NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 — Basis of Presentation
GlassBridge
Enterprises, Inc. (“GlassBridge”, the “Company”, “we”, “us” or “our”) owns
and operates an asset management business through various subsidiaries.
The
interim Condensed Consolidated Financial Statements of GlassBridge are unaudited but, in the opinion of management, reflect all adjustments
necessary for a fair statement of financial position, results of operations, comprehensive loss and cash flows for the periods presented.
Except as otherwise disclosed herein, these adjustments consist of normal and recurring items. The results of operations for any interim
period are not necessarily indicative of full year results. The Condensed Consolidated Financial Statements and Notes are presented in
accordance with the requirements for Quarterly Reports on Form 10-Q and do not contain certain information included in our annual Consolidated
Financial Statements and Notes presented in accordance with the requirements of Annual Reports on Form 10-K.
The
interim Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, and entities
in which the Company owns or controls fifty percent or more of the voting shares or interest in such entity, and has the right to control.
The results of entities disposed of are included in the unaudited Condensed Consolidated Financial Statements up to the date of the disposal
and, where appropriate, these operations have been reflected as discontinued operations. All inter-company balances and transactions
have been eliminated in consolidation and, in the opinion of management, all adjustments necessary for a fair presentation have been
included in the interim results reported.
The
preparation of the interim Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Condensed Consolidated Financial
Statements and the reported amounts of revenue and expenses for the reporting periods. Despite our intention to establish accurate estimates
and use reasonable assumptions, actual results may differ from our estimates.
The
December 31, 2021 Condensed Consolidated Balance Sheet data were derived from the audited Consolidated Financial Statements, but do not
include all disclosures required by GAAP. This Form 10-Q should be read in conjunction with our Consolidated Financial Statements and
Notes included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the U.S. Securities and Exchange
Commission on March 31, 2022.
The
Company completed the disposition of its entire interest in SportBLX on December 30, 2021, and the operating results of the Sports Technology
Platform are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented. Our continuing
operations for each period presented represents our Asset Management Business as well as corporate expenses. Assets and liabilities directly
associated with our legacy Businesses and Nexsan Business and that are not part of our ongoing operations are included in other assets
and other investments.
Note
2 — New Accounting Pronouncements
The
Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting
Standards Board (“FASB”). ASUs not listed below were assessed and determined to be not applicable to the Company’s
consolidated results of operations and financial condition.
Adoption
of New Accounting Pronouncements
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 was effective as of January 1, 2021. As this ASU relates only to disclosures, there was no impact
to the Company’s consolidated results of operations and financial condition.
Note
3 — Loss per Common Share
Basic
income per common share is calculated using the weighted average number of shares outstanding for the period. Unvested restricted stock
and treasury shares are excluded from the calculation of weighted average number of common shares outstanding in all cases. Once restricted
stock vests, it is included in our common shares outstanding.
Diluted
income per common share is computed on the basis of the weighted average shares outstanding plus the dilutive effect of our stock-based
compensation plans, using the “treasury stock” method. Since the exercise price of our stock options is greater than the
average market price of the Company’s common stock for the period, we did not include dilutive common equivalent shares for these
instruments in the computation of diluted net income per share because the effect would have been anti-dilutive.
The
following table sets forth the computation of weighted average basic and diluted income per share (unaudited):
Schedule
of computation of Weighted Average Basic and Diluted Income (Loss) Per Share
| (Dollars
in millions, except for per share amounts) | |
2022 | | |
2021 | |
| | |
Three
Months Ended | |
| | |
March
31, | |
| (Dollars
in millions, except for per share amounts) | |
2022 | | |
2021 | |
| Numerator: | |
| | | |
| | |
| Loss
from continuing operations | |
$ | (0.8 | ) | |
$ | (2.2 | ) |
| Loss
from discontinued operations | |
| — | | |
| — | |
| Net
loss | |
$ | (0.8 | ) | |
$ | (2.2 | ) |
| Denominator: | |
| | | |
| | |
| Weighted
average number of common shares outstanding during the period - basic and diluted (in thousands) | |
| 26.4 | | |
| 25.2 | |
| | |
| | | |
| | |
| Loss
per common share — basic and diluted: | |
| | | |
| | |
| Continuing
operations | |
$ | (30.30 | ) | |
$ | (87.30 | ) |
| Discontinued
operations | |
| — | | |
| — | |
| Net
loss | |
$ | (30.30 | ) | |
$ | (87.30 | ) |
| | |
| | | |
| | |
| Anti-dilutive
shares excluded from calculation | |
| 0.0 | | |
| 0.0 | |
Note
4 — Discontinued Operations
On
December 30, 2021, the Company completed the disposition of its entire interest in Sport-BLX. The operating results for the Sports Technology
Platform are presented in our Condensed Consolidated Statements of Operations as discontinued operations for all periods presented and
reflect revenues and expenses that are directly attributable to the business that were eliminated from our ongoing operations.
