UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.) | |
510 Madison Ave, 9th Floor New York, New York |
10022 | |
| (Address of principal executive offices) | (Zip Code) |
(651) 704-4000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
| None | None | None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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. [X] Yes [ ] 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No
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.
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 [X] No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,137,487 shares of Common Stock, par value $0.01 per share, were outstanding as of August 14, 2019.
GLASSBRIDGE ENTERPRISES, INC.
| 2 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except for per share amounts)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net revenue | $ | 0.1 | $ | — | $ | 0.1 | $ | — | ||||||||
| Cost of goods sold | — | — | — | — | ||||||||||||
| Gross profit | 0.1 | — | 0.1 | — | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 1.2 | 1.6 | 2.0 | 3.2 | ||||||||||||
| GBAM Fund expenses | — | 0.1 | — | 0.2 | ||||||||||||
| Restructuring and other | — | 0.1 | 0.1 | 0.1 | ||||||||||||
| Total operating expenses | 1.1 | 1.8 | 2.1 | 3.5 | ||||||||||||
| Operating loss from continuing operations | (1.1 | ) | (1.8 | ) | (2.0 | ) | (3.5 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | — | — | — | (0.1 | ) | |||||||||||
| Net loss from GBAM Fund activities | — | (0.4 | ) | — | (0.5 | ) | ||||||||||
| Other income, net | — | 0.1 | — | 0.3 | ||||||||||||
| Total other income (expense) | — | (0.3 | ) | — | (0.3 | ) | ||||||||||
| Loss from continuing operations before income taxes | (1.1 | ) | (2.1 | ) | (2.0 | ) | (3.8 | ) | ||||||||
| Income tax benefit | — | — | — | — | ||||||||||||
| Loss from continuing operations | (1.1 | ) | (2.1 | ) | (2.0 | ) | (3.8 | ) | ||||||||
| Discontinued Operations: | ||||||||||||||||
| Income on sale of discontinued businesses, net of income taxes | 0.5 | 0.0 | 10.5 | — | ||||||||||||
| Income from discontinued operations, net of income taxes | — | 0.8 | 0.5 | 0.8 | ||||||||||||
| Income from discontinued businesses, net of income taxes | 0.5 | 0.8 | 11.0 | 0.8 | ||||||||||||
| Net income (loss) | $ | (0.6 | ) | $ | (1.3 | ) | $ | 9.0 | $ | (3.0 | ) | |||||
| Income (loss) per common share — basic and diluted: | ||||||||||||||||
| Continuing operations | $ | (0.22 | ) | $ | (0.41 | ) | $ | (0.39 | ) | $ | (0.75 | ) | ||||
| Discontinued operations | 0.10 | 0.16 | 2.16 | 0.16 | ||||||||||||
| Net income (loss) | $ | (0.12 | ) | $ | (0.25 | ) | $ | 1.77 | $ | (0.59 | ) | |||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and diluted | 5.1 | 5.1 | 5.1 | 5.1 | ||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| 3 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net income (loss) | $ | (0.6 | ) | $ | (1.3 | ) | $ | 9.0 | $ | (3.0 | ) | |||||
| Other comprehensive income, net of tax: | ||||||||||||||||
| Net pension adjustments, net of tax: | ||||||||||||||||
| Reclassification of adjustment for defined benefit plans recorded in net loss | — | 0.1 | 0.1 | 0.2 | ||||||||||||
| Total net pension adjustments | — | 0.1 | 0.1 | 0.2 | ||||||||||||
| Net foreign currency translation: | ||||||||||||||||
| Unrealized foreign currency translation gains (losses) | — | 0.1 | — | (0.2 | ) | |||||||||||
| Total net foreign currency translation | — | 0.1 | — | (0.2 | ) | |||||||||||
| Total other comprehensive income, net of tax | — | 0.2 | 0.1 | — | ||||||||||||
| Comprehensive income (loss) | (0.6 | ) | (1.1 | ) | 9.1 | (3.0 | ) | |||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| 4 |
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| June 30, 2019 | December 31, 2018 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1.0 | $ | 4.1 | ||||
| Account receivable | 0.1 | — | ||||||
| Other current assets | 1.4 | 1.2 | ||||||
| Current assets of discontinued operations | — | 3.2 | ||||||
| Total current assets | 2.5 | 8.5 | ||||||
| Other assets | 6.6 | 6.1 | ||||||
| Non-current assets of discontinued operations | — | 0.4 | ||||||
| Total assets | $ | 9.1 | $ | 15.0 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 0.1 | $ | 0.4 | ||||
| Other current liabilities | 2.7 | 3.3 | ||||||
| Current liabilities of discontinued operations | 0.9 | 4.6 | ||||||
| Total current liabilities | 3.7 | 8.3 | ||||||
| Other liabilities | 15.2 | 23.7 | ||||||
| Other liabilities of discontinued operations | 0.2 | 2.2 | ||||||
| Total liabilities | 19.1 | 34.2 | ||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $.01 par value, authorized 25 million shares, none issued and outstanding | — | — | ||||||
| Common stock, $.01 par value, authorized 10 million shares, 5.7 million issued at June 30, 2019; 5.7 million issued at December 31, 2018 | 0.1 | 0.1 | ||||||
| Additional paid-in capital | 1,049.1 | 1,049.0 | ||||||
| Accumulated deficit | (1,013.9 | ) | (1,022.9 | ) | ||||
| Accumulated other comprehensive loss | (20.6 | ) | (20.7 | ) | ||||
| Treasury stock, at cost: 0.6 million shares at March 31, 2019; 0.6 million shares at December 31, 2018 | (24.7 | ) | (24.7 | ) | ||||
| Total GlassBridge Enterprises, Inc. shareholders’ deficit | (10.0 | ) | (19.2 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 9.1 | $ | 15.0 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| 5 |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In millions)
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Shares | Amount | (Deficit) | |||||||||||||||||||||||||
| Balance as of December 31, 2018 | 5,687,789 | $ | 0.1 | $ | 1,049.0 | $ | (1,022.9 | ) | $ | (20.7 | ) | 550,302 | $ | (24.7 | ) | $ | (19.2 | ) | ||||||||||||||
| Net income | 9.0 | 9.0 | ||||||||||||||||||||||||||||||
| Pension adjustments, net of tax | 0.1 | 0.1 | ||||||||||||||||||||||||||||||
| Purchase of treasury stock | 90,000 | 0.0 | 0.0 | |||||||||||||||||||||||||||||
| Rounding | 0.1 | 0.1 | ||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | 5,687,789 | $ | 0.1 | $ | 1049.1 | $ | (1013.9 | ) | $ | (20.6 | ) | 640,302 | $ | (24.7 | ) | $ | (10.0 | ) | ||||||||||||||
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 | 5,687,789 | $ | 0.1 | $ | 1,050.9 | $ | (1,027.5 | ) | $ | (18.9 | ) | 633,939 | $ | (26.6 | ) | $ | (4.7 | ) | $ | (26.7 | ) | |||||||||||||||
| Net loss | (3.0 | ) | (0.3 | ) | (3.3 | ) | ||||||||||||||||||||||||||||||
Purchase of treasury stock | 13,879 | 0.0 | 0.0 | |||||||||||||||||||||||||||||||||
| Restricted stock grants and other | (2.1 | ) | (113,308 | ) | 2.0 | (0.1 | ) | |||||||||||||||||||||||||||||
| Net change in cumulative translation adjustment | (0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||||||
| Pension adjustments, net of tax | 0.2 | 0.2 | ||||||||||||||||||||||||||||||||||
| ASC 606 Adjustment | 0.3 | 0.3 | ||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2018 | 5,687,789 | $ | 0.1 | $ | 1,048.8 | $ | (1,030.2 | ) | $ | (18.9 | ) | 534,510 | $ | (24.6 | ) | $ | (5.0 | ) | $ | (29.8 | ) | |||||||||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| 6 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) attributable to GlassBridge | $ | 9.0 | $ | (3.0 | ) | |||
| Net loss attributable to noncontrolling interest | — | (0.3 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | — | 1.2 | ||||||
| Stock-based compensation | — | (0.3 | ) | |||||
| Pension settlement and curtailments | — | 0.2 | ||||||
| Gain on sale of assets | (9.9 | ) | — | |||||
| Short term investment | — | 0.7 | ||||||
| Other, net | (0.2 | ) | 0.1 | |||||
| Changes in operating assets and liabilities | (3.0 | ) | (3.2 | ) | ||||
| Net cash used in operating activities | (4.1 | ) | (4.6 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment in securities | (0.6 | ) | — | |||||
| Capital expenditures | — | (0.2 | ) | |||||
| Disbursement related to disposal group | (0.8 | ) | — | |||||
| Proceeds from sale of assets | 1.2 | — | ||||||
| Net cash used in investing activities | (0.2 | ) | (0.2 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Net cash provided by financing activities | — | — | ||||||
| Net change in cash and cash equivalents | (4.3 | ) | (4.8 | ) | ||||
| Cash, cash equivalents and restricted cash — beginning of period | 5.3 | 10.7 | ||||||
| Cash, cash equivalents and restricted cash — end of period (a) | $ | 1.0 | $ | 5.9 | ||||
| Supplemental disclosures of cash paid during the period: | ||||||||
| Income taxes (net of refunds received) | $ | — | $ | 0.2 | ||||
| (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 | $ | 1.0 | $ | 5.3 | ||||
| Restricted cash included in other current assets | — | 0.2 | ||||||
| Non-current assets: | ||||||||
| Restricted cash included in non-current assets of discontinued operations | — | 0.4 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 1.0 | $ | 5.9 | ||||
Total cash, cash equivalents and restricted cash as of December 31, 2018 includes $4.1 million cash and cash equivalents, $0.8 million cash and cash equivalents included in current assets of discontinued operations and $0.4 million of restricted cash included in non-current assets of discontinued operations.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| 7 |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
GlassBridge Enterprises, Inc. (“GlassBridge”, the “Company”, “we”, “us” or “our”) is a holding company. We actively explore a diverse range of new, strategic asset management business opportunities for our portfolio. The company’s wholly-owned subsidiary GlassBridge Asset Management, LLC (“GBAM”) is an investment advisor focused on technology-driven quantitative strategies and other alternative investment strategies.
