NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Background and Basis of Presentation
Background
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. Our partially-owned subsidiary NXSN
Acquisition Corp. (together with its subsidiaries, “NXSN”) operates a global enterprise data storage business through
its subsidiaries.
Basis
of Presentation
The
financial statements are presented on a consolidated basis and include the accounts of the Company, its wholly-owned subsidiaries,
and entities in which the Company owns or controls fifty percent or more of the voting shares and has the right to control. The
results of entities disposed of are included in the Consolidated Financial Statements up to the date of the disposal and, where
appropriate, these operations have been reflected as discontinued operations. Our Consolidated Financial Statements are prepared
in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All inter-company
balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments
necessary for a fair presentation have been included in the results reported.
The
operating results of our legacy business segments, Consumer Storage and Accessories and Tiered Storage and Security Solutions
(the “Legacy Businesses”), are presented in our Consolidated Statements of Operations as discontinued operations for
all periods presented. Our continuing operations in each period presented represents our global enterprise data storage business
with an emerging enterprise-class, private cloud sync and share product line (the “Nexsan Business”, which consists
of the products of NXSN’s subsidiaries Nexsan Corporation (together with its subsidiaries other than Connected Data, Inc.
(“CDI”), “Nexsan”) and CDI), and 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. Assets and liabilities directly associated with our Legacy Businesses and that are not part of our ongoing operations
have been separately presented on the face of our Consolidated Balance Sheets for all periods presented. See Note 4 -
Discontinued
Operations
for further information.
On
January 23, 2017, we closed a transaction (the “NXSN Transaction”) with NXSN, pursuant to which all of the issued
and outstanding common stock of Nexsan (to which all of the outstanding stock of CDI had been contributed) was transferred to
NXSN in exchange for 50% of the issued and outstanding common stock of NXSN and a $25 million senior secured convertible promissory
note (the “NXSN Note”). Spear Point Private Equity LP (“SPPE”), an affiliate of Spear Point Capital Management,
LLC (“Spear Point”), owns the remaining 50% issued and outstanding shares of NXSN common stock and shares of NXSN
non-voting preferred stock.
As
a result of the NXSN Transaction, we identified NXSN as a variable interest entity (“VIE”). We consolidate a VIE in
our financial statements if we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is the party
that has the power to direct activities that most significantly impact the activities of the VIE and has the obligation to absorb
losses or the right to benefits from the VIE that could potentially be significant to the VIE. Following January 23, 2017, NXSN’s
financial results are included in our Consolidated Financial Statements since we made the determination that we are the primary
beneficiary of such VIE. Until January 23, 2017, as we owned 100% of the equity interest of Nexsan and CDI, the financial results
of Nexsan and CDI were included in our Consolidated Financial Statements as wholly-owned subsidiaries. See Note 14 -
Business
Segment Information and Geographic Data
for additional information.
On
February 2, 2017, we closed a transaction with Clinton Group, Inc. (“Clinton”) which has facilitated the launch of
our Asset Management Business, which consists of our investment advisory business conducted through GBAM (the “Capacity
and Services Transaction”). See Note 6 -
Intangible Assets and Goodwill
and Note 16 -
Related Party Transactions
for further information.
On
February 21, 2017, we effected a 1:10 reverse split of our common stock, without any change in the par value per share (the “Reverse
Stock Split”) and decreased the number of authorized shares of our common stock from 100,000,000 to 10,000,000. All share
and per share values of our common stock for all periods presented are retroactively restated for the effect of the Reverse Stock
Split.
In
March 2017, ARRIVE was formed through a collaboration with Roc Nation, a full-service entertainment company founded by Shawn “JAY
Z” Carter, Primary Venture Partners (“Primary”) and GBAM. Primary will serve as a venture advisor and GlassBridge
will provide institutional and operational support. ARRIVE was created to invest alongside entrepreneurs and early stage businesses.
Among other things, ARRIVE has launched a traditional venture fund in order to, among other activities, support existing portfolio
companies through their subsequent growth stages and anticipates launching other special purpose investment vehicles to invest
in private equity transactions.
In
June 2017, we launched our first GBAM-managed investment fund (the “GBAM Fund”) which focuses on technology-driven
quantitative strategies and other alternative investment strategies. The fund initially performed in-line with expectations 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 GlassBridge Quantitative
Equity Fund to save operating costs. The GBAM Fund’s financial results are included in our Consolidated Financial Statements
as part of the Asset Management Business. See Note 14 -
Business Segment Information and Geographic Data
for additional
information.
On
July 20, 2017, the Company notified the NYSE of its intention to voluntarily delist its common stock from the NYSE. After much
careful consideration and deliberation, our Board approved resolutions authorizing the Company to initiate voluntary 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 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 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.
The
Company’s continued operations and ultimate ability to continue as a going concern will depend on its ability to enhance
revenue and operating results, enter into strategic relationships or raise additional capital. The Company can provide no assurances
that all or any of such plans will occur; and if the Company is unable to return to profitability or otherwise raise sufficient
capital, there would be a material adverse effect on its business.
Liquidity
and Management Plan
The
Company has incurred operating and cash flows losses for several reporting periods and has a negative working capital balance
of $0.2 million as of December 31, 2018. Negative working capital includes $4.9 million of remaining cash to fund our operations
at least through the first quarter of 2020. These conditions raised substantial doubt about our ability to continue as a going
concern. We have undertaken a financial and operation restructuring plan approved by our board prior to this reporting year. Accordingly,
we are operating under that plan which includes executing changes to our business model. Management’s plan with respect
to these matters, which we believe alleviates the substantial doubt, is as follows:
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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. The business is targeted to break even.
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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
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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%.
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Tax
Refund:
As a result of the 2017 tax reform, we expect to receive approximately $1.1 million alternative minimum tax refund
in mid-2019.
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Pension
Liabilities:
The Company is currently in discussions with the Pension Benefit Guaranty Corporation seeking relief from
the minimum funding requirements of our U.S. pension plan. As of December 31, 2018, required contributions of $2.1 million
had not been paid and are included in the Company’s current liabilities.
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Asset
Monetization:
We sold certain IP addresses to a third party. Proceeds of $950,000 are in escrow, subject to the completion
of the terms defined in the purchase agreement and are recorded in other current assets of discontinued operations as of December
31, 2018. The Company expects to receive the cash from escrow in Q1, 2019. See Note 4 –
Discontinued Operations
for more information on this transaction.
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Our
cash balance and the short-term investment was $4.9 million as of December 31, 2018. Our liquidity needs for the next 12 months
include the following: corporate expenses of approximately $2.0 million, pension obligation funding costs will
be approximately $4.0 million (if we do not obtain funding relief from the Pension Benefit Guaranty Corporation
and we are required to make the minimum pension contributions), legal settlement payment of $1.0 million to CMC and
others of $0.5 million, and any cash shortfall associated with the Asset Management Business.
We
expect that our cash and short-term investments and potential cash flow from GBAM and asset monetization (i.e. monetizing
$4.0 investment in Arrive) will provide liquidity sufficient to meet our obligations as they become due within one year from the
date these financial statements are issued. We also plan to raise additional capital from non-strategic asset sales,
or otherwise, if necessary, although no assurance can be made that we will be able to secure such financing, if needed, on favorable
terms or at all.
Note
2 — Summary of Significant Accounting Policies
Use
of Estimates.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported asset and liability amounts and the contingent asset and liability disclosures at the date of the financial
statements, as well as the revenue and expense amounts reported during the period. Actual results could differ from those estimates.
Foreign
Currency.
For our international operations, where the local currency has been determined to be the functional currency, assets
and liabilities are translated at year-end exchange rates with cumulative translation adjustments included as a component of shareholders’
equity. Income and expense items are translated at average foreign exchange rates prevailing during the year. Income and losses
from foreign currency transactions are included in our Consolidated Statements of Operations.
Cash
Equivalents.
Cash equivalents consist of highly liquid investments with an original maturity of three months or less at the
time of purchase. The carrying amounts reported in our Consolidated Balance Sheets for cash equivalents approximate fair value.
Restricted
Cash.
Cash related to contractual obligations or restricted by management for specific use is classified as restricted and
is included in other current assets and non-current assets on our Consolidated Balance Sheets depending on the timing of the restrictions.
As of December 31, 2018, and December 31, 2017, we had $0.0 million and $0.2 million, respectively, in other current assets
of continuing operations related to bank deposits.
In
non-current assets of discontinued operations, we had $0.4 million and $1.7 million of restricted cash as of December 31, 2018
and December 31, 2017, respectively, which relates to cash set aside as indemnification for certain customers.
Investments.
Investment securities are classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading.
The Company’s short-term investment balances as of December 31, 2018 and 2017 included trading securities, which
are measured at fair value. The corresponding income or loss associated with these trading securities is reported in our
Consolidated Statements of Operations as a component of “Other income (expense), net”. Trading securities are bought
and held principally for the purpose of selling them in the near term therefore are only held for a short period of time.
Fair
Value Measurements.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a
liability, or the exit price in an orderly transaction between market participants on the measurement date. A three-level hierarchy
is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of
the measurement date. Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 measurements include quoted prices in markets that are not active or model inputs that are observable either directly
or indirectly for substantially the full term of the asset or liability. Level 3 measurements include significant unobservable
inputs. A financial instrument’s level within the hierarchy is based on the highest level of any input that is significant
to the fair value measurement. The Company measures certain assets and liabilities including cash and cash equivalents, and investments
in trading securities at their estimated fair value on a recurring basis. The Company’s non-financial assets such as goodwill,
intangible assets and property, plant and equipment are recorded at fair value on a nonrecurring basis. See Note 12 -
Fair
Value Measurements
for additional information.
Trade
Accounts Receivable and Allowances.
Trade accounts receivable are stated net of estimated allowances, which primarily represent
estimated amounts associated with customer returns, discounts on payment terms and the inability of certain customers to make
the required payments. When determining the allowances, we take several factors into consideration, including prior history of
accounts receivable credit activity and write-offs, the overall composition of accounts receivable aging, the types of customers
and our day-to-day knowledge of specific customers. Changes in the allowances are recorded as reductions of net revenue or as
bad debt expense (included in selling, general and administrative expense), as appropriate, in our Consolidated Statements of
Operations. In general, accounts which have entered into an insolvency action, have been returned by a collection agency as uncollectible
or whose existence can no longer be confirmed are written off in full and both the receivable and the associated allowance are
removed from our Consolidated Balance Sheet. If, subsequent to the write-off, a portion of the account is recovered, it is recorded
as a reduction of bad debt expense in our Consolidated Statements of Operations at the time cash is received.
Inventories.
Following the sale of the Nexsan Business as described in Note 1 –
Basis of Presentation,
the Company does not
have any inventory. Inventories have historically consisted primarily of parts used in assembly, were valued at the lower of cost
or net realizable value, with cost determined on a first-in, first-out basis. We provided estimated inventory write-downs for
excess, slow-moving and obsolete inventory as well as inventory with a carrying value in excess of estimated net realizable value.
Property,
Plant and Equipment, net.
Property, plant and equipment, including leasehold and other improvements that extend an asset’s
useful life or productive capabilities, are recorded at cost less accumulated depreciation and amortization. Maintenance and repairs
are expensed as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed are removed from
the related accounts, and the income or losses are reflected in the results of operations.
Property,
plant and equipment are generally depreciated on a straight-line basis over their estimated useful lives. The estimated depreciable
lives range from 10 to 20 years for buildings and 5 to 10 years for machinery and equipment. Leasehold and other improvements
are amortized over the remaining life of the lease or the estimated useful life of the improvement, whichever is shorter. Depreciation
expense was $0.3 million and $1.5 million all in discontinued operations for the years ended December 31, 2018 and 2017 respectively.
Intangible
Assets.
We record all assets and liabilities acquired in purchase acquisitions, including intangibles, at estimated fair value.
The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analyses
require management to make subjective estimates of how the acquired assets will perform in the future using certain valuation
methods. See Note 6 -
Intangible Assets
for further information on our intangible assets and impairment testing.
Impairment
of Long-Lived Assets.
We periodically review the carrying value of our property and equipment and our intangible assets to
test whether current events or circumstances indicate that such carrying value may not be recoverable. For the testing of long-lived
assets that are “held for use,” if the tests indicate that the carrying value of the asset group that contains the
long-lived asset being evaluated is greater than the expected undiscounted cash flows to be generated by such asset or asset group,
an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying value of such asset
group exceeds its estimated fair value. We generally measure fair value by considering sale prices for similar assets or by discounting
estimated future cash flows from such assets using an appropriate discount rate. Management judgment is necessary to estimate
the fair value of assets and, accordingly, actual results could vary significantly from such estimates. See Note 6 -
Intangible
Assets
for further information on impairment testing.
Restructuring.
Restructuring generally includes significant actions involving employee-related severance charges, contract termination costs,
and impairment or accelerated depreciation/amortization of assets associated with such actions. These charges are reflected in
the quarter when the actions are probable and the amounts are estimable, which is typically when management approves the associated
actions. Contract termination and other charges primarily reflect costs to terminate a contract before the end of its term or
costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. Asset
impairment charges related to intangible assets and property, plant and equipment reflect the excess of the assets’ carrying
values over their fair values.
Revenue
Recognition.
Following the sale of the Nexsan Business as described in Note 1 –
Basis of Presentation,
the Company
does not have any revenue. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, installation
has been completed (if applicable) or services have been rendered, fees are fixed or determinable and collectability is reasonably
assured. For product sales, delivery is considered to have occurred when the risks and rewards of ownership transfer to the customer.
We base our estimates for returns on historical experience and have not experienced significant fluctuations between estimated
and actual return activity.
The
majority of the Company’s former Nexsan products have both software and non-software components that together deliver the
products’ essential functionality. The software is embedded within the hardware and sold together as a single storage solution
to the customer. Accordingly, the software and non-software components do not qualify as separate units of accounting as prescribed
in Accounting Standards Codification (“ASC”) 605-25 and are combined as a single unit of accounting. There are no
situations where revenue is recognized separately for software.
We
also offered services in conjunction with our former Nexsan products which may include installation, training, hardware maintenance
and software support. For such services that are determined to be essential to the functionality of the product, the product and
services do not qualify as separate units of accounting as prescribed in ASC 605-25 and are combined as a single unit of accounting.
In situations where the sale of our Storage and Security Solutions products and associated services qualify as multiple element
arrangements, we allocate arrangement consideration to each unit of accounting based on its relative selling price, and revenue
is recognized for each element when all the criteria for revenue recognition for such elements have been met.
Revenue
associated with stand-alone service arrangements (such as maintenance arrangements) that are sold separately is recorded ratably
over the service period.
Rebates
that are provided to our customers are accounted for as a reduction of revenue at the time of sale based on an estimate of the
cost to honor the related rebate programs. The rebate programs that we offer vary across our businesses as we serve numerous markets.
The most common incentives relate to amounts paid or credited to customers that are volume-based and rebates to support promotional
activities.
Concentrations
of Credit Risk.
Following the sale of the Nexsan Business as described in Note 1 –
Basis of Presentation,
the
Company does not have any revenue or related accounts receivable. The Company intends to earn revenues in its Asset Management
business primarily by providing investment advisory services to third party investors through GlassBridge managed funds as well
as separate managed accounts. As the Company scales its Asset Management business, it could potentially have major customers and
concentrations of credit risk that may require ongoing evaluation.
Cost
of Goods Sold.
Following the sale of the Nexsan Business as described in Note 1 –
Basis of Presentation,
the
Company does not have any cost of goods sold. Cost of goods sold has historically included raw materials, direct labor, manufacturing
overhead, shipping and receiving costs, freight costs, depreciation of manufacturing equipment and other less significant indirect
costs related to the production of our products.
