adverse impact on the SportBLX business.

 

The internet industry is characterized by constant changes, including rapid technological evolution, continual shifts in customer demands, frequent introductions of new products, and services and constant emergence of new industry standards and practices. Thus, our success will depend, in part, on our ability to respond to these changes timely and cost-effectively; failure to do so may cause use of the SportBLX platform to decline and our business to be materially and adversely affected.

 

Any failure or interruptions in the internet infrastructure, bandwidth providers, data center providers, other third parties or our own systems could adversely affect the SportBLX platform.

 

Our platform depends on maintenance of the internet and other telecommunications services by third parties, including the Foundation. Such services include maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet access and services and reliable telecommunications systems that connect our operations. While the SportBLX platform is designed to operate without interruption, we may experience interruptions and delays in services and availability from time to time. We rely on systems as well as third-party vendors, including data center, bandwidth, and telecommunications equipment providers, to provide our solutions. We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with SportBLX platform users.

 

We face risks relating to third parties’ billing and payment systems or from other service provider failures.

 

The billing and payment systems of third parties, such as online third-party payment processors, help us to maintain accurate records of payments of sales proceeds by paying users and collecting such payments. Our business and results of operations could be adversely affected if these third parties fail to accurately account for or calculate the revenues generated from of our services. Moreover, if there are security breaches or failure or errors in the payment process of these third parties, user experience may be affected and our business results may be negatively impacted.

 

We also do not have control over the security measures of our third-party payment service providers, and security breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of all of the online payment systems we use. In addition, there may be billing software errors that would damage customer confidence in these payment systems. If any of the above were to occur, we may lose users, which may have an adverse effect on our business.

 

Item 1B.Unresolved Staff Comments.

 

None.

 

Item 2.Properties.

 

Our worldwide headquarters is in New York City. Our headquarters facility is in good operating condition suitable for the respective use and is adequate for our current needs.

 

Facility; how held   Function  

Segment(s)

Using Space

         
New York, New York; leased   Corporate Headquarters, Administrative   Corporate, Asset Management

 

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Item 3. Legal Proceedings.

 

Not applicable.

 

Item 4.Mine Safety Disclosures.

 

Not Applicable.

 

14

 

 

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

As of February 28, 2020, there were 25,170 shares of our common stock, $0.01 par value, outstanding and held by 45 shareholders of record. Our common stock is traded on the OTCQB under the symbol “GLAE”. Over-the counter quotations reported by the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

No dividends were declared or paid during 2020 or 2019. Any future dividend payments will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board. On August 22, 2019, we effected a 1:200 reverse split of our common stock, without any change in the par value per share and decreased the number of authorized shares of our common stock from 10,000,000 to 50,000.

  

Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Issuer Purchases of Equity Securities

 

Not applicable.

 

Item 6.Selected Financial Data.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The Company owns and operates an asset management business and a sports investment platform through AAM and SportBLX (“Asset Management Business”), which are respectively wholly owned and majority owned by Adara. GlassBridge Asset Management, LLC changed its name to Adara Asset Management LLC (“AAM”) in 2020.

 

The following discussion is intended to be read in conjunction with Item 1. Business and our Consolidated Financial Statements and related Notes that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. GlassBridge’s actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statements Regarding Forward-Looking Statements” and in Item 1A. Risk Factors of this Annual Report on Form 10-K.

 

The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See, Notes to Consolidated Financial Statements—Note 2 - Summary of Significant Accounting Policies , for further information regarding consolidation. References to “GlassBridge,” the “Company,” “we,” “us” and “our” are to GlassBridge Enterprises Inc., and its subsidiaries and consolidated entities unless the context indicates otherwise. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Introduction

 

GlassBridge has, during recent periods, undergone significant changes. Until 2015, we primarily provided data storage and security solutions through our two legacy business segments.

 

On August 16, 2018, the Company sold its Nexsan business, acquired between 2012 and 2015, as set forth in Notes to Consolidated Financial Statements-- Note 1 – Background and Basis of Presentation.

 

As described in Notes to Consolidated Financial Statements—Notes 1–15, in a series of transactions during 2019, the Company sold its international subsidiaries, acquired a controlling interest in SportBLX, and sold to Orix, for $17,562,700, a 20.1% interest in Adara, which owns all of AAM and part of our SportBLX holdings, and two notes from Adara to the Company in total principal amount of $13,000,000.

