Item 1. Unaudited Financial Statements
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| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Revenue | | | | | $ | 317.9 | | | $ | 412.8 | |
Cost of revenue | | | | | 274.3 | | | 363.0 | |
Gross profit | | | | | 43.6 | | | 49.8 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | | | | | 41.7 | | | 42.6 | |
Depreciation and amortization | | | | | 6.3 | | | 6.9 | |
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Other operating income | | | | | (0.4) | | | (0.4) | |
(Loss) income from operations | | | | | (4.0) | | | 0.7 | |
Other (expense) income: | | | | | | | |
Interest expense | | | | | (15.6) | | | (12.6) | |
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Loss from equity investees | | | | | (4.0) | | | (0.5) | |
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Other income (expense), net | | | | | 16.5 | | | (0.1) | |
Loss from operations before income taxes | | | | | (7.1) | | | (12.5) | |
Income tax expense | | | | | (0.9) | | | (1.6) | |
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Net loss | | | | | (8.0) | | | (14.1) | |
Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest | | | | | (1.0) | | | 1.7 | |
Net loss attributable to INNOVATE Corp. | | | | | (9.0) | | | (12.4) | |
Less: Preferred dividends | | | | | 1.2 | | | 1.2 | |
Net loss attributable to common stockholders | | | | | $ | (10.2) | | | $ | (13.6) | |
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Loss per share - basic and diluted | | | | | $ | (0.13) | | | $ | (0.18) | |
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Weighted average common shares outstanding - basic and diluted | | | | | 77.7 | | | 77.3 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in millions)
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| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Net loss | | | | | | $ | (8.0) | | | $ | (14.1) | |
Other comprehensive (loss) income | | | | | | | | |
Foreign currency translation adjustment, net of tax | | | | | | (1.0) | | | 0.7 | |
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Dispositions of investments, net of tax | | | | | | (9.1) | | | — | |
Other comprehensive (loss) income | | | | | | $ | (10.1) | | | $ | 0.7 | |
Comprehensive loss | | | | | | (18.1) | | | (13.4) | |
Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests | | | | | | 1.7 | | | 1.6 | |
Comprehensive loss attributable to INNOVATE Corp. | | | | | | $ | (16.4) | | | $ | (11.8) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INNOVATE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except share amounts)
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| | March 31, 2023 | | December 31, 2022 |
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Assets | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 16.6 | | | $ | 80.4 | |
Accounts receivable, net | | 253.7 | | | 254.9 | |
Contract assets | | 180.2 | | | 165.1 | |
Inventory | | 21.3 | | | 18.9 | |
Restricted cash | | — | | | 0.3 | |
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Other current assets | | 14.7 | | | 16.8 | |
Total current assets | | 486.5 | | | 536.4 | |
Investments | | 7.7 | | | 59.5 | |
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Deferred tax asset | | 1.7 | | | 1.7 | |
Property, plant and equipment, net | | 164.0 | | | 165.0 | |
Goodwill | | 127.0 | | | 127.1 | |
Intangibles, net | | 186.1 | | | 190.1 | |
Other assets | | 71.1 | | | 71.9 | |
Total assets | | $ | 1,044.1 | | | $ | 1,151.7 | |
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Liabilities, temporary equity and stockholders’ deficit | | | | |
Current liabilities | | | | |
Accounts payable | | $ | 167.0 | | | $ | 202.5 | |
Accrued liabilities | | 45.0 | | | 65.4 | |
Current portion of debt obligations | | 32.9 | | | 30.6 | |
Contract liabilities | | 104.9 | | | 98.6 | |
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Other current liabilities | | 24.7 | | | 20.1 | |
Total current liabilities | | 374.5 | | | 417.2 | |
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Deferred tax liability | | 3.7 | | | 9.1 | |
Debt obligations | | 664.3 | | | 683.8 | |
Other liabilities | | 107.6 | | | 71.2 | |
Total liabilities | | 1,150.1 | | | 1,181.3 | |
Commitments and contingencies | | | | |
Temporary equity | | | | |
Preferred stock Series A-3 and Series A-4, $0.001 par value | | 17.3 | | | 17.6 | |
Shares authorized: 20,000,000 as of both March 31, 2023 and December 31, 2022 | | | | |
Shares issued and outstanding: 6,125 of Series A-3 and 10,000 of Series A-4 as of both March 31, 2023 and December 31, 2022 | | | | |
Redeemable noncontrolling interest | | (5.2) | | | 43.4 | |
Total temporary equity | | 12.1 | | | 61.0 | |
Stockholders’ deficit | | | | |
Common stock, $0.001 par value | | 0.1 | | | 0.1 | |
Shares authorized: 160,000,000 as of both March 31, 2023 and December 31, 2022 | | | | |
Shares issued: 80,537,415 and 80,216,028 as of March 31, 2023 and December 31, 2022, respectively | | | | |
Shares outstanding: 79,049,423 and 78,787,768 as of March 31, 2023 and December 31, 2022, respectively | | | | |
Additional paid-in capital | | 326.8 | | | 330.1 | |
Treasury stock, at cost: 1,487,992 and 1,428,260 shares as of March 31, 2023 and December 31, 2022, respectively | | (5.4) | | | (5.3) | |
Accumulated deficit | | (461.1) | | | (452.1) | |
Accumulated other comprehensive (loss) income | | (1.5) | | | 5.9 | |
Total INNOVATE Corp. stockholders’ deficit | | (141.1) | | | (121.3) | |
Noncontrolling interest | | 23.0 | | | 30.7 | |
Total stockholders’ deficit | | (118.1) | | | (90.6) | |
Total liabilities, temporary equity and stockholders’ deficit | | $ | 1,044.1 | | | $ | 1,151.7 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited, in millions)
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| | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) (a) | | Total INNOVATE Stockholders'(Deficit) Equity | | Non- controlling Interest | | Total Stockholders’ (Deficit) Equity | | Temporary Equity |
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| | Shares | | Amount | | | |
Balance as of December 31, 2022 | | 78.8 | | | $ | 0.1 | | | $ | 330.1 | | | $ | (5.3) | | | $ | (452.1) | | | $ | 5.9 | | | $ | (121.3) | | | $ | 30.7 | | | $ | (90.6) | | | $ | 61.0 | |
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Share-based compensation | | — | | | — | | | 0.5 | | | — | | | — | | | — | | | 0.5 | | | — | | | 0.5 | | | — | |
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Taxes paid in lieu of shares issued for share-based compensation | | (0.1) | | | — | | | — | | | (0.1) | | | — | | | — | | | (0.1) | | | — | | | (0.1) | | | — | |
Preferred stock dividends | | — | | | — | | | (0.9) | | | — | | | — | | | — | | | (0.9) | | | — | | | (0.9) | | | (0.3) | |
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Issuance of common stock | | 0.3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Distributions to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10.7) | | | (10.7) | | | (5.2) | |
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Transactions with noncontrolling interests | | — | | | — | | | (2.9) | | | — | | | — | | | — | | | (2.9) | | | 3.0 | | | 0.1 | | | 0.1 | |
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DBMGi preferred stock liability reclass | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (41.8) | |
Net (loss) income | | — | | | — | | | — | | | — | | | (9.0) | | | — | | | (9.0) | | | 2.2 | | | (6.8) | | | (1.2) | |
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Other comprehensive (loss) | | — | | | — | | | — | | | — | | | — | | | (7.4) | | | (7.4) | | | (2.2) | | | (9.6) | | | (0.5) | |
Balance as of March 31, 2023 | | 79.0 | | | 0.1 | | | $ | 326.8 | | | $ | (5.4) | | | $ | (461.1) | | | $ | (1.5) | | | $ | (141.1) | | | $ | 23.0 | | | $ | (118.1) | | | $ | 12.1 | |
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| | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive Income (a) | | Total INNOVATE Stockholders' (Deficit) Equity | | Non- controlling Interest | | Total Stockholders’ (Deficit) Equity | | Temporary Equity |
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| | Shares | | Amount | | | |
Balance as of December 31, 2021 | | 77.8 | | | $ | 0.1 | | | $ | 330.6 | | | $ | (5.2) | | | $ | (416.2) | | | $ | 6.4 | | | $ | (84.3) | | | $ | 28.1 | | | $ | (56.2) | | | $ | 68.1 | |
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Share-based compensation | | — | | | — | | | 0.8 | | | — | | | — | | | — | | | 0.8 | | | — | | | 0.8 | | | — | |
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Preferred stock dividend | | — | | | — | | | (0.8) | | | — | | | — | | | — | | | (0.8) | | | (1.3) | | | (2.1) | | | (0.3) | |
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Issuance of common stock | | 0.6 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Transactions with noncontrolling interests | | — | | | — | | | 0.1 | | | — | | | — | | | — | | | 0.1 | | | (0.2) | | | (0.1) | | | 0.1 | |
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Other | | — | | | — | | | 0.1 | | | — | | | — | | | — | | | 0.1 | | | — | | | 0.1 | | | — | |
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Net loss | | — | | | — | | | — | | | — | | | (12.4) | | | — | | | (12.4) | | | — | | | (12.4) | | | (1.7) | |
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Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 0.6 | | | 0.6 | | | — | | | 0.6 | | | — | |
Balance as of March 31, 2022 | | 78.4 | | | $ | 0.1 | | | $ | 330.8 | | | $ | (5.2) | | | $ | (428.6) | | | $ | 7.0 | | | $ | (95.9) | | | $ | 26.6 | | | $ | (69.3) | | | $ | 66.2 | |
(a) Inclusive of other comprehensive (loss) income, foreign currency cumulative translation adjustments totaled a loss of $2.7 million and income of $5.8 million as of March 31, 2023 and 2022, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
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| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Cash flows from operating activities | | | | |
Net loss | | $ | (8.0) | | | $ | (14.1) | |
Adjustments to reconcile net loss to cash (used in) provided by operating activities | | | | |
Share-based compensation expense | | 0.5 | | | 0.8 | |
Depreciation and amortization (including amounts in cost of revenue) | | 10.2 | | | 10.6 | |
Amortization of deferred financing costs and debt discount | | 1.6 | | | 1.2 | |
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Loss from equity investees | | 4.0 | | | 0.5 | |
Realized and unrealized gains on equity method investments | | (16.1) | | | — | |
Asset impairment expense | | — | | | 0.1 | |
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Deferred income taxes | | (5.4) | | | 0.4 | |
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Other operating activities, net | | (0.5) | | | 0.2 | |
Changes in assets and liabilities, net of acquisitions: | | | | |
Accounts receivable | | 1.6 | | | (25.8) | |
Contract assets | | (15.1) | | | (22.0) | |
Other current assets | | (1.1) | | | (1.2) | |
Inventory | | (2.4) | | | (2.5) | |
Other assets | | 2.5 | | | 4.5 | |
Accounts payable | | (36.3) | | | 20.2 | |
Accrued liabilities | | (19.0) | | | (7.2) | |
Contract liabilities | | 6.3 | | | (24.0) | |
Other current liabilities | | (1.4) | | | (4.9) | |
Other liabilities | | 1.6 | | | (0.2) | |
Cash used in operating activities | | (77.0) | | | (63.4) | |
Cash flows from investing activities | | | | |
Purchase of property, plant and equipment | | (3.7) | | | (4.6) | |
Proceeds from disposal of property, plant and equipment | | 0.3 | | | 1.8 | |
Loan to equity method investee | | — | | | (4.5) | |
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Proceeds from the sale of equity method investments | | 54.2 | | | — | |
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Other investing activities | | 0.4 | | | (0.1) | |
Cash provided by (used in) investing activities | | 51.2 | | | (7.4) | |
Cash flows from financing activities | | | | |
Proceeds from debt obligations, net of deferred financing costs | | 0.9 | | | — | |
Principal payments on debt obligations | | (4.6) | | | (6.4) | |
Proceeds from line of credit | | 40.0 | | | 100.0 | |
Payments on line of credit | | (57.0) | | | (40.0) | |
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Payments to noncontrolling interests and redeemable noncontrolling interests related to sale of equity method investment | | (15.9) | | | — | |
Dividend payments | | (1.2) | | | (2.4) | |
Other financing activities | | (0.2) | | | — | |
Cash (used in) provided by financing activities | | (38.0) | | | 51.2 | |
Effects of exchange rate changes on cash, cash equivalents and restricted cash | | (0.4) | | | 0.5 | |
Net decrease in cash and cash equivalents, including restricted cash | | (64.2) | | | (19.1) | |
Cash, cash equivalents and restricted cash, beginning of period | | 82.2 | | | 47.5 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 18.0 | | | $ | 28.4 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
INNOVATE Corp. ("INNOVATE" and, together with its consolidated subsidiaries, the "Company", "we" and "our") is a diversified holding company that has a portfolio of subsidiaries in a variety of operating segments. We seek to grow these businesses so that they can generate long-term sustainable free cash flow and attractive returns in order to maximize value for all stakeholders. While the Company generally intends to acquire controlling equity interests in its operating subsidiaries, the Company may invest to a limited extent in a variety of noncontrolling equity interest positions or debt instruments. The Company’s shares of common stock trade on the NYSE under the symbol "VATE".
The Company currently has three reportable segments, plus our Other segment, based on management’s organization of the enterprise: Infrastructure, Life Sciences, Spectrum, and Other which includes businesses that do not meet the separately reportable segment thresholds.
1.Our Infrastructure segment is comprised of DBM Global Inc. ("DBMG") and its wholly-owned subsidiaries. DBMG is a fully integrated industrial construction, structural steel and facility maintenance provider that provides fabrication and erection of structural steel and heavy steel plate services and also fabricates trusses and girders and specializes in the fabrication and erection of large-diameter water pipe and water storage tanks, as well as 3-D Building Information Modeling (“BIM”) and detailing. DBMG provides these services on commercial, industrial, and infrastructure construction projects such as high- and low-rise buildings and office complexes, hotels and casinos, convention centers, sports arenas and stadiums, shopping malls, hospitals, dams, bridges, mines, metal processing, refineries, pulp and paper mills and power plants. Through GrayWolf Industrial Inc. ("GrayWolf"), DBMG provides integrated solutions for digital engineering, modeling and detailing, construction, heavy equipment installation and facility services including maintenance, repair, and installation to a diverse range of end markets. Through Aitken Manufacturing, Inc., DBMG manufactures pollution control scrubbers, tunnel liners, pressure vessels, strainers, filters, separators and a variety of customized products. Through Banker Steel Holdco, LLC ("Banker Steel"), DBMG provides full-service fabricated structural steel and erection services primarily for the East Coast and Southeast commercial and industrial construction market, in addition to full design-assist services. The Company maintains an approximately 91% controlling interest in DBMG.
2.Our Life Sciences segment is comprised of Pansend Life Sciences, LLC ("Pansend"), its subsidiaries and equity method investments. Pansend maintains controlling interests of approximately 80% in Genovel Orthopedics, Inc. ("Genovel"), which seeks to develop products to treat early osteoarthritis of the knee and approximately 57% in R2 Technologies, Inc. ("R2"), which develops aesthetic and medical technologies for the skin. Pansend also invests in other early stage or developmental stage healthcare companies including an approximately 46% interest in MediBeacon Inc. ("MediBeacon"), a medical technology company specializing in the advances of fluorescent tracer agents and transdermal measurement, potentially enabling real-time, direct monitoring of kidney function, and an approximately 26% interest in Triple Ring Technologies, Inc. ("Triple Ring"), a science and technology co-development company.
3.Our Spectrum segment is comprised of HC2 Broadcasting Holdings Inc. ("Broadcasting") and its subsidiaries. Broadcasting strategically acquired and operates over-the-air broadcasting stations across the United States. The Company maintains a 98% controlling interest in Broadcasting and maintains a controlling interest of approximately 77%, inclusive of approximately 10% proxy and voting rights from minority holders of DTV America Corporation ("DTV"). On a fully diluted basis, the Company would have an approximately 86% controlling interest in Broadcasting.
4.Our Other segment represents all other businesses or investments that do not meet the definition of a segment individually or in the aggregate. Included in the Other segment is the former Marine Services segment, which includes its holding company, Global Marine Holdings, LLC ("GMH"), in which the Company maintains approximately 73% controlling interest. GMH's results include its subsidiary's 19% equity method investment in HMN International Co., Ltd., formerly known as Huawei Marine Networks Co. (“HMN”), until it was sold on March 6, 2023. Refer to Note 6. Investments for additional information.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries and all other subsidiaries over which the Company exerts control. All intercompany profits, transactions and balances have been eliminated in consolidation. The remaining interests not owned by the Company are presented as a noncontrolling interest component of total equity.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), have been condensed or omitted in these interim unaudited financial statements pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
These interim financial statements should be read in conjunction with the Company’s annual audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 14, 2023. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2023.
Use of Estimates and Assumptions
The preparation of the Company’s Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.
Liquidity
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and operating leases) and other cash needs for our operations for at least the next twelve months from the issuance of the unaudited Condensed Consolidated Financial Statements through a combination of available cash, availability on our Revolving Credit Line, and distributions from our subsidiaries. The ability of INNOVATE’s subsidiaries to make distributions to INNOVATE is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant. Although the Company believes, to the extent needed, that it will be able to raise additional debt or equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds on hand or expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company, if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term and dilute holders of common stock. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.
Recent Accounting Pronouncements
Accounting Pronouncements Adopted in the Current Year
Credit Loss Standard
In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This new standard and its related amendments change the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables and contract assets, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the new expected loss model, which is based on historical experience, current conditions and reasonable and supportable forecasts, entities recognize estimated credit losses over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred.
The adoption of ASU 2016-13 and its related amendments on January 1, 2023, did not have any effect on the Company’s Condensed Consolidated Financial statements and did not record any effects through retained earnings. For the amounts calculated for the Current Expected Credit Loss (“CECL”) model for the three months ended March 31, 2023, subsequent to initial transition, the Company has recognized an expense in the unaudited Condensed Consolidated Statements of Operations. As the amount is immaterial, it is presented within general and administration costs rather than a separate line.
The Company reviewed its entire portfolio of assets recognized on the balance sheet as of January 1, 2023, and identified Accounts Receivable and Contract Assets as the material impacted assets in-scope of Topic 326. The risk of credit losses from the remaining portfolio of assets was concluded to be immaterial. Accounts Receivable and Contract Assets are presented net of allowances for credit losses. Refer to Note 4. Accounts Receivable, Net. At each balance sheet date, all potentially uncollectible accounts are assessed individually for the purpose of determining the appropriate provision for doubtful accounts. Management has elected to use a risk-based, pool-level segmentation framework to calculate the expected loss rate. Management evaluates its experience with historical losses and then applies this historical loss ratio to financial assets with similar characteristics. The Company’s historical loss ratio or its determination of risk pools may be adjusted for changes in customer, economic, market or other circumstances. The Company may also establish an allowance for credit losses for specific receivables when it is probable that the receivable will not be collected and the loss can be reasonably estimated. Amounts are written off against the allowance when they are considered to be uncollectible, and reversals of previously reserved amounts are recognized if a specifically reserved item is settled for an amount exceeding the previous estimate.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Other Recent Accounting Pronouncements
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) which contains optional practical expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extended the period for utilization of the practical expedients under ASU 2020-04 through December 31, 2024. The Company has instruments, including DBMGi's $41.8 million Series A Preferred Stock (Refer to Note 15. Preferred Stock and Equity) and INNOVATE's $5.0 million line of credit agreement (Refer to Note 11. Debt Obligations) that reference LIBOR. DBMGi's Series A Preferred Stock and INNOVATE's line of credit agreement, prior to its extension in April 2023, reference LIBOR and contain customary LIBOR replacement language, including, but not limited to, the use of replacement rates based on the secured overnight financing rate, and, consequently, these ASUs are not expected to have a material effect on the Company's Condensed Consolidated Financial Statements. Refer to Note 21. Subsequent Events for additional information on the extension of INNOVATE's line of credit and the change in benchmark from LIBOR-based rates to SOFR-based rates.
