Discontinued Operations

12 Months Ended

Dec. 31, 2018

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

Note 4 — Discontinued Operations

The NXSN Sale

Background of Sale

On August 16, 2018, the Company completed the disposition of its entire interest in the Nexsan Business, as described herein.

On August 16, 2018, we simultaneously acquired all of the capital stock of NXSN Acquisition Corp. (together with its subsidiaries, “NXSN”) from Humilis Holdings Private Equity LP f/k/a Spear Point Private Equity LP (“Humilis”) and sold all of the capital stock of the Nexsan Group (as defined herein)(collectively the “NXSN Sale”) to StorCentric, Inc. (the “Buyer”), a newly-incorporated Delaware company affiliated with Drobo, Inc., a Delaware corporation (“Drobo”) for $5,675,000. As previously reported, NXSN owned all of the issued and outstanding shares of capital stock (the “Nexsan Shares”) of Nexsan Corporation, a Delaware corporation (“Nexsan”); and Nexsan owns all of the outstanding capital stock of the following companies: Nexsan Technologies Limited, an England and Wales entity (“Nexsan UK”), Nexsan Technologies Incorporated, a Delaware corporation (“Nexsan US”), Connected Data, Inc., a California corporation (“Connected Data”), 6360319 Canada Inc and 6360246 Canada Inc, Canadian corporations (“First Canadian Entity” and collectively with Nexsan UK, Nexsan US, Connected Data, the “Direct Subsidiaries”); and First Canadian Entity owns all of the outstanding capital stock of Nexsan Technologies Canada, Inc., a Canadian corporation (“Nexsan Canada” and collectively with the Second Canadian Entity, the “Indirect Subsidiaries” and the Indirect Subsidiaries collectively with the Direct Subsidiaries and Nexsan, the “Nexsan Group”).

Prior to the NXSN Sale, we owned fifty percent of the common stock of NXSN and a Senior Secured Convertible Note of NXSN dated January 23, 2017 (the “NXSN Note”) in the original principal amount of $25,000,000 which Note was declared in default on November 14, 2017. The NXSN Note is secured in favor of the Company by that certain Guaranty and Security Agreement dates as of January 23, 2017 by and among NXSN, Nexsan, the Company and the other participants thereto (the “NXSN Security Agreement”) pursuant to which inter alia Nexsan, Connected Data and Nexsan US, collectively, had guaranteed the obligations of NXSN under the NXSN Note (collectively, the “Nexsan Guaranty”). We had pledged the NXSN Note as security for that certain GlassBridge Enterprises, Inc. Secured Promissory Note dated September 28, 2017 (the “GlassBridge Note”) issued in favor of IOENGINE, LLC, a Delaware limited liability company(“IOENGINE”) in the original principal amount of $4,000,000 pursuant to that certain Pledge Agreement dated September 28, 2017 by and between the Company and IOENGINE (the “GlassBridge Pledge Agreement”), in connection with the settlement of litigation with IOENGINE.

The Company had acquired from Connected Data a Promissory Note dated May 15, 2015 made by Drobo initially in favor of Connected Data (including the related along, the “Drobo Note”).

Description of Sale and Material Agreements

As the first step in the NXSN Transaction, the Company caused NXSN to enter into an Exchange Agreement dated as of August 16, 2018 with Humilis (the “NXSN-Humilis Agreement”) pursuant to which NXSN agreed to grant Humilis an option to purchase the Nexsan Shares (the “Share Option”), equal to an aggregate of 140,000,500 shares of NXSN common stock and 5,600,000 shares of NXSN preferred stock, as set forth in an assignable Option Agreement dated as of an even date with the NXSN-Humilis Agreement (the “Option Agreement”) in exchange, inter alia, for the transfer to the Company of all of Humilis’ equity interests in NXSN.

Such Option Agreement was then assigned to Humilis Holdings LLC, an affiliate of Humilis, which, in turn, assigned the Option Agreement to Buyer pursuant to an Assignment of Contract by and between Humilis Holdings LLC and Buyer (the “Buyer-Humilis Assignment”), after which Buyer exercised the Share Option in accordance with the terms of the Option Agreement by entering into that certain Stock Purchase Agreement, dated August 16, 2018 (the “SPA”), by and among StorCentric, Inc., as Buyer, NXSN, as Seller, and the Company as Parent, contemplating gross proceeds in the amount of $5,675,000 (the “SPA Gross Proceeds”).