 

As a result of these transactions, the Company now operates in two segments, an Asset Management Business, through AAM, and a sports investment platform, through SportBLX—both owned by Adara.

 

Executive Summary

 

Consolidated Results of Continuing Operations for the Year Ended December 31, 2019

 

  Revenue of $0.1 million in 2019 was up $0.1 million compared with revenue of $0.0 million in 2018.
     
  Selling, general and administrative expense was $3.4 million in 2019, down $3.0 million compared with $6.4 million in 2018. The decrease from prior year is primarily due to corporate cost reductions.
     
  Restructuring and other expense was $0.1 million in 2019 compared to $(4.8) million in 2018.
     
  Operating loss from continuing operations was $3.4 million in 2019 compared to $8.3 million in 2018.
     
  Other income was $14.8 million in 2019, compared with $0.5 million expense in 2018.
     
  The income tax benefit was $0.0 million in 2019 as compared to $0.1 million in 2018.
     
  Basic and diluted income per share from continuing operations was $330.15 for 2019 compared with a loss per share of $341.18 for 2018.

 

16

 

 

Consolidated Cash Flow/Financial Condition for the Year Ended December 31, 2019

 

  Cash and cash equivalents totaled $5.5 million as of December 31, 2019, compared with $4.9 million cash and cash equivalents at December 31, 2018.
     
  Cash used in operating activities was $11.3 million in 2019 compared with cash used in operating activities of $10.5 million in 2018. Cash used in operating activities in 2019 was primarily related to corporate expenditures, legal settlements and related costs. Cash used in operating activities in 2018 was primarily related to operating loss and working capital changes.
     
  Cash used in investing activities was $3.3 million in 2019 compared with cash provided by investing activities of $5.1 million in 2018. Cash used in investing activities in 2019 was primarily related to the purchase of SportBLX. Cash provided by investing activities in 2018 was primarily related to proceeds from the sale of the Nexsan business.
     
  Cash provided by financing activities was $14.8 million in 2019 from proceeds of the sale of an equity interest in Adara Enterprises Corp and proceeds from the Orix notes payable, compared with $0.0 million in 2018.

 

See Analysis of Cash Flows section below for further information.

 

Results of Operations

 

Net Revenue

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Net revenue  $0.1   $    NM 

 

“NM” - Indicates the Percent Change is not meaningful

 

Revenue of $0.1 million in 2019 was up $0.1 million, compared with revenue of $0.0 million in 2018.

 

Selling, General and Administrative (SG&A)

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Selling, general and administrative  $3.4   $6.4    (59.0)%
As a percent of revenue   3400.0%   NM      

 

SG&A expense decreased in 2019 compared with 2018 by $3.0 million (or 59.0%) due to corporate cost reductions. The cost reductions primarily relate to headcount reductions and legal costs.

 

17

 

 

Restructuring and Other

 

The components of our restructuring and other expense included in our Consolidated Statements of Operations were as follows:

 

   Years Ended December 31,
   2019  2018
   (In millions)
Restructuring          
Severance and related  $0.1   $0.2 
Total restructuring  $0.1   $0.2 
Other          
German levy settlement   —      (5.0)
Total other  $—     $(5.0)
Total  $0.1   $(4.8)

 

Restructuring

 

Total restructuring expense of $0.1 million, recorded for the year ended December 31, 2019, and $0.2 million, for the year ended December 31, 2018, related to severance payments. See Note 8- Restructuring and Other Expense in our Notes to Consolidated Financial Statements for information on Other expense.

 

Other

 

In the fourth quarter of 2018, our former subsidiary Imation Europe B.V. (“IEBV”) and its German subsidiary finalized a settlement agreement with the German collecting society that resulted in mutual releases and a one-time payment by IEBV of 150,000 Euros. As a result, the Company recorded a benefit in other of $5 million in continuing operations for the year ending December 31, 2018.

 

18

 

 

Operating Loss From Continuing Operations

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Operating loss  $(3.4)  $(8.3)   (59.0)%
As a percent of revenue   (3,400.0)%   NM      

 

Operating loss from continuing operations of $3.4 million decreased in 2019 by $4.9 million, compared with an operating loss of $8.3 million in 2018.

