UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q | ||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | ||||
For the quarterly period ended September 30, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | ||||
Commission File No. 001-35210
INNOVATE CORP. (Exact name of registrant as specified in its charter) | ||
| Delaware | 54-1708481 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
295 Madison Avenue, 12th Floor, New York, NY | 10017 | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(212) 235-2690
(Registrant’s telephone number, including area code)
_____________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common Stock, par value $0.001 per share | VATE | New York Stock Exchange | ||||||
Preferred Stock Purchase Rights | N/A | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 31, 2022, 78,355,954 shares of common stock, par value $0.001, were outstanding.
INNOVATE CORP.
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 6. | ||||||||
1
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share amounts)
PART I: FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | 423.0 | $ | 394.8 | $ | 1,228.0 | $ | 810.4 | |||||||||||||||
| Cost of revenue | 364.6 | 339.7 | 1,069.5 | 688.4 | |||||||||||||||||||
| Gross profit | 58.4 | 55.1 | 158.5 | 122.0 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 45.6 | 44.3 | 130.3 | 120.9 | |||||||||||||||||||
| Depreciation and amortization | 6.8 | 8.9 | 20.6 | 17.6 | |||||||||||||||||||
| Other operating (income) loss | (0.6) | 0.8 | 0.7 | 1.0 | |||||||||||||||||||
| Income (loss) from operations | 6.6 | 1.1 | 6.9 | (17.5) | |||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest expense | (13.3) | (12.8) | (38.4) | (46.6) | |||||||||||||||||||
| Loss on early extinguishment or restructuring of debt | — | (0.1) | — | (12.5) | |||||||||||||||||||
| Loss from equity investees | (1.1) | (2.9) | (2.1) | (4.8) | |||||||||||||||||||
| Other (expense) income, net | (0.9) | 0.6 | 0.5 | 4.4 | |||||||||||||||||||
| Loss from continuing operations before income taxes | (8.7) | (14.1) | (33.1) | (77.0) | |||||||||||||||||||
| Income tax benefit (expense) | 2.0 | (0.1) | (1.6) | (3.8) | |||||||||||||||||||
| Loss from continuing operations | (6.7) | (14.2) | (34.7) | (80.8) | |||||||||||||||||||
Loss from discontinued operations (including net loss on disposal of $200.3 million and $159.9 million for the three and nine months ended September 30, 2021, respectively) | — | (200.3) | — | (149.9) | |||||||||||||||||||
| Net loss | (6.7) | (214.5) | (34.7) | (230.7) | |||||||||||||||||||
| Net loss attributable to noncontrolling interest and redeemable noncontrolling interest | 1.3 | 2.6 | 4.5 | 7.9 | |||||||||||||||||||
| Net loss attributable to INNOVATE Corp. | (5.4) | (211.9) | (30.2) | (222.8) | |||||||||||||||||||
| Less: Preferred dividends and deemed dividends from conversions | 1.2 | 1.1 | 3.6 | 1.7 | |||||||||||||||||||
| Net loss attributable to common stock and participating preferred stockholders | $ | (6.6) | $ | (213.0) | $ | (33.8) | $ | (224.5) | |||||||||||||||
| Loss per common share - continuing operations | |||||||||||||||||||||||
| Basic | $ | (0.09) | $ | (0.16) | $ | (0.44) | $ | (0.98) | |||||||||||||||
| Diluted | $ | (0.09) | $ | (0.16) | $ | (0.44) | $ | (0.98) | |||||||||||||||
| Loss per common share - discontinued operations | |||||||||||||||||||||||
| Basic | $ | — | $ | (2.59) | $ | — | $ | (1.94) | |||||||||||||||
| Diluted | $ | — | $ | (2.59) | $ | — | $ | (1.94) | |||||||||||||||
| Loss per share - Net loss attributable to common stock and participating preferred stockholders | |||||||||||||||||||||||
| Basic | $ | (0.09) | $ | (2.75) | $ | (0.44) | $ | (2.92) | |||||||||||||||
| Diluted | $ | (0.09) | $ | (2.75) | $ | (0.44) | $ | (2.92) | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 77.6 | 77.2 | 77.5 | 77.0 | |||||||||||||||||||
| Diluted | 77.6 | 77.2 | 77.5 | 77.0 | |||||||||||||||||||
2
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in millions)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Net loss | $ | (6.7) | $ | (214.5) | $ | (34.7) | $ | (230.7) | ||||||||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax | (2.0) | (1.2) | (3.8) | (2.4) | ||||||||||||||||||||||
| Unrealized loss on available-for-sale securities, net of tax | — | — | — | (57.7) | ||||||||||||||||||||||
| Dispositions | — | (334.0) | — | (334.0) | ||||||||||||||||||||||
| Other comprehensive loss | $ | (2.0) | $ | (335.2) | $ | (3.8) | $ | (394.1) | ||||||||||||||||||
| Comprehensive loss | (8.7) | (549.7) | (38.5) | (624.8) | ||||||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interests | 1.5 | 2.6 | 4.8 | 8.0 | ||||||||||||||||||||||
| Comprehensive loss attributable to INNOVATE Corp. | $ | (7.2) | $ | (547.1) | $ | (33.7) | $ | (616.8) | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
INNOVATE CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except share amounts)
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Assets | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | 25.8 | $ | 45.5 | ||||||||||
| Accounts receivable, net | 327.9 | 247.1 | ||||||||||||
| Contract assets | 156.0 | 118.6 | ||||||||||||
| Inventory | 20.7 | 17.0 | ||||||||||||
| Restricted cash | 0.4 | 2.0 | ||||||||||||
| Assets held for sale | — | 1.5 | ||||||||||||
| Other current assets | 13.5 | 10.9 | ||||||||||||
| Total current assets | 544.3 | 442.6 | ||||||||||||
| Investments | 57.7 | 56.0 | ||||||||||||
| Deferred tax asset | 2.7 | 3.0 | ||||||||||||
| Property, plant and equipment, net | 168.0 | 169.9 | ||||||||||||
| Goodwill | 126.8 | 127.4 | ||||||||||||
| Intangibles, net | 194.3 | 208.4 | ||||||||||||
| Other assets | 71.4 | 73.3 | ||||||||||||
| Total assets | $ | 1,165.2 | $ | 1,080.6 | ||||||||||
| Liabilities, temporary equity and stockholders’ deficit | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | 213.0 | $ | 179.2 | ||||||||||
| Accrued liabilities | 88.2 | 93.4 | ||||||||||||
| Current portion of debt obligations | 81.4 | 69.5 | ||||||||||||
| Contract liabilities | 95.4 | 79.1 | ||||||||||||
| Other current liabilities | 20.1 | 18.3 | ||||||||||||
| Total current liabilities | 498.1 | 439.5 | ||||||||||||
| Deferred tax liability | 10.2 | 9.1 | ||||||||||||
| Debt obligations | 627.9 | 556.8 | ||||||||||||
| Other liabilities | 57.6 | 63.3 | ||||||||||||
| Total liabilities | $ | 1,193.8 | $ | 1,068.7 | ||||||||||
| Commitments and contingencies | ||||||||||||||
| Temporary equity | ||||||||||||||
| Preferred stock | 17.9 | 18.8 | ||||||||||||
| Redeemable noncontrolling interest | 45.0 | 49.3 | ||||||||||||
| Total temporary equity | 62.9 | 68.1 | ||||||||||||
| Stockholders’ deficit | ||||||||||||||
Common stock, $0.001 par value | 0.1 | 0.1 | ||||||||||||
Shares authorized: 160,000,000 as of both September 30, 2022 and December 31, 2021 | ||||||||||||||
Shares issued: 79,784,214 and 79,225,964 as of September 30, 2022 and December 31, 2021, respectively | ||||||||||||||
Shares outstanding: 78,394,998 and 77,836,748 as of September 30, 2022 and December 31, 2021, respectively | ||||||||||||||
| Additional paid-in capital | 330.2 | 330.6 | ||||||||||||
Treasury stock, at cost: 1,389,216 shares as of both September 30, 2022 and December 31, 2021 | (5.2) | (5.2) | ||||||||||||
| Accumulated deficit | (446.4) | (416.2) | ||||||||||||
| Accumulated other comprehensive income | 2.9 | 6.4 | ||||||||||||
| Total INNOVATE Corp. stockholders’ deficit | (118.4) | (84.3) | ||||||||||||
| Noncontrolling interest | 26.9 | 28.1 | ||||||||||||
| Total stockholders’ deficit | (91.5) | (56.2) | ||||||||||||
| Total liabilities, temporary equity and stockholders’ deficit | $ | 1,165.2 | $ | 1,080.6 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total INNOVATE Stockholders' Deficit | Non- controlling Interest | Total Stockholders’ Deficit | Temporary Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 78.4 | $ | 0.1 | $ | 330.7 | $ | (5.2) | $ | (441.0) | $ | 4.7 | $ | (110.7) | $ | 26.6 | $ | (84.1) | $ | 65.0 | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 0.4 | — | — | — | 0.4 | — | 0.4 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock dividends and accretion | — | — | (0.9) | — | — | — | (0.9) | — | (0.9) | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transactions with noncontrolling interests | — | — | — | — | — | — | — | (0.2) | (0.2) | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | (5.4) | — | (5.4) | 0.6 | (4.8) | (1.9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (1.8) | (1.8) | (0.1) | (1.9) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 78.4 | $ | 0.1 | $ | 330.2 | $ | (5.2) | $ | (446.4) | $ | 2.9 | $ | (118.4) | $ | 26.9 | $ | (91.5) | $ | 62.9 | |||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total INNOVATE Stockholders' Deficit | Non- controlling Interest | Total Stockholders’ Deficit | Temporary Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 1.7 | — | — | — | 1.7 | — | 1.7 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment to redeemable noncontrolling interest | — | — | 0.1 | — | — | — | 0.1 | — | 0.1 | (0.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock dividends and accretion | — | — | (1.7) | — | — | — | (1.7) | (1.3) | (3.0) | (0.9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 0.6 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock for dividend | — | — | (0.9) | — | — | — | (0.9) | — | (0.9) | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transactions with noncontrolling interests | — | — | 0.1 | — | — | — | 0.1 | (0.4) | (0.3) | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | 0.3 | — | — | — | 0.3 | — | 0.3 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | (30.2) | — | (30.2) | 0.8 | (29.4) | (5.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (3.5) | (3.5) | (0.3) | (3.8) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 78.4 | $ | 0.1 | $ | 330.2 | $ | (5.2) | $ | (446.4) | $ | 2.9 | $ | (118.4) | $ | 26.9 | $ | (91.5) | $ | 62.9 | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited, in millions)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total INNOVATE Stockholders' Equity (Deficit) | Non- controlling Interest | Total Stockholders’ Equity (Deficit) | Temporary Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 77.8 | $ | 0.1 | $ | 354.8 | $ | (5.2) | $ | (199.6) | $ | 338.2 | $ | 488.3 | $ | 23.2 | $ | 511.5 | $ | 6.2 | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 0.4 | — | — | — | 0.4 | — | 0.4 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment to redeemable noncontrolling interest | — | — | — | — | — | — | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | (1.1) | — | — | — | (1.1) | — | (1.1) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | — | — | — | — | — | — | — | — | — | 19.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of redeemable noncontrolling interest | — | — | — | — | — | — | — | — | — | 40.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of preferred stock by subsidiary | — | — | (0.1) | — | — | — | (0.1) | — | (0.1) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transactions with noncontrolling interests | — | — | (22.4) | — | — | — | (22.4) | 5.3 | (17.1) | 5.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | (0.4) | — | — | — | (0.4) | — | (0.4) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (211.9) | — | (211.9) | (1.0) | (212.9) | (1.6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (335.0) | (335.0) | — | (335.0) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 77.8 | $ | 0.1 | $ | 331.2 | $ | (5.2) | $ | (411.5) | $ | 3.2 | $ | (82.2) | $ | 27.5 | $ | (54.7) | $ | 70.3 | |||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total INNOVATE Stockholders' Equity (Deficit) | Non- controlling Interest | Total Stockholders’ Equity (Deficit) | Temporary Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 76.7 | $ | 0.1 | $ | 355.7 | $ | (4.2) | $ | (188.7) | $ | 396.9 | $ | 559.8 | $ | 40.4 | $ | 600.2 | $ | 15.7 | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 1.7 | — | — | — | 1.7 | — | 1.7 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value adjustment to redeemable noncontrolling interest | — | — | (0.3) | — | — | — | (0.3) | — | (0.3) | 0.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxes paid in lieu of shares issued for share-based compensation | — | — | — | (1.0) | — | — | (1.0) | — | (1.0) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividend | — | — | (1.4) | — | — | — | (1.4) | — | (1.4) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1.1 | — | 0.7 | — | — | — | 0.7 | — | 0.7 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | — | — | — | — | — | — | — | — | — | 19.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of nonredeemable controlling interest | — | — | — | — | — | — | — | — | — | 40.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of preferred stock by subsidiary | — | — | (0.3) | — | — | — | (0.3) | — | (0.3) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of preferred shares | — | — | — | — | — | — | — | — | — | (10.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transactions with noncontrolling interests | — | — | (21.6) | — | — | — | (21.6) | (9.7) | (31.3) | 9.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | (3.3) | — | — | — | (3.3) | — | (3.3) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (222.8) | — | (222.8) | (3.1) | (225.9) | (4.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (393.7) | (393.7) | (0.1) | (393.8) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 77.8 | $ | 0.1 | $ | 331.2 | $ | (5.2) | $ | (411.5) | $ | 3.2 | $ | (82.2) | $ | 27.5 | $ | (54.7) | $ | 70.3 | |||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
INNOVATE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
| Nine Months Ended September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||
| Net loss | $ | (34.7) | $ | (230.7) | ||||||||||
| Less: Loss from discontinued operations, net of tax | — | (149.9) | ||||||||||||
| (34.7) | (80.8) | |||||||||||||
| Adjustments to reconcile net loss to cash used in continuing operating activities | ||||||||||||||
| Share-based compensation expense | 1.7 | 1.7 | ||||||||||||
| Depreciation and amortization | 31.8 | 26.0 | ||||||||||||
| Amortization of deferred financing costs and debt discount | 3.2 | 9.4 | ||||||||||||
| Loss on extinguishment of debt | — | 12.5 | ||||||||||||
| Loss from equity investees | 2.1 | 4.8 | ||||||||||||
| Asset impairment expense | 2.0 | 2.7 | ||||||||||||
| Deferred income taxes | 1.2 | 1.1 | ||||||||||||
| Other operating activities, net | (2.7) | (5.0) | ||||||||||||
| Changes in assets and liabilities, net of acquisitions: | ||||||||||||||
| Accounts receivable | (77.0) | (78.3) | ||||||||||||
| Contract assets | (37.4) | (27.2) | ||||||||||||
| Other current assets | (1.1) | (0.4) | ||||||||||||
| Inventory | (3.7) | (1.8) | ||||||||||||
| Other assets | 10.2 | 7.9 | ||||||||||||
| Accounts payable | 31.5 | 65.7 | ||||||||||||
| Accrued liabilities | (5.6) | 6.7 | ||||||||||||
| Contract liabilities | 16.3 | 16.8 | ||||||||||||
| Other current liabilities | (4.9) | (2.8) | ||||||||||||
| Other liabilities | (5.1) | (7.1) | ||||||||||||
| Cash used in continuing operating activities | (72.2) | (48.1) | ||||||||||||
| Cash provided by discontinued operating activities | — | 33.5 | ||||||||||||
| Cash used in operating activities | (72.2) | (14.6) | ||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Purchase of property, plant and equipment | (16.3) | (15.0) | ||||||||||||
| Proceeds from disposal of property, plant and equipment | 1.9 | 12.5 | ||||||||||||
| Loan to equity method investee | (4.5) | — | ||||||||||||
| Cash received from dispositions, net of cash disposed | — | 74.0 | ||||||||||||
| Extraordinary dividend received in business disposition | — | 62.5 | ||||||||||||
| Cash paid for acquisitions, net of cash acquired | — | (128.5) | ||||||||||||
| Other investing activities | 0.6 | 0.9 | ||||||||||||
| Cash (used in) provided by continuing investing activities | (18.3) | 6.4 | ||||||||||||
| Cash used in discontinued investing activities | — | (221.3) | ||||||||||||
| Cash used in investing activities | (18.3) | (214.9) | ||||||||||||
| Cash flows from financing activities | ||||||||||||||
| Proceeds from debt obligations, net of deferred financing costs | 9.9 | 452.3 | ||||||||||||
| Principal payments on debt obligations | (23.7) | (454.8) | ||||||||||||
| Proceeds from line of credit, net of deferred financing costs | 176.8 | 156.0 | ||||||||||||
| Payments on line of credit | (85.1) | (78.5) | ||||||||||||
| Redemption of preferred stock | — | (10.4) | ||||||||||||
| Cash received by subsidiary to issue preferred stock | — | 10.5 | ||||||||||||
| Transactions with noncontrolling interests | — | (9.5) | ||||||||||||
| Dividend payments | (3.9) | (2.0) | ||||||||||||
| Other financing activities | (0.8) | (1.4) | ||||||||||||
| Cash provided by continuing financing activities | 73.2 | 62.2 | ||||||||||||
| Cash used in discontinued financing activities | — | (7.6) | ||||||||||||
| Cash provided by financing activities | 73.2 | 54.6 | ||||||||||||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | (2.5) | (1.7) | ||||||||||||
| Net decrease in cash and cash equivalents, including restricted cash and cash classified within assets held for sale | (19.8) | (176.6) | ||||||||||||
| Less: Net decrease in cash and cash equivalents from discontinued operations | — | (195.4) | ||||||||||||
| Net change in cash, cash equivalents and restricted cash | (19.8) | 18.8 | ||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 47.5 | 45.3 | ||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 27.7 | $ | 64.1 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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 56% 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 47% 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 acquires and operates over-the-air broadcasting stations across the United States. In addition, Broadcasting, through its wholly-owned subsidiary, HC2 Network Inc. ("Network"), operates Azteca America, a Spanish-language broadcast network offering high quality Hispanic content to a diverse demographic 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").
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 results include the current and prior year equity investment in HMN Technologies Co., Ltd. (“HMN”), its 19% equity method investment, and the discontinued operations of Global Marine Systems Limited ("GMSL"). Also included in the Other segment is the discontinued operations of Beyond6, Inc. ("Beyond6"), and Continental Insurance Group ("CIG").
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. For the three and nine months ended September 30, 2022, the results of DBMG, Pansend, Genovel, R2, Broadcasting, and GMH have been consolidated into the Company’s results based on guidance from the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC" 810, Consolidation). The remaining interests not owned by the Company are presented as a noncontrolling interest component of total equity.
8
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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 financial statements pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation.
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, 2021, filed with the SEC on March 9, 2022. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2022.
Use of Estimates and Assumptions
The preparation of the Company’s Condensed 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 Condensed Consolidated Financial Statements through a combination of available cash 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.