The interim Condensed Consolidated Financial Statements of GlassBridge are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair statement of financial position, results of operations, comprehensive loss and cash flows for the periods presented. Except as otherwise disclosed herein, these adjustments consist of normal and recurring items. The results of operations for any interim period are not necessarily indicative of full year results. The Condensed Consolidated Financial Statements and Notes are presented in accordance with the requirements for Quarterly Reports on Form 10-Q and do not contain certain information included in our annual Consolidated Financial Statements and Notes presented in accordance with the requirements of Annual Reports on Form 10-K.
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company owns or controls fifty percent or more of the voting shares and has the right to control. The results of entities disposed of are included in the unaudited Condensed Consolidated Financial Statements up to the date of the disposal and, where appropriate, these operations have been reflected as discontinued operations. All inter-company balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments necessary for a fair presentation have been included in the interim results reported.
The preparation of the interim Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Condensed Consolidated Financial Statements and the reported amounts of revenue and expenses for the reporting periods. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
The December 31, 2018 Condensed Consolidated Balance Sheet data was derived from the audited Consolidated Financial Statements but does not include all disclosures required by GAAP. This Form 10-Q should be read in conjunction with our Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the U.S. Securities and Exchange Commission on April 1, 2019.
The operating results of our legacy business segments, Consumer Storage and Accessories and Tiered Storage and Security Solutions (the “Legacy Businesses”) and the Nexsan Business (which includes the “Nexsan Group” as defined below), are presented in our Condensed Consolidated Statements of Operations as discontinued operations for all periods presented. Our continuing operations in each period presented represents our “Asset Management Business,” which consists of our investment advisory business conducted through GBAM, as well as corporate expenses and activities not directly attributable to our Legacy Businesses or the Nexsan Business. Assets and liabilities directly associated with our Legacy Businesses and Nexsan Business and that are not part of our ongoing operations have been separately presented on the face of our Condensed Consolidated Balance Sheet as of both June 30, 2019 and December 31, 2018. See Note 4 - Discontinued Operations for further information.
Sale of international subsidiaries and Imation Latin America Corp.
As previously disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) as of April 2, 2019, on March 31, 2019, the Company entered into a securities purchase agreement (the “IMN Capital Agreement”) with IMN Capital Holdings, Inc., a Delaware corporation (“IMN Capital”) whereby the Company sold its entire ownership of its international subsidiaries together with its entire ownership in Imation Latin America Corp., a Delaware corporation (the “Imation Subsidiaries”). As previously disclosed, certain subsidiaries of the Company, including the Imation Subsidiaries, are parties to certain lawsuits, claims, and other legal proceedings concerning claims and counterclaims relating to excess payments made by the Imation Subsidiaries relating to copyright levies in European Union (“EU”) member states (the “Subsidiary Litigation”). Pursuant to the terms and subject to the conditions of the IMN Capital Agreement, IMN Capital acquired from the Company the Company’s shares representing the Company’s ownership interests in each of the Imation Subsidiaries (the “Subsidiary Sale”). Following the Subsidiary Sale, the Imation Subsidiaries are no longer affiliates of the Company, and the Company has no interest in or to the Imation Subsidiaries except as explicitly described in the IMN Capital Agreement. In consideration for the Subsidiary Sale, the Company shall receive certain compensation from IMN Capital. As defined in the IMN Capital Agreement, a payment occurrence is the settlement or final adjudication as to all demands, claims, counter-claims, cross-claims, third-party claims, damages, fees, costs and expenses, brought and raised on any matters arising from or related to the Subsidiary Litigation (a “Payment Occurrence”). In connection with the Subsidiary Sale, the purchase price furnished by IMN Capital to the Company (the “Purchase Price”) shall consist of (i) $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 expects to record a one-time non-cash gain of approximately $10 million in connection with IMN Capital Agreement transaction.
| 8 |
Liquidity and Management Plan
The Company incurred operating and cash flow losses for several reporting periods and had a working capital deficit of $1.2 million as of June 30, 2019. These losses raised substantial doubt about our ability to continue as a going concern. Although the working capital deficit is $1.2 million, it included $1.0 million of cash as of June 30, 2019, which, in addition to a $1.1 million tax refund received in July 2019, is expected to fund our operations for the next twelve months. As a result, we have undertaken a financial and operational restructuring plan approved by our Board of Directors (the “Board”) prior to the 2018 fiscal year (the “Restructuring Plan”). Operating under the Restructuring Plan includes executing changes to our business model. Management’s execution of the Restructuring Plan, which we believe will alleviate the substantial doubt about our ability to continue as a going concern, is as follows:
| ● | Asset Management Business: We expect the Asset Management Business to grow assets under management (AUM) in 2019 and to make progress in the venture and private equity business. |
| ● | Legacy Business: As we settled most of the major litigation, the Legacy Business cash spending is expected to be significantly lower in 2019. Furthermore, in 2018 we finalized a European levy litigation financing agreement which would eliminate levy legal costs going forward. The major operating expenses are accounting, compliance (statutory audit & tax filing), legal fees (non-levy related) and Germany pension funding In connection with the Subsidiary Sale, the Company shall have no further obligations regarding certain entities which were, prior to the Subsidiary Sale, affiliates or subsidiaries of the Company, including Imation Argentina S.A.C.I.F.I, Imation Holdings Pte Ltd., Imation Latin America Corp., Imation Holdings B.V., Imation Corp. Japan, Imation Canada, Inc., Imation Polska Sp Z.O.O. and Global Data Media FZ LLC. |
| ● | Corporate: We will continue to reduce corporate spending in all areas including the board cost and the corporate personnel. We have decided to outsource the corporate finance, accounting and IT operations to Clinton Group starting in Q1, 2019. This reduces corporate costs by 50%. |
| ● | Tax Refund: As a result of the 2017 tax reform, we received approximately a $1.1 million alternative minimum tax refund in July 2019. |
| ● | Pension Liabilities: The Company’s application for termination of the GlassBridge Enterprises Cash Balance Pension Plan (the “Plan”) was approved by the Pension Benefit Guaranty Corporation. The termination was effective as of April 30, 2019, and will relieve the Company of the minimum funding requirements of the Plan. |
| ● | Asset Monetization: We sold certain IP addresses to a third party. The Company received proceeds of approximately $1.2 million in the first six months of 2019. |
Our cash balance was $1.0 million as of June 30, 2019. Our liquidity needs for the next 12 months include the following: corporate expenses of approximately $1.6 million and investments of $0.4 million.
Our cash of $1.0 million as of June 30, 2019, which, in addition to a $1.1 million tax refund received in July 2019 is expected to fund our operations for the next twelve months.