 

Other Income and (Expense)

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Interest expense   (0.3)   (0.1)   200.0%
Net income (loss) from AAM fund activities       (0.9)   (100.0)%
Other income (expense), net   

15.1

    0.5    2,920.0%
Total other income (expense)  $

14.8

  $(0.5)   (3,060.0)%
As a percent of revenue   

NM

   NM      

 

 

NM - Not meaningful

 

Total other income was $14.8 million in 2019, compared to other expense of $0.5 million in 2018. Other income in 2019 primarily related to a $12 million unrealized gain in the Arrive investment, net of a $1.2 million distribution, and a $3.0 million unrealized gain in SportBLX. Other expense in 2018 primarily related to losses on AAM fund activities.

 

See Asset Management Business discussion within the Segment Results section for additional information on net income from AAM fund activities.

 

Income Tax Benefit (Provision)

 

   Years Ended December 31, 
   2019   2018 
   (In millions) 
Income tax benefit (provision)  $   $0.1 
Effective tax rate   NM    NM 

 

 

NM - Not meaningful

 

The income tax provision was $0.0 million in 2019, as compared to a $0.1 million benefit in 2018. The 2018 benefit was attributable to a minimum tax credit refund. Because we maintain a valuation allowance related to our U.S. deferred tax assets the tax provision generally represents discrete tax events that may occur from time to time. The effective tax rate for 2019 was not meaningful.

 

As of December 31, 2019, and 2018, we had valuation allowances of $236.4 million and $230.6 million, respectively, to account for deferred tax assets we have concluded are not considered to be more-likely-than-not to be realized in the future due to our cumulative losses in recent years. The deferred tax assets subject to valuation allowance include certain operating loss carryforwards, deferred tax deductions, capital loss carryforwards and tax credit carryforwards.

 

19

 

 

Income from discontinued operations

 

   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 

 

Discontinued operations represent the results of operations from our legacy businesses and Nexsan business. For the year ended December 31, 2019, income from discontinued operations primarily relates to the sale of the foreign subsidiaries. For the year ended December 31, 2018, income from discontinued operations primarily relates to income on the sale of the Nexsan business and lower operating expenses.

 

See Note 5 - Discontinued Operations in our Notes to Consolidated Financial Statements for more information.

 

Segment Results

 

With the wind down of our legacy businesses substantially completed by the first quarter of 2016 and the sale of the Nexsan business in the third quarter of 2018 and following the launch of AAM, the asset management business and the sports investment platform, SportBlx, are our two reportable segments as of December 31, 2019. Results from the legacy businesses and Nexsan business were reported within discontinued operations.

 

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. Corporate and unallocated amounts include 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.

 

20

 

 

Information related to our segments is as follows:

 

Asset Management Business

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Net revenue  $0.1   $    NM 
Operating income (loss)  $0.1   $(4.5)   (102.2)%
                
As a percent of revenue   100%   NM      

 

 

NM - Not meaningful

 

Revenue from our asset management business primarily consists of management and performance fees paid by the funds under our management.

 

Sports Investment Platform

 

   Years Ended December 31,   Percent Change
   2019   2018   2019 vs. 2018
   (In millions)    
Net revenue  $   $   NM
Operating loss  $(0.2)  $   NM
              
As a percent of revenue   NM    NM    

 

 

NM - Not meaningful

 

21

 

 

Corporate and Unallocated

 

   Years Ended December 31,   Percent Change 
   2019   2018   2019 vs. 2018 
   (In millions)     
Corporate and unallocated operating loss  $

(3.3

)  $(3.3)   0.0%
Intangible impairment       (6.2)   (100.0)%
Restructuring and other   (0.1)   4.8    (102.1)%
Total   

(3.4

)   (4.7)   

(27.7

)%

 

The corporate and unallocated operating loss was flat from 2018 to 2019. Restructuring and other increased in 2019 compared with 2018 by $4.9 million primarily due to the German levy settlement.

 

Financial Position

 

Our cash and cash equivalents balance, as of December 31, 2019, was $5.5 million, compared to cash of $4.9 million, as of December 31, 2018. See the Analysis of Cash Flows section below for more information.