Selling,
General and Administrative (SG&A) Expenses.
SG&A expenses include sales and marketing, customer service, finance,
legal, human resources, information technology, general management and similar expenses.
Research
and Development Costs.
Following the sale of the Nexsan Business as described in Note 1 –
Basis of Presentation,
the Company does not have any research and development costs. Research and development costs were historically expensed as
incurred and included salaries, payroll taxes, employee benefit costs, supplies, depreciation and maintenance of research equipment.
Rebates
Received.
We historically received rebates from some of our inventory vendors if we achieve pre-determined purchasing thresholds.
These rebates are accounted for as a reduction of the price of the vendor’s products and are included as a reduction of
our cost of goods sold in the period in which the purchased inventory is sold. Following the sale of the Nexsan Business as described
in Note 1 –
Basis of Presentation,
the Company does not have any inventory vendors or receive rebates.
Income
Taxes.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (“Tax Reform Act”). The Tax Reform Act makes broad and complex changes to the U.S. tax code, including,
but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to
pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal
income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain
earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing
how existing AMT credits can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new
limitation on deductible interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017. We have discussed the provisions that affect the Company’s financial
statements in further detail where appropriate.
We
are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our
actual current tax obligations based on expected taxable income, statutory tax rates and tax credits allowed in the various jurisdictions
in which we operate. Tax laws require certain items to be included in our tax returns at different times than the items are reflected
in our results of operations. Some of these differences are permanent, such as expenses that are not deductible in our tax returns,
and some are temporary differences that will reverse over time. Temporary differences result in deferred tax assets and liabilities,
which are included in our Consolidated Balance Sheets. We must assess the likelihood that our deferred tax assets will be realized
and establish a valuation allowance to the extent necessary.
We
record income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We
measure deferred tax assets and liabilities using the enacted statutory tax rates that are expected to apply in the years in which
the temporary differences are expected to be recovered or paid. Due to the Tax Reform Act’s reduction in corporate statutory
tax rates effective after 2017, we had remeasured our deferred tax assets effective December 31, 2017 where appropriate.
We
regularly assess the likelihood that our deferred tax assets will be recovered in the future. In accordance with accounting rules,
a valuation allowance is recorded to the extent we conclude a deferred tax asset is not considered to be more-likely-than-not
to be realized. We consider all positive and negative evidence related to the realization of the deferred tax assets in assessing
the need for a valuation allowance. If we determine it is more-likely-than-not that we will not realize all or part of our deferred
tax assets, an adjustment to the deferred tax asset will be charged to earnings in the period such determination is made.
Our
income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items
that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position
in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based
solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized
as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
Treasury
Stock.
Our repurchases of shares of common stock are recorded at cost as treasury stock and are presented as a reduction of
shareholders’ equity. When treasury shares are reissued, we use a last-in, first-out method, and the difference between
repurchase cost and fair value at reissuance is treated as an adjustment to equity.
Stock-Based
Compensation.
Stock-based compensation awards classified as equity awards are measured at fair value at the date of grant
and expensed over their vesting or service periods. We also have stock appreciation rights outstanding which are considered liability
awards as the settlement of these awards, if they were to vest, would be in cash. If these awards were determined to be probable
of achieving its stock price conditions and revenue performance conditions, we would record the estimated fair value of such awards
as a liability and re-measure their estimated value each reporting period. The performance targets were not met for the outstanding
stock appreciation rights (“SARs”) and will be subsequently canceled.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions
used in the valuation model are supported primarily by historical indicators and current market conditions. Expected volatilities
are based on historical volatility of our stock and are calculated using the historical weekly close rate for a period of time
equal to the expected term. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant. We use historical data and management judgment to estimate option exercise and employee termination
activity within the valuation model. The expected term of stock options granted is based on historical data and represents the
period of time that stock options granted are expected to be outstanding. It is calculated on an aggregated basis and estimated
based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior. In determining
the expected term, we consider the vesting period of the awards, the contractual term of the awards, historical average holding
periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of these factors.
The dividend yield, if applicable, is based on the latest dividend payments made on or announced by the date of the grant. Forfeitures
are estimated based on historical experience and current demographics. See Note 8 -
Stock-Based Compensation
for further
information regarding stock-based compensation.
Income
(Loss) per Common Share.
Basic income (loss) per common share is calculated using the weighted average number of shares outstanding
during the year. Unvested restricted stock and treasury shares are excluded from the calculation of basic weighted average number
of common shares outstanding. Once restricted stock vests, it is included in our common shares outstanding.
Diluted
income (loss) per common share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect
of our stock-based compensation plans using the “treasury stock” method. Since the exercise price of our stock options
is greater than the average market price of the Company’s common stock for the period, we did not include dilutive common
equivalent shares for these instruments in the computation of diluted income (loss) per common share because the effect would
be anti-dilutive. See Note 3 -
Income (Loss) per Common Share
for our calculation of weighted average basic and diluted
shares outstanding.
Adoption
of New Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”)
2014-09 (“Topic 606”) Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements
in Accounting Standards Codification Topic 605 Revenue Recognition (“Topic 605”) and requires entities to recognize
revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to
which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we adopted Topic 606 using
the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting
periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue
to be reported in accordance with our historic accounting under Topic 605. Topic 606 only applied to the Nexsan Business, which
is reflected in discontinued operations.
In
January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which
revises the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation
of certain fair value changes for financial liabilities measured at fair value. ASU No. 2016-01 also amends certain disclosure
requirements associated with the fair value of financial instruments. The guidance requires the fair value measurement of investments
in equity securities and other ownership interests in an entity, including investments in partnerships, unincorporated joint ventures
and limited liability companies (collectively, equity securities) that do not result in consolidation and are not accounted for
under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities
will no longer be able to recognize unrealized holding income and losses on equity securities they classify under current
guidance as available for sale in other comprehensive income (“OCI”). They also will no longer be able to use the
cost method of accounting for equity securities that do not have readily determinable fair values. Instead, for these types of
equity investments that do not otherwise qualify for the net asset value practical expedient, entities will be permitted to elect
a practicability exception and measure the investment at cost less impairment plus or minus observable price changes (in orderly
transactions). ASU No. 2016-01 also establishes an incremental recognition and disclosure requirement related to the presentation
of fair value changes of financial liabilities for which the fair value option (“FVO”) has been elected. Under this
guidance, an entity would be required to separately present in OCI the portion of the total fair value change attributable to
instrument-specific credit risk as opposed to reflecting the entire amount in earnings. For derivative liabilities for which the
FVO has been elected, however, any changes in fair value attributable to instrument-specific credit risk would continue to be
presented in net income, which is consistent with current guidance. This standard is effective beginning January 1, 2018 via a
cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily
determinable fair values which is applied prospectively. The Company adopted this ASU in the first quarter of 2018 and there was
no material impact to its consolidated results of operations and financial condition.
In
November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance on the classification and presentation
of restricted cash in the statement of cash flows. Under ASU No. 2016-18, changes in restricted cash and restricted cash equivalents
would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no
longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition,
a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes
more than one line item for cash/equivalents and restricted cash/equivalents. For the Company, this ASU became effective January
1, 2018 and entities were required to apply the standard’s provisions on a retrospective basis. The Company adopted this
ASU in the first quarter of 2018 and there was no material impact to its consolidated statements of cash flows.
In
March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost, which amends the requirements related to the presentation of the components of net periodic benefit cost for an
entity’s sponsored defined benefit pension and other postretirement plans. This ASU requires entities to (1) disaggregate
the current-service-cost component from the other components of net benefit cost (the “other components”) and present
it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere
in the income statement and outside of income from operations if such a subtotal is presented. In addition, only service costs
are eligible for capitalization. The standard was effective in fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company retrospectively adopted ASU No. 2017-07 during the first quarter of 2018. The adoption
of ASU 2017-07 resulted in the reclassification of ($2.9) million and $1.4 million of the Company’s net periodic pension
cost, other than service cost, from “Selling, general and administrative” into “Other income (expense), net”
in the Condensed Consolidated Statements of Operations for the twelve months ended December 31, 2018 and 2017, respectively.
In
February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU No. 2018-03 clarify
certain aspects of the guidance issued in ASU No. 2016-01 and are effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years beginning after June 15, 2018. The Company adopted this ASU in the third quarter
of 2018 and there was no material impact to its consolidated results of operations and financial condition.
New
Accounting Pronouncements to Be Adopted
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 will be effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. A modified retrospective transition approach is required for lessees with capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
The Company does not expect this standard to have a material effect on its consolidated financial statements.
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 fiscal years, and interim periods
within those years, beginning after December 31, 2018; however, public business entities are allowed to early adopt the amendments
of ASU 2018-02 in any interim period for which the financial statements have not yet been issued. The amendments of this ASU may
be applied either at the beginning of the period (annual or interim) of adoption or retrospectively to each of the period(s) in
which the effect of the change in the U.S. federal corporate tax rate in the Tax Reform Act is recognized. The Company does not
expect this standard to have a material effect on its consolidated financial statements.
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. The Company does not expect this standard to have a material effect on its consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions
Made. The ASU applies to entities that receive or make contributions, which primarily are not-for-profit entities but also affects
business entities that make contributions. In the context of business entities that make contributions, the FASB clarified that
a contribution is conditional if the arrangement includes both a barrier for the recipient to be entitled to the assets transferred
and a right of return for the assets transferred (or a right of release of the business entity’s obligation to transfer
assets). The recognition of contribution expense is deferred for conditional arrangements and is immediate for unconditional arrangements.
The ASU requires modified prospective transition to arrangements that have not been completed as of the effective date or that
are entered into after the effective date, but full retrospective application to each period presented is permitted. For the Company,
the ASU is effective as of January 1, 2019. The Company does not expect this standard to have a material impact on its consolidated
financial statements.
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. The Company does not expect this standard to have a material impact on its
consolidated financial statements.
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 non-lease
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. The Company does not expect this standard to have a material impact on its consolidated
financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates,
amends, and adds disclosure requirements for fair value measurements. The amended and new disclosure requirements primarily relate
to Level 3 fair value measurements. For the Company, the ASU is effective as of January 1, 2020. The removal and amendment of
certain disclosures may be early adopted with retrospective application while the new disclosure requirements are to be applied
prospectively. As this ASU relates only to disclosures, there will be no impact to the Company’s consolidated results of
operations and financial condition.
In
August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which makes minor
changes to the disclosure requirements related to defined benefit pension and other postretirement plans. The ASU requires a retrospective
transition approach. For the Company, the ASU is effective as of January 1, 2021. As this ASU relates only to disclosures, there
will be no impact to the Company’s consolidated results of operations and financial condition.
Note
3 — Income (Loss) per Common Share
The
following table sets forth the computation of the weighted average basic and diluted income (loss) per share:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(8.7
|
)
|
|
$
|
(2.3
|
)
|
Income
(loss) from discontinued operations, net of income taxes
|
|
|
12.8
|
|
|
|
(6.1
|
)
|
Net
income (loss)
|
|
$
|
4.1
|
|
|
$
|
(8.4
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average number of diluted shares outstanding during the period - basic and diluted
|
|
|
5.1
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common
share attributable to GlassBridge common shareholders — basic and diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(1.71
|
)
|
|
$
|
(0.49
|
)
|
Discontinued
operations
|
|
|
2.51
|
|
|
|
(1.30
|
)
|
Net
income (loss)
|
|
$
|
0.80
|
|
|
$
|
(1.79
|
)
|
Anti-dilutive shares
excluded from calculation
|
|
|
0.1
|
|
|
|
0.3
|
|
Note
4 — Discontinued Operations
The
NXSN Sale
Background
of Sale
On
August 16, 2018, the Company completed the disposition of its entire interest in the Nexsan Business, as described herein.
On
August 16, 2018, we simultaneously acquired all of the capital stock of NXSN Acquisition Corp. (together with its subsidiaries,
“NXSN”) from Humilis Holdings Private Equity LP f/k/a Spear Point Private Equity LP (“Humilis”) and sold
all of the capital stock of the Nexsan Group (as defined herein)(collectively the “NXSN Sale”) to StorCentric, Inc.
(the “Buyer”), a newly-incorporated Delaware company affiliated with Drobo, Inc., a Delaware corporation (“Drobo”)
for $5,675,000. As previously reported, NXSN owned all of the issued and outstanding shares of capital stock (the “Nexsan
Shares”) of Nexsan Corporation, a Delaware corporation (“Nexsan”); and Nexsan owns all of the outstanding capital
stock of the following companies: Nexsan Technologies Limited, an England and Wales entity (“Nexsan UK”), Nexsan Technologies
Incorporated, a Delaware corporation (“Nexsan US”), Connected Data, Inc., a California corporation (“Connected
Data”), 6360319 Canada Inc and 6360246 Canada Inc, Canadian corporations (“First Canadian Entity”
and collectively with Nexsan UK, Nexsan US, Connected Data, the “Direct Subsidiaries”); and First Canadian Entity
owns all of the outstanding capital stock of Nexsan Technologies Canada, Inc., a Canadian corporation (“Nexsan Canada”
and collectively with the Second Canadian Entity, the “Indirect Subsidiaries” and the Indirect Subsidiaries collectively
with the Direct Subsidiaries and Nexsan, the “Nexsan Group”).
Prior
to the NXSN Sale, we owned fifty percent of the common stock of NXSN and a Senior Secured Convertible Note of NXSN dated January
23, 2017 (the “NXSN Note”) in the original principal amount of $25,000,000 which Note was declared in default on November
14, 2017. The NXSN Note is secured in favor of the Company by that certain Guaranty and Security Agreement dates as of January
23, 2017 by and among NXSN, Nexsan, the Company and the other participants thereto (the “NXSN Security Agreement”)
pursuant to which inter alia Nexsan, Connected Data and Nexsan US, collectively, had guaranteed the obligations of NXSN under
the NXSN Note (collectively, the “Nexsan Guaranty”). We had pledged the NXSN Note as security for that certain GlassBridge
Enterprises, Inc. Secured Promissory Note dated September 28, 2017 (the “GlassBridge Note”) issued in favor of IOENGINE,
LLC, a Delaware limited liability company(“IOENGINE”) in the original principal amount of $4,000,000 pursuant to that
certain Pledge Agreement dated September 28, 2017 by and between the Company and IOENGINE (the “GlassBridge Pledge Agreement”),
in connection with the settlement of litigation with IOENGINE.
The
Company had acquired from Connected Data a Promissory Note dated May 15, 2015 made by Drobo initially in favor of Connected Data
(including the related along, the “Drobo Note”).
Description
of Sale and Material Agreements
As
the first step in the NXSN Transaction, the Company caused NXSN to enter into an Exchange Agreement dated as of August 16, 2018
with Humilis (the “NXSN-Humilis Agreement”) pursuant to which NXSN agreed to grant Humilis an option to purchase the
Nexsan Shares (the “Share Option”), equal to an aggregate of 140,000,500 shares of NXSN common stock and 5,600,000
shares of NXSN preferred stock, as set forth in an assignable Option Agreement dated as of an even date with the NXSN-Humilis
Agreement (the “Option Agreement”) in exchange, inter alia, for the transfer to the Company of all of Humilis’
equity interests in NXSN.
Such
Option Agreement was then assigned to Humilis Holdings LLC, an affiliate of Humilis, which, in turn, assigned the Option Agreement
to Buyer pursuant to an Assignment of Contract by and between Humilis Holdings LLC and Buyer (the “Buyer-Humilis Assignment”),
after which Buyer exercised the Share Option in accordance with the terms of the Option Agreement by entering into that certain
Stock Purchase Agreement, dated August 16, 2018 (the “SPA”), by and among StorCentric, Inc., as Buyer, NXSN, as Seller,
and the Company as Parent, contemplating gross proceeds in the amount of $5,675,000 (the “SPA Gross Proceeds”).