Note 2 — New Accounting Pronouncements
Adoption of New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU No. 2016-02 is effective for the Company beginning January 1, 2019, and does not have a material impact on its consolidated results of operations or financial condition.
| 9 |
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU seeks to help entities reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), enacted on December 22, 2017. ASU 2018-02 was issued in response to concerns regarding current guidance in GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income, and as a result the stranded tax effects would not reflect the appropriate tax rate. The amendments of this ASU allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical corporate income tax rate of 35.0% and the newly enacted corporate income tax rate of 21.0%. The amendments in this ASU are effective for the Company beginning January 1, 2019, and do not have a material impact on its consolidated results of operations or financial condition.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. The ASU also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, Revenue from Contracts with Customers. The ASU requires a modified retrospective transition approach. For the Company, the ASU is effective as of January 1, 2019 and does not have a material impact on its consolidated results of operations or financial condition.
In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends ASU No. 2016-02, Leases. The new ASU includes certain clarifications to address potential narrow-scope implementation issues which the Company is incorporating into its assessment and adoption of ASU No. 2016-02. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for the Company is January 1, 2019. This standard does not have a material impact on the Company’s consolidated results of operations or financial condition.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASU No. 2016-02, Leases. The new ASU offers an additional transition method by which entities may elect not to recast the comparative periods presented in financial statements in the period of adoption and allows lessors to elect a practical expedient to not separate lease and nonlease components when certain conditions are met. This ASU has the same transition requirements and effective date as ASU No. 2016-02, which for the Company is January 1, 2019. This standard does not have a material impact on the Company’s consolidated results of operations or financial condition.
New Accounting Pronouncements To Be Adopted
In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, amends, and adds disclosure requirements for fair value measurements. The amended and new disclosure requirements primarily relate to Level 3 fair value measurements. For the Company, the ASU is effective as of January 1, 2020. The removal and amendment of certain disclosures may be early adopted with retrospective application while the new disclosure requirements are to be applied prospectively. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of operations and financial condition.
In August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which makes minor changes to the disclosure requirements related to defined benefit pension and other postretirement plans. The ASU requires a retrospective transition approach. For the Company, the ASU is effective as of January 1, 2021. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of operations and financial condition.
Note 3 — Income (Loss) per Common Share
Basic income (loss) per common share is calculated using the weighted average number of shares outstanding for the period. Unvested restricted stock and treasury shares are excluded from the calculation of basic weighted average number of common shares outstanding. Once restricted stock vests, it is included in our common shares outstanding.
Diluted income (loss) per common share is computed on the basis of the weighted average shares outstanding plus the dilutive effect of our stock-based compensation plans using the “treasury stock” method. Since the exercise price of our stock options is greater than the average market price of the Company’s common stock for the period, we did not include dilutive common equivalent shares for these instruments in the computation of diluted net income (loss) per share because the effect would have been anti-dilutive.
| 10 |
The following table sets forth the computation of the weighted average basic and diluted income (loss) per share:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions, except for per share amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Numerator: | ||||||||||||||||
| Income (loss) from continuing operations | $ | (1.1 | ) | $ | (2.1 | ) | $ | (2.0 | ) | $ | (3.8 | ) | ||||
| Income (loss) from discontinued operations, net of income taxes | 0.5 | 0.8 | 11.0 | 0.8 | ||||||||||||
| Net income (loss) | $ | (0.6 | ) | $ | (1.3 | ) | $ | 9.0 | $ | (3.0 | ) | |||||
| Denominator: | ||||||||||||||||
| Weighted average number of common shares outstanding during the period - basic and diluted | 5.1 | 5.1 | 5.1 | 5.1 | ||||||||||||
| Income (loss) per common share— basic and diluted: | ||||||||||||||||
| Continuing operations | $ | (0.22 | ) | $ | (0.41 | ) | $ | (0.39 | ) | $ | (0.75 | ) | ||||
| Discontinued operations | 0.10 | 0.16 | 2.16 | 0.16 | ||||||||||||
| Net gain (loss) | $ | (0.12 | ) | $ | (0.25 | ) | $ | 1.77 | $ | (0.59 | ) | |||||
| Anti-dilutive shares excluded from calculation | 0.1 | 0.4 | 0.0 | 0.3 | ||||||||||||
| 11 |
Note 4 — Discontinued Operations
On March 31, 2019, the Company entered into a securities purchase agreement with IMN Capital Holdings, Inc., a Delaware company (“IMN Capital”) to sell its entire ownership of its international subsidiaries and Imation Latin America Corp., a Delaware corporation (the “Imation Subsidiaries”) (the “Subsidiary Sale”). In connection with the sale, the purchase price furnished by IMN Capital to the Company consisted of (i) $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.
The operating results for the Legacy Businesses and the Nexsan Business are presented in our Condensed Consolidated Statements of Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these businesses that were eliminated from our ongoing operations.
The key components of the results of discontinued operations were as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net revenue | $ | — | $ | 9.5 | $ | 0.1 | $ | 18.8 | ||||||||
| Cost of goods sold | — | 5.4 | 0.1 | 9.9 | ||||||||||||
| Gross profit | — | 4.1 | — | 8.9 | ||||||||||||
| Selling, general and administrative | — | 3.5 | 0.3 | 7.4 | ||||||||||||
| Research and development | — | 0.7 | — | 1.9 | ||||||||||||
| Restructuring and other | (0.2 | ) | (0.1 | ) | (0.2 | ) | — | |||||||||
| Other (income) expense | — | (0.4 | ) | (0.6 | ) | (0.8 | ) | |||||||||
| Income from discontinued operations, before income taxes | 0.2 | 0.4 | 0.5 | 0.4 | ||||||||||||
| Income on sale of discontinued businesses, before income taxes | — | — | 9.6 | — | ||||||||||||
| Income tax benefit | 0.3 | 0.1 | 0.9 | 0.1 | ||||||||||||
| Net loss attributable to noncontrolling interest | — | 0.3 | — | 0.3 | ||||||||||||
| Gain (Loss) from discontinued operations, net of income taxes | $ | 0.5 | $ | 0.8 | $ | 11.0 | $ | 0.8 | ||||||||
Net income of discontinued operations for the three months ended June 30, 2019 decreased by $0.3 million compared to the same period last year mainly due to the sale of the Imation Subsidiaries. Net income of discontinued operations for the six months ended June 30, 2019 increased by $10.2 million compared to the same period last year mainly due to the sale of the Imation Subsidiaries.
Current assets of discontinued operations were $0.0 million as of June 30, 2019. Current assets of discontinued operations as of December 31, 2018 of $2.4 million included $0.7 million of accounts receivable, $1.0 million related to funds held in escrow and $0.7 million of other current assets. The decrease of the current assets in 2019 was due to the sale of the Imation Subsidiaries.
Current liabilities of discontinued operations were $0.9 million as of June 30, 2019. Current liabilities of discontinued operations of $4.6 million as of December 31, 2018 included $1.7 million of accounts payable, $1.0 million due to CMC and $2.2 million of other current liabilities. The decrease of the current liabilities in 2019 was due to the sale of the Imation Subsidiaries.
Other liabilities of discontinued operations were $0.2 million as of June 30, 2019. Other liabilities of discontinued operations of $2.2 million as of December 31, 2018 included $0.5 million of withholding tax, $0.6 million of tax contingencies and $1.1 million of other liabilities. The decrease of the other liabilities in 2019 was due to the sale of the Imation Subsidiaries.
| 12 |
Note 5 — Supplemental Balance Sheet Information
Additional supplemental balance sheet information is provided as follows:
Other assets primarily included a $4.0 million strategic investment in equity securities. The strategic investment in equity securities is consistent with our stated strategy of exploring a diverse range of new strategic asset management business opportunities for our portfolio. Historically, we accounted for such investment under the cost method of accounting. The adoption of ASU No. 2016-01 in the first quarter of 2018 effectively eliminated the cost method of accounting and the carrying value of this investment is written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. Our strategic investment in equity securities does not have a readily determinable fair value therefore the new guidance was adopted prospectively. As of June 30, 2019, there were no indicators of impairment for this investment. The Company will assess the investment for potential impairment on a quarterly basis. In addition, other assets as of June 30, 2019 also include escrowed funds related to the NXSN sale of $0.7 million and $0.2 million of other assets.
Other current liabilities primarily included pension minimum contributions of $1.9 million and $1.9 million and accrued payroll of $0.0 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively.
Other liabilities included pension liabilities of $14.4 million and $23.0 million as of June 30, 2019 and December 31, 2018, respectively. The change in the pension liabilities was due to the Subsidiary Sale.