 

Our accounts payable balance, as of December 31, 2019, was $2.0 million, an increase of $1.6 million from $0.4 million, as of December 31, 2018.

 

Our other current liabilities balance, as of December 31, 2019, was $1.5 million, compared to $3.3 million, as of December 31, 2018.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity include our cash and cash equivalents. Our primary operating liquidity needs relate to our working capital and funding our operations.

 

We had $5.5 million cash on hand as of December 31, 2019.

 

Our liquidity needs for the next 12 months include the following: corporate expenses of approximately $3.2 million and any cash shortfall associated with our businesses.

 

We expect that our cash will provide liquidity sufficient to meet our needs for our operations and our obligations. We also plan to raise additional capital if necessary, although no assurance can be made that we will be able to secure such financing, if needed, on favorable terms or at all.

 

Cash and Cash Equivalents

 

Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Restricted cash is related to contractual obligations or restricted by management and is included in non-current assets on our Consolidated Balance Sheets depending on the timing of the restrictions. The restricted cash balance in non-current assets of discontinued operations as of December 31, 2019 was $0.0 million and as of December 31, 2018 was $0.4 million which related to cash set aside as indemnification for certain customers.

 

Analysis of Cash Flows

 

Cash Flows Used in Operating Activities:

 

   Years Ended December 31, 
   2019   2018 
   (In millions) 
Net income  $23.1   $4.1 
Adjustments to reconcile net income to net cash used in operating activities   (25.2)   0.2 
Changes in operating assets and liabilities   (9.2)   (14.8)
Net cash used in operating activities  $(11.3)  $(10.5)

 

22

 

 

Cash flows from operating activities can fluctuate from period to period as many items can impact cash flows. Cash used in operating activities for 2019 was primarily driven by corporate expenditures, legal settlements and related costs. Cash used in operating activities for 2018 was primarily driven by changes in operating assets and liabilities.

 

Cash Flows Provided by (Used in) Investing Activities:

 

   Years Ended December 31, 
   2019   2018 
   (In millions) 
Capital expenditures  $   $(0.2)
Purchase of SportBLX   (3.7)    
Purchases of investments   (1.3)    
Proceeds from fund distribution   1.3     
Disbursement related to disposal group   (0.8)    
Proceeds from sale of assets and businesses   1.2    5.3 
Net cash provided by (used in) investing activities  $(3.3)  $5.1 

 

Cash used in investing activities in 2019 was primarily related to the purchase of SportBLX. Cash provided by investing activities in 2018 was primarily related to the proceeds on the sale of the Nexsan business.

 

Cash Flows Provided by (Used in) Financing Activities:

 

   Years Ended December 31, 
   2019   2018 
   (In millions) 
Proceeds from sale of equity interest in Adara Enterprises Corp   4.6     
Proceeds from Orix notes payable   10.2     
Net cash provided by financing activities  $14.8   $ 

 

Cash provided by financing activities in 2019 primarily relates to the sale of an equity interest in Adara Enterprises Corp and proceeds for the Orix notes payable. See Note 12 – Shareholders’ Equity for more information.

 

No dividends were declared or paid during 2019 or 2018. Any future dividends are at the discretion of and subject to the approval of our Board.

 

Related Party Transactions

 

See Note 15 - Related Party Transactions in our Notes to Consolidated Financial Statements for information on related party transactions between the Company and GlassBridge’s Board of Directors and Executive Officers.

 

Off-Balance Sheet Arrangements

 

Other than the operating lease commitments discussed in Note 14 - Litigation, Commitments and Contingencies in the Notes to Consolidated Financial Statements, we are not using off-balance sheet arrangements, including special purpose entities.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates to ensure they are consistent with historical experience and the various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and could materially impact our results of operations.

 

We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

 

Uncertain Tax Positions. 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 more-likely-than-not 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. At December 31, 2019, our accrual related to uncertain tax positions and unrecognized tax benefits was reduced to $0.0 million, due to selling foreign subsidiaries to which the amounts related.

 

23

 

 

Our U.S. federal income tax returns for 2016 through 2019 are subject to examination by the Internal Revenue Service. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2013.

