GLASSBRIDGE ENTERPRISES, INC. GlassBridge Enterprises, Inc. owns and operates an asset management business through various subsidiaries and a sports technology platform through a 50.7% ownership investment inSport-BLX, Inc ("SportBLX") (together the "Business"). The following discussion is intended to be read in conjunction with Item 1. Business and our Consolidated Financial Statements and related Notes that appear elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.GlassBridge's actual results could differ materially from those anticipated due to various factors discussed under "Cautionary Statements Regarding Forward-Looking Statements" and in Item 1A. Risk Factors of this Annual Report on Form 10-K. The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See, Notes to Consolidated Financial Statements-Note 2 - Summary of Significant Accounting Policies , for further information regarding consolidation. References to "GlassBridge ," the "Company," "we," "us" and "our" are toGlassBridge Enterprises Inc. , and its subsidiaries and consolidated entities unless the context indicates otherwise. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"). IntroductionGlassBridge has, during recent periods, undergone significant changes. Until 2015, we primarily provided data storage and security solutions through our two legacy business segments. OnAugust 16, 2018 , the Company also sold itsNexsan business.
As described in Notes to Consolidated Financial Statements-Notes 1-15, in a series of transactions during 2019, the Company sold its international subsidiaries and acquired a controlling interest in SportBLX.
As a result of these transactions, the Company now operates in two segments, an asset management business, and a sports technology platform, through SportBLX.
InJanuary 2021 ,Adara Enterprises , Corp. ("Adara" or "AEC") received notice fromESW Holdings, Inc. ("ESW") thatAdara had defaulted on its obligation to pay at maturity, i.e., onJanuary 20, 2021 ,$11,000,000 in principal and all other amounts due to ESW under a Loan and Security Agreement ("ESW Loan Agreement"), datedJuly 21, 2020 . Pursuant to the ESW Loan Agreement, AEC gave to ESW a security interest in all of AEC's assets, andGlassBridge pledged to ESW all ofGlassBridge's AEC stock and 30% ofGlassBridge's SportBLX stock. The Loan Agreement provides that, upon AEC's default, AEC may elect to cooperate with ESW to effect a prearranged reorganization of AEC in bankruptcy, pursuant to which ESW acquires fromGlassBridge all equity in AEC and certain of its assets, most notably property and equipment consisting of quantitative trading software, as well as deferred tax assets resulting from net operating losses, for consideration of$8,500,000 , which amount would be used to satisfy the claims of all valid creditors and certain administrative expenses associated with the bankruptcy case, with all residual funds to be paid toGlassBridge . OnApril 22, 2021 , AEC filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in theBankruptcy Court for the District of Delaware . AEC's prepackaged chapter 11 plan of reorganization was confirmed at a hearing onJune 9, 2021 and became effective onJune 15, 2021 (the "Effective Date"). Upon the occurrence of the Effective Date, ESW paid$8.5 million in consideration, less$325,000 that ESW had previously funded in the form of a postpetition debtor-in-possession loan to AEC to fund the costs of administration associated with AEC's bankruptcy case. Also on the Effective Date, 50% of the equity in reorganized AEC was issued to ESW, and the other 50% of the equity in reorganized AEC was issued to ESW's affiliate,ESW Capital LLC . Finally, on the Effective Date,GlassBridge received a release of its guaranty obligations to ESW as well as a license to use AEC's quantitative trading software in connection with the sports industry.Adara has historically been one of the subsidiaries through which the company has operated its asset management business. The Company, however, remains committed to its asset management business and holds various investments and assets, includingArrive LLC ("Arrive"), in other subsidiaries. The default on the ESW loan agreement is expected to provide additional liquidity for the Business though the prearranged bankruptcy plan described above. Executive Summary
Consolidated Results of Continuing Operations for the Year Ended
? Revenue of
? Selling, general and administrative expense was
million compared with
primarily due to the development of the operations of SportBLX and
? Restructuring and other expense was
million in 2019.
? Operating loss from continuing operations, which included goodwill impairment
charges of
in 2019.
? Other expense was
million in 2019.