Note 6 — Restructuring and Other Expense
Restructuring and other expense was $0.0 million and $0.1 million for the three and six months ended June 30, 2019, respectively. Restructuring and other expense was $0.1 million and $0.1 million for the three and six months ended June 30, 2018, respectively.
Activity related restructuring accruals was as follows:
| (In millions) | Severance and Related | |||
| Accrued balance at December 31, 2018 | $ | 0.1 | ||
| Charges | 0.1 | |||
| Usage and payments | (0.1 | ) | ||
| Accrued balance at March 31, 2019 | $ | 0.1 | ||
| Charges | 0.0 | |||
| Usage and payments | (0.0 | ) | ||
| Accrued balance at June 30, 2019 | $ | 0.1 | ||
| 13 |
Note 7 — Stock-Based Compensation
Stock-based compensation for continuing operations consisted of the following:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Stock-based compensation expense | $ | (0.0 | ) | $ | (0.1 | ) | $ | (0.0 | ) | $ | (0.3 | ) | ||||
We have stock-based compensation awards consisting of stock options, restricted stock and stock appreciation rights under four plans (collectively, the “Stock Plans”) which are described in detail in our Annual Report on Form 10-K for the year ended December 31, 2018. As of June 30, 2019, there were 288,295 shares available for grant under the 2011 Incentive Plan. No further shares were available for grant under any other stock incentive plan.
Stock Options
The following table summarizes our stock option activity:
| Stock Options | Weighted Average Exercise Price | |||||||
| Outstanding December 31, 2018 | 22,758 | $ | 83.67 | |||||
| Canceled | (22,758 | ) | 83.67 | |||||
| Outstanding June 30, 2019 | — | $ | — | |||||
| Exercisable as of June 30, 2019 | — | $ | — | |||||
The weighted average assumptions used in the valuation of options are not applicable for the periods ending June 30, 2019 and 2018 as no options were granted over this time.
As of June 30, 2019, there was no unrecognized compensation expense related to non-vested stock options granted under our Stock Plans.
Restricted Stock
The following table summarizes our restricted stock activity:
| Restricted Stock | Weighted Average Grant Date Fair Value Per Share | |||||||
| Nonvested as of December 31, 2018 | 30,000 | $ | 7.03 | |||||
| Granted | — | — | ||||||
| Vested | (15,000 | ) | 7.03 | |||||
| Forfeited | (15,000 | ) | 7.03 | |||||
| Nonvested as of June 30, 2019 | — | $ | — | |||||
The cost of the awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation is recognized on a straight-line basis over the requisite vesting period.
| 14 |
As of June 30, 2019, the company did not have any unrecognized compensation expense related to non-vested restricted stock granted under our Stock Plans.
Note 8 — Retirement Plans
Pension Plans
Beginning in September 2018, the Company entered into discussions with the U.S. Pension Benefit Guaranty Corporation (the “PBGC”), a United States government agency established by Title IV of the Employee Retirement Income Security Act of 1974 (“ERISA”) which insures certain pension plans, for the purpose of obtaining certain relief from the Company’s obligations under the Plan. On April 16, 2019, the Company received notice from the PBGC, that the Company’s application for termination of the Plan had been approved by the PBGC, with the termination date of the Plan to occur on April 30, 2019, the PBGC finding that (i) the Plan did not meet the minimum funding standard required under section 412 of the Internal Revenue Code; (ii) the Plan would be unable to pay benefits when due and (iii) the Plan should be terminated in order to protect the interests of the Plan participants (the “Notice of Determination”). The Plan was terminated effective April 30, 2019, and the PBGC was appointed trustee of the Plan at that time, pursuant to an Agreement for Appointment of Trustee and Termination of Plan entered into between the Company and the PBGC. The Company’s obligations under the Plan have not yet been agreed-upon between the Company and the PBGC, and as such, the Plan, including associated liabilities thereunder, remains reflected in the Company’s financial statements and notes hereto.
Germany was the Company’s only remaining international plan. In connection with the Subsidiary Sale in the first quarter of 2019, the Company no longer has any international plans.
Note 9 — Income Taxes
For interim income tax reporting, we are required to estimate our annual effective tax rate and apply it to year-to-date pre-tax income/loss excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.
For the three months ended June 30, 2019, we recorded income tax from continuing operations of $0.0 million on a loss of $1.1 million. For the three months ended June 30, 2018, we recorded income tax of $0.0 million on a loss of $2.1 million. The effective income tax rate for the three months ended June 30, 2019 differs from the U.S. federal statutory rate of 21% primarily due to a valuation allowance on various deferred tax assets.
Adjustments were made to previous financial statements as a result of the Tax Reform Act passed on December 22, 2017. Most significantly, the elimination of the corporate alternative minimum tax and ability to file for refunds of minimum tax credit carryovers resulted in reclassification of $2.2 million as a receivable, half of which is shown as a current receivable on the balance sheet to reflect the cash refund received in July 2019 (with the remainder due in years 2020 through 2022).
We accrue for the effects of uncertain tax positions and the related potential penalties and interest. During the first quarter of 2019, we reversed $0.6 million of the liability related to our Legacy Businesses’ foreign subsidiaries, as these liabilities stay with the foreign entities that were sold during the quarter. The tax benefit was recorded in discontinued operations, where the liabilities of $0.6 million had previously been recorded. There is no remaining liability as of June 30, 2019.
We file income tax returns in multiple jurisdictions and are subject to review by various U.S and foreign taxing authorities. Our U.S. federal income tax returns for 2015 through 2018 are subject to examination by the Internal Revenue Service. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions or state and local tax jurisdictions for years before 2012. In the event that we have determined not to file tax returns with a particular state or city, all years remain subject to examination by the tax jurisdiction.
Note 10 — Shareholders’ Equity
Treasury Stock
On May 2, 2012, the Board authorized a share repurchase program that allowed for the repurchase of 500,000 shares of common stock. On November 14, 2016, our Board authorized a new share repurchase program under which we may repurchase up to 500,000 shares of common stock. This authorization replaces the Board’s prior May 2, 2012 share repurchase authorization. Under the share repurchase program, we may repurchase shares from time to time using a variety of methods, which may include open market transactions and privately negotiated transactions.
The Company purchased 90,000 shares during the three months ended June 30, 2019. Since the inception of the November 14, 2016 authorization, we have repurchased 155,915 shares of common stock for $0.3 million and, as of June 30, 2019, we had remaining authorization to repurchase 344,085 additional shares. The treasury stock held as of June 30, 2019 was acquired at an average price of $38.61 per share.
| 15 |
Following is a summary of treasury share activity:
| Treasury Shares | ||||
| Balance as of December 31, 2018 | 550,302 | |||
| Purchases | 90,000 | |||
| Restricted stock grants | — | |||
| Forfeitures and other | — | |||
| Balance as of June 30, 2019 | 640,302 | |||
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss and related activity consisted of the following:
| (In millions) | Defined Benefit Plans | |||
| Balance as of December 31, 2018 | $ | (20.7 | ) | |
| Amounts reclassified from accumulated other comprehensive income, net of tax | 0.1 | |||
| Balance as of June 30, 2019 | $ | (20.6 | ) | |
Details of amounts reclassified from accumulated other comprehensive loss and the line item in the Condensed Consolidated Statements of Operations are as follows:
Amounts Reclassified from Accumulated Other Comprehensive Loss | Affected Line Item in the Condensed | |||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, |
Consolidated Statements of Operations Where | ||||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | (Gain) Loss is Presented | |||||||||||||
| Amortization of net actuarial loss | $ | 0.0 | $ | 0.1 | $ | 0.1 | $ | 0.2 | Other income (expense) | |||||||||
| Cumulative translation adjustment | 0.0 | 0.1 | 0.0 | (0.2 | ) | Discontinued operations | ||||||||||||
| Total reclassifications for the period | $ | 0.0 | $ | 0.2 | $ | 0.1 | $ | — | ||||||||||
Income taxes are not provided for cumulative translation adjustment relating to permanent investments in international subsidiaries. Reclassification adjustments are made to avoid double counting in comprehensive income (loss) items that are also recorded as part of net income (loss) and are presented net of taxes in the Consolidated Statements of Comprehensive Income (Loss).
Note 11 — Segment Information
The Legacy Businesses and the Nexsan Business are presented in our Condensed Consolidated Statements of Operations as discontinued operations and are not included in segment results for all periods presented. See Note 4 - Discontinued Operations for further information about these divestitures.