The
key components of the results of discontinued operations were as follows:
Schedule of Key Components of Discontinued Operations
| (In
millions) | |
2022 | | |
2021 | |
| | |
Three
Months Ended | |
| | |
March
31, | |
| (In
millions) | |
2022 | | |
2021 | |
| Net
revenue | |
$ | — | | |
$ | — | |
| Operating
expenses: | |
| | | |
| | |
| Selling,
general and administrative | |
| — | | |
| 0.1 | |
| Restructuring
and other | |
| — | | |
| (0.1 | ) |
| Total
operating expenses | |
| — | | |
| — | |
| Operating
income from discontinued operations | |
| — | | |
| — | |
| Other
income (expense) | |
| — | | |
| — | |
| Income
from discontinued operations, before income taxes | |
| — | | |
| — | |
| Income
tax | |
| — | | |
| — | |
| Income
from discontinued operations, net of income taxes | |
$ | — | | |
$ | — | |
Restructuring
and other includes the net loss attributable to the noncontrolling interest of $0.1 million for the three months ended March 31, 2021
which was reclassified to discontinued operations due to the sale of the Sports Technology Platform.
Note
5 — Supplemental Balance Sheet Information
Additional
supplemental balance sheet information is provided as follows:
Total
assets of as of March 31, 2022 and December 31, 2021 include a $12.8 million investment in Arrive LLC (“Arrive”). Historically,
we accounted for such investments under the cost method of accounting. The adoption of ASU No. 2016-01 in the first quarter of 2018 effectively
eliminated the cost method of accounting, and the carrying value of this investment is written down, or impaired, to fair value when
a decline in value is considered to be other-than-temporary. Our strategic investment in equity securities does not have a readily determinable
fair value; therefore, the new guidance was adopted prospectively. As of March 31, 2022, there were no indicators of impairment for this
investment. The Company will assess the investment for potential impairment, quarterly.
Other
assets of $0.4 million and $0.2 million as of March 31, 2022 and December 31, 2021, respectively, include a separate investment in Arrive.
The Company uses the same method of accounting for this investment as its other investment in Arrive, described in the prior paragraph.
Other
current liabilities, as of March 31, 2022 and December 31, 2021, include accruals for payroll expense of $0.2 million and insurance and
corporate liability accruals of $0.2 million.
Note
6 — Debt
Debt
and notes payable consists of the following:
Schedule of Debt and Notes Payable
| | |
March
31, | | |
| |
| | |
2022 | | |
December
31, | |
| | |
(unaudited) | | |
2021 | |
| | |
(In
millions) | |
| GHI
LLC note payable | |
$ | 3.5 | | |
$ | 3.4 | |
| Other
liabilities | |
| 0.2 | | |
| 0.2 | |
| Total
long term debt | |
$ | 3.7 | | |
$ | 3.6 | |
The
Company entered into a Term Loan and Security Agreement (“GHI Loan Agreement”) with Gazellek Holdings I, LLC (“GHI
LLC”), pursuant to which GHI LLC lent $3,450,000 to the Company on August 6, 2021. The loan bears in-kind interest, quarterly,
at the annual rate of 7%, which has the effect of compounding the interest and adding it to the principal amount. The loan is secured
by substantially all of the Company’s assets and those of all of its subsidiaries, which are required to guarantee the loan, and
matures August 2, 2024.
The
Company is required to prepay the loan upon receiving proceeds from future indebtedness exceeding $5,000,000 (other than indebtedness
that is junior to the loan), or if the Company issues any capital stock (provided that the Company is allowed to retain up to 20% of
the proceeds from such issuance). The GHI Loan Agreement contains customary representations and warranties, covenants and events of default.
Upon the occurrence of an event of default, the loan bears interest at a rate 5% above of the then-effective interest rate and, at GHI
LLC’s option, is payable either in cash or in cash and shares of Company common stock, valued at market, equal to up to 10% of
the outstanding principal amount of the loan. A default fee equal to 0.5% of the outstanding principal applies if any default exists
for 10 days or more.