? The income tax benefit was $0.0 million in 2020 and 2019.
? Basic and diluted loss per share from continuing operations was
2020 compared with income per share of $330.15 for 2019.
Consolidated Cash Flow/Financial Condition for the Year Ended
? Cash and cash equivalents totaled
compared with
? Cash used in operating activities was
used in operating activities of
activities in 2020 was primarily related to the development of the operations
of SportBLX and
related to corporate expenditures, legal settlements and related costs.
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? Cash used in investing activities was
million in 2019. Cash used in investing activities in 2020 was primarily
related to a
to Adara Asset Management ("AAM") which was disposed of during the year. Cash
used in investing activities in 2019 was primarily related to the purchase of
SportBLX.
? Cash provided by financing activities was
proceeds of the ESW note payable, compared with
proceeds of the sale of an equity interest in
proceeds from the Orix notes payable.
See Analysis of Cash Flows section below for further information.
Results of Operations
Net Revenue
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Net revenue $ 0.5 $ 0.1 400.0 %
"NM" - Indicates the Percent Change is not meaningful
Revenue of
Selling, General and Administrative (SG&A)
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)Selling, general and administrative $ 8.9$ 3.4
161.8 % As a percent of revenue 1,780.0 % 3,400.0 %
SG&A expense increased in 2020 compared with 2019 by
Goodwill Impairment
Years Ended December 31,
2020 2019
(In millions)
Goodwill impairment $ 42.3 $ -
We test the carrying amount of a reporting unit's goodwill for impairment on an
annual basis and during an interim period if an event occurs or circumstances
change that would warrant impairment testing.
During the fourth quarter of 2020, management engaged in a strategic and
financial assessment of the Sports Technology Business. In assessing
recoverability of the goodwill recorded as part of the purchase price allocation
from the SportBLX acquisition, we compared the carrying amount of the goodwill
with its implied fair value. As a result of this assessment, we determined the
carrying value of the goodwill exceeds its fair value. Consequently, we recorded
an impairment charge of $42.3 million in the Consolidated Statements of
Operations for the year ended December 31, 2020 .
As of
Restructuring
The components of our restructuring and other expense included in our Consolidated Statements of Operations were as follows:
Years Ended December 31,
2020 2019
(In millions)
Restructuring
Severance and related $ - $ 0.1
Total restructuring $ - $ 0.1
Total restructuring expense was $0.0 million and $0.1 million , for the years
ended December 31, 2020 and 2019, respectively. Restructuring expense recorded
for the year ended December 31, 2019 related to severance payments. See Note 9-
Restructuring and Other Expense in our Notes to Consolidated Financial
Statements for information.
17
Operating Loss From Continuing Operations
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Operating loss $ (50.7 ) $ (3.4 ) 1,391.2 %
As a percent of revenue (10,140.0 )% (3,400.0 )%
Operating loss from continuing operations of $50.7 million increased in 2020 by
$46.9 million , compared with an operating loss of $3.4 million in 2019. The
operating loss of $50.7 million included a goodwill impairment of $42.3 million .
Other Income and (Expense)
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Interest expense $ (2.6 ) $ (0.3 ) 766.7 %
Realized loss on investments (1.9 ) - NMDefined benefit plan adjustment (8.5 ) -
NM
Other income (expense), net 0.1 15.1 (133.3 ) Total other income (expense)$ (12.9 ) $ 14.8
(187.2 )% As a percent of revenue (2,580.0 )% 14,800.0 % NM - Not meaningful
Total other expense was$12.9 million in 2020, compared to other income of$14.8 million in 2019. Other expense in 2020 primarily related to the settlement of the Company's pension liability. Other income in 2019 primarily related to a$12 million unrealized gain in the Arrive investment, net of a$1.2 million distribution, and a$3.0 million unrealized gain in SportBLX.
Income Tax Benefit (Provision)
Years Ended December 31,
2020 2019
(In millions)
Income tax benefit (provision) $ - $ -
Effective tax rate NM NM
NM - Not meaningful
The income tax provision was $0.0 million in 2020 and 2019. Because we maintain
a valuation allowance related to our U.S. deferred tax assets, the tax provision
generally represents discrete tax events that may occur from time to time.