Subject
to the terms and conditions of the SPA and the ancillary agreements referred to in the SPA (the “Ancillary Agreements”)
(i) the Company and NXSN caused the Nexsan Guaranty and all encumbrances on the Nexsan Shares and the assets and business of Nexsan
and the Nexsan Subsidiaries, including under the NXSN Security Agreement to be released, (ii) NXSN transferred all right, title
and interest in and to the Nexsan Shares to Buyer free and clear of all encumbrances, (iii) Buyer paid off any and all amounts
due and owing under the GlassBridge Note out of the purchase price otherwise payable to NXSN in accordance with that certain Pre-Pay
Agreement dated as of August 13, 2018 by and among IOENGINE, the Company and Scott McNulty (the “IOENGINE Pre-Payment Agreement”),
being Two Million Two Hundred Fifty Thousand Dollars ($2,250,000; (iv) in accordance with that certain Settlement Agreement and
Mutual Release dated August 10, 2018 entered into inter alia, by NXSN, Nexsan US and Humilis (the “NTI A/R Settlement Agreement”)
regarding the Receivables Litigation (as defined in the SPA), Nexsan US paid the Payment (as defined therein); (v) Buyer paid
NXSN the Consideration described in the SPA to NXSN as payment in full for the purchase of the Shares, (vi) the Company delivered
a certification that the original signed Drobo Note cannot be located (with appropriate indemnities) to Buyer and the Drobo Note
was deemed to be cancelled, and (vii) all obligations of the Nexsan and the Nexsan Subsidiaries toward the Company or NXSN (other
than the obligations under the SPA) were extinguished.
The
SPA also provided for the placement in an Escrow Account $650,000 of the Consideration (the “Escrowed Funds”) to be
held as a possible source of indemnification by NXSN and the Company for any indemnifiable costs or liabilities arising within
18 months of the NXSN Transaction. The Company does not believe any of the Escrowed Funds should be used; and should therefore
be remitted to the Company on or about February 16, 2020.Furthermore, The SPA provided for the working capital adjustment toward
the SPA Gross Proceeds based on the difference between the actual working capital on July 31, 2018 and the working capital target.
Upon
deducting the Escrowed Funds and payment made to IOENGINE pursuant to the IOENGINE Pre-Payment Agreement from the SPA Gross Proceeds,
the Company received a cash payment of Two Million Seven Hundred Seventy-five Thousand Dollars ($2,775,000.00) in connection with
the SPA.
The
foregoing is a summary of the NXSN Transaction and is qualified in its entirety by reference to the Company’s Current Report
on Form 8-K, filed with the Securities and Exchange Commission as of August 16, 2018.
The
Legacy Businesses
In
September 2015, the Company adopted a restructuring plan (the “Restructuring Plan”) approved by the Board of Directors
of the Company (the “Board”) which began the termination process of our Legacy Businesses. Strategically, our Board
and management determined that there was not a viable plan to make the Legacy Businesses successful and, accordingly, we began
to aggressively wind down these businesses in an accelerated manner via the Restructuring Plan. On January 4, 2016, the Company
closed on the sale of its Memorex trademark and receivables associated with two associated trademark licenses to DPI Inc., a St.
Louis-based branded consumer electronics company for $9.4 million. The Restructuring Plan also called for the aggressive rationalization
of the Company’s corporate overhead and focused on reducing our operating losses. As of December 31, 2016, the wind-down
of our Legacy Businesses was substantially complete. We have effectively terminated all employees associated with our Legacy Businesses
and ceased all operations, including revenue-producing activities. As of December 31, 2018, we have substantially collected all
our outstanding receivables and settled all of our outstanding payables associated with these businesses.
On
December 28, 2018, GlassBridge entered into a Purchase Agreement with Hilco IP Services LLC d/b/a Hilco Streambank, a Delaware
limited liability company as purchaser (the “Purchaser”), whereby Purchaser would acquire GlassBridge’s right,
title and interest in and to certain IPv4 internet protocol addresses for an aggregate purchase price of $950,000 (the “Address
Purchase Agreement”) to be held in escrow subject to the subsequent sale of the IPv4 addresses. On February 15, 2019, GlassBridge
and Purchaser entered into a Letter Agreement to complete the transactions contemplated in the Address Purchase Agreement (the
“Letter Agreement”). Pursuant to the terms of the Letter Agreement: (1) GlassBridge (i) delivered an executed bill
of sale to Purchaser, (ii) delivered ten (10) blank signed American Registry for Internet Numbers (“ARIN”) Officer
Attestation Forms (the “ARIN Forms’) to Purchaser and (iii) designated Purchaser or Purchaser’s designee, as
applicable, as a point of contact on GlassBridge’s ARIN accounts as necessary; and (2) Purchaser instructed the escrow agent
to release $750,000 to GlassBridge, with $200,000 to remain in escrow.
Results
of Discontinued Operations
The
operating results for the Legacy Businesses and the Nexsan Business are presented in our Consolidated Statements of Operations
as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these
businesses that were eliminated from our ongoing operations.
The
key components of the results of discontinued operations were as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Net revenue
|
|
$
|
24.8
|
|
|
$
|
36.8
|
|
Cost
of goods sold
|
|
|
13.7
|
|
|
|
20.0
|
|
Gross profit
|
|
|
11.1
|
|
|
|
16.8
|
|
Selling, general and
administrative
|
|
|
8.1
|
|
|
|
24.7
|
|
Research and development
|
|
|
2.4
|
|
|
|
8.1
|
|
Intangible impairment
|
|
|
—
|
|
|
|
2.7
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
3.8
|
|
Restructuring and other
|
|
|
(3.8
|
)
|
|
|
(21.8
|
)
|
Other
net expense
|
|
|
(1.7
|
)
|
|
|
2.1
|
|
Income (loss) from
discontinued operations, before income taxes
|
|
|
6.1
|
|
|
|
(2.8
|
)
|
Gain on sale of discontinued
businesses, before income taxes
|
|
|
6.4
|
|
|
|
—
|
|
Income
tax (provision) benefit
|
|
|
0.3
|
|
|
|
(3.3
|
)
|
Income
(loss) from discontinued businesses, net of income taxes
|
|
$
|
12.8
|
|
|
$
|
(6.1
|
)
|
Net
income of discontinued operations for year ended December 31, 2018 increased by $18.9 million compared to the year ended December
31, 2017 mainly due to the income on the sale of the Nexsan Business of $6.4 million, lower selling, general and
administrative, research and development and tax expenses, restructuring and other income of $3.8 million primarily related
to a $1.9 million gain related to a final early payment of the IOENGINE Note and $1.0 million from the sale of internet
protocol addresses with the Address Purchase Agreement. The restructuring amount in the year ended December 31, 2017 primarily
included a settlement of the CMC and IOENGINE lawsuits and other customer and vendor balances. Restructuring and other also includes
the net loss attributable to noncontrolling interest of $0.6 million for the year ended December 31, 2018 and $10.2 million or
the year ended December 31, 2017. These amounts were reclassified to discontinued operations due to the sale of the Nexsan Business
in the period ending September 30, 2018.
The
depreciation and amortization expenses recorded as part of income (loss) from discontinued operations (included in selling, general
and administrative and research and development expenses in table above) were $0.3 and $2.0 million for the year ended
December 31, 2018 and 2017, respectively.
Lease
expense recorded as part of income (loss) from discontinued operations (included in selling, general and administrative expenses
in table above) were $0.5 million and $1.1 million for the years ending December 31, 2018 and 2017, respectively. This expense
was related to the Nexsan Business and the Company is no longer obligated under the lease, since Nexsan was sold.
The
income tax (provision) benefit related to discontinued operations was $0.3 million and ($3.3) million for the years ended December
31, 2018 and 2017, respectively. See Note 10 -
Income Taxes
for additional information.
Current
assets of discontinued operations of $2.4 million as of December 31, 2018 included $0.7 million of accounts receivable, $1.0 million
related to the funds held in escrow for the Address Purchase Agreement and $0.7 million of other current assets. Current
assets of discontinued operations as of December 31, 2017 of $11.5 million included $5.8 million of accounts receivable, $3.5
million of inventory, $2.2 million of other current assets. The decrease of the current assets in 2018 was primarily due to the
divestiture of the Nexsan Business.
Current
liabilities of discontinued operations of $4.6 million as of December 31, 2018 included $1.7 million of accounts payable, $1.0
million due to CMC, and $2.2 million of other current liability amounts. Current liabilities of discontinued operations of $20.2
million as of December 31, 2017 included $7.2 million of deferred revenue, accounts payable of $6.7 million, $0.7 million of customer
credit and rebate accruals and $5.6 million of other current liabilities. The decrease of the current liabilities in 2018 was
primarily due to the divestiture of the Nexsan Business.
Other
liabilities of discontinued operations of $2.2 million as of December 31, 2018 included $0.5 million of withholding
tax, $0.6 million of tax contingencies, and $1.1 million of other liabilities. Other liabilities of discontinued
operations of $13.6 million as of December 31, 2017 included $4.1 million due to IOENGINE, $1.0 million due to CMC, $1.0 million
of withholding tax, $0.9 million of tax contingencies and $6.6 million of other liabilities, which is mostly related to the Nexsan
Business. See Note 15 -
Litigation, Commitments and Contingencies
for additional information on the CMC and IOENGINE settlements.
Note
5 — Supplemental Balance Sheet Information
Additional
supplemental balance sheet information is provided below.
Other
assets as of December 31, 2018 and December 31, 2017 include a $4.0 million strategic investment in equity securities, which is
consistent with our stated strategy of exploring a diverse range of new strategic asset management business opportunities for
our portfolio. We account for such investments under the cost method of accounting. In addition, other assets as of December 31,
2018 include a $1.1 million minimum tax refund, escrowed funds related to the NXSN sale of $0.7 million and $0.3 million of other
assets. Other assets as of December 31, 2017 also include a $2.1 million minimum tax refund and $0.3 million of other assets.
Other
current liabilities (included as a separate line item in our Consolidated Balance Sheets) include the following:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Accrued
payroll
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
Levy accruals
|
|
|
0.3
|
|
|
|
5.6
|
|
Pension minimum contributions
|
|
|
1.9
|
|
|
|
—
|
|
Other
current liabilities
|
|
|
0.7
|
|
|
|
1.4
|
|
Total
other current liabilities
|
|
$
|
3.1
|
|
|
$
|
7.6
|
|
Other
liabilities as of December 31, 2018 include pension liabilities of $23.0 million and other liabilities of $0.7 million. Other
liabilities as of December 31, 2017 include pension liabilities of $24.3 million and other liabilities of $0.9 million. See Note
9 -
Retirement Plans
for additional information on pension liabilities.
Note
6 — Intangible Assets
Intangible
Assets
Intangible
assets as of December 31, 2017 consist of intangible assets acquired when we closed the Capacity and Services Transaction with
Clinton on February 2, 2017. The Capacity and Services Transaction allows for GBAM to place up to $1 billion of investment capacity
under Clinton’s management within Clinton’s quantitative equity strategy for an initial term of five years, for which
the Company issued to Clinton’s affiliate Madison Avenue Capital Holdings, Inc. 1,250,000 shares of its common stock as
consideration. We recorded the 1,250,000 shares of common stock issued as an intangible asset and calculated a fair value of $10.1
million using our closing stock price on February 2, 2017. We are amortizing the $10.1 million on a straight-line basis over the
five-year term. See Note 16 -
Related Party Transactions
for additional information.
In
2018, our fund underperformed, and our only third-party investor redeemed its investment in the second quarter. During
an investor earnings call on November 13, 2018, we informed shareholders that “In light of recent underperformance in the
overall quantitative space and resultant headwinds, we are currently conducting a complete business review. This involves all
areas of our business including implementing cost-reduction programs, evaluating the viability of certain initiatives as well
as pursuing strategic transactions that can complement or supplement our existing businesses.”
In
the fourth quarter, after our internal business review and deliberations the management team decided to temporarily close the
GlassBridge Quantitative Equity Fund to save operating costs. The decision was discussed in a board meeting on November 28, 2018.
While the Company will continue to pursue the quantitative fund business in Asia and Europe, the decision to temporarily close
the fund had a significant impact on the asset management business’ revenue projection. This resulted in a triggering event
which required us to review our intangible asset for impairment.
In
assessing recoverability of the intangible assets, we compared the carrying amount of the intangible asset with its estimated
fair value with fair value calculated using estimated undiscounted future cash flows. The fair value of the intangible is zero.
Consequently, we recorded a full impairment charge of $6.3 million for the net remaining intangible assets balance related to
the Clinton Capacity transaction in the fourth quarter of 2018.
The
following table presents the remaining intangible assets balance as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Cost
|
|
$
|
—
|
|
|
$
|
10.1
|
|
Accumulated
amortization
|
|
|
—
|
|
|
|
(1.9
|
)
|
Intangible
assets, net
|
|
$
|
—
|
|
|
$
|
8.2
|
|
The
following table presents the changes in intangible assets:
|
|
Intangible
Assets
|
|
|
|
(In
millions)
|
|
December 31, 2017
|
|
$
|
8.2
|
|
Amortization
|
|
|
(1.9
|
)
|
Impairment
charges
|
|
|
(6.3
|
)
|
December 31, 2018
|
|
$
|
—
|
|
Amortization
expense from continuing operations for intangible assets consisted of the following:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Amortization
expense
|
|
$
|
1.9
|
|
|
$
|
1.9
|
|
Based
on the intangible assets in service as of December 31, 2018, estimated amortization expenses for each of the next five years ending
December 31 is as follows:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
|
|
(In
millions)
|
|
Amortization
expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note
7 — Restructuring and Other Expense
Restructuring
expenses generally include severance and related charges, lease termination costs and other costs related to restructuring programs.
Employee-related severance charges are largely based upon distributed employment policies and substantive severance plans. Generally,
these charges are reflected in the period in which the Board approves the associated actions, the actions are probable,
and the amounts are estimable which may occur prior to the communication to the affected employee(s). This estimate considers
all information available as of the date the financial statements are issued.
Restructuring
and Other Expense
The
components of our restructuring and other expense for our continuing operations included in our Consolidated Statements of Operations
were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Restructuring Expense:
|
|
|
|
|
|
|
|
|
Severance
and related
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
Other
(1)
|
|
|
—
|
|
|
|
(1.9
|
)
|
Total
restructuring
|
|
$
|
0.2
|
|
|
$
|
(1.2
|
)
|
Other Expense:
|
|
|
|
|
|
|
|
|
Pension
settlement/curtailment (Note 9)
|
|
$
|
—
|
|
|
$
|
1.1
|
|
German
levy settlement (Note 15)
|
|
|
(5.0
|
)
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
(0.1
|
)
|
Total
other
|
|
$
|
(5.0
|
)
|
|
$
|
1.0
|
|
Total
|
|
$
|
(4.8
|
)
|
|
$
|
(0.2
|
)
|
(1)
For the year ended December 31, 2017, other includes $1.5 million net income from an asset sale and $0.4 million
reversal of other employee costs. We have considered these costs to be attributable to our corporate activities and, therefore,
they are not part of our discontinued operations.
Restructuring
Accruals
The
restructuring accrual balance was $0.1 million and $0.0 million as of December 31, 2018 and 2017, respectively.