Subsequent Events
ASC 855, Subsequent Events requires the Company to evaluate events that occur after the balance sheet date as of which the financial statements are issued, and to determine whether adjustments to or additional disclosures in the financial statements are necessary. Refer to Note 21. Subsequent Events for any subsequent events.
3. Revenue and Contracts in Process
Revenue from contracts with customers consists of the following (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Revenue | | | | | | | | |
Infrastructure | | | | | | $ | 311.7 | | | $ | 402.2 | |
Life Sciences | | | | | | 0.5 | | | 0.8 | |
Spectrum | | | | | | 5.7 | | | 9.8 | |
| | | | | | | | |
Total revenue | | | | | | $ | 317.9 | | | $ | 412.8 | |
Accounts receivables, net, from contracts with customers consist of the following (in millions): | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Accounts receivables with customers | | | | |
Infrastructure | | $ | 245.4 | | | $ | 244.5 | |
Life Sciences | | 0.9 | | | 0.8 | |
Spectrum | | 3.1 | | | 5.1 | |
Total accounts receivables with customers | | $ | 249.4 | | | $ | 250.4 | |
Infrastructure Segment
The following table disaggregates DBMG's revenue by market (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Commercial | | | | | | $ | 112.5 | | | $ | 238.2 | |
Industrial | | | | | | 91.3 | | | 89.2 | |
Healthcare | | | | | | 31.4 | | | 26.1 | |
Convention | | | | | | 25.4 | | | 19.6 | |
Transportation | | | | | | 41.5 | | | 10.0 | |
Leisure | | | | | | 3.2 | | | 4.2 | |
Government | | | | | | 3.7 | | | 7.4 | |
Other | | | | | | 2.7 | | | 7.2 | |
Total revenue from contracts with customers | | | | | | 311.7 | | | 401.9 | |
Other revenue | | | | | | — | | | 0.3 | |
Total Infrastructure segment revenue | | | | | | $ | 311.7 | | | $ | 402.2 | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Contract assets and contract liabilities and recognized earnings consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Costs incurred on contracts in progress | | $ | 2,472.5 | | | $ | 2,503.3 | |
Estimated earnings | | 405.9 | | | 378.9 |
Contract revenue earned on uncompleted contracts | | 2,878.4 | | | 2,882.2 | |
Less: progress billings | | 2,803.1 | | | 2,815.7 | |
| | $ | 75.3 | | | $ | 66.5 | |
| | | | |
The above is included in the accompanying Condensed Consolidated Balance Sheets under the following line items: |
Contract assets | | $ | 180.2 | | | $ | 165.1 | |
Contract liabilities | | (104.9) | | | (98.6) | |
| | $ | 75.3 | | | $ | 66.5 | |
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Cost in excess of billings | | $ | 103.8 | | | $ | 90.7 | |
Conditional retainage | | 76.4 | | | 74.4 | |
Contract assets | | $ | 180.2 | | | $ | 165.1 | |
| | | | |
Billings in excess of costs | | $ | (163.5) | | | $ | (152.0) | |
Conditional retainage | | 58.6 | | | 53.4 | |
Contract liabilities | | $ | (104.9) | | | $ | (98.6) | |
The change in contract assets is a result of the recording of $101.2 million of contract assets driven by new commercial projects, offset by $86.1 million of contract assets transferred to receivables from contract assets recognized at the beginning of the period.
The change in contract liabilities is a result of periodic contract liabilities of $89.7 million driven largely by new commercial projects, offset by revenue recognized that was included in the contract liability balance at the beginning of the period in the amount of $83.4 million.
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
As of March 31, 2023, the transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | Within One Year | | Within Five Years | | | | Total |
Commercial | | $ | 269.8 | | | $ | 25.5 | | | | | $ | 295.3 | |
Industrial | | 362.4 | | | 9.5 | | | | | 371.9 | |
Transportation | | 332.5 | | | 57.1 | | | | | 389.6 | |
Government | | 6.6 | | | 1.3 | | | | | 7.9 | |
Leisure | | 2.1 | | | — | | | | | 2.1 | |
Healthcare | | 127.7 | | | 287.5 | | | | | 415.2 | |
Convention | | 93.8 | | | — | | | | | 93.8 | |
Other | | 5.3 | | | 0.5 | | | | | 5.8 | |
Remaining unsatisfied performance obligations | $ | 1,200.2 | | | $ | 381.4 | | | | | $ | 1,581.6 | |
DBMG's remaining unsatisfied performance obligations increase with awards of new contracts and decrease as it performs work and recognizes revenue on existing contracts. DBMG includes a project within its remaining unsatisfied performance obligations at such time the project is awarded and agreement on contract terms has been reached. DBMG's remaining unsatisfied performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made. DBMG expects to recognize this revenue approximately within the next 3.75 years.
Remaining unsatisfied performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of DBMG's contracts are subject to cancellation at the election of its customers, in accordance with industry practice, DBMG does not limit the amount of unrecognized revenue included within its remaining unsatisfied performance obligations due to the inherent substantial economic penalty that would be incurred by its customers upon cancellation.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Life Sciences Segment
The following table disaggregates the Life Sciences segment's revenue by type (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Systems and consumables revenue | | | | | | $ | 0.5 | | | $ | 0.8 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total Life Sciences segment revenue | | | | | | $ | 0.5 | | | $ | 0.8 | |
Spectrum Segment
The following table disaggregates the Spectrum segment's revenue by type (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Broadcast station | | | | | | $ | 5.2 | | | $ | 4.8 | |
Network advertising | | | | | | — | | | 3.9 | |
Network distribution | | | | | | — | | | 0.7 | |
Other | | | | | | 0.5 | | | 0.4 | |
| | | | | | | | |
| | | | | | | | |
Total Spectrum segment revenue | | | | | | $ | 5.7 | | | $ | 9.8 | |
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
As of March 31, 2023, the transaction price allocated to remaining unsatisfied performance obligations consisted of $7.8 million of broadcast station revenues of which $3.8 million is expected to be recognized within one year and $4.0 million is expected to be recognized within the next 3 years.
On December 31, 2022, Broadcasting shut-down the operations and broadcasting of the Azteca America network and, had terminated both the PLA and BSA with TV Azteca. HC2 Network did not quality for discontinued operations presentation as HC2 Network was not significant to the Company, did not represent a strategic shift and will not have a major effect on the Company's operations and financial results. As a result of the cessation of the Azteca operations, the Company no longer has any unsatisfied performance obligations related to network advertising or network distribution.
4. Accounts Receivable, Net
Accounts receivable, net, consisted of the following (in millions): | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Contracts in progress | | $ | 245.6 | | | $ | 244.8 | |
Unbilled retentions | | 0.2 | | | 0.2 | |
Trade receivables | | 4.0 | | | 5.9 | |
Other receivables | | 4.3 | | | 4.5 | |
Allowance for expected credit losses (1)(2) | | (0.4) | | | (0.5) | |
Total | | $ | 253.7 | | | $ | 254.9 | |
(1) Allowance for doubtful accounts as of December 31, 2022, prior to the adoption of ASU 2016-13.
(2) There was no change to the allowance for expected credit losses as a result of the adoption of ASU 2016-13 on January 1, 2023.
For the three months ended March 31, 2023, the Company recognized a $0.1 million reversal of provisions for expected credit losses and for the three months ended March 31, 2022, recognized provisions for doubtful accounts of $0.2 million.
5. Inventory
Inventory consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Raw materials and consumables | | $ | 18.5 | | | $ | 15.7 | |
Work in process | | 0.8 | | | 1.2 | |
Finished goods | | 2.0 | | | 2.0 | |
Total inventory | | $ | 21.3 | | | $ | 18.9 | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
6. Investments
The carrying values of the Company's investments were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Measurement Alternative(1) | | Equity Method | | Fair Value | | Total |
Common stock | | $ | — | | | $ | 3.1 | | | $ | — | | | $ | 3.1 | |
Preferred stock and fixed maturities | | — | | | — | | | 4.6 | | | 4.6 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | — | | | $ | 3.1 | | | $ | 4.6 | | | $ | 7.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Measurement Alternative(1) | | Equity Method | | Fair Value | | Total |
Common stock | | $ | — | | | $ | 3.0 | | | $ | — | | | $ | 3.0 | |
Preferred stock and fixed maturities | | — | | | — | | | 4.6 | | | 4.6 | |
Put option | | 11.3 | | | — | | | — | | | 11.3 | |
Investment in securities | | — | | | 40.6 | | | — | | | 40.6 | |
Total | | $ | 11.3 | | | $ | 43.6 | | | $ | 4.6 | | | $ | 59.5 | |
(1) The Company accounts for its equity securities without readily determinable fair values under the measurement alternative election of ASC 321, whereby the Company can elect to measure an equity security without a readily determinable fair value, that does not qualify for the practical expedient to estimate fair value (net asset value), at its cost minus impairment, if any.
Equity Method Investments
The Company's equity method investments as of March 31, 2023 are comprised of investments in MediBeacon and Triple Ring, and, as of December 31, 2022 were comprised of investments in MediBeacon, Triple Ring and HMN.
The Company's share of net losses from its equity method investments totaled $4.0 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively. The Company accounts for its Triple Ring equity method investment results on a one-month lag basis.
MediBeacon
Pansend accounts for MediBeacon's preferred stock as an equity method investment, inclusive of any fixed maturity securities (notes) issued by Pansend to MediBeacon. On March 15, 2022, Pansend issued MediBeacon a $4.5 million 8.0% convertible note due March 2025, increasing the total outstanding principal to $5.0 million.
On February 23, 2023, pursuant to its amended commercial partnership with Huadong Medicine Co. Ltd ("Huadong"), a publicly traded company on the Shenzhen Stock Exchange, MediBeacon issued $7.5 million of its preferred stock to Huadong in exchange for additional shares of preferred stock, which decreased Pansend's ownership in MediBeacon from approximately 47% as of December 31, 2022 to approximately 46% subsequent to the transaction. As a result of this equity transaction, Pansend recognized a gain of $3.8 million in Other income (expense), net in the Condensed Consolidated Statements of Operations, which increased Pansend's basis in MediBeacon. Concurrently, Pansend recognized additional equity method losses of $3.8 million which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. Therefore, as of March 31, 2023, Pansend's carrying amount of its investment in MediBeacon remains at zero inclusive of the $5.0 million 8.0% convertible note due March 2025.
HMN
On March 6, 2023, the Company, through New Saxon 2019 Limited (“New Saxon”), an indirect subsidiary of GMH, closed on the sale of its remaining 19% interest in HMN to subsidiaries and an affiliate of Hengtong Optic-Electric Co Ltd. The sale was consummated pursuant to the terms of a supplemental agreement entered into by the parties in June 2022. New Saxon received gross proceeds of $54.2 million and interest income of $0.5 million, of which $4.4 million was withheld for a foreign tax payment. Refer to Note 12. Income Taxes for additional information. As of March 31, 2023, $15.9 million had been paid to GMH's non-controlling interest holders and redeemable noncontrolling interest holders pursuant to the partnership agreement, and $0.1 million was paid in April 2023. New Saxon recognized a gain on sale of $12.3 million, which is reflected in Other income (expense), net in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
The following tables provide combined summarized unaudited financial information for the Company's equity method investments(1) (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Assets | | $ | 65.9 | | | $ | 786.4 | |
Liabilities | | 100.2 | | | 670.2 | |
Equity | | $ | (34.3) | | | $ | 116.2 | |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Total revenues | | | | | | $ | 39.0 | | | $ | 70.2 | |
Gross profit | | | | | | $ | 11.3 | | | $ | 17.6 | |
Operating loss | | | | | | $ | (6.0) | | | $ | (1.2) | |
Net (loss) income | | | | | | $ | (6.6) | | | $ | 1.9 | |
(1) Excludes the Assets and Liabilities of HMN as of March 31, 2023, and only includes the results of operations of HMN until the date of sale in the first quarter of 2023.
7. Property, Plant and Equipment, Net
Property, plant and equipment, net, ("PP&E") consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
| | | | |
Equipment, furniture and fixtures, and software | | $ | 202.7 | | | $ | 196.0 | |
Building and leasehold improvements | | 45.5 | | | 44.8 | |
Land | | 26.1 | | | 26.1 | |
Construction in progress | | 6.0 | | | 8.4 | |
Plant and transportation equipment | | 8.0 | | | 8.2 | |
| | $ | 288.3 | | | $ | 283.5 | |
Less: Accumulated depreciation | | 124.3 | | | 118.5 | |
Total | | $ | 164.0 | | | $ | 165.0 | |
Depreciation expense was $6.3 million and $6.4 million for the three months ended March 31, 2023 and 2022, respectively. These amounts included $3.9 million and $3.7 million of depreciation expense recognized within cost of revenue for the three months ended March 31, 2023 and 2022, respectively.
As of March 31, 2023 and December 31, 2022, the net book value of equipment under capital leases included in PP&E was $2.7 million and $2.1 million, respectively. As of March 31, 2023 and December 31, 2022, the net book value of capitalized internal-use software included in PP&E was $37.2 million and $35.6 million, respectively.
8. Goodwill and Intangibles, Net
Goodwill
The carrying amounts of goodwill by segment were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Infrastructure | | Spectrum | | Total |
| | | | | | |
| | | | | | |
| | | | | | |
Balance at December 31, 2022 | | $ | 105.7 | | | $ | 21.4 | | | $ | 127.1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Translation adjustment | | (0.1) | | | — | | | (0.1) | |
Balance as of March 31, 2023 | | $ | 105.6 | | | $ | 21.4 | | | $ | 127.0 | |
Indefinite-lived Intangible Assets
The carrying amounts of indefinite-lived intangible assets were as follows (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
FCC licenses | | $ | 106.3 | | | $ | 106.3 | |
| | | | |
Total | | $ | 106.3 | | | $ | 106.3 | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
For the three months ended March 31, 2022, the Company recorded an impairment charge of $0.1 million, which is reflected in Other operating income in the unaudited Condensed Consolidated Statements of Operations. The impairment charges related to non-core FCC licenses which were sold in order to bring their carrying value equal to the agreed upon sales price prior to the execution of the sale.
Definite Lived Intangible Assets
The gross carrying amounts and accumulated amortization of definite lived intangible assets by major intangible asset class were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Weighted-Average Original Useful Life | | March 31, 2023 | | December 31, 2022 |
| | | Gross Carrying Amount | Accumulated Amortization | Net | | Gross Carrying Amount | Accumulated Amortization | Net |
Trade names | | 14 years | | $ | 25.4 | | | $ | (8.4) | | | $ | 17.0 | | | $ | 25.4 | | | $ | (8.0) | | | $ | 17.4 | |
Customer relationships and contracts | | 11 years | | 87.6 | | | (38.8) | | | 48.8 | | | 87.6 | | | (35.4) | | | 52.2 | |
Channel sharing arrangements | | 35 years | | 12.6 | | | (1.5) | | | 11.1 | | | 12.6 | | | (1.4) | | | 11.2 | |
Other | | 12 years | | 4.0 | | | (1.1) | | | 2.9 | | | 4.1 | | | (1.1) | | | 3.0 | |
Total | | | | $ | 129.6 | | | $ | (49.8) | | | $ | 79.8 | | | $ | 129.7 | | | $ | (45.9) | | | $ | 83.8 | |
Amortization expense for definite lived intangible assets was $3.9 million and $4.1 million for the three months ended March 31, 2023 and 2022, respectively, and was included in Depreciation and amortization in our Condensed Consolidated Statements of Operations.
9. Leases
Operating lease right-of-use-assets and assets held under finance leases are recognized in the Condensed Consolidated Balance Sheets within Other assets and Property, plant and equipment, net, respectively. Operating lease liabilities and finance lease liabilities are recognized in the Condensed Consolidated Balance Sheets within Other liabilities and Debt obligations, respectively. Right-of-use lease assets and lease liabilities consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Right-of-use assets: | | | | |
Operating lease (Other assets) | | $ | 64.5 | | | $ | 65.8 | |
Finance lease (Property, plant and equipment, net) | | 2.7 | | | 2.1 | |
Total right-of-use assets | | $ | 67.2 | | | $ | 67.9 | |
| | | | |
Lease liabilities: | | | | |
Current portion of operating lease (Other current liabilities) | | $ | 15.6 | | | $ | 17.1 | |
Non-current portion of operating lease (Other liabilities) | | 53.6 | | | 53.8 | |
Finance lease (Debt obligations) | | 2.7 | | | 2.1 | |
Total lease liabilities | | $ | 71.9 | | | $ | 73.0 | |
The tables below present financial information associated with the Company's leases. The information is presented as of, and for the three months ended March 31, 2023 and 2022. The Company has entered into operating and finance lease agreements primarily for land, office space, equipment and vehicles, expiring between 2023 and 2045.
The following table summarizes the components of lease expense (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | | | | | $ | 0.1 | | | $ | — | |
| | | | | | | | |
Net finance lease cost | | | | | | 0.1 | | | — | |
Operating lease cost | | | | | | 5.9 | | | 5.9 | |
| | | | | | | | |
Variable lease cost | | | | | | 0.1 | | | 0.1 | |
Sublease income | | | | | | (0.2) | | | (0.2) | |
Total lease cost | | | | | | $ | 5.9 | | | $ | 5.8 | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Cash flow information related to leases is as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| | | | | | | | |
Financing cash flows from finance leases | | | | | | $ | 0.1 | | | $ | — | |
Operating cash flows from operating leases | | | | | | $ | 6.3 | | | $ | 6.2 | |
Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | |
Finance leases | | | | | | $ | 0.6 | | | $ | — | |
Operating leases | | | | | | $ | 3.9 | | | $ | 6.5 | |
The weighted-average remaining lease term and the weighted-average discount rate for finance leases and operating leases for the periods presented are as follows:
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Weighted-average remaining lease term (years) - operating leases | | 7.4 | | 7.5 |
Weighted-average remaining lease term (years) - finance leases | | 2.0 | | 1.4 |
Weighted-average discount rate - operating leases | | 5.5 | % | | 5.3 | % |
Weighted-average discount rate - finance leases | | 5.6 | % | | 5.7 | % |
Future minimum lease commitments (undiscounted) as of March 31, 2023, were as follows (in millions):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2023 | $ | 14.5 | | | $ | 1.8 | |
2024 | 15.3 | | | 0.4 | |
2025 | 11.8 | | | 0.3 | |
2026 | 8.3 | | | 0.2 | |
2027 | 6.0 | | | 0.2 | |
Thereafter | 28.8 | | | — | |
Total future minimum lease payments | 84.7 | | | 2.9 | |
Less: amounts representing interest | (15.5) | | | (0.2) | |
Total lease liability balance | $ | 69.2 | | | $ | 2.7 | |
In November 2021, INNOVATE Corp. entered into a ten-year lease agreement for a special purpose space in Palm Beach, Florida. In February 2023, the lease agreement was amended to extend the term of the lease to 15 years. The lease has not yet commenced, but will require future monthly lease payments of approximately $0.2 million over the entire lease term and yearly common area maintenance charges of $0.6 million, both of which are subject to 3% annual upward adjustments, with total square footage of 20,950. The lease also provides for the Company to receive an allowance from the landlord of $4.4 million, as amended in February 2023, to be used toward costs to design, engineer, install, supply and construct improvements (the "Construction Allowance"), payable at the end of the construction period, of which $0.9 million and $0.8 million is included in prepaid rent in Other assets as of March 31, 2023 and December 31, 2022, respectively. The future lease payments and remaining unexpended amounts under the allowance are not yet recorded in our Condensed Consolidated Balance Sheet. We expect the accounting lease commencement date for this initial portion of the lease for financial reporting purposes to begin in 2024.