 

The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue may require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. It is reasonably possible that our unrecognized tax benefits could increase or decrease significantly during the next twelve months due to the resolution of certain U.S. and international tax uncertainties; however, it is not possible to estimate the potential change at this time.

 

Intangibles. We record all assets and liabilities acquired in purchase transactions, including intangibles, at estimated fair value. Intangible assets with a definite life are amortized based on a pattern in which the economic benefits of the assets are consumed, typically with useful lives ranging from one to 30 years. The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using certain valuation methods including discounted cash flow analysis. We evaluate assets on our balance sheet, including such intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries may indicate a possible impairment that would require an impairment test. The test for impairment requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value.

 

Goodwill. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value. The initial recognition of goodwill and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis. Goodwill is the excess of the cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized. We test the carrying amount of a reporting unit’s goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period.

 

Goodwill is considered impaired when its carrying amount exceeds its implied fair value. The Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If we determine in this assessment that the fair value of the reporting unit is more than its carrying amount, we may conclude that there is no need to perform Step 1 of the impairment test. We have an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing Step 2 of the goodwill impairment test.

 

Step 1 of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. If fair value is deemed to be less than carrying value, Step 2 of the impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the reporting unit’s goodwill, an impairment loss must be recognized for the excess. This involves measuring the fair value of the reporting unit’s assets and liabilities (both recognized and unrecognized) at the time of the impairment test. The difference between the reporting unit’s fair value and the fair values assigned to the reporting unit’s individual assets and liabilities is the implied fair value of the reporting unit’s goodwill.

 

Copyright Levies. In many European Union (“EU”) member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with “fair compensation” for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (the “Directive”). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law-making activities. On October 21, 2010, the Court of Justice of the European Union (“CJEU”) ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term “commercial channel sales” when referring to products intended for uses other than private copying and “consumer channel sales” when referring to products intended for uses including private copying.

 

24

 

 

Since the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting societies related to commercial channel sales. Based on the CJEU’s October 2010 ruling and subsequent litigation and law-making activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various collecting societies. Accordingly, subsequent to the October 21, 2010 ECJ ruling, we began withholding levy payments to the various collecting societies, and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions, except France due to certain court rulings. See Note 14 - Litigation, Commitments and Contingencies in the Notes to Consolidated Financial Statements for discussion of these court rulings. As of December 31, 2019, and 2018, we had accrued liabilities of $0.0 million and $0.3 million, respectively, associated with levies related to consumer channel sales for which we are withholding payment. In addition, various decisions and enactments have established that the levy rates in various countries improperly excluded from their calculations and assessments the private copying performed using computers and smartphones. This in turn meant that, to the extent levy rates were determined to be retroactively excessive, the Company would be entitled to a rebate on that basis as well.

 

Since the October 2010 CJEU ruling, for as long as sales were made in these countries, we evaluated, quarterly, on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law-making activities within each jurisdiction as well as throughout the EU.

 

In connection with the sale of our overseas subsidiaries, in 2019, the Company is no longer liable for adverse outcomes and may receive contingent payouts should our former subsidiary Imation Europe B.V. (“IEBV”) prevail in litigation.

 

Claims and Litigation. We record a liability when a loss from a pending or threatened claim or litigation is known or considered probable and the amount can be reasonably estimated.

 

Recently Issued Accounting Standards

 

See Note 2 — Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for disclosure related to recently issued accounting standards.

 

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

25

 

 

Item 8. Financial Statements and Supplementary Data.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of GlassBridge Enterprises, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of GlassBridge Enterprises, Inc. and Subsidiaries (the “Company”) at December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive income, shareholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Turner, Stone & Company, L.L.P.

 

Dallas, Texas

April 3, 2020

 

We have served as the Company’s auditor since 2018.