As of December 31, 2020 and 2019, we had valuation allowances of $231.9 million
and $236.4 million , respectively, to account for deferred tax assets we have
concluded are not considered to be more-likely-than-not to be realized in the
future due to our cumulative losses in recent years. The deferred tax assets
subject to valuation allowance include certain operating loss carryforwards,
deferred tax deductions, capital loss carryforwards and tax credit
carryforwards.
18
Income from discontinued operations
For the Years Ended December 31,
2020 2019
(In millions)
Other income (expense) $ - $ 1.3
Income from discontinued operations, before income
taxes - 1.3
Gain on sale of discontinued businesses, before
income taxes - 9.4
Income tax benefit - 1.0
Income from discontinued businesses, net of income
taxes $ - $ 11.7
Discontinued operations represent the results of operations from our legacy
businesses and
See Note 5 - Discontinued Operations in our Notes to Consolidated Financial Statements for more information.
Segment Results
With the wind down of our legacy businesses substantially completed by the first quarter of 2016 and the sale of theNexsan business in the third quarter of 2018 and following the launch of AAM, the asset management business and the sports technology platform, SportBlx, are our two reportable segments as ofDecember 31, 2020 . Results from the legacy businesses andNexsan business were reported within discontinued operations. We evaluate segment performance based on revenue and operating loss. The operating loss reported in our segments excludes corporate and other unallocated amounts. Although such amounts are excluded from the business segment results, they are included in reported consolidated results. Corporate and unallocated amounts include costs which are not allocated to the business segments in management's evaluation of segment performance such as litigation settlement expense, corporate expense and other expenses.
Information related to our segments is as follows:
Asset Management Business
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Net revenue $ 0.0 $ 0.1 (100.0 )%
Operating income (loss) $ (5.2 ) $ 0.1 (5,300.0 )%
As a percent of revenue NM 100.0 %
NM - Not meaningful
19
Revenue from our asset management business primarily consists of management and performance fees paid by the funds under our management.
Sports Technology Platform
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Net revenue $ 0.5 $ - NM
Operating loss $ (44.0 ) $ (0.2 ) (21,900.0 )%
As a percent of revenue (8,800.0 )% NM
NM - Not meaningful
The operating loss in the Sports technology platform includes a goodwill
impairment charge of $42.3 million . See Note 7 - Goodwill for additional
information.
Corporate and Unallocated
Years Ended December 31, Percent Change
2020 2019 2020 vs. 2019
(In millions)
Corporate and unallocated operating loss $ (1.5 ) $ (3.3 ) (54.5 )%
Restructuring and other - (0.1 ) (100.0 )%
Total $ (1.5 ) $ (3.4 ) (55.9 )%
For the year ended
Financial Position
Our cash and cash equivalents balance, as of
Our accounts payable balance, as of
Our other current liabilities balance, as of
Liquidity and Capital Resources
Our primary sources of liquidity include our cash and cash equivalents. Our primary operating liquidity needs relate to our working capital and funding our operations.
We had
Our liquidity needs for the next 12 months include the following: corporate
expenses of approximately
We expect that our cash, in addition to asset monetization, will provide liquidity sufficient to meet our needs for our operations and our obligations. We also plan to raise additional capital if necessary, although no assurance can be made that we will be able to secure such financing, if needed, on favorable terms or at all. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. Restricted cash is related to contractual obligations or restricted by management and is included in other current assets on our Consolidated Balance Sheets depending on the timing of the restrictions. The restricted cash balance in other current assets as ofDecember 31, 2020 was$0.5 million and as ofDecember 31, 2019 was$0.0 million . 20 Analysis of Cash Flows
Cash Flows Used in Operating Activities:
Years Ended December 31,
2020 2019
(In millions)
Net income (loss) $ (63.6 ) $ 23.1
Adjustments to reconcile net income (loss) to net
cash used in operating activities 53.5 (25.2 )
Changes in operating assets and liabilities 2.6 (9.2 )
Net cash used in operating activities $ (7.5 ) $ (11.3 )
Cash flows from operating activities can fluctuate from period to period as many items can impact cash flows. Cash used in operating activities for 2020 was primarily driven by the development of the operations of SportBLX andAdara and includes a goodwill impairment of$42.3 million . Cash used in operating activities for 2019 was primarily driven by corporate expenditures, legal settlements and related costs.