In December 2021, the Company entered into a five-year lease agreement with an option to extend the lease for another five years for office space in West Palm Beach, Florida. The new lease has not commenced yet, but will require future monthly lease payments of approximately $0.1 million over the entire lease term, subject to 3% annual upward adjustment, with total square footage of 15,786. Other than a $0.2 million deposit included in Other assets, the future lease payments are not yet recorded on our Condensed Consolidated Balance Sheets, as the building is still under construction. We expect the accounting lease commencement date for this initial portion of the lease for financial reporting purposes to begin in 2024.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
10. Other Assets, Accrued Liabilities and Other Liabilities
Other assets, which are reflected in non-current assets in the Condensed Consolidated Balance Sheets, consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Right-of-use assets | | $ | 64.5 | | | $ | 65.8 | |
Restricted cash - non-current | | 1.4 | | | 1.5 | |
Other | | 5.2 | | | 4.6 | |
Total other assets | | $ | 71.1 | | | $ | 71.9 | |
Accrued liabilities consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Accrued expenses | | $ | 16.2 | | | $ | 18.9 | |
| | | | |
Accrued payroll and employee benefits | | 21.7 | | | 30.8 | |
Accrued interest | | 6.7 | | | 15.3 | |
Accrued income taxes | | 0.4 | | | 0.4 | |
Total accrued liabilities | | $ | 45.0 | | | $ | 65.4 | |
Other current liabilities consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Lease liability, current | | $ | 15.6 | | | $ | 17.1 | |
Redeemable preferred stock Series A | | 7.0 | | | — | |
Other current liabilities | | 2.1 | | | 3.0 | |
Total other current liabilities | | $ | 24.7 | | | $ | 20.1 | |
Other liabilities, which are reflected in non-current liabilities in the Condensed Consolidated Balance Sheets, consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Lease liability, net of current portion | | $ | 53.6 | | | $ | 53.8 | |
Redeemable preferred stock Series A | | 34.8 | | | — | |
Other | | 19.2 | | | 17.4 | |
Total other liabilities | | $ | 107.6 | | | $ | 71.2 | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
11. Debt Obligations
Debt obligations, including finance lease obligations, consisted of the following (in millions):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Infrastructure | |
3.25% Note due 2026 | $ | 98.0 | | | $ | 99.5 | |
PRIME minus 0.85% Line of Credit due 2024 | 105.7 | | | 107.7 | |
4.00% Note due 2024 | 12.5 | | | 15.0 | |
8.00% Note due 2024 | 18.1 | | | 18.7 | |
| | | |
Obligations under finance leases | 2.7 | | | 2.1 | |
Total Infrastructure | $ | 237.0 | | | $ | 243.0 | |
| | | |
Spectrum | | | |
8.50% Note due 2024 | $ | 19.3 | | | $ | 19.3 | |
11.45% Notes due 2024 | 50.4 | | | 50.4 | |
| | | |
| | | |
Total Spectrum | $ | 69.7 | | | $ | 69.7 | |
| | | |
Life Sciences | | | |
20.00% Note due 2023 | $ | 13.0 | | | — | |
18.00% Note due 2023 | — | | | 10.8 | |
Total Life Sciences | $ | 13.0 | | | $ | 10.8 | |
| | | |
Non-Operating Corporate | | | |
8.50% Senior Secured Notes, due 2026 | $ | 330.0 | | | $ | 330.0 | |
7.50% Convertible Senior Notes, due 2026 | 51.8 | | | 51.8 | |
LIBOR plus 5.75% Line of Credit | 5.0 | | | 20.0 | |
Total Non-Operating Corporate | $ | 386.8 | | | $ | 401.8 | |
| | | |
Total outstanding principal | $ | 706.5 | | | $ | 725.3 | |
Unamortized issuance discount, issuance premium, and deferred financing costs | (9.3) | | | (10.9) | |
Less: current portion of debt obligations | (32.9) | | | (30.6) | |
Debt obligations | $ | 664.3 | | | $ | 683.8 | |
As of March 31, 2023, aggregate finance lease and debt payments, including interest, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Finance Leases | | Debt | | Total |
2023 | | $ | 1.8 | | | $ | 60.9 | | | $ | 62.7 | |
2024 | | 0.4 | | | 253.1 | | | 253.5 | |
2025 | | 0.3 | | | 46.8 | | | 47.1 | |
2026 | | 0.2 | | | 469.7 | | | 469.9 | |
2027 | | 0.2 | | | — | | | 0.2 | |
Thereafter | | — | | | — | | | — | |
Total minimum principal and interest payments | | 2.9 | | | 830.5 | | | 833.4 | |
Less: Amount representing interest | | (0.2) | | | (126.7) | | | (126.9) | |
Total aggregate finance lease and debt payments | | $ | 2.7 | | | $ | 703.8 | | | $ | 706.5 | |
The interest rates on finance leases ranged from approximately 2.0% to 6.0%.
Infrastructure
The $98.0 million UMB Term Loan expires May 31, 2026 and bears interest at a rate of 3.25% with an effective interest rate of 3.3%. Interest is paid monthly. Infrastructure also has a $135.0 million Revolving Line with UMB, which expires on May 31, 2024 and bears interest at a rate of Prime Rate minus 0.85%. Interest is paid monthly. The UMB Revolving Line associated with our Infrastructure segment contains customary restrictive and financial covenants related to debt levels and performance, including a Fixed Coverage Ratio covenant, as defined in the agreement.
The $12.5 million note expires March 31, 2024 and bears interest at a rate of 4.00%. Interest is paid quarterly. The $18.1 million note expires May 27, 2024 and bears interest at a rate of 8.00%. Interest is paid quarterly.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Spectrum
On December 30, 2022, Broadcasting entered into a Seventh Omnibus Amendment to Secured Notes which, among other things, extended the maturity date of $52.2 million of its Senior Secured Notes, due December 30, 2022 to May 31, 2024. The effective interest rates on the notes range from 12.8% to 19.6%. Interest is capitalized and payable upon maturity of the principal. The $52.2 million of Senior Secured Notes consisted of $19.3 million of 8.5% Senior Secured Notes and $32.9 million of 10.5% Senior Secured Notes. The other terms of the $19.3 million 8.5% Senior Notes remained the same. At the time of the extension, HC2 Broadcasting had accrued interest and other fees of $6.9 million. The interest rate on the $32.9 million 10.5% Senior Notes was increased to 11.45% and cumulative accrued interest and exit fees of $17.5 million were capitalized into the principal balance with both note extensions accounted for as debt modification events. All other terms were essentially the same. Total outstanding principal after the refinancing was $69.7 million and $6.9 million of accrued interest and fees remain accrued, with total exit fees of $7.6 million which were recorded as original issue discount with a corresponding liability reflected in Other Liabilities.
Concurrently therewith and as part of the consideration for extending the 10.5% Senior Notes, HC2 Broadcasting amended warrants to purchase 145,825 shares of common stock of HC2 Broadcasting Holdings, Inc. common stock held by the lenders of the 10.5% Senior Notes by extending the time to exercise such to the second half of 2026 and reducing the exercise price per share (i) from $140.00 to $0.01 in the case of the certain of the warrants and (ii) from $130.00 to $0.01 in the case of the remaining warrants. The warrants have a five-year term and are exercisable at any time. The change in the fair value of the warrants was recorded as original issue discount with a corresponding impact reflected in Noncontrolling interest of $3.1 million.
Life Sciences
During June to December 2022, R2 Technologies entered in various notes totaling $10.8 million with Lancer Capital, LLC ("Lancer"), a related party, an entity controlled by Avram A. Glazer, the Chairman of INNOVATE's Board of Director. On February 15, 2023 and February 28, 2023, R2 Technologies closed on an additional 18% $0.5 million note and an additional 18% $0.4 million note with Lancer, respectively. On March 31, 2023, R2 Technologies entered into an exchange agreement with Lancer, which terminated all prior outstanding notes and simultaneously issued a new note with an aggregate original principal amount of $13.0 million, which comprised of all prior outstanding principal amounts and unpaid accrued interest. The interest rate on the new note increased from 18% to 20%, and the new maturity date has been extended to the earlier of June 30, 2023 or within five business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing. Subsequent to quarter end, on April 28, 2023, R2 Technologies closed on an additional 20% $0.4 million note with Lancer.
For the three months ended March 31, 2023, R2 Technologies recognized interest expense related to the contractual interest coupon with Lancer of $0.5 million. The interest was capitalized into the new principal balance with Lancer on March 31, 2023. Future interest will be payable upon maturity of the note.
Non-Operating Corporate
2026 Senior Secured Notes
The 2026 Senior Secured Notes were issued at 100% of par, with a stated interest rate of 8.50% and an effective interest rate of 9.26%, which reflects $2.7 million of deferred financing fees. For the three months ended March 31, 2023 and 2022, interest expense recognize relating to both the contractual interest coupon and amortization of the deferred financing fees was $7.5 million and $7.6 million, respectively.
2026 Convertible Notes
The 2026 Convertible Notes were issued under a separate indenture dated February 1, 2021, between the Company and U.S. Bank, as trustee (the "Convertible Indenture"). The 2026 Convertible Notes were issued at 100% of par with a stated interest rate of 7.50%. The fair value of the embedded conversion feature contained in the 2026 Convertible Notes had a fair value of $12.3 million, which was recorded as a premium on the 2026 Convertible Notes. The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased. The 2026 Convertible Notes have an effective interest rate of 3.21%, which reflects the initial $12.3 million premium and $1.1 million of deferred financing fees.
Each $1,000 of principal of the 2026 Convertible Notes will initially be convertible into 234.2971 shares of our common stock, which is equivalent to an initial conversion price of approximately $4.27 per share, subject to adjustment upon the occurrence of specified events.
As of March 31, 2023, the 2026 Convertible Notes had a net carrying value of $58.8 million inclusive of an unamortized premium of $7.7 million. Based on the closing price of our common stock of $2.97 on March 31, 2023, the if-converted value of the 2026 Convertible Notes did not exceed its principal value.
For both the three months ended March 31, 2023 and 2022, interest expense recognized relating to both the contractual interest coupon and amortization of discount net of premium was $0.5 million.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Line of Credit - Revolving Credit Agreement
The Company has a $20.0 million line of credit with MSD PCOF Partners IX, LLC ("Revolving Credit Line"), which matures on February 23, 2024, and has an interest rate margin applicable to loans borrowed under the Revolving Credit Line of 5.75%. The affirmative and negative covenants governing the Revolving Credit Line are substantially consistent with the affirmative and negative covenants contained in the indenture that governs the 2026 Senior Secured Notes. In May 2021, INNOVATE drew $5.0 million under the Revolving Credit Agreement. In July 2022, the Company drew an additional $15.0 million under the Revolving Credit Agreement. In March 2023, the Company paid down $15.0 million of the Revolving Credit Agreement, reducing the outstanding balance to $5.0 million. Subsequent to quarter end, on April 25, 2023, the Company extended the maturity date of its Revolving Credit Agreement to March 16, 2025, changed the benchmark rates for interest to SOFR-based rates and lowered the amount of net cash proceeds from certain asset sales in excess of which a prepayment is required from $50.0 million to $10.0 million. Refer to Note 21. Subsequent Events.
INNOVATE is in compliance with its debt covenants as of March 31, 2023.
Subsequent to quarter end, on May 9, 2023, the Company issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million. The promissory note is due February 28, 2026, and bears interest at 9% per annum through May 8, 2024, 16% per annum from May 9, 2024 to May 8, 2025, and 32% per annum thereafter. The promissory note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3 million or 12.5% of the proceeds from certain equity sales. Refer to Footnote 15. Preferred Stock and Equity for additional information. Additionally, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
12. Income Taxes
The Company used the Annual Effective Tax Rate ("ETR") approach of ASC 740-270, Interim Reporting, to calculate its 2023 interim tax provision.
Income tax expense of $0.9 million and $1.6 million for the three months ended March 31, 2023 and 2022, respectively, primarily relates to tax expense as calculated under ASC 740 for taxpaying entities. Additionally, the tax benefits associated with losses generated by the INNOVATE Corp. U.S. tax consolidated group and certain other businesses have been reduced by a full valuation allowance as we do not believe it is more-likely-than-not that the losses will be utilized. Additionally, the annual ETR calculated for the 2023 first quarter interim tax provision included a $1.1 million tax benefit, consisting of a current tax expense of $4.4 million related to a foreign tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million put option, both of which were related to the sale of New Saxon's 19% investment in HMN on March 6, 2023.
Net Operating Losses
At December 31, 2022, the Company had gross U.S. net operating loss carryforwards available to reduce future taxable income of the U.S. consolidated group in the amount of $226.3 million. The Company expects that approximately $162.9 million of the gross U.S. net operating loss carryforwards would be available to offset taxable income in 2023. This estimate may change based on changes to actual results reported on the 2022 U.S. tax return. The amount of U.S. net operating loss carryforwards reflected in the financial statements differ from the amounts reported on the U.S. tax return due to uncertain tax positions related to tax laws and regulations that are subject to varied interpretation by the IRS.
Additionally, the Company has $124.5 million of gross U.S. net operating loss carryforwards from its subsidiaries that do not qualify to be included in the INNOVATE Corp. U.S. consolidated income tax return, including $83.8 million from R2, $38.3 million from DTV America, and other entities of $2.4 million.
Unrecognized Tax Benefits
The Company follows the provision of ASC 740 which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company is subject to challenge from various taxing authorities relative to certain tax planning strategies, including certain intercompany transactions as well as regulatory taxes.
The Company did not have any unrecognized tax benefits as of March 31, 2023 and 2022 related to uncertain tax positions that would impact the effective income tax rate if recognized. The Company has reduced the net operating loss carryforward by $58.7 million for uncertain tax positions based on our interpretation of tax laws and regulations that are subject to varied interpretation by the IRS.
Examinations
The Company conducts business globally, and as a result, INNOVATE or one or more of its subsidiaries files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. Tax years 2002-2021 remain open for examination.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
The Company is currently under examination in various domestic and foreign tax jurisdictions. The open tax years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the applicability of income tax credits for the relevant tax period. Given the nature of tax audits, there is a risk that disputes may arise.
13. Commitments and Contingencies
Litigation
The Company is subject to claims and legal proceedings that arise in the ordinary course of business. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company’s Condensed Consolidated Financial Statements. The Company does not believe that any of such pending claims and legal proceedings will have a material adverse effect on its Condensed Consolidated Financial Statements. The Company records a liability in its Condensed Consolidated Financial Statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amount of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary for its Condensed Consolidated Financial Statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the Company's Condensed Consolidated Financial Statements. Any legal or other expenses associated with the litigation are accrued for as the expenses are incurred.
Based on a review of the current facts and circumstances with counsel in each of the matters disclosed, management has provided for what is believed to be a reasonable estimate of loss exposure. While acknowledging the uncertainties of litigation, management believes that the ultimate outcome of litigation will not have a material effect on its financial position and will defend itself vigorously.
VAT assessment
On February 20, 2017, and on August 15, 2017, the Company's subsidiary, PTGi International Carrier Services Ltd. (“PTGi-ICS Ltd”), received notices from Her Majesty’s Revenue and Customs office in the U.K. ("HMRC") indicating that it was required to pay certain Value-Added Taxes ("VAT") for the 2015 and 2016 tax years. On February 15, 2022, the Upper Tribunal (Tax and Chancery) Chamber (the "Tax Tribunal") found in favor of PTGi-ICS Ltd. HMRC has acknowledged that it will not appeal the Tax Tribunal’s decision and it must pay reasonable legal fees incurred by PTGi-ICS Ltd. On August 1, 2022 ICS received £1.1 million (~$1.3 million) from HMRC for the VAT refunds previously withheld. ICS is working on cost reimbursements from HMRC and is working with HMRC agents to obtain full resolution.
Fair Value Investments Litigation
On October 1, 2020, Fair Value Investments Incorporated (“FVI”) filed a stockholder class action and derivative complaint in the Delaware Court of Chancery (the "Court") against INNOVATE Corp. and certain of DBMG’s current and former officers and directors, including current and former INNOVATE officers and directors AJ Stahl, Kenneth S. Courtis, Robert V. Leffler, Jr., Philip A. Falcone, Michael J. Sena, and Paul Voigt (together with INNOVATE, the “INNOVATE Defendants”) styled Fair Value Investments Incorporated v. Roach, et al., C.A. No. 2020-0847-JTL (Del. Ch.) (the “FVI Action”). In the FVI Action, FVI alleges that the Company, in its capacity as DBMG’s controlling stockholder, and DBMG’s current and former officers and directors breached their fiduciary duties to DBMG and DBMG’s minority stockholders by approving certain transactions that allegedly provide disproportionate benefits to the Company. FVI challenges the following transactions: (i) DBMG’s payments to the Company from 2016–present pursuant to a Tax Sharing Agreement between DBMG and the Company; (ii) DBMG acting as a guarantor or providing collateral for loans taken on by the Company; (iii) DBMG’s issuance of dividends to its common and preferred stockholders in 2017–2020; (iv) DBMG’s issuance of preferred stock to the Company to finance DBMG’s 2018 acquisition of GrayWolf Industrial; and (v) the Company’s appointment of directors to DBMG’s board of directors by written consent in lieu of holding an annual stockholder meeting.
On February 23, 2021, FVI filed an Amended Verified Stockholder Class Action Complaint (the "Amended Complaint"). In the Amended Complaint, FVI named two additional defendants: the Company’s Chief Executive Officer, Wayne Barr, and DBMG’s General Counsel, Scott D. Sherman. The Amended Complaint includes additional fact allegations in support of the largely similar claims raised in the original complaint. Defendants moved to dismiss the Amended Complaint on April 23, 2021. The Court heard argument on the motions to dismiss on January 21, 2022. Ruling from the bench, the Court granted Defendants’ motions to dismiss, in part. The Court dismissed all claims against all individual defendants other than Ronald Yagoda, including all claims against Messrs. Barr, Stahl, Courtis, Leffler, Falcone, Sena, and Voigt. As to the two remaining defendants - INNOVATE Corp. and Yagoda - the Court dismissed all claims regarding: (i) DBMG acting as a guarantor or providing collateral for loans by the Company; (ii) DBMG’s issuance of dividends to its common and preferred stockholders in 2017–2020; (iii) the Company’s appointment of directors to DBMG’s board of directors by written consent in lieu of holding an annual stockholder meeting; and (iv) DBMG’s payments to the Company in 2016 and May 2017 pursuant to a Tax Sharing Agreement between DBMG and the Company. The Company believes the surviving claims in the FVI Amended Complaint relating to (i) DBMG’s payments to the Company after May 2017 pursuant to a Tax Sharing Agreement between DBMG and the Company and (ii) DBMG’s issuance of preferred stock to the Company to finance DBMG’s 2018 acquisition of GrayWolf Industrial are without merit. Discovery on the two remaining claims is underway.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
On December 23, 2022, the parties entered into a Joint Stipulation and Proposed Scheduling Order which, among other things, scheduled the trial date for March 12-14, 2024.
On March 1, 2023, FVI's counsel filed a Motion to Withdraw and Temporarily Stay Proceedings, which motion was granted on March 9, 2023. The Court ordered a 30-day stay of the proceedings to allow FVI to engage new counsel, which stay expired on April 10, 2023. On May 1, 2023, the Company moved to dismiss this case with prejudice as to FVI and its Chairman, Gary Lutin, as part of its vigorous defense thereof.