 

26

 

 

GLASSBRIDGE ENTERPRISES, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Years Ended December 31,
   2019  2018
   (In millions, except per share amounts)
Net revenue  $0.1   $ 
Operating expenses:          
Selling, general and administrative   3.4    6.4 
AAM fund expenses       0.5 
Impairment charges:          
Intangible assets       6.2 
Restructuring and other   0.1    (4.8)
Total operating expenses   3.5    8.3 
Operating loss from continuing operations   (3.4)   (8.3)
Other income (expense):          
Interest expense   (0.3)   (0.1)
Net income (loss) from AAM fund activities       (0.9)
Unrealized gain on Arrive investment   12.1     
Unrealized gain on SportBLX   3.0     
Other income (expense), net       0.5 
Total other income (expense)   14.8    (0.5)
Income (loss) from continuing operations before income taxes   11.4    (8.8)
Income tax benefit   —      0.1 
Income (loss) from continuing operations   11.4    (8.7)
Discontinued operations:          
Income from discontinued operations, net of income taxes   1.3    6.4 
Gain on sale of discontinued businesses, net of income taxes   10.4    6.4 
Income from discontinued operations, net of income taxes   11.7    12.8 
Net Income  $23.1   $4.1 
Less: Net income attributable to noncontrolling interest   2.9     
Net Income attributable to GlassBridge Enterprises, Inc.  $20.2   $4.1 
           
Earnings (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 Earnings  $791.60   $141.17 
Weighted average common shares outstanding:          
Basic and diluted (in thousands)   25.5    25.5 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

27

 

 

GLASSBIRDGE ENTERPRISES, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   For the Years Ended December 31, 
   2019   2018 
   (In millions) 
Net income  $23.1   $4.1 
           
Net pension adjustments, net of tax:          
Liability adjustments for defined benefit pension plans       (2.9)
Reclassification of adjustments for defined benefit plans recorded in net loss   0.1    0.4 
Total net pension adjustments   0.1    (2.5)
           
Net foreign currency translation:          
Unrealized foreign currency translation income       0.7 
Total net foreign currency translation       0.7 
           
Total other comprehensive income (loss), net of tax   0.1    (1.8)
           
Comprehensive income  $23.2   $2.3 
Less: Comprehensive income attributable to noncontrolling interest   2.9     
Comprehensive income attributable to GlassBridge Enterprises, Inc.  $20.3   $2.3 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

28

 

 

GLASSBRIDGE ENTERPRISES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

   December 31,
   2019  2018
   (In millions, except per
   share amounts)
ASSETS      
Current assets:          
Cash and cash equivalents  $5.5   $4.9 
Short term investments   0.2     
Accounts receivable, net   0.1     
Prepaid operating expenses   1.7    0.1 
Other current assets   1.1    1.1 
Current assets of discontinued operations      2.4 
Total current assets   8.6    8.5 
Goodwill (provisional)   50.6     
Arrive long term investment   14.8    4.0 
Other assets and other investments   2.4    2.1 
Non-current assets of discontinued operations       0.4 
Total assets  $76.4   $15.0 
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $2.0   $0.4 
Other current liabilities   1.5    3.5 
Current liabilities of discontinued operations       4.6 
Total current liabilities   3.5    8.5 
Pension liability   13.5    23.0 
Stock purchase agreement notes payable (See Note 15 – Related Party Transactions)   17.6     
Orix notes payable (See Note 12 – Shareholders’ Equity)   10.3     
Other liabilities   0.2    0.7 
Other liabilities of discontinued operations       2.2 
Total liabilities   45.1    34.4 
See Note 14 – Litigation, Commitments and Contingencies          
Shareholders’ deficit:          
Preferred stock, $.01 par value, authorized 0.2 million shares, none issued and outstanding        
Common stock, $.01 par value, authorized 50,000 shares        
2019 – shares issued: 28,097, outstanding: 25,170          
2018 – shares issued: 28,097, outstanding: 25,695          
Additional paid-in capital   1,053.9    1,048.9 
Accumulated deficit   (1,002.7)   (1,022.9)
Accumulated other comprehensive loss   (20.6)   (20.7)
Treasury stock, at cost 2,927 shares at December 31,2019; 2,402 shares at December 31, 2018   (24.9)   (24.7)
Total GlassBridge Enterprises, Inc. shareholders’ equity (deficit)   5.7    (19.4)
Noncontrolling interest   25.6     
Total shareholders’ equity (deficit)  $31.3   $(19.4)
Total liabilities and shareholders’ equity  $76.4   $15.0 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

29

 

 

GLASSBRIDGE ENTERPRISES, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

 

   Common Stock   Additional Paid-in   Accumulated   Accumulated Other Comprehensive  