COVID-19
There are many uncertainties regarding the current coronavirus ("COVID-19") pandemic, and the Company continues to closely monitor the impact of the COVID-19 pandemic, including the effectiveness of the vaccine programs, on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, business partners and distribution channels and any potential prolonging or worsening of the pandemic due to COVID-19 variants. We are unable to predict the impact that COVID-19 will have on the Company's financial position and operating results due to numerous uncertainties. However, as the pandemic continues, it may have an adverse effect on the Company’s results of operations, financial condition, or liquidity.
COVID-19 has continued to cause supply chain challenges related to labor shortages and supply chain disruptions, which may create significant delays in our ability to complete projects or deliver products. The receipt of material from impacted areas has been slowed or disrupted and our suppliers are expected to face similar challenges in fulfilling or placing orders, including jurisdictions such as Greater China which continue to have government-mandated lockdowns. In addition, reductions in the number of ocean carrier voyages, ocean freight capacity issues, congestion at major international gateways and other economic factors continue to persist worldwide due to COVID-19 and worldwide supply impacts as there is much greater demand for shipping and reduced capacity and equipment, which has resulted in recent price increases per shipping container. In addition, in the United States, trucking costs have risen dramatically due to driver shortages and increased labor costs, as well as new federal and state safety, environmental and labor regulations. These changes may disrupt our supply chain, which may result in a delay in the completion of our projects and cause us to incur significant additional costs. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. These supply chain disruptions and transportation challenges could have a material adverse effect on our results of operations or financial condition.
The Company expects to continue to assess the evolving impact of the COVID-19 pandemic.
9
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Accounting Pronouncements Adopted in the Current Year
There were no new accounting pronouncements adopted during the nine months ended September 30, 2022.
Accounting Pronouncements to be Adopted in 2023
Credit Loss Standard
In June 2016, the FASB issued 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 expected loss model, entities will 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 Company is required to adopt Topic 326 on January 1, 2023. The Company is currently evaluating the application of the new standard and does not expect the adoption to have a significant impact on the Company's financial statements.
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. See Note 25. Subsequent Events for any subsequent events.
3. Revenue and Contracts in Process
Revenue from contracts with customers consist of the following (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
Infrastructure | $ | 412.7 | $ | 383.0 | $ | 1,197.0 | $ | 776.3 | ||||||||||||||||||
| Life Sciences | 1.2 | 1.6 | 3.0 | 2.8 | ||||||||||||||||||||||
| Spectrum | 9.1 | 10.2 | 28.0 | 31.3 | ||||||||||||||||||||||
| Total revenue | $ | 423.0 | $ | 394.8 | $ | 1,228.0 | $ | 810.4 | ||||||||||||||||||
Accounts receivables, net, from contracts with customers consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Accounts receivables with customers | ||||||||||||||
Infrastructure | $ | 313.9 | $ | 226.8 | ||||||||||
| Life Sciences | 0.8 | 0.3 | ||||||||||||
| Spectrum | 7.1 | 9.4 | ||||||||||||
| Total accounts receivables with customers | $ | 321.8 | $ | 236.5 | ||||||||||
Contract assets and contract liabilities and recognized earnings consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Costs incurred on contracts in progress | $ | 2,098.3 | $ | 2,161.5 | ||||||||||
| Estimated earnings | 343.5 | 316.4 | ||||||||||||
| Contract revenue earned on uncompleted contracts | 2,441.8 | 2,477.9 | ||||||||||||
| Less: progress billings | 2,381.2 | 2,438.4 | ||||||||||||
| $ | 60.6 | $ | 39.5 | |||||||||||
| The above is included in the accompanying consolidated balance sheets under the following line items: | ||||||||||||||
| Contract assets | $ | 156.0 | $ | 118.6 | ||||||||||
| Contract liabilities | (95.4) | (79.1) | ||||||||||||
| $ | 60.6 | $ | 39.5 | |||||||||||
10
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Infrastructure Segment
The following table disaggregates DBMG's revenue by market (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Commercial | $ | 187.3 | $ | 207.0 | $ | 643.9 | $ | 343.3 | ||||||||||||||||||
| Industrial | 96.3 | 92.9 | 270.5 | 207.9 | ||||||||||||||||||||||
| Healthcare | 36.0 | 17.1 | 93.3 | 37.2 | ||||||||||||||||||||||
| Convention | 55.5 | 23.4 | 97.2 | 51.7 | ||||||||||||||||||||||
| Transportation | 15.0 | 16.0 | 32.9 | 40.0 | ||||||||||||||||||||||
| Leisure | 7.9 | 4.8 | 17.7 | 16.5 | ||||||||||||||||||||||
| Government | 10.9 | 15.9 | 27.4 | 54.6 | ||||||||||||||||||||||
| Other | 3.7 | 5.9 | 13.7 | 25.1 | ||||||||||||||||||||||
| Total revenue from contracts with customers | 412.6 | 383.0 | 1,196.6 | 776.3 | ||||||||||||||||||||||
| Other revenue | 0.1 | — | 0.4 | — | ||||||||||||||||||||||
| Total Infrastructure segment revenue | $ | 412.7 | $ | 383.0 | $ | 1,197.0 | $ | 776.3 | ||||||||||||||||||
Contract assets and contract liabilities consisted of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Cost in excess of billings | $ | 85.4 | $ | 68.3 | ||||||||||
| Conditional retainage | 70.6 | 50.3 | ||||||||||||
| Contract assets | $ | 156.0 | $ | 118.6 | ||||||||||
| Billings in excess of costs | $ | (152.7) | $ | (137.6) | ||||||||||
| Conditional retainage | 57.3 | 58.5 | ||||||||||||
| Contract liabilities | $ | (95.4) | $ | (79.1) | ||||||||||
The change in contract assets is a result of the recording of $171.4 million of contract assets driven by new commercial projects, offset by $134.0 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 $93.2 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 $76.9 million.
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
As of September 30, 2022, the transaction price allocated to remaining unsatisfied performance obligations consisted of the following (in millions):
| Within One Year | Within Five Years | Total | ||||||||||||||||||
| Commercial | $ | 409.7 | $ | 110.4 | $ | 520.1 | ||||||||||||||
| Industrial | 243.4 | 18.5 | 261.9 | |||||||||||||||||
| Transportation | 332.9 | 97.6 | 430.5 | |||||||||||||||||
| Government | 13.2 | — | 13.2 | |||||||||||||||||
| Leisure | 6.6 | — | 6.6 | |||||||||||||||||
| Healthcare | 418.9 | 108.9 | 527.8 | |||||||||||||||||
| Convention | 132.0 | 8.0 | 140.0 | |||||||||||||||||
| Other | 3.0 | — | 3.0 | |||||||||||||||||
| Remaining unsatisfied performance obligations | $ | 1,559.7 | $ | 343.4 | $ | 1,903.1 | ||||||||||||||
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 within the next thirty-six months.
11
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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.
Life Sciences Segment
The following table disaggregates the Life Sciences segment's revenue by type (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Systems and consumables revenue | $ | 1.2 | $ | 1.6 | $ | 3.0 | $ | 2.8 | ||||||||||||||||||
| Total Life Sciences segment revenue | $ | 1.2 | $ | 1.6 | $ | 3.0 | $ | 2.8 | ||||||||||||||||||
Spectrum Segment
The following table disaggregates the Spectrum segment's revenue by type (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Broadcast station | $ | 4.7 | $ | 4.7 | $ | 14.2 | $ | 13.6 | ||||||||||||||||||
| Network advertising | 3.4 | 4.2 | 10.7 | 13.7 | ||||||||||||||||||||||
| Network distribution | 0.8 | 0.8 | 2.2 | 2.5 | ||||||||||||||||||||||
| Other | 0.2 | 0.5 | 0.9 | 1.5 | ||||||||||||||||||||||
| Total Spectrum segment revenue | $ | 9.1 | $ | 10.2 | $ | 28.0 | $ | 31.3 | ||||||||||||||||||
As of September 30, 2022, the transaction price allocated to remaining unsatisfied performance obligations consisted of $3.4 million of broadcast station revenues, $0.1 million of network advertising and $0.1 million of other revenues, of which $2.8 million is expected to be recognized within one year and $0.8 million is expected to be recognized within the next thirty-six months.
4. Accounts Receivable, Net
Accounts receivable, net consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Contracts in progress | $ | 313.9 | $ | 226.8 | ||||||||||
| Unbilled retentions | 0.4 | 0.4 | ||||||||||||
| Trade receivables | 7.8 | 9.9 | ||||||||||||
| Other receivables | 6.1 | 10.6 | ||||||||||||
| Allowance for doubtful accounts | (0.3) | (0.6) | ||||||||||||
| Total | $ | 327.9 | $ | 247.1 | ||||||||||
5. Inventory
Inventory consists of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Raw materials and consumables | $ | 17.3 | $ | 14.3 | ||||||||||
| Work in process | 0.8 | 1.2 | ||||||||||||
| Finished goods | 2.6 | 1.5 | ||||||||||||
| Total inventory | $ | 20.7 | $ | 17.0 | ||||||||||
12
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):
| September 30, 2022 | ||||||||||||||||||||||||||
Measurement Alternative(1) | Equity Method | Fair Value | Total | |||||||||||||||||||||||
| Common stock | $ | — | $ | 2.9 | $ | — | $ | 2.9 | ||||||||||||||||||
| Preferred stock and fixed maturities | — | 0.5 | 5.6 | 6.1 | ||||||||||||||||||||||
| Put option | 11.3 | — | — | 11.3 | ||||||||||||||||||||||
| Investment in securities | — | 37.4 | — | 37.4 | ||||||||||||||||||||||
| Total | $ | 11.3 | $ | 40.8 | $ | 5.6 | $ | 57.7 | ||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
Measurement Alternative(1) | Equity Method | Fair Value | Total | |||||||||||||||||||||||
| Common stock | $ | — | $ | 2.1 | $ | — | $ | 2.1 | ||||||||||||||||||
| Preferred stock and fixed maturities | 0.5 | 2.1 | 5.4 | 8.0 | ||||||||||||||||||||||
| Put option | 11.3 | — | — | 11.3 | ||||||||||||||||||||||
| Investment in securities | — | 34.6 | — | 34.6 | ||||||||||||||||||||||
| Total | $ | 11.8 | $ | 38.8 | $ | 5.4 | $ | 56.0 | ||||||||||||||||||
(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.
Pansend accounts for MediBeacon's preferred stock as an equity method investment, inclusive of any fixed maturity securities issued by Pansend to MediBeacon. During the nine months ended September 30, 2022, Pansend issued MediBeacon a $4.5 million 8.0% convertible note due March 2025, increasing the total outstanding principal to $5.0 million. The increase in the net basis was partially offset by additional equity method losses recognized on MediBeacon.
Equity Method Investments
The Company's share of net loss from its equity method investments was $1.1 million and $2.9 million for the three months ended September 30, 2022 and 2021, respectively. The Company's share of net loss from its equity method investments totaled $2.1 million and $4.8 million for the nine months ended September 30, 2022 and 2021, respectively. The Company accounts for its Triple Ring equity method investment results on a one-month lag basis.
The following tables provide summarized financial information for the Company's equity method investments (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Assets | $ | 645.4 | $ | 604.5 | ||||||||||
| Liabilities | 530.4 | 481.5 | ||||||||||||
| Equity | $ | 115.0 | $ | 123.0 | ||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Total revenues | $ | 149.8 | $ | 92.0 | $ | 359.1 | $ | 390.6 | ||||||||||||||||||
| Gross profit | $ | 23.1 | $ | 14.4 | $ | 68.0 | $ | 58.7 | ||||||||||||||||||
| Operating income (loss) | $ | 2.5 | $ | (7.1) | $ | 7.9 | $ | (6.2) | ||||||||||||||||||
| Net income (loss) | $ | 0.1 | $ | (8.4) | $ | 6.9 | $ | (8.3) | ||||||||||||||||||
13
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
7. Property, Plant & Equipment, Net
Property, plant and equipment, net, consists of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Equipment, furniture and fixtures, and software | $ | 192.1 | $ | 180.7 | ||||||||||
| Building and leasehold improvements | 44.8 | 43.0 | ||||||||||||
| Land | 26.1 | 24.1 | ||||||||||||
| Construction in progress | 9.3 | 8.9 | ||||||||||||
| Plant and transportation equipment | 8.3 | 8.3 | ||||||||||||
| $ | 280.6 | $ | 265.0 | |||||||||||
| Less: Accumulated depreciation | 112.6 | 95.1 | ||||||||||||
| Total | $ | 168.0 | $ | 169.9 | ||||||||||
Depreciation expense was $6.6 million and $7.8 million for the three months ended September 30, 2022 and 2021, respectively. These amounts included $3.9 million and $3.4 million of depreciation expense recognized within cost of revenue for the three months ended September 30, 2022 and 2021, respectively.
Depreciation expense was $19.3 million and $17.7 million for the nine months ended September 30, 2022 and 2021, respectively. These amounts included $11.2 million and $8.4 million of depreciation expense recognized within cost of revenue for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022 and December 31, 2021, the aggregate net book value of equipment under capital leases totaled $2.2 million and $0.2 million, respectively.
8. Goodwill and Intangibles, Net
Goodwill
The carrying amount of goodwill by segment was as follows (in millions):
Infrastructure | Spectrum | Total | ||||||||||||||||||
| Balance at December 31, 2021 | $ | 106.0 | $ | 21.4 | $ | 127.4 | ||||||||||||||
| Translation | (0.6) | — | (0.6) | |||||||||||||||||
| Balance as of September 30, 2022 | $ | 105.4 | $ | 21.4 | $ | 126.8 | ||||||||||||||
Indefinite-lived Intangible Assets
The carrying amount of indefinite-lived intangible assets was as follows (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| FCC licenses | $ | 106.4 | $ | 106.5 | ||||||||||
| Total | $ | 106.4 | $ | 106.5 | ||||||||||
For the nine months ended September 30, 2022 and 2021, the Company recorded impairment charges of $0.1 million and $2.7 million, respectively, which is reflected in Other operating (income) loss, related to non-core FCC licenses which were sold or expired in order to bring their carrying value equal to the agreed upon sales price prior to the execution of the sale or expiration.
14
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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 | September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||||
| Trade names | 14 years | $ | 25.4 | $ | (7.6) | $ | 17.8 | $ | 25.4 | $ | (6.3) | $ | 19.1 | |||||||||||||||||||||||||||||||
| Customer relationships and contracts | 11 years | 87.5 | (31.8) | 55.7 | 87.7 | (21.6) | 66.1 | |||||||||||||||||||||||||||||||||||||
| Channel sharing arrangements | 35 years | 12.6 | (1.4) | 11.2 | 12.6 | (1.1) | 11.5 | |||||||||||||||||||||||||||||||||||||
| Other | 12 years | 4.1 | (0.9) | 3.2 | 8.5 | (3.3) | 5.2 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 129.6 | $ | (41.7) | $ | 87.9 | $ | 134.2 | $ | (32.3) | $ | 101.9 | ||||||||||||||||||||||||||||||||
For the nine months ended September 30, 2022, the Company recorded impairment charges to definite lived intangible assets of $1.5 million in Other operating (income) loss related to the impairment of the HC2 Network Program License Agreement ("PLA") due to a decline in performance.
Amortization expense for definite lived intangible assets was $4.1 million and $4.5 million for the three months ended September 30, 2022 and 2021, respectively, and was included in Depreciation and amortization in our Condensed Consolidated Statements of Operations.
Amortization expense for definite lived intangible assets was $12.5 million and $8.3 million for the nine months ended September 30, 2022 and 2021, respectively, and was included in Depreciation and amortization in our Condensed Consolidated Statements of Operations.
Amortization
Future estimated annual amortization expense for intangible assets is as follows (in millions):
| Estimated Amortization | ||||||||
| 2022 | $ | 4.1 | ||||||
| 2023 | 11.0 | |||||||
| 2024 | 7.4 | |||||||
| 2025 | 7.2 | |||||||
| 2026 | 6.9 | |||||||
| Thereafter | 51.3 | |||||||
| Total | $ | 87.9 | ||||||
9. Acquisitions
Infrastructure Segment
Banker Steel Acquisition
On March 15, 2021, the Company announced that DBMG entered into an agreement to acquire 100% of Banker Steel Holdco LLC ("Banker Steel") for $145.0 million, which closed on May 27, 2021. The acquisition was financed with $64.1 million from a partial draw on a new $110.0 million revolving credit facility, $49.6 million of sellers' notes, $6.3 million of assumed debt of Banker Steel, and $25.0 million in cash received from INNOVATE in the settlement of certain intercompany balances.
Banker Steel, which is included in the Company's Infrastructure segment, 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. Banker Steel consists of six operating companies: Banker Steel Co., LLC; NYC Constructors, LLC; Memco LLC; Derr & Isbell Construction LLC; Innovative Detailing and Engineering Solutions; and Lynchburg Freight and Specialty LLC.
15
INNOVATE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Results of Operations and Unaudited Supplemental Pro Forma Information
The following table presents the unaudited results of operations data for the nine months ended September 30, 2021 for Banker Steel from the date of acquisition (in millions):
| Nine Months Ended September 30, 2021 | ||||||||
| Revenue | $ | 153.8 | ||||||
| Income from operations | $ | 7.3 | ||||||
| Net income attributable to INNOVATE | $ | 4.5 | ||||||
The following table presents unaudited consolidated pro forma results of operations data as if the acquisition of Banker Steel had occurred at the beginning of the prior period. This information does not purport to be indicative of the actual results that would have occurred if the acquisitions had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in millions):
| Nine Months Ended September 30, 2021 | ||||||||
| Revenue | $ | 1,007.9 | ||||||
| Loss from operations | $ | (6.0) | ||||||
| Net loss attributable to INNOVATE | $ | (214.5) | ||||||
10. Dispositions, Deconsolidations and Discontinued Operations
Sale of CIG
The sale of CIG closed on July 1, 2021 to Continental General Holdings LLC ("Continental"), an entity controlled by Michael Gorzynski, a former director of the Company who also serves as executive chairman of Continental since October 2020. Our previous segment incorporating CIG (the "Insurance segment"), which primarily consisted of a closed block of long-term care insurance, had a book value, inclusive of intercompany eliminations, at the time of the sale of $544.0 million, inclusive of $344.0 million of Accumulated other comprehensive income ("AOCI"). The carrying value of the Insurance segment at the time of sale excluded cash of $62.5 million and investments of $26.7 million which were distributed to the Company through an extraordinary dividend immediately prior to the sale. The extraordinary dividend was approved by our domestic regulator in connection with the approval of the sale. The amount included in AOCI was reversed from equity at the time of the sale and offset the loss recognized.
While several factors impacted the fair value of the Insurance segment at the end of 2019, following discussions with our domestic regulator, changes in the asset management fee arrangement and expectations of future dividends primarily and ultimately resulted in the full impairment of the goodwill associated with the Insurance segment during the year ended December 31, 2019. While these factors did not have a major impact on the operations of the stand-alone business, they did have a significant impact on the economic benefit that could be realized by the Company.
As a result of the factors described above, combined with the risks associated with the long-term care insurance industry, the Company exited the Insurance segment and sold the business resulting in a $200.8 million loss on the sale of CIG in the third quarter of 2021.