DTV Derivative Litigation
On March 15, 2021, twenty-two DTV stockholders and eight holders of DTV stock options filed a stockholder class action and derivative complaint in the Delaware Court of Chancery in an action styled Bocock, et al., v. HC2 Holdings, Inc. et al., C.A. No. 2021-0224 (Del. Ch.). Plaintiffs named as defendants INNOVATE Corp. (f/k/a HC2 Holdings, Inc.), HC2 Broadcasting Holdings, Inc., HC2 Broadcasting Inc., and Continental General Insurance Corporation (the “INNOVATE Entities”) and certain current and former officers and directors of the INNOVATE Entities and DTV, including Philip Falcone, Michael Sena, Wayne Barr, Jr., Les Levi, Paul Voigt, Ivan Minkov, and Paul Robinson (the “Individual Defendants”). Plaintiffs principally allege that the defendants breached their fiduciary duties and/or aided and abetted breaches of fiduciary duty by participating in a “scheme” in which the INNOVATE Entities (i) acquired majority voting and operating control over DTV; (ii) exploited that control to misappropriate DTV’s assets and business opportunities for the benefit of the INNOVATE Entities; and (iii) purchased DTV stock at a discount to fair value and diminished the value of DTV stock options. Plaintiffs allege that the Individual Defendants (i) “prompted” the INNOVATE Entities to purchase more than 100 low-power television (“LPTV”) broadcast stations originally identified for potential acquisition by DTV, (ii) allowed the INNOVATE Entities to misappropriate DTV technology, known as “DTV Cast,” (iii) caused DTV to transfer unspecified LPTV broadcasting station licenses to INNOVATE affiliates “without paying any value,” and (iv) transferred to the INNOVATE Entities unspecified DTV broadcasting stations that had been “repacked” by the FCC. Defendants moved to dismiss the Complaint on May 19, 2021. On June 23, 2021, plaintiffs amended their complaint. In the amended complaint, plaintiffs assert the same claims they asserted in their initial complaint, added a claim for waste associated with DTV’s purported transfer of licenses and construction permits for less than fair value, and dropped Paul Robinson as a defendant. Defendants moved to dismiss the amended complaint in its entirety on August 25, 2021, and the parties completed briefing on the motions to dismiss on November 10, 2021. The Court heard argument on the motions to dismiss on March 29, 2022. On June 28, 2022, the Court requested that the parties submit supplemental briefing on the motions to dismiss by July 20, 2022. The parties completed the supplemental briefing on July 20, 2022.
On October 28, 2022, the Court issued a Memorandum Opinion on Defendants’ motion to dismiss the Complaint. First, the Court dismissed all claims against Continental General Insurance Corporation for lack of personal jurisdiction. Second, the Court dismissed all claims the stockholder plaintiffs purported to assert directly. Third, the Court dismissed as time-barred all claims challenging conduct that occurred before March 15, 2018, including claims challenging (i) the November 2017 acquisition of Azteca America by INNOVATE; (ii) INNOVATE’s purported usurpation of the so-called “DTV Cast” technology; and (iii) the WFWC-CD Station acquisition. Fourth, the Court dismissed claims associated with the INNOVATE Entities’ purported purchases of unidentified broadcasting stations. Fifth, the Court dismissed all claims challenging the Expense Sharing Agreement, and the Right to Use Agreement between INNOVATE and DTV, and certain Stock-Based Compensation Agreements. Sixth, the Court dismissed the aiding and abetting claim against the INNOVATE Entities. Seventh, the Court dismissed the civil conspiracy claim as to all defendants. Lastly, the Court dismissed the option-holders’ claim for tortious interference with prospective business opportunities. Thus, after the Court issued its October 28, 2022 Memorandum Opinion, the only claims to survive Defendants’ motion to dismiss are (i) a derivative claim against the INNOVATE Entities (other than Continental General), Levi, and Falcone for breach of fiduciary duty in connection with the $0.1 million Frank Digital acquisition; (ii) a derivative claim for breach of fiduciary duty against the INNOVATE Entities (other than Continental General), in their capacities as DTV’s controlling stockholders, relating to the sale of six licenses (for less than $0.5 million) in connection with the Gray Media sale; (iii) a derivative claim for breach of fiduciary duty against the INNOVATE Entities (other than Continental General) and Levi in connection with the transfer of licenses ultimately sold to TV-49 for $0.1 million; and (iv) a derivative claim for waste against Levi and Falcone in connection with the sale of two stations to Lowcountry, which Lowcountry later sold for $0.2 million and $0.4 million, respectively. The Company believes these remaining claims are without merit, and the Company intends to vigorously defend this litigation.
Marin Hospital Replacement Litigation
On October 20, 2022, McCarthy Building Companies, Inc. (“McCarthy”) filed suit against Schuff Steel Company (“Schuff”), a subsidiary of DBMG, and Quality Assurance Engineering, Inc. dba Consolidated Engineering Laboratories (“CEL”) in the Superior Court of the State of California for the County of Marin, styled McCarthy Building Companies, Inc. v. Schuff Steel Company; Quality Engineering, Inc. dba Consolidated Engineering Laboratories, et al., Case No. CIV2203963 (the “Action”). In the Action, McCarthy alleges damages and delays caused by alleged failures in fabrication, erection, welding, and quality control by Schuff and improper quality assurance responsibilities by CEL on the Marin General Hospital Replacement Building (the “Project”). McCarthy asserts claims against Schuff for breach of contract, express indemnity, breach of express warranties, negligence, equitable implied indemnity, breach of implied warranties, and declaratory relief. On February 13, 2023, Schuff filed its response denying liability to McCarthy and asserting a Cross-Complaint against McCarthy, and other companies involved in the design, construction, and quality assurance, who potentially are liable for damages and delays alleged by McCarthy on the Project. In the Cross-Complaint, Schuff asserts claims for breach of contract, violation of statute, equitable indemnity apportionment, and contribution and express indemnity (the “Cross-Complaint”). Schuff intends to vigorously defend this Action and aggressively pursue the Cross-Complaint and cannot reasonably estimate any range of potential loss at this time.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Other Commitments and Contingencies
Letters of Credit and Performance Bonds
As of March 31, 2023, DBMG had outstanding letters of credit of $2.6 million under credit and security agreements and performance bonds of $871.2 million. As of December 31, 2022, DBM had outstanding letters of credit of $2.6 million under credit and security agreements and performance bonds of $956.6 million. DBMG’s contract arrangements with customers sometimes require DBMG to provide performance bonds to partially secure its obligations under its contracts. Bonding requirements typically arise in connection with private contracts and sometimes with respect to certain public work projects. DBMG’s performance bonds are obtained through surety companies and typically cover the entire project price. The ratings of the bonding companies utilized by DBMG are highly rated, ranging from A-, A, A+ and AA.
14. Share-based Compensation
Total share-based compensation expense recognized by the Company and its subsidiaries under all equity compensation arrangements was $0.5 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively.
All grants are time based and vest either immediately or over a period established at grant, typically with a requisite service period of two to three years for the employee to vest in the stock-based award, subject to discretion by Compensation Committee of the Board of Directors. There are no other substantive conditions for vesting. The Company recognizes compensation expense for equity awards, reduced by actual forfeitures as they are incurred, using the straight-line basis.
Restricted Stock
A summary of INNOVATE’s restricted stock activity is as follows: | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Unvested - December 31, 2021 | | 555,879 | | | $ | 3.79 | |
Granted | | 1,031,611 | | | $ | 2.41 | |
Vested | | (400,395) | | | $ | 3.77 | |
Forfeited | | (45,289) | | | $ | 3.68 | |
Unvested - December 31, 2022 | | 1,141,806 | | | $ | 2.56 | |
Granted | | 321,387 | | | $ | 2.93 | |
Vested | | (260,330) | | | $ | 3.64 | |
| | | | |
Unvested - March 31, 2023 | | 1,202,863 | | | $ | 2.42 | |
The aggregate vesting date fair value of the restricted stock awards which vested during the three months ended March 31, 2023 and 2022 was $0.8 million and $0.6 million, respectively. As of March 31, 2023, the total unrecognized stock-based compensation expense related to unvested restricted stock awards was $2.5 million and is expected to be recognized over the remaining weighted average period of 2.1 years.
Stock Options
A summary of INNOVATE’s stock option activity is as follows: | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price |
Outstanding - December 31, 2021 | | 4,715,859 | | | $ | 5.13 | |
Granted | | 280,791 | | | $ | 3.25 | |
| | | | |
| | | | |
Expired | | (1,500) | | | $ | 4.06 | |
Outstanding and exercisable- December 31, 2022 | | 4,995,150 | | | $ | 5.02 | |
| | | | |
| | | | |
| | | | |
| | | | |
Outstanding and exercisable - March 31, 2023 | | 4,995,150 | | | $ | 5.02 | |
| | | | |
| | | | |
As of March 31, 2023, the intrinsic value and weighted-average remaining life of the Company's outstanding and exercisable stock options were $0.1 million and approximately 1.5 years, respectively. The maximum contractual term of the Company's exercisable stock options is approximately 10 years. As of March 31, 2023, there were no unvested stock options and no unrecognized stock-based compensation expense related to unvested stock options.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
15. Preferred Stock and Equity
Preferred Shares
The Company’s preferred shares authorized, issued and outstanding consisted of the following: | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | |
Preferred shares authorized, $0.001 par value | | 20,000,000 | | | 20,000,000 | |
| | | | |
| | | | |
Series A-3 shares issued and outstanding | | 6,125 | | | 6,125 | |
Series A-4 shares issued and outstanding | | 10,000 | | | 10,000 | |
Preferred Share Activity
Series A-3 and A-4 Share Issuance and Conversion
On July 1, 2021 (the "Exchange Date") as a part of the sale of Continental Insurance Group ("CIG"), INNOVATE entered into an exchange agreement (the "Exchange Agreement") with Continental General Insurance Company ("CGIC"), also a former subsidiary, which held the remaining shares of the Series A and Series A-2 Preferred Stock and was eliminated in consolidation prior to the sale of the Insurance segment on July 1, 2021. Per the Exchange Agreement, INNOVATE exchanged 6,125 shares of the Series A and 10,000 shares of the Series A-2 shares that CGIC held for an equivalent number of Series A-3 Convertible Participating Preferred Stock ("Series A-3") and Series A-4 Convertible Participating Preferred Stock ("Series A-4"), respectively. The terms remained substantially the same, except that the Series A-3 and Series A-4 will mature on July 1, 2026. A cash payment of $0.3 million was made as a part of the exchange for accrued and unpaid dividends on the Series A and Series A-2 being exchanged.
Upon issuance of the Series A-3 and Series A-4 Preferred Stock on July 1, 2021, the Series A-3 and Series A-4 have been classified as temporary equity in the Company's Condensed Consolidated Balance Sheet with a combined redemption value of $16.1 million with a current fair value as of March 31, 2023 of $17.3 million.
Dividends. The Series A-3 and Series A-4 Preferred Stock accrue a cumulative quarterly cash dividend at an annualized rate of 7.50%. The accrued values of the Series A-3 and Series A-4 Preferred Stock accrete quarterly at an annualized rate of 4.00% that is reduced to 2.00% or 0.0% if the Company achieves specified rates of growth measured by increases in its net asset value; provided, that the accreting dividend rate will be 7.25% in the event that (A) the daily volume weighted average price ("VWAP") of the Company's common stock is less than a certain threshold amount, (B) the Company's common stock is not registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, (C) the Company's common stock is not listed on certain national securities exchanges or the Company is delinquent in the payment of any cash dividends. The Series A-3 and Series A-4 Preferred Stock is also entitled to participate in cash and in-kind distributions to holders of shares of Company's common stock on an as-converted basis.
Subsequent Measurement. The Company has elected to account for the Series A-3 and Series A-4 Preferred Stock by immediately recognizing changes in the redemption value as they occur. The carrying value of the Series A-3 and Series A-4 Preferred Stock will be adjusted to equal what the redemption amount would be as if the redemption were to occur at the end of the reporting period as if it were also the redemption date for the Series A-3 and Series A-4 Preferred Stock. Any cash dividends paid will directly reduce the carrying value of the Series A-3 and Series A-4 Preferred Stock until the carrying value equals the redemption value. The Company has a history of paying dividends on its preferred stock and expects to continue to pay such dividends each quarter.
Optional Conversion. Each share of Series A-3 and Series A-4 may be converted by the holder into shares of the Company's common stock at any time based on the then-applicable Conversion Price. Each share of Series A-3 is initially convertible at a conversion price of $4.25 (as it may be adjusted from time to time, the "Series A-3 Conversion Price"), and each share of Series A-4 is initially convertible at a conversion price of $8.25 (as it may be adjusted from time to time, the "Series A-4 Conversion Price") (“collectively the “Conversion Prices”). The Conversion Prices are subject to adjustment for dividends, certain distributions, stock splits, combinations, reclassifications, reorganizations, mergers, recapitalizations and similar events, as well as in connection with issuances of equity or equity-linked or other comparable securities by the Company at a price per share (or with a conversion or exercise price or effective issue price) that is below the Conversion Prices’ (which adjustment shall be made on a weighted average basis). Actual conversion prices at the time of the exchange were $3.52 for the Series A and $5.33 for the Series A-2.
Redemption by the Holder / Automatic Conversion. On July 1, 2026, holders of the Series A-3 and Series A-4 shall be entitled to cause the Company to redeem the Series A-3 and Series A-4 at the accrued value per share plus accrued but unpaid dividends (to the extent not included in the accrued value of Series A-3 and Series A-4). Each share of Series A-3 and Series A-4 that is not so redeemed will be automatically converted into shares of the Company's common stock at the Conversion Price then in effect.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Upon a change of control (as defined in each Certificate of Designation) holders of the Series A-3 and Series A-4 shall be entitled to cause the Company to redeem their shares of Series A-3 and Series A-4 at a price per share of Series A-3 and Series A-4 equal to the greater of (i) the accrued value of the Series A-3 and Series A-4, plus any accrued and unpaid dividends (to the extent not included in the accrued value of Series A-3 and Series A-4 Preferred Stock), and (ii) the value that would be received if the share of Series A-3 and Series A-4 were converted into shares of the Company's common stock immediately prior to the change of control.
Redemption by the Company / "Company Call Option". At any time after the third anniversary of the Original Issue Date, May 29, 2014, the Company may redeem the Series A-3/Series A-4, in whole but not in part, at a price per share generally equal to 150% of the accrued value per share, plus accrued but unpaid dividends (to the extent not included in the accrued value of the Series A-3/Series A-4), subject to the holder's right to convert prior to such redemption.
Forced Conversion. The Company may force conversion of the Series A-3 and Series A-4 into shares of the Company's common stock if the common stock's thirty-day VWAP exceeds 150% of the then-applicable Conversion Price and the Common Stock’s daily VWAP exceeds 150% of the then-applicable Conversion Price for at least twenty trading days out of the thirty trading day period used to calculate the thirty-day VWAP. In the event of a forced conversion, the holders of Series A-3 and Series A-4 will have the ability to elect cash settlement in lieu of conversion if certain market liquidity thresholds for the Company's common stock are not achieved.
Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Company (any such event, a “Liquidation Event”), the holders of Series A-3 and Series A-4 will be entitled to receive per share the greater of (i) the accrued value of the Series A-3 and Series A-4, plus any accrued and unpaid dividends (to the extent not included in the accrued value of Series A-3 and Series A-4), and (ii) the value that would be received if the share of Series A-4 and Series A-4 were converted into shares of the Company's common stock immediately prior to such occurrence. The Series A-3 and Series A-4 will rank junior to any existing or future indebtedness but senior to the Company's common stock and any future equity securities other than any future senior or pari passu preferred stock issued in compliance with each Certificate of Designation. The Series A-3 Preferred Stock and the Series A-4 Preferred Stock rank at parity.
Voting Rights. Except as required by applicable law, the holders of the shares of the Series A-3 and Series A-4 will be entitled to vote on an as-converted basis with the holders of the Series A-3 Preferred Stock and the Series A-4 Preferred Stock (on an as-converted basis), as applicable, and the holders of the Company’s common stock on all matters submitted to a vote of the holders of the Company's common stock with the holders of Series A-3 Preferred Stock and Series A-4 Preferred Stock on certain matters, and separately as a class on certain limited matters.
Consent Rights. For so long as any of the Series A-3 and Series A-4 is outstanding, consent of the holders of shares representing at least 75% of certain of the Series A-3 and Series A-4 then outstanding is required for certain material actions.
Participation Rights. Pursuant to the securities purchase agreements entered into with the initial purchasers of the Series A-3 Preferred Stock and the Series A-4 Preferred Stock, subject to meeting certain ownership thresholds, certain purchasers of the Series A-3 Preferred Stock and the Series A-4 Preferred Stock are entitled to participate, on a pro-rata basis in accordance with their ownership percentage, determined on an as-converted basis, in issuances of equity and equity linked securities by the Company. In addition, subject to meeting certain ownership thresholds, certain initial purchasers of the Series A-3 Preferred Stock and the Series A-4 Preferred Stock will be entitled to participate in issuances of preferred securities and in debt transactions of the Company.
As of March 31, 2023, Series A-3 Preferred Stock and Series A-4 Preferred Stock were convertible into 1,740,700 and 1,875,533 shares, respectively, of INNOVATE's common stock.
Preferred Share Dividends
During the three months ended March 31, 2023 and 2022, INNOVATE's Board of Directors (the "Board") declared cash dividends with respect to INNOVATE’s issued and outstanding Preferred Stock, as presented in the following table (in millions):
| | | | | | | | | | | | | | |
2023 | | | | | | | | |
Declaration Date | | March 31, 2023 | | | | | | |
Holders of Record Date | | March 31, 2023 | | | | | | |
Payment Date | | April 17, 2023 | | | | | | |
Total Dividend | | $ | 0.3 | | | | | | | |
| | | | | | | | | | | | | | |
2022 | | | | | | | | |
Declaration Date | | March 31, 2022 | | | | | | |
Holders of Record Date | | March 31, 2022 | | | | | | |
Payment Date | | April 15, 2022 | | | | | | |
Total Dividend | | $ | 0.3 | | | | | | | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
DBMGi Series A Preferred Stock Issuance
On November 30, 2018, CGIC purchased 40,000 shares of DBMGi's Series A Preferred Stock, which was eliminated in consolidation. On July 1, 2021, as a part of the sale of CIG which resulted in the deconsolidation of the entity, INNOVATE was deemed to have issued $40.9 million of DBMGi Series A Preferred Stock to the now deconsolidated CGIC. Upon issuance of the DBMGi Series A Preferred Stock on July 1, 2021, the DBMGi Series A Preferred Stock has been classified as temporary equity in the Company's Condensed Consolidated Balance Sheet. As of both March 31, 2023 and December 31, 2022, there were 41,820.25 shares of DBMGi's Series A Preferred Stock outstanding and 500,000 shares with a par value of $0.001 each are authorized for issuance.
Redemption Option. The DBMGi Preferred Stock is redeemable at any time, in whole or in part, at the option of the Company, or at any time or by the holder prior to July 2026.
Dividends. The DBMGi Series A Preferred Stock will accrue a cumulative quarterly cash or payment in kind dividend at a rate of (a) for the first five years following the date of issuance, (i) 9.00% per annum if dividends are paid in kind or (ii) 8.25% per annum if dividends are paid in cash and (b) starting on the fifth anniversary of the date of issuance, a rate per annum equal to (i) LIBOR (as defined in the Certificate of Designation) plus a spread of 5.85% (together, the “LIBOR Rate”) per annum, plus 0.75% if dividends are paid in kind or (ii) the LIBOR Rate per annum in the case of dividends paid in cash. Subsequent to the transition away from LIBOR beginning in 2023, the Certificate of Designation allows for a LIBOR Successor Rate, which allows the Company to reasonably determine an alternate benchmark rate (including any mathematical or other adjustments to the benchmarks (if any) incorporated therein) giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated syndicated credit facilities for such alternative benchmarks.
Subsequent Measurement. The DBMGi Series A Preferred Stock is measured each reporting period at its maximum redemption value, which is equal to the stated value plus all accrued, accumulated and unpaid dividends as of the end of each reporting period as they are currently redeemable. The Company pays accrued dividends quarterly in cash (with an option to PIK), and the Company does not expect to make any subsequent measurement adjustments recorded to the initial carrying amount. As such no accretion will be recognized until future dividend payments would otherwise reduce the carrying value below its redemption value. In such a case, the Company will adjust the carrying value to its maximum redemption amount.