Treasury

Stock

   Non-controlling   Total
Shareholders’ Equity
 
   Shares   Amount   Capital   Deficit   Loss   Shares   Amount   Interest   (Deficit) 
   (In millions, except per share amounts) 
Balance as of December 31, 2017   28,097   $   $1,050.8   $(1,027.5)  $(18.9)   2,820   $(26.6)  $(4.7)  $(26.9)
Net income                  4.1                   4.7    8.8 
Purchase of treasury stock                            69    0.0         0.0 
Restricted stock grants and other             (1.9)             (487)   1.9          
Net change in cumulative translation adjustment                       0.7                   0.7 
Pension adjustments, net of tax                       (2.5)                  (2.5)
ASC 606 adjustment                  0.3                        0.3 
Reclassification adjustment                  0.2                        0.2 
Balance as of December 31, 2018   28,097   $   $1,048.9   $(1,022.9)  $(20.7)   2,402   $(24.7)  $   $(19.4)
Net income                  20.2                   2.9    23.1 
Purchase of treasury stock                            450              
Restricted stock grants and other             0.2              75    (0.2)         
Pension adjustments, net of tax                       0.1                   0.1 
Recognition of noncontrolling interest             4.7                        22.7    27.5 
Balance as of December 31, 2019   28,097   $

   $1,053.9   $(1,002.7)  $(20.6)   2,927   $(24.9)  $25.6   $31.3 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

30

 

 

GLASSBRIDGE ENTERPRISES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Years Ended December 31, 
   2019   2018 
   (In millions) 
Cash Flows from Operating Activities:          
Net income  $23.1   $4.1 
Adjustments to reconcile net income to net cash used in operating activities:          
Depreciation and amortization   0.1    2.2 
Stock-based compensation   0.2    (0.3)
Unrealized gain on Arrive investment   (12.1)    
Unrealized gain on SportBLX investment   (3.0)    
Intangible assets impairment       6.3 
Pension settlement and curtailments       (2.5)
Gain on sale of assets and businesses   (10.4)   (6.4)
Short term investment       0.7 
Other, net       (0.2)
Changes in operating assets and liabilities:          
Accounts receivable   (0.1)   0.3 
Inventories       0.8 
Prepaid expenses   (1.6)    
Other assets   0.8    (2.3)
Accounts payable   (5.6)   (0.7)
Other current liabilities   (2.7)    
Other liabilities       (12.9)
Net cash used in operating activities   (11.3)   (10.5)
Cash Flows from Investing Activities:          
Capital expenditures       (0.2)
Purchase of SportBLX   (3.7)    
Purchase of investments   (1.3)    
Proceeds from fund distribution   1.3     
Disbursement related to disposal group   (0.8)    
Proceeds from sale of assets and businesses   1.2    5.3 
Net cash provided by (used in) investing activities   (3.3)   5.1 
Cash Flows from Financing Activities:          
Proceeds from sale of equity interest in Adara Enterprises Corp   4.6     
Proceeds from Orix notes payable   10.2     
Net cash provided by financing activities   14.8     
Net change in cash and cash equivalents   0.2    (5.4)
Cash and cash equivalents — beginning of year   5.3    10.7 
Cash and cash equivalents — end of year  $5.5   $5.3 
           
Supplemental disclosures of cash paid during the period:          
Income taxes (net of refunds received)  $(1.1)  $0.6 
           
Non-cash investing and financing activities during the period:          
Notes payable issued for purchase of SportBLX   17.6     
Recognition of non-controlling interest – SportBLX   23.7     
Recognition of non-controlling interest – Adara Enterprises Corp   1.0     
Total non-cash investing and financing activities during the period   42.3     
           
(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheets          
Current assets:          
Cash and cash equivalents  $5.5   $4.9 
Non-current assets:          
Restricted cash included in non-current assets of discontinued operations  $   $0.4 
Total cash, cash equivalents and restricted cash  $5.5   $5.3 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

31

 

 

GLASSBRIDGE ENTERPRISES, INC.

 

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.

 

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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.

 

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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.

 

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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.

 

35

 

 

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.

 

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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”).

 

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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.

 

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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.

 

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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.

 

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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)

 

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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