On February 2, 2017, we closed the Capacity and Services Transaction with Clinton. The Capacity and Services Transaction allows GBAM to access investment capacity within Clinton’s quantitative equity strategy. In addition, we have recently taken steps to build our own independent organizational foundation while leveraging Clinton’s capabilities and infrastructure. While our intention is to primarily engage in the management of third-party assets, we may make opportunistic proprietary investments from time to time that comply with applicable laws and regulations. Since the closing of the Capacity and Services Transaction, we have focused on our Asset Management Business as our primary operating business segment. See Note 14 - Related Party Transactions for additional information.
In March 2017, ARRIVE was formed through a collaboration with Roc Nation, a full-service entertainment company founded by Shawn “JAY Z” Carter, Primary Venture Partners (“Primary”) and GBAM. Primary will serve as a venture advisor and GlassBridge will provide institutional and operational support. ARRIVE was created to invest alongside entrepreneurs and early stage businesses. Among other things, ARRIVE has launched a traditional venture fund in order to, among other activities, support existing portfolio companies through their subsequent growth stages and anticipates launching other special purpose investment vehicles to invest in private equity transactions.
| 16 |
In June 2017, we launched our first GBAM-managed investment fund (the “GBAM Fund”) which focuses on technology-driven quantitative strategies and other alternative investment strategies. The fund initially performed in-line with the expectation for 2017. However, we had a difficult time raising third-party capital due to the overall under-performance of the hedge fund industry. In Q4, 2018, after our internal business review and deliberations, we decided to temporarily close the GBAM Fund to save operating costs.
We have made the determination to consolidate the GBAM Fund and, accordingly, its financial results were included in our Consolidated Financial Statements as part of the Asset Management Business shown below.
As of June 30, 2019, the Asset Management Business is our only reportable segment.
We evaluate segment performance based on revenue and operating loss. The operating loss reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated results. The corporate and unallocated operating loss includes costs which are not allocated to the business segments in management’s evaluation of segment performance such as litigation settlement expense, corporate expense and other expenses.
For our Asset Management Business, we include net income from GBAM Fund activities in our performance evaluation. Net income from GBAM Fund activities primarily represents realized and unrealized gains and losses for the GBAM Fund.
Net revenue and operating loss from continuing operations by segment were as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net revenue | ||||||||||||||||
| Asset Management Business | $ | 0.1 | $ | — | $ | 0.1 | $ | — | ||||||||
| Total net revenue | $ | 0.1 | $ | — | $ | 0.1 | $ | — | ||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (In millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Operating income (loss) from continuing operations | ||||||||||||||||
| Asset Management Business | $ | 0.1 | $ | (0.9 | ) | $ | 0.1 | $ | (1.8 | ) | ||||||
| Total segment operating income (loss) | 0.1 | (0.9 | ) | 0.1 | (1.8 | ) | ||||||||||
| Corporate and unallocated | (1.2 | ) | (0.8 | ) | (2.0 | ) | (1.6 | ) | ||||||||
| Restructuring and other | — | (0.1 | ) | (0.1 | ) | (0.1 | ) | |||||||||
| Total operating loss | (1.1 | ) | (1.8 | ) | (2.0 | ) | (3.5 | ) | ||||||||
| Interest expense | — | — | — | (0.1 | ) | |||||||||||
| Net losses from GBAM Fund activities | — | (0.4 | ) | — | (0.5 | ) | ||||||||||
| Other income (expense), net | — | 0.1 | — | 0.3 | ||||||||||||
| Loss from continuing operations before income taxes | $ | (1.1 | ) | $ | (2.1 | ) | $ | (2.0 | ) | $ | (3.8 | ) | ||||
Note 12 — Litigation, Commitments and Contingencies
The Company is a party, as either a sole or joint defendant or plaintiff, in various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business (including litigation relating to our Legacy Businesses and discontinued operations). All such matters involve uncertainty and accordingly, outcomes that cannot be predicted with assurance. As of June 30, 2019, we are unable to estimate with certainty the ultimate aggregate amount of monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters, individually or in the aggregate, could materially affect our financial condition, results of operations and cash flows.
Intellectual Property Litigation
The Company is subject to allegations of patent infringement by our competitors as well as non-practicing entities (“NPEs”) - sometimes referred to as “patent trolls” - who may seek monetary settlements from us, our competitors, suppliers and resellers. The nature of such litigation is complex and unpredictable and, consequently, the Company is not able to reasonably estimate with precision the amount of any monetary liability or financial impact that may be incurred with respect to these matters. As of August 14, 2019, given the exits from the Legacy Businesses, the Company believes that the ultimate resolution of these matters in the aggregate will not materially adversely affect our financial condition, results of operations and cash flows.
| 17 |
Trade Related Litigation
On January 26, 2016, CMC, a supplier of our Legacy Businesses, filed a suit in the District Court of Ramsey County Minnesota, seeking damages from the Company and the Company’s wholly-owned subsidiary Imation Latin America Corp. (“ILAC”) for alleged breach of contract. CMC also brought similar claims in Japan and the Netherlands against other of our subsidiaries. As previously disclosed in the Current Report on Form 8-K we filed with the SEC on September 18, 2017, we entered into a settlement agreement with CMC on September 15, 2017 resolving all claims relating to the CMC lawsuits. Pursuant to the settlement, (i) we agreed that our subsidiary Imation Corporation Japan (“ICJ”) will cause the release and payment to CMC of approximately $9.2 million in attached assets, (ii) ICJ made a payment to CMC of $1.5 million on October 10, 2017, (iii) our subsidiary Imation Europe B.V. (“IEBV”) will cause the release and payment to CMC of approximately $825,000 in attached assets, (iv) ICJ issued to CMC an unsecured promissory note (the “CMC Note”) in the amount of $1.5 million, and (v) we guaranteed CMC ICJ’s obligations under the CMC Note. As of December 31, 2017, both ICJ and Europe B.V. had released the required payments to CMC. In January 2018, ICJ made a $0.5 million payment to CMC in relation to the $1.5 million CMC Note discussed above. On March 28, 2019, the Company, together with its subsidiaries, including IJC, entered into a pre-pay agreement (the “Pre-Pay Agreement”) with CMC providing that the Company shall pre-pay the remaining balance of $1,000,000 due and payable under the CMC Note for a one-time cash payment of $325,000, and CMC accepted such pre-payment in full satisfaction of the Company’s obligations under the settlement agreement and the CMC Note. The $325,000 payment was made on March 28, 2019.
The Company has various trade disputes with vendors related to the Legacy Businesses. The Company believes it has made adequate accruals with respect to the disputes for which such is appropriate according to our accounting policy.
Employee Matters
On March 29, 2017, three former Legacy Business employees who were among the approximately 100 similarly situated employees terminated as a result of the Restructuring Plan filed a lawsuit in the Minnesota State District Court of Ramsey County asserting state law claims for non-payment of allegedly promised severance benefits of approximately $200,000. While full discovery of the relevant facts has not been completed, we believe these state law claims are without merit and are vigorously defending our position. On February 27, 2019, the Company settled the claim for a gross payment of $86,000.
Forty-five former Legacy Business employees are suing the Company for unpaid severance allegedly promised to them by the Company. Plaintiffs allege the Company promised them and other employees a severance package that they claim is separate from severance under Imation’s discretionary ERISA severance plan called the Income Assistance Plan. The Company entered into a settlement agreement as of July 25, 2019 with the forty-five former Legacy Business employees to settle this claim for a gross payment of $150,000.
Copyright Levies
We had previously disclosed various copyright levy litigations related to our former subsidiary – IEBV. In connection with the Subsidiary Sale, the Company is no longer liable for adverse outcomes and may receive Contingent Payouts should IEBV prevail in litigation.
Indemnification Obligations
In the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim. There have historically been no material losses related to such indemnifications. As of June 30, 2019 and December 31, 2018, estimated liability amounts associated with such indemnifications were not material.
Environmental Matters
Our Legacy Business operations and indemnification obligations resulting from our spinoff from 3M subject us liabilities arising from a wide range of federal, state and local environmental laws. For example, from time to time we have received correspondence from 3M notifying us that we may have a duty to defend and indemnify 3M with respect to certain environmental claims such as remediation costs. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed and are adjusted accordingly. We did not have any environmental accruals as of June 30, 2019. Compliance with environmental regulations has not had a material adverse effect on our financial results.
| 18 |
Note 13 — Related Party Transactions
On January 1, 2019, the Company and Clinton entered into a management service agreement (the “Management Service Agreement”), pursuant to which Clinton agreed to provide certain services to the Company, including accounting and treasury services, service of managing the third party fund administrator, IT services, payroll and benefit services and other administration services as reasonably requested by the Company. The initial term of this Management Service Agreement is six (6) months (the “Initial Term”) and shall renew for successive renewal terms of three (3) calendar months (each, a “Renewal Term”) unless either Party provides notice of nonrenewal to the other Party prior to the conclusion of the then current initial term or renewal term. The Company shall pay Clinton at the rate of $68,750 each quarter for the Initial Term and each Renewal Term.