Note
8 — Stock-Based Compensation
Stock
compensation consisted of the following:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Stock
compensation expense
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
We
have stock-based compensation awards outstanding under four plans (collectively, the Stock Plans). We have stock options outstanding
under our 2000 Stock Incentive Plan (2000 Incentive Plan) and 2005 Stock Incentive Plan (2005 Incentive Plan), and we have stock
options and restricted stock outstanding under our 2008 Stock Incentive Plan (2008 Incentive Plan). We have stock options, restricted
stock and SARs outstanding under our 2011 Stock Incentive Plan (2011 Incentive Plan). Restricted stock granted and stock option
awards exercised are issued from our treasury stock. The purchase of treasury stock is discretionary and will be subject to determination
by our Board of Directors each quarter following its review of our financial performance and other factors.
No
further shares are available for grant under the 2000 Incentive Plan, the 2005 Incentive Plan or the 2008 Incentive Plan. Stock-based
compensation awards issued under these plans generally have terms of ten years and, for employees, vest over a four-year period.
Awards issued to directors under these plans become fully exercisable on the first anniversary of the grant date. Stock options
granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal to the
fair value of the Company’s stock on the date of grant. As of December 31, 2018, there were 10,802 stock-based compensation
awards outstanding that were issued under these plans and consist of stock options and restricted stock.
The
2011 Incentive Plan was approved and adopted by our shareholders on May 4, 2011 and became effective immediately. The 2011 Incentive
Plan was amended and approved by our shareholders on May 8, 2013. The 2011 Incentive Plan permits the grant of stock options,
SARs, restricted stock, restricted stock units, dividend equivalents, performance awards, stock awards and other stock-based awards.
The aggregate number of shares of our common stock that may be issued under all stock-based awards made under the 2011 Incentive
Plan is 934,300. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustments
as provided in the 2011 Incentive Plan for stock splits, stock dividends, recapitalization and other similar events. Awards may
be granted under the 2011 Incentive Plan until the earlier to occur of May 3, 2021 or the date on which all shares available for
awards under the 2011 Incentive Plan have been granted; provided, however, that incentive stock options may not be granted after
February 10, 2021.
Stock-based
compensation awards issued under the 2011 Incentive Plan generally have a term of ten years and, for employees, vest over a three-year
period. Awards issued to directors under this plan become fully exercisable on the first anniversary of the grant date. Stock
options granted under these plans are not incentive stock options. Exercise prices of awards issued under these plans are equal
to the fair value of the Company’s stock on the date of grant.
As
of December 31, 2018, we had 41,956 of stock-based compensation awards consisting of stock options and restricted stock
outstanding under the 2011 Incentive Plan. As of December 31, 2018, there were 288,295 shares available for grant under our 2011
Incentive Plan.
Stock
Options
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions
used in the valuation model are supported primarily by historical indicators and current market conditions. Volatility was calculated
using the historical weekly close rate for a period of time equal to the expected term. The risk-free rate of return was determined
by using the U.S. Treasury yield curve in effect at the time of grant. The expected term was calculated on an aggregated basis
and estimated based on an analysis of options already exercised and any foreseeable trends or changes in recipients’ behavior.
In determining the expected term, we considered the vesting period of the awards, the contractual term of the awards, historical
average holding periods, stock price history, impacts from recent restructuring initiatives and the relative weight for each of
these factors. The dividend yield was based on the latest dividend payments made on or announced by the date of the grant.
The
weighted average assumptions used in the valuation of options are not applicable for the years ended December 31, 2018 and 2017
as no options were granted over this time.
|
|
|
2018
|
|
|
|
2017
|
|
Volatility
|
|
|
N/A
|
|
|
|
N/A
|
|
Risk-free
interest rate
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected life (months)
|
|
|
N/A
|
|
|
|
N/A
|
|
Dividend
yield
|
|
|
N/A
|
|
|
|
N/A
|
|
The
following table summarizes our stock option activity:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Outstanding December 31, 2016
|
|
|
286,706
|
|
|
$
|
77.51
|
|
|
|
3.8
|
|
Canceled
|
|
|
(71,400
|
)
|
|
|
80.23
|
|
|
|
|
|
Forfeited
|
|
|
(25,841
|
)
|
|
|
16.42
|
|
|
|
|
|
Outstanding December 31, 2017
|
|
|
189,466
|
|
|
$
|
84.81
|
|
|
|
1.8
|
|
Canceled
|
|
|
(166,708
|
)
|
|
|
84.96
|
|
|
|
|
|
Outstanding December 31, 2018
|
|
|
22,758
|
|
|
$
|
83.67
|
|
|
|
0.2
|
|
Exercisable as of December 31,
2017
|
|
|
22,758
|
|
|
$
|
83.67
|
|
|
|
0.2
|
|
No
options were granted during the years ended December 31, 2018 and 2017. The aggregate intrinsic value of all outstanding stock
options was $0.0 million as of December 31, 2018 and 2017. There were no options exercised in 2018 or 2017.
Total
stock-based compensation expense associated with stock options related to continuing operations recognized in our Consolidated
Statements of Operations for the years ended December 31, 2018 and 2017 was $(0.3) million and 0.1 million, respectively. As of
December 31, 2018, there was no unrecognized compensation expense related to outstanding stock options.
No
related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2018 or 2017.
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, 2016
|
|
|
79,925
|
|
|
$
|
20.64
|
|
Granted
|
|
|
206,666
|
|
|
|
3.36
|
|
Vested
|
|
|
(5,404
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
(67,205
|
)
|
|
|
22.84
|
|
Nonvested as of December 31, 2017
|
|
|
213,982
|
|
|
$
|
3.53
|
|
Granted
|
|
|
160,146
|
|
|
|
1.13
|
|
Vested
|
|
|
(298,136
|
)
|
|
|
1.68
|
|
Forfeited
|
|
|
(45,992
|
)
|
|
|
4.86
|
|
Nonvested as of December 31, 2018
|
|
|
30,000
|
|
|
$
|
7.03
|
|
Of
the restricted stock granted during the years ended December 31, 2018 and 2017, none of the shares were performance-based.
The
total fair value of shares that vested during the years 2018 and 2017 was $0.5 million and $0.1 million, respectively.
Total
stock-based compensation expense associated with restricted stock relating to continuing operations recognized in our Consolidated
Statements of Operations for the years ended December 31, 2018 and 2017 was $0.3 million and $(0.2) million, respectively. This
expense would result in a related tax benefit of $0.1 million and taxes of $0.1 million for the years ended December 31, 2018
and 2017, respectively. However, these tax benefits are included in the U.S. deferred tax assets which are subject to a full valuation
allowance and due to the valuation allowance, we did not recognize the related tax benefit in 2018 or 2017. As of December 31,
2018, there was $0.1 million of total unrecognized compensation expense related to outstanding restricted stock. That expense
is expected to be recognized over a weighted average period of 1.2 years.
No
related stock-based compensation was capitalized as part of an asset for the years ended December 31, 2018 or 2017.
Stock
Appreciation Rights (SARs)
The
following table summarizes our stock appreciation rights activity:
|
|
Stock
Appreciation Rights
|
|
Outstanding as of December 31, 2016
|
|
|
209,962
|
|
Granted
|
|
|
—
|
|
Canceled
|
|
|
(138,526
|
)
|
Outstanding as of December 31, 2017
|
|
|
71,436
|
|
Granted
|
|
|
—
|
|
Canceled
|
|
|
(71,436
|
)
|
Outstanding as of December 31,
2018
|
|
|
—
|
|
The
Company did not grant any SARs for the years ended December 31, 2018 and 2017. During the year ended December 31, 2015, we granted
0.3 million SARs under the 2011 Incentive Plan to certain employees associated with our former Nexsan and IronKey operations.
These awards expired on December 31, 2017 and could only vest if both stock price and revenue performance conditions specified
by the terms of the SARs were met. As of December 31, 2018, and 2017, we had not recorded any compensation expense associated
with these SARs based on the applicable accounting rules. The stock price and performance conditions were not met for the outstanding
SARs and such SARs were canceled.
Note
9 — Retirement Plans
Pension
Plans
We
have various non-contributory defined benefit pension plans covering employees in the United States (the “U.S. plan”)
and Germany (the “German plan”) employed prior to January 1, 2010. Total pension expense was $0.5 million and $0.8
million in 2018 and 2017, respectively. The measurement date of our pension plans is December 31st. We contributed $0.8 million
to our worldwide pension plans related to the plan year ending December 31, 2018. Traditionally, the Company has made contributions
consistent with the funding requirements of the plan and which are set forth in applicable benefits laws and local tax laws. The
Company did not, however, make required contributions of $2.1 million that were due in 2018 and are recorded as other current
liabilities. In addition to the foregoing, the Company did not make a required contribution of approximately $0.4 million, which
was due on January 15, 2019. The Company did not make the required payments due to pending discussions with the Pension Benefit
Guaranty Corporation (“PBGC”) in which the Company is discussing potential options seeking relief of funding obligations.
If the Company does not receive any relief from the PBGC, approximately $4.5 million in contributions would be required to fund
the pension plan in the next twelve months. There is, and can be no guaranty, that the Company will receive relief from the PBGC.
Effective
January 1, 2010, the U.S. plan was amended to exclude new hires and rehires from participating in the plan. In addition, we eliminated
benefit accruals under the U.S. plan as of January 1, 2011, thus “freezing” the defined benefit pension plan. Under
the plan freeze, no pay credits were made to a participant’s account balance after December 31, 2010. However, interest
credits will continue in accordance with the annual update process.
For
the U.S. plan, employees who have completed three years or more of service, including service with 3M Company before July 1, 1996,
or who have reached age 65, are entitled to pension benefits beginning at normal retirement age (65) based primarily on employees’
pay credits and interest credits. Through December 31, 2009, pay credits were made to each eligible participant’s account
equal to six percent of that participant’s eligible earnings for the year. Beginning on January 1, 2010 and through December
31, 2010, pay credit contributions were reduced to three percent of each participant’s eligible earnings. In conjunction
with the plan freeze, no additional pay credits were made to a participant’s account balance after December 31, 2010. A
monthly interest credit is made to each eligible participant’s account based on the participant’s account balance
as of the last day of the preceding year. The interest credit rate is established annually and is based on the interest rate of
certain low-risk debt instruments. The interest credit rate was 2.80 percent for 2018. In accordance with the annual update process,
the interest credit rate will be 3.36 percent for 2019.
In
connection with actions taken under our announced restructuring programs, the number of employees accumulating benefits under
our pension plan in the United States continues to decline. Participants in our U.S. plan have the option of receiving cash lump
sum payments when exiting the plan, which a number of participants exiting the plan have elected to receive. Lump sum payments
in 2017 exceeded the service and interest costs associated with that year. As a result, a partial settlement event occurred in
that year and, accordingly, we recognized a settlement loss of $1.1 million during the year ended 2017. This settlement loss is
included in restructuring and other in our Consolidated Statements of Operations.
The
U.S. plan permits four payment options: a lump-sum option, a life income option, a survivor option or a period certain option.
The
benefit obligations and plan assets, changes to the benefit obligations and plan assets, and the funded status of the defined
benefit pension plans were as follows:
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning
of year
|
|
$
|
63.7
|
|
|
$
|
64.9
|
|
|
$
|
26.8
|
|
|
$
|
24.1
|
|
Interest cost
|
|
|
2.2
|
|
|
|
2.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Actuarial (gain) loss
|
|
|
(2.0
|
)
|
|
|
2.5
|
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
Benefits paid
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
Settlement payments
|
|
|
(1.8
|
)
|
|
|
(3.7
|
)
|
|
|
—
|
|
|
|
—
|
|
Foreign exchange
rate changes
|
|
|
—
|
|
|
|
—
|
|
|
|
(1.3
|
)
|
|
|
3.4
|
|
Projected benefit
obligation, end of year
|
|
$
|
59.6
|
|
|
$
|
63.7
|
|
|
$
|
24.6
|
|
|
$
|
26.8
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning
of year
|
|
$
|
48.8
|
|
|
$
|
49.8
|
|
|
$
|
17.5
|
|
|
$
|
15.2
|
|
Actual return on plan assets
|
|
|
(2.2
|
)
|
|
|
4.8
|
|
|
|
0.3
|
|
|
|
1.1
|
|
Foreign exchange rate changes
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.8
|
)
|
|
|
2.1
|
|
Company contributions
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
—
|
|
|
|
0.1
|
|
Benefits paid
|
|
|
(2.5
|
)
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
|
|
(1.0
|
)
|
Settlement payments
|
|
|
(1.8
|
)
|
|
|
(3.7
|
)
|
|
|
—
|
|
|
|
—
|
|
Fair value of
plan assets, end of year
|
|
|
43.1
|
|
|
|
48.8
|
|
|
|
16.0
|
|
|
|
17.5
|
|
Funded status
of the plan, end of year
|
|
$
|
(16.5
|
)
|
|
$
|
(14.9
|
)
|
|
$
|
(8.6
|
)
|
|
$
|
(9.3
|
)
|
Amounts
recognized in our Consolidated Balance Sheets consisted of the following:
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Current liabilities
|
|
|
(2.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Noncurrent liabilities
|
|
|
(14.4
|
)
|
|
|
(14.9
|
)
|
|
|
(8.6
|
)
|
|
|
(9.3
|
)
|
Accumulated other comprehensive loss
— pre-tax
|
|
|
—
|
|
|
|
18.9
|
|
|
|
8.9
|
|
|
|
9.8
|
|
Pre-tax
amounts recognized in accumulated other comprehensive loss consisted of the following:
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
Net
actuarial loss
|
|
$
|
21.8
|
|
|
$
|
18.9
|
|
|
$
|
8.9
|
|
|
$
|
9.8
|
|
Total
|
|
$
|
21.8
|
|
|
$
|
18.9
|
|
|
$
|
8.9
|
|
|
$
|
9.8
|
|
The
following table includes information for pension plans with an accumulated benefit obligation in excess of plan assets.
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Projected benefit obligation,
end of year
|
|
$
|
59.6
|
|
|
$
|
63.7
|
|
|
$
|
24.6
|
|
|
$
|
26.8
|
|
Accumulated benefit obligation, end
of year
|
|
|
59.6
|
|
|
|
63.7
|
|
|
|
24.6
|
|
|
|
26.8
|
|
Plan assets at fair value, end of year
|
|
|
43.1
|
|
|
|
48.8
|
|
|
|
16.0
|
|
|
|
17.5
|
|
Components
of net periodic pension cost included the following:
|
|
United
States
|
|
|
Germany
|
|
|
|
Years
Ended December 31,
|
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Interest cost
|
|
|
2.1
|
|
|
|
2.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Expected return on plan assets
|
|
|
(3.1
|
)
|
|
|
(3.3
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
Amortization
of net actuarial loss
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.4
|
|
Net
periodic pension cost (credit)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
Settlements and
curtailments
|
|
|
—
|
|
|
|
1.1
|
|
|
|
—
|
|
|
|
—
|
|
Total pension
cost
|
|
$
|
(0.6
|
)
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
The
German plan is the only remaining international plan and incurred pension costs of $0.1 million and $0.2 million for the years
ended December 31, 2018 and 2017, respectively.
The
estimated net actuarial loss, prior service credit and net obligations at transition for the defined benefit pension plans that
will be amortized from accumulated other comprehensive loss into net periodic benefit costs in 2019 are a $0.8 million loss, $0.0
million and $0.0 million, respectively.