Cash Flows (Used in) Investing Activities:
Years Ended December 31,
2020 2019
(In millions)Purchase of property and equipment$ (1.7 ) $ - Purchase of SportBLX - (3.7 ) Purchases of investments (1.1 ) (1.3 ) Proceeds from sale of investments 0.2 - Proceeds from fund distribution 2.0 1.3 Disbursement related to disposal group (1.8 ) (0.8 ) Proceeds from sale of assets and businesses - 1.2
Net cash (used in) investing activities
Cash used in investing activities in 2020 included expenditures in connection with the ESW,George Hall and Orix transactions inJuly 2020 . These include a$1.7 million purchase of software and a$1.8 million contribution to AAM which was disposed of during the year. Cash provided by investing activities in 2019 was primarily related to the purchase of SportBLX.
Cash Flows Provided by Financing Activities:
Years Ended December 31,
2020 2019
(In millions)Proceeds from Orix notes payable 16.0
10.2
Repayment of Orix note payable (16.0 ) - Proceeds from ESW note payable 5.4 - Proceeds from Bank Loan 0.4 - Proceeds from other related parties notes payable 0.4 - Proceeds from sale of equity interest inAdara Enterprises Corp -
4.6
Net cash provided by financing activities $ 6.2
$ 14.8 Cash provided by financing activities in 2020 relates to an ESW note payable, a note payable issued under the Paycheck Protection Program (the "Bank Loan") and notes payable from other related parties. Cash provided by financing activities in 2019 primarily relates to the sale of an equity interest inAdara Enterprises Corp and proceeds for the Orix notes payable. See Note 8 - Debt, Note 13 - Shareholders' Equity and Note 16 - Related Party Transactions for more information. 21
No dividends were declared or paid during 2020 or 2019. Any future dividends are at the discretion of and subject to the approval of our Board.
Related Party Transactions See Note 16 - Related Party Transactions in our Notes to Consolidated Financial Statements for information on related party transactions between the Company andGlassBridge's Board of Directors and Executive Officers.
Off-Balance Sheet Arrangements
Other than the operating lease commitments discussed in Note 15 - Litigation, Commitments and Contingencies in the Notes to Consolidated Financial Statements, we are not using off-balance sheet arrangements, including special purpose entities.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates to ensure they are consistent with historical experience and the various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and could materially impact our results of operations.
We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
Uncertain Tax Positions. Our income tax returns are subject to review by various taxing authorities. As such, we record accruals for items that we believe may be challenged by these taxing authorities. The threshold for recognizing the benefit of a tax return position in the financial statements is that the position must more-likely-than-not be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit that, in our judgment, is greater than 50 percent likely to be realized. AtDecember 31, 2019 and 2020, our accrual related to uncertain tax positions and unrecognized tax benefits was$0.0 million .