Subject to the terms and conditions of the SPA and the ancillary agreements referred to in the SPA (the “Ancillary Agreements”) (i) the Company and NXSN caused the Nexsan Guaranty and all encumbrances on the Nexsan Shares and the assets and business of Nexsan and the Nexsan Subsidiaries, including under the NXSN Security Agreement to be released, (ii) NXSN transferred all right, title and interest in and to the Nexsan Shares to Buyer free and clear of all encumbrances, (iii) Buyer paid off any and all amounts due and owing under the GlassBridge Note out of the purchase price otherwise payable to NXSN in accordance with that certain Pre-Pay Agreement dated as of August 13, 2018 by and among IOENGINE, the Company and Scott McNulty (the “IOENGINE Pre-Payment Agreement”), being Two Million Two Hundred Fifty Thousand Dollars ($2,250,000; (iv) in accordance with that certain Settlement Agreement and Mutual Release dated August 10, 2018 entered into inter alia, by NXSN, Nexsan US and Humilis (the “NTI A/R Settlement Agreement”) regarding the Receivables Litigation (as defined in the SPA), Nexsan US paid the Payment (as defined therein); (v) Buyer paid NXSN the Consideration described in the SPA to NXSN as payment in full for the purchase of the Shares, (vi) the Company delivered a certification that the original signed Drobo Note cannot be located (with appropriate indemnities) to Buyer and the Drobo Note was deemed to be cancelled, and (vii) all obligations of the Nexsan and the Nexsan Subsidiaries toward the Company or NXSN (other than the obligations under the SPA) were extinguished.

The SPA also provided for the placement in an Escrow Account $650,000 of the Consideration (the “Escrowed Funds”) to be held as a possible source of indemnification by NXSN and the Company for any indemnifiable costs or liabilities arising within 18 months of the NXSN Transaction. The Company does not believe any of the Escrowed Funds should be used; and should therefore be remitted to the Company on or about February 16, 2020.Furthermore, The SPA provided for the working capital adjustment toward the SPA Gross Proceeds based on the difference between the actual working capital on July 31, 2018 and the working capital target.

Upon deducting the Escrowed Funds and payment made to IOENGINE pursuant to the IOENGINE Pre-Payment Agreement from the SPA Gross Proceeds, the Company received a cash payment of Two Million Seven Hundred Seventy-five Thousand Dollars ($2,775,000.00) in connection with the SPA.

The foregoing is a summary of the NXSN Transaction and is qualified in its entirety by reference to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission as of August 16, 2018.

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, 2018, 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.

Results of Discontinued Operations

The operating results for the Legacy Businesses and the Nexsan Business are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these businesses that were eliminated from our ongoing operations.

The key components of the results of discontinued operations were as follows:

	For the Years Ended December 31,
	2018			2017
	(In millions)
Net revenue	$	24.8		$	36.8
Cost of goods sold		13.7			20.0
Gross profit		11.1			16.8
Selling, general and administrative		8.1			24.7
Research and development		2.4			8.1
Intangible impairment		—			2.7
Goodwill impairment		—			3.8
Restructuring and other		(3.8	)		(21.8	)
Other net expense		(1.7	)		2.1
Income (loss) from discontinued operations, before income taxes		6.1			(2.8	)
Gain on sale of discontinued businesses, before income taxes		6.4			—
Income tax (provision) benefit		0.3			(3.3	)
Income (loss) from discontinued businesses, net of income taxes	$	12.8		$	(6.1	)

Net income of discontinued operations for year ended December 31, 2018 increased by $18.9 million compared to the year ended December 31, 2017 mainly due to the income on the sale of the Nexsan Business of $6.4 million, lower selling, general and administrative, research and development and tax expenses, restructuring and other income of $3.8 million primarily related to a $1.9 million gain related to a final early payment of the IOENGINE Note and $1.0 million from the sale of internet protocol addresses with the Address Purchase Agreement. The restructuring amount in the year ended December 31, 2017 primarily included a settlement of the CMC and IOENGINE lawsuits and other customer and vendor balances. Restructuring and other also includes the net loss attributable to noncontrolling interest of $0.6 million for the year ended December 31, 2018 and $10.2 million or the year ended December 31, 2017. These amounts were reclassified to discontinued operations due to the sale of the Nexsan Business in the period ending September 30, 2018.

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 $0.3 and $2.0 million for the year ended December 31, 2018 and 2017, respectively.

Lease expense recorded as part of income (loss) from discontinued operations (included in selling, general and administrative expenses in table above) were $0.5 million and $1.1 million for the years ending December 31, 2018 and 2017, respectively. This expense was related to the Nexsan Business and the Company is no longer obligated under the lease, since Nexsan was sold.

The income tax (provision) benefit related to discontinued operations was $0.3 million and ($3.3) million for the years ended December 31, 2018 and 2017, respectively. See Note 10 - Income Taxes for additional information.

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. Current assets of discontinued operations as of December 31, 2017 of $11.5 million included $5.8 million of accounts receivable, $3.5 million of inventory, $2.2 million of other current assets. The decrease of the current assets in 2018 was primarily due to the divestiture of the Nexsan Business.

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. Current liabilities of discontinued operations of $20.2 million as of December 31, 2017 included $7.2 million of deferred revenue, accounts payable of $6.7 million, $0.7 million of customer credit and rebate accruals and $5.6 million of other current liabilities. The decrease of the current liabilities in 2018 was primarily due to the divestiture of the Nexsan Business.

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. Other liabilities of discontinued operations of $13.6 million as of December 31, 2017 included $4.1 million due to IOENGINE, $1.0 million due to CMC, $1.0 million of withholding tax, $0.9 million of tax contingencies and $6.6 million of other liabilities, which is mostly related to the Nexsan Business. See Note 15 - Litigation, Commitments and Contingencies for additional information on the CMC and IOENGINE settlements.