On September 3, 2022, INNOVATE and Continental entered into a tax cooperation agreement permitting Continental General Insurance Company ("CGIC") to consolidate into INNOVATE's 2021 U.S. tax return for the six-month period INNOVATE owned CGIC, allowing CGIC to shield some of its income tax liability by utilizing a portion of INNOVATE's Net Operating Losses ("NOLs") while also converting a portion of INNOVATE's IRC Sec. 163(j) carryforward assets into NOLs. See Note 16. Income Taxes for additional information regarding income tax attributes.
The net tax savings of $2.9 million on CGIC's income tax liability was split between CGIC and INNOVATE in accordance with the tax sharing agreement, which was executed on October 11, 2022. INNOVATE recognized a current income tax benefit of $2.9 million in the current period and expects to receive $1.2 million as a result of the tax sharing agreement during the fourth quarter of 2022. As CGIC is no longer a subsidiary of INNOVATE, the $1.7 million tax benefit to be received by CGIC tax share is treated as a deemed contribution, and INNOVATE recognizes an additional $1.7 million loss related to the previous sale of the subsidiary, through continuing operations.
16
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Sale of Beyond6
On December 31, 2020, the Company announced a plan to sell Beyond6 to an affiliate of Mercuria Investments US, Inc., pursuant to an Agreement and Plan of Merger (the "Merger Agreement") among Beyond6, Greenfill, Inc., a Delaware corporation ("Parent"), Greenfill Merger Inc., a newly-formed Delaware corporation and wholly-owned subsidiary of the Parent, and an affiliate of INNOVATE as the Stockholder Representative for the Beyond6 stockholders, for a total purchase price, net of Beyond6's debt and transaction expenses, customary purchase price adjustments and escrow arrangements, of approximately $106.5 million. Net proceeds received by INNOVATE at closing was cash consideration of approximately $70.0 million. The sale closed on January 15, 2021. During the first quarter of 2021, the Company recognized a $39.2 million gain on the sale. During the third quarter of 2021, as a result of releases of related escrows and hold backs, the Company recognized an additional $0.5 million gain on the sale.
A portion of the proceeds from the sale of Beyond6 were used to repay $15.0 million of the then outstanding balance under the 6.75% line of credit with MSD PCOF Partners IX, LLC ("Revolving Credit Agreement") and repay $27.9 million of the Company's 2021 Senior Secured Notes.
Sale of GMSL
On January 30, 2020, the Company announced that, through its indirect subsidiary, GMH, in which the Company holds an approximately 73% controlling interest, the Company entered into a definitive agreement to sell 100% of the shares of GMSL to Trafalgar AcquisitionCo, Ltd. and an affiliate of J.F. Lehman & Company, LLC. The total base consideration was $250.0 million, subject to customary purchase price adjustments, working capital adjustments, and a potential earn-out of up to $12.5 million at such time, if any, if J.F. Lehman & Company, LLC and its investment affiliates achieve a specified multiple of their invested capital.
The purchase price is subject to customary potential downward or upward post-closing adjustments based on net working capital, cash, unpaid transaction expenses, indebtedness and certain of the Company’s pre-closing paid capital expenditures. The Share Purchase Agreement contained customary representations, warranties and covenants for a transaction of this nature.
The transaction closed on February 28, 2020. GMH received approximately $144.0 million of net proceeds from the sale, of which $36.8 million and $5.5 million were paid to noncontrolling interest holders and redeemable noncontrolling interest holders, respectively. INNOVATE received net proceeds of approximately $100.8 million. In connection with the closing of the transaction, the purchaser deposited (i) $1.25 million of the base price into an escrow fund for the purpose of securing certain indemnification obligations for losses payable in the first twelve months after closing and (ii) $1.91 million of the base price into an escrow fund for the purpose of securing a purchase price adjustment, if any, in favor of purchaser. Following the closing, the purchaser paid an amount equal to $2.4 million on the earlier of December 31, 2020 and the date on which a cash collateralized bonding facility was released.
In the first quarter of 2020, the Company recorded a $39.3 million loss on the sale and recognized a $31.3 million of Accumulated other comprehensive loss, which was comprised of $17.2 million of actuarial losses on pension and $14.1 million of currency translation adjustments. During the fourth quarter of 2020, the Company recognized a gain on sale of $2.4 million as a result of the cash collateralized bonding facility release. During the first quarter of 2021, the Company recognized a gain of $1.2 million as a result of indemnity release.
17
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Discontinued Operations Reporting
The results of Beyond6 and CIG and the related expenses directly attributable to the entities were reported as discontinued operations. The discontinued operations of Beyond6, and CIG are included in the Company's Other Segment. Summarized operating results of the discontinued operations are as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenue | $ | — | $ | — | $ | — | $ | 1.7 | ||||||||||||||||||
| Life, accident and health earned premiums, net | — | — | — | 55.7 | ||||||||||||||||||||||
| Net investment income | — | — | — | 92.4 | ||||||||||||||||||||||
| Realized/unrealized gains on investments | — | — | — | 5.1 | ||||||||||||||||||||||
| Total revenue | — | — | — | 154.9 | ||||||||||||||||||||||
| Cost of revenue | — | — | — | 0.8 | ||||||||||||||||||||||
| Policy benefits, changes in reserves, and commissions | — | — | — | 126.0 | ||||||||||||||||||||||
| Selling, general and administrative | — | — | — | 21.1 | ||||||||||||||||||||||
| Depreciation and amortization | — | — | — | (11.0) | ||||||||||||||||||||||
| Income from operations | — | — | — | 18.0 | ||||||||||||||||||||||
| Interest expense | — | — | — | (0.5) | ||||||||||||||||||||||
| Loss on sale and liquidation of subsidiaries | — | (200.3) | — | (159.9) | ||||||||||||||||||||||
| Other loss | — | — | — | (3.1) | ||||||||||||||||||||||
| Pre-tax loss from discontinued operations | — | (200.3) | — | (145.5) | ||||||||||||||||||||||
| Income tax expense | — | — | — | (4.4) | ||||||||||||||||||||||
| Loss from discontinued operations | $ | — | $ | (200.3) | $ | — | $ | (149.9) | ||||||||||||||||||
Assets Held for Sale
As of September 30, 2022 the Company had no assets held for sale, and as of December 31, 2021, the Company had approximately $1.5 million of other current assets related to discontinued operations which were classified in Assets held for sale in the Condensed Consolidated Balance Sheet.
11. 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. As of September 30, 2022 and December 31, 2021, lease right-of-use assets and lease liabilities consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Right-of-use assets: | ||||||||||||||
| $ | 65.7 | $ | 69.6 | |||||||||||
| 2.2 | 0.2 | |||||||||||||
| Total right-of-use assets | $ | 67.9 | $ | 69.8 | ||||||||||
| Lease liabilities: | ||||||||||||||
| $ | 17.3 | $ | 15.5 | |||||||||||
| 53.2 | 58.5 | |||||||||||||
| 2.2 | 0.1 | |||||||||||||
| Total lease liabilities | $ | 72.7 | $ | 74.1 | ||||||||||
The tables below present financial information associated with the Company's leases. The Company has entered into operating and finance lease agreements primarily for land, office space, equipment and vehicles, expiring between 2022 and 2045.
18
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
The following table summarizes the components of lease expense (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 0.1 | $ | 0.2 | $ | 0.2 | $ | 0.8 | ||||||||||||||||||
| Interest on lease liabilities | — | — | — | — | ||||||||||||||||||||||
| Net finance lease cost | 0.1 | 0.2 | 0.2 | 0.8 | ||||||||||||||||||||||
| Operating lease cost | 5.8 | 7.9 | 17.6 | 15.7 | ||||||||||||||||||||||
| Variable lease cost | 0.1 | 0.1 | 0.4 | 0.3 | ||||||||||||||||||||||
| Sublease income | (0.1) | — | (0.5) | — | ||||||||||||||||||||||
| Total lease cost | $ | 5.9 | $ | 8.2 | $ | 17.7 | $ | 16.8 | ||||||||||||||||||
Cash flow information related to leases is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||
| Financing cash flows from finance leases | $ | — | $ | 0.1 | $ | 0.1 | $ | 0.6 | ||||||||||||||||||
| Operating cash flows from operating leases | $ | 5.6 | $ | 8.1 | $ | 17.6 | $ | 16.0 | ||||||||||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | ||||||||||||||||||||||||||
| Finance leases | $ | 1.7 | $ | — | $ | 2.2 | $ | — | ||||||||||||||||||
| Operating leases | $ | 2.8 | $ | 1.7 | $ | 10.5 | $ | 42.9 | ||||||||||||||||||
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:
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Weighted-average remaining lease term (years) - operating lease | 7.5 | 7.5 | ||||||||||||
| Weighted-average remaining lease term (years) - finance lease | 1.6 | 2.3 | ||||||||||||
| Weighted-average discount rate - operating lease | 5.4 | % | 5.4 | % | ||||||||||
| Weighted-average discount rate - finance lease | 5.6 | % | 4.2 | % | ||||||||||
As of September 30, 2022, undiscounted cash flows for finance and operating leases are as follows (in millions):
| Operating Leases | Finance Leases | ||||||||||
| 2022 | $ | 5.1 | $ | 0.1 | |||||||
| 2023 | 19.2 | 1.8 | |||||||||
| 2024 | 13.4 | 0.3 | |||||||||
| 2025 | 10.0 | 0.1 | |||||||||
| 2026 | 6.8 | — | |||||||||
| Thereafter | 31.6 | — | |||||||||
| Total future lease payments | 86.1 | 2.3 | |||||||||
| Less: Present values | (15.6) | (0.1) | |||||||||
| Total lease liability balance | $ | 70.5 | $ | 2.2 | |||||||
In November 2021, INNOVATE Corp. entered into a ten-year lease agreement for a special purpose space in Palm Beach, Florida. The new 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 new lease also provides for the Company to receive an allowance from the landlord of $2.1 million to be used toward costs to design, engineer, install, supply and construct improvements, payable at the end of the construction period. The future lease payments and unexpended amounts under the allowance are not yet recorded on our 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.
19
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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 $0.14 million over the entire lease term, subject to 3% annual upward adjustment, with total square footage of 15,786. The future lease payments are not yet recorded on our consolidated balance sheet, 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.
12. Other Assets
Other assets, which are reflected in non-current assets in the Condensed Consolidated Balance Sheets, consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Right-of-use assets | $ | 65.7 | $ | 69.6 | ||||||||||
| Restricted cash - non-current | 1.5 | — | ||||||||||||
| Other | 4.2 | 3.7 | ||||||||||||
| Total other assets | $ | 71.4 | $ | 73.3 | ||||||||||
For the nine months ended September 30, 2022, the Company recorded impairment charges to right-of-use assets of $0.4 million, which are reflected in Other operating (income) loss, related to FCC licenses impaired. Refer to Note 8. Goodwill and Intangibles, Net for additional information.
13. Accrued Liabilities
Accrued liabilities consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Accrued expenses and other current liabilities | $ | 21.7 | $ | 24.5 | ||||||||||
| Accrued payroll and employee benefits | 40.4 | 38.9 | ||||||||||||
| Accrued interest | 25.8 | 29.6 | ||||||||||||
| Accrued income taxes | 0.3 | 0.4 | ||||||||||||
| Total accrued liabilities | $ | 88.2 | $ | 93.4 | ||||||||||
14. Debt Obligations
Debt obligations consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | ||||||||||
Infrastructure | |||||||||||
3.25% Note due 2026 | $ | 101.0 | $ | 107.2 | |||||||
PRIME minus 0.85% Line of Credit due 2024 | 107.7 | 30.4 | |||||||||
4.00% Note due 2024 | 17.5 | 25.0 | |||||||||
8.00% Note due 2024 | 19.1 | 19.6 | |||||||||
11.00% Note due 2024 | — | 6.3 | |||||||||
| Obligations under finance leases | 2.2 | 0.1 | |||||||||
| Spectrum | |||||||||||
8.50% Note due 2022 | 19.3 | 19.3 | |||||||||
10.50% Note due 2022 | 32.9 | 32.9 | |||||||||
| Life Sciences | |||||||||||
12.00% Note due 2022 | 10.0 | — | |||||||||
| 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 | |||||||||
7.50% Convertible Senior Notes, due 2022 | — | 3.2 | |||||||||
LIBOR plus 5.75% Line of Credit due 2024 | 20.0 | 5.0 | |||||||||
| 711.5 | 630.8 | ||||||||||
| Unamortized issuance discount, issuance premium, and deferred financing costs | (2.2) | (4.5) | |||||||||
| Less: current portion of debt obligations | (81.4) | (69.5) | |||||||||
| Debt obligations | $ | 627.9 | $ | 556.8 | |||||||
20
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Aggregate finance lease and debt payments, including interest, are as follows (in millions):
| Finance Leases | Debt | Total | ||||||||||||||||||
| 2022 | $ | 0.1 | $ | 79.2 | $ | 79.3 | ||||||||||||||
| 2023 | 1.8 | 62.3 | 64.1 | |||||||||||||||||
| 2024 | 0.3 | 194.2 | 194.5 | |||||||||||||||||
| 2025 | 0.1 | 41.2 | 41.3 | |||||||||||||||||
| 2026 | — | 469.8 | 469.8 | |||||||||||||||||
| Thereafter | — | — | — | |||||||||||||||||
| Total minimum principal and interest payments | 2.3 | 846.7 | 849.0 | |||||||||||||||||
| Less: Amount representing interest | (0.1) | (137.4) | (137.5) | |||||||||||||||||
| Total aggregate finance lease and debt payments | $ | 2.2 | $ | 709.3 | $ | 711.5 | ||||||||||||||
The interest rates on the finance leases range from approximately 2.0% to 6.0%.
Infrastructure
In May 2021, DBMG repaid its LIBOR plus 1.50% revolving line of credit (the "Revolving Line") under the Credit and Security Agreement with Wells Fargo Bank and its term loan due 2023 (the "TCW Loan") under a financing agreement with TCW Asset Management Company LLC. In addition, DBMG entered into a new credit facility with UMB Bank ("UMB"). Under the terms of the agreement, UMB agreed to a $110.0 million term loan ("UMB Term Loan") and $110.0 million revolving credit agreement ("UMB Revolving Line"). The UMB Term loan expires in 2026 and will bear interest at a rate of 3.25% with an effective interest rate of 3.25%. The UMB Revolving Line expires in 2024 and bears interest at a rate of Prime Rate minus 0.85%. The proceeds were used to fully repay DBMG's existing debt obligations, fund a portion of the Banker Steel acquisition, and provide additional working capital capacity to DBMG.
The 2021 extinguishment of the Revolving Line and the TCW Loan yielded a loss on extinguishment of $1.6 million included in Loss on early extinguishment or restructuring of debt in the Condensed Consolidated Statement of Operations.
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. 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.
Spectrum
On October 24, 2019, Spectrum issued $78.7 million 364-day secured notes (the "2020 Notes"). The 2020 Notes were comprised of a $36.2 million, 8.50% tranche funded by an affiliate of MSD Partners, L.P. (the “8.50% Note”). The remaining $42.5 million, 10.50% tranche (the “10.50% Note”) was a modification of the existing Secured Note, with certain institutional investors. The 2020 Notes had an original maturity date of October 2020, and were amended multiple times during 2020 as further described below. The net proceeds from the financing were used to retire Broadcasting’s existing debt, as well as fund acquisitions, working capital and general corporate purposes. In connection with the issuance of the 10.50% Note due 2020, Spectrum issued warrants to the same institutional investors to purchase 50,000 shares of common stock at $176.4 per share for a total purchase price of $8.8 million, or net settled, if exercised as of the issuance date, and as may be adjusted at any future exercise of the warrant pursuant to its terms. The warrant has a five-year term and is immediately exercisable.
In February 2020, Spectrum amended its agreement governing its 8.50% Note funded by MSD Partners, L.P., increasing the principal balance to $39.3 million. The proceeds were used to repay principal and interest on existing debt. In August 2020, Spectrum modified its agreement with MSD Partners, L.P. and Great American Life Insurance Company to extend the maturity on its 8.50% Note and 10.50% Note to October 2021. In September 2020, Spectrum further amended its agreement governing its 8.50% Note, increasing the principal balance by $4.0 million to $43.3 million. The proceeds were used to repay principal and interest on existing debt and for general business purposes. In November 2020, Spectrum paid down $2.9 million of its 8.50% Note and $3.0 million on other various notes. In December 2020, Spectrum paid down $21.0 million and $9.6 million of its 8.50% Note and 10.50% Note, respectively from the proceeds from the sale of stations. On August 30, 2021, Broadcasting repurchased $1.0 million of DTV's outstanding notes payable, inclusive of accrued interest, to certain institutional investors. Also on August 30, 2021, DTV extended its remaining outstanding notes by 60 days.
On October 21, 2021, Broadcasting entered into the Fifth Omnibus Amendment to Secured Notes, Consent and Second Amendment to Asset Sale Under Secured Notes and Intercreditor Agreement (the “Amendment”), which, among other things, extended $52.2 million of its Senior Secured Notes, due October 21, 2021, through November 30, 2022. Concurrently, Broadcasting completed the last of a series of repurchases of all the outstanding secured notes, inclusive of accrued interest, of DTV America Corporation (“DTV”) for a total consideration of $6.2 million using a combination of cash on hand and proceeds from the sales on non-core assets.
21
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
On October 26, 2021, Broadcasting repurchased the outstanding convertible promissory notes of DTV for a total consideration of $0.7 million using proceeds from the sales of non-core assets. Subsequent to these acquisitions, DTV’s debt is held by Broadcasting and eliminated in consolidation.
Life Sciences
On June 27, 2022, R2 Technologies issued a $0.5 million short-term 90-day 12.0% bridge financing loan with Lancer Capital, LLC, a related party, an entity controlled by Avram A. Glazer, the Chairman of the Board of Directors. On July 13, 2022, R2 Technologies entered into a note purchase agreement with Lancer Capital, LLC. The note payable bears interest at 12.0% per annum and was funded in two tranches. The first tranche of $5.0 million closed on July 13, 2022, and included the settlement of a $0.5 million short-term 90-day 12.0% bridge financing loan made on June 27, 2022 by Lancer Capital, LLC, and an additional $4.5 million in cash. The second tranche of $5.0 million closed on August 8, 2022. The note is payable on the earlier of December 31, 2022 or within five business days from the date on which R2 Technologies receives greater than $10.0 million from an equity or debt financing event.
For the three and nine months ended September 30, 2022, R2 Technologies recognized interest expense related to the contractual interest coupon with Lancer Capital, LLC of $0.2 million.