On January 31, 2017, the Company held a special meeting of the stockholders of the Company at which the stockholders approved the issuance of up to 1,500,000 shares (the “Capacity Shares”) of the Company’s common stock (as adjusted to reflect the Reverse Stock Split), par value $0.01 per share, pursuant to the Subscription Agreement, dated as of November 22, 2016, by and between the Company and Clinton, as amended by Amendment No. 1 to the Subscription Agreement, dated as of January 9, 2017 (as so amended, the “Subscription Agreement”). Pursuant to the terms of the Subscription Agreement, on February 2, 2017 (the “Initial Closing Date”), the Company entered into the Capacity and Services Transaction with Clinton Group and GBAM (the “Capacity and Services Transaction”). As consideration for the capacity and services Clinton has agreed to provide under the Capacity and Services Transaction and pursuant to the terms of the Subscription Agreement, the Company issued 1,250,000 shares of the Company’s common stock (as adjusted to reflect the Reverse Stock Split) to Madison Avenue Capital Holdings, Inc. (“Madison”), an affiliate of Clinton, on the Initial Closing Date. The closing price of the Company’s common stock on the Initial Closing Date was $8.10. The Company also entered into a Registration Rights Agreement with Madison on the Initial Closing Date, relating to the registration of the resale of the Capacity Shares as well as a letter agreement with Madison pursuant to which Madison has agreed to a three-year lockup with respect to any Capacity Shares issued to it.
The Company did not have a short term investment balance in Clinton Lighthouse as of June 30, 2019 and December 31, 2018, and as such did not have any unrealized gains for the three months ended June 30, 2019. Pursuant to the Capacity and Services Agreement, the Company will no longer incur management or performance fees related to our investment in Clinton Lighthouse.
Daniel A. Strauss serves as our Chief Executive Officer and Chief Operating Officer, and Francis Ruchalski serves as our Chief Financial Officer, pursuant to the terms of a the Amended and Restated Services Agreement we entered into with Clinton on March 31, 2019 (the “Amended Services Agreement”) replacing in its entirety that certain Services Agreement we entered into with Clinton on March 2, 2017 (the “Services Agreement”). The Amended Services Agreement provides that Clinton will make available certain of its employees to provide services to the Company, including CEO services, COO services and CFO services (the “Executive Services”). In addition to the Executive Services, Clinton will make available other employees of Clinton as necessary to manage certain business functions as deemed necessary in the sole discretion of Clinton to provide other management services (the “Management Services”). Under the Amended Services Agreement, Clinton may designate substitutes for Mr. Strauss or Mr. Ruchalski or any other employee providing any Management Services. In consideration for the Executive Services and Management Services, the Company shall provide to Clinton a rate of $243,750 for the initial term, such term being the first three (3) months following the execution date of the Amended Services Agreement, and to automatically renew for successive renewal terms of three (3) calendar months each, the fee for each renewal term being $243,750. Clinton will continue to pay Mr. Strauss’s and Mr. Ruchalski’s compensation and benefits and we have agreed to pay or reimburse Mr. Strauss for their reasonable expenses. Pursuant to the terms of the Amended Services Agreement, we have also agreed to indemnify Mr. Strauss, Mr. Ruchalski, Clinton, any substitute for Mr. Strauss, Mr. Ruchalski, or any other Clinton employee providing services under the Master Services Agreement for certain losses. As of June 30, 2019, the Company paid Clinton $1,775,000 under the Services Agreement and recorded $775,000 and $250,000 within “Selling, general and administrative” in our Condensed Consolidated Statements of Operations for the six months ended June 30, 2019 and 2018, respectively.
On January 4, 2019, the Company entered into a Common Stock Purchase Agreement (the “Sport-BLX Purchase Agreement”) together with Sport-BLX, Inc., a Delaware corporation, where George E. Hall, the holder of approximately 25.78% of the Company’s outstanding common stock, is Executive Chairman and CEO (“Sport-BLX”), whereby the Company agreed to purchase from Sport-BLX 10,526 shares of Sport-BLX common stock, par value $0.001 per share, at a price equal to $95 per share, for aggregate consideration of $1,000,000. As of June 30, 2019, The Company had furnished to Sport-BLX $600,000 of the total consideration due and payable by the Company to Sport-BLX under the terms of the Sport-BLX Purchase Agreement.
Note 14 — Subsequent Events
None.
| 19 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements and Risk Factors
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-Q, in our other filings with the 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: our need for substantial additional capital in order to fund our business; our ability to realize the anticipated benefits of our restructuring plan and other recent significant changes; the negative impacts of our delisting from the New York Stock Exchange, 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 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; 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; the efforts of Clinton’s key personnel and the performance of its overall 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, including any fund or account managed by Clinton; 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 in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, and from time to time in our filings with the SEC.
Overview
GlassBridge Enterprises, Inc. (“GlassBridge”, the “Company”, “we”, “us” or “our”) is a holding company. We actively explore a diverse range of new, strategic asset management business opportunities for our portfolio. The Company’s wholly-owned subsidiary GlassBridge Asset Management, LLC (“GBAM”) is an investment advisor focused on technology-driven quantitative strategies and other alternative investment strategies.
In February 2017, we closed a transaction with Clinton Group Inc. (“Clinton”) that facilitated the launch of our “Asset Management Business”, which consists of our investment advisory business conducted through GBAM (the “Capacity and Services Transaction”). The Capacity and Services Transaction allows for GBAM to access investment capacity within Clinton’s quantitative equity strategy. The Capacity and Services Transaction was structured to provide for the quick and efficient scaling of an asset management business and designed to provide investors with access to quantitative equity strategies. By partnering with Clinton and leveraging Clinton’s proven technology-driven strategy, we intend for GBAM to bypass traditional seeding models, which typically include a lengthy roll out and substantial costs. We intend to use algorithms and other quantitative strategies with the goal of achieving consistent, competitive risk-adjusted returns for GBAM’s investors. In addition, we have recently taken steps to build our own independent organizational foundation while leveraging Clinton’s capabilities and infrastructure. While our intention is to primarily engage in the management of third-party assets, we may make opportunistic proprietary investments from time to time that comply with applicable laws and regulations.
| 20 |
In February 2017, the Company effected a 1:10 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 100,000,000 to 10,000,000.
On July 20, 2017, the Company notified the New York Stock Exchange (the “NYSE”) of its intention to voluntarily delist its common stock from the NYSE. After much careful discussion and deliberation, our Board of Directors (the “Board”) approved resolutions authorizing the Company to initiate voluntarily delisting from the NYSE. The Board weighed several material factors in reaching this decision, including avoiding the risks that involuntary suspension of trading could cause and the importance of a controlled transition to the OTCQX marketplace (“OTCQX”) to ensure the continuing availability of a market for trading our common stock. The last trading day on the NYSE was August 1, 2017. Our common stock began trading on the OTCQX Market under the symbol “GLAE” on August 2, 2017.
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. For more information regarding the NXSN Transaction, please review the summary of the NXSN Transaction in Note 1 - Basis of Presentation to this report, and the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission as of August 16, 2018.
With the wind down of our legacy businesses segments, Consumer Storage and Accessories and Tiered Storage and Security Solutions (the “Legacy Businesses”) substantially completed in the first quarter of 2016, the sale of our IronKey business in February 2016, the sale of our Nexsan Business in August 2018 and the Subsidiary Sale in March 2019 we have one operating business segment remaining: the “Asset Management Business”. Following the launch of GBAM, we have transitioned to become a publicly-traded alternative asset manager. In February 2017 we changed our name to GlassBridge Enterprises, Inc. to reflect our new primary focus on asset management. We continue to evaluate various business endeavors and opportunistic acquisitions of operating businesses to augment our current organic initiatives. As a result of the termination of our pension plan by the PBGC and final phases of legacy wind down, we have redoubled our efforts on growth initiatives that are intended to maximize shareholder value.