Scheduled
maturities of the Company’s long-term debt, as they exist as of March 31, 2022, in each of the next five fiscal years and thereafter
are as follows:
Schedule of Long-term Debt Maturities
| Fiscal
years ending in |
(in
millions) |
| 2022 |
$ |
— |
|
| 2023 |
|
0.2 |
|
| 2024 |
|
3.5 |
|
| 2025 |
|
— |
|
| 2026 |
|
— |
|
| 2027
and thereafter |
|
— |
|
| Total |
$ |
3.7 |
|
Note
7 — Stock-Based Compensation
We
have stock-based compensation awards consisting of stock options under the 2011 Incentive Plan, which is described in detail in our Annual
Report on Form 10-K for the year ended December 31, 2021. As of March 31, 2022, there are no remaining shares available for grant under
the 2011 Incentive Plan. No further shares were available for grant under any other stock incentive plan. The Company did not have any
stock-based compensation expense for the three months ended March 31, 2022 and 2021.
Stock
Options
The
following table summarizes our stock option activity:
Summary of Stock Option Activity
| | |
Stock
Options | | |
Weighted
Average Exercise Price | |
| Outstanding
December 31, 2021 | |
| 1,360 | | |
$ | 106.00 | |
| Outstanding
March 31, 2022 | |
| 1,360 | | |
$ | 106.00 | |
| Exercisable
as of March 31, 2022 | |
| 1,262 | | |
$ | 106.00 | |
As
of March 31, 2022, options to purchase 1,360 shares are outstanding and 1,262 shares are exercisable, and the aggregate intrinsic value
of all outstanding stock options was $0.0 million. No options were granted or exercised during the three months ended March 31, 2022.
As
of March 31, 2022, unrecognized compensation expense related to outstanding stock options was immaterial.
Note
8 — Income Taxes
For
interim income tax reporting, we are required to estimate our annual effective tax rate and apply it to year-to-date pre-tax income (loss),
excluding unusual or infrequently occurring discrete items. For the three months ended March 31, 2022, we recorded income tax from continuing
operations of $0.0 million, on a loss of $0.8 million. For the three months ended March 31, 2021, we recorded income tax from continuing
operations of $0.0 million on a loss of $2.2 million. The effective income tax rate for the three months ended March 31, 2022 differs
from the U.S. federal statutory rate of 21% primarily due to a valuation allowance on various deferred tax assets.
The
Company received an income tax refund in February 2021 of approximately $0.6 million related to the Tax Reform Act’s elimination
of corporate alternative minimum tax and the ability to receive refunds of AMT credit carryovers. This was the final AMT credit refund
due to the Company, as $1.6 million of the total $2.2 million tax benefit recorded in 2017 through 2018 had already been received in
prior years.
We
file income tax returns in multiple jurisdictions that are subject to review by various U.S and state taxing authorities. Our U.S. federal
income tax returns for 2018 through 2021, and certain state returns from 2016 to present, are open to examination.
Note
9 — Shareholders’ Equity
Treasury
Stock
On
November 14, 2016, our Board authorized a share repurchase program under which we may repurchase up to 2,500 shares of common stock,
from time to time, using a variety of methods, which may include open market transactions and privately negotiated transactions.
The
Company did not purchase any shares during the three months ended March 31, 2022. Since the November 14, 2016 authorization, we have
repurchased 780 shares of common stock for $0.3 million, and, as of March 31, 2022, we had remaining authorization to repurchase 1,720
additional shares.
As
of March 31, 2022 and December 31, 2021, the Company has 2,927 shares of treasury stock, acquired at an average price of $8,496.47 per
share.
Stock
Warrants
In
connection with the GHI Loan Agreement, the Company issued to GHI LLC, for $120,000, a Common Stock Purchase Warrant entitling GHI LLC
to purchase 4.8% of GLAE’s outstanding common stock, at the price of $0.01 per share, and a second Common Stock Purchase Warrant
entitling GHI LLC to purchase 5.2% of GLAE’s outstanding common stock, at the price of $169.62 per share. The second warrant is
automatically canceled if the Company consummates a Sale Transaction that is sourced other than by GHI LLC or its affiliates. A “Sale
Transaction” is a merger, consolidation, combination or similar transaction (in one or a series of related transactions), such
that the beneficial owners of shares of Company common stock immediately prior to the transaction or transactions will, immediately after
such transaction or transactions, beneficially own less than a majority of the shares of common stock or outstanding equity of the surviving
corporation (on a fully diluted basis). Each warrant expires August 2, 2026, is exercisable net of proceeds received; entitles its holder
to receive certain distributions on the Company’s common stock, as if the warrant had been exercised; and bears registration rights
respecting the underlying common stock. The first warrant purports to give its holder voting rights, as if the warrant had been exercised.
The sale was exempt from registration under the Securities Act pursuant to Sec. 4(a)(2), as not involving any public offering, because
no general solicitation was involved, and GHI LLC is an accredited professional investor, which agreed to accept restricted securities.