Non-Operating Corporate
2026 Senior Secured Notes
On February 1, 2021, INNOVATE repaid its 2021 Senior Secured Notes and issued $330.0 million aggregate principal amount of 8.50% senior secured notes due 2026 (the "2026 Senior Secured Notes"). The 2026 Senior Secured Notes were issued under an indenture dated February 1, 2021, by and among the Company, the guarantors party thereto and U.S. Bank National Association, a national banking association ("U.S. Bank"), as trustee (the "Secured Indenture"). In addition, the Company entered into exchange agreements with certain holders of approximately $51.8 million aggregate principal amount of its existing $55.0 million 7.50% convertible senior notes due 2022 (the "2022 Convertible Notes"), pursuant to which the Company exchanged such holders' 2022 Convertible Notes for newly issued 7.50% convertible notes due 2026 (the "2026 Convertible Notes"). The 2026 Senior Secured Notes were issued in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
The Company accounted for the transactions under the debt extinguishment model as the present value of cash flows under the terms of the 2026 Senior Secured Notes and 2026 Convertible Notes was at least 10% different from the present value of the remaining cash flows under the 2021 Senior Secured Notes and the 2022 Convertible Notes. The extinguishment of the 2021 Senior Secured Notes yielded a loss on extinguishment of $4.5 million. The extinguishment of the $51.8 million of 2022 Convertible Notes yielded a loss on extinguishment of $5.5 million, an acceleration of the amortization of discount of $5.3 million, and extinguishment of the bifurcated conversion option classified as equity of $7.7 million.
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 nine months ended September 30, 2022 and 2021, interest expense recognized for the period relating to both the contractual interest coupon and amortization of the deferred financing fees was $22.6 million and $19.7 million, respectively.
2026 Convertible Notes
As of September 30, 2022, the 2026 Convertible Notes had a net carrying value of $59.8 million and an unamortized premium of $8.8 million. Based on the closing price of our common stock of $0.70 on September 30, 2022, the if-converted value of the 2026 Convertible Notes did not exceed its principal value. For the nine months ended September 30, 2022 and 2021, interest expense recognized for the period relating to both the contractual interest coupon and amortization of discount net of premium was $1.5 million and $1.3 million, respectively.
2022 Convertible Notes
On June 1, 2022, the 2022 Convertible Notes of $3.2 million matured, and the Company repaid the principal and accrued interest upon maturity. For the nine months ended September 30, 2022 and 2021, interest expense recognized for the period relating to both the contractual interest coupon and amortization of the discount on the 2022 Convertible Notes was $0.2 million and $0.3 million, respectively.
22
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Line of Credit
On February 23, 2021, the Company entered into a third amendment (the "Amendment") of the 6.75% line of credit with MSD PCOF Partners IX, LLC ("Revolving Credit Agreement"). Among other things, the Amendment (i) increases the aggregate principal amount of the Revolving Credit Agreement to $20.0 million, (ii) extends the maturity date of the Revolving Credit Amendment to February 23, 2024, (iii) updates the affirmative and negative covenants contained in the Amended Credit Agreement so that they are substantially consistent with the affirmative and negative covenants contained in the indenture that governs the 2026 Senior Secured Notes and (iv) reduces the interest rate margin applicable to loans borrowed under the Amended Credit Agreement to 5.75% from the 6.75% described above. Except as modified by the Amendment, the terms of the Revolving Credit Agreement remain in effect. 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.
INNOVATE is in compliance with its debt covenants as of September 30, 2022.
15. Other Liabilities
Other liabilities, which are reflected in non-current liabilities in the Condensed Consolidated Balance Sheets, consist of the following (in millions):
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Lease liability, net of current portion | $ | 53.2 | $ | 58.5 | ||||||||||
| Other | 4.4 | 4.8 | ||||||||||||
| Total other liabilities | $ | 57.6 | $ | 63.3 | ||||||||||
16. Income Taxes
The Company used the Annual Effective Tax Rate ("ETR") approach of ASC 740-270, Interim Reporting, to calculate its 2022 interim tax provision.
Income tax benefit was $2.0 million and an expense of $0.1 million for the three months ended September 30, 2022 and 2021, respectively. The income tax benefit recorded for the three months ended September 30, 2022 relates to the net tax savings of $2.9 million from the CGIC consolidation in the 2021 tax return, resulting in a partial release of the valuation allowance. See Note 10. Dispositions, Deconsolidations and Discontinued Operations for information regarding the transaction. This was partially offset by income 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 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. The income tax expense recorded for the three months ended September 30, 2021 primarily related to the projected 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 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.
Income tax expense was $1.6 million and $3.8 million for the nine months ended September 30, 2022 and 2021, respectively. The income tax expense recorded for the nine months ended September 30, 2022 primarily relates to the projected 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 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. This was partially offset by the net tax savings of $2.9 million from the CGIC consolidation in the 2021 tax return, resulting in a partial release of the valuation allowance. The income tax expense recorded for the nine months ended September 30, 2021 primarily relates to the projected 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 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.
Net Operating Losses
At December 31, 2021, the Company had gross U.S. net operating loss carryforwards available to reduce future taxable income in the amount of $239.6 million, of which a portion is subject to annual limitation under IRC Sec. 382. This includes $75.1 million of additional U.S. net operating loss carryforwards resulting from the CGIC consolidation in the 2021 tax return. See Note 10. Dispositions, Deconsolidations and Discontinued Operations for information regarding the transaction. Based on estimates as of September 30, 2022, the Company expects that approximately $170.9 million of the gross U.S. net operating loss carryforwards would be available to offset taxable income in 2022. This estimate may change based on changes to actual results reported on the 2021 U.S. tax return. The amount of U.S. net operating loss carryforwards reflected in the financial statements differs 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, as of December 31, 2021, the Company had $103.9 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 $66.1 million from R2, $33.5 million from DTV America, and other entities of $4.3 million.
23
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Unrecognized Tax Benefits
The Company follows the provision of ASC 740-10, Income Taxes, 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 December 31, 2021 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, the Company 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. 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. Tax years 2002 - 2020 remain open for examination.
17. 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 waiting on the repayment of the outstanding interest and costs. The Company is working with HMRC agents to obtain full resolution.
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INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Fair Value Investments Litigation
On October 1, 2020, Fair Value Investments Incorporated (“FVI”) filed a putative 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 and, if necessary, trial in this action is expected to occur in the second half of 2023. The Company intends to vigorously defend this litigation.
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.
25
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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.
Insurance Company Books and Records Demand
On July 28, 2021, the Company received a demand from a company stockholder pursuant to 8 Del. C. § 220 to inspect books and records of the Company relating to, among other things, the Company’s sale of its Insurance segment. The Company has responded to the demand and cannot determine at this time if the books and records demand will lead to litigation.
INNOVATE Books and Records Demand
On June 6, 2022, the Company received a demand from a Company stockholder pursuant to 8 Del. C. § 220 to inspect books and records of the Company relating to, among other things, the Company’s lease agreement for a special purpose space in Palm Beach, Florida; the request by certain Company stockholders for a waiver of the share purchase limitations in the Company’s Tax Benefits Preservation Plan; and the receipt of a letter by the Audit Committee of the Board on May 18, 2022 from Michael Gorzynski, on behalf of MG Capital Management, Ltd. The Company has responded to the demand and cannot determine at this time if the books and records demand will lead to litigation.
Other Commitments and Contingencies
Letters of Credit and Performance Bonds
As of September 30, 2022, DBMG had outstanding letters of credit of $2.6 million under credit and security agreements and performance bonds of $1,057.8 million. As of December 31, 2021, DBM had outstanding letters of credit of $13.5 million under credit and security agreements and performance bonds of $900.8 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.
HMN Equity Interest
On October 30, 2019, the Company announced the sale of its New Saxon 2019 Limited (“New Saxon”) stake in HMN, its 49% joint venture with Huawei Technologies Co., Ltd., to Hengtong Optic-Electric Co Ltd ("Hengtong"). Under the terms of the agreement, the sale of New Saxon’s 49% interest in HMN will be affected in two tranches. The first tranche, the sale of the portion of New Saxon’s 30% interest of HMN, closed on May 12, 2020 (the "First HMN Close"). The remaining 19% interest of HMN is retained by New Saxon and subject to a put option agreement by New Saxon, exercisable starting on the second year anniversary of the closing date of the First HMN Close at a price equal to the greater of the share price paid for the 30% interest or fair market value as of the exercisable date.
On June 24, 2022, New Saxon entered into a supplemental agreement for the outright sale of its remaining 19% interest in HMN, which also changed the buyers from a Hong Kong entity to three Chinese entities. There is no guarantee that the transaction will be consummated in the anticipated timeframe, on the contemplated terms or at all. The new agreement preserves the rights under the original put option agreement and the Company has the ability to exercise the put option after October 31, 2022. The significant terms and structure of the transaction have not otherwise changed, and the transaction still requires cash settlement.
26
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
18. Share-based Compensation
Total share-based compensation expense recognized by the Company and its subsidiaries under all equity compensation arrangements was $0.4 million for both the three months ended September 30, 2022 and 2021, and was $1.7 million for both the nine months ended September 30, 2022 and 2021.
All grants are time based and vest either immediately or over a period established at grant, typically with a requisite service period of 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, 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, 2020 | 628,433 | $ | 3.93 | |||||||||||
| Granted | 593,458 | $ | 3.81 | |||||||||||
| Vested | (514,543) | $ | 3.89 | |||||||||||
| Forfeited | (151,469) | $ | 4.13 | |||||||||||
| Unvested - December 31, 2021 | 555,879 | $ | 3.79 | |||||||||||
| Granted | 599,797 | $ | 3.57 | |||||||||||
| Vested | (292,091) | $ | 3.81 | |||||||||||
| Forfeited | (45,289) | $ | 3.68 | |||||||||||
| Unvested - September 30, 2022 | 818,296 | $ | 3.63 | |||||||||||
The aggregate fair value of the restricted stock awards which vested during the nine months ended September 30, 2022 was $0.8 million. As of September 30, 2022, the total unrecognized stock-based compensation expense related to unvested restricted stock was $2.2 million. The unrecognized compensation cost is expected to be recognized over the remaining weighted average period of 2.2 years.
Stock Options
A summary of INNOVATE’s stock option activity is as follows:
| Shares | Weighted Average Exercise Price | |||||||||||||
| Outstanding - December 31, 2020 | 4,739,858 | $ | 5.13 | |||||||||||
| Expired | (23,999) | $ | 5.31 | |||||||||||
| Outstanding - December 31, 2021 | 4,715,859 | $ | 5.13 | |||||||||||
| Granted | 280,791 | $ | 3.25 | |||||||||||
| Exercised | — | — | ||||||||||||
| Forfeited | — | — | ||||||||||||
| Expired | (1,500) | $ | 4.06 | |||||||||||
| Outstanding - September 30, 2022 | 4,995,150 | $ | 5.02 | |||||||||||
| Eligible for exercise | 4,995,150 | $ | 5.02 | |||||||||||
The weighted average grant-date fair value of stock options granted during the period was $1.47. As of September 30, 2022, the intrinsic value and average remaining life of the Company's outstanding and exercisable stock options were zero and approximately 2.1 years, respectively. The maximum contractual term of the Company's exercisable stock options is approximately 10 years. As of September 30, 2022, there were no unvested stock options and no unrecognized stock-based compensation expenses related to unvested stock options.
27
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
19. Temporary Equity
Preferred Shares
The Company’s preferred shares authorized, issued and outstanding consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||||||||
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 CIG, INNOVATE entered into an exchange agreement (the "Exchange Agreement") with the now deconsolidated CGIC, who 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 Consolidated Balance Sheet with a combined redemption value of $16.1 million with a current fair value as of September 30, 2022 of $17.9 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.
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.
28
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
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 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 September 30, 2022, 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 nine months ended September 30, 2022 and 2021, INNOVATE's Board of Directors (the "Board") declared cash dividends with respect to INNOVATE’s issued and outstanding Preferred Stock, excluding the Series A and Series A-2 Preferred Stock which was owned by CGIC and was eliminated in consolidation prior to the sale of the Insurance segment on July 1, 2021, as presented in the following table (in millions):
| 2022 | ||||||||||||||||||||
| Declaration Date | March 31, 2022 | June 30, 2022 | September 30, 2022 | |||||||||||||||||
| Holders of Record Date | March 31, 2022 | June 30, 2022 | September 30, 2022 | |||||||||||||||||
| Payment Date | April 15, 2022 | July 15, 2022 | October 15, 2022 | |||||||||||||||||
| Total Dividend | $ | 0.3 | $ | 0.3 | $ | 0.3 | ||||||||||||||
| 2021 | ||||||||||||||||||||
| Declaration Date | March 31, 2021 | May 29, 2021 | September 30, 2021 | |||||||||||||||||
| Holders of Record Date | March 31, 2021 | May 29, 2021 | September 30, 2021 | |||||||||||||||||
| Payment Date | April 15, 2021 | June 4, 2021 | October 15, 2021 | |||||||||||||||||
| Total Dividend | $ | 0.2 | $ | 0.1 | $ | 0.3 | ||||||||||||||
29
INNOVATE CORP.
NOTES TO 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 Balance Sheet.
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 will be subsequently 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.
During the nine months ending September 30, 2022 and 2021, DBMGi's Board of Directors declared dividends with respect to DBMGi’s issued and outstanding Preferred Stock, as presented in the following table (in millions):
2022
| Declaration Date | March 31, 2022 | June 30, 2022 | September 30, 2022 | |||||||||||||||||
| Holders of Record Date | March 31, 2022 | June 30, 2022 | September 30, 2022 | |||||||||||||||||
| Payment Date | April 15, 2022 | July 15, 2022 | October 15, 2022 | |||||||||||||||||
| Total Dividend* | $ | 0.9 | $ | 0.9 | $ | 0.9 | ||||||||||||||
*The dividends paid on April 15, 2022 and October 15, 2022 were paid in cash. The DBMGi Board of Directors elected to pay the second quarter dividend payable July 15, 2022 in shares.
2021
| Declaration Date | September 30, 2021 | |||||||
| Holders of Record Date | September 30, 2021 | |||||||
| Payment Date | October 15, 2021 | |||||||
| Total Dividend | $ | 0.8 | ||||||
20. 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 September 30, 2022 and 2021, DBMG incurred lease expense of $24 thousand and $23 thousand, respectively, and for the nine months ended September 30, 2022 and 2021, DBMG incurred lease expense of $72 thousand and $31 thousand, respectively.
30
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
Banker Steel has leased one plane from Banker Aviation LLC, a related party that is owned by Donald Banker, a related party, with monthly lease payments of $0.1 million and a total lease liability of $1.6 million. During the first quarter 2022, one of the two plane leases was terminated. For the three months ended September 30, 2022 and 2021, DBMG incurred lease expense of $0.3 million and $0.4 million, respectively, and for the nine months ended September 30, 2022 and 2021, DBMG incurred lease expense of $1.0 million and $0.6 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 September 30, 2022 and 2021, DBMG incurred interest expense of zero and $0.1 million, respectively, and for both the nine months ended September 30, 2022 and 2021, DBMG incurred interest expense of $0.2 million. Refer to Note 14. Debt Obligations for additional information.
Life Sciences
For the three and nine months ended September 30, 2022, R2 Technologies incurred approximately $0.1 million and $0.3 million, respectively, of stock compensation and royalty expenses that were paid to Blossom Innovations, LLC, an investor and a related party of R2 Technologies.
On June 27, 2022, R2 Technologies issued a $0.5 million short-term 90-day 12.0% bridge financing loan with Lancer Capital, LLC, a related party, an entity controlled by Avram A. Glazer, Chairman of the Board of Directors of INNOVATE. On July 13, 2022, R2 Technologies entered into a note purchase agreement with Lancer Capital, LLC. The note payable will bear interest at 12.0% per annum, and will be funded in two tranches. The first tranche of $5.0 million closed on July 13, 2022, and included the settlement of a $0.5 million short-term 90-day 12.0% bridge financing loan made on June 27, 2022 by Lancer Capital, LLC, and an additional $4.5 million in cash. The second tranche of $5.0 million closed on August 8, 2022. The note is payable on the earlier of December 31, 2022 or within five business days from the date on which R2 Technologies receives greater than $10.0 million from an equity or debt financing event. For the three and nine months ended September 30, 2022, R2 Technologies recognized interest expense related to the contractual interest coupon with Lancer Capital, LLC of $0.2 million.
21. 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 are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| Segment | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Customer A | Infrastructure | 25.2% | 18.9% | 24.2% | 12.2% | ||||||||||||||||||||||||
| Customer B | Infrastructure | * | 13.0% | * | * | ||||||||||||||||||||||||
| Customer C | Infrastructure | 10.1% | * | * | * | ||||||||||||||||||||||||
*Less than 10% revenue concentration
Summarized financial information with respect to the Company’s operating segments is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
Infrastructure | $ | 412.7 | $ | 383.0 | $ | 1,197.0 | $ | 776.3 | ||||||||||||||||||
| Life Sciences | 1.2 | 1.6 | 3.0 | 2.8 | ||||||||||||||||||||||
| Spectrum | 9.1 | 10.2 | 28.0 | 31.3 | ||||||||||||||||||||||
| Total revenue | $ | 423.0 | $ | 394.8 | $ | 1,228.0 | $ | 810.4 | ||||||||||||||||||
31
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Income (loss) from operations | ||||||||||||||||||||||||||
Infrastructure | $ | 18.5 | $ | 12.6 | $ | 42.2 | $ | 17.0 | ||||||||||||||||||
| Life Sciences | (5.5) | (4.9) | (15.7) | (14.2) | ||||||||||||||||||||||
| Spectrum | (0.6) | (1.2) | (4.1) | (1.0) | ||||||||||||||||||||||
| Other | (0.3) | (1.0) | (0.4) | (1.6) | ||||||||||||||||||||||
| Non-operating Corporate | (5.5) | (4.4) | (15.1) | (17.7) | ||||||||||||||||||||||
| Total income (loss) from operations | $ | 6.6 | $ | 1.1 | $ | 6.9 | $ | (17.5) | ||||||||||||||||||
A reconciliation of the Company's consolidated segment operating income (loss) to consolidated loss from continuing operations before income taxes is as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Income (loss) from operations | $ | 6.6 | $ | 1.1 | $ | 6.9 | $ | (17.5) | ||||||||||||||||||
| Interest expense | (13.3) | (12.8) | (38.4) | (46.6) | ||||||||||||||||||||||
| Loss on early extinguishment or restructuring of debt | — | (0.1) | — | (12.5) | ||||||||||||||||||||||
| Loss from equity investees | (1.1) | (2.9) | (2.1) | (4.8) | ||||||||||||||||||||||
| Other (expense) income, net | (0.9) | 0.6 | 0.5 | 4.4 | ||||||||||||||||||||||
| Loss from continuing operations before income taxes | $ | (8.7) | $ | (14.1) | $ | (33.1) | $ | (77.0) | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Depreciation and Amortization | ||||||||||||||||||||||||||
Infrastructure | $ | 5.3 | $ | 7.4 | $ | 15.9 | $ | 13.1 | ||||||||||||||||||
Infrastructure recognized within cost of revenue | 3.9 | 3.4 | 11.2 | 8.4 | ||||||||||||||||||||||
| Total Infrastructure | 9.2 | 10.8 | 27.1 | 21.5 | ||||||||||||||||||||||
| Life Sciences | 0.1 | — | 0.2 | 0.1 | ||||||||||||||||||||||
| Spectrum | 1.4 | 1.4 | 4.4 | 4.3 | ||||||||||||||||||||||
| Non-operating Corporate | — | 0.1 | 0.1 | 0.1 | ||||||||||||||||||||||
| Total depreciation and amortization | $ | 10.7 | $ | 12.3 | $ | 31.8 | $ | 26.0 | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Capital Expenditures (*) | ||||||||||||||||||||||||||
Infrastructure | $ | 6.9 | $ | 6.1 | $ | 13.5 | $ | 11.6 | ||||||||||||||||||
| Life Sciences | 0.2 | — | 0.3 | 0.5 | ||||||||||||||||||||||
| Spectrum | 0.4 | 0.9 | 2.5 | 2.9 | ||||||||||||||||||||||
| Total | $ | 7.5 | $ | 7.0 | $ | 16.3 | $ | 15.0 | ||||||||||||||||||
(*) The above capital expenditures exclude assets acquired under terms of capital lease and vendor financing obligations.
| September 30, 2022 | December 31, 2021 | ||||||||||
| Investments | |||||||||||
Infrastructure | $ | — | $ | 0.7 | |||||||
| Life Sciences | 9.0 | 10.2 | |||||||||
| Other | 48.7 | 45.1 | |||||||||
| Total | $ | 57.7 | $ | 56.0 | |||||||
32
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Equity Method Investments (included in Investments above) | ||||||||||||||
| Infrastructure | $ | — | $ | 0.7 | ||||||||||
| Life Sciences | 3.4 | 4.2 | ||||||||||||
| Other | 37.4 | 33.9 | ||||||||||||
| Total | $ | 40.8 | $ | 38.8 | ||||||||||
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Total Assets | ||||||||||||||
Infrastructure | $ | 893.3 | $ | 786.4 | ||||||||||
| Life Sciences | 18.8 | 22.0 | ||||||||||||
| Spectrum | 191.0 | 198.9 | ||||||||||||
| Other | 50.4 | 48.0 | ||||||||||||
| Non-operating Corporate | 11.7 | 25.3 | ||||||||||||
| Total | $ | 1,165.2 | $ | 1,080.6 | ||||||||||
22. 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. The dilutive effect of options and their equivalents (including non-vested stock issued under stock-based compensation plans), is computed using the "if-converted method" as this measurement was determined to be more dilutive between the two available methods in each period.