Important Notices and Disclaimers
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to be read in conjunction with our Condensed Consolidated Financial Statements and related Notes that appear elsewhere in this Quarterly Report on Form 10-Q. This MD&A contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated due to various factors discussed in this MD&A under the caption “Forward-Looking Statements and Risk Factors” and the information contained in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on April 2, 2018, including in Part 1 Item 1A. Risk Factors of such Annual Report.
Nothing contained in this Quarterly Report on Form 10-Q constitutes an offer to sell or a solicitation to buy any securities or otherwise invest in any investment vehicle managed, advised or coordinated by GBAM (collectively, the “GlassBridge Vehicle”), and may not be relied upon in connection with any investment or offer or sale of securities. Any such offer or solicitation may only be made pursuant to the current Confidential Private Offering Memorandum (or similar document) for any such GlassBridge Vehicle, which is provided only to qualified offerees and which should be carefully reviewed prior to investing. GBAM is a newly formed entity and the GlassBridge Vehicles are currently either in formation state or have recently launched. GBAM is registered as an investment adviser with the SEC under the U.S. Investment Advisers Act of 1940, as amended, or under similar state laws, and nothing in this Quarterly Report on Form 10-Q constitutes investment advice with respect to securities.
This Quarterly Report on Form 10-Q includes tradenames and trademarks owned by us or that we have the right to use. Solely for convenience, the trademarks or tradenames referred to in this Quarterly Report on Form 10-Q may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and tradenames.
| 21 |
Executive Summary
Consolidated Results of Operations for the Three Months Ended June 30, 2019
| ● | Net revenue from continuing operations of $0.1 million for the three months ended June 30, 2019 was up compared with $(0.1) million in the same period last year. |
| ● | Following the sale of the Nexsan Business as described in Note 1 - Basis of Presentation, the Company does not have any revenue in continuing operations for the periods presented. |
| ● | Operating loss from continuing operations was $1.1 million for the three months ended June 30, 2019 compared to an operating loss of $1.8 million in the same period last year. This was an improvement of $0.7 million, primarily due to a decrease in operating expenses as well as an increase in revenue. |
Basic and diluted loss per share from continuing operations was $0.22 for the three months ended June 30, 2019, compared with a basic and diluted loss per share of $0.41 for the same period last year.
Consolidated Results of Operations for the Six Months Ended June 30, 2019
| ● | Net revenue from continuing operations of $0.1 million for the six months ended June 30, 2019 was up compared with $0.0 million in the same period last year. |
| ● | Operating loss from continuing operations was $2.0 million for the six months ended June 30, 2019 compared to an operating loss of $3.5 million in the same period last year. This was an improvement of $1.5 million, primarily due to a decrease in operating expenses as well as an increase in revenue. |
Basic and diluted loss per share from continuing operations was $0.40 for the six months ended June 30, 2019, compared with a basic and diluted loss per share of $0.75 for the same period last year.
Cash Flow/Financial Condition for the Six Months Ended June 30, 2019
| ● | Cash and cash equivalents totaled $1.0 million at June 30, 2019 compared with $4.9 million at December 31, 2018. The decrease in the cash balance of $3.9 million was primarily due to corporate expenses, a $0.3 million litigation settlement payment to CMC Magnetic Corp. (“CMC”) and deconsolidated international cash of $0.8 million in connection with the Subsidiary Sale. See Note 13 - Litigation, Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information on the CMC settlement. |
Results of Operations
The following discussion relates to continuing operations unless indicated otherwise. The operating results of our former Legacy Businesses and the Nexsan Business are presented in our Condensed Consolidated Statements of Operations as discontinued operations and are not included in segment results for all periods presented. See Note 4 - Discontinued Operations in our Notes to Condensed Consolidated Financial Statements in Item 1 for further information on these divestitures.
Net Revenue
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Net revenue | $ | 0.1 | $ | — | 100 | % | $ | 0.1 | $ | — | NM | |||||||||||||
Net revenue for the three and six months ended June 30, 2019 was $0.1 million.
Gross Profit
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Gross profit | $ | 0.1 | $ | — | 100 | % | $ | 0.1 | $ | — | NM | |||||||||||||
| Gross margin | 100 | % | NM | 100 | % | NM | ||||||||||||||||||
“NM” - Indicates the Percent Change is not meaningful
Gross margin for the three and six months ended June 30, 2019 was $0.1 million.
| 22 |
Selling, General and Administrative (“SG&A”)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Selling, general and administrative | $ | 1.2 | $ | 1.5 | (20.0 | )% | $ | 2.0 | $ | 3.2 | (37.5 | )% | ||||||||||||
| As a percent of revenue | NM | NM | NM | |||||||||||||||||||||
“NM” - Indicates the Percent Change is not meaningful
SG&A expense decreased for the three months ended June 30, 2019 by $0.3 million (or 20.0%) compared with the same period last year primarily due to reduced corporate expenditures and legal expenses.
SG&A expense decreased for the six months ended June 30, 2019 by $1.2 million (or 37.5%) compared with the same period last year primarily due to reduced corporate expenditures and legal expenses.
Restructuring and Other
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Restructuring and other | $ | 0.0 | $ | 0.1 | (100.0 | )% | $ | 0.1 | $ | 0.1 | — | % | ||||||||||||
“NM” - Indicates the Percent Change is not meaningful
Restructuring and other expenses were $0.0 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively.
Restructuring and other expenses were $0.1 million and $0.1 million for the six months ended June 30, 2019 and 2018, respectively.
See Note 7 - Restructuring and Other Expense in our Notes to Condensed Consolidated Financial Statements in Item 1 for further details on our restructuring and other expenses.
Operating Loss from Continuing Operations
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Operating loss from continuing operations | $ | (1.1 | ) | $ | (1.8 | ) | (38.9 | )% | $ | (2.0 | ) | $ | (3.5 | ) | (42.9 | )% | ||||||||
| As a percent of revenue | NM | NM | NM | NM | ||||||||||||||||||||
“NM” - Indicates the Percent Change is not meaningful
Operating loss from continuing operations decreased by $0.7 million for the three months ended June 30, 2019 compared with the same period last year primarily due to reduced corporate expenditures and legal expenses.
Operating loss from continuing operations decreased by $1.5 million for the six months ended June 30, 2019 compared with the same period last year primarily due to reduced corporate expenditures and legal expenses.
| 23 |
Other Income (Expense)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Interest expense | $ | — | $ | — | NM | $ | — | $ | (0.1 | ) | (100.0 | )% | ||||||||||||
| Net gain (loss) from GBAM Fund activities | — | (0.4 | ) | (100.0 | )% | — | (0.5 | ) | (100.0 | )% | ||||||||||||||
| Other income (expense), net | — | 0.1 | (100.0 | )% | — | 0.3 | (100.0 | )% | ||||||||||||||||
| Total other income (expense) | $ | — | $ | (0.3 | ) | (100.0 | )% | $ | — | $ | (0.3 | ) | (100.0 | )% | ||||||||||
| As a percent of revenue | NM | NM | NM | NM | ||||||||||||||||||||
“NM” - Indicates the Percent Change is not meaningful
Total other income (expense) for the three months ended June 30, 2019 was $0.0 million compared to $(0.3) million for the same period last year.
Total other income (expense) for the six months ended June 30, 2019 was $0.0 million compared to $(0.3) million for the same period last year.
See Asset Management Business discussion within the Segment Results section for additional information on net gain (loss) from GBAM Fund activities.
Income Tax Benefit (Provision)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Income tax benefit (provision) | $ | — | $ | — | (100.0 | )% | $ | (0.0 | ) | $ | — | NM | ||||||||||||
| Effective tax rate | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||
Income tax for the three months ended June 30, 2019 and 2018 was $0.0 million. The effective income tax rate for the three months ended June 30, 2019 differs from the U.S. federal statutory rate of 21% primarily due to a valuation allowance on various deferred tax assets.
Income (Loss) from Discontinued Operations
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Net revenue | $ | — | $ | 9.5 | $ | 0.1 | $ | 18.8 | ||||||||
| Cost of goods sold | — | 5.4 | 0.1 | 9.9 | ||||||||||||
| Gross profit | — | 4.1 | — | 8.9 | ||||||||||||
| Selling, general and administrative | — | 3.5 | 0.3 | 7.4 | ||||||||||||
| Research and development | — | 0.7 | — | 1.9 | ||||||||||||
| Restructuring and other | (0.2 | ) | (0.1 | ) | (0.2 | ) | — | |||||||||
| Other (income) expense | — | (0.4 | ) | (0.6 | ) | (0.8 | ) | |||||||||
| Income from discontinued operations, before income taxes | 0.2 | 0.4 | 0.5 | 0.4 | ||||||||||||
| Income on sale of discontinued businesses, before income taxes | — | — | 9.6 | |||||||||||||
| Income tax benefit | 0.3 | 0.1 | 0.9 | 0.1 | ||||||||||||
| Net loss attributable to noncontrolling interest | — | 0.3 | — | 0.3 | ||||||||||||
| Income (loss) from discontinued operations, net of income taxes | $ | 0.5 | $ | 0.8 | $ | 11.0 | $ | 0.8 | ||||||||
| 24 |
Discontinued operations are comprised of results from our Legacy Businesses and the Nexsan Business. For the three and six months ended June 30, 2019, income from discontinued operations decreased by $0.3 million and increased by $10.2 million, respectively, compared with the same periods last year due to the Subsidiary Sale.