On March 15, 2023, DBMGi received a redemption notice from CGIC, the holder of the Series A Fixed-to-Floating Rate Perpetual Preferred Stock of DBMGi (the “DBMGi Preferred Stock”) requesting that DBMGi redeem 41,820.25 shares of DBMGi Preferred Stock, representing all of the issued and outstanding shares of DBMGi Preferred Stock, within 60 days of the notice, or by May 15, 2023. On May 9, 2023, the Company entered into a Stock Purchase Agreement and Subordinated Unsecured Promissory Note with CGIC whereby the Company agreed to purchase the 41,820.25 shares of DBMGi Preferred Stock for full satisfaction of the redemption notice. In full consideration of the DBMGi Preferred Stock, the Company paid CGIC $7.1 million on May 9, 2023, and issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million, which includes the accrued dividend payable from April 1, 2023 to May 9, 2023 of $0.4 million. The promissory note is due February 28, 2026, and bears interest at 9% per annum through May 8, 2024, 16% per annum from May 9, 2024 to May 8, 2025, and 32% per annum thereafter. The promissory note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3 million or 12.5% of the proceeds from certain equity sales. Other covenants in the promissory note are generally consistent with the Company's Indenture governing the 8.50% Senior Secured Notes due 2026, dated as of February 1, 2021, by and among the Company, the guarantors party thereto and U.S. Bank National Association. Additionally, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
During the three months ended March 31, 2023 and 2022, DBMGi's Board of Directors declared dividends with respect to DBMGi’s issued and outstanding Preferred Stock, as presented in the following tables (in millions):
2023 | | | | | | | | | | | | | | |
Declaration Date | | March 31, 2023 | | | | | | |
Holders of Record Date | | March 31, 2023 | | | | | | |
Payment Date | | April 17, 2023 | | | | | | |
Total Dividend | | $ | 0.9 | | | | | | | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
2022
| | | | | | | | | | | | | | |
Declaration Date | | March 31, 2022 | | | | | | |
Holders of Record Date | | March 31, 2022 | | | | | | |
Payment Date | | April 15, 2022 | | | | | | |
Total Dividend | | $ | 0.9 | | | | | | | |
The above dividends were paid in cash.
Stockholders’ Rights Agreement - Tax Benefits Preservation Plan
On August 30, 2021, the Company entered into a Tax Benefits Preservation Plan (the “Preservation Plan”) between the Company and Computershare Trust Company, N.A., as Rights Agent. The Preservation Plan is designed to protect the Company’s ability to use its tax net operating losses and certain other tax assets (“Tax Benefits”) by deterring an “ownership change” as defined under Section 382 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder (the “Code”). If any person or group acquires 4.9% or more of the outstanding shares of the Company's Common Stock (subject to certain exceptions), there would be a triggering event under the Preservation Plan which could result in significant dilution in the ownership interest of such person or group. As such, the Preservation Plan has anti-takeover effects. In connection with the adoption of the Preservation Plan, the Company disclosed that given the change-over in the Company’s stock over the past several years, the Company was approaching the risk of losing its Tax Benefits. The Tax Benefits Preservation Plan terminated on March 31, 2023.
Subsequent to quarter end, on April 1, 2023, as a result of the expiration of the Preservation Plan on March 31, 2023, the Company entered into a new Tax Benefits Preservation Plan (the “2023 Plan”) with Computershare Trust Company, N.A., as rights agent (the “Rights Agent”), and the Board of Directors of the Company declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock, par value $0.001 per share, of the Company (the “Common Stock”) to stockholders of record at the close of business on April 10, 2023 (the “Record Date”). Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”) of Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), at a purchase price of $15.00 per Unit, subject to adjustment (the “Purchase Price”).
Rights Certificates and Exercise Period
Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate rights certificates (“Rights Certificates”) will be distributed. Subject to certain exceptions specified in the 2023 Plan, the Rights will separate from the Common Stock then outstanding and a distribution date (the “Distribution Date”) will occur upon the earlier of (i) 10 business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has become the beneficial owner of 4.9% or more of the shares of the Common Stock (the “Stock Acquisition Date”) and (ii) 10 business days (or such later date as the Board shall determine) following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person.
Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates (or, in the case of book entry shares, by the notations in the book entry accounts) and will be transferred with and only with such Common Stock, (ii) new Common Stock certificates issued after the Record Date will contain a notation incorporating the 2023 Plan by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. Pursuant to the 2023 Plan, the Company reserves the right (prior to the occurrence of a Triggering Event (as defined below) and upon any exercise of Rights) to make the necessary and appropriate rounding adjustments so that only whole shares of Series B Preferred Stock will be issued.
The definition of “Acquiring Person” contained in the 2023 Plan contains several exemptions, including for (i) the Company or any of the Company’s subsidiaries; (ii) 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; (iii) any person who becomes the beneficial owner of 4.9% or more of the shares of the Common Stock then outstanding as a result of (x) a reduction in the number of shares of Common Stock by the Company due to a or (y) a stock dividend, stock split, reverse stock split or similar transaction, unless and until such person increases his ownership by more than 0.5% over such person’s lowest percentage stock ownership on or after the consummation of the relevant transaction; (iv) any person who, together with all affiliates and associates of such person, was the beneficial owner of 4.9% or more of the shares of the Common Stock then outstanding on the date of the 2023 Plan, unless and until such person and its affiliates and associates increase their aggregate ownership by more than 0.5% over their lowest percentage stock ownership on or after the date of the 2023 Plan or decrease their aggregate percentage stock ownership below 4.9%; (v) any person who, within 10 business days of being requested by the Company to do so, certifies to the Company that such person became an Acquiring Person inadvertently or without knowledge of the terms of the Rights and who, together with all affiliates and associates, thereafter within 10 business days following such certification disposes of such number of shares of Common Stock so that it, together with all affiliates and associates, ceases to be an Acquiring Person; (vi) any person that the Board, in its sole discretion, has affirmatively determined shall not be deemed an Acquiring Person.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
The Rights are not exercisable until the Distribution Date and will expire at the earliest of (i) 11:59 p.m. (New York City time) on October 1, 2023 or such later date and time as may be determined by the Board and approved by the stockholders of the Company by a vote of the majority of the votes cast by the holders of shares entitled to vote thereon at a meeting of the stockholders of the Company prior to 11:59 p.m. (New York City time) on October 1, 2023 (which later date and time shall be in no event later than 11:59 p.m. (New York City time) on October 1, 2026), (ii) the time at which the Rights are redeemed or exchanged as provided in the 2023 Plan, (iii) the time at which the Board determines that the 2023 Plan is no longer necessary or desirable for the preservation of Tax Benefits, and (iv) the close of business on the first day of a taxable year of the Company to which the Board determines that no Tax Benefits may be carried forward.
16. Related Parties
Non-Operating Corporate
In September 2018, the Company entered into a 75-month lease for office space. As part of the agreement, INNOVATE was able to pay a lower security deposit and lease payments, and received favorable lease terms as consideration for landlord required cross default language in the event of default of the shared space leased by Harbinger Capital Partners, a company controlled by INNOVATE's former CEO and formerly a related party, in the same building. With the adoption of ASC 842, as of January 1, 2019, this lease was recognized as a right-of-use asset and lease liability on the Condensed Consolidated Balance Sheets.
Infrastructure
Banker Steel, a subsidiary of DBMG, has leased two office spaces from 2940 Fulks St LLC, a related party that is owned by Donald Banker, CEO of Banker Steel and a related party, with monthly lease payments of $10 thousand and a total lease liability of $0.1 million. For the three months ended March 31, 2023 and 2022, DBMG incurred lease expense of $25 thousand and $8 thousand, respectively.
Banker Steel previously leases two planes from Banker Aviation, LLC, a related party that is owned by Donald Banker. During the first quarter of 2022, one of the two plane leases was terminated. The remaining lease has monthly lease payments of $0.1 million and a total lease liability of $0.9 million. For the three months ended March 31, 2023 and 2022, DBMG incurred lease expense related to these leases of $0.3 million and $0.1 million, respectively.
Banker Steel also had a subordinated 11.0% note payable of $6.3 million to Donald Banker, a related party, which was redeemed in full by DBMG on April 4, 2022. For the three months ended March 31, 2022, DBMG incurred interest expense related to this note of $0.2 million.
Life Sciences
During June to December 2022, R2 Technologies entered in various notes totaling $10.8 million with Lancer, a related party, an entity controlled by Avram A. Glazer, the Chairman of INNOVATE's Board of Director. On February 15, 2023 and February 28, 2023, R2 Technologies closed on an additional 18% $0.5 million note and an additional 18% $0.4 million note with Lancer, respectively. On March 31, 2023, R2 Technologies entered into an exchange agreement with Lancer, which terminated all prior outstanding notes and simultaneously issued a new note with an aggregate original principal amount of $13.0 million, which comprised of all prior outstanding principal amounts and unpaid accrued interest. The interest rate on the new note increased from 18% to 20%, and the new maturity date has been extended to the earlier of June 30, 2023 or within 5 business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing. Subsequent to quarter end, on April 28, 2023, R2 Technologies closed on an additional 20% $0.4 million note with Lancer.
For the three months ended March 31, 2023, R2 Technologies recognized interest expense related to the contractual interest coupon with Lancer of $0.5 million. The interest was capitalized into the new principal balance with Lancer on March 31, 2023. Future interest will be payable upon maturity of the note.
For the three months ended March 31, 2023 and 2022, R2 Technologies recognized revenues of $0.2 million and $0.3 million, respectively, from sales to a subsidiary of Huadong, a related party of R2 Technologies. The related receivables totaled $0.6 million, as of both March 31, 2023 and December 31, 2022.
For both the three months ended March 31, 2023 and 2022, R2 Technologies incurred approximately $0.1 million of stock compensation and royalty expenses, respectively, that were paid to Blossom Innovations, LLC, an investor and a related party of R2 Technologies.
17. Operating Segments and Related Information
The Company currently has one primary reportable geographic segment - United States and primarily all revenue is derived in the United States. The Company has three reportable operating segments, plus our Other segment, based on management’s organization of the enterprise - Infrastructure, Life Sciences, Spectrum, and Other. We also have included a Non-operating Corporate segment. All inter-segment revenues are eliminated on consolidation.
The Company's revenue concentrations of 10% and greater were as follows:
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, |
| Segment | | | | | | 2023 | | 2022 |
Customer A | Infrastructure | | | | | | 28.1% | | 23.3% |
Customer B | Infrastructure | | | | | | * | | 11.8% |
| | | | | | | | | |
*Less than 10% revenue concentration
Summarized financial information with respect to the Company’s operating segments is as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Revenue | | | | | | | | |
Infrastructure | | | | | | $ | 311.7 | | | $ | 402.2 | |
Life Sciences | | | | | | 0.5 | | | 0.8 | |
Spectrum | | | | | | 5.7 | | | 9.8 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total revenue | | | | | | $ | 317.9 | | | $ | 412.8 | |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
(Loss) income from operations | | | | | | | | |
Infrastructure | | | | | | $ | 6.3 | | | $ | 11.9 | |
Life Sciences | | | | | | (4.4) | | | (5.0) | |
Spectrum | | | | | | (0.5) | | | (0.4) | |
Other | | | | | | (1.4) | | | (0.1) | |
Non-operating Corporate | | | | | | (4.0) | | | (5.7) | |
| | | | | | | | |
Total (loss) income from operations | | | | | | $ | (4.0) | | | $ | 0.7 | |
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| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Reconciliation of the consolidated segment (loss) income from operations to consolidated loss from operations before income taxes | | | | | | | | |
(Loss) income from operations | | | | | | $ | (4.0) | | | $ | 0.7 | |
Interest expense | | | | | | (15.6) | | | (12.6) | |
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Loss from equity investees | | | | | | (4.0) | | | (0.5) | |
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Other income (expense), net | | | | | | 16.5 | | | (0.1) | |
Loss from operations before income taxes | | | | | | $ | (7.1) | | | $ | (12.5) | |
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| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Depreciation and Amortization | | | | | | | | |
Infrastructure | | | | | | $ | 4.9 | | | $ | 5.3 | |
Infrastructure recognized within cost of revenue | | | | | | 3.9 | | | 3.7 | |
Total Infrastructure | | | | | | 8.8 | | | 9.0 | |
Life Sciences | | | | | | 0.1 | | | 0.1 | |
Spectrum | | | | | | 1.3 | | | 1.5 | |
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Total depreciation and amortization | | | | | | $ | 10.2 | | | $ | 10.6 | |
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| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Capital Expenditures (*) | | | | | | | | |
Infrastructure | | | | | | $ | 3.0 | | | $ | 2.9 | |
Life Sciences | | | | | | 0.1 | | | 0.1 | |
Spectrum | | | | | | 0.3 | | | 1.6 | |
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Non-operating Corporate | | | | | | 0.3 | | | — | |
Total | | | | | | $ | 3.7 | | | $ | 4.6 | |
(*) The above capital expenditures exclude assets acquired under capital lease and other financing obligations.
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| |
Investments | | | |
| | | |
Life Sciences | $ | 7.7 | | | $ | 7.6 | |
| | | |
Other | — | | | 51.9 | |
| | | |
Total | $ | 7.7 | | | $ | 59.5 | |
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| | March 31, 2023 | | December 31, 2022 |
| | |
Equity Method Investments (included in Investments above) | | | | |
| | | | |
Life Sciences | | $ | 3.1 | | | $ | 3.0 | |
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Other | | — | | | 40.6 | |
Total | | $ | 3.1 | | | $ | 43.6 | |
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| | March 31, 2023 | | December 31, 2022 |
| | |
Total Assets | | | | |
Infrastructure | | $ | 832.7 | | | $ | 879.3 | |
Life Sciences | | 15.0 | | | 15.4 | |
Spectrum | | 182.7 | | | 188.2 | |
Other | | 1.0 | | | 53.6 | |
Non-operating Corporate | | 12.7 | | | 15.2 | |
| | | | |
Total | | $ | 1,044.1 | | | $ | 1,151.7 | |
18. Basic and Diluted Loss Per Common Share
Earnings per share ("EPS") is calculated using the two-class method, which allocates earnings among common stock and participating securities to calculate EPS when an entity's capital structure includes either two or more classes of common stock or common stock and participating securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. As such, shares of any unvested restricted stock of the Company are considered participating securities; however, they do not participate in losses and as such are excluded from the computation of basic earnings (loss) per share during periods of net losses. The dilutive effect, if applicable, of stock options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the "if-converted method" if this measurement is determined to be more dilutive between the two available methods in a period.
The Company had no dilutive common share equivalents during the three months ended March 31, 2023 and 2022 due to results from continuing operations being a loss, net of tax. As of March 31, 2023, 1,145,796 common stock equivalents from unvested restricted stocks were excluded from the weighted average number of shares used to calculate diluted loss per share as their inclusion would have been anti-dilutive. Other instruments that may, in the future, if the average market price of the Company's stock exceeds the conversion prices, have a dilutive effect on earnings per share, but were excluded from the computation of diluted net loss per share for the three months ended March 31, 2023 and 2022 are: preferred stock, convertible debt and stock options. The following table presents a reconciliation of net loss used in the basic and diluted EPS calculations (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Net loss | | | | | | $ | (8.0) | | | $ | (14.1) | |
Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest | | | | | | (1.0) | | | 1.7 | |
Net loss attributable to INNOVATE Corp. | | | | | | (9.0) | | | (12.4) | |
Less: Preferred dividends | | | | | | 1.2 | | | 1.2 | |
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Net loss attributable to common stockholders | | | | | | $ | (10.2) | | | $ | (13.6) | |
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Denominator for basic and diluted loss per share: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average common shares outstanding | | | | | | 77.7 | | | 77.3 | |
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Loss per share - basic and diluted | | | | | | $ | (0.13) | | | $ | (0.18) | |
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INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
19. Fair Value of Financial Instruments
Fair Value of Financial Instruments Not Measured at Fair Value
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis. The table excludes carrying amounts for cash and cash equivalents and restricted cash, accounts receivable and contract assets, accounts payable, contract liabilities and other current liabilities, and other assets and liabilities that approximate fair value due to relatively short periods to maturity (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | | | | | | Fair Value Measurement Using: |
| Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | |
Other invested assets | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Total assets not accounted for at fair value | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Liabilities | | | | | | | | | | |
Debt obligations (2) | | $ | 694.5 | | | $ | 643.1 | | | $ | — | | | $ | 643.1 | | | $ | — | |
Total liabilities not accounted for at fair value | | $ | 694.5 | | | $ | 643.1 | | | $ | — | | | $ | 643.1 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | Fair Value Measurement Using: |
| Carrying Value | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | |
Other invested assets (1) | | $ | 11.3 | | | $ | 11.3 | | | $ | — | | | $ | — | | | $ | 11.3 | |
Total assets not accounted for at fair value | | $ | 11.3 | | | $ | 11.3 | | | $ | — | | | $ | — | | | $ | 11.3 | |
Liabilities | | | | | | | | | | |
Debt obligations (2) | | $ | 712.3 | | | $ | 643.0 | | | $ | — | | | $ | 643.0 | | | $ | — | |
Total liabilities not accounted for at fair value | | $ | 712.3 | | | $ | 643.0 | | | $ | — | | | $ | 643.0 | | | $ | — | |
(1) Other invested assets was comprised of a put option that related to the Company's 19% investment in HMN, which was sold March 6, 2023. Refer to Note 6. Investments for additional information. (2) Excludes operating lease obligations accounted for under ASC 842, Leases.
Debt Obligations. The fair value of the Company’s long-term obligations was determined using reporting from Citadel Securities. The methodology combines direct market observations from contributed sources with quantitative pricing models to generate evaluated prices and classified as Level 2.
20. Supplementary Financial Information
Other Income (Expense), net
The following table provides information relating to Other income (expense), net for the periods indicated (in millions):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Gain on sale of equity method investment | | $ | 12.3 | | | $ | — | |
Gain on step-up of equity method investment | | 3.8 | | | — | |
Other income (expense), net | | 0.4 | | | (0.1) | |
Total | | $ | 16.5 | | | $ | (0.1) | |
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Supplemental Cash Flow Information
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows (in millions):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Cash and cash equivalents, beginning of period | | $ | 80.4 | | | $ | 45.5 | |
Restricted cash | | 0.3 | | | 2.0 | |
Restricted cash included in other assets (non-current) | | 1.5 | | | — | |
Total cash, cash equivalents and restricted cash, beginning of period | | $ | 82.2 | | | $ | 47.5 | |
| | | | |
Cash and cash equivalents, end of period | | $ | 16.6 | | | $ | 26.4 | |
Restricted cash | | — | | | 2.0 | |
Restricted cash included in other assets (non-current) | | 1.4 | | | — | |
Total cash and cash equivalents and restricted cash, end of period | | $ | 18.0 | | | $ | 28.4 | |
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Supplemental cash flow information: | | | | |
Cash paid for interest | | $ | 19.5 | | | $ | 18.6 | |
Cash paid for taxes, net of refunds | | $ | 5.0 | | | $ | 0.4 | |
| | | | |
Non-cash investing and financing activities: | | | | |
Property, plant and equipment included in accounts payable | | $ | 1.4 | | | $ | — | |
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21. Subsequent Events
Subsequent to quarter end, on April 25, 2023, the Company extended the maturity date of its Revolving Credit Agreement to March 16, 2025, changed the benchmark rates for interest to SOFR-based rates and lowered the amount of net cash proceeds from certain asset sales in excess of which a prepayment is required from $50.0 million to $10.0 million.