The Company had no dilutive common share equivalents during the three and nine months ended September 30, 2022 and 2021 due to results from continuing operations being a loss, net of tax. 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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Loss from continuing operations | $ | (6.7) | $ | (14.2) | $ | (34.7) | $ | (80.8) | ||||||||||||||||||
| Loss from continuing operations attributable to noncontrolling interest and redeemable noncontrolling interest | 1.3 | 2.6 | 4.5 | 7.0 | ||||||||||||||||||||||
| Loss from continuing operations attributable to INNOVATE Corp. | (5.4) | (11.6) | (30.2) | (73.8) | ||||||||||||||||||||||
| Less: Preferred dividends and deemed dividends from conversions | 1.2 | 1.1 | 3.6 | 1.7 | ||||||||||||||||||||||
| Loss from continuing operations attributable to INNOVATE common stockholders | (6.6) | (12.7) | (33.8) | (75.5) | ||||||||||||||||||||||
| Loss from discontinued operations | — | (200.3) | — | (149.9) | ||||||||||||||||||||||
| Loss from discontinued operations attributable to noncontrolling interest and redeemable noncontrolling interest | — | — | — | 0.9 | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax and noncontrolling interest | — | (200.3) | — | (149.0) | ||||||||||||||||||||||
| Net loss attributable to common stock and participating preferred stockholders | $ | (6.6) | $ | (213.0) | $ | (33.8) | $ | (224.5) | ||||||||||||||||||
| Earnings allocable to common shares: | ||||||||||||||||||||||||||
| Participating shares at end of period: | ||||||||||||||||||||||||||
| Weighted-average common stock outstanding | 77.6 | 77.2 | 77.5 | 77.0 | ||||||||||||||||||||||
| Unvested restricted stock | — | — | — | — | ||||||||||||||||||||||
| Preferred stock (as-converted basis) | — | — | — | — | ||||||||||||||||||||||
| Total | 77.6 | 77.2 | 77.5 | 77.0 | ||||||||||||||||||||||
33
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
| Percentage of loss allocated to: | ||||||||||||||||||||||||||
| Common stock | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||
| Unvested restricted stock | — | % | — | % | — | % | — | % | ||||||||||||||||||
| Preferred stock | — | % | — | % | — | % | — | % | ||||||||||||||||||
| Numerator for loss per share, basic: | ||||||||||||||||||||||||||
| Net loss from continuing operations attributable to common stock, basic | $ | (6.6) | $ | (12.7) | $ | (33.8) | $ | (75.5) | ||||||||||||||||||
| Net loss from discontinued operations attributable to common stock, basic | — | (200.3) | — | (149.0) | ||||||||||||||||||||||
| Net loss attributable to common stock, basic | $ | (6.6) | $ | (213.0) | $ | (33.8) | $ | (224.5) | ||||||||||||||||||
| Earnings allocable to common shares, diluted: | ||||||||||||||||||||||||||
| Numerator for loss per share, diluted | ||||||||||||||||||||||||||
| Net loss from continuing operations attributable to common stock, basic | $ | (6.6) | $ | (12.7) | $ | (33.8) | $ | (75.5) | ||||||||||||||||||
| Net loss from discontinued operations attributable to common stock, basic | — | (200.3) | — | (149.0) | ||||||||||||||||||||||
| Net loss attributable to common stock, basic | $ | (6.6) | $ | (213.0) | $ | (33.8) | $ | (224.5) | ||||||||||||||||||
| Denominator for basic and dilutive loss per share | ||||||||||||||||||||||||||
| Weighted average common shares outstanding - basic | 77.6 | 77.2 | 77.5 | 77.0 | ||||||||||||||||||||||
| Effect of assumed shares under treasury stock method for stock options and restricted shares and if-converted method for convertible instruments | — | — | — | — | ||||||||||||||||||||||
| Weighted average common shares outstanding - diluted | 77.6 | 77.2 | 77.5 | 77.0 | ||||||||||||||||||||||
| Loss per share - continuing operations | ||||||||||||||||||||||||||
| Basic | $ | (0.09) | $ | (0.16) | $ | (0.44) | $ | (0.98) | ||||||||||||||||||
| Diluted | $ | (0.09) | $ | (0.16) | $ | (0.44) | $ | (0.98) | ||||||||||||||||||
| Loss per share - discontinued operations | ||||||||||||||||||||||||||
| Basic | $ | — | $ | (2.59) | $ | — | $ | (1.94) | ||||||||||||||||||
| Diluted | $ | — | $ | (2.59) | $ | — | $ | (1.94) | ||||||||||||||||||
| Loss per share - Net loss attributable to common stock and participating preferred stockholders | ||||||||||||||||||||||||||
| Basic | $ | (0.09) | $ | (2.75) | $ | (0.44) | $ | (2.92) | ||||||||||||||||||
| Diluted | $ | (0.09) | $ | (2.75) | $ | (0.44) | $ | (2.92) | ||||||||||||||||||
34
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
23. 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):
| September 30, 2022 | Fair Value Measurement Using: | |||||||||||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Other invested assets | $ | 11.3 | $ | 11.3 | $ | — | $ | — | $ | 11.3 | ||||||||||||||||||||||
| Total assets not accounted for at fair value | $ | 11.3 | $ | 11.3 | $ | — | $ | — | $ | 11.3 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
Debt obligations (1) | $ | 707.1 | $ | 637.5 | $ | — | $ | 637.5 | $ | — | ||||||||||||||||||||||
| Total liabilities not accounted for at fair value | $ | 707.1 | $ | 637.5 | $ | — | $ | 637.5 | $ | — | ||||||||||||||||||||||
| December 31, 2021 | Fair Value Measurement Using: | |||||||||||||||||||||||||||||||
| Carrying Value | Estimated Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Other invested assets | $ | 11.3 | $ | 11.3 | $ | — | $ | — | $ | 11.3 | ||||||||||||||||||||||
| Total assets not accounted for at fair value | $ | 11.3 | $ | 11.3 | $ | — | $ | — | $ | 11.3 | ||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
Debt obligations (1) | $ | 626.3 | $ | 648.2 | $ | — | $ | 648.2 | $ | — | ||||||||||||||||||||||
| Total liabilities not accounted for at fair value | $ | 626.3 | $ | 648.2 | $ | — | $ | 648.2 | $ | — | ||||||||||||||||||||||
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.
35
INNOVATE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(Unaudited)
24. Supplementary Financial Information
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):
| September 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash and cash equivalents, beginning of period | $ | 45.5 | $ | 43.8 | ||||||||||
| Restricted cash | 2.0 | 1.5 | ||||||||||||
| Restricted cash included in other assets (non-current) | — | — | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 47.5 | $ | 45.3 | ||||||||||
| Cash and cash equivalents, end of period | $ | 25.8 | $ | 55.5 | ||||||||||
| Restricted cash | 0.4 | 8.6 | ||||||||||||
| Restricted cash included in other assets (non-current) | 1.5 | — | ||||||||||||
| Total cash and cash equivalents and restricted cash | $ | 27.7 | $ | 64.1 | ||||||||||
| Cash and cash equivalents classified in Assets held for sale, beginning of period | $ | — | $ | 195.2 | ||||||||||
| Restricted cash classified in Assets held for sale | — | 0.2 | ||||||||||||
| Total cash and cash equivalents and restricted cash classified in Assets held for sale | $ | — | $ | 195.4 | ||||||||||
| Cash and cash equivalents classified in Assets held for sale, end of period | $ | — | $ | — | ||||||||||
| Restricted cash classified in Assets held for sale | — | — | ||||||||||||
| Total cash and cash equivalents and restricted cash classified in Assets held for sale | $ | — | $ | — | ||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Cash paid for interest | $ | 38.9 | $ | 31.3 | ||||||||||
| Cash paid for taxes, net of refunds | $ | 3.8 | $ | 4.3 | ||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Property, plant and equipment included in accounts payable | $ | 0.9 | $ | 2.1 | ||||||||||
| Issuance of preferred stock | $ | 0.9 | $ | 19.1 | ||||||||||
| Issuance of redeemable noncontrolling interest | $ | — | $ | 40.9 | ||||||||||
| Extinguishment of convertible note in exchange | $ | — | $ | 51.8 | ||||||||||
| Issuance of convertible note in exchange | $ | — | $ | (51.8) | ||||||||||
| Debt assumed in acquisitions | $ | — | $ | 6.3 | ||||||||||
25. Subsequent Events
None.
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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, 2021, filed with the SEC on March 9, 2022 (the "2021 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 2021 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
We are a diversified holding company with principal operations conducted through three operating platforms or reportable segments: Infrastructure ("DBMG"), Life Sciences ("Pansend"), and Spectrum ("Broadcasting"), plus our Other segment, which includes businesses that do not meet the separately reportable segment thresholds.
Our Operations
Refer to Note 1. Organization and Business to our Condensed Consolidated Financial Statements for additional information.
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
COVID-19 Impact on our Business
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic, and on March 13, 2020, the United States declared the pandemic to be a national emergency. As COVID-19 spread throughout the country, the situation has continued to evolve, including the adoption of the COVID-19 vaccine and the reopening of state economies.
The Company’s top priority has been to protect its employees and their families and those of the Company’s customers. The Company continues to take precautionary measures as directed by health authorities and local governments, where applicable, including changing operational procedures, providing additional protective gear and cleaning to protect personnel and customers who request it, which has resulted and may continue to result in disruptions to and increased costs of the Company’s operations. We may take further action as may be required by government authorities or that we determine are in the best interests of our employees, customers, partners, vendors, and suppliers. Work-from-home and other measures introduce additional operational risks, including cybersecurity risks, and have changed the way we conduct some of our operations. After the vaccine rollout commenced, most employees have begun to return to the office or worksites, either full-time or part-time. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, including any new strains of the virus, and illness and workforce disruptions could lead to unavailability of key personnel and harm our ability to perform critical functions.
37
The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including, but not limited to, the outbreak of any new strains of the coronavirus, any related travel advisories and restrictions, lockdowns and quarantine measures enacted by foreign governments, such as China, and its impact to the U.S. and global financial markets, all of which are highly uncertain and cannot be predicted. Preventing the effects from and responding to this market disruption if any other public health threat, related or otherwise, may further increase costs of our business and may have a material adverse effect on our business, financial condition, and results of operations.
COVID-19 has caused supply chain challenges related to labor shortages and supply chain disruptions, which may create significant delays in our ability to complete projects or deliver products. The receipt of material from impacted areas has been slowed or disrupted and our suppliers have experienced similar challenges in fulfilling orders due to unavailability of certain materials used in manufacturing. In addition, reductions in the number of ocean carrier voyages, ocean freight capacity issues, congestion at major international gateways and other economic factors continue to persist worldwide due to COVID-19 and worldwide supply impacts as there is much greater demand for shipping and reduced capacity and equipment, which has resulted in price increases per shipping container. In addition, in the United States, trucking costs have continued to rise due to driver shortages and increased labor costs, and new federal and state safety, environmental and labor regulations could be implemented. These changes may disrupt our supply chain, which may result in a delay in the completion of our projects or manufacturing of our products and may cause us to incur significant additional costs. Although we may attempt to pass on certain of these increased costs to our customers, we may not be able to pass all of these cost increases on to our customers. As a result, our margins may be adversely impacted by such cost increases. These supply chain disruptions and transportation challenges could have a material adverse effect on our results of operations or financial condition.
We continue to monitor the evolving situation and guidance from authorities, including federal, state and local public health departments, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plans. As such, given the dynamic nature of this situation, we cannot reasonably estimate the continued impact of COVID-19 on our results of operations, financial condition, or cash flows in the future, but it could have a material adverse impact on our future revenue growth as well as our overall profitability and may lead to revised payment terms with certain of our customers.
During the nine months ended September 30, 2022, the effects of COVID-19 and the related actions undertaken in the U.S. to attempt to control its spread, specifically impacted certain of our segments as follows:
Infrastructure
DBMG was not materially impacted by COVID-19 and did not incur any COVID-19 related costs during the nine months ended September 30, 2022. DBMG continues to perform work on jobs contracted during the last twelve to twenty-four months that had lower point of sale margins to maintain shop capacity and utilization but continues to see an increase in point of sale margins on newer contracted work.
Life Sciences
R2 Technologies' supplier has encountered difficulties obtaining certain materials to manufacture its Glacial Spa and Glacial Rx devices due to supply chain constraints and has experienced longer lead times purchasing materials and obtaining inventory. Additionally, international sales in Greater China have been impacted as a result of government-mandated lockdowns in certain cities, which has resulted in delays in purchase orders by our partners in China.
Spectrum
Spectrum was not materially impacted by COVID-19 during the nine months ended September 30, 2022.
Network Business
The Network business, which is owned by our Spectrum segment, has continued to be impacted by decreasing advertising revenues as a result of a decreased footprint, declining ratings, and increased operating costs. As such, the Company plans to wind down Network in the fourth quarter of 2022.
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 and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021.
38
Results of Operations
The following table summarizes our results of operations and a comparison of the change between the periods (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||
Infrastructure | $ | 412.7 | $ | 383.0 | $ | 29.7 | $ | 1,197.0 | $ | 776.3 | $ | 420.7 | ||||||||||||||||||||||||||
| Life Sciences | 1.2 | 1.6 | (0.4) | 3.0 | 2.8 | 0.2 | ||||||||||||||||||||||||||||||||
| Spectrum | 9.1 | 10.2 | (1.1) | 28.0 | 31.3 | (3.3) | ||||||||||||||||||||||||||||||||
| Total revenue | $ | 423.0 | $ | 394.8 | $ | 28.2 | $ | 1,228.0 | $ | 810.4 | $ | 417.6 | ||||||||||||||||||||||||||
| Income (loss) from operations | ||||||||||||||||||||||||||||||||||||||
Infrastructure | $ | 18.5 | $ | 12.6 | $ | 5.9 | $ | 42.2 | $ | 17.0 | $ | 25.2 | ||||||||||||||||||||||||||
| Life Sciences | (5.5) | (4.9) | (0.6) | (15.7) | (14.2) | (1.5) | ||||||||||||||||||||||||||||||||
| Spectrum | (0.6) | (1.2) | 0.6 | (4.1) | (1.0) | (3.1) | ||||||||||||||||||||||||||||||||
| Other | (0.3) | (1.0) | 0.7 | (0.4) | (1.6) | 1.2 | ||||||||||||||||||||||||||||||||
| Non-operating Corporate | (5.5) | (4.4) | (1.1) | (15.1) | (17.7) | 2.6 | ||||||||||||||||||||||||||||||||
| Total income (loss) from operations | $ | 6.6 | $ | 1.1 | $ | 5.5 | $ | 6.9 | $ | (17.5) | $ | 24.4 | ||||||||||||||||||||||||||
| Interest expense | (13.3) | (12.8) | (0.5) | (38.4) | (46.6) | 8.2 | ||||||||||||||||||||||||||||||||
| Loss on early extinguishment or restructuring of debt | — | (0.1) | 0.1 | — | (12.5) | 12.5 | ||||||||||||||||||||||||||||||||
| Loss from equity investees | (1.1) | (2.9) | 1.8 | (2.1) | (4.8) | 2.7 | ||||||||||||||||||||||||||||||||
| Other (expense) income, net | (0.9) | 0.6 | (1.5) | 0.5 | 4.4 | (3.9) | ||||||||||||||||||||||||||||||||
| Loss from continuing operations before income taxes | $ | (8.7) | $ | (14.1) | $ | 5.4 | $ | (33.1) | $ | (77.0) | $ | 43.9 | ||||||||||||||||||||||||||
| Income tax benefit (expense) | 2.0 | (0.1) | 2.1 | (1.6) | (3.8) | 2.2 | ||||||||||||||||||||||||||||||||
| Loss from continuing operations | $ | (6.7) | $ | (14.2) | $ | 7.5 | $ | (34.7) | $ | (80.8) | $ | 46.1 | ||||||||||||||||||||||||||
| Loss from discontinued operations (including net loss on disposal of $200.3 million and $159.9 million for the three and nine months ended September 30, 2021, respectively) | — | (200.3) | 200.3 | — | (149.9) | 149.9 | ||||||||||||||||||||||||||||||||
| Net loss | $ | (6.7) | $ | (214.5) | $ | 207.8 | $ | (34.7) | $ | (230.7) | $ | 196.0 | ||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest and redeemable noncontrolling interest | 1.3 | 2.6 | (1.3) | 4.5 | 7.9 | (3.4) | ||||||||||||||||||||||||||||||||
| Net loss attributable to INNOVATE Corp. | $ | (5.4) | $ | (211.9) | $ | 206.5 | $ | (30.2) | $ | (222.8) | $ | 192.6 | ||||||||||||||||||||||||||
| Less: Preferred dividends and deemed dividends from conversions | 1.2 | 1.1 | 0.1 | 3.6 | 1.7 | 1.9 | ||||||||||||||||||||||||||||||||
| Net loss attributable to common stock and participating preferred stockholders | $ | (6.6) | $ | (213.0) | $ | 206.4 | $ | (33.8) | $ | (224.5) | $ | 190.7 | ||||||||||||||||||||||||||
Revenue: Revenue for the three months ended September 30, 2022 increased $28.2 million to $423.0 million from $394.8 million for the three months ended September 30, 2021. The increase in revenue was primarily due to the Infrastructure segment, which had increased market demand along with larger projects entering the market.