Assumptions
used to determine benefit obligations were as follows:
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
4.25
|
%
|
|
|
3.50
|
%
|
|
|
1.7
|
%
|
|
|
1.56
|
%
|
Rate of compensation increase
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Assumptions
used to determine net periodic benefit costs were as follows:
|
|
United
States
|
|
|
Germany
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
3.5
|
%
|
|
|
4.00
|
%
|
|
|
1.7
|
%
|
|
|
1.56
|
%
|
Expected return on plan assets
|
|
|
6.5
|
%
|
|
|
6.50
|
%
|
|
|
3.5
|
%
|
|
|
3.50
|
%
|
Rate of compensation increase
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
The
discount rate for the U.S. plan is determined through a modeling process utilizing a customized portfolio of high-quality bonds
whose annual cash flows cover the expected benefit payments of the plan, as well as comparing the results of our modeling to other
corporate bond and pension liability indices. Appropriate benchmarks are used to determine the discount rate for the international
plans. The expected long-term rate of return on assets assumption is derived from a study conducted by our actuaries and investment
managers that includes a review of anticipated future long-term performance of individual asset classes and consideration of the
appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings
expected on the funds invested to provide for the pension plan benefits. While the study considers recent fund performance
and historical returns, the assumption is primarily a long-term, prospective rate. The expected long-term rate of return on assets
assumption for the German plan reflects the investment allocation and expected total portfolio returns specific to that plan and
country. Beginning in 2011, the projected salary increase assumption was not applicable for the U.S. plan due to the elimination
of benefit accruals as of January 1, 2011. Beginning in 2016, it was no longer applicable for the German plan.
The
mortality table for the U.S. plan used the RP 2014 Mortality Table adjusted and projected with the MP-2018 Improvement Scale for
December 31, 2018.
The
plans’ asset allocations by asset category were as follows:
|
|
United
States
|
|
|
International
|
|
|
|
As
of December 31,
|
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Short-term investments
|
|
|
12
|
%
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Fixed income securities
|
|
|
27
|
%
|
|
|
27
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Equity securities
|
|
|
61
|
%
|
|
|
72
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Insurance contracts
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
For
the U.S. plan, we maintain target allocation percentages among various asset classes based on an investment policy established
for the plan, which is designed to achieve long-term objectives of return, while mitigating against downside risk and considering
expected cash flows. The current target asset allocation includes equity securities at 65 percent, fixed income securities at
25 percent and other investments of 10 percent. Other investments include short-term investments and absolute return strategy
funds which are investments designed to achieve a certain return. Management reviews our U.S. investment policy for the plan at
least annually. Outside the U.S., the investment objectives are similar to the U.S., subject to local regulations. In some countries,
a higher percentage allocation to fixed income securities is required.
As
of December 31, 2018, the following reflects estimated future benefit payments in each of the next five years and in the aggregate
for the five years thereafter:
|
|
United
States
|
|
|
International
|
|
|
|
(In
millions)
|
|
2019
|
|
$
|
14.5
|
|
|
$
|
1.0
|
|
2020
|
|
|
4.0
|
|
|
|
1.0
|
|
2021
|
|
|
4.4
|
|
|
|
1.1
|
|
2022
|
|
|
4.0
|
|
|
|
1.1
|
|
2023
|
|
|
4.3
|
|
|
|
1.1
|
|
2022-2026
|
|
|
17.3
|
|
|
|
5.6
|
|
The
assets in our defined benefit pension plans are measured at fair value on a recurring basis (at least annually). A three-level
hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability
as of the measurement date.
Following
is a description of the valuation methodologies used for assets measured at fair value.
Short-term
investments.
The carrying value of these assets approximates fair value because maturities are generally less than three months.
Accordingly, these investments are classified as Level 1 financial instruments.
Mutual
funds.
Investments in mutual funds are valued using the net asset value (“NAV”) of shares held as of December
31st. The NAV is a quoted transactional price for participants in the fund which do not represent an active market. In relation
to these investments, there are no unfunded commitments and the shares can be redeemed on a daily basis with minimal restrictions.
Events that may lead to a restriction to transact with the funds are not considered probable. The investment objective of our
mutual funds in the U.S. Plan is to provide capital appreciation through an investment strategy that allocates its assets among
limited liability companies and/or separate investment accounts or to invest in large cap equity funds focusing on high quality
yields through short maturity investments in spread sectors depending on the fund.
Common
stocks.
Investments in common stock are valued at the closing price reported on major markets on which the individual securities
are traded. Accordingly, these investments are classified as Level 1 financial instruments.
Comingled
trust funds.
These assets are valued using the NAV of shares as of December 31st. The NAV is a quoted transactional price
for participants in the fund which do not represent an active market. In relation to these investments, there are no unfunded
commitments and the shares can be redeemed on a daily basis with minimal restrictions. Events that may lead to a restriction to
transact with the funds are not considered probable. The Fund’s investment objective is to achieve long-term growth primarily
by investing in a diversified portfolio of equity securities of companies located in any country other than the United States.
Insurance
contracts
. These assets are valued using quoted prices for similar assets. Accordingly, these investments are classified as
Level 2 financial instruments.
These
methods may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair
values. Furthermore, while we believe the valuation methods are appropriate and consistent with other market participants, the
use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different
value measurement. Investments, in general, are subject to various risks, including credit, interest and overall market volatility
risks.
The
fair value of the plan assets by asset category were as follows:
United
States
|
|
December
31, 2018
|
|
|
Quoted
Prices
in Active
Markets for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
(In
millions)
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$
|
5.2
|
|
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US small cap core
*
|
|
|
1.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Large-cap growth
funds *
|
|
|
12.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Emerging markets
*
|
|
|
3.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
International growth fund *
|
|
|
9.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stocks
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commingled trust funds *
|
|
|
11.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
43.1
|
|
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
*
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value (NAV) per share (or
its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented
in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of
plan assets.
International
|
|
December
31, 2018
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
(In
millions)
|
|
Insurance contracts
|
|
|
16.0
|
|
|
|
—
|
|
|
|
16.0
|
|
|
|
—
|
|
Total
|
|
$
|
16.0
|
|
|
$
|
—
|
|
|
$
|
16.0
|
|
|
$
|
—
|
|
United States
|
|
December
31, 2017
|
|
|
Quoted
Prices
in Active Markets for Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
(In
millions)
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-cap growth
funds *
|
|
|
19.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
International growth fund *
|
|
|
15.7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common stocks
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
Commingled trust funds *
|
|
|
13.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
48.8
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
*
In accordance with ASC 820-10, certain investments that are measured at fair value using the net asset value (NAV) per share (or
its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented
in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of
plan assets.
International
|
|
December
31, 2017
|
|
|
Quoted
Prices
in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
(In millions)
|
|
Insurance
contracts
|
|
|
17.5
|
|
|
|
—
|
|
|
|
17.5
|
|
|
|
—
|
|
Total
|
|
$
|
17.5
|
|
|
$
|
—
|
|
|
$
|
17.5
|
|
|
$
|
—
|
|
Note
10 — Income Taxes
The
components of loss from continuing operations before income taxes were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
U.S.
|
|
$
|
(13.8
|
)
|
|
$
|
(8.0
|
)
|
International
|
|
|
5.0
|
|
|
|
—
|
|
Total
|
|
$
|
(8.8
|
)
|
|
$
|
(8.0
|
)
|
The
components of the income tax (provision) benefit from continuing operations were as follows:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
0.1
|
|
|
$
|
5.7
|
|
International
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
|
|
|
|
|
|
International
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
0.1
|
|
|
$
|
5.7
|
|
The
income tax provision from continuing operations differs from the amount computed by applying the statutory United States income
tax rate (21 percent) because of the following items:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Tax at statutory U.S. tax
rate
|
|
$
|
1.9
|
|
|
$
|
10.0
|
|
State income taxes, net of federal benefit
|
|
|
0.6
|
|
|
|
1.0
|
|
Net effect of international operations
|
|
|
(4.0
|
)
|
|
|
1.1
|
|
Federal rate reduction effect on deferred
tax assets
|
|
|
—
|
|
|
|
(104.9
|
)
|
Valuation allowances
|
|
|
30.8
|
|
|
|
91.8
|
|
Tax on unremitted earnings of foreign
subsidiaries
|
|
|
0.5
|
|
|
|
5.1
|
|
U.S. tax on foreign earnings
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Stock-based compensation
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
Net effect of subsidiary sale
|
|
|
(29.2
|
)
|
|
|
—
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
(1.4
|
)
|
Minimum tax credit refundable
|
|
|
0.1
|
|
|
|
2.1
|
|
Reclassification
to discontinued operations and other
|
|
|
(
0.1
|
)
|
|
|
2.0
|
|
Income tax (provision)
benefit
|
|
$
|
0.1
|
|
|
$
|
5.7
|
|
Tax
legislation from the Tax Cuts and Jobs Act (“Tax Reform Act”) passed on December 22, 2017 was incorporated into the
tax provision. The Tax Reform Act made broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing
the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on
certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from
foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign
corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits
can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible
interest expense; and (8) changing rules related to uses and limitations of net operating loss carryforwards created in tax years
beginning after December 31, 2017.
The
tax law change that had a significant impact on the Company’s 2018 and 2017 tax provision is the ability to realize minimum
tax credit carryovers as cash refunds, with the elimination of the corporate alternative minimum tax. A tax benefit of $2.1 million
was recorded in continuing operations in 2017 and was increased by another $0.1 in 2018 when the IRS announced a sequestration
reduction would not apply to the refund. The Company can expect the cash refunds to be received as follows after filing 2018 through
2021 corporate income tax returns: $1.1 million in 2019, $.5 million in 2020, and $.3 million in each of 2021 and 2022.
Tax
reform changes related to international subsidiaries did not impact the tax provision. The Deemed Repatriation Transition Tax
on previously untaxed accumulated and current earnings and profits of foreign subsidiaries, payable in installments, was zero
for the Company. This is because the calculation allows deficits of controlled subsidiaries to offset earnings of other controlled
subsidiaries, which resulted in a net deficit in unrepatriated earnings and therefore no tax. Any income inclusions in 2018 under
the Subpart F, GILTI and other international provisions do not affect the tax rate due to net operating loss carryovers.
Other
tax law changes affected financial statement presentation without a current tax impact. Tax laws require certain items to be included
in our tax returns at different times than the items are reflected in our results of operations. Some of these items are temporary
differences that will reverse over time. We record the tax effect of temporary differences as deferred tax assets and deferred
tax liabilities in our Consolidated Balance Sheets.
In
2018 and 2017 the net cash paid for income taxes, relating to both continuing and discontinued operations, was $0.4 million and
$0.0 million, respectively.
The
components of net deferred tax assets and liabilities were as follows:
|
|
As
of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Accounts receivable allowances
|
|
$
|
—
|
|
|
$
|
—
|
|
Inventories
|
|
|
—
|
|
|
|
1.9
|
|
Compensation and employee benefits
|
|
|
0.3
|
|
|
|
1.5
|
|
Tax credit carryforwards
|
|
|
22.2
|
|
|
|
23.9
|
|
Net operating loss carryforwards
|
|
|
167.1
|
|
|
|
190.9
|
|
Accrued liabilities and other reserves
|
|
|
0.2
|
|
|
|
2.1
|
|
Pension
|
|
|
6.8
|
|
|
|
6.7
|
|
Property, plant and equipment
|
|
|
—
|
|
|
|
(0.1
|
)
|
Intangible assets, net
|
|
|
2.5
|
|
|
|
0.3
|
|
Capital losses
|
|
|
9.5
|
|
|
|
9.4
|
|
Other, net
|
|
|
44.4
|
|
|
|
1.3
|
|
Total deferred tax assets
|
|
|
253.0
|
|
|
|
237.9
|
|
Valuation allowance
|
|
|
(253.0
|
)
|
|
|
(237.9
|
)
|
Net deferred
tax assets
|
|
|
—
|
|
|
|
—
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
—
|
|
Unremitted earnings
of foreign subsidiaries
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
Total deferred
tax liabilities
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Total deferred
tax liabilities
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
Net deferred
tax liabilities
|
|
$
|
(0.5
|
)
|
|
$
|
(1.0
|
)
|
We
regularly assess the likelihood that our deferred tax assets will be recovered in the future. A valuation allowance is recorded
to the extent we conclude a deferred tax asset is not considered more-likely-than-not to be realized. We consider all positive
and negative evidence related to the realization of the deferred tax assets in assessing the need for a valuation allowance.
Our
accounting for deferred tax consequences represents our best estimate of future events. A valuation allowance established or revised
as a result of our assessment is recorded through income tax provision in our Consolidated Statements of Operations. Changes in
our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and
results of operations.
We
maintain a valuation allowance related to our U.S. deferred tax assets and the majority of our foreign deferred tax assets. The
valuation allowance was $230.6 million and $237.9 million as of December 31, 2018 and 2017, respectively. The deferred tax asset
changes and corresponding valuation allowance changes in 2018 compared to 2017 were due primarily to Nexsan adjustments.
The
net deferred tax liability not offset by valuation allowance of $0.5 million relates to foreign tax withholding on unremitted
foreign earnings.
In
November 2015, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2015-17, Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes, which amends the guidance requiring companies to separate deferred income
tax liabilities and assets into current and non-current amounts in a classified statement of financial position. This accounting
guidance simplifies the presentation of deferred income taxes, such that deferred tax liabilities and assets be classified as
non-current in a classified statement of financial position. This determination is still required to be performed at a jurisdiction-by-jurisdiction
basis. This accounting guidance is effective for the Company beginning in the first quarter of 2017, but we elected to adopt this
guidance prospectively as of December 31, 2015. As a result, we classified all deferred tax liabilities and assets as non-current
in the Consolidated Balance Sheet at December 31, 2015. The table below shows the components of our deferred tax balances as they
are recorded on our Consolidated Balance Sheets:
|
|
As
of December 31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Deferred
tax liability - non-current
|
|
|
(0.5
|
)
|
|
|
(1.0
|
)
|
Total
|
|
$
|
(0.5
|
)
|
|
$
|
(1.0
|
)
|
Federal
net operating loss carryforwards totaling $611.6 million will begin expiring in 2029. The Company had analysis performed by outside
consultants to confirm that none of the federal net operating loss carryovers should be limited by Section 382. This limitation
could result if there is a more than 50 percent ownership shift in the GlassBridge shares within a three-year testing period.
No such ownership shift has occurred through December 31, 2018.
The
Company’s $609.0 million in federal net operating loss carryforwards generated through 2017 continue to be subject to the
historical tax rules that allow carryforward for 20 years from origin, with the ability to offset 100 percent of future taxable
income. The $2.6 million estimated net operating loss generated in 2018, and any future year tax losses, will be subject to the
Tax Reform Act limitations which, while having indefinite life, can offset only 80 percent of future taxable income.
We
have state income tax loss carryforwards of $323.6 million, which will expire at various dates up to 2037. We have U.S. and foreign
tax credit carryforwards of $21.3 million, $17.7 million of which will expire between 2019 and 2021, and the remainder of which
will expire between 2022 and 2032. Federal capital losses of $38.0 million will expire between 2019 and 2022. Of the aggregate
foreign net operating loss carryforwards totaling $67.5 million, $1.6 million will expire between 2019 and 2021, $43.7
million will expire at various dates up to 2027 and $22.2 million may be carried forward indefinitely.
Our
income tax returns are subject to review by various U.S. and foreign taxing authorities. As such, we record accruals for items
that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position
in the financial statements is that the position must be more-likely-than-not to be sustained by the taxing authorities based
solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized
as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In
Millions)
|
|
Beginning
Balance
|
|
$
|
0.9
|
|
|
$
|
1.3
|
|
Additions:
|
|
|
|
|
|
|
|
|
Additions for tax
positions of current years
|
|
|
—
|
|
|
|
—
|
|
Additions for tax
positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Reductions:
|
|
|
|
|
|
|
|
|
Reductions for tax
positions of prior years
|
|
|
—
|
|
|
|
—
|
|
Settlements with
taxing authorities
|
|
|
—
|
|
|
|
—
|
|
Reductions
due to lapse of statute of limitations
|
|
|
(0.3
|
)
|
|
|
(0.4
|
)
|
Total
|
|
|
0.6
|
|
|
|
0.9
|
|
The
total amount of unrecognized tax benefits as of December 31, 2018 was $0.6 million. If the unrecognized tax benefits remaining
at December 31, 2018 were recognized in our consolidated financial statements, $0.6 million would ultimately affect income tax
expense and our related effective tax rate.