On May 9, 2023, the Company entered into a Stock Purchase Agreement and Subordinated Unsecured Promissory Note with CGIC whereby the Company agreed to purchase the 41,820.25 shares of DBMGi Preferred Stock for full satisfaction of the redemption notice. In full consideration of the DBMGi Preferred Stock, the Company paid CGIC $7.1 million on May 9, 2023, and issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million, which includes the accrued dividend payable from April 1, 2023 to May 9, 2023 of $0.4 million. The promissory note is due February 28, 2026, and bears interest at 9% per annum through May 8, 2024, 16% per annum from May 9, 2024 to May 8, 2025, and 32% per annum thereafter. Refer to Footnote 15. Preferred Stock and Equity for additional information. Additionally, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated annual audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 14, 2023 (the "2022 Annual Report") and the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section in our 2022 Annual Report as well as the section below entitled "Special Note Regarding Forward-Looking Statements" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Unless the context otherwise requires, in this Quarterly Report on Form 10-Q, "INNOVATE" means INNOVATE Corp. and the "Company," "we" and "our" mean INNOVATE together with its consolidated subsidiaries. "U.S. GAAP" means accounting principles accepted in the United States of America.
Our Business and Our Operations
We are a diversified holding company with principal operations conducted through three operating platforms or reportable segments: Infrastructure ("DBMG"), Life Sciences ("Pansend"), and Spectrum, plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.
For additional information on our business, refer to Note 1. Organization and Business to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Cyclical Patterns
Our segments' operations can be highly cyclical. Our volume of business in our Infrastructure segment may be adversely affected by declines or delays in projects, which may vary by geographic region. Project schedules, particularly in connection with large, complex, and longer-term projects can also create fluctuations in the services provided, which may adversely affect us in a given period.
For example, in connection with larger, more complicated projects, the timing of obtaining permits and other approvals may be delayed, and we may need to maintain a portion of our workforce and equipment in an underutilized capacity to ensure we are strategically positioned to deliver on such projects when they move forward.
Examples of other items that may cause our results or demand for our services to fluctuate materially from quarter to quarter include: weather or project site conditions; financial condition of our customers and their access to capital; margins of projects performed during any particular period; rising interest rates and inflation; and economic, political and market conditions on a regional, national or global scale.
Accordingly, our operating results in any particular period may not be indicative of the results that can be expected for any other period.
Recent Developments
Thus far in 2023, as part of our strategic process we engaged in several transactions that had an effect on the results of operations and financial condition of our business and individual segments.
Dispositions
Other
Sale of Remaining 19% Interest in HMN
On March 6, 2023, the Company, through New Saxon 2019 Limited (“New Saxon”), an indirect subsidiary of GMH, closed on the sale of its remaining 19% interest in HMN to subsidiaries and an affiliate of Hengtong Optic-Electric Co Ltd. The sale was consummated pursuant to the terms of a supplemental agreement entered into by the parties in June 2022. New Saxon received gross proceeds of $54.2 million, and interest income of $0.5 million, of which $4.4 million was withheld for a foreign tax payment. As of March 31, 2023, $15.9 million had been paid to GMH's non-controlling interest holders and redeemable noncontrolling interest holders pursuant to the partnership agreement, and $0.1 million was paid in April 2023. New Saxon recognized a gain on sale of $12.3 million, which is reflected in Other income (expense), net in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023.
Debt Obligations and Financing
In 2023 thus far, we have refinanced some of our loans and obtained new capital financing. This financing helped us provide needed capital for our operations and the operations of our subsidiaries.
Life Sciences
On March 31, 2023, R2 Technologies entered into an exchange agreement with Lancer, an entity controlled by Avram A. Glazer, the Chairman of INNOVATE's Board of Directors, which terminated all prior outstanding notes and simultaneously issued a new note with an aggregate original principal amount of $13.0 million, which comprised of all prior outstanding principal amounts and unpaid accrued interest. The interest rate on the new note increased from 18% to 20%, and the new maturity date has been extended to the earlier of June 30, 2023 or within 5 business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing. Subsequent to quarter end, on April 28, 2023, R2 Technologies closed on an additional 20% $0.4 million note with Lancer.
In November 2022, MediBeacon amended its existing agreements with Huadong Medicine Co. Ltd ("Huadong"), which will provide approximately $10 million in funding by June 30, 2023, including $7.5 million or 50% of the remaining $15 million milestone investment due upon FDA approval of MediBeacon's TGFR at a pre-money valuation of approximately $400 million. On February 23, 2023, pursuant to its amended commercial partnership with Huadong, a publicly traded company on the Shenzhen Stock Exchange, MediBeacon issued $7.5 million of its preferred stock to Huadong in exchange for additional shares of preferred stock. As a result of this equity transaction, Pansend recognized a gain of $3.8 million in Other income (expense), net in the Condensed Consolidated Statements of Operations, which increased Pansend's basis in MediBeacon. Concurrently, Pansend recognized additional equity method losses of $3.8 million which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero.
Corporate
Subsequent to quarter end, on April 25, 2023, the Company extended the maturity date of its Revolving Credit Agreement to March 16, 2025, changed the benchmark rates for interest to SOFR-based rates and lowered the amount of net cash proceeds from certain asset sales in excess of which a prepayment is required from $50.0 million to $10.0 million. Refer to Note 21. Subsequent Events of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Subsequent to quarter end, on May 9, 2023, the Company issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million. The promissory note is due February 28, 2026, and bears interest at 9% per annum through May 8, 2024, 16% per annum from May 9, 2024 to May 8, 2025, and 32% per annum thereafter. The promissory note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3 million or 12.5% of the proceeds from certain equity sales. Refer to Footnote 15. Preferred Stock and Equity of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information. Additionally, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
Other
On December 30, 2022, the Company entered into a letter agreement with Continental General Insurance Company (“CGIC”) pursuant to which CGIC and its affiliates agreed to vote certain shares of the Company’s Series A-3 Convertible Participating Preferred Stock, par value $0.001 per share, and the Company’s Series A-4 Convertible Participating Preferred Stock, par value $0.001 per share, to the extent such shares result in CGIC beneficially owning more than 9.9% of the aggregate voting power of the Company, in the same manner as the majority of the holders holding less than 10% of the Company’s common stock, par value $0.001 per share, vote their shares with respect to any matter pursuant to which such shares are entitled to vote.
Stockholders' Rights Agreement
Subsequent to quarter end, on April 1, 2023, the Company entered into a Tax Benefits Preservation Plan (the "Plan") with ComputerShare Trust Company, N.A., as rights agent (the "Rights Agent"). The Plan is intended to help protect the Company's ability to use its tax net operating losses and other certain tax assets ("Tax Benefits") by deterring an "ownership change," as defined under Section 382 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations thereunder (the "Code"), by a person or group of affiliated or associated persons from acquiring beneficial ownership of 4.9% or more of the outstanding common shares.
In connection with entering into the Plan, on April 1, 2023 the Board of Directors of the Company declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock, par value $0.001 per share, of the Company (the “Common Stock”) to stockholders of record at the close of business on April 10, 2023 (the “Record Date”). Each Right is governed by the terms of the Plan and entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share (a “Unit”) of Series B Preferred Stock, par value $0.001 per share (the “Series B Preferred Stock”), at a purchase price of $15.00 per Unit, subject to adjustment (the “Purchase Price”). The Company had entered into a previous Tax Benefits Preservation Plan on August 30, 2021 (the “Prior Plan”), in order to help protect the Company’s ability to use its Tax Benefits by deterring an ownership change. The Prior Plan expired on March 31, 2023.
Refer to Note 15. Preferred Stock and Equity of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information for further information.
Financial Presentation Background
In the below section within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we compare, pursuant to U.S. GAAP and SEC disclosure rules, the Company’s results of operations for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Results of Operations
The following table summarizes our results of operations and a comparison of the change between the periods as indicated (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Revenue | | | | | | | | | | | | |
Infrastructure | | | | | | | | $ | 311.7 | | | $ | 402.2 | | | $ | (90.5) | |
Life Sciences | | | | | | | | 0.5 | | | 0.8 | | | (0.3) | |
Spectrum | | | | | | | | 5.7 | | | 9.8 | | | (4.1) | |
| | | | | | | | | | | | |
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Total revenue | | | | | | | | $ | 317.9 | | | $ | 412.8 | | | $ | (94.9) | |
| | | | | | | | | | | | |
(Loss) income from operations | | | | | | | | | | | | |
Infrastructure | | | | | | | | $ | 6.3 | | | $ | 11.9 | | | $ | (5.6) | |
Life Sciences | | | | | | | | (4.4) | | | (5.0) | | | 0.6 | |
Spectrum | | | | | | | | (0.5) | | | (0.4) | | | (0.1) | |
Other | | | | | | | | (1.4) | | | (0.1) | | | (1.3) | |
Non-operating Corporate | | | | | | | | (4.0) | | | (5.7) | | | 1.7 | |
| | | | | | | | | | | | |
Total (loss) income from operations | | | | | | | | $ | (4.0) | | | $ | 0.7 | | | $ | (4.7) | |
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Interest expense | | | | | | | | (15.6) | | | (12.6) | | | (3.0) | |
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Loss from equity investees | | | | | | | | (4.0) | | | (0.5) | | | (3.5) | |
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Other income (expense), net | | | | | | | | 16.5 | | | (0.1) | | | 16.6 | |
Loss from operations before income taxes | | | | | | | | $ | (7.1) | | | $ | (12.5) | | | $ | 5.4 | |
Income tax expense | | | | | | | | (0.9) | | | (1.6) | | | 0.7 | |
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Net loss | | | | | | | | $ | (8.0) | | | $ | (14.1) | | | $ | 6.1 | |
Net (income) loss attributable to noncontrolling interest and redeemable noncontrolling interest | | | | | | | | (1.0) | | | 1.7 | | | (2.7) | |
Net loss attributable to INNOVATE Corp. | | | | | | | | $ | (9.0) | | | $ | (12.4) | | | $ | 3.4 | |
Less: Preferred dividends | | | | | | | | 1.2 | | | 1.2 | | | — | |
Net loss attributable to common stockholders | | | | | | | | $ | (10.2) | | | $ | (13.6) | | | $ | 3.4 | |
Revenue: Revenue for the three months ended March 31, 2023 decreased $94.9 million to $317.9 million from $412.8 million for the three months ended March 31, 2022. The decrease was primarily driven by our Infrastructure segment, and, to a lesser extent our Spectrum segment. DBMG's commercial structural steel fabrication and erection and industrial maintenance and repair businesses encountered customer and general contractor driven delays, resulting in the timing of work performed by DBMG to be delayed in the current period. Revenues at our Spectrum segment decreased primarily as a result of the termination of HC2 Network, Inc. ("Network") and its associated Azteca America network ("Azteca") content on December 31, 2022.
(Loss) income from operations: Income from operations for the three months ended March 31, 2023 decreased $4.7 million to a loss of $4.0 million from income of $0.7 million for the three months ended March 31, 2022. The decrease was due to overall decreased gross profit, partially offset by decreases in selling, general and administrative expenses ("SG&A") and depreciation and amortization. The decrease in gross profit was primarily driven by our Infrastructure segment due to customer and general contractor driven delays, resulting in the timing of work performed by DBMG to be delayed in the current period. The overall decrease in SG&A is primarily driven by net decreases in bonus and stock compensation expense, legal and other unrepeated expenses related to the settlement with the former CEO recorded in the comparable period, and a decrease in research and development costs, which were partially offset by an increase in transaction expenses related to the sale of New Saxon's 19% investment in HMN.
Interest expense: Interest expense for the three months ended March 31, 2023 increased $3.0 million to $15.6 million from $12.6 million for the three months ended March 31, 2022. The increase was primarily attributable to higher interest rates, increased amortization of debt issuance costs on the debt, and higher outstanding principal balances at our Spectrum, Infrastructure and Life Sciences segments, as a result of new debt issued subsequent to the comparable period.
Loss from equity investees: Loss from equity investees for the three months ended March 31, 2023 increased $3.5 million to $4.0 million from $0.5 million for the three months ended March 31, 2022. The increase in loss was primarily due to higher equity method losses from our investment in MediBeacon. As a result of an additional equity investment made during the first quarter by Huadong to MediBeacon, Pansend's basis in MediBeacon increased by $3.8 million and Pansend recognized $3.8 million additional equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. Additionally, the decrease was driven by the equity investment in HMN, which was sold on March 6, 2023, and had losses for the approximately two months of equity method loss being recognized compared to income for the three months in the comparable period. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information. TripleRing Technologies also had higher income in the comparable period, as it had recognized a gain on debt extinguishment.
Other income (expense), net: Other (expense) income, net for the three months ended March 31, 2023 increased $16.6 million to income of $16.5 million from an expense of $0.1 million for the three months ended March 31, 2022. Other income, net for the three months ended March 31, 2023 primarily consisted of a gain on the sale of the equity investment in HMN of $12.3 million and a $3.8 million step-up gain from the increase in Pansend's basis as a result of MediBeacon issuing $7.5 million of its preferred stock to Huadong. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Income tax expense: Income tax expense for the three months ended March 31, 2023 decreased $0.7 million to $0.9 million from $1.6 million for the three months ended March 31, 2022. The income tax expense recorded for the three months ended March 31, 2023 and 2022 primarily relates to the tax expense as calculated under ASC 740 for taxpaying entities. Additionally, the tax benefits associated with losses generated by the INNOVATE Corp. U.S. consolidated income tax return and certain other business have been reduced by a full valuation allowance as we do not believe it is more-likely-than not that the losses will be utilized prior to expiration. The annual effective tax rate calculated for the 2023 first quarter interim tax provision included a $1.1 million tax benefit, consisting of a current tax expense of $4.4 million related to foreign tax payment and a deferred tax benefit of $5.5 million related to the reversal of the deferred tax liability associated with the $11.3 million put option agreement, both of which were related to the sale of New Saxon's 19% investment in HMN on March 6, 2023.
Segment Results of Operations
In the Company's Condensed Consolidated Financial Statements, other operating (income) loss includes: (i) (gain) loss on sale or disposal of assets; (ii) lease termination costs; (iii) asset impairment expense; (iv) accretion of asset retirement obligations; and (v) FCC reimbursements. Each table summarizes the results of operations of our operating segments and compares the amount of the change between the periods presented (in millions).
Infrastructure Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Revenue | | | | | | | | $ | 311.7 | | | $ | 402.2 | | | $ | (90.5) | |
| | | | | | | | | | | | |
Cost of revenue | | | | | | | | 270.9 | | | 357.7 | | | (86.8) | |
Selling, general and administrative | | | | | | | | 29.7 | | | 27.9 | | | 1.8 | |
Depreciation and amortization | | | | | | | | 4.9 | | | 5.3 | | | (0.4) | |
Other operating income | | | | | | | | (0.1) | | | (0.6) | | | 0.5 | |
Income from operations | | | | | | | | $ | 6.3 | | | $ | 11.9 | | | $ | (5.6) | |
Revenue: Revenue for the three months ended March 31, 2023 decreased $90.5 million to $311.7 million from $402.2 million for the three months ended March 31, 2022. The decrease was primarily driven by timing of projects at DBMG's commercial structural steel fabrication and erection and industrial maintenance and repair businesses, both of which encountered customer and general contractor driven delays, resulting in the timing of work performed by DBMG to be delayed in the current period.
Cost of revenue: Cost of revenue for the three months ended March 31, 2023 decreased $86.8 million to $270.9 million from $357.7 million for the three months ended March 31, 2022. The decrease was primarily driven by DBMG's commercial structural steel fabrication and erection and industrial maintenance and repair businesses, both of which encountered customer and general contractor driven delays, resulting in the timing of work performed by DBMG to be delayed in the current period.
Selling, general and administrative: Selling, general and administrative expense for the three months ended March 31, 2023 increased $1.8 million to $29.7 million from $27.9 million for the three months ended March 31, 2022. The increase in SG&A was primarily driven by increases in restructuring costs, salaries and benefits and an increase in legal expenses.
Depreciation and amortization: Depreciation and amortization for the three months ended March 31, 2023 decreased $0.4 million to $4.9 million from $5.3 million for the three months ended March 31, 2022. The decrease in depreciation and amortization was primarily driven by DBMG's commercial structural steel fabrication and erection group, as certain fixed assets became fully depreciated subsequent to the comparable period.
Other operating income: Other operating income from our Infrastructure segment for the three months ended March 31, 2023 decreased $0.5 million to $0.1 million from $0.6 million for the three months ended March 31, 2022. The decrease in other operating income was primarily driven by an unrepeated asset sale in the comparable period.
Life Sciences Segment | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Revenue | | | | | | | | $ | 0.5 | | | $ | 0.8 | | | $ | (0.3) | |
| | | | | | | | | | | | |
Cost of revenue | | | | | | | | 0.5 | | | 0.6 | | | (0.1) | |
Selling, general and administrative | | | | | | | | 4.3 | | | 5.1 | | | (0.8) | |
Depreciation and amortization | | | | | | | | 0.1 | | | 0.1 | | | — | |
| | | | | | | | | | | | |
Loss from operations | | | | | | | | $ | (4.4) | | | $ | (5.0) | | | $ | 0.6 | |
Revenue: Revenue for the three months ended March 31, 2023 decreased $0.3 million to $0.5 million from $0.8 million for the three months ended March 31, 2022. The decrease in revenue was attributable to R2, primarily as a result of product mix due to the launch of the differentiated sales platform in the second half of 2022, setting up a long-term strategy. R2 had less revenue recognized upfront from unit sales and outside US sales, which was partially offset with new recurring revenues for monthly unit charges and consumable sales from the new sales programs.
Selling, general and administrative: Selling, general and administrative expense for the three months ended March 31, 2023 decreased $0.8 million to $4.3 million from $5.1 million for the three months ended March 31, 2022. The decrease was primarily driven by decreases at R2 in salaries and benefits and research and development costs.
Spectrum Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Revenue | | | | | | | | $ | 5.7 | | | $ | 9.8 | | | $ | (4.1) | |
| | | | | | | | | | | | |
Cost of revenue | | | | | | | | 2.9 | | | 4.7 | | | (1.8) | |
Selling, general and administrative | | | | | | | | 2.3 | | | 3.8 | | | (1.5) | |
Depreciation and amortization | | | | | | | | 1.3 | | | 1.5 | | | (0.2) | |
Other operating (income) loss | | | | | | | | (0.3) | | | 0.2 | | | (0.5) | |
Loss from operations | | | | | | | | $ | (0.5) | | | $ | (0.4) | | | $ | (0.1) | |
Revenue: Revenue from our Spectrum segment for the three months ended March 31, 2023 decreased $4.1 million to $5.7 million from $9.8 million for the three months ended March 31, 2022. The decrease was primarily driven by the elimination of advertising revenues at Azteca, which ceased operations on December 31, 2022. This was partially offset by an increase in station revenues, which launched new customers in the current period.
Cost of revenue: Cost of revenue for the three months ended March 31, 2023 decreased $1.8 million to $2.9 million from $4.7 million for the three months ended March 31, 2022. The overall decrease was primarily driven by a decrease in advertising cost of revenue as a result of the termination of Azteca.
Selling, general and administrative: Selling, general and administrative expense for the three months ended March 31, 2023 decreased $1.5 million to $2.3 million from $3.8 million for the three months ended March 31, 2022. The overall decrease was primarily driven by the termination of Network, which was partially offset by an increase in salaries and benefits expense at station group.
Depreciation and amortization: Depreciation and amortization expense for the three months ended March 31, 2023 decreased $0.2 million to $1.3 million from $1.5 million for the three months ended March 31, 2022. The overall decrease was primarily driven by the Program License Agreement, which was fully impaired subsequent to the comparable period.
Other operating (income) loss: Other operating (income) loss for the three months ended March 31, 2023 increased $0.5 million to income of $0.3 million from a loss of $0.2 million for the three months ended March 31, 2022. The overall increase in other operating income was primarily related to an increase in FCC reimbursements received in the current period.
Non-operating Corporate | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Selling, general and administrative | | | | | | | | $ | 4.0 | | | $ | 5.7 | | | $ | (1.7) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Loss from operations | | | | | | | | $ | (4.0) | | | $ | (5.7) | | | $ | 1.7 | |
Selling, general and administrative: Selling, general and administrative expenses for the three months ended March 31, 2023 decreased $1.7 million to $4.0 million from $5.7 million for the three months ended March 31, 2022. The decrease in SG&A expenses was driven by a decrease in stock compensation, a decrease in disposition and acquisition expenses, legal and other unrepeated expenses related to the settlement with the former CEO recorded in the comparable period, a decrease in accounting expenses, a decrease in bonus expense and a decrease in salaries and benefits from a reduced headcount.