See Note 4 - Discontinued Operations in our Notes to Condensed Consolidated Financial Statements in Item 1 for more information on our discontinued operations.
Segment Results
Following the sale of the Nexsan Business, the Asset Management Business is our only reportable segment as of June 30, 2019. 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.
Information related to our segments is as follows:
Asset Management Business
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Operating income (loss) | $ | 0.1 | $ | (0.9 | ) | 111.1 | % | $ | 0.1 | $ | (1.8 | ) | 105.6 | % | ||||||||||
| Net gain (loss) from GBAM Fund activities | — | (0.4 | ) | 100.0 | % | — | (0.5 | ) | 100.0 | % | ||||||||||||||
GBAM is an investment advisor focused on technology-driven quantitative strategies and other alternative investment strategies. Revenue from our Asset Management Business would primarily consist of management and performance fees paid by the funds under our management. Since we closed the Capacity and Services Transaction in February 2017, we jump-started the Asset Management Business by leveraging Clinton’s resources. We are executing our business development plan and have been in contact with over one hundred potential strategic investors. Obtaining third party investment for similarly situated funds can take time, particularly in light of recent headwinds resulting from industry trends of under performance of our initial fund’s strategy.
In the fourth quarter of 2018, after our internal business review and deliberations the management team decided to temporarily close the GlassBridge Quantitative Equity Fund to save operating costs. We retained and utilized various consultants and outside legal counsel to assist in the development of policies, procedures and compliance functionality tailored to the launch of GBAM. These outside resources were tasked with building and launching an asset management platform designed to comply with all applicable laws and regulations. Because we intend for the scope of our Asset Management Business to increase substantially, management instructed our consultants and counsel to focus on developing a platform that is well-positioned to scale up in an efficient manner as our business grows.
Corporate and Unallocated
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||
| June 30, | Percent | June 30, | Percent | |||||||||||||||||||||
| (Dollars in millions) | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||
| Corporate and unallocated operating loss | $ | (1.2 | ) | $ | (0.8 | ) | 50.0 | % | $ | (2.0 | ) | $ | (1.6 | ) | 25.0 | % | ||||||||
| Restructuring and other | — | (0.1 | ) | (100.0 | )% | (0.1 | ) | (0.1 | ) | — | % | |||||||||||||
| Total | $ | (1.2 | ) | $ | (0.9 | ) | $ | (2.1 | ) | $ | (1.7 | ) | ||||||||||||
“NM” - Indicates the Percent Change is not meaningful
For the three months ended June 30, 2019, corporate and unallocated operating loss consists of $1.2 million of corporate general and administrative expenses, a 50.0% increase from the prior year. Restructuring and other expenses decreased by $0.1 million year over year.
| 25 |
For the six months ended June 30, 2019, corporate and unallocated operating loss consists of $1.9 million of corporate general and administrative expenses, an 18.8% increase from the prior year. Restructuring and other expenses were flat from the prior year.
See Note 7 - Restructuring and Other Expense in our Notes to Condensed Consolidated Financial Statements in Item 1 for further details on our restructuring and other expenses.
Impact of Changes in Foreign Currency Rates
The impact of changes in foreign currency exchange rates to worldwide revenue was immaterial for the three and six months ended June 30, 2019.
Financial Position
Our cash and cash equivalents balance as of June 30, 2019 was $1.0 million compared to $4.1 million as of December 31, 2018.
Our accounts payable balance as of June 30, 2019 was $0.1 million compared to $0.4 million as of December 31, 2018.
Our other current liabilities balance as of June 30, 2019 was $2.7 million compared to $3.3 million as of December 31, 2018.
Liquidity and Capital Resources
Cash Flows Provided by (Used in) Operating Activities:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Net income (loss) | $ | 9.0 | $ | (3.3 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | — | 1.2 | ||||||
| Stock-based compensation | — | (0.3 | ) | |||||
| Pension settlement and curtailments | — | 0.2 | ||||||
| Gain on sale of assets | (9.9 | ) | — | |||||
| Short term investment | — | 0.7 | ||||||
| Other, net | (0.2 | ) | 0.1 | |||||
| Changes in operating assets and liabilities | (3.0 | ) | (3.2 | ) | ||||
| Net cash used in operating activities | $ | (4.1 | ) | $ | (4.6 | ) | ||
Cash used in operating activities was $4.1 million for the six months ended June 30, 2019, which primarily related to corporate expenditures, legal settlements and related costs. Cash used in operating activities was $4.6 million for the six months ended June 30, 2018, primarily relating to the operating loss.
Cash Flows Used in Investing Activities:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
Investment in securities | $ | (0.6 | ) | $ | — | |||
Capital expenditures | — | (0.2 | ) | |||||
| Disbursement related to disposal group | (0.8 | ) | — | |||||
| Proceeds from sale of assets | 1.2 | — | ||||||
| Net cash used in investing activities | $ | (0.2 | ) | $ | (0.2 | ) | ||
For the six months ended June 30, 2019 cash used in investing activities includes $1.2 million received from the sale of IP addresses offset by deconsolidated international cash of $0.8 million in connection with the Subsidiary Sale and $0.6 million invested in Sport-BLX, Inc.
| 26 |
Cash Flows Provided by Financing Activities:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in millions) | 2019 | 2018 | ||||||
| Net cash provided by (used in) financing activities | $ | — | $ | — | ||||
No cash was used for financing activities for the six months ended June 30, 2019 and 2018.
We have various resources available to us for purposes of managing liquidity and capital needs. Our primary sources of liquidity include our cash and cash equivalents. Our primary liquidity needs relate to funding our operations.
We had $1.0 million cash and cash equivalents on hand as of June 30, 2019.
Our liquidity needs for the next 12 months include the following: corporate expenses of approximately $1.6 million and investments of $0.4 million.
Our cash of $1.0 million as of June 30, 2019, which, in addition to a $1.1 million tax refund received in July 2019 is expected to fund our operations for the next twelve months.
Copyright Levies
See Note 13 - Litigation, Commitments and Contingencies in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein for further information.
Off Balance Sheet Arrangements
As of June 30, 2019, we did not have any material off-balance sheet arrangements.
Critical Accounting Policies and Estimates
A discussion of the Company’s critical accounting policies was provided in Part II Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Recent Accounting Pronouncements
See Note 2 - New Accounting Pronouncements in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein for further information.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2019, the end of the period covered by this report, the Chairman and principal executive officer, Joseph A. De Perio, and the Chief Financial Officer, Francis Ruchalski, have concluded that the disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2019 based on the guidelines established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. During the quarter ended March 31, 2019, management concluded there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 27 |
See Note 13 - Litigation, Commitments and Contingencies in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 herein for further information regarding our legal proceedings.
The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business (including litigation relating to our Legacy Businesses and discontinued operations). All such matters involve uncertainty and, accordingly, outcomes that cannot be predicted with assurance. As of June 30, 2019, we are unable to estimate with certainty the ultimate aggregate amount of monetary liability or financial impact that we may incur with respect to these matters. It is reasonably possible that the ultimate resolution of these matters, individually or in the aggregate, could materially affect our financial condition, results of the operations and cash flows. Similarly, the Company is the plaintiff in a number of matters in the United States and elsewhere where the potential outcomes could be materially beneficial to the Company. These outcomes are also uncertain.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
The following documents are filed as part of, or incorporated by reference into, this report:
| Exhibit Number | Description of Exhibit | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101 | The following financial information from GlassBridge Enterprises, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements. |
| 28 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GLASSBRIDGE ENTERPRISES, INC. | |||
| Date: | August 14, 2019 | /s/ Francis Ruchalski | |
| Name: | Francis Ruchalski | ||
| Title: | Chief Financial Officer (duly authorized officer and principal financial officer) | ||
| 29 |