Revenue for the nine months ended September 30, 2022 increased $417.6 million to $1,228.0 million from $810.4 million for the nine months ended September 30, 2021. The increase in revenue was primarily due to the Infrastructure segment, which acquired Banker Steel on May 27, 2021, and also had increased market demand along with larger projects entering the market.
Income (loss) from operations: Income from operations for three months ended September 30, 2022 increased $5.5 million to $6.6 million from $1.1 million for the three months ended September 30, 2021. The increase in income from operations was primarily attributable to the Infrastructure segment due to an increase at Banker Steel and increased profit at the fabrication and erection business from larger jobs with increased profits in the current year. The increase in income from operations was partially offset by the Non-operating Corporate segment as a result of a severance accrual in the current period related to the Company's former Chief Legal Officer.
39
Income from operations for the nine months ended September 30, 2022 increased $24.4 million to income of $6.9 million from a loss of $17.5 million for the nine months ended September 30, 2021. The increase in income from operations was primarily attributable to the Infrastructure segment as a result of the contribution from Banker Steel, which was acquired on May 27, 2021 and increases at DBMG's commercial structural steel fabrication and erection business supported by timing of project work under execution and changes in backlog mix. The increase in income from operations was also attributable to the Non-operating Corporate segment, primarily as a result of decreases in legal, and proxy-related expenses. The increases in income from operations were partially offset by the Spectrum segment as a result of decreased advertising revenues at the Azteca network due to a decreased footprint and declines in paid programming, an increase in expenses at the Azteca network as a result of higher support fees and license royalty expense incurred under the program license agreement ("PLA"), which started in the first quarter of 2022, as well as a decrease in gains from FCC reimbursements.
Interest expense: Interest expense for the three months ended September 30, 2022 increased $0.5 million to $13.3 million from $12.8 million for the three months ended September 30, 2021. The increase was primarily driven by increased outstanding principal balances at Infrastructure over the comparable period.
Interest expense for the nine months ended September 30, 2022 decreased $8.2 million to $38.4 million from $46.6 million for the nine months ended September 30, 2021. The decrease was primarily attributable to Non-Operating Corporate's refinancing of the 2021 Senior Secured Notes in the first quarter of 2021, which decreased the average cost of capital and the total principal outstanding, partially offset by an increase in interest expense at our Infrastructure segment, driven by increased outstanding principal balances.
Loss on early extinguishment or restructuring of debt: Loss on early extinguishment or restructuring of debt was $0.1 million and $12.5 million for the three and nine months ended September 30, 2021, respectively. There was no comparable expense in the current period. The expense in the comparable period was driven by the write-off of deferred financing costs and original issuance discount in connection with the refinancing of the 2021 Senior Secured Notes and the 2022 Convertible Notes in the first quarter of 2021, as well as the refinancing of Infrastructure debt in conjunction with the Banker Steel acquisition in the second quarter of 2021.
Loss from equity investees: Loss from equity investees for the three months ended September 30, 2022 decreased $1.8 million to $1.1 million from $2.9 million for the three months ended September 30, 2021. The decrease in loss from equity investees was driven primarily by the equity investment in HMN Technologies Co., Ltd. ("HMN"), as it produced higher income than in the comparable period, which is generally attributable to the timing of project work. This was partially offset by higher equity method losses recorded from our equity investment in MediBeacon, which had an increase in expenses as the investment commenced its US Pivotal Study of the Transdermal Glomerular Filtration Rate ("TGFR") in the second quarter of 2022 to study the viability of real-time, direct monitoring of kidney function.
Loss from equity investees for the nine months ended September 30, 2022 decreased $2.7 million to $2.1 million from $4.8 million for the nine months ended September 30, 2021. The decrease in the loss from equity investees was driven by the equity investment in HMN, as it produced higher income than in the comparable period, which is generally attributable to the timing of project work, as well as higher equity method income recorded from our investment in Triple Ring. This was partially offset by higher equity method losses recorded from our equity investment in MediBeacon, which had an increase in expenses as the investment commenced its US Pivotal Study of the TGFR in the second quarter of 2022 to study the viability of real-time, direct monitoring of kidney function.
Other (expense) income, net: Other (expense) income, net for the three months ended September 30, 2022 decreased $1.5 million to a loss of $0.9 million from income of $0.6 million for the three months ended September 30, 2021. The decrease in other income was primarily attributable to a tax sharing arrangement and consolidation on the 2021 tax return, resulting in a deemed distribution loss of $1.7 million related to a former subsidiary, CGIC. Refer to Note 10. Dispositions, Deconsolidations and Discontinued Operations in the Condensed Consolidated Financial Statements for additional information. This was partially offset by a fair value adjustment in the current period for an investment at our Life Sciences segment, as well as an increase in foreign currency transaction gains from our Infrastructure segment.
Other income, net for the nine months ended September 30, 2022 decreased $3.9 million to $0.5 million from $4.4 million for the nine months ended September 30, 2021. The decrease in other income was primarily attributable to a tax sharing arrangement and consolidation on the 2021 tax return, resulting in a deemed distribution loss of $1.7 million related to a former subsidiary, CGIC. Refer to Note 10. Dispositions, Deconsolidations and Discontinued Operations in the Condensed Consolidated Financial Statements for additional information. Additionally contributing to the decrease was the Non-operating Corporate segment, driven by the unrepeated gains on litigation settlement and embedded derivatives recorded in the comparable period, as well as the Infrastructure segment, driven by a litigation settlement paid in the current period. This was partially offset by a fair value adjustment in the current period for our investment at our Life Sciences segment, as well as an increase in foreign currency translation gains at the Infrastructure segment.
Income tax benefit (expense): Income tax benefit (expense) for the three months ended September 30, 2022 decreased $2.1 million to a benefit of $2.0 million from an expense of $0.1 million for the three months ended September 30, 2021. Income tax expense for the nine months ended September 30, 2022 decreased $2.2 million to $1.6 million from $3.8 million for the nine months ended September 30, 2021. The decrease was primarily driven by the net tax savings of $2.9 million from the CGIC consolidation in the 2021 tax return, resulting in a partial release of the valuation allowance. Refer to Note 10. Dispositions, Deconsolidations and Discontinued Operations in the Condensed Consolidated Financial Statements for additional information. This was partially offset by income 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 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.
40
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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Revenue | $ | 412.7 | $ | 383.0 | $ | 29.7 | $ | 1,197.0 | $ | 776.3 | $ | 420.7 | ||||||||||||||||||||||||||
| Cost of revenue | 358.7 | 334.4 | 24.3 | 1,052.4 | 674.1 | 378.3 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 30.2 | 28.5 | 1.7 | 87.1 | 72.0 | 15.1 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 5.3 | 7.4 | (2.1) | 15.9 | 13.1 | 2.8 | ||||||||||||||||||||||||||||||||
| Other operating loss (income) | — | 0.1 | (0.1) | (0.6) | 0.1 | (0.7) | ||||||||||||||||||||||||||||||||
| Income from operations | $ | 18.5 | $ | 12.6 | $ | 5.9 | $ | 42.2 | $ | 17.0 | $ | 25.2 | ||||||||||||||||||||||||||
Revenue: Revenue from our Infrastructure segment for the three months ended September 30, 2022 increased $29.7 million to $412.7 million from $383.0 million for the three months ended September 30, 2021. The increase was primarily driven by an increase at Banker Steel and DBMG's commercial structural steel fabrication and erection business. This was partially offset by decreases at the industrial maintenance and repair, and construction modeling and detailing businesses due to the completion of unrepeated, large projects in 2021 and early 2022.
Revenue for the nine months ended September 30, 2022 increased $420.7 million to $1,197.0 million from $776.3 million for the nine months ended September 30, 2021. The increase was primarily driven by DBMG's acquisition of Banker Steel, which was acquired on May 27, 2021. The increase was also attributable to increases at DBMG's commercial structural steel fabrication and erection business supported by timing of project work under execution and changes in backlog mix. This was partially offset by decreases at the industrial maintenance and repair, and construction modeling and detailing businesses due to the completion of projects in 2021.
Cost of revenue: Cost of revenue from our Infrastructure segment for the three months ended September 30, 2022 increased $24.3 million to $358.7 million from $334.4 million for the three months ended September 30, 2021. The increase was primarily driven by Banker Steel and DBMG's commercial structural steel fabrication and erection business due to larger projects. This was partially offset by decreases at the industrial maintenance and repair, and construction modeling and detailing businesses due to the completion of unrepeated large projects in 2021 and early 2022.
Cost of revenue for the nine months ended September 30, 2022 increased $378.3 million to $1,052.4 million from $674.1 million for the nine months ended September 30, 2021. The increase was primarily driven by DBMG’s acquisition of Banker Steel, which was acquired on May 27, 2021 and DBMG's commercial structural steel fabrication and erection business due to larger projects. This was partially offset by decreases at the industrial maintenance and repair, and construction modeling and detailing businesses due to the completion of unrepeated large projects in 2021.
Selling, general and administrative: Selling, general and administrative expense from our Infrastructure segment for the three months ended September 30, 2022 increased $1.7 million to $30.2 million from $28.5 million for the three months ended September 30, 2021. The increase was primarily driven by an increase in salaries and wage expenses, travel costs, and professional fees, which was partially offset by a decrease in acquisition and integration costs related to Banker Steel.
Selling, general and administrative expense for the nine months ended September 30, 2022 increased $15.1 million to $87.1 million from $72.0 million for the nine months ended September 30, 2021. The increase was primarily driven by the acquisition of Banker Steel, which was acquired on May 27, 2021, as well as increases in salaries and wage expenses, professional fees, and travel costs, which was partially offset by a decrease in acquisition and integration costs related to Banker Steel.
Depreciation and amortization: Depreciation and amortization from our Infrastructure segment for the three months ended September 30, 2022 decreased $2.1 million to $5.3 million from $7.4 million for the three months ended September 30, 2021. The decrease was primarily driven by runoff of depreciation expense related to assets acquired in the 2021 Banker Steel transaction.
Depreciation and amortization for the nine months ended September 30, 2022 increased $2.8 million to $15.9 million from $13.1 million for the nine months ended September 30, 2021. The increase was largely due to the additional amortization and depreciation of assets obtained in the acquisition of Banker Steel in May 2021.
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Other operating loss (income): Other operating income from our Infrastructure segment for the nine months ended September 30, 2022 increased $0.7 million to income of $0.6 million from a loss of $0.1 million for the nine months ended September 30, 2021. The increase in other operating income was primarily driven by a gain on disposal of an asset in the current period.
Life Sciences Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Revenue | $ | 1.2 | $ | 1.6 | $ | (0.4) | $ | 3.0 | $ | 2.8 | $ | 0.2 | ||||||||||||||||||||||||||
| Cost of revenue | 1.0 | 0.9 | 0.1 | 2.5 | 1.5 | 1.0 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 5.6 | 5.6 | — | 16.0 | 15.4 | 0.6 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 0.1 | — | 0.1 | 0.2 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||
| Loss from operations | $ | (5.5) | $ | (4.9) | $ | (0.6) | $ | (15.7) | $ | (14.2) | $ | (1.5) | ||||||||||||||||||||||||||
Revenue: Revenue from our Life Sciences segment for the three months ended September 30, 2022 decreased $0.4 million to $1.2 million from $1.6 million for the three months ended September 30, 2021. The decrease in revenue was attributable to R2, driven by a decrease in Glacial Rx system sales in the U.S., which was partially offset by additional revenues from the launch of the Glacial Spa systems and consumables outside the U.S. at the end of 2021.
Revenue for the nine months ended September 30, 2022 increased $0.2 million to $3.0 million from $2.8 million for the nine months ended September 30, 2021. The increase in revenue was attributable to R2, which was driven by additional revenues from the launch of Glacial Spa systems and consumables outside the U.S. at the end of 2021, which was partially offset by a decrease in Glacial Rx system and consumable sales within the U.S.
Cost of revenue: Cost of revenue from our Life Sciences segment for the three months ended September 30, 2022 increased $0.1 million to $1.0 million from $0.9 million for the three months ended September 30, 2021. Cost of revenue for the nine months ended September 30, 2022 increased $1.0 million to $2.5 million from $1.5 million for the nine months ended September 30, 2021. The increase in cost of revenue was attributable to a change in product mix at R2.
Selling, general and administrative: Selling, general and administrative expenses for the nine months ended September 30, 2022 increased $0.6 million to $16.0 million from $15.4 million for the nine months ended September 30, 2021. The increase was driven by compensation-related growth in the current period, increased clinical expenses due to additional staffing needs and increased clinical studies, and other general staffing increases across the organization as the Company continues commercialization, partially offset by a decrease in R&D.
Spectrum Segment
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Revenue | $ | 9.1 | $ | 10.2 | $ | (1.1) | $ | 28.0 | $ | 31.3 | $ | (3.3) | ||||||||||||||||||||||||||
| Cost of revenue | 4.9 | 4.4 | 0.5 | 14.6 | 12.8 | 1.8 | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 4.0 | 4.9 | (0.9) | 11.8 | 14.3 | (2.5) | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 1.4 | 1.4 | — | 4.4 | 4.3 | 0.1 | ||||||||||||||||||||||||||||||||
| Other operating (income) loss | (0.6) | 0.7 | (1.3) | 1.3 | 0.9 | 0.4 | ||||||||||||||||||||||||||||||||
| Loss from operations | $ | (0.6) | $ | (1.2) | $ | 0.6 | $ | (4.1) | $ | (1.0) | $ | (3.1) | ||||||||||||||||||||||||||
Revenue: Revenue from our Spectrum segment for the three months ended September 30, 2022 decreased $1.1 million to $9.1 million from $10.2 million for the three months ended September 30, 2021. The decrease was primarily driven by a decrease in advertising revenues at the Azteca network due to a decreased footprint and declines in paid programming.
Revenue from our Spectrum segment for the nine months ended September 30, 2022 decreased $3.3 million to $28.0 million from $31.3 million for the nine months ended September 30, 2021. The decrease was primarily driven by a decrease in advertising revenues at the Azteca network due to a decreased footprint and declines in paid programming. This was partially offset by an increase in station revenues as they launched new customers and increased the number of operating stations.
Cost of revenue: Cost of revenue for our Spectrum segment for the three months ended September 30, 2022 increased $0.5 million to $4.9 million from $4.4 million for the three months ended September 30, 2021. Cost of revenue for the nine months ended September 30, 2022 increased $1.8 million to $14.6 million from $12.8 million for the nine months ended September 30, 2021. The overall increases were primarily due to costs related to a higher station count and an increase in expenses at the Azteca network as a result of higher support fees and license royalty expense paid to Azteca International Corporation, which started in the first quarter of 2022.
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Selling, general and administrative: Selling, general and administrative expense from our Spectrum segment for the three months ended September 30, 2022 decreased $0.9 million to $4.0 million from $4.9 million for the three months ended September 30, 2021. The decrease was primarily driven by a decrease in salaries and benefit expenses and a decrease in legal expenses.
Selling, general and administrative expense for the nine months ended September 30, 2022 decreased $2.5 million to $11.8 million from $14.3 million for the nine months ended September 30, 2021. The decrease was primarily driven by severance expense incurred in the comparable period, a decrease in salaries and benefit expenses and a decrease in legal expenses. This was partially offset by an increase in bad debt expense.
Other operating (income) loss: Other operating income from our Spectrum segment for the three months ended September 30, 2022 increased $1.3 million to other operating income of $0.6 million from other operating expense of $0.7 million for the three months ended September 30, 2021. The increase in income was primarily related to FCC reimbursements received in the current period, as well as fewer asset impairments in the current period.
Other operating loss for the nine months ended September 30, 2022 increased $0.4 million to $1.3 million from $0.9 million for the nine months ended September 30, 2021. The increase in loss was primarily related to a decrease in FCC reimbursements, which was partially offset by fewer asset impairments in the current period.
Non-operating Corporate
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 5.5 | $ | 4.3 | $ | 1.2 | $ | 15.0 | $ | 17.6 | $ | (2.6) | ||||||||||||||||||||||||||
| Depreciation and amortization | — | 0.1 | (0.1) | 0.1 | 0.1 | — | ||||||||||||||||||||||||||||||||
| Loss from operations | $ | (5.5) | $ | (4.4) | $ | (1.1) | $ | (15.1) | $ | (17.7) | $ | 2.6 | ||||||||||||||||||||||||||
Selling, general and administrative: Selling, general and administrative expenses from our Non-operating Corporate segment for the three months ended September 30, 2022 increased $1.2 million to $5.5 million from $4.3 million for the three months ended September 30, 2021. The increase was driven by severance related to the Company's former Chief Legal Officer accrued in the current period, as well as an increase in legal expenses. This was partially offset by a decrease in non-recurring and acquisition expenses.
Selling, general and administrative expenses for the nine months ended September 30, 2022 decreased $2.6 million to $15.0 million from $17.6 million for the nine months ended September 30, 2021. The decrease was driven by a decrease in legal, disposition and acquisition expense, as well as settlement expense for the Company's former CEO accrued in the prior period. This was partially offset by an increase in severance related to the Company's former Chief Legal Officer, increases in professional fees, and compensation-related expenses.
(Loss) Income from Equity Investees
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
| Life Sciences | $ | (2.5) | $ | (2.3) | $ | (0.2) | $ | (5.8) | $ | (5.5) | $ | (0.3) | ||||||||||||||||||||||||||
| Other | 1.4 | (0.6) | 2.0 | 3.7 | 0.7 | 3.0 | ||||||||||||||||||||||||||||||||
| (Loss) from equity investees | $ | (1.1) | $ | (2.9) | $ | 1.8 | $ | (2.1) | $ | (4.8) | $ | 2.7 | ||||||||||||||||||||||||||
Life Sciences: Loss from equity investees within our Life Sciences segment for the three months ended September 30, 2022 increased $0.2 million to $2.5 million from $2.3 million for the three months ended September 30, 2021. The increase in loss was primarily due to higher equity method losses recorded from our equity investment in MediBeacon, which had an increase in expenses due to the commencement of its US Pivotal Study of the TGFR in the second quarter of 2022 to study the viability of real-time, direct monitoring of kidney function.
Loss from equity investees for the nine months ended September 30, 2022 increased $0.3 million to $5.8 million from $5.5 million for the nine months ended September 30, 2021. The increase in loss was primarily due to higher equity method losses recorded from our equity investment in MediBeacon, which had an increase in expenses as the investment commenced its US Pivotal Study of the TGFR in the second quarter of 2022 to study the viability of real-time, direct monitoring of kidney function. This was partially offset by net higher equity method income recorded from our investment in Triple Ring.