Loss from Equity Investees | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
| | | | | | | | | | | | |
Life Sciences | | | | | | | | $ | (3.7) | | | $ | (1.0) | | | $ | (2.7) | |
Other | | | | | | | | (0.3) | | | 0.5 | | | (0.8) | |
Loss from equity investees | | | | | | | | $ | (4.0) | | | $ | (0.5) | | | $ | (3.5) | |
Life Sciences: Loss from equity investees within our Life Sciences segment for the three months ended March 31, 2023 increased $2.7 million to $3.7 million from $1.0 million for the three months ended March 31, 2022. The increase in loss was primarily due to higher equity method losses from our investment in MediBeacon. On February 23, 2023, MediBeacon issued $7.5 million of preferred stock to Huadong in exchange for additional shares of preferred stock. As a result of this equity transaction, Pansend's basis in MediBeacon increased by $3.8 million and Pansend recognized $3.8 million additional equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information. TripleRing Technologies also had higher income in the comparable period, as it had recognized a gain on debt extinguishment.
Other: Loss from equity investees within our Other segment for the three months ended March 31, 2023 decreased $0.8 million to a loss of $0.3 million from income of $0.5 million for the three months ended March 31, 2022. The decrease was driven by the equity investment in HMN, which was sold on March 6, 2023, resulting in approximately two months of equity method loss being recognized compared to income for the three months in the comparable period. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Non-GAAP Financial Measures and Other Information
Adjusted EBITDA
Adjusted EBITDA is not a measurement recognized under U.S. GAAP. In addition, other companies may define Adjusted EBITDA differently than we do, which could limit its usefulness.
Management believes that Adjusted EBITDA provides investors with meaningful information for gaining an understanding of our results as it is frequently used by the financial community to provide insight into an organization’s operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation, amortization and the other items listed in the definition of Adjusted EBITDA below can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a company’s ability to service debt. While management believes that non-U.S. GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our U.S. GAAP financial results. Using Adjusted EBITDA as a performance measure has inherent limitations as an analytical tool as compared to net income (loss) or other U.S. GAAP financial measures, as this non-GAAP measure excludes certain items, including items that are recurring in nature, which may be meaningful to investors. As a result of the exclusions, Adjusted EBITDA should not be considered in isolation and does not purport to be an alternative to net income (loss) or other U.S. GAAP financial measures as a measure of our operating performance. Adjusted EBITDA excludes the results of operations and any consolidating eliminations of our previous Insurance segment.
The calculation of Adjusted EBITDA, as defined by us, consists of Net income (loss) attributable to INNOVATE Corp., excluding discontinued operations, if applicable; depreciation and amortization; other operating (income) loss, which is inclusive of (gain) loss on sale or disposal of assets, lease termination costs, asset impairment expense and FCC reimbursements; interest expense; other (income) expense, net; income tax expense (benefit); noncontrolling interest; share-based compensation expense; restructuring and exit costs; and acquisition and disposition costs.
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(in millions) | | Three months ended March 31, 2023 |
| | Infrastructure | | Life Sciences | | Spectrum | | Non-operating Corporate | | Other and Eliminations | | INNOVATE |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income (loss) attributable to INNOVATE Corp. | | $ | 2.0 | | | $ | (2.8) | | | $ | (5.0) | | | $ | (11.9) | | | $ | 8.7 | | | $ | (9.0) | |
Adjustments to reconcile net income (loss) to Adjusted EBITDA: | | | | | | | | | | | | |
Depreciation and amortization | | 4.9 | | | 0.1 | | | 1.3 | | | — | | | — | | | 6.3 | |
Depreciation and amortization (included in cost of revenue) | | 3.9 | | | — | | | — | | | — | | | — | | | 3.9 | |
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Other operating income | | (0.1) | | | — | | | (0.3) | | | — | | | — | | | (0.4) | |
Interest expense | | 3.4 | | | 0.5 | | | 3.2 | | | 8.5 | | | — | | | 15.6 | |
Other (income) expense, net | | (0.2) | | | (3.9) | | | 1.8 | | | (1.6) | | | (12.6) | | | (16.5) | |
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Income tax expense (benefit) | | 1.1 | | | — | | | — | | | 1.0 | | | (1.2) | | | 0.9 | |
Noncontrolling interest | | 0.2 | | | (1.9) | | | (0.6) | | | — | | | 3.3 | | | 1.0 | |
| | | | | | | | | | | | |
Share-based compensation expense | | — | | | 0.2 | | | — | | | 0.3 | | | — | | | 0.5 | |
Restructuring and exit costs | | 0.5 | | | — | | | — | | | — | | | — | | | 0.5 | |
| | | | | | | | | | | | |
Acquisition and disposition costs | | 0.6 | | | — | | | — | | | 0.2 | | | 1.3 | | | 2.1 | |
Adjusted EBITDA | | $ | 16.3 | | | $ | (7.8) | | | $ | 0.4 | | | $ | (3.5) | | | $ | (0.5) | | | $ | 4.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Three months ended March 31, 2022 |
| | Infrastructure | | Life Sciences | | Spectrum | | Non-operating Corporate | | Other and Eliminations | | INNOVATE |
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| | | | | | | | | | | | |
Net income (loss) attributable to INNOVATE Corp. | | $ | 6.1 | | | $ | (4.1) | | | $ | (3.4) | | | $ | (11.3) | | | $ | 0.3 | | | $ | (12.4) | |
Adjustments to reconcile net income (loss) to Adjusted EBITDA: | | | | | | | | | | | | |
Depreciation and amortization | | 5.3 | | | 0.1 | | | 1.5 | | | — | | | — | | | 6.9 | |
Depreciation and amortization (included in cost of revenue) | | 3.7 | | | — | | | — | | | — | | | — | | | 3.7 | |
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Other operating (income) loss | | (0.6) | | | — | | | 0.2 | | | — | | | — | | | (0.4) | |
Interest expense | | 2.2 | | | — | | | 2.0 | | | 8.4 | | | — | | | 12.6 | |
Other expense (income), net | | 0.1 | | | 0.1 | | | 1.5 | | | (1.6) | | | — | | | 0.1 | |
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Income tax expense (benefit) | | 2.9 | | | — | | | — | | | (1.3) | | | — | | | 1.6 | |
Noncontrolling interest | | 0.6 | | | (2.0) | | | (0.6) | | | — | | | 0.3 | | | (1.7) | |
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Share-based compensation expense | | — | | | 0.1 | | | — | | | 0.7 | | | — | | | 0.8 | |
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Acquisition and disposition costs | | 0.2 | | | — | | | 0.1 | | | 0.5 | | | (0.5) | | | 0.3 | |
Adjusted EBITDA | | $ | 20.5 | | | $ | (5.8) | | | $ | 1.3 | | | $ | (4.6) | | | $ | 0.1 | | | $ | 11.5 | |
Infrastructure: Net income from our Infrastructure segment for the three months ended March 31, 2023 decreased $4.1 million to $2.0 million from $6.1 million for the three months ended March 31, 2022. Adjusted EBITDA from our Infrastructure segment for the three months ended March 31, 2023 decreased $4.2 million to $16.3 million from $20.5 million for the three months ended March 31, 2022. The decrease in Adjusted EBITDA was primarily driven by timing of projects at Banker Steel and the industrial maintenance and repair businesses, both of which encountered customer and general contractor driven delays, resulting in the timing of work performed by DBM to be delayed in the current period. SG&A also increased over the comparable period, primarily driven by increases in salary and benefits. While the commercial structural steel fabrication and erection business also experienced similar delays in the current period that impacted its revenue, the decrease in Adjusted EBITDA was partially offset by a margin improvement as projects completed in the comparable period, which had lower margins due to market pressure on point-of-sale project margins during the COVID-19 pandemic, were replaced with more recent projects with higher point-of-sale margins in the current period.
Life Sciences: Net loss from our Life Sciences segment for the three months ended March 31, 2023 decreased $1.3 million to $2.8 million from $4.1 million for the three months ended March 31, 2022. Adjusted EBITDA loss from our Life Sciences segment for the three months ended March 31, 2023 increased $2.0 million to $7.8 million from $5.8 million for the three months ended March 31, 2022. The increase in Adjusted EBITDA loss was primarily due to higher equity method losses from our investment in MediBeacon. On February 23, 2023, MediBeacon issued $7.5 million of preferred stock to Huadong in exchange for additional shares of preferred stock. As a result of this equity transaction, Pansend's basis in MediBeacon increased by $3.8 million and Pansend recognized $3.8 million additional equity method losses which were previously unrecognized because Pansend's carrying amount of its investment in MediBeacon had been previously reduced to zero. Refer to Note 6. Investments of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information. TripleRing Technologies also had higher income in the comparable period, due to recognition of a gain on debt extinguishment. The increase was partially offset by a decrease in SG&A expenses at R2, primarily from decreased salaries and benefits and research and development expenses.
Spectrum: Net loss from our Spectrum segment for the three months ended March 31, 2023 increased $1.6 million to $5.0 million from $3.4 million for the three months ended March 31, 2022. Adjusted EBITDA from our Spectrum segment for the three months ended March 31, 2023 decreased $0.9 million to $0.4 million from $1.3 million for the three months ended March 31, 2022. The overall decrease in Adjusted EBITDA was primarily driven by the termination of Network and increased salaries and benefits at station group, partially offset by an increase in station revenues, which launched new customers in the current period.
Non-operating Corporate: Net loss from our Non-operating Corporate segment for the three months ended March 31, 2023 increased $0.6 million to $11.9 million from $11.3 million for the three months ended March 31, 2022. Adjusted EBITDA loss from our Non-operating Corporate segment for the three months ended March 31, 2023 decreased $1.1 million to $3.5 million from $4.6 million for the three months ended March 31, 2022. The decrease in Adjusted EBITDA loss was driven by unrepeated expenses related to the settlement with the former CEO recorded in the prior period, a decrease in accounting expenses and a decrease in salaries and benefits and bonus expense.
Other and Eliminations: Net income from our Other and Eliminations segment for the three months ended March 31, 2023 increased $8.4 million to $8.7 million from $0.3 million for the three months ended March 31, 2022. Adjusted EBITDA from our Other segment for the three months ended March 31, 2023 decreased $0.6 million to an Adjusted EBITDA loss of $0.5 million from Adjusted EBITDA income of $0.1 million for the three months ended March 31, 2022. The decrease in Adjusted EBITDA for Other and Eliminations was driven by reduced contribution from HMN, which was sold on March 6, 2023, resulting in approximately two months of equity method loss being recognized compared to income for the three months in the comparable period.
Adjusted EBITDA by segment is summarized as follows:
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(in millions): | | | | Three Months Ended March 31, |
| | | | | | | | 2023 | | 2022 | | Increase / (Decrease) |
Infrastructure | | | | | | | | $ | 16.3 | | | $ | 20.5 | | | $ | (4.2) | |
Life Sciences | | | | | | | | (7.8) | | | (5.8) | | | (2.0) | |
Spectrum | | | | | | | | 0.4 | | | 1.3 | | | (0.9) | |
Non-operating Corporate | | | | | | | | (3.5) | | | (4.6) | | | 1.1 | |
Other and Eliminations | | | | | | | | (0.5) | | | 0.1 | | | (0.6) | |
Adjusted EBITDA | | | | | | | | $ | 4.9 | | | $ | 11.5 | | | $ | (6.6) | |
Backlog
Projects in backlog consist of awarded contracts, letters of intent, notices to proceed, change orders, and purchase orders obtained. Backlog increases as contract commitments are obtained, decreases as revenues are recognized and increases or decreases to reflect modifications in the work to be performed under the contracts. Backlog is converted to sales in future periods as work is performed or projects are completed. Backlog can be significantly affected by the receipt or loss of individual contracts.
Infrastructure Segment
As of March 31, 2023, DBMG's backlog was $1,595.6 million, consisting of $1,545.0 million under contracts or purchase orders and $50.6 million under letters of intent or notices to proceed. Approximately $844.7 million, representing 52.9% of DBMG’s backlog as of March 31, 2023, was attributable to five contracts, letters of intent, notices to proceed or purchase orders. If one or more of these projects terminate or reduce their scope, DBMG’s backlog could decrease substantially. DBMG includes an additional $14.0 million in its backlog that is not included in the remaining unsatisfied performance obligations disclosed in Note 3. Revenue and Contracts in Process of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information. This additional backlog includes commitments under master service agreements that are estimated amounts of work to be performed based on customer communications, historic performance and knowledge of our customers' intentions.
Liquidity and Capital Resources
Short- and Long-Term Liquidity Considerations and Risks
Our Non-Operating Corporate segment consists of holding companies, and its liquidity needs are primarily for interest payments on its 2026 Senior Secured Notes, 2026 Convertible Notes and Revolving Credit Agreement, dividend payments on its Preferred Stock and recurring operational expenses.
On a consolidated basis, as of March 31, 2023, we had $16.6 million of cash and cash equivalents, excluding restricted cash, compared to $80.4 million as of December 31, 2022. On a stand-alone basis, as of March 31, 2023, the Non-operating Corporate segment had cash and cash equivalents, excluding restricted cash, of $3.6 million compared to $9.1 million at December 31, 2022.
Our subsidiaries' principal liquidity requirements arise from cash used in operating activities, debt service, and capital expenditures, including purchases of steel construction equipment, over-the-air ("OTA") broadcast station equipment, development of back-office systems, operating costs and expenses, and income taxes.
As of March 31, 2023, we had $706.5 million of principal indebtedness on a consolidated basis compared to $725.3 million as of December 31, 2022, a decrease of $18.8 million, which was primarily due to a $15.0 million repayment of our Non-Operating Corporate segment's Revolving Credit Agreement.
As of March 31, 2023, on a stand-alone basis, our Non-operating Corporate segment indebtedness decreased to $386.8 million from $401.8 million as of December 31, 2022, a decrease of $15.0 million, driven by a repayment under our Revolving Credit Agreement of $15.0 million. As of March 31, 2023, our Non-Operating Corporate segment's stand-alone indebtedness consists of the $330.0 million aggregate principal amount of 2026 Senior Secured Notes, $51.8 million aggregate principal amount of 2026 Convertible Notes, and $5.0 million aggregate principal amount drawn on its Revolving Credit Agreement. Our Non-operating Corporate segment is required to make semi-annual interest payments on the 2026 Senior Secured Notes and 2026 Convertible Notes and quarterly interest payments on the Revolving Credit Agreement.
We are required to make dividend payments on our outstanding Preferred Stock on January 15th, April 15th, July 15th, and October 15th of each year.
We have financed our growth and operations to date, and expect to finance our future growth and operations, through public offerings and private placements of debt and equity securities, credit facilities, vendor financing, capital lease financing and other financing arrangements, as well as cash generated from the operations of our subsidiaries. In the future, we may also choose to sell assets or certain investments to generate cash.
On March 15, 2023, DBMGi received a redemption notice from CGIC, the holder of the Series A Fixed-to-Floating Rate Perpetual Preferred Stock of DBMGi (the “DBMGi Preferred Stock”) requesting that DBMGi redeem 41,820.25 shares of DBMGi Preferred Stock, representing all of the issued and outstanding shares of DBMGi Preferred Stock, within 60 days of the notice, or by May 15, 2023. On May 9, 2023, the Company entered into a Stock Purchase Agreement and Subordinated Unsecured Promissory Note with CGIC whereby the Company agreed to purchase the 41,820.25 shares of DBMGi Preferred Stock for full satisfaction of the redemption notice. In full consideration of the DBMGi Preferred Stock, the Company paid CGIC $7.1 million on May 9, 2023, and issued a subordinated unsecured promissory note to CGIC in the principal amount of $35.1 million, which include the accrued dividend payable from April 1, 2023 to May 9, 2023 of $0.4 million. The promissory note is due February 28, 2026, and bears interest at 9% per annum through May 8, 2024, 16% per annum from May 9, 2024 to May 8, 2025, and 32% per annum thereafter. The promissory note also requires a mandatory prepayment from the proceeds from certain asset sales and the greater of $3 million or 12.5% of the proceeds from certain equity sales. Other covenants in the promissory note are generally consistent with the Company's Indenture governing the 8.50% Senior Secured Notes due 2026, dated as of February 1, 2021, by and among the Company, the guarantors party thereto and U.S. Bank National Association. The foregoing is a summary only and does not purport to be a complete description of all of the terms, provisions, covenants, and agreements contained in the Stock Purchase Agreement and Subordinated Unsecured Promissory Note, and is subject to and qualified in its entirety by reference to the full text of the Stock Purchase Agreement and Subordinated Unsecured Promissory Note, which are filed herewith as Exhibits 10.5 and 10.6, respectively, and are incorporated herein by reference. Additionally, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt service and lease commitments) and other cash needs for our operations for at least the next twelve months from the issuance of the Condensed Consolidated Financial Statements through a combination of available cash, availability on our Revolving Credit Line, and distributions from our subsidiaries. The ability of INNOVATE’s subsidiaries to make distributions to INNOVATE is subject to numerous factors, including restrictions contained in each subsidiary’s financing agreements, availability of sufficient funds at each subsidiary and the approval of such payment by each subsidiary’s board of directors, which must consider various factors, including general economic and business conditions, tax considerations, strategic plans, financial results and condition, expansion plans, any contractual, legal or regulatory restrictions on the payment of dividends, and such other factors each subsidiary’s board of directors considers relevant. Although the Company believes, to the extent needed, that it will be able to raise additional debt or equity capital, refinance indebtedness or preferred stock, enter into other financing arrangements or engage in asset sales and sales of certain investments sufficient to fund any cash needs that we are not able to satisfy with the funds on hand or expected to be provided by our subsidiaries, there can be no assurance that it will be able to do so on terms satisfactory to the Company, if at all. Such financing options, if pursued, may also ultimately have the effect of negatively impacting our liquidity profile and prospects over the long-term and dilute the holders of common stock. Our ability to sell assets and certain of our investments to meet our existing financing needs may also be limited by our existing financing instruments. In addition, the sale of assets or the Company’s investments may also make the Company less attractive to potential investors or future financing partners.
Capital Expenditures
Capital expenditures for the periods indicated are set forth in the table below (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
Infrastructure | | | | | | $ | 3.0 | | | $ | 2.9 | |
Life Sciences | | | | | | 0.1 | | | 0.1 | |
Spectrum | | | | | | 0.3 | | | 1.6 | |
Non-operating Corporate | | | | | | 0.3 | | | — | |
Total | | | | | | $ | 3.7 | | | $ | 4.6 | |
Indebtedness
Non-Operating Corporate
2026 Senior Secured Notes
On February 1, 2021, our Non-Operating Corporate segment repaid the 2021 Senior Secured Notes and issued $330.0 million aggregate principal amount of 8.50% senior secured notes due February 1, 2026 (the "2026 Senior Secured Notes"). The 2026 Senior Secured Notes mature on February 1, 2026, and accrue interest at a rate of 8.50% per year, which interest is paid semi-annually on February 1 and August 1 of each year. For additional information on the terms and conditions of the 2026 Senior Secured Notes, including guarantees, ranking and collateral, refer to Note 11. Debt Obligations to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
2026 Convertible Notes - Terms and Conditions
As of March 31, 2023, we had $51.8 million 2026 Convertible Notes outstanding. The 2026 Convertible Notes were issued under a separate indenture dated February 1, 2021, between the Company and U.S. Bank, as trustee (the "Convertible Indenture"). The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased. The 2026 Convertible Notes accrue interest at a rate of 7.5% per year, which interest is paid semi-annually on February 1 and August 1 of each year. For additional information on the terms and conditions of the 2026 Convertible Notes, including optional redemption, conversion rights guarantees, ranking and collateral, refer to Note 11. Debt Obligations to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Our debt contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes and the 2026 Convertible Notes to become immediately due and payable.