It
is reasonably possible that the amount of the unrecognized tax benefits could increase or decrease significantly during the next
twelve months; however, it is not possible to reasonably estimate the effect on the unrecognized tax benefit at this time.
Our
federal income tax returns for 2015 through 2018 are subject to examination by the Internal Revenue Service. We currently have
foreign tax audits underway in various jurisdictions. Based on available information, the uncertain tax position associated with
these foreign audits have been assessed and included in our income tax provision. For state and foreign tax purposes, the statutes
of limitation vary by jurisdiction. With few exceptions, we are no longer subject to examination by foreign tax jurisdictions
or state and local tax jurisdictions for years before 2012.
Note
11 — Major Customers and Accounts Receivable
Major
customers are those customers that account for more than 10% of revenues or accounts receivable. Following the sale of the Nexsan
Business as described in Note 1 - Basis of Presentation, above, the Company does not have any revenue or accounts receivables
from customers in continuing operations as of December 31, 2018.
Note
12 — Fair Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or the exit price
in an orderly transaction between market participants on the measurement date. A three-level hierarchy is used for fair value
measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date.
Level 1 measurements consist of unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 measurements
include quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially
the full term of the asset or liability. Level 3 measurements include significant unobservable inputs. A financial instrument’s
level within the hierarchy is based on the highest level of any input that is significant to the fair value measurement. Following
is a description of our valuation methodologies used to estimate the fair value for our assets and liabilities.
Assets
and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The
Company’s non-financial assets such as goodwill, intangible assets and property, plant and equipment are recorded at fair
value when an impairment is recognized or at the time acquired in a business combination. The determination of the estimated fair
value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements.
As of December 31, 2018, there were no indicators that would require an impairment of intangible assets.
Assets
and Liabilities that are Measured at Fair Value on a Recurring Basis
The
Company measures certain assets and liabilities at their estimated fair value on a recurring basis, including cash and cash equivalents
and investments in trading securities (described further below under the “Trading Equity Securities” heading).
The
following table provides information by level for assets and liabilities that are measured at fair value on a recurring basis
for year ended December 31, 2018 and December 31, 2017:
Description
|
|
|
December 31, 2018
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
|
(In
millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Description
|
|
December
31, 2017
|
|
|
Quoted
Prices
in Active Markets for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
|
(In
millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
securities
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Trading
Equity Securities
On
February 8, 2016, the Company entered into a subscription agreement with Clinton Lighthouse Equity Strategies Fund (Offshore)
Ltd. (“Clinton Lighthouse”). Clinton Lighthouse is a market neutral fund which provides daily liquidity to its investors.
The short-term investment was classified as a trading security as we expect to be actively managing this investment at
all times with the intention of maximizing our investment returns. Income or loss including unrealized income and losses
associated with this trading security is recorded as a component of “Other income (expense), net” in our Consolidated
Statements of Operations and purchases or sales of this security are reflected as operating activities in our Consolidated Statements
of Cash Flows. As of December 31, 2018, the short-term investment balance in Clinton Lighthouse was $0.0 million compared
to $0.4 million as of December 31, 2017. The decrease of $0.4 million mainly relates to redemptions.
In
June 2017, we launched the GBAM Fund which focuses on technology-driven quantitative strategies and other alternative investment
strategies. The short-term investments within the GBAM Fund were classified as trading securities as we expect to be actively
managing the GBAM Fund at all times with the intention of maximizing our investment returns. Income or loss associated with these
trading securities is recorded as a component of “Net income from GBAM Fund activities” in our Consolidated
Statements of Operations and purchases or sales of these securities are reflected as operating activities in our Consolidated
Statements of Cash Flows. As of December 31, 2018, the short-term investment balance for the GBAM Fund was $0.0 million.
See Note 14 -
Business Segment Information and Geographic Data
for additional information.
In
connection with the adoption of ASU No. 2015-07, Fair Value Measurement (Topic 820), FASB Accounting Standards Codification 820
-
Fair Value Measurement and Disclosures
no longer requires investments for which fair value is determined based on practical
expedient reliance to be reported utilizing the fair value hierarchy. As of December 31, 2018, and 2017, our short-term
investments in Clinton Lighthouse and the GBAM Fund were fair valued using the NAV as practical expedient and has been removed
from the fair value hierarchy table above.
Other
Assets and Liabilities
The
carrying value of accounts receivable and accounts payable approximate their fair values due to the short-term duration of these
items.
Note
13 — Shareholders’ Equity
Treasury
Stock
On
May 2, 2012, our Board of Directors authorized a share repurchase program that allowed for the repurchase of 0.5 million shares
of common stock. On November 14, 2016, our Board authorized a new share repurchase program under which we may repurchase up to
0.5 million of our outstanding shares of common stock. This authorization replaces the Board’s previous share repurchase
authorization from May 2, 2012. Under the share repurchase program, we may repurchase shares from time to time using a variety
of methods, which may include open market transactions and privately negotiated transactions.
Since
the inception of the November 14, 2016 authorization, we have repurchased 65,915 shares of common stock for $0.3 million and,
as of December 31, 2018, we had authorization to repurchase 434,085 additional shares.
During
the year ended December 31, 2018, the Company purchased 13,879 of treasury shares for $13,575. During the year ended 2017, the
Company purchased 27,950 shares for $67,582. The treasury stock held as of December 31, 2018 was acquired at an average price
of $44.88 per share. The following is a summary of treasury share activity:
|
|
Treasury
Shares
|
|
Balance as of December 31, 2016
|
|
|
744,091
|
|
Purchases
|
|
|
27,950
|
|
Restricted stock
grants and other
|
|
|
(138,102
|
)
|
Balance as of December 31, 2017
|
|
|
633,939
|
|
Purchases
|
|
|
13,879
|
|
Restricted stock
grants and other
|
|
|
(97,516
|
)
|
Balance as of December 31, 2018
|
|
|
550,302
|
|
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss and related activity consisted of the following:
|
|
Defined
Benefit
Plans
|
|
|
Foreign
Currency Translation
|
|
|
Total
|
|
|
|
(In
millions)
|
|
Balance as of December 31, 2017
|
|
$
|
(18.2
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(18.9
|
)
|
Other comprehensive
(loss) income before reclassifications, net of tax
(1)
|
|
|
(2.9
|
)
|
|
|
0.7
|
|
|
|
(2.2
|
)
|
Amounts reclassified
from accumulated other comprehensive loss, net of tax
|
|
|
0.4
|
|
|
|
—
|
|
|
|
0.4
|
|
Net current period
other comprehensive income (loss)
|
|
|
(2.5
|
)
|
|
|
0.7
|
|
|
|
(2.2
|
)
|
Balance as of December 31, 2018
|
|
$
|
(20.7
|
)
|
|
$
|
—
|
|
|
$
|
(20.7
|
)
|
(1)
No income tax expense was recorded for liability adjustments for defined benefit plans for the year ended December 31, 2018.
During
the year ended December 31, 2018, the Company reclassified into discontinued operations $0.7 million of foreign currency translation
losses associated with our Nexsan Business, which was sold on August 16, 2018. As of December 31, 2018, the Company had no remaining
accumulated foreign currency translation losses in other comprehensive loss for which balances could be reclassified into the
Consolidated Statement of Operations in the future.
Details
of amounts reclassified from Accumulated other comprehensive loss and the line item in our Consolidated Statement of Operations
for the year ended December 31, 2018 are as follows:
|
|
Amounts
Reclassified from
Accumulated
Other
Comprehensive
Loss
|
|
|
Affected
Line Item in the Statement Where Net
Loss is Presented
|
|
|
(In
millions)
|
|
|
|
Amortization of net actuarial
loss
|
|
|
(2.9
|
)
|
|
Other Income (Expense)
|
Cumulative translation
adjustment
|
|
|
0.7
|
|
|
Other Income
(Expense)
|
Total reclassifications
for the period
|
|
$
|
(2.2
|
)
|
|
|
Income
taxes are not provided for foreign translation relating to permanent investments in international subsidiaries. Reclassification
adjustments are made to avoid double counting in comprehensive loss items that are also recorded as part of net loss and are presented
net of taxes in the Consolidated Statements of Comprehensive Loss.
382
Rights Agreement
On
August 6, 2015, the Board of Directors adopted a rights plan intended to avoid an “ownership change” within the meaning
of Section 382 of the Code, and thereby preserve the current ability of the Company to utilize certain net operating loss carryforwards
and other tax benefits of the Company and its subsidiaries (the “Tax Benefits”). If the Company experiences an “ownership
change,” as defined in Section 382 of Code, the Company’s ability to fully utilize the Tax Benefits on an annual basis
will be substantially limited, and the timing of the usage of the Tax Benefits and such other benefits could be substantially
delayed, which could therefore significantly impair the value of those assets. The rights plan is intended to act as a deterrent
to any person or group acquiring “beneficial ownership” of 4.9% or more of the Company’s outstanding shares
of common stock, without the approval of the Board. The description and terms of the Rights (as defined below) applicable to the
rights plan are set forth in the 382 Rights Agreement, dated as of August 7, 2015 (the “Rights Agreement”), by and
between the Company and Wells Fargo Bank, N.A., as Rights Agent.
As
part of the Rights Agreement, the Board authorized and declared a dividend distribution of one right (a Right) for each outstanding
share of the Company’s common stock, to stockholders of record at the close of business on September 10, 2015. Each Right
entitles the holder to purchase from the Company a unit consisting of one one-hundredth of a share (a “Unit”) of Series
A Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a purchase price
of $15.00 per Unit, subject to adjustment (the “Purchase Price”). Until a Right is exercised, the holder thereof,
as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in
respect of Rights.
Under
the Rights Agreement, an Acquiring Person is any person or group of affiliated or associated persons (a “Person”)
who is or becomes the beneficial owner of 4.9% or more of the outstanding shares of the Company’s common stock other than
as a result of repurchases of stock by the Company, dividends or distribution by the Company, stock issued under certain benefit
plans or certain inadvertent actions by stockholders. For purposes of calculating percentage ownership under the Rights Agreement,
outstanding shares of the Company’s common stock include all of the shares of common stock actually issued and outstanding.
Beneficial ownership is determined as provided in the Rights Agreement and generally includes, without limitation, any ownership
of securities a Person would be deemed to actually or constructively own for purposes of Section 382 of the Code or the Treasury
Regulations promulgated thereunder. The Rights Agreement provides that the following shall not be deemed an Acquiring Person for
purposes of the Rights Agreement: (i) the Company or any subsidiary of the Company and any employee benefit plan of the Company,
or of any subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant
to the terms of any such plan or (ii) any Person that, as of August 7, 2015, is the beneficial owner of 4.9% or more of the shares
of Common Stock outstanding (such Person, an “Existing Holder”) unless and until such Existing Holder acquires beneficial
ownership of additional shares of common stock (other than pursuant to a dividend or distribution paid or made by the Company
on the outstanding shares of common stock or pursuant to a split or subdivision of the outstanding shares of common stock) in
an amount in excess of 0.5% of the outstanding shares of common stock.
The
Rights Agreement provides that a Person shall not become an Acquiring Person for purpose of the Rights Agreement in a transaction
that the Board determines is exempt from the Rights Agreement, which determination shall be made in the sole and absolute discretion
of the Board, upon request by any Person prior to the date upon which such Person would otherwise become an Acquiring Person,
including, without limitation, if the Board determines that (i) neither the beneficial ownership of shares of common stock by
such Person, directly or indirectly, as a result of such transaction nor any other aspect of such transaction would jeopardize
or endanger the availability to the Company of the Tax Benefits or (ii) such transaction is otherwise in the best interests of
the Company.
Initially,
the Rights will not be exercisable and will be attached to all common stock representing shares then outstanding, and no separate
Rights certificates will be distributed. Subject to certain exceptions specified in the Rights Agreement, the Rights will separate
from the common stock and become exercisable and a distribution date (a “Distribution Date”) will occur upon the earlier
of (i) 10 business days (or such later date as the Board shall determine) following a public announcement that a Person has become
an Acquiring Person or (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a
tender offer, exchange offer or other transaction that, upon consummation thereof, would result in a Person becoming an Acquiring
Person.
Until
the Distribution Date, common stock held in book-entry form, or in the case of certificated shares, common stock certificates,
will evidence the Rights and will contain a notation to that effect. Any transfer of shares of common stock prior to the Distribution
Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred on the books
and records of the Rights Agent as provided in the Rights Agreement.
If
on or after the Distribution Date, a Person is or becomes an Acquiring Person, each holder of a Right, other than certain Rights
including those beneficially owned by the Acquiring Person (which will have become void), will have the right to receive upon
exercise common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to
two times the Purchase Price.
In
the event that, at any time following the first date of a public announcement that a Person has become an Acquiring Person or
that discloses information which reveals the existence of an Acquiring Person or such earlier date as a majority of the Board
becomes aware of the existence of an Acquiring Person (any such date, the Stock Acquisition Date), (i) the Company engages in
a merger or other business combination transaction in which the Company is not the surviving corporation, (ii) the Company engages
in a merger or other business combination transaction in which the Company is the surviving corporation and the common stock of
the Company is changed or exchanged or (iii) 50% or more of the Company’s assets, cash flow or earning power is sold or
transferred, each holder of a Right (except Rights which have previously been voided as set forth above) shall thereafter have
the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the Purchase Price.
At
any time following the Stock Acquisition Date and prior to an Acquiring Person obtaining shares that would lead to a more than
50% change in the outstanding common stock, the Board may exchange the Rights (other than Rights owned by such Person which have
become void), in whole or in part, for common stock or Preferred Stock at an exchange ratio of one share of common stock, or one
one-hundredth of a share of Preferred Stock (or of a share of a class or series of the Company’s preferred stock having
equivalent rights, preferences and privileges), per Right, subject to adjustment.
The
Rights and the Rights Agreement will expire on the earliest of (i) 5:00 P.M. New York City time on August 7, 2021, which was extended
by stockholder approval on June 18, 2018, pursuant to a Resolution of the Board of Directors at its Meeting on April 13, 2018,
(ii) the time at which the Rights are redeemed or exchanged pursuant to the Rights Agreement, (iii) the date on which the Board
determines that the Rights Agreement is no longer necessary for the preservation of material valuable Tax Benefits or is no longer
in the best interest of the Company and its stockholders, (iv) the beginning of a taxable year to which the Board determines that
no Tax Benefits may be carried forward and (v) the first anniversary of the adoption of the Agreement if stockholder approval
has not been received by or on such date.
At
any time until the earlier of the Distribution Date or the expiration date of the Rights, the Company may redeem the Rights in
whole, but not in part, at a price of $0.001 per Right. Immediately upon the action of the Board ordering redemption of the Rights,
the Rights will terminate and the only right of the holders of Rights will be to receive the $0.001 redemption price.
Note
14 — Business Segment Information and Geographic Data
The
Legacy Businesses and Nexsan Business are presented in our Consolidated Statements of Operations as discontinued operations and
are not included in segment results for all periods presented. See Note 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 16 -
Related Party Transactions
for additional information.
In
March 2017, ARRIVE was formed through a collaboration with Roc Nation, a full-service entertainment company founded by Shawn “JAY
Z” Carter, Primary Venture Partners (“Primary”) and GBAM. Primary will serve as a venture advisor and GlassBridge
will provide institutional and operational support. ARRIVE was created to invest alongside entrepreneurs and early stage businesses.