Other: Income from equity investees within our Other segment for the three months ended September 30, 2022 increased $2.0 million to $1.4 million from a loss of $0.6 million for the three months ended September 30, 2021. Income from equity investees for the nine months ended September 30, 2022 increased $3.0 million to $3.7 million from $0.7 million for the nine months ended September 30, 2021. The increases were driven by the equity investment in HMN, as it produced higher income than in the comparable period, which is generally attributable to the timing of project work.
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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; 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; loss on early extinguishment or restructuring of debt; income tax expense (benefit); noncontrolling interest; share-based compensation expense; non-recurring items; costs associated with the COVID-19 pandemic; and acquisition and disposition costs.
| (in millions) | Three months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||
Infrastructure | Life Sciences | Spectrum | Non-operating Corporate | Other and Eliminations | INNOVATE | |||||||||||||||||||||||||||||||||
| Net (loss) attributable to INNOVATE Corp. | $ | (5.4) | ||||||||||||||||||||||||||||||||||||
| Less: Discontinued operations | — | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to INNOVATE Corp., excluding discontinued operations | $ | 10.4 | $ | (5.5) | $ | (1.4) | $ | (9.6) | $ | 0.7 | $ | (5.4) | ||||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 5.3 | 0.1 | 1.4 | — | — | 6.8 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization (included in cost of revenue) | 3.9 | — | — | — | — | 3.9 | ||||||||||||||||||||||||||||||||
| Other operating (income) | — | — | (0.6) | — | — | (0.6) | ||||||||||||||||||||||||||||||||
| Interest expense | 2.6 | 0.2 | 2.2 | 8.3 | — | 13.3 | ||||||||||||||||||||||||||||||||
| Other (income) expense, net | (0.6) | (0.3) | (1.1) | 2.9 | — | 0.9 | ||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 5.0 | — | — | (7.0) | — | (2.0) | ||||||||||||||||||||||||||||||||
| Noncontrolling interest | 1.0 | (2.2) | (0.4) | — | 0.3 | (1.3) | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | 0.1 | — | 0.3 | — | 0.4 | ||||||||||||||||||||||||||||||||
| Acquisition and disposition costs | — | — | 0.2 | 0.1 | 0.1 | 0.4 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 27.6 | $ | (7.6) | $ | 0.3 | $ | (5.0) | $ | 1.1 | $ | 16.4 | ||||||||||||||||||||||||||
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| (in millions) | Three months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
Infrastructure | Life Sciences | Spectrum | Non-operating Corporate | Other and Eliminations | INNOVATE | |||||||||||||||||||||||||||||||||
| Net (loss) attributable to INNOVATE Corp. | $ | (211.9) | ||||||||||||||||||||||||||||||||||||
| Less: Discontinued operations | (200.3) | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to INNOVATE Corp., excluding discontinued operations | $ | 6.9 | $ | (5.1) | $ | (4.1) | $ | (8.0) | $ | (1.3) | $ | (11.6) | ||||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 7.4 | — | 1.4 | 0.1 | — | 8.9 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization (included in cost of revenue) | 3.4 | — | — | — | — | 3.4 | ||||||||||||||||||||||||||||||||
| Other operating loss | 0.1 | — | 0.7 | — | — | 0.8 | ||||||||||||||||||||||||||||||||
| Interest expense | 2.2 | — | 2.4 | 8.2 | — | 12.8 | ||||||||||||||||||||||||||||||||
| Other (income) expense, net | (0.3) | — | 1.5 | (1.8) | — | (0.6) | ||||||||||||||||||||||||||||||||
| Loss on early extinguishment or restructuring of debt | — | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 2.9 | — | — | (2.8) | — | 0.1 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest | 0.7 | (2.0) | (0.9) | — | (0.4) | (2.6) | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 0.3 | 0.1 | — | 0.4 | ||||||||||||||||||||||||||||||||
| Nonrecurring Items | (0.1) | — | — | — | — | (0.1) | ||||||||||||||||||||||||||||||||
| COVID-19 Costs | 0.4 | — | — | — | — | 0.4 | ||||||||||||||||||||||||||||||||
| Acquisition and disposition costs | 0.8 | — | 0.4 | 0.4 | 0.7 | 2.3 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 24.4 | $ | (7.1) | $ | 1.8 | $ | (3.8) | $ | (1.0) | $ | 14.3 | ||||||||||||||||||||||||||
Infrastructure: Net income from our Infrastructure segment for the three months ended September 30, 2022 increased $3.5 million to $10.4 million from $6.9 million for the three months ended September 30, 2021. Adjusted EBITDA from our Infrastructure segment for the three months ended September 30, 2022 increased $3.2 million to $27.6 million from $24.4 million for the three months ended September 30, 2021. The increase in Adjusted EBITDA can be attributed to an increased contribution from the fabrication and erection business and Banker Steel. The increase was partially offset by increases in salaries and wages, travel costs, and professional fees, as well as lower contributions from the industrial maintenance and repair, and construction modeling and detailing businesses.
Life Sciences: Net loss from our Life Sciences segment for the three months ended September 30, 2022 increased $0.4 million to $5.5 million from $5.1 million for the three months ended September 30, 2021. Adjusted EBITDA loss from our Life Sciences segment for the three months ended September 30, 2022 increased $0.5 million to $7.6 million from $7.1 million for the three months ended September 30, 2021. The increase in Adjusted EBITDA loss was primarily driven by a decrease in gross margin at R2 due to change in product mix and an increase in equity method losses recorded for Pansend's investment in MediBeacon.
Spectrum: Net loss from our Spectrum segment for the three months ended September 30, 2022 decreased $2.7 million to $1.4 million from $4.1 million for the three months ended September 30, 2021. Adjusted EBITDA from our Spectrum segment for the three months ended September 30, 2022 decreased $1.5 million to $0.3 million from $1.8 million for the three months ended September 30, 2021. The overall decrease in Adjusted EBITDA was primarily driven by the decrease in advertising revenue at the Azteca network driven by a decreased footprint, declines in paid programming, as well as an increase in expenses at the Azteca network as a result of higher support fees and licensing royalty expense incurred under the PLA, which started in the first quarter of 2022, and an increase in station costs as a result of new station builds. This was partially offset by decrease in legal expenses, commissions and salaries and benefit expenses.
Non-operating Corporate: Net loss from our Non-operating Corporate segment for the three months ended September 30, 2022 increased $1.6 million to $9.6 million from $8.0 million for the three months ended September 30, 2021. Adjusted EBITDA loss from our Non-operating Corporate segment for the three months ended September 30, 2022 increased $1.2 million to $5.0 million from $3.8 million for the three months ended September 30, 2021. The increase in Adjusted EBITDA loss was driven by severance related to the Company's former Chief Legal Officer accrued in the current period, as well as increased legal expenses.
Other and Eliminations: Net income from our Other and Eliminations segment for the three months ended September 30, 2022 increased $2.0 million to $0.7 million from a loss of $1.3 million for the three months ended September 30, 2021. Adjusted EBITDA from our Other segment for the three months ended September 30, 2022 increased $2.1 million to $1.1 million from a loss of $1.0 million for the three months ended September 30, 2021. The improvement in Adjusted EBITDA for our Other and Eliminations segment was primarily driven by the equity investment in HMN, as it produced higher income than in the comparable period, which is generally attributable to the timing of project work.
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| (in millions) | Nine months ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||
Infrastructure | Life Sciences | Spectrum | Non-operating Corporate | Other and Eliminations | INNOVATE | |||||||||||||||||||||||||||||||||
| Net (loss) attributable to INNOVATE Corp. | $ | (30.2) | ||||||||||||||||||||||||||||||||||||
| Less: Discontinued operations | — | |||||||||||||||||||||||||||||||||||||
| Net Income (loss) attributable to INNOVATE Corp., excluding discontinued operations | $ | 23.3 | $ | (14.9) | $ | (10.5) | $ | (30.4) | $ | 2.3 | $ | (30.2) | ||||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 15.9 | 0.2 | 4.4 | 0.1 | — | 20.6 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization (included in cost of revenue) | 11.2 | — | — | — | — | 11.2 | ||||||||||||||||||||||||||||||||
| Other operating (income) loss | (0.6) | — | 1.3 | — | — | 0.7 | ||||||||||||||||||||||||||||||||
| Interest expense | 7.0 | 0.2 | 6.1 | 25.1 | — | 38.4 | ||||||||||||||||||||||||||||||||
| Other (income) expense, net | (1.9) | (0.4) | 1.8 | — | — | (0.5) | ||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 11.4 | — | — | (9.8) | — | 1.6 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest | 2.3 | (6.3) | (1.5) | — | 1.0 | (4.5) | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | 0.3 | — | 1.4 | — | 1.7 | ||||||||||||||||||||||||||||||||
| Nonrecurring items | 0.1 | — | — | — | — | 0.1 | ||||||||||||||||||||||||||||||||
| Acquisition and disposition costs | 0.3 | — | 0.4 | 0.6 | (0.4) | 0.9 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 69.0 | $ | (20.9) | $ | 2.0 | $ | (13.0) | $ | 2.9 | $ | 40.0 | ||||||||||||||||||||||||||
| (in millions) | Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||
Infrastructure | Life Sciences | Spectrum | Non-operating Corporate | Other and Eliminations | INNOVATE | |||||||||||||||||||||||||||||||||
| Net (loss) attributable to INNOVATE Corp. | $ | (222.8) | ||||||||||||||||||||||||||||||||||||
| Less: Discontinued operations | (149.9) | |||||||||||||||||||||||||||||||||||||
| Net Income (loss) attributable to INNOVATE Corp., excluding discontinued operations | $ | 8.3 | $ | (13.6) | $ | (9.6) | $ | (58.0) | $ | — | $ | (72.9) | ||||||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to Adjusted EBITDA: | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 13.1 | 0.1 | 4.3 | 0.1 | — | 17.6 | ||||||||||||||||||||||||||||||||
| Depreciation and amortization (included in cost of revenue) | 8.4 | — | — | — | — | 8.4 | ||||||||||||||||||||||||||||||||
| Other operating loss | 0.1 | — | 0.9 | — | — | 1.0 | ||||||||||||||||||||||||||||||||
| Interest expense | 6.3 | — | 7.1 | 33.2 | — | 46.6 | ||||||||||||||||||||||||||||||||
| Other (income) expense, net | (4.2) | — | 2.3 | (2.5) | — | (4.4) | ||||||||||||||||||||||||||||||||
| Loss on early extinguishment or restructuring of debt | 1.5 | — | 1.0 | 10.0 | — | 12.5 | ||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 4.1 | — | — | (0.3) | — | 3.8 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest | 0.9 | (6.0) | (1.9) | — | (0.9) | (7.9) | ||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | 0.1 | 0.6 | 1.0 | — | 1.7 | ||||||||||||||||||||||||||||||||
| Nonrecurring items | 0.3 | — | — | 0.5 | — | 0.8 | ||||||||||||||||||||||||||||||||
| COVID-19 costs | 8.3 | — | — | — | — | 8.3 | ||||||||||||||||||||||||||||||||
| Acquisition and disposition costs | 2.5 | — | 0.6 | 2.5 | 0.7 | 6.3 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 49.6 | $ | (19.4) | $ | 5.3 | $ | (13.5) | $ | (0.2) | $ | 21.8 | ||||||||||||||||||||||||||
Infrastructure: Net income from our Infrastructure segment for the nine months ended September 30, 2022 increased $15.0 million to $23.3 million from $8.3 million for the nine months ended September 30, 2021. Adjusted EBITDA from our Infrastructure segment for the nine months ended September 30, 2022 increased $19.4 million to $69.0 million from $49.6 million for the nine months ended September 30, 2021. The increase in Adjusted EBITDA can be attributed to the contribution of Banker Steel and increased contribution at the fabrication and erection business as a result of larger jobs with increased profits in the current year. The increase was partially offset by an increase in general and administrative expenses due to the acquisition of Banker Steel, increases in salaries and wages, travel costs and professional fees, as well as lower contribution from the industrial maintenance and repair, and construction modeling and detailing businesses.
Life Sciences: Net loss from our Life Sciences segment for the nine months ended September 30, 2022 increased $1.3 million to $14.9 million from $13.6 million for the nine months ended September 30, 2021. Adjusted EBITDA loss from our Life Sciences segment for the nine months ended September 30, 2022 increased $1.5 million to $20.9 million from $19.4 million for the nine months ended September 30, 2021. The increase in Adjusted EBITDA loss was primarily driven by the increase in equity method losses recorded for Pansend's investment in MediBeacon, a decrease in gross margin at R2 due to a change in product mix along with an increase in general and administrative expenses at R2 driven by a severance accrual in the current period, increased clinical expenses due to additional staffing needs and increased clinical studies, and other general staffing increases across the organization as the company continues commercialization, partially offset by a decrease in R&D. This was partially offset by an increase in equity method income recorded for Pansend's investment in Triple Ring.
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Spectrum: Net loss from our Spectrum segment for the nine months ended September 30, 2022 increased $0.9 million to $10.5 million from $9.6 million for the nine months ended September 30, 2021. Adjusted EBITDA from our Spectrum segment for the nine months ended September 30, 2022 decreased $3.3 million to $2.0 million from $5.3 million for the nine months ended September 30, 2021. The overall decrease in Adjusted EBITDA was primarily driven by the decrease in revenue at the Azteca network driven by a decreased footprint and a decline in paid programming, as well as an increase in expenses at the Azteca network as a result of higher support fees and license royalty expense incurred under the PLA, which started in the first quarter of 2022, an increase in station costs as a result of new station builds. This was partially offset by unrepeated severance costs in the comparable period and decreased salary and benefit expenses, as well as higher station revenues as the station group launched new customers and grew the number of its operating stations.
Non-operating Corporate: Net loss from our Non-operating Corporate segment for the nine months ended September 30, 2022 decreased $27.6 million to $30.4 million from $58.0 million for the nine months ended September 30, 2021. Adjusted EBITDA loss from our Non-operating Corporate segment for the nine months ended September 30, 2022 decreased $0.5 million to $13.0 million from $13.5 million for the nine months ended September 30, 2021. The decrease in Adjusted EBITDA loss was driven by a decrease in legal expenses, as well as the settlement expense for the Company's former CEO accrued in the prior period. This was partially offset by increased professional fees, additional severance expense in the current period related to the former Chief Legal Officer, and other compensation related items.
Other and Eliminations: Net income from our Other and Eliminations segment for the nine months ended September 30, 2022 increased $2.3 million to $2.3 million from zero for the nine months ended September 30, 2021. Adjusted EBITDA from our Other segment for the nine months ended September 30, 2022 increased $3.1 million to $2.9 million from a loss of $0.2 million for the nine months ended September 30, 2021. The improvement in Adjusted EBITDA for our Other and Eliminations segment was primarily driven by our equity investment in HMN, as it produced higher income than in the comparable period, which is generally attributable to the timing of project work.
Adjusted EBITDA by segment is summarized as follows:
| (in millions): | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Increase / (Decrease) | 2022 | 2021 | Increase / (Decrease) | |||||||||||||||||||||||||||||||||
Infrastructure | $ | 27.6 | $ | 24.4 | $ | 3.2 | $ | 69.0 | $ | 49.6 | $ | 19.4 | ||||||||||||||||||||||||||
| Life Sciences | (7.6) | (7.1) | (0.5) | (20.9) | (19.4) | (1.5) | ||||||||||||||||||||||||||||||||
| Spectrum | 0.3 | 1.8 | (1.5) | 2.0 | 5.3 | (3.3) | ||||||||||||||||||||||||||||||||
| Non-Operating Corporate | (5.0) | (3.8) | (1.2) | (13.0) | (13.5) | 0.5 | ||||||||||||||||||||||||||||||||
| Other and Eliminations | 1.1 | (1.0) | 2.1 | 2.9 | (0.2) | 3.1 | ||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 16.4 | $ | 14.3 | $ | 2.1 | $ | 40.0 | $ | 21.8 | $ | 18.2 | ||||||||||||||||||||||||||
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 September 30, 2022, DBMG's backlog was $1,916.5 million, consisting of $1,416.8 million under contracts or purchase orders and $499.7 million under letters of intent or notices to proceed. Approximately $953.0 million, representing 49.7% of DBMG’s backlog as of September 30, 2022, 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 $13.4 million in its backlog that is not included in the remaining unsatisfied performance obligations disclosed in Note 3. Revenue and Contracts in Process. 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.
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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.
As of September 30, 2022, the Company had $25.8 million of cash and cash equivalents, excluding restricted cash, compared to $45.5 million as of December 31, 2021. On a stand-alone basis, as of September 30, 2022, the Non-Operating Corporate segment had cash and cash equivalents, excluding restricted cash, of $5.1 million compared to $22.0 million at December 31, 2021.
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 September 30, 2022, the Company had $711.5 million of principal indebtedness on a consolidated basis compared to $630.8 million as of December 31, 2021, an increase of $80.7 million, which was primarily due to a $77.3 million increase in DBMG's Line of Credit to fund working capital requirements, offset in part by recurring principal payments on outstanding debt and repayment of certain instruments.
On a stand-alone basis, as of September 30, 2022 and December 31, 2021, the Non-Operating Corporate segment had indebtedness of $401.8 million and $390.0 million, respectively, an increase of $11.8 million, driven by an increase in the Revolving Credit Agreement of $15.0 million, partially offset by the $3.2 million repayment of the 2022 Convertible Note upon maturity. The 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 $20.0 million aggregate principal amount drawn on its Revolving Credit Agreement. The Non-Operating Corporate segment is required to make semi-annual interest payments on its 2026 Senior Secured Notes and 2026 Convertible Notes and quarterly and monthly interest payments on its Revolving Credit Agreement.
INNOVATE received $5.0 million in tax sharing from its Infrastructure segment during the three months ended September 30, 2022. INNOVATE received $13.7 million and $7.6 million in dividends and tax sharing from its Infrastructure segment during the nine months ended September 30, 2022, respectively.
INNOVATE is required to make dividend payments on its 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.
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 Condensed Consolidated Financial Statements through a combination of available cash 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.
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.
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DBMG’s off-balance sheet arrangements as of September 30, 2022 included letters of credit of $2.6 million under credit and security agreements and performance bonds of $1,057.8 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.
COVID-19 Expenditures
We have historically seen significant cost increases, primarily at our Infrastructure segment, driven by expenses associated with maintaining a safe work environment and while executing on its projects. During the nine months ended September 30, 2021, $8.3 million of COVID-19 costs were incurred. Although the COVID-19 pandemic did not have a material impact on INNOVATE’s liquidity for the nine months ended September 30, 2022, management believes the continuation of the pandemic and its related effect on the U.S. and global economies could introduce added pressure on the Company’s liquidity position and financial performance. Our sources of liquidity are primarily from the dividends and tax sharing agreement with DBMG, cash proceeds from completed and anticipated monetization’s and other arrangements.