Revolving Credit Agreement
We have a revolving credit agreement with MSD PCOF Partners IX, LLC ("Revolving Credit Agreement"). The Revolving Credit Agreements has a maximum commitment of $20.0 million, of which $5.0 million had been drawn as of March 31, 2023. The Revolving Credit Agreement has a maturity date of February 23, 2024 and accrues interest at a rate of 5.75% per year, which is paid quarterly. For additional information on the terms and conditions of the Revolving Credit Facility, including guarantees, ranking and collateral, refer to Note 11. Debt Obligations to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference. Subsequent to quarter end, on April 25, 2023, the Company extended the maturity date of its Revolving Credit Agreement to March 16, 2025, changed the benchmark rates for interest to SOFR-based rates and lowered the amount of net cash proceeds from certain asset sales in excess of which a prepayment is required from $50.0 million to $10.0 million. Subsequent to quarter end, on May 8, 2023, INNOVATE drew an additional $8.0 million under the Revolving Credit Agreement, increasing the outstanding balance to $13.0 million.
Infrastructure
As of March 31, 2023, our Infrastructure segment had an aggregate principal amount of outstanding debt of $237.0 million. On August 2, 2022, DBMG negotiated and finalized an amendment to its UMB Revolving Line which included a retrospective change to the terms of the Fixed Coverage Ratio, and an increase in the UMB Revolving Line commitment from $110.0 million to $135.0 million, among other things. Refer to Note 11. Debt Obligations of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Life Sciences
During June to December 2022, R2 Technologies entered in various notes totaling $10.8 million with Lancer, a related party, an entity controlled by Avram A. Glazer, the Chairman of INNOVATE's Board of Director. During the first quarter of 2023, on February 15, 2023 and February 28, 2023, R2 Technologies closed on an additional 18% $0.5 million and an additional 18% $0.4 million note with Lancer, respectively. On March 31, 2023, R2 Technologies entered into an exchange agreement with Lancer on the outstanding principal and accrued interest, which increased the total outstanding principal to $13.0 million, increased the interest rate from 18% to 20%, and extended the maturity date to the earlier of June 30, 2023 or within 5 business days of the date on which R2 Technologies receives an aggregate $20.0 million from the consummation of a debt or equity financing. Subsequent to quarter end, on April 28, 2023, R2 Technologies closed on an additional 20% $0.4 million note with Lancer.
As of March 31, 2023, our Life Sciences segment has aggregate principal outstanding debt of $13.0 million.
Spectrum
On December 30, 2022, Broadcasting entered into a Seventh Omnibus Amendment to Secured Notes which, among other things, extended the maturity date of $52.2 million of its Senior Secured Notes, due December 30, 2022 to May 31, 2024. The effective interest rates on the notes range from 12.8% to 19.6%. Interest is capitalized and payable upon maturity of the principal. The $52.2 million of Senior Secured Notes consisted of $19.3 million of 8.5% Senior Secured Notes and $32.9 million of 10.5% Senior Secured Notes. The other terms of the $19.3 million 8.5% Senior Notes remained the same. At the time of the extension, HC2 Broadcasting had accrued interest and other fees of $6.9 million. The interest rate on the $32.9 million 10.5% Senior Notes was increased to 11.45% and cumulative accrued interest and exit fees of $17.5 million were capitalized into the principal balance with both note extensions accounted for as debt modification events. All other terms were essentially the same. Total outstanding principal after the refinancing was $69.7 million and $6.9 million of accrued interest and fees remain accrued, with total exit fees of $7.6 million which were recorded as original issue discount with a corresponding liability reflected in Other Liabilities.
Concurrently therewith and as part of the consideration for extending the 10.5% Senior Notes, HC2 Broadcasting amended warrants to purchase 145,825 shares of common stock of HC2 Broadcasting Holdings, Inc. common stock held by the lenders of the 10.5% Senior Notes by extending the time to exercise such to the second half of 2026 and reducing the exercise price per share (i) from $140.00 to $0.01 in the case of the certain of the warrants and (ii) from $130.00 to $0.01 in the case of the remaining warrants. The warrants have a five-year term and are exercisable at any time. The change in the fair value of the warrants was recorded as original issue discount with a corresponding impact reflected in Noncontrolling interest of $3.1 million.
As of March 31, 2023, our Spectrum segment has aggregate principal outstanding debt of $69.7 million.
Refer to Note 11. Debt Obligations to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional details regarding the indebtedness of our Infrastructure, Life Sciences and Spectrum segments.
Restrictive Covenants
The indenture governing the 2026 Senior Secured Notes dated February 1, 2021, by and among INNOVATE, the guarantors party thereto and U.S. Bank National Association, a national banking association, as trustee (the "Secured Indenture"), contains certain affirmative and negative covenants limiting, among other things, the ability of the Company, and, in certain cases, the Company’s subsidiaries, to incur additional indebtedness; create liens; engage in sale-leaseback transactions; pay dividends or make distributions in respect of capital stock; make certain restricted payments; sell assets; engage in transactions with affiliates; or consolidate or merge with, or sell substantially all of its assets to, another person. These covenants are subject to a number of important exceptions and qualifications.
The Company is also required to comply with certain financial maintenance covenants, which are similarly subject to a number of important exceptions and qualifications. These covenants include maintenance of (1) liquidity and (2) collateral coverage.
The maintenance of liquidity covenant provides that the Company will not permit the aggregate amount of (i) all unrestricted cash and Cash Equivalents of the Company and the Subsidiary Guarantors, (ii) amounts available for drawing under revolving credit facilities and undrawn letters of credit of the Company and the Subsidiary Guarantors and (iii) dividends, distributions or payments that are immediately available to be paid to the Company by any of its Restricted Subsidiaries to be less than the Company’s obligation to pay interest on the 2026 Senior Secured Notes and all other Debt, including Convertible Preferred Stock mandatory cash dividends or any other mandatory cash pay Preferred Stock but excluding any obligation to pay interest on Convertible Preferred Stock or any other mandatory cash pay Preferred Stock which, in each case, may be paid by accretion or in-kind in accordance with its terms of the Company and its Subsidiary Guarantors for the next six months. As of March 31, 2023, the Company was in compliance with this covenant.
The maintenance of collateral coverage provides that the certain subsidiaries' Collateral Coverage Ratio (as defined in the Secured Indenture as the ratio of (i) the Loan Collateral to (ii) Consolidated Secured Debt (each as defined therein)) calculated on a pro forma basis as of the last day of each fiscal quarter may not be less than 1.50 to 1.00. As of March 31, 2023, the Company was in compliance with this covenant.
The instruments governing the Company’s Preferred Stock also limit the Company’s and its subsidiaries ability to take certain actions, including, among other things, to incur additional indebtedness; issue additional Preferred Stock; engage in transactions with affiliates; and make certain restricted payments. These limitations are subject to a number of important exceptions and qualifications.
The Company has conducted its operations in a manner that resulted in compliance with the Secured Indenture; however, compliance with certain financial covenants for future periods may depend on the Company or one or more of the Company’s subsidiaries undertaking one or more non-operational transactions, such as the management of operating cash outflows, a monetization of assets, a debt incurrence or refinancing, the raising of equity capital, or similar transactions. If the Company is unable to remain in compliance and does not make alternate arrangements, an event of default would occur under the Company’s Secured Indenture which, among other remedies, could result in the outstanding obligations under the indenture becoming immediately due and payable and permitting the exercise of remedies with respect to the collateral. There is no assurance the Company will be able to complete any non-operational transaction it may undertake to maintain compliance with covenants under the Secured Indenture or, even if the Company completes any such transaction, that it will be able to maintain compliance for any subsequent period.
The UMB Revolving Line associated with our Infrastructure segment contains customary restrictive and financial covenants related to debt levels and performance, including a Fixed Coverage Ratio covenant, as defined in the agreement.
As of March 31, 2023, we were in compliance with the covenants of our debt agreements.
Summary of Consolidated Cash Flows
The below table summarizes the cash provided by or used in our activities and the amount of the respective changes between the years (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | March 31, | Increase / (Decrease) |
| | 2023 | | 2022 | |
Cash used in operating activities | | (77.0) | | | (63.4) | | | (13.6) | |
Cash provided by (used in) investing activities | | 51.2 | | | (7.4) | | | 58.6 | |
Cash (used in) provided by financing activities | | (38.0) | | | 51.2 | | | (89.2) | |
Effects of exchange rate changes on cash, cash equivalents and restricted cash | | (0.4) | | | 0.5 | | | (0.9) | |
Net decrease in cash and cash equivalents, including restricted cash | | $ | (64.2) | | | $ | (19.1) | | | $ | (45.1) | |
Operating Activities
Cash used in operating activities was $77.0 million for the three months ended March 31, 2023, as compared to $63.4 million for the three months ended March 31, 2022, an increase in cash used of $13.6 million. Cash flows from operations are primarily influenced by changes in the timing of demand for services and operating margins, but can also be affected by working capital needs associated with the services we provide. For the three months ended March 31, 2023, the increase in cash used in operating activities was primarily due to decreases in net income and increases in cash outflows from working capital changes at our Infrastructure and Spectrum segments, as well as a foreign tax payment of $4.4 million at our Other segment related to the sale of New Saxon's 19% investment in HMN on March 6, 2023. This was partially offset by an improvement in working capital at our Non-operating Corporate segment, driven by a decrease in SG&A expenses.
Investing Activities
Cash provided by investing activities was $51.2 million for the three months ended March 31, 2023 as compared to cash used in investing activities of $7.4 million for the three months ended March 31, 2022, an improvement of $58.6 million. The improvement in cash provided by investing activities was primarily driven by the $54.2 million of gross cash proceeds received from the sale of New Saxon's 19% investment in HMN on March 6, 2023. Capital expenditures, net of disposals for the three months ended March 31, 2023 were $3.4 million, as compared to $2.8 million for three months ended March 31, 2022, a net increase in cash used in PP&E activity of $0.6 million, largely from an unrepeated asset sale at Infrastructure in the comparable period in 2022, partially offset by a decrease in capital expenditures at our Spectrum segment which had station buildouts in the comparable period. Additionally, the three months ended March 31, 2022 had unrepeated events, such as the $4.5 million loan to MediBeacon in the first quarter of 2022.
Financing Activities
Cash used in financing activities was $38.0 million for the three months ended March 31, 2023 as compared to cash provided by financing activities of $51.2 million for the three months ended March 31, 2022, an increase in cash used of $89.2 million. The increased in cash used in financing activities was primarily driven by a decrease in net proceeds of $77.0 million from our credit facilities, primarily from a decrease in proceeds drawn on Infrastructure's UMB Revolving Line and a $15.0 million repayment of the Non-operating Corporate Line of Credit. In addition, we made $15.9 million in distributions to non-controlling interests and redeemable non-controlling interests related to the sale of New Saxon's 19% investment in HMN on March 6, 2023. This was partially offset by proceeds from new debt issued at R2 Technologies in the current period, a decrease in principal payments on debt obligations and a decrease in dividend payments.
Infrastructure
Cash Flows
Cash flows from operating activities are the principal source of cash used to fund DBMG’s operating expenses, interest payments on debt, and capital expenditures. DBMG's short-term cash needs are primarily for working capital to support operations including receivables, inventories, and other costs incurred in performing its contracts. DBMG attempts to structure the payment arrangements under its contracts to match costs incurred under the project. To the extent it is able to bill in advance of costs incurred, DBMG generates working capital through billings in excess of costs and recognized earnings on uncompleted contracts. DBMG relies on its credit facilities to meet its working capital needs. DBMG believes that its existing borrowing availability together with cash from operations will be adequate to meet all funding requirements for its operating expenses, interest payments on debt and capital expenditures for the foreseeable future. DBMG believes that its available funds, cash generated by operating activities and funds available under its bank credit facilities will be sufficient to fund its capital expenditures and its working capital needs. However, DBMG may expand its operations through future acquisitions and may require additional equity or debt financing.
DBMG is required to make monthly or quarterly interest payments on all of its debt. Based upon the March 31, 2023 debt balance, DBMG anticipates that its interest payments will be approximately $3.1 million for each remaining quarter of 2023.
Off- Balance Sheet Arrangements
We may enter into certain off-balance sheet arrangements in the ordinary course of business. Our off-balance sheet transactions may include, but are not limited to: leases that have not yet commenced, short-term leases, liabilities associated with non-cancelable operating leases with durations of less than twelve months, letter of credit obligations, surety, performance or payment bonds entered into in the normal course of business, and liabilities associated with multi-employer pension plans. Refer to Note 9. Leases, Note 13. Commitments and Contingencies of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information on leases and letters of credit and performance and/or payment bonds, respectively.
New Accounting Pronouncements
For information on new accounting pronouncements refer to Note 2. Summary of Significant Accounting Policies of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Critical Accounting Estimates
There have been no material changes in the Company’s critical accounting policies during the period ended March 31, 2023. For information about critical accounting policies and estimates, refer to “Critical Accounting Estimates” under Item 7 of our 2022 Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 14, 2023.
Related Party Transactions
For a discussion of our Related Party Transactions, refer to Note 16. Related Parties of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, which is incorporated herein by reference for additional information.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains or incorporates a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on current expectations, and are not strictly historical statements. In some cases, you can identify forward-looking statements by terminology such as "if," "may," "should," "believe," "anticipate," "future," "forward," "potential," "estimate," "opportunity," "goal," "objective," "growth," "outcome," "could," "expect," "intend," "plan," "strategy," "provide," "commitment," "result," "seek," "pursue," "ongoing," "include" or in the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties and are not guarantees of performance, results, or the creation of stockholder value, although they are based on our current plans or assessments which we believe to be reasonable as of the date hereof.
Factors that could cause actual results, events and developments to differ include, without limitation: the ability of our subsidiaries (including, target businesses following their acquisition) to generate sufficient net income and cash flows to make upstream cash distributions, capital market conditions, our and our subsidiaries’ ability to identify any suitable future acquisition opportunities, efficiencies/cost avoidance, cost savings, income and margins, growth, economies of scale, combined operations, future economic performance, conditions to, and the timetable for, completing the integration of financial reporting of acquired or target businesses with INNOVATE or the applicable subsidiary of INNOVATE, completing future acquisitions and dispositions, litigation, potential and contingent liabilities, management’s plans, changes in regulations and taxes.
We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. You should understand that the following important factors, in addition to those discussed under the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC March 14, 2023 and the documents incorporated herein by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. You should also understand that many factors described under one heading below may apply to more than one section in which we have grouped them for the purpose of this presentation. As a result, you should consider all of the following factors, together with all of the other information presented herein, in evaluating our business and that of our subsidiaries.
INNOVATE Corp. and Subsidiaries
Our actual results or other outcomes may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our dependence on distributions from our subsidiaries to fund our operations and payments on our obligations;
•the impact on our business and financial condition of our substantial indebtedness and the significant additional indebtedness and other financing obligations we may incur;
•the impact of covenants in the Indenture governing INNOVATE’s 2026 Senior Secured Notes, 2026 Convertible Notes, and Revolving Credit Agreement, the Certificates of Designation governing INNOVATE’s Preferred Stock and all other subsidiary debt obligations as summarized in Note 13. Debt Obligations to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC March 14, 2023 and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
•the effect of the novel coronavirus (“COVID-19”) pandemic and related governmental responses on our business, financial condition and results of operations;
•our possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
•our dependence on certain key personnel;
•bank failures or other similar events that could adversely affect our and our customers' and vendors' liquidity and financial performance;
•our possible inability to hire and retain qualified executive management, sales, technical and other personnel;
•the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
•the impact of recent supply chain disruptions, labor shortages and increases in overall price levels, including in transportation costs;
•the impact of a higher interest rate environment;
•the effects related to or resulting from Russia's military action in Ukraine, including the imposition of additional sanctions and export controls, as well as the broader impact to financial markets and the global macroeconomic and geopolitical environment;
•increased competition in the markets in which our operating segments conduct their businesses;
•limitations on our ability to successfully identify any strategic acquisitions or business opportunities and to compete for these opportunities with others who have greater resources;
•our ability to effectively increase the size of our organization, if needed, and manage our growth
•the impact of expending significant resources in considering acquisition targets or business opportunities that are not consummated;
•our expectations and timing with respect to our ordinary course acquisition activity and whether such acquisitions are accretive or dilutive to stockholders;
•the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved
•uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
•the impact of catastrophic events, including natural disasters, pandemic illness and the outbreak of war, or acts of terrorism;
•potential impacts on our business resulting from climate change, greenhouse gas regulations, and the impact of climate change-related changes in the frequency and severity of weather patterns;
•the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
•tax consequences associated with our acquisition, holding and disposition of target companies and assets;
•our ability to remain in compliance with the listing standards of the New York Stock Exchange;
•the ability of our operating segments to attract and retain customers;
•our expectations regarding the timing, extent and effectiveness of our cost reduction initiatives and management’s ability to moderate or control discretionary spending;
•management’s plans, goals, forecasts, expectations, guidance, objectives, strategies and timing for future operations, acquisitions, synergies, asset dispositions, fixed asset and goodwill impairment charges, tax and withholding expense, selling, general and administrative expenses, product plans, performance and results;
•management’s assessment of market factors and competitive developments, including pricing actions and regulatory rulings;
•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries, or businesses, including the wind-down of our Network business by our Spectrum segment, that we may make in the future and the effect of any such dispositions or sales on our results of operations;
•the possibility of indemnification claims arising out of divestitures of businesses; and
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all.
Infrastructure / DBM Global Inc.
Our actual results or other outcomes of DBMG, and, thus, our Infrastructure segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•adverse impacts from weather affecting DBMG’s performance and timeliness of completion of projects, which could lead to increased costs and affect the quality, costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•our ability to maintain efficient staffing and productivity as well as delays and cancellations as a result of the COVID-19 pandemic;
•cost overruns on fixed-price or similar contracts or failure to receive timely or proper payments on cost-reimbursable contracts, whether as a result of improper estimates, performance, disputes, or otherwise;
•uncertain timing and funding of new contract awards, as well as project cancellations;
•potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
•changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•the impact of inflationary pressures;
•adverse outcomes of pending claims or litigation or the possibility of new claims or litigation, and the potential effect of such claims or litigation on DBMG’s business, financial condition, results of operations or cash flow;
•risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
•its ability to settle or negotiate unapproved change orders and claims;
•fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and
•lack of necessary liquidity to provide bid, performance, advance payment and retention bonds, guarantees, or letters of credit securing DBMG’s obligations under bids and contracts or to finance expenditures prior to the receipt of payment for the performance of contracts.
Life Sciences / Pansend Life Sciences, LLC
Our actual results or other outcomes of Pansend Life Sciences, LLC, and, thus, our Life Sciences segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our Life Sciences segment’s ability to invest in development stage companies;
•our Life Sciences segment’s ability to develop products and treatments related to its portfolio companies;
•medical advances in healthcare and biotechnology;
•governmental regulation in the healthcare industry; and
•our Life Science's segment possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all.
Spectrum / HC2 Broadcasting Holdings Inc.
Our actual results or other outcomes of Broadcasting, and, thus, our Spectrum segment, may differ from those expressed or implied by forward-looking statements contained herein due to a variety of important factors, including, without limitation, the following:
•our Spectrum segment’s ability to operate in highly competitive markets and maintain market share;
•our Spectrum segment’s ability to effectively implement its business strategy or be successful in the operation of its business;
•our Spectrum segment's possible inability to raise additional capital when needed or refinance its existing debt, on attractive terms, or at all;
•new and growing sources of competition in the broadcasting industry; and
•FCC regulation of the television broadcasting industry.
We caution the reader that undue reliance should not be placed on any forward-looking statements, which speak only as of the date of this document. Neither we nor any of our subsidiaries undertake any duty or responsibility to update any of these forward-looking statements to reflect events or circumstances after the date of this document or to reflect actual outcomes, except as required by applicable law.