Among other things, ARRIVE has launched a traditional venture fund in order to, among other activities, support existing portfolio
companies through their subsequent growth stages and anticipates launching other special purpose investment vehicles to invest
in private equity transactions.
In
June 2017, we launched our first GBAM-managed investment fund (the “GBAM Fund”) which focuses on technology-driven
quantitative strategies and other alternative investment strategies. The fund initially performed in-line with the expectation
for 2017. However, we had a difficult time raising third-party capital due to the overall under-performance of the hedge fund
industry. In Q4, 2018, after our internal business review and deliberations,
We
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 December 31, 2018, 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 includes realized and unrealized income and losses for the GBAM Fund.
Net
revenue and operating loss from continuing operations by segment were as follows:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
|
|
|
(In
millions)
|
|
Net Revenue
|
|
|
|
|
|
|
|
|
Asset
Management Business
|
|
|
—
|
|
|
|
—
|
|
Total net revenue
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Years
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
|
Operating
loss from continuing operations
|
|
|
|
|
|
|
|
|
Asset
Management Business
|
|
|
(3.6
|
)
|
|
|
(4.3
|
)
|
Total segment operating
loss
|
|
|
(3.6
|
)
|
|
|
(4.3
|
)
|
Corporate and unallocated
|
|
|
(3.3
|
)
|
|
|
(4.6
|
)
|
Intangible impairment
|
|
|
(6.2
|
)
|
|
|
—
|
|
Restructuring
and other
|
|
|
4.8
|
|
|
|
0.2
|
|
Total operating
loss
|
|
|
(8.3
|
)
|
|
|
(8.7
|
)
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
—
|
|
Net income
(loss) from GBAM Fund activities
|
|
|
(0.9
|
)
|
|
|
1.2
|
|
Other
income (expense), net
|
|
|
0.5
|
|
|
|
(0.5
|
)
|
Loss
from continuing operations before income taxes
|
|
$
|
(8.8
|
)
|
|
$
|
(8.0
|
)
|
Restructuring
and other for the year ended December 31, 2018 includes severance costs of $0.2 million and a gain on the German levy settlement
of $5.0 million. Restructuring and other for the year ended December 31, 2017 primarily includes pension settlement costs of $1.1
million, severance costs of $0.7 million, offset by income on an asset sale of $1.5 million and reversal of employee costs
and other of $0.4 million. See Note 7 -
Restructuring and Other Expenses
for more information.
Note
15 — 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 December 31, 2018,
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 April 1, 2019, except as set forth below with respect to the IOENGINE settlement, 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.
On
December 31, 2014, IOENGINE, an NPE, filed suit in the District Court for the District of Delaware alleging infringement of United
States Patent No. 8,539,047 by certain products we formerly sold under the IronKey brand. On February 17, 2017, following a trial,
the jury returned a verdict against us in the patent infringement case brought by IOENGINE against the Company in the United States
District Court for the District of Delaware. The jury awarded the IOENGINE $11.0 million in damages. As previously disclosed in
the Current Report on Form 8-K we filed with the SEC on September 28, 2017, we entered into a settlement agreement with IOENGINE
on September 28, 2017 resolving all claims relating to the IOENGINE lawsuit. Pursuant to the settlement agreement, (i) we paid
IOENGINE $3.75 million in cash on October 3, 2017, (ii) issued to IOENGINE a promissory note (the “IOENGINE Note”)
in the principal amount of $4.0 million under which no payments are due until June 30, 2019 (except in connection with acceleration
upon an event of default), and (iii) we pledged certain of our assets to secure our obligations under the IOENGINE Note, notably
the NXSN Note. As described in Note 1 -
Basis of Presentation
, above, as part of the NXSN Transaction, the Company agreed,
pursuant to the terms of the Pre-Payment Agreement (as defined above), to prepay the GlassBridge Note (as defined above), originally
in the amount of Four Million Dollars ($4,000,000) plus interest over the period from June 30, 2019 through September 28, 2020,
for Two Million Two Hundred Fifty Thousand Dollars ($2,250,000).
On
May 6, 2016, Nexsan Technologies Incorporated, a subsidiary of NXSN (“NTI”), filed a complaint in United States District
Court for the District of Massachusetts seeking a declaratory judgment against EMC Corporation (“EMC”). NTI alleges
that NTI has a priority of right to use certain of its UNITY trademarks and that NTI’s prosecution of its trademark applications
with the respect to, and to use of, such trademarks does not infringe upon EMC’s trademarks. In addition, NTI seeks injunctive
relief to prevent EMC from threatening NTI with legal action related to use of UNITY trademarks or making any public statements
or statements to potential customers calling into question NTI’s right to use UNITY trademarks. EMC has answered and counterclaimed
alleging that NTI’s use of the UNITY trademark infringes EMC’s common law rights in the UNITY and EMC UNITY trademarks.
The United States District Court for the District of Massachusetts (USDC) has found (in an interlocutory ruling) that any prior
use by EMC was not sufficient to overcome NTI’s priority by virtue of its filing of its trademark applications. We are currently
seeking an order from the USDC compelling the Trademark Trial and Appeal Board of the United States Patent and Trademark Office
(TTAB) to proceed to determine the registrability of “Nexsan Unity” over EMC’s opposition, which the TTAB has
refused so far to do until the USDC proceeding is completely final. In connection with the NXSN Sale (see
The NXSN Sale -
Background
of Sale
above), pursuant to the terms of the SPA (as defined above), the Company conveyed to the Buyer (as defined above)
all right, title and interests in this action, including any rights to receive damages from EMC Corporation. As of this date,
the Company has no right, title or interest in this action.
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.
ICJ
was a defendant in a lawsuit in The Tokyo District Court, Civil 49th Division, brought against it by Suntop Art Work Co., Ltd.,
seeking damages of at least 100 Million Yen (approximately $900,000 at the current exchange rate) plus interest, based on allegations
that ICJ is in violation of a Japanese legal equitable principle requiring long-term business counterparties to provide a judicially-determined
adequate notice of cessation of business even when a shorter time has been agreed in writing by the parties. This case was settled
and dismissed in exchange for a payment by ICJ of 5 Million Yen (approximately $45,000 at the then current exchange rate) on June
11, 2018.
The
Company has various trade disputes with vendors related to either the Legacy Businesses or the Nexsan Business. 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. On February 27, 2019, the Company
settled the claim for a gross payment of $86,000.
On
November 21, 2018, the Company was served by forty-five former Imation employees who are asserting claims for unpaid severance
allegedly promised to them by the Company. The Plaintiffs allege that the Company promised them and other employees a severance
package that they claim is separate from severance under Imation’s discretionary ERISA severance plan called the Income Assistance
Plan. The case
has not been filed and no schedule
is set. We believe these state law claims are without merit and are vigorously defending our position. While an unfavorable
outcome is reasonably possible, an estimate of such loss cannot be made at this time.
IEBV
is the defendant in four separate lawsuits in trial courts in Versailles and Bordeaux, France, brought by former employees based
on the alleged failure to have provided them, in accordance with the French labor laws in effect at the time of their termination,
with employment opportunities elsewhere in the world commensurate with their abilities and positions prior to termination. The
plaintiffs in the IEBV lawsuits are seeking an aggregate of approximately $700,000. IEBV believes these claims are entirely without
merit and is vigorously defending its position. The Company believes it has made adequate accruals with respect to the disputes
for which such is appropriate according to our accounting policy.
The
Company had also received demand letters from three Nexsan former executives seeking severance payments in the amount of
approximately of $500,000 total. In connection with the SPA executed as part of the NXSN Transaction, the Company disclosed in
Section 2.7 of the Disclosure Schedules to such SPA all actions, orders, including proposed or threatened litigation, or any related
matters (together, the “Actions”) regarding Nexsan, including these claims. Pursuant to the terms of the SPA and the
NXSN Transaction, upon the consummation of the NXSN Transaction, the Company thereby divested itself of any obligations, liabilities,
right, title and/or interest in or to such Actions, including these claims, with the Buyer obtaining all obligations, liabilities,
right, title and/or interest in or to the Actions, including these claims.
Copyright
Levies
In
many European Union (“EU”) member countries, the sale of certain of our Legacy Business products is subject to a private
copyright levy. The levies are intended to compensate copyright holders with “fair compensation” for the harm caused
by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in
2002 (the “Directive”). Levies are generally charged directly to the importer of the product upon the sale of the
products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright
holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for
administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law-making
activities. On October 21, 2010, the Court of Justice of the European Union (the “CJEU”) ruled that fair compensation
is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states.
The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private
copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments
made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed
to be making private copies. Within this disclosure, we use the term “commercial channel sales” when referring to
products intended for uses other than private copying and “consumer channel sales” when referring to products intended
for uses including private copying. In addition, various decisions and enactments have established that the levy rates in various
countries improperly excluded from their calculations and assessments the private copying performed using computers and smartphones.
This in turn meant that to the extent levy rates were determined to be retroactively excessive, the Company would be entitled
to a rebate on that basis as well.
Since
the Directive was implemented in 2002, we estimate that we have paid in excess of $100 million in levies to various ongoing collecting
societies related to commercial channel sales. Based on the CJEU’s October 2010 ruling and subsequent litigation and law-making
activities, we believe that these payments were not consistent with the Directive and should not have been paid to the various
collecting societies. Accordingly, subsequent to the October 21, 2010 CJEU ruling, we began withholding levy payments to the various
collecting societies and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However,
we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions
except Italy and France due to certain court rulings in those jurisdictions. As of December 31, 2018, and December 31,
2017, we had accrued liabilities of $0.3 million and $5.6 million, respectively, associated with levies related to consumer
channel sales for which we are withholding payment. These accruals are recorded as “Other current liabilities” on
the Company’s Consolidated Balance Sheets (and not within discontinued operations). The Company’s management oversees
copyright levy matters and continues to explore options to resolve these matters.
Since
the October 2010 CJEU ruling, for as long as sales were made in these countries, we evaluated quarterly on a country-by-country
basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) whether accrued,
but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction
basis and considers ongoing and cumulative developments related to levy litigation and law-making activities within each
jurisdiction as well as throughout the EU.
The
Company is still subject to several pending or threatened legal actions by the individual European national levy collecting societies
in relation to private copyright levies under the Directive. These remaining actions generally seek payment of the commercial
and consumer optical levies withheld by IEBV and its German subsidiary. IEBV and its German subsidiary have corresponding claims
in those actions seeking reimbursement of levies improperly collected by those collecting societies. IEBV and its German subsidiary
are also subject to threatened actions by certain of their former customers seeking reimbursement of funds they allege related
to commercial levies that they claim they should not have paid. Although these actions are subject to the uncertainties inherent
in the litigation process, based on the information presently available to us, management does not expect the ultimate resolution
of these actions will have a material adverse effect on our financial condition, results of operations or cash flows. As noted
below with respect to France and the Netherlands, it is possible, and uncertain as to timing and amount, that by either settlement
or litigation, IEBV could recover materially significant amounts from the levy authorities or their government sponsors. We anticipate
that additional court decisions may be rendered that may directly or indirectly impact our levy exposure in specific European
countries which could cause us to review our levy exposure in those countries.
France
.
We have overpaid levies related to sales into the Company’s commercial channel in an amount of $55.1 million. We adopted
a practice of offsetting ongoing levy liability with the French collecting society for IEBV’s sales in the consumer channel
against the $55.1 million we have overpaid for copyright levies in France (due to us paying levies on commercial channels sales
prior to the October 21, 2010 CJEU ruling). During the fourth quarter of 2013, GlassBridge reversed $9.5 million of French copyright
levies (existing at the time of a 2013 French court decision) that arose from consumer channel sales that had been accrued but
not paid to cost of sales. As of December 31, 2017, we had offset approximately $14.4 million. We believe that we have utilized
a methodology, and have sufficient documentation and evidence, to fully support our estimates that we have overpaid $55.1 million
to the French collection society of levies on commercial channel sales and that we have incurred (but not paid) $14.4 million
of levies on consumer channel sales in France. However, such amounts are currently subject to challenge in court and there is
no certainty that our estimates would be upheld and supported. In December 2012, IEBV filed a complaint against the French collection
society, Copie France, for reimbursement of the $55.1 million in commercial channel levies that IEBV had paid prior to October
2010. A hearing occurred on December 8, 2015, in the High Court of Justice (Tribunal de Grande Instance de Paris (“TGIP”))
on IEBV’s claim and Copie France’s counterclaim. On April 8, 2016, the TGIP rejected all IEBV’s claims finding
that the European Union law arguments raised by IEBV were inapplicable and relied solely on French law to grant Copie France’s
counterclaims of approximately $17 million. On October 9, 2018, the Paris Court of Appeals affirmed the TGIP’s ruling in
favor of Copie France and against the Company. To appeal this ruling, the Company may be required to first pay the judgment in
the amount of approximately $17 million. We believe Copie France’s counterclaim is without merit and intend to defend IEBV’s
position vigorously. We are now preparing to appeal the France Supreme Court (Cours de Cassation) which is the final stage in
the process of reaching the CJEU. Despite these adverse rulings, the Company does not believe it to be probable that it will have
to make any copyright levy payments in the future to Copie France and, accordingly, has not recorded an accrual for this matter.
The likely outcome and time to reach a final resolution through the appellate process at the Cours de Cassation, which may include
the possibility of preliminary questions to the CJEU, remains unclear. We estimate, however, that an ultimate net recovery remains
reasonably foreseeable, which could be in the millions of dollars.
The
Netherlands
. IEBV is currently involved in pending litigation in the Netherlands, both as a sole complainant and a co-complainant
and counterparty, with Stichting de Thuiskopie (“Thuiskopie”) and the government of the Netherlands (“Dutch
State”) concerning disputed levies on optical media based on both improper levies on commercial channel sales and excessive
rates due to the exclusion of computer and smartphone and illegal copying. The Dutch State has reduced the levy rates based on
the exclusion theory but has as yet refused to apply the reduced rates retroactively for rebate purposes. Specifically, IEBV is
(A) the sole complainant in the action pending versus Thuiskopie and the Dutch State, originally identified as C/09/489719/HA
ZA 15-659 of the District Court of The Hague (the “IE Case”), and (B) a co-complainant in the case brought by the
association of vendors of similar products, originally identified as C/09/438914/HA ZA 13-264 (the “FIAR Case”). In
the IE Case, there has been an interlocutory ruling by the Dutch Supreme Court in IEBV’s favor; however, several important
issues and procedural steps remain. We estimate that eventual net recoveries could range between $5 million and $10 million, although
it is also possible that there will be no material recoveries. IEBV is only a small part, approximately 15%, of the plaintiff
group in the FIAR Case; however, the total amount sought by the plaintiffs therein may be as much as $100 million.
Germany
.
During the first quarter of 2015, GlassBridge reversed a $2.8 million accrual for German copyright levies on optical products
as the result of a favorable German court decision retroactively setting levy rates at a level much lower than the rates sought
by the German collecting society. The reversal was recorded as a reduction of cost of sales. In the fourth quarter of
2018, IEBV and its German subsidiary finalized a settlement agreement with the German collecting society that
resulted in mutual releases and a one-time payment by IEBV of 150,000 Euros. The Company recorded a benefit
in restructuring and other of $5 million in continuing operations and has an accrual for the settlement payment of 150,000 Euros
as of December 31, 2018.
Canada
.