Capital Expenditures
Capital expenditures for the periods ended September 30, 2022 and 2021 are set forth in the table below (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Infrastructure | $ | 6.9 | $ | 6.1 | $ | 13.5 | $ | 11.6 | ||||||||||||||||||
| Life Sciences | 0.2 | — | 0.3 | 0.5 | ||||||||||||||||||||||
| Spectrum | 0.4 | 0.9 | 2.5 | 2.9 | ||||||||||||||||||||||
| Total | $ | 7.5 | $ | 7.0 | $ | 16.3 | $ | 15.0 | ||||||||||||||||||
Indebtedness
Non-Operating Corporate
2026 Senior Secured Notes Terms and Conditions
Maturity. The 2026 Senior Secured Notes mature on February 1, 2026.
Interest. The 2026 Senior Secured Notes accrue interest at a rate of 8.50% per year. Interest on the 2026 Senior Secured Notes is paid semi-annually on February 1 and August 1 of each year.
Issue Price. The issue price of the 2026 Senior Secured Notes was 100% of par.
Ranking. The notes and the note guarantees are the Company’s and certain of its direct and indirect domestic subsidiaries’ (the "Subsidiary Guarantors") general senior secured obligations. The notes and the note guarantees will rank: (i) senior in right of payment to all of the Company’s and the Subsidiary Guarantors’ future subordinated debt; (ii) equal in right of payment, subject to the priority of any First-Out Obligations (as defined in the Secured Indenture), with all of the Company’s and the Subsidiary Guarantors’ existing and future senior debt and effectively senior to all of its and the Subsidiary Guarantor’s unsecured debt to the extent of the value of the collateral; and (iii) effectively subordinated to all liabilities of its non-guarantor subsidiaries. The notes and the note guarantees are secured on a first-priority basis by substantially all of the Company’s assets and the assets of the Subsidiary Guarantors, subject to certain exceptions and permitted liens.
Collateral. The 2026 Senior Secured Notes are secured by a first priority lien on substantially all of the Company’s assets (except for certain "Excluded Assets," and subject to certain "Permitted Liens," each as defined in the Secured Indenture), including, without limitation:
•all equity interests owned by the Company or a Subsidiary Guarantor (which, in the case of any equity interest in a foreign subsidiary, will be limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary) and the related rights and privileges associated therewith (but excluding Equity Interests of Insurance Subsidiaries (as defined in the Secured Indenture), to the extent the pledge thereof is deemed a "change of control" under applicable insurance regulations);
•all equipment, goods and inventory owned by the Company or a Subsidiary Guarantor;
•all cash and investment securities owned by the Company or a Subsidiary Guarantor;
•all documents, books and records, instruments and chattel paper owned by the Company or a Subsidiary Guarantor;
•all general intangibles owned by the Company or a Subsidiary Guarantor; and
•any proceeds and supporting obligations thereof.
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The Secured Indenture permits the Company, under specified circumstances, to incur additional debt in the future that could equally and ratably share in the collateral. The amount of such debt is limited by the covenants contained in the Secured Indenture.
Events of Default. The Secured Indenture contains customary events of default which could, subject to certain conditions, cause the 2026 Senior Secured Notes to become immediately due and payable.
2026 Convertible Notes Terms and Conditions
Maturity. The 2026 Convertible Notes mature on August 1, 2026 unless earlier converted, redeemed or purchased.
Interest. The 2026 Convertible Notes accrue interest at a rate of 7.5% per year. Interest on the 2026 Convertible Notes is paid semi-annually on February 1 and August 1 of each year.
Issue Price. The issue price of the 2026 Convertible Notes was 100% of par.
Ranking. The notes are the Company’s general unsecured and unsubordinated obligations and will rank equally in right of payment with all of the Company’s existing and future unsecured and unsubordinated indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the notes. The notes will be effectively subordinated to all of the Company’s existing and future secured indebtedness, including the Company’s 2026 Senior Secured Notes, to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries, including trade credit.
Optional Redemption. The Company may not redeem the notes prior to August 1, 2023. On or after August 1, 2023, the Company may redeem for cash all of the notes if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (which need not be consecutive trading days) during any 30 consecutive trading-day period ending within five trading days prior to the date on which the Company provides notice of redemption. The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date.
Conversion Rights. The 2026 Convertible Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 234.2971 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of approximately $4.27 per share of the Company’s common stock), at any time prior to the close of business on the business day immediately preceding the maturity date, in principal amounts of $1,000 or an integral multiple of $1,000 in excess thereof. In addition, following a Make-Whole Fundamental Change (as defined in the Convertible Indenture) or the Company’s delivery of a notice of redemption for the 2026 Convertible Notes, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its 2026 Convertible Notes in connection with (i) such Make-Whole Fundamental Change or (ii) such notice of redemption. However, to comply with certain listing standards of The New York Stock Exchange, the Company will settle in cash its obligation to increase the conversion rate in connection with a Make-Whole Fundamental Change or redemption until it has obtained the requisite stockholder approval.
Events of Default. The Convertible Indenture contains customary events of default which could, subject to certain conditions, cause the Convertible Notes to become immediately due and payable.
Revolving Credit Agreement
Lender. MSD PCOF Partners IX, LLC (“MSD”)
Maturity: The Revolving Credit Agreement has a maturity date of February 23, 2024.
Ranking. Obligations under the Revolving Credit Agreement constitute a First-Out Debt, as defined in the Secured Indenture, and are secured on a pari passu basis with the 2026 Senior Secured Notes.
Collateral: As provided under a Collateral Trust Joinder, the lender was added as a secured party to the Collateral Trust Agreement, and accordingly the pari passu obligations and commitments under the Revolving Credit Agreement are secured equally and ratably by the collateral of the Secured Notes.
Infrastructure
The UMB Term Loan and 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. 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.
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Life Sciences and Spectrum
As of September 30, 2022, our Life Sciences and Spectrum segments have principal outstanding debt of $10.0 million and $52.2 million, respectively, which will mature in the fourth quarter of 2022. The Company is currently in negotiations to refinance the debt at Spectrum and Life Sciences and intends to satisfy the loan with a debt or equity event. However, there can be no assurance that it will be able to do so on terms satisfactory to the Company, if at all.
See Note 14. Debt Obligations to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional details regarding the Company's indebtedness.
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 September 30, 2022, 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 September 30, 2022, 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 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.
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Summary of Consolidated Cash Flows
The below table summarizes the cash provided or used in our activities and the amount of the respective changes between the periods (in millions):
| Nine Months Ended September 30, | Increase / (Decrease) | |||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Cash used in continuing operating activities | $ | (72.2) | $ | (48.1) | $ | (24.1) | ||||||||||||||
| Cash provided by discontinued operating activities | — | 33.5 | (33.5) | |||||||||||||||||
| Cash used in operating activities | (72.2) | (14.6) | (57.6) | |||||||||||||||||
| Cash (used in) provided by continuing investing activities | (18.3) | 6.4 | (24.7) | |||||||||||||||||
| Cash used in discontinued investing activities | — | (221.3) | 221.3 | |||||||||||||||||
| Cash used in investing activities | (18.3) | (214.9) | 196.6 | |||||||||||||||||
| Cash provided by continuing financing activities | 73.2 | 62.2 | 11.0 | |||||||||||||||||
| Cash used in discontinued financing activities | — | (7.6) | 7.6 | |||||||||||||||||
| Cash provided by financing activities | 73.2 | 54.6 | 18.6 | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (2.5) | (1.7) | (0.8) | |||||||||||||||||
| Net decrease in cash and cash equivalents, including restricted cash and cash classified within assets held for sale | $ | (19.8) | $ | (176.6) | $ | 156.8 | ||||||||||||||
| Less: Net decrease in cash and cash equivalents from discontinued operations | — | (195.4) | 195.4 | |||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (19.8) | $ | 18.8 | $ | (38.6) | ||||||||||||||
Operating Activities
Cash used in continuing operating activities was $72.2 million for the nine months ended September 30, 2022, as compared to $48.1 million for the nine months ended September 30, 2021. The $24.1 million increase in cash used from operating activities was primarily due to an increase in working capital at Infrastructure as a result of increased activity as a result of the acquisition of Banker Steel at the end of May 2021, increases in the commercial structural steel fabrication and erection business, and larger backlog combined with the timing of receipt of receivables. This was partially offset by a decrease in net loss from improved operations.
Investing Activities
Cash used by continuing investing activities was $18.3 million for the nine months ended September 30, 2022 as compared to cash provided by continuing investing activities of $6.4 million for the nine months ended September 30, 2021. The $24.7 million decrease in cash from investing activities was primarily due to the sale of Continental and Beyond6 in 2021 for aggregate net proceeds and dividends received of $136.5 million, unrepeated sales of non-core assets at our Spectrum segment in 2021, additional investing outlays in the current period at our Life Sciences segment to purchase an additional convertible note from MediBeacon, partially offset by the acquisition of Banker Steel for $128.5 million in the comparable period.
Financing Activities
Cash provided by continuing financing activities was $73.2 million for the nine months ended September 30, 2022 as compared to $62.2 million for the nine months ended September 30, 2021, an increase of $11.0 million. Cash provided by financing activities for the nine months ended September 30, 2022 relates primarily to our Infrastructure segment's increase on its revolving line of credit to fund working capital requirements on larger, more complex jobs, and an additional $10.0 million of short-term note financing at R2 from Lancer Capital in the current period, partially offset by principal payments on debt obligations, payments of dividends and other financing activities. Cash provided by financing activities for the nine months ended September 30, 2021 was primarily due to the 2021 refinancing of the Infrastructure notes in conjunction with the acquisition of Banker Steel; financing activities at our Life Sciences segment related to the $10.0 million investment by Huadong into R2 in the first quarter of 2021, which was partially offset by a redemption by INNOVATE of its preferred stock of $10.4 million, transactions with noncontrolling interests, payment of dividends and other financing activities.
Discontinued Operations
Cash from discontinued operations was zero for the nine months ended September 30, 2022 as compared to cash used by discontinued operations of $195.4 million for the nine months ended September 30, 2021. The $195.4 million decrease in cash used was primarily due to the 2021 sales of the Insurance segment and Beyond6, which did not have any activity in the current period.
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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 is required to make monthly or quarterly interest payments on all of its debt. Based upon the September 30, 2022 debt balance, DBMG anticipates that its interest payments will be approximately $2.8 million for the last remaining quarter of 2022.
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.
Discontinued Operations
We had several entities classified as discontinued operations for the nine months ended September 30, 2021. Accordingly, revenue, costs, and expenses of the discontinued operations were excluded from continuing operations. The entities reported in discontinued operations are as follows:
•On December 31, 2020, the Company signed the Merger Agreement to sell Beyond6. The sale closed on January 15, 2021. During the first quarter of 2021, the Company recognized a $39.2 million gain on the sale. During the third quarter of 2021, as a result of releases of related escrows and holdbacks, the Company recognized an additional $0.5 million gain on the sale.
•The sale of CIG closed on July 1, 2021 to Continental General Holdings LLC, an entity controlled by Michael Gorzynski, a former director of the Company who also serves as executive chairman of Continental since October 2020. The Company recorded a $200.8 million loss on the sale.
Cash flows from discontinued operations are reported in the Statement of Cash Flows as a separate line item within the Operations, Investing and Financing activities sections for each year presented.
In the absence of cash flows from the discontinued operations, the Company does not expect there to be an impact on liquidity at the Company.
New Accounting Pronouncements
For a discussion of our New Accounting Pronouncements, refer to Note 2. Summary of Significant Accounting Policies to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
Critical Accounting Estimates
There have been no material changes in the Company’s critical accounting policies during the period ended September 30, 2022. For information about critical accounting policies and estimates, refer to “Critical Accounting Estimates” under Item 7 of our 2021 Annual Report.
Related Party Transactions
For a discussion of our Related Party Transactions, refer to Note 20. Related Parties to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
Corporate Information
INNOVATE, a Delaware corporation, was incorporated in 1994. The Company’s executive offices are located at 295 Madison Avenue, 12th Floor, New York, NY, 10017. The Company’s telephone number is (212) 235-2690. Our Internet address is www.innovatecorp.com. We make available free of charge through our Internet website our 2021 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on or accessible through our website is not a part of this Quarterly Report on Form 10-Q.
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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 2021 Annual Report, 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:
•the effect of the novel coronavirus (“COVID-19”) pandemic and related governmental responses on our business, financial condition and results of operations;
•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;
•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 possible inability to generate sufficient liquidity, margins, earnings per share, cash flow and working capital from our operating segments;
•the impact of catastrophic events, including natural disasters, pandemic illness and the outbreak of war, or acts of terrorism;
•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 14. Debt Obligations to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q and future financing agreements on our ability to operate our business and finance our pursuit of acquisition opportunities;
•our ability to remain in compliance with the listing standards of the New York Stock Exchange;
•our dependence on certain key personnel;
•uncertain global economic conditions in the markets in which our operating segments conduct their businesses;
•the ability of our operating segments to attract and retain customers;
•increased competition in the markets in which our operating segments conduct their businesses;
•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;
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•the impact of additional material charges associated with our oversight of acquired or target businesses and the integration of our financial reporting;
•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;
•our expectations and timing with respect to any strategic dispositions and sales of our operating subsidiaries, or businesses, including the anticipated 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;
•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;
•tax consequences associated with our acquisition, holding and disposition of target companies and assets;
•the effect any interests our officers, directors, stockholders and their respective affiliates may have in certain transactions in which we are involved;
•our ability to effectively increase the size of our organization, if needed, and manage our growth;
•the potential for, and our ability to, remediate future material weaknesses in our internal controls over financial reporting;
•our possible inability to raise additional capital when needed or refinance our existing debt, on attractive terms, or at all; and
•our possible inability to hire and retain qualified executive management, sales, technical and other personnel.
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:
•the impact of inflationary pressures;
•our ability to maintain efficient staffing and productivity as well as delays and cancellations as a result of the COVID-19 pandemic;
•its ability to realize cost savings from expected performance of contracts, whether as a result of improper estimates, performance, or otherwise;
•potential impediments and limitations on our ability to complete ordinary course acquisitions in anticipated time frames or at all;
•uncertain timing and funding of new contract awards, as well as project cancellations;
•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;
•risks associated with labor productivity, including performance of subcontractors that DBMG hires to complete projects;
•its ability to settle or negotiate unapproved change orders and claims;
•changes in the costs or availability of, or delivery schedule for, equipment, components, materials, labor or subcontractors;
•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;
•fluctuating revenue resulting from a number of factors, including the cyclical nature of the individual markets in which our customers operate;
•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;
•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; and
•governmental regulation in the healthcare industry.
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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 ability to attract advertisers during the COVID-19 pandemic;
•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's segment 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.
Other
Our actual results or other outcomes of our Other 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:
•risks associated with our equity method investment that operates in China (i.e., HMN International Co., Ltd F/K/A Huawei Marine Systems Co. Limited, a Hong Kong holding company with a Chinese operating subsidiary), including the exercisability of New Saxon 2019 Ltd.'s put option pertaining to its 19% interest in HMN;
•the possibility that our sale of the remaining 19% interest of New Saxon in HMN to Hengtong may not be consummated in the anticipated timeframe, on the contemplated terms or at all; and
•the risk that unexpected costs will be incurred in connection with the completion of the sale of our interest in HMN to Hengtong.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange Act") as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures were effective. Disclosure controls and procedures mean our controls and other procedures that are designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal period ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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 amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary for the 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 its Condensed Consolidated Financial Statements. See Note 17. Commitments and Contingencies to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Persistent inflation and economic uncertainty may negatively impact DBMG's business.
Inflation in the United States and worldwide has increased DBMG’s costs and may result in additional cost increases, including of steel and welding wire components and other inputs that are critical to the completion of DBMG’s projects, may cause additional shortages of supplies and components, may increase cost of borrowing, and may continue to reduce DBMG’s purchasing power, all of which would have a negative impact on DBMG’s results of operation. Due to competitive pressure and pressure from DBMG’s customers, DBMG may not be able to offset the impacts of inflation in the price of its products. Additionally, continued inflation and economic uncertainty may result in DBMG’s customers decreasing the scope, canceling, or delaying projects in process.
Our failure to meet the continued listing requirements of NYSE could result in a delisting of our securities, which in turn could adversely affect our financial condition and the market for our common stock.
On October 27, 2022, the Company was notified by NYSE that the average closing price of the Company’s common stock had fallen below $1.00 per share over a period of 30 consecutive trading days, which is the minimum average share price required by Section 802.01C of the NYSE Listed Company Manual (“Section 802.01C”). The Company has six months following receipt of the notification to regain compliance with the minimum share price requirement. If the Company does not regain compliance with the minimum share price requirement, we expect that our common stock will be delisted from NYSE. If the common stock ultimately were to be delisted from NYSE, it could negatively impact the Company by, among other things, (i) reducing the liquidity and market price of the Company’s common stock; (ii) reducing the number of investors willing to hold or acquire the Company’s common stock, which could negatively impact the Company’s ability to raise equity financing; and (iii) limiting the Company’s ability to sell its common stock in certain states within the United States, also potentially impacting the Company’s ability to raise financing. If the Company’s common stock is delisted from NYSE, the price paid by investors may not be recovered. As of the filing date of this Quarterly Report, the Company has not regained compliance with Section 802.01C.
ITEM 6. EXHIBITS
(a) Exhibits
Please note that the agreements included as exhibits to this Form 10-Q are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about INNOVATE Corp. or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 10.2 | Separation and Release Agreement by and between INNOVATE Corp. and Joseph A. Ferraro dated September 13, 2022 (incorporated by reference to Exhibit 10.1 to INNOVATE's Current Report on Form 8-K, filed on September 16, 2022) (File No. 001-35210). | |||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 31.1 | ||||||||
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| Exhibit Number | Description | |||||||
| 31.2 | ||||||||
| 32.1* | ||||||||
| 101 | The following materials from the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in extensible business reporting language (XBRL); (i) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021, (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021, (iii) Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, (iv) Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the three and nine months ended September 30, 2022 and 2021, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, and (vi) Notes to Condensed Consolidated Financial Statements (filed herewith). | |||||||
| 104 | Inline XBRL for the cover page of this Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set. | |||||||
| * | These certifications are being "furnished" and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INNOVATE Corp. | ||||||||||||||
| Date: | November 2, 2022 | By: | /S/ MICHAEL J. SENA | |||||||||||
| Michael J. Sena Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||||||||||||||
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shall be considered a prepayment in full of the Loans; accordingly, the prepayment fee described in this Section shall be part of the Obligations and may be included by the Administrative Agent and Lenders in any judgment taken against the Borrower. The Borrower acknowledges that the prepayment fee described in this Section is a reasonable estimate of the cost to the Lenders resulting from the prepayment or acceleration of the Loans and is not imposed as a penalty. Notwithstanding the foregoing, no fee shall be payable under this Section 2.6.4 as a result of (x) a termination of this Agreement in connection with a restructuring or refinancing of the Commitments with Administrative Agent, (y) any prepayment made with excess cash arising from Borrower's operations, or (z) any prepayment made with proceeds of asset sales by Borrowers.
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