Our
The ultimate outcome of tax matters may differ from our estimates and assumptions. Unfavorable settlement of any particular issue may require the use of cash and could result in increased income tax expense. Favorable resolution could result in reduced income tax expense. It is reasonably possible that our unrecognized tax benefits could increase or decrease significantly during the next twelve months due to the resolution of certainU.S. and international tax uncertainties; however, it is not possible to estimate the potential change
at this time. Intangibles. We record all assets and liabilities acquired in purchase transactions, including intangibles, at estimated fair value. Intangible assets with a definite life are amortized based on a pattern in which the economic benefits of the assets are consumed, typically with useful lives ranging from one to 30 years. The initial recognition of intangible assets, the determination of useful lives and, if necessary, subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using certain valuation methods including discounted cash flow analysis. We evaluate assets on our balance sheet, including such intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries may indicate a possible impairment that would require an impairment test. The test for impairment requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value.Goodwill . We record all assets and liabilities acquired in purchase acquisitions, including goodwill, at fair value. The initial recognition of goodwill and subsequent impairment analysis require management to make subjective judgments concerning estimates of how the acquired assets will perform in the future using valuation methods including discounted cash flow analysis.Goodwill is the excess of the cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination.Goodwill is not amortized. We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. 22Goodwill is considered impaired when its carrying amount exceeds its implied fair value. The Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If we determine in this assessment that the fair value of the reporting unit is more than its carrying amount, we may conclude that there is no need to perform Step 1 of the impairment test. We have an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing Step 2 of the goodwill impairment test. Step 1 of the impairment test involves comparing the fair value of the reporting unit to which goodwill was assigned to its carrying amount. If fair value is deemed to be less than carrying value, Step 2 of the impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of the reporting unit's goodwill. If the carrying amount of the reporting unit's goodwill is greater than the implied fair value of the reporting unit's goodwill, an impairment loss must be recognized for the excess. This involves measuring the fair value of the reporting unit's assets and liabilities (both recognized and unrecognized) at the time of the impairment test. The difference between the reporting unit's fair value and the fair values assigned to the reporting unit's individual assets and liabilities is the implied fair value of the reporting unit's goodwill. Copyright Levies. In manyEuropean Union ("EU") member countries, the sale of recordable optical media is subject to a private copyright levy. The levies are intended to compensate copyright holders with "fair compensation" for the harm caused by private copies made by natural persons of protected works under the European Copyright Directive, which became effective in 2002 (the "Directive"). Levies are generally charged directly to the importer of the product upon the sale of the products. Payers of levies remit levy payments to collecting societies which, in turn, are expected to distribute funds to copyright holders. Levy systems of EU member countries must comply with the Directive, but individual member countries are responsible for administering their own systems. Since implementation, the levy systems have been the subject of numerous litigation and law-making activities. OnOctober 21, 2010 , theCourt of Justice of theEuropean Union ("CJEU") ruled that fair compensation is an autonomous European law concept that was introduced by the Directive and must be uniformly applied in all EU member states. The CJEU stated that fair compensation must be calculated based on the harm caused to the authors of protected works by private copying. The CJEU ruling made clear that copyright holders are only entitled to fair compensation payments (funded by levy payments made by importers of applicable products, including the Company) when sales of optical media are made to natural persons presumed to be making private copies. Within this disclosure, we use the term "commercial channel sales" when referring to products intended for uses other than private copying and "consumer channel sales" when referring to products intended for uses including private copying. 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'sOctober 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 theOctober 21, 2010 ECJ ruling, we began withholding levy payments to the various collecting societies, and, in 2011, we reversed our existing accruals for unpaid levies related to commercial channel sales. However, we continued to accrue, but not pay, a liability for levies arising from consumer channel sales, in all applicable jurisdictions, exceptFrance due to certain court rulings. As ofDecember 31, 2020 , and 2019, we had accrued liabilities of$0.0 million associated with levies related to consumer channel sales for which we are withholding payment. In addition, various decisions and enactments have established that the levy rates in various countries improperly excluded from their calculations and assessments the private copying performed using computers and smartphones. This in turn meant that, to the extent levy rates were determined to be retroactively excessive, the Company would be entitled to a rebate on that basis as well. Since theOctober 2010 CJEU ruling, for as long as sales were made in these countries, we evaluated, quarterly, on a country-by-country basis whether (i) levies should be accrued on current period commercial and/or consumer channel sales; and, (ii) accrued, but unpaid, copyright levies on prior period consumer channel sales should be reversed. Our evaluation is made on a jurisdiction-by-jurisdiction basis and considers ongoing and cumulative developments related to levy litigation and law-making activities within each jurisdiction as well as throughout the EU. 23
In connection with the sale of our overseas subsidiaries, in 2019, the Company
is no longer liable for adverse outcomes and may receive contingent payouts
should our former subsidiary
Claims and Litigation. We record a liability when a loss from a pending or threatened claim or litigation is known or considered probable and the amount can be reasonably estimated.
Recently Issued Accounting Standards
See Note 2 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements for disclosure related to recently issued accounting standards.
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