The Canadian Private Copying Collective (“CPCC”) filed suit in the Ontario Superior Court against our subsidiary Imation
Enterprises Corp. (“IEC”) seeking damages of approximated CAD 1 million and penalties and interest of approximately
CAD 5 million. On September 29, 2017, after we provided discovery materials to the CPCC which we believe demonstrated that the
CPCC’s claims were entirely without merit, the CPCC declined to pursue the lawsuit further, issued to IEC a full and final
release of the claims underlying the lawsuit and the lawsuit was dismissed on October 4, 2017.
Litigation
Finance Agreement
On
May 21, 2018 (the “Signing Date”), IEBV entered into a litigation finance and management agreement (the “Litigation
Management Agreement”), effective as of May 1, 2018 (the “Effective Date”), with Mach 5 B.V., a company organized
under the laws of the Netherlands (“Mach 5”), relating to the Dutch Litigation and the French Litigation. Mach 5 and
its affiliates possess expertise and have an interest in the subject matter of the Dutch Litigation and the French Litigation.
Pursuant
to the Litigation Management Agreement, Mach 5 has agreed, as of the Effective Date, to assume the responsibility for paying IEBV’s
legal fees and expenses and managing the tactics and strategy of IEBV’s Dutch and French counsel relating to the Dutch Litigation
and the French Litigation and to pay fifty percent (50%) of the legal fees of IEBV’s Dutch counsel incurred from March 1,
2018 through the Effective Date. In addition, IEBV has agreed that Mach 5 will be entitled to receive the following percentages
of all amounts actually received by IEBV in the Dutch Litigation and French Litigation, whether by settlement or legal process
(net of any amounts payable to IEBV’s French counsel in respect of any contingent fee arrangement in effect on the Effective
Date):
|
●
|
Thirty
percent (30%) if received within one year after the Signing Date;
|
|
|
|
|
●
|
Twenty-seven
and one-half percent (27.5%) if received after one year after the Signing Date; and
|
|
|
|
|
●
|
Twenty-five
percent (25%) if received after two years after the Signing Date.
|
Neither
party to the Litigation Management Agreement will have the right to terminate it prior to the third anniversary date of the Signing
Date unless there is an uncured material breach of the agreement.
Indemnification
Obligations
In
the normal course of business, we periodically enter into agreements that incorporate general indemnification language. Performance
under these indemnities would generally be triggered by a breach of terms of the contract or by a supportable third-party claim.
There have historically been no material losses related to such indemnifications. As of December 31, 2018, and 2017, estimated
liability amounts associated with such indemnifications were not material.
Environmental
Matters
Our
Legacy Business operations and indemnification obligations resulting from our spinoff from 3M subject us liabilities arising from
a wide range of federal, state and local environmental laws. For example, from time to time we have received correspondence from
3M notifying us that we may have a duty to defend and indemnify 3M with respect to certain environmental claims such as remediation
costs. Environmental remediation costs are accrued when a probable liability has been determined and the amount of such liability
has been reasonably estimated. These accruals are reviewed periodically as remediation and investigatory activities proceed and
are adjusted accordingly. We did not have any environmental accruals as of December 31, 2018. Compliance with environmental regulations
has not had a material adverse effect on our financial results.
Operating
Leases
We
incur rent expense under operating leases, which primarily relate to office space. Most long-term leases include one or more options
to renew at the then fair rental value for a period of approximately one to three years. The following table sets forth the components
of net rent expense for the years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
(In
millions)
|
Minimum lease payments
|
|
$
|
0.1
|
|
|
$
|
0.
1
|
|
Contingent rentals
|
|
|
—
|
|
|
|
—
|
|
Total rental
expense, net
|
|
$
|
0.1
|
|
|
$
|
0.
1
|
|
The
Company does not have any long-term lease obligations as of December 31, 2018.
Sold
Accounts Receivable Litigation
As
noted above, following the NXSN Transaction, in the first quarter of 2017, Nexsan sold $1.2 million of its accounts receivable
to individuals introduced by or affiliated with Spear Point for a discounted purchase price of $1.1 million, subject to a right
to repurchase within five months of the original sale at the original sales price plus 2% interest per month. The accounts receivable
sale was recorded as a sale of financial assets under ASC 860. After exercising the remedies referred to above pursuant to the
NXSN Default Notice and the NXSN Exercise Notice, we were made aware that the proceeds of the sold accounts receivable may have
been either paid to Nexsan or cancelled or replaced by the account debtors. On June 15, 2018, a lawsuit was commenced in the 22nd
Judicial District Court for the Parish of St. Tammany, Louisiana, by two of the purchasers, Messrs. Mack and Romano, against a
number of defendants including NTI, NXSN and the Company, and seeking total damages in excess of $500,000, which lawsuit was removed
to the United States District Court for the Eastern District of Louisiana on July 10 (the “Receivables Litigation”).
As described in Note 1 - Basis of Presentation, above, as part of the NXSN Transaction: (i) NXSN, Nexsan US and Humilis entered
into the NTI A/R Settlement Agreement with Messrs. Mack and Romano and the Receivables Litigation was settled, and will be dismissed
with prejudice, in return for a payment to Messrs. Mack and Romano in the amount of Four Hundred Thousand Dollars ($400,000) and
(ii) the remaining Receivables Purchaser’s claim has been limited to any claim he might assert against parties not affiliated
with the Company.
Note
16 - Related Party Transactions
Barry
L. Kasoff serves as president of Realization Services, Inc. (“RSI”), a management consulting firm specializing in
assisting companies and capital stakeholders in troubled business environments. Mr. Kasoff also previously served as Chief Restructuring
Officer of the Company from November 2015 to September 2016 and a member of the Board from May 2015 to February 2017. Pursuant
to a consulting agreement between the Company and RSI dated August 17, 2015 and subsequent amendments, RSI performed consulting
services for the Company for the period from August 8, 2015 to March 30, 2016, including assisting the Company with a review and
assessment of the Company’s business and the formulation of a business plan to enhance shareholder value going forward.
On July 15, 2016, the Company entered into a consulting agreement with RSI to perform consulting services from July 18, 2016 through
August 14, 2016 with an option for a three-week extended term. Mr. Kasoff resigned from his position as the Company’s
Chief Restructuring Officer on September 8, 2016 and from the Board on February 2, 2017. In connection with the CMC settlement,
RSI received consulting fees of $0.6 million for the year ended December 31, 2017. These fees were recorded in restructuring and
other charges. See Note 15 -
Litigation, Commitments and Contingencies
for additional information.
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
short-term investment balance in Clinton Lighthouse decreased from $0.4 million as of December 31, 2017 to $0.0 million
as of December 31, 2018 due to redemptions during the period. Unrealized income for the year ended December 31, 2018 was
less than $0.1 million. We recorded the unrealized income (losses) within “Other income (expense), net” in
the Condensed Consolidated Statements of Operations. 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 Operating Officer pursuant to the terms of a Services Agreement we entered into with Clinton on
March 2, 2017 (the “Services Agreement”). The Services Agreement provides that Clinton will make available one of
its employees to serve as Chief Operating Officer of the Company, and any subsidiary of the Company we may designate from time
to time, as well as provide to GBAM, our investment adviser subsidiary, certain additional services. Pursuant to the terms of
the Services Agreement, we may request that Clinton designate a mutually agreeable replacement employee to serve as Chief Operating
Officer or terminate Clinton’s provision of an employee to us for such role. Under the Services Agreement, we have agreed
to pay Clinton $125,000 for an initial term concluding on May 31, 2017, which term will automatically renew unless terminated
for successive three-month terms at a rate of $125,000 per renewal term. If the Services Agreement is terminated prior to the
conclusion of a term, we will be reimbursed for the portion of the prepaid fee attributable to the unused portion of such term.
Clinton will continue to pay Mr. Strauss’s compensation and benefits and we have agreed to pay or reimburse Mr. Strauss
for his reasonable expenses. Pursuant to the terms of the Services Agreement, we have also agreed to indemnify Mr. Strauss, Clinton,
any substitute Chief Operating Officer and certain of their affiliates for certain losses. As of December 31, 2018, the Company
paid Clinton $1,000,000 million under the Services Agreement and recorded $500,000 and $416,668 within “Selling, general
and administrative” in our Condensed Consolidated Statements of Operations for year ended December 31, 2018 and 2017, respectively.
Clinton was paid a fee in the amount of $127,500 in October 2018 for transaction advisory services related to the Nexsan divestiture.
The Company did not pay another investment banker advisory fees for this transaction. The fee was recorded in current liabilities
of discontinued operations on the Condensed Consolidated Balance Sheet and in Discontinued Operations on our Condensed Consolidated
Statements of Operations for the period ending September 30, 2018.
Note
17 - Subsequent Events
On
January 1, 2019 GlassBridge entered into a Management Services Agreement with Clinton (the “Management Services Agreement”)
due to the closing of our Minnesota office. The Management Services Agreement engages Clinton to provide services for GlassBridge
to include: accounting and treasury services including bookkeeping, payment process, banking and assisting with tax and SEC filings;
managing the third party fund administrator, the custodian bank and the compliance firm; IT services including maintaining GlassBridge’s
central servers, data security, emails and end-user support: payroll and benefit services (including medical insurance) for GlassBridge
employees; and GlassBridge will pre-pay Clinton for these direct costs 5 days in advance: other administration services
as reasonably requested by GlassBridge. The Initial term will commence on January 1, 2019 and conclude six months after that date.
Thereafter, unless either party provides notice of nonrenewal to the other Party prior to the conclusion of the then current Initial
Term, the Agreement will automatically renew for the successive three calendar months. In exchange for the provision of services
and performance of services, GlassBridge will pay Clinton at the rate of $68,750 each quarter for the Initial Term and $68,750
each quarter for the renewal term. The Fees are payable in advance at the start of the Initial Term and each Renewal Term, if
any.
As previously disclosed
in a Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 13, 2018, on January 26, 2016,
CMC Magnetics Corporation (“CMS”), a supplier of certain of the Company’s divested 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 (altogether, the “CMC Litigation”). On September 15, 2017,
the Company and CMC entered into a settlement agreement (the “Settlement Agreement”) providing for the full, final
and complete global settlement of the CMC Litigation. 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. 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 payment of $325,000 was made on March 29, 2019.
On March 31, 2019,
the Company entered into a securities purchase agreement (the “IMN Capital 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”). 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 the European
Union (the “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 Imation Shares representing the Company’s
ownership interests in each of the Imation Subsidiaries (the “Subsidiary Sale”). Following the Subsidiary Sale, the
Imation Subsidiaries are no longer affiliates of the Company, and the Company has no interest in or to the Imation Subsidiaries
except as explicitly described in the IMN Capital Agreement. In consideration for the Subsidiary Sale, the Company shall receive
certain compensation from IMN Capital. As defined in the IMN Capital Agreement, a payment occurrence is the settlement or final
adjudication as to all demands, claims, counter-claims, cross-claims, third-party claims, damages, fees, costs and expenses, brought
and raised on any matters arising from or related to the Subsidiary Litigation (a “Payment Occurrence”). In connection
with the Subsidiary Sale, the purchase price furnished by IMN Capital to the Company (the “Purchase Price”) shall
consist of (i) one hundred dollars ($100.00) payable on the closing date of the IMN Capital Agreement and (ii) 75% of all net
proceeds from Subsidiary Litigation (which, for the avoidance of doubt, shall be calculated after the payment of (i) the retirement
of the Germany pension liability; (ii) contingency fees payable to attorneys engaged in connection with the Subsidiary Litigation;
(iii)fees payable to Mach 5, the litigation financing company and (iv) the payment of all applicable taxes including income taxes
in connection with the Subsidiary Litigation) (such payment, the “Contingent Payment”). The Company expects to record
one-time non-cash gain of approximately $12 million in connection with IMN Capital Agreement transaction in Q1, 2019.
On March 29, 2019,
the Board of Directors (the “Board”) of the Company appointed Daniel A. Strauss (“Mr. Strauss”) to serve
as the Chief Executive Officer (the “CEO”) of the Company in addition to his role as Chief Operating Officer (the
“COO”) of the Company, and appointed Francis Ruchalski (“Mr. Ruchalski” and together with Mr. Strauss
the “Executives”) to serve as the Chief Financial Officer (the “CFO”) of the Company, effective April
5, 2019. Mr. Strauss, age 34, has been the Chief Operating Officer of the Company since 2017, and a Portfolio Manager at Clinton
Group, Inc. (“Clinton”) since 2010 and will continue in such role following his appointment. Mr. Strauss has over
ten years of experience in corporate finance as a portfolio manager and investment analyst in private and public equity through
which he has developed a deep understanding of corporate finance and strategic planning activities. At Clinton, Mr. Strauss is
responsible for evaluating and executing private equity transactions across a range of industries. Post-investment, Mr. Strauss
is responsible for the ongoing management and oversight of Clinton’s portfolio investments. From 2008 to 2010, he worked
for Angelo, Gordon & Co. as a member of the firm’s private equity and special situations area. Mr. Strauss was previously
with Houlihan Lokey, where he focused on mergers and acquisitions from 2006 to 2008. Mr. Strauss has served on the boards of directors
of Pacific Mercantile Bancorp (NASDAQ: PMBC) from August 2011 until December 2015 and Community Financial Shares, Inc. (OTC: CFIS)
from December 2012 until its sale to Wintrust Financial Corporation in July 2015. Mr. Ruchalski, age 55, is currently the Chief
Financial Officer of Clinton, and has been employed by Clinton since 1997. Prior to joining Clinton, Mr. Ruchalski was an audit
manager with Anchin, Block & Anchin, LLP, a certified public accounting firm, from 1986 to 1997. Mr. Ruchalski’s responsibilities
while with Anchin, Block & Anchin LLP included client auditing and financial and taxation planning. Mr. Ruchalski holds a
bachelor of science in accounting from St. John’s University. The Executives will serve as our CEO and COO, and CFO respectively,
pursuant to the terms of that certain Amended and Restated Services Agreement (the “Amended MSA”) replacing in its
entirety that certain Services Agreement previously disclosed on a Current Report on Form 8-K dated as of March 6, 2017. Clinton
is an investment adviser registered with the U.S. Securities and Exchange Commission (the “Commission”) and a stockholder
of the Company. The Amended MSA provides that Clinton will make available certain of its employees to provide services to the
Company, including CEO services, to be provided by Mr. Strauss, COO services, to be provided by Mr. Strauss, and CFO services,
to be provided by Mr. Ruchalski (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” and together with the Executive Services,
the “MSA Services”). Clinton may at any time designate a substitute for Mr. Strauss, Mr. Ruchalski, or any other employee
providing any of the MSA Services, such substitute being mutually agreeable to each of the Company and Clinton. In consideration
for the MSA Services, the Company shall provide to Clinton a rate of $243,750 for the initial term, such initial term being the
first three (3) months following the execution date of the Amended MSA, and shall automatically renew for successive renewal terms
of three (3) calendar months, the fee for each renewal term being $243,750. Each of the Company or Clinton may terminate the Amended
MSA, for any reason, by transmitting five (5) days’ prior notice to the other party.
On March 29, 2019,
Danny Zheng (“Mr. Zheng”), the Company’s Chief Financial Officer and Interim Chief Executive Office submitted
his resignation from his positions with the Company. In connection with Mr. Zheng’s resignation, the Company together with
Mr. Zheng entered into certain separation agreement (the “Zheng Separation Agreement”). Pursuant to the terms of the
Zheng Separation Agreement, Mr. Zheng received a one-time cash severance payment in the amount $57,500, subject to any applicable
withholdings. In consideration of this payment, Mr. Zheng executed a general release on behalf of the Company, and waived any
other entitlements and benefits, including those described in that certain Employment Agreement entered into between Mr. Zheng
and the Company (f/k/a Imation Corp.) on April 26, 2016. Mr. Zheng’s final employment date with the Company will be April
5, 2019.