See Note 6 – Debt for more information on the GHI Loan Agreement.
Note
10 — Segment Information
As
of March 31, 2022, 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 that are not allocated to the business segments in management’s
evaluation of segment performance, such as litigation settlement expense, corporate expense and other expenses.
Net
revenue, operating loss from operations and assets by segment were as follows (unaudited):
Schedule of Net Revenue, Operating Loss from Continuing Operations and Assets by Segment
| (In
millions) | |
2022 | | |
2021 | |
| | |
Three
Months Ended | |
| | |
March
31, | |
| (In
millions) | |
2022 | | |
2021 | |
| Net
revenue | |
| | | |
| | |
| Asset
management business | |
$ | — | | |
$ | — | |
| Total
net revenue | |
| — | | |
| — | |
| Operating
income (loss) from operations | |
| | | |
| | |
| Asset
management business | |
| (0.4 | ) | |
| (1.2 | ) |
| Total
segment operating loss | |
| (0.4 | ) | |
| (1.2 | ) |
| Corporate
and unallocated | |
| (0.4 | ) | |
| (0.1 | ) |
| Total
operating loss | |
| (0.8 | ) | |
| (1.3 | ) |
| Interest
expense | |
| (0.1 | ) | |
| (0.9 | ) |
| Other
income (expense), net | |
| 0.1 | | |
| — | |
| | |
March
31, | | |
| |
| | |
2022 | | |
December
31, | |
| (In
millions) | |
(unaudited) | | |
2021 | |
| Assets | |
| | | |
| | |
| Asset
management business | |
$ | 13.4 | | |
$ | 13.2 | |
| Total
segment assets | |
| 13.4 | | |
| 13.2 | |
| Corporate
and unallocated | |
| 3.2 | | |
| 4.0 | |
| Total
consolidated assets | |
$ | 16.6 | | |
$ | 17.2 | |
Note
11 — Litigation, Commitments and Contingencies
In
an action removed, on February 14, 2022, from New York Supreme Court to the Southern District of New York, Cypress Holdings, III L.P.
v. Sport-BLX, Inc. et al., 1:22-cv-01243-LGS (S.D.N.Y.), plaintiff Cypress Holdings, III L.P. purports to assert claims against SportBLX,
Mr. Hall, and Mr. De Perio for securities fraud and related issues and seeks compensatory damages, punitive damages and attorneys’
fees, in connection with solicitations of investments in SportBLX. Plaintiff also purports to allege that the Company is liable for unjust
enrichment and tortious interference with contract. The Company intends to defend this matter vigorously and its motion to dismiss the
amended complaint in its entirety will be forthcoming. The Company believes that an outcome resulting in a loss is remote and does
not have any accruals related to the matter.
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 has
historically been no material losses related to such indemnifications. As of March 31, 2022 and December 31, 2021, 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 to 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 March 31, 2022. Compliance with environmental regulations has not had a material adverse effect
on our financial results.
Note
12 — Related Party Transactions
On
July 31, 2021, George E. Hall and Joseph A. De Perio agreed to accept $2,354,736 and $1,060,264, respectively, from the Company in satisfaction
of its obligations arising from a stock purchase agreement in the amounts of $12,116,718 and $5,455,782, respectively. The obligations
were due December 12, 2022 and bore interest at a 5% annual rate. Accordingly, GLAE’s obligations in the amounts of $12,116,718
and $5,455,782 have been paid in full.
Also
on July 31, 2021, as part of the settlement of the stock purchase agreement, the Company assigned obligations owed to it from SportBLX,
totaling $4,176,102.11, to Fintech Debt Corp (“FDC”), which is controlled by George E. Hall, the owner of 30.1% of the Company’s
outstanding stock, and Joseph A. De Perio, a director, for $400,000.
The
net gain on the settlement of the stock purchase agreement and the assignment of obligations to FDC were related party gains, and, as
such, were recorded as equity transactions in the Condensed Consolidated Balances Sheets, rather than recognized as income in the Condensed
Consolidated Statements of Operations.
On
December 30, 2021, the Company completed a series of transactions for the purpose of disposing of its interest in SportBLX, described
below:
●
On December 21, 2021, SportBLX sold proprietary code to S-BLX Securities, which is controlled by Messrs. Hall and De Perio, for $225,000.
●
On December 24, 2021, SportBLX repurchased $1,500,000 of its debt from FDC for $126,000
●
Finally, on December 30, 2021, the Company completed the disposition of its entire interest in SportBLX, selling all of its shares to
FDC